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The ‘Trump Factor’ in the US–Japan trade deal

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US President Donald Trump shakes hands with Japan's Ambassador to the United States Shinsuke Sugiyama in front of US Trade Representative Robert Lighthizer during a formal signing ceremony for the US-Japan Trade Agreement at the White House in Washington, 7 October 2019 (Photo: Reuters/Kevin Lamarque).

In Brief

‘Win–win’ is the phrase du jour for both Prime Minister Abe and chief trade negotiator Toshimitsu Motegi when describing the recent US–Japan trade agreement. Both have emphasised how the deal has delivered positive outcomes for Japan as well as for the United States. But the result on the most critical issue for Japan — US tariffs on Japanese cars and car parts — was a negative.

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There was no abolition of existing 2.5 per cent tariffs and only a temporary stay of additional car tariffs under Section 232 of the Trade Expansion Act (the imposition of higher auto tariffs on national security grounds). These are to be discussed in future trade negotiations with no firm US commitment to their abolition.

The contrast with the personal, political and electoral gains for Trump could not be greater. Japan has committed to either eliminating or lowering tariffs on 7.2 billion yen worth of American agricultural imports — delivering a big win for Trump that effectively restores the TPP US–Japan status quo for the United States on everything of major importance to the US side except dairy. Trump described it as ‘a huge victory for America’s farmers, ranchers and growers. And that’s very important to me’.

Given how important winning is in negotiations for Trump because of his need to tout trade successes to his electoral base — particularly in crucial farming states such as Iowa — Japan might have insisted on the removal or reduction of tariffs on cars. Instead, though this is an ongoing negotiation, it’s allowed its national trading interests to become a tool in Trump’s election campaign strategy. In wheeling and dealing on trade, ‘America first’ is in reality ‘Trump first’.

Japan very successfully stuck to its original trade negotiating parameters on agriculture — no more than offered under the TPP — but this approach weakened Japan’s position rather than strengthened it. It was the equivalent of saying ‘we will concede up to the same level as the TPP’.

Using this tactic, the Abe government gave certainty to its own farm voters in the lead up to the July Upper House elections but at the same time lost its bargaining power, hobbling its ability to negotiate on the offensive. Originally, alongside the principle of no concessions on agriculture beyond the TPP, was another Japanese demand: abolition of the 2.5 per cent tariff on cars.

This was also agreed on in the TPP but was met with little response from the US side. Instead, Trump managed to get away with not giving away anything on cars given their importance to Trump’s election goals in key ‘rust belt’ states such as Ohio and Pennsylvania.

Trump also demanded that Japan accept an emergency import of US corn separate from the agreement, which Abe accommodated with a highly dubious claim that Japan needed surplus US corn to cover losses in domestic production caused by a pest problem.

As Kenji Goto argues, given these concessions, the so-called ‘balance sheet’ in the trade agreement was not balanced at all. Japan ended up making almost all the crucial concessions, not the United States.

The US ‘concession’ on rice — a tariff-free rice quota of up to 70,000 tons a year– was a political if not an economic gain for Japan. It was originally agreed to in the TPP but was approved by Trump because domestic pressure on this market access issue is virtually zero.

The agreement enables Trump to use ‘gains’ from the US–Japan agreement to partially compensate for the ‘losses’ of American farmers in the trade war with China. Like China, Japan could have played hardball in negotiations knowing Trump is needy for victories on agriculture. Instead, it offered its agricultural market concessions up front.

It was Trump who unilaterally left the TPP, so Japan was not required to engage in the negotiations. Trump told Japan that it did not need to negotiate, but if they didn’t, the United States intended to impose substantial (additional) tariffs on cars.

In short, Japan’s entry into the negotiations was motivated by the threat of sanctions. This violates its basic stance in trade agreements, which is not to engage in negotiations motivated by sanctions. Japanese car executives, however, were much more concerned about the imposition of additional tariffs than the abolition of the 2.5 per cent tariff agreed in the TPP and are pleased that these have not eventuated.

Section 232 will hang over Japan’s head like the Sword of Damocles as long as US–Japan trade negotiations continue. The current deal is the product of only round one of these negotiations. In round two, which is expected to be a more wide-ranging trade deal, Japan will be again negotiating under the threat of sanctions. This includes additional tariffs and even the possibility of a quantitative cap on car exports.

The US–Japan trade negotiations look like a never-ending story played according to Trump’s rules. Not only does the current trade deal undermine Japan’s much-touted claim to be the flagbearer of free trade and Abe’s desire to raise the flag of free trade high, but the agreement could also be criticised as a ‘dirty FTA’ that ignores the WTO.

In reaching the deal, Japan has de facto prioritised cooperation with Trump’s re-election goals while ignoring multilateral trade negotiation principles. The postponement of a deal on cars — Japan’s primary export to the United States — means that the liberalisation rate of the agreement will only be around 60–70 per cent on a trade value basis, not the 90 per cent or ‘substantially all trade’ required by WTO rules for FTAs. To add insult to injury, the agreement’s just an interim agreement that can be used in the short term for Mr Trump’s own immediate electoral gains without commitment in the long term to a principled end.

Aurelia George Mulgan is Professor in the School of Humanities and Social Sciences, the University of New South Wales, Canberra.

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