Media  Global Economy  2019.05.16

Japan-US trade talks: blind belief, "Japan is cornered by the US" -The US is the one that is desperate. Japan should be aware that it is in a far better position.-

The article was originally posted on RONZA on April 15, 2019
Japan is in a far better position, but...

The Japan-US trade talks were held on April 15 and 16 in Washington.

What are being reported from the US, which is situated the other side of the ocean, are nothing but harsh demands on Japan. US Secretary of the Treasury Steven Mnuchin insisted on the introduction of currency provisions to prevent Japan from manipulating its currency by lowering the value of the yen to increase its export to the US. US Secretary of Agriculture Sonny Perdue said that the US should demand more concessions from Japan beyond that which has already been agreed to in the TPP, including further farm tariff cuts, and to come to a quick agreement with Japan on agricultural produce, leaving other sectors for later negotiations.

The problem is that the media, with the exception of some outlets, have been reporting on the statements as they are without collecting further information from actual negotiators or related industries to corroborate them.

The report from Japan is the same as that from the US. On March 29, one major Japanese newspaper reported on the decrease of the US share in the Japanese beef and pork markets, which resulted from the reduction in tariffs for parties to the TPP11 and the Japan-EU FTA coming into effect. It, then, concluded that demands from discontented US farmers would likely lead the Trump administration to put further pressure on Japan during negotiations on a trade agreement for goods that is expected to commence in April.

The Japanese media apparently believes that Japan is being attacked in a one-sided manner. So does the Japanese government.

However, as repeatedly discussed in my previous articles, Japan is in a far better position than the US. In spite of that, because of the traumas of past Japan-US trade talks in which Japan made countless concessions to the US, Japan always tries to find a way to dodge US demands passively.

The US is the one that feels pressed.

First of all, we should be aware that Japan does not need to conclude a free trade agreement with the US.

Some may think that Japan has lost access to the US market as a result of the US withdrawal from the TPP. Concerning access to the US market, Japan would have hardly gained anything by concluding the TPP.

Because of opposition from Ford, etc., it was agreed that a tariff of 2.5 percent imposed on Japanese automobiles be reduced to zero over an incredibly long period of 25 years. Notwithstanding the US's withdrawal from the TPP, Japan's export industries are continuously exporting their products to the US as before.

Secondly, it is the US that is pressed.

With the TPP11 and the Japan-EU FTA coming into effect, the US is now required to compete against its rivals in agricultural produce exports such as Canada, Australia, New Zealand and EU countries on conditions that decisively favor them. A beef tariff for those countries will be reduced to 26.6 percent in April and become as low as 9 percent after 14 years. By contrast, the beef tariff for the US will remain at 38.5 percent. There have already been more than a 10 percent difference between tariffs for the US and other countries, which will widen further as time goes on. This also applies to wheat, dairy products, wine and other agricultural products.

I have been participating for the last ten years in the Agricultural Outlook Forum that is annually held by the US Department of Agriculture (USDA) in February. Discussions in the Forum used to focus on the importance of the Chinese market. This year, however, was different. The Forum held a special session on the Japanese agricultural market in which representatives from the US meat and wheat industries highlighted the importance of the Japanese market.

In the session, the representative from the meat industry stated that stagnation in meat exports would reduce demand for corn and soybeans supplied for feed. She, then, stressed that it would bring about a 15 - 20 billion USD (1.8 trillion - 2.4 trillion yen) loss to corn and soybeans producers in the Corn Belt, an agricultural area of the Midwest, who have already suffered a serious blow from the US-China trade war.

In my article "The TPP spoiled by foolish America (September 13, 2016)", I suggested making a TPP (TPP11) agreement without the US. This has become a reality.

Prime Minister Abe, as well as negotiators from the Japanese government who opposed my viewpoints at that time, would now likely be at a total loss for what to do regarding US demands if the TPP11 had not been concluded.

I am going to extract passages from my article "Japan outpositions the US in bilateral trade pact talks (December 28, 2018)" below.

Japan is in a far better position to negotiate with the US.

Protracted negotiations will put Trump in trouble, as they will affect US agriculture. Trump will not be reelected unless he wins in the Midwest--which overlaps the Rust Belt and the Corn Belt--as well as in Florida, Ohio, and other swing states. Trump will be doomed if he fails to win farmers' votes in the Corn Belt.

By contrast, Japan can afford not to conclude trade negotiations with the US. Tokyo should simply tell Washington to return to the TPP if it wants farmers' votes in the Midwest.

Canada and Mexico had to accept the provisions on currency and non-market economies in the USMCA because they had no other choice but to conclude an FTA with the US. This is not the case with Japan. Since Japan can continue to export without signing an FTA with the US, it does not need to accept non-market economy provisions like the ones in the USMCA.

