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Trade War – Part 1: Japan can’t make concessions in agriculture

On July 27, Prime Minister Shinzo Abe was in his office at the Kantei, talking to Minister of State for Economic and Fiscal Policy Toshimitsu Motegi. “We can’t make concessions in agriculture and I want you to avert additional auto tariffs too,” he said. Motegi will lead the Japanese team on the new “FFR” trade talks, which Japan and the U.S. will soon kick off in Washington D.C. on August 9 to realize free, fair and reciprocal bilateral trade. Abe and Motegi simulated various scenarios and discussed how Japan should respond to U.S. requests.

 

With the Upper House election scheduled to take place next summer, agriculture is becoming a politically sensitive area. Abe is growing wary of a scenario in which the U.S. ratchets up pressure on agriculture if the topic is put on the agenda of Japan-U.S. free trade agreement (FTA) negotiations. He said: “The U.S. also wants to produce results before the midterm congressional elections.”  The Japanese and U.S. leaders bear in mind that behind trade friction is domestic affairs, namely, elections.

 

In April, Abe and U.S. President Donald Trump agreed to launch the FFR framework. The U.S. team will be led by U.S. Trade Representative Robert Lighthizer, whom Abe regards as a hawkish negotiator. Abe has asked his aides, “How much authority Lighthizer is granted.”  

 

Japan and the U.S. have been making moves before the FFR talks begin. In late July, Kazuyoshi Umemoto, who serves as Japan’s chief negotiator for the Trans-Pacific Partnership free trade pact and head of the FFR talks at the working level, and several other Japanese government officials received an email. “The “U.S. is looking to chart a path to a bilateral FTA,” it said. The email was sent by Michael Beeman, assistant U.S. trade representative for Japan, Korea and the Asia-Pacific Economic Cooperation (APEC), calling on Japan to start preliminary talks on the FFR. Umemoto replied: “President Trump has requested Japan purchase U.S. goods in his summit talks with Prime Minister Abe and Japan wants to deepen discussions on this topic.”

 

Meanwhile, Minister of Economy, Trade and Industry Hiroshige Seko visited the “Rust Belt” during a trip to the U.S. from July 30 and played up contributions that Japanese businesses have made to the local job market. The objective was to dissuade the U.S. from imposing additional auto tariffs.

 

On July 19, the U.S. Department of Commerce held a public hearing. Business leaders and organizations from over 40 countries across the world, including the Japan Business Federation [Keidanren], attended. For over seven hours, they stated their objections to additional auto tariffs by saying that “increased production costs will make American cars less competitive” and that “American workers will also take a hit from additional tariffs.”

 

Additional tariffs will have a devastating impact. Toyota Motor estimates that additional tariffs on auto parts will push up the production cost of the “Camry” sedan, a mainstay model that it manufactures in the U.S., by 1,800 dollars. Japan’s six leading automakers might have to shoulder a cost of about 2 trillion yen all told. Nonetheless, there is not much they can do at the moment. “We need to wait for a permanent decision to be made and not be affected by inter-governmental negotiations and rumors,” said Carlos Ghosn, who leads the Renault-Nissan-Mitsubishi Alliance.

 

Under such circumstances, Japan is looking to strengthen its partnership with the European Union (EU).

 

On July 17, Japan and the EU signed an economic agreement partnership (EPA). During the talks, EU Commission President Jean-Claude Juncker had once proposed “Japan, the U.S. and Europe introduce reciprocal zero auto tariffs.” Abe confirmed with his European counterpart that Japan and the EU will “ally to fight against protectionism.”

 

At the Charlevoix G7 summit held in June, German Chancellor Angela Merkel spoke to Abe amid heated discussions on the U.S. introduction of aluminum and steel tariffs: “Be honest. You are trying to make a deal with the U.S.” Abe responded: “We are not making any deal with the U.S. Our position is the same as yours. We make a good alliance.”   

 

The expansion of the TPP membership is another tactic that Japan is pursuing with an eye on the U.S. On July 4, Atsuyuki Oike, acting chief negotiator for the TPP, secretly flew to Indonesia and got the feeling that the Southeast Asian nation “will not make a move before the presidential election next year but may move after the election.”

 

On July 10, after Oike returned to Japan, Umemoto briefed Motegi at the minister’s office, telling him that the “European Free Trade Association (EFTA), which is joined by Norway, Switzerland, Liechtenstein and Iceland, looks like interested in the TPP.” It appears that Japan’s TPP expansion strategy is producing results.

 

The Japanese government envisages making a deal with the U.S. by promising to increase purchases of shale gas and military hardware. In early July, Motegi instructed vice ministers of ministries and agencies and other senior officials to “get me seeds that can soon bear fruit.” Will Japan be able to make a deal with the U.S.? The close relationship between Abe and Trump will be soon put to the test.

 

Japan and the U.S. will meet in Washington D.C. on August 9 for their first FFR dialogue. With President Trump stepping up his protectionist approach and trade tensions escalating, how will the Japanese government and business community respond?

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