By Junji Nakagawa, professor at the University of Tokyo
The trade war waged by the U.S. Trump administration is now intensifying. Additional tariffs imposed in March on steel and aluminum products under Section 232 of the Trade Expansion Act have been effective as evidenced by the review of the U.S.-South Korea free trade agreement (FTA).
Encouraged by this outcome, the Trump administration continues studying in preparation for imposing additional tariffs on automobiles and auto parts under the same section. The Commerce Department will apparently make a final report soon on the matter. In response to this move, the European Union (EU) agreed with the U.S. in July to start negotiations aimed at eliminating tariffs on industrial products except automobiles.
The U.S. decided to invoke trade sanctions against China by unilaterally raising tariffs under Section 301 of the Trade Act, because the country, according to the U.S., forces American companies expanding into China to transfer their technology and disadvantages the U.S. through its trade practices and measures including insufficient protection of intellectual property. Washington threatens to expand the scope of sanctions against China’s U.S.-bound exports from $50 billion to $200 billion and to $500 billion, thereby pressing China to stop the aforementioned trade practices and measures.
The Trump administration’s trade tactics, intended to draw desired results through bilateral negotiations, is steadfastly producing good results. The first round of new trade talks with Japan for “free, fair and reciprocal (FFR) trade” was held in early August in Washington.
Shortly after its inauguration, the Trump administration withdrew from the Trans-Pacific Partnership (TPP) agreement. In response, Japan concluded the “TPP11” with 11 other countries without the U.S. and finally managed to get the trade pact signed in March. Japan also concluded an economic partnership agreement (EPA) with the EU, which was signed in July. These mega-FTAs are expected to come into force early next year.
As a result, these FTAs will disadvantage the U.S. agricultural industry in terms of its entry into Japan’s market and the industry will likely put pressure on the Trump administration. It is expected, therefore, that the U.S. will strongly urge Japan to open up its agricultural market in bilateral negotiations. How should Japan respond to the approach?
At this point, many are pessimistic about the future prospect of bilateral negotiations between the U.S. and Japan. If the U.S. imposes additional tariffs on automobiles and auto parts under Section 232 of the Trade Expansion Act, it will impact Japanese companies far more seriously compared to the additional tariffs imposed earlier on steel and aluminum products. In order to evade such a demand by Washington, Japanese government officials for trade negotiations, according to a media report, are considering proposing to the U.S. that Tokyo will open up its agricultural market more widely than in the case of the TPP agreement and create more jobs in the U.S. by having Japanese auto companies in the U.S. expand their production.
However, making compromises based on excessively pessimistic views will lead to serious problems in the future. The Trump administration unilaterally took measures under Section 232 of the Trade Expansion Act and Section 301 of the Trade Act based on American laws but it is questionable whether such measures are compatible with the World Trade Organization (WTO) agreement as an international rule.
The WTO’s multilateral negotiations (so called “Doha Round”) were crippled due to confrontation between advanced countries and emerging countries. In the meantime, the U.S. initiated the TPP as a mega-FTA to set an advanced rule aimed at liberalizing trade and investment, which suits the global economy in the 21st century as the supply chain becomes more globalized. With the withdrawal of the U.S. from the TPP, negotiations were expected to face a deadlock, but Japan took the lead and managed to have the 11 countries sign the agreement. Some details of the EPA between Japan and the EU differ from the TPP11, but both are mega-FTAs incorporating the liberalization of trade and rules that fit the global economy in the 21st century.
The Abe administration has consistently urged the U.S. to return to the TPP. This was the only correct measure from a broader viewpoint of reforming the multilateral trade structure suitable for the 21st century’s global economy after the Trump administration rocked it. Japan should maintain this stance in the FFR negotiations and tenaciously persuade the U.S. to return to the TPP.
Nonetheless, the pressure from the U.S. is strong as it threatens to impose additional tariffs on automobiles and auto parts. It would be too optimistic if Japan assumes that it could dodge demands from the U.S. by repeating the same measures taken so far. Bearing a victory in mind in the upcoming midterm election scheduled for November as top priority, the Trump administration is implementing its trade policy. It is indispensable for the administration to produce a result in the FFR negotiations with Japan and make an appeal to voters. While maintaining its stance that has been taken so far, Japan should aim to bring about a result that saves the Trump administration’s face.
There are three cards for Japan to play to achieve the goal.
First, Japan will open up its market for agricultural products. Japan sets its tariffs on industrial products at extremely low level. There is almost no room left for further lowing them. In fact, while the U.S. maintains a 2.5% import tariff on passenger cars and 25% on pickup trucks, Japan’s import tariff on automobiles is 0%.
When the TPP11 and the Japan-EU EPA will come into force, it will extremely disadvantage American agricultural products in the Japanese market as the country has withdrawn from the TPP. In order to win the midterm election, the Trump administration needs to obtain Japan’s commitment to open up its market for agricultural products, thereby gaining support from American farmers. In response, Japan should open up its market. However, the level of opening up should not exceed the level that Japan promised to the U.S. in the past TPP negotiations. If the level of Japan’s opening up its market exceeds that of the TPP, the U.S. is almost unlikely to return to the TPP.
Second, Japan will propose rules to the U.S. for four fields including intellectual property, investment, restriction on state-owned companies, and e-commerce, which will in effect restore the TPP. In the trade war with China, the U.S. is severely attacking Beijing concerning these four fields.
China infringes on intellectual property, forces foreign companies to transfer their technology, provides enormous amount of subsidies to state-owned companies and closes its e-commerce market. In its long-term strategy called “China Manufacturing 2025” toward the high development of Chinese industries, the PRC aims to become a strong manufacturing country by ignoring international rules and trade practice of advanced nations. The U.S. and American people are strongly angry about China’s such practice.
By unilaterally raising tariffs in accordance with Section 301 of the Trade Act as its leverage, the Trump administration demands that China stop such measures and trade practices. If Japan can agree with the U.S. on the aforementioned four fields – a de facto restoration of TPP rules – in the FFR negotiations, it would be a strong “weapon” for the U.S. to use against China. Making this a precedent, the U.S. could demand that China adopt the same rules.
Third, Japanese companies will expand their investments in the U.S. in the fields of automobile and auto parts, which will lead to creating jobs in the U.S. President Trump likes a policy that can appeal to his supporters with visible results. The Japanese manufacturing industry, not only automobiles and auto parts industries such as Toyota and Honda, has established a broad manufacturing base in the U.S. Increasing investments and creating more jobs in the U.S. will also benefit Japanese companies operating in the U.S. Even if the U.S. invokes additional tariffs on automobiles and auto parts – the worst case scenario – the third card could offset the impact of additional tariffs to some extent.
If this happens, the Trump administration could appeal to its supporters on its creation of tens of thousands of jobs as its achievement. In the upcoming FFR negotiations, if Japan in cooperation with the manufacturing industry proposes the third card, the U.S. would welcome the idea.
Given the U.S. political schedule, the FFR negotiations must be carried out swiftly. By playing the three cards, if Japan can conclude the FFR before the midterm election in November, it would be a good point for the Trump administration. An outcome of the FFR might be a conclusion of FTA between Japan and the U.S. However, by playing the second card, it could be considered the first and effective step for the U.S. to return to the TPP.
The U.S. successive administrations from the George W. Bush administration to the Obama administration defined the TPP as the “trade agreement model for the 21st century.” While the Trump administration aims to win the midterm election, Japan should persistently negotiate with and persuade the administration to honorably return to the TPP. That will be the goal of Japan’s trade policy with the U.S. in the post-FFR negotiations.