By Junji Nakagawa, professor at the University of Tokyo
The U.S. administration led by President Donald Trump is seeking to please voters by producing results in trade policies before the country holds a midterm election this autumn. This is why the U.S. is adamant about changing regional content requirement rules in the auto sector, which the U.S. identifies as a priority in renegotiating the North American Free Trade Agreement (NAFTA). Other than this point, the NAFTA renegotiation is essentially a revival of the Trans-Pacific Partnership (TPP) talks in the North American region and a consensus will be probably reached on NAFTA.
With regard to the rules of origin for automobiles, my prediction is that the U.S., Canada, and Mexico will agree on Ottawa’s proposal for raising the regional content requirement to a reasonable level and the U.S. will drop its demand for a higher U.S. content requirement. But if the U.S. remains uncompromising, the negotiations will become drawn out and may break down in the end.
If the NAFTA negotiations fail, the Trump administration will probably blame Mexico and Canada for “not embracing our legitimate demands, which will help cut U.S. trade deficits and improve the job market,” in an attempt to win domestic support. It would be a nightmare for Japanese companies investing in North America as well as U.S. producers and consumers if the renegotiations were to break down and collapse. But this outcome cannot be totally ruled out when considering how the renegotiations have developed thus far.
On Jan. 26, President Trump announced U.S. plans to consider rejoining the TPP if the U.S. can benefit from renegotiations in an address he delivered at the annual meeting of the World Economic Forum held in Davos. The remark came immediately after the 11 TPP member states announced the conclusion of negotiations of the “TPP-11,” under which parts of the original pact have been frozen so the accord can be effectuated. This is likely what prompted President Trump to change course.
But President Trump did not rule out the possibility of the U.S. holding bilateral negotiations with the TPP members individually. He made TPP renegotiation a condition to consider for returning to the TPP, but it remains unclear what the U.S. would demand in order to gain a better deal.
The Trump administration is now in its second year. At the moment, there are many uncertainties over the prospects for its trade policies, including the NAFTA renegotiations and a possible return to the TPP. In his State of the Union address at the end of January, President Trump did not discuss trade policies extensively. He noted the U.S. will rectify bad trade agreements and negotiate new deals, but did not specifically mention NAFTA or the TPP.
So what issues should Japan address amid uncertain prospects for the Trump administration’s trade policies? The biggest task that Japan needs to take on is to set a course for the signing of the TPP-11 so that it can be effectuated.
The members of the TPP-11 are scheduled to sign the pact on March 8. To put it into force, six nations must ratify it. Japan has already ratified the TPP, but the TPP and the TPP-11 are different treaties so it must obtain new approval from the Diet for ratification. The Abe government plans to submit bills on the TPP-11 during the current Diet session for approval before June. Japan needs to press the other members to ratify the agreement swiftly to meet the goal of effectuating it in 2019.
Efforts to make steady progress toward the effectuation of the TPP-11 will put pressure on the U.S. to return to the deal. Japan needs to continue to urge the U.S. to return to the TPP, but at the same time it needs to send out the message that it will not accept renegotiation. As evidenced by the NAFTA renegotiation, if the U.S. keeps making unreasonable demands in the process of rejoining the TPP, the negotiations will fall apart and become prolonged. The Trump administration would gain nothing from such an outcome.
The TPP supports the liberalization of trade and investment at a higher level commensurate with the globalization of supply chains in today’s world economy and encompasses wide-ranging, high-standard trade and investment rules. The liberalization of e-commerce and rules that regulate preferential treatment for state-run firms would serve as an effective weapon to deal with China’s domestic regulations on e-commerce and preferential treatment for state-run enterprises – practices that the U.S. regards as problematic. Japan should talk to the U.S. about the benefits that the TPP would bring and persistently urge it to return to the pact.
On NAFTA, Japan can only exert a limited influence in moving forward the stalled renegotiations as it is not involved in the talks. But if it can steadily move forward the TPP-11 process and shows the U.S. its unwavering approach, it will be able to send out a consistent message to the three nations engaged in the NAFTA renegotiations.
NAFTA needs to be revamped to keep pace with the TPP since it has been in place for 20 some years. But forcing drastic changes in supply chains that have been built up under NAFTA is unacceptable, and such demands must not be heeded. Japan needs to convey this message. Amid growing uncertainty over the future, Japan should not allow itself to be drawn into the confusion. (Abridged)