Media  Global Economy  2019.08.08

Japan does not need a Japan-US FTA like this-it's like the humiliating loss of a baseball match that is 'called' part way into the game because of a huge margin

The article was originally posted on RONZA on July 20, 2019
Japan must have been at an overwhelming advantage

The original strategy of the Japanese government was to conclude a TPP 11 to the exclusion of the US so as to put US farm produce at a disadvantage than farm produce from other countries such as Australia in the Japanese market, thus prodding the US to return to the TPP. President Trump's withdrawal from the TPP scuttled this strategy. Still, even in Japan-US bilateral talks, Tokyo could have undermined Washington's negotiating position. The threat of additional auto tariffs forced the Japanese government to have bilateral negotiations with the US. But the growing prospect that such tariffs will be postponed put Japan in an overwhelmingly better position in talks with the US (Trump cannot raise auto tariffs).

To begin with, it would have been better for Japan to do without a Japan-US free trade agreement (FTA). Tokyo should have told Washington to return to the TPP in response to the US insistence that a TPP 11 would put the US in trouble.

Now that Trump has pulled the US out of the TPP, he could not possibly say that the US will rejoin the pact. Now he needs a Japan-US FTA by all means.

Trump won the 2016 presidential election because he clinched a victory in the traditional Democratic stronghold states of Wisconsin, Michigan, Ohio, and Pennsylvania among other Midwestern states by appealing to the voters that free trade and immigrants are stealing US jobs. These states, where the automobiles, steel and other smokestack industries are concentrated, are collectively known as the Rust Belt. Winning these states in next year's presidential election is vital for Trump to be reelected.

In the midterm elections last November, however, the Democratic Party won the gubernatorial elections in such Midwest states as Michigan, Illinois, Wisconsin, Minnesota, and Pennsylvania, regaining its power of influence there.

The Midwest, which will sway the chances of Trump being reelected, overlaps not only the Rust Belt but also the Corn Belt, the leading agricultural region in the US. Trump cannot afford to lose the votes of farmers, traditional ardent supporters of the Republican Party.

Despite all this, the coming into force of the TPP 11 and the Japan-EU FTA has put the US in a decisively unfavorable position in the Japanese market in relation to its agricultural export competitors such as Canada, Australia, New Zealand, and the EU. For Trump, the failure to conclude a Japan-US FTA soon and thus make the US able to compete equally with these rivals in the Japanese market will diminish his chances of winning the presidential election next year.

In the US-China trade war that Trump instigated, China raised tariffs on American soybeans. The resultant drop in soybean exports to China is dealing a hard blow to Midwest farmers. Trump will be more in trouble if the US also loses the beef and other agricultural markets in Japan. This must have given Japan an overwhelming upper hand over the US, which must secure the agricultural produce market in Japan.

Japan tumbled at the outset of talks

Despite all this, Japan is finding itself making concession after concession as in the past Japan-US negotiations.

First and foremost, Japan subjectively assumed that, in bilateral negotiations, the US would demand more concessions beyond that which has been agreed to in the TPP and made resisting such demands its defense line in such talks.

The result was devastating for Japan. In the joint statement issued by the Japanese and US leaders in September 2018, Tokyo stated that it could not go beyond the level of concessions it made in previous agreements such as the TPP and the Japan-EU FTA. This is tantamount to stating, at the start of bilateral negotiations, that Tokyo could make the same level of concessions to the US as well.

Bilateral talks were now not over whether Japan would concede any farm tariff reduction to the US; they were over whether Japan could resist the US demand for more concessions beyond the TPP levels. The US is now convinced that it can obtain TPP-level concessions from Japan at the very least.

In the Japan-EU FTA, Tokyo agreed to make concessions beyond the TPP levels with regard to cheese and other products of interest to the EU. The US demand includes similar concessions from Japan, although the US took the liberty of pulling out of the TPP.

Import quotas as well as the levels at which safeguards will be triggered under the TPP 11 have been set with US export levels taken into account. Therefore, if it becomes clear that the US will not join the TPP 11, these import quotas and safeguard trigger levels need to be reset by counting out such US export levels. Negotiations to that end need to be conducted with Australia, among other member countries.

If Japan makes concessions to the US beyond the TPP levels, it cannot help but concede the same levels of concessions to Canada, Australia, and New Zealand, all of which made their own concessions to launch the TPP 11. But Japan's agricultural sector will oppose any further concessions.

The Trump administration seems dead set against making concessions the US once agreed to in the TPP

Under the US-Korea Free Trade Agreement (KORUS FTA), the US tariff on auto imports from South Korea was eliminated in 2017. A US tariff of 2.5% on car imports from Japan, on the other hand, will be abolished in 25 years. (More specifically, the tariff reduction will not begin until 15 years hence; it will be reduced to 2.25% in 15 years, halved to 1.25% in 20 years, further lowered to 0.5% in 22 years, and abolished altogether in 25 years.)

A US tariff of 25% on Japanese trucks will be maintained for 29 years and then abolished in the 30th year. The Japanese government explained that the TPP, as soon as it takes effect, will eliminate the 87.4% tariff on Japanese auto parts, which they say is a much greater achievement than that won by South Korea under the KORUS FTA.