In short, Japan is in a better position unlike Canada or Mexico. The logic or cause and the international community are on Japan's side as well.

In addition, devastated by severe floods this year, many farmers in the Midwest have not even been able to plant crops.

Although these floods were not caused by Trump, the damage that they caused, compounded by resentment from farmers in the Midwest who have suffered from the US-China trade war and the loss of the Japanese market, may escalate opposition to him. In that case, Trump ambition to win the next-year election will get a fatal blow.

The US withdrew from the TPP unilaterally

Thirdly, this situation was created by the US's unilateral withdrawal from the TPP.

Subsequently, Japan was obliged to redesign the framework of TPP11. The US can reddress its disadvantageous position in the Japanese market by returning to the TPP.

Canada, Australia and New Zealand worked together with Japan to conclude the TPP11. Is it acceptable to grant the US the same treatment as those countries without imposing any penalty for the troubles that their withdrawal caused in the first place?

It is pure nonsense that the US Secretary of Agriculture demands more than the levels agreed upon in the TPP. What was agreed upon in the TPP constitutes the maximum level to which Japan can concede. It is not a starting line.


Let me give you an example of a deal that President Trump often talks about.

One American paid a visit to a Japanese. He was so attracted to a scroll hanging inside the house that he requested that the Japanese sell it to him. The Japanese was financially better off. He firmly turned down the offer made by the American on the grounds that the scroll was a treasure passed down through his family. However, the American was dying for it. He initially offered 1 million yen, but the Japanese refused. After his offer of 10 million yen was turned down, he finally raised it to 20 million yen. It is the American who lost the deal in this case.

If the US demands further concessions on farm tariff cuts than the levels agreed upon in the TPP or makes unreasonable demands for auto and currency provisions, Japan can simply refuse by stating that it is difficult to accept its demands. Protracted negotiations will widen the gap between tariffs on agricultural products for the US and other countries, which will hurt the US.

What Japan needs to do is to stay rational.

Last September, I asked USDA negotiators when the US wished to clinch a deal if the talks were to start in January. He responded to me that it should be done by February. The US farm industry is that pressed.

In addition, last February, negotiators from the USDA and the Congressional Research Service expressed their concern over an issue concerning staged tariff reductions (meaning gradual tariff reductions.) Even if the US manages to conclude an agreement with Japan on tariff reductions equivalent to the levels agreed upon in the TPP, tariffs on beef and other produce will be gradually reduced to 9% over 16 years. If a Japan-US trade agreement comes into effect in April next year, tariff reductions for the US will commence three years after those for Canada, Australia and New Zealand come into effect. As a result, it will take 16 years before disparities in tariffs between for the US and TPP party countries such as Australia finally become even. The negotiators asked me if there was a way to prevent such a situation from occurring. They were not anticipating winning further concessions from Japan beyond the levels agreed upon in the TPP.

I suggested to them that President Trump ask for Prime Minister Abe because Abe had such trust in Trump that he recommended Trump for the Nobel Peace Prize.

With regard to the talks, I wonder why the media has only been reporting on US demands on Japan, but nothing about Japan's demands on the US. Japan never wished for trade talks with the US. Nevertheless, Japan has decided to enter into negotiations by yielding to the US demand. Japan should seek a favor in return. That is a deal. Japan should demand the immediate abolishment of auto tariffs.

If the US insists on raising auto tariffs to 25 percent in the name of national security, in return, Japan should respond that it will increase tariffs on agricultural produce, including beef by 100%. Japan should act in a rational way by claiming that it can't violate WTO rules.

Lastly, US government negotiators questioned me as to why Japan denied entering into negotiations for an FTA (free trade agreement) which covers the service sector by insisting that negotiations were for a "trade agreement on goods (TAG)." The talks will start with discussions on its scope (what to be covered in the talks.)

I replied that the term "TAG" was coined by the Japanese government as a way to claim that negotiations with the US would not be for an FTA. Then, I stated that because both governments agreed to enter into bilateral negotiations, that logic was completely flawed, and the Japanese government would have no choice but to enter into negotiations for an FTA. They explained that because of congressional rules and procedures, they were required to submit an integrated package for an FTA to Congress for approval, not singularly. If so, the reported remark by US Agriculture Secretary Sonny Perdue that the US should quickly reach an agreement on agricultural produce by leaving other sectors to later negotiations, as mentioned at the beginning, does not have any basis for the argument. Further, this violates the FTA rule of GATT/WTO. In short, USDA officers have failed to appropriately educate the Secretary, who is an ex-Governor of the State of Georgia.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "RONZA" on April 15, 2019.)