Media  Global Economy  2019.09.25

Japan's tributary diplomacy to buy excess US corn Japan: US FTA all in the name of Trump's re-election

The article was originally posted on RONZA on August 26, 2019
All in the name of Trump's re-election

Japan and the US have reached a broad agreement in trade negotiations. Prime Minister Abe will be visiting the US as early as September to sign the agreement.

Put simply, the agreement is all in aid of President Trump's re-election in next year's presidential election.

Until now, I have mainly analyzed and evaluated the negotiations from the Japanese perspective. This time, I would like to change my perspective and view the agreement from the American side of the Trump Administration.

Trump's prime interest is to win re-election to the presidency, for which the votes of Midwest farmers are vital.

In the US presidential election, there are states for which it is known in advance which party's candidate they will vote, such as California for the Democrats and Texas for the Republicans.

Besides these states, there are around ten states called swing states in which there is no clear trend. Whether a candidate wins in these states or not determines the overall outcome of the presidential election. Florida is a well-known swing state, but many other swing states such as Pennsylvania, Ohio, Michigan, and Iowa are concentrated in an area called the Midwest.

In the previous presidential election, Trump gathered the votes of workers of the steel and automotive industries in the Midwest, appealing to the voters that free trade is stealing US jobs, and won in the Midwest states. Pennsylvania and Ohio had once grown as centers of the steel industry and Michigan as a center of the automotive industry.

These smokestack industries lost ground to foreign companies including Japanese companies and are now called the Rust Belt. In the past, the Midwest states had been impregnable strongholds of the Democratic Party backed by support of the labor unions, but workers turned to support Trump. This was the key factor for Trump's victory in the presidential election.

In next year's election also, Trump's victory in the Midwest states is vital to his re-election.

The Midwest is the "Corn Belt"

As well as being the Rust Belt, the Midwest is an agricultural region called the Corn Belt. Conservative farmers have traditionally supported the Republican party. If the farmers vote for the Democratic party, Trump will have to fight an uphill battle.

The Corn Belt is the region planted in corn-soybean rotation. Both crops are principally used in animal feed.

However, due to the China-US trade war that Trump instigated, China, which is the world's top export destination for soybeans, raised tariffs on US soybeans. As a result, US soybeans are left in the field with no place to go, and soybean prices have crashed.

Furthermore, under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP 11) and Japan-EU free trade agreement (FTA), Japan's tariffs on beef and pork imported from countries such as Australia, Canada, Denmark, and Spain will be lower than those on US beef and pork, causing US exports to fall. If these livestock industries suffer damage, the Midwest farmers who supply soybeans and corn as animal feed will suffer further damage.

Great concessions in what seemed to be an overwhelmingly advantageous negotiation

Trump's decision to withdraw from the Trans-Pacific Partnership (TPP) has placed American agricultural produce at a disadvantage in the Japanese market. The US government had no choice but to hold Japan-US FTA negotiations, unable to rejoin the TPP on account of Trump's intention.

In the meantime, Japan can as before export automobiles to the US without a Japan-US FTA. Japan does not need the FTA. It is the US that had to ask Japan to hold talks for a Japan-US FTA. If Japan had stuck to its principles and demanded US's return to the TPP, the US would not have had much of a choice.

And yet, Japan sensitively responded to the US's imposition of additional auto tariffs from the perspective of national security using Section 232 of the Trade Expansion Act of 1962. Furthermore, Japan not only agreed to hold the Japan-US FTA negotiations, but also granted concessions for agricultural produce to the level agreed on in the TPP well before the negotiations were started, stating that the limit of concessions is the TPP level.

The negotiations, which were to be overwhelmingly advantageous for Japan by all rights, ended up just like the Japan-US negotiations of the 1980s in which the Japanese side succumbed to US demands. While the US won an agreement on agricultural produce to the same level set by the TPP, it did not have to make concessions in auto tariffs to the same level set by the TPP.

Not only that, import quotas as well as the levels at which safeguards will be triggered under the TPP 11 for agricultural products 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.

Japan, being good-natured, has taken on extra negotiations that it does not have to take. Worse still, if negotiations with Australia and other member countries come to a rupture, Japan will be the one in trouble, not the US.

Japan accepted inequality

The threat of additional auto tariffs was effective on Japan.

I do not think the US can actually impose additional auto tariffs. While steel tariffs have been raised from the same perspective of national security, steel that is used only as raw materials differs completely from automobiles that are purchased by many Americans as final consumption goods. The automotive industry itself opposes additional tariffs.

Steel tariffs were raised immediately after Trump's assumption of the presidency. The raising of auto tariffs was to be decided in May of this year, more than two years into the presidency, but the decision has been postponed for another 180 days.

The European Union (EU), which will be similarly affected by additional auto tariffs, assesses these circumstances calmly. At first, the EU had considered the additional tariffs problematic and agreed to hold trade negotiations with the US, but France and other member states opposed the inclusion of agricultural products in the negotiations, which themselves have not yet been started.

The timing of the negotiations was perfect. As long as the US Congress asserts that it will not approve any FTAs other than a comprehensive FTA that encompasses services, investment, intellectual property rights, etc., a free trade agreement of the very limited scope that does not require Congressional approval was necessary.

If a comprehensive FTA were to be concluded between Japan and the US, the agreement would take time to be approved by Congress and cannot be assumed to be effectuated in time for the presidential election.

On this point, Japan before the start of the negotiations had rather insisted on limiting talks for a free trade agreement on goods in order to fend off arguments from the Japanese opposition parties that oppose a comprehensive FTA. This was a timely offer for the US. The agreement would require Congressional approval if the 25 percent import tariff on trucks were to be removed, but Japan forgave the removal, deciding not to request concessions from the US to the same level set by the TPP.

While the agreement would not require US Congressional approval, it would require approval of Japan's Diet as Japan would need to reduce tariffs on agricultural imports. Japan also accepted this point.

Trump's monologue

Even allies such as Germany and France do not listen to what I say, but Shinzo listens to whatever I say.

It is great that he has promised to go so far as to buy excess US corn. Since Japanese corn tariffs are set at zero and imports are handled by not the state trading enterprise like China but the private sector, I do not know how Japan is going to increase corn purchase, but Shinzo has made a promise that even China cannot make with its state-owned enterprises handling the imports.

If beef and pork tariffs are lowered by this agreement and imports from the US are to be increased, Japan's production of beef and pork will probably decrease and the demand for corn as animal feed will decline with it, but Japan has promised to increase corn imports. This means that Japan is going to shoulder US excess corn stock by incurring the price charged for storage.

Shinzo is really a great guy. Let me invite him to the Super Bowl in return for the sumo tournament.