However, the amount Japan paid to the US as auto parts tariffs, which will be eliminated right away, was only 20 billion yen, while Japan paid some 100 billion yen to the country as auto tariffs. In short, Tokyo failed to obtain satisfactory concessions with regard to automobiles in the TPP negotiations.

Because Japan was in a far better negotiating position, it should have demanded an immediate elimination of US auto tariffs in Japan-US FTA talks, rather than their gradual abolition over a period of 25 years in line with the TPP.

The US, however, is refusing to accept Japan's modest demand for auto tariff reductions on a par with the TPP while demanding that Japan lower its tariffs on US farm products beyond the TPP levels.

On July 17, Reuters reported on the ongoing Japan-US negotiations in Washington as follows:

An auto industry official said the deal could involve Japan offering U.S. farmers new access to its market in return for Washington reducing tariffs on certain Japanese auto parts [...] The deal would not require congressional approval since the U.S. president can eliminate or reduce tariffs on products that have a duty of less than 5 percent, and most auto parts tariffs are roughly 3 percent to 6 percent.

The deal would not require US Congressional approval, but would require approval from Japan's Diet

Why does Washington call for a deal that would not require US Congressional approval?

In fact, US Congress is calling on its government to come up with a comprehensive FTA that encompasses not only agricultural products or other goods, but also services and intellectual property rights. US Congress says it will approve such a deal only.

Moreover, Congress, including Republicans, is opposed to certain chapters of the TPP Agreement, including the one on intellectual property rights. It is thus unlikely that Congress will approve a comprehensive FTA that includes provisions like the ones contained in the TPP Agreement. In fact, it remains uncertain whether Congress will approve USMCA, which has replaced NAFTA, due to the opposition of the Democratic Party.

If Washington wants to conclude a deal that would satisfy Congress with Japan, it needs to work on the lengthy process of reworking what it once agreed to in TPP talks. Even if it clinches a deal with Japan, there is no guarantee that Congress will approve it. It is unclear how many years it will take for Washington to put in force a comprehensive Japan-US FTA that can win Congressional approval. That could not possibly happen in time for next year's presidential election.

If things go on like this, Trump cannot satisfy the wishes of the US agricultural sector, which is placed in a far less competitive position in relation to its competitors in Canada and Australia. Not only that, the longer it takes for negotiations to reach a deal, the wider the gap in competitiveness will become between the US farm sector and its competitors, which are benefitting from the phased reduction of tariffs in the Japanese market.

In a nutshell, Washington needs to shy away from a comprehensive FTA in order to evade the requirement to seek Congressional approval. It is also in this light that Washington's negotiating position is quite fragile.

Even under a free trade agreement on goods only, the Trump administration cannot afford to make concessions by reducing auto tariffs if it wants to win votes in the Rust Belt, which is characterized by the auto and steel industries. But the administration can reduce tariffs on auto parts because it can argue that the resultant increase in auto parts will create more American jobs as they are assembled in auto plants in the US.

On top of that, a tariff of not more than 5% does not require Congressional approval. If Japan accepts such a deal, Trump can satisfy the wishes of the US agricultural sector by the end of this year. Such a situation in which the US government is placed provides the background to Reuters' report quoted earlier.

Of course, the deal would not require US Congressional approval, but would require the approval of Japan's Diet as Japan would need to reduce tariffs on farm imports. No other negotiations could be more humiliating to Japan.

Shouldn't Tokyo leave the negotiating table?

To begin with, it is Trump who took the liberty of pulling the US out of the TPP to find himself in a predicament. Tokyo, which does not need a Japan-US FTA, is far better positioned in negotiations than Washington, which desperately needs such a deal. At a glance, this position can be likened to the absolutely advantageous position a yokozuna (sumo grand champion) takes, called "morozashi" (a deep double underarm grip which prevents the opponent from grabbing the belt), in his bout with, say, a makushita (junior-grade sumo wrestler).

In reality, however, the ongoing bilateral talks are more like a vassal state doing whatever is told to do by its suzerain state. Are there any Japanese negotiators who will just walk away, saying "I can't stand such a Japan-US FTA anymore."

The fact the Japanese and American leaders are on good terms is apparently resulting in a Japan that does whatever is told to do by the US. Are the Japanese negotiators pandering to the good relationship between Shinzo and Donald?

Japan's Prime Minister Shinzo Abe says he tells his US counterpart whatever he needs to say. But the remarks Trump made in relation to the Japan-US security agreement suggest that what Abe tells him fails to resonate with Trump.

As political scientist Kiichi Fujiwara points out in the Jiji Shogen column of the evening edition of the Asahi Shimbun on July 17, Prime Minister Shinzo Abe has produced very few noteworthy results on the diplomatic front, although he is seemingly playing out brilliant summit diplomacy and negotiations.

I suggest that Abe ask Trump to help him issue a demand to Kim Jong-un for the immediate release of the Japanese abductees in North Korea in return for making concessions on US farm produce. Abe keeps saying that the abduction issue is a top priority issue for his administration and that he stands by the families of the abductees. Abe, who must be staying close to the hearts of the abductees, might as well take advantage of the Shinzo-Donald relationship to ask Trump to cooperate in addressing the issue. It may be difficult for Abe to make such a demand to Kim Jong-un. But Trump might be able to make the release of the abductees a reality.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "RONZA" on July 8, 2019.)