Media  Global Economy  2019.06.11

Japan out-positions the U.S. in trade talks

the japan times on May 31, 2019
Protracted trade negotiations between Japan and the U.S. could prove costly for the U.S. agricultural industry and that could cost U.S. President Donald Trump crucial votes in the 2020 election.

The Japanese tend to believe that Japan is being attacked in a one-sided manner in its trade negotiations with the United States. Such a perception is due to the trauma of past talks in which Japan made countless concessions to Washington. Japan has always tried to find a way to dodge U.S. demands passively. Here are some reasons that Japan is in fact in a far better position than the U.S. when it comes to the current trade talks.

First, Japan does not need to conclude a free trade agreement with the U.S. Notwithstanding the U.S. withdrawal from the Trans-Pacific Partnership, Japan's export industries, such as its automakers, continue to ship their products to the U.S. just like before.

Second, it is the U.S. that is pressed. With the TPP-11 and the economic partnership agreement between Japan and the European Union coming into effect, the U.S. is now required to compete against its rivals in agricultural produce exports such as Canada, Australia, New Zealand and EU countries under conditions that decisively favor them in the Japanese market.

Take the beef tariff for those countries for example. It was reduced to 26.6 percent in April and will go down to as low as 9 percent after 14 years. In contrast, the tariff on U.S. beef will remain at 38.5 percent. There is already more than a 10 percentage point difference between tariffs on beef from the U.S. and other countries, which will widen even further as time goes on. This also applies to pork, wheat, dairy products, wine and other agricultural products.

The trade war with China has already worn out the U.S. agricultural industry. U.S. soybean producers lost the Chinese market, to which over 60 percent of their exports had been destined, after China raised its tariffs on this No. 1 U.S. farm export commodity. The gap has been filled by Brazil. Substantial damage in the Japanese market would deal a serious blow to the U.S. agricultural industry.

In the November gubernatorial elections, the Democratic Party garnered more votes than before in the Midwest states that overlap the Rust Belt and the Corn Belt, where corn and soybeans are mainly produced on the most fertile land in the country. Donald Trump won these states in the 2016 presidential election. Michigan, Illinois, Wisconsin, Minnesota, Kansas and Pennsylvania all elected a Democratic governor in 2018.

Prolonged negotiations between Japan and the U.S. would affect the prospects of Trump being re-elected in 2020. Trump will not be re-elected unless he wins in the Midwest as well as in Florida, Ohio and other swing states. Corn and soybeans produced in the Midwest are used for feed in the production of beef and pork. A decline of beef and pork exports to the Japanese market would result in less demand for corn and soybeans.

The current talks undoubtedly concern a free trade agreement in the GATT/WTO sense. Accordingly, the parties to a free trade agreement must adhere to the rule in Article XXIV paragraph 8 of the General Agreement on Tariffs and Trade that "the duties and other restrictive regulations of commerce on substantially all the trade" must be eliminated. No matter how the U.S. wants to agree on agricultural tariffs as a matter of priority, such an agreement cannot be described as an FTA -- which must cover "substantially all the trade" -- unless it embraces all goods, including automobiles.

The harder Washington pushes Tokyo with regard to autos and currency provisions, the more protracted the negotiations will become. That, in turn, would mean that Australia, Canada, EU countries and other agricultural produce exporters with easier access to the Japanese market under the TPP and the Japan-EU EPA would drive American agricultural produce out of Japan. Tokyo can take the position of walking away from the negotiating table unless the U.S. offers a satisfactory compromise. Or it should simply tell the Trump administration to return to the TPP if it wants the Midwest farm vote.

When the U.S. Congress turned out not to approve the TPP, I suggested making a TPP agreement without the U.S. (or TPP-11) in the summer of 2016 -- before the November presidential election that year. This has become a reality. Prime Minister Shinzo Abe, as well as other government officials who opposed my views at that time, would now likely be at a total loss for what to do regarding U.S. demands if the TPP-11 had not been concluded.

Third, this situation has been created by Washington's unilateral withdrawal from the TPP. Subsequently, Japan was obliged to redesign the framework of the TPP-11. Can the U.S. redress its disadvantageous position in the Japanese market just by returning to the TPP? Canada, Australia and New Zealand worked together with Japan to conclude the TPP-11. Is it fair to grant the U.S. the same treatment as those countries without imposing any penalty for the trouble that its withdrawal caused?

Vietnam accepted the requirement that its state-owned enterprises adopt the rules under the TPP agreement in return for expanded access to the U.S. textile market. To have Vietnam participate in the TPP-11, Japan must have persuaded Vietnam that the U.S. will eventually return to the TPP and that Vietnam will have access to its textile market.

Can Japan take the attitude of currying favor with Trump, who made the questionable decision to withdraw from the TPP, and disregard the interests of Vietnam, which has apparently responded to Japan's persuasion? Not only that, if a Japan-U.S. trade agreement is concluded and the disadvantage to U.S. agricultural products in the Japanese market is removed, there would be no incentive for the U.S. to return to the TPP.

Japan never wished for the trade talks with the U.S. Nevertheless, despite its stated commitment to seeking a multilateral agreement like the TPP with less trade distortion, Japan was forced to enter into negotiations by yielding to the U.S. demand. Japan should seek a favor in return. In the TPP negotiations, the Obama administration persuaded Tokyo into agreeing that the 2.5 percent U.S. tariff on autos will be reduced to zero over an extended period of 25 years. Japan should demand the immediate abolition of such a U.S. tariff.

The question is whether Japanese negotiators have the guts to negotiate with this firmly in mind. I hope that they are not poisoned by a morbid fear of the U.S. or the "America First" notion that puts Japan-U.S. relations before anything else.

The ultimate question may be how much Shinzo can assert himself vis-a-vis Donald.