Turning TAG into network to isolate China
U.S. President Donald Trump is racing to stem the flow of state-of-the-art technology into China. It has been revealed that President Trump proposed to Prime Minister Shinzo Abe during his trip to the United States that the trade talks look at making the prevention of the transfer of state-of-the-art technology to third countries mandatory. “Third countries” refers to China, and the aim is to transform the Japan-U.S. Trade Agreement on goods (TAG) into a network that goes beyond the bilateral framework to contain China by including regulations prohibiting the transfer of state-of-the-art technology to third countries, like China.
There are concerns that the question of imposing additional tariffs on autos will be reopened if the Prime Minister refuses. The Trump administration has asked its ally Japan to stand by its side at the front lines of prohibiting the flow of advanced technology into China.
If this were to come out into the open, there would inevitably be backlash from the Xi administration, which is working feverishly to repair China’s relationship with Japan.
“The Prime Minister has been saddled with a difficult issue,” says a top official at the Ministry of Economy, Trade and Industry (METI) who is handling the negotiations with the United States. The Kantei has said that Japan’s demands, including the non-imposition of tariffs on Japanese autos, will be accepted during the negotiations for the Japan-U.S. Trade Agreement on goods, which are to start in January, and Japan will be able to deftly fend off the U.S. administration’s demands regarding trade with Japan. In reality, however, the Prime Minister was slapped with a serious problem at the late-September Japan-U.S. summit. “Trade negotiations at the Japan-U.S. summit gradually turned into the discussion of a trade agreement to in effect contain China,” said a Ministry of Foreign Affairs expert on negotiations with the United States.
Depending on how the negotiations between Japan and the U.S. progress, Japan’s trade and investment ties with China could be brought up. “The Japanese government could even be requested to take the hard-line policy of ‘banning the marketing of mobile phones’ made by the two Chinese majors,” which Western countries see as rivals, the source confided.
“The U.S. has forcibly demanded that a third-country clause be explicitly taken up in the Japan-U.S. trade talks, which are bilateral negotiations,” said the source.
At the Japan-U.S. summit in late September, the Prime Minister was asked for his views on trade negotiations with China, including the punitive tariffs against China. The Prime Minister strongly supported the U.S. President’s China policy, agreeing that China’s violation of intellectual property rights has thrown global trade rules into a state of disarray. Heartened by this, the President reportedly pressed to have a clause on “regulations on trade with China” added to the Japan-U.S. trade negotiations. “This will be good for Japan, too,” the President commented. In other words, what the United States really pressed Japan to do is to complete the containment of China through a “third-country clause.”
“Is this not the Abe administration joining hands with the Trump administration to restrict Chinese trade?” asked an official at the Chinese embassy in Tokyo to a top METI official who was an old friend. The embassy official had been rendered speechless and pale after reading the Japan-U.S. joint statement released by the two leaders [after their summit].
China openly revealing sense of crisis
A “third-country clause” was agreed by the Japanese and U.S. leaders and included in the Japan-U.S. joint statement. Paragraph 6 in the statement states: “Japan and the United States will strengthen cooperation to better protect Japanese and American companies and workers from non-market oriented policies and practices by third countries.”
The paragraph discusses the protection of intellectual property rights related to Japanese and U.S. state-of-the-art technology, including “intellectual property theft, forced technology transfer, and trade-distorting industrial subsidies,” and seeks joint defense of this technology against China. The paragraph also talks about “work[ing] closely together, through Japan–United States as well as Japan–United States–European Union cooperation.” By adding Europe, the paragraph hints at forming a “net around China” through a large coalition among industrialized nations.
This is a containment policy that will affect the welfare of China. It is consistent with the lecture that Vice President Mike Pence gave in October on the new cold war with China. China’s Internet media is in uproar over this development, saying “Japan and the United States should be careful of what they say and do.” Chinese Foreign Minister Wang Yi exploded at U.S. State Secretary Mike Pompeo during his visit to China in October: “We demand that the U.S. side immediately stop these kinds of mistaken actions and statements.”
A top executive of a major trading company stationed in Shanghai commented that China is openly showing this degree of crisis over the Japan-U.S. containment of China “because the Chinese economy has started to slow down” on account of the Trump administration’s China policy.
It is true that the Chinese economy is “gradually starting to gasp for air” with the U.S.’s repeated imposition of punitive tariffs, says a Hong Kong analyst. Chinese exports to the United States, which drive the economy, showed a substantial increase from January to September, because authorities ordered that the figures be padded. The real impact of the punitive tariffs will start to appear from now on.
U.S.-bound exports of more and more high-tech products, including electronic goods, are already decreasing rapidly. Anticipating a prolongation of trade friction between the United States and China, there is a move among foreign affiliated firms to transfer their factories [from China] to Southeast Asia and other regions. Broadening the range of products subject to tariffs from semiconductors and other high-tech products to home electric appliances and daily goods has had a major impact, and in October Chinese exports to the U.S. fell below those of the previous year. The numbers of Chinese EVs and other autos sold in the United States have declined by double-digit percentages.
This is not the first time for the Trump administration to include a “third-country clause” to contain China in bilateral negotiations. On Sept. 30, right before Prime Minister Abe arrived in America, the United States and Canada agreed to the “United States-Mexico-Canada Agreement,” a new trade agreement to replace the North American Free Trade Agreement (NAFTA). With this, it has in effect become difficult for China to get around the network of anti-China sanctions and engage in FTA negotiations with Mexico and Canada.
Chinese mobile phones making inroads into SDF
Discussions on a third-country clause are moving forward in effect. United States Trade Representative Robert E. Lighthizer invited METI Minister Hiroshige Seko and European Commissioner for Trade Cecilia Malmström to New York City at the end of September for the Fourth Trilateral Meeting of Trade Ministers. USTR Lighthizer criticized the “market-distorting measures taken by third countries (China)” in the field of mobile communications and appealed to his counterparts about the need for the ministers to join hands to regulate this.
The U.S. administration is increasingly wary of China’s 5G mobile communications business. The U.S. government has instituted a government-wide ban on the use of 5G equipment produced by the two Chinese majors in the field, Huawei and ZTE. Other Western countries are also making moves to exclude China, as witnessed by the Australian government’s barring the two Chinese companies from entering the 5G technology equipment market. Only Japan is allowing the two Chinese mobile majors to go “unchecked.” Working jointly with Huawei, SoftBank is expanding tests of services that use 5G technology in Japan.
Huawei is setting up research facilities in Chiba and other areas in Japan one after the last, and it is showing signs of making inroads into the Japanese market with its low-priced offerings. This method falls under the “unfair trading practices, including distortions created by state-owned enterprises and overcapacity” by third countries mentioned in paragraph 6 of the Japan-U.S. joint statement. There is also a chance that [the U.S. administration] will ask the Abe administration to introduce measures to bar mass-marketing [of the two Chinese companies’ products] in Japan. The U.S. Department of Defense regards it as dangerous for the two companies to make inroads into the public sector and to sell personal-use mobile phones to those involved with the Self-Defense Forces. It warns that this could “rattle the foundations of the alliance.”
It is said that “the history of [Japan-U.S.] trade talks is the story of [Japan] battling pressure from the U.S.” The current METI must take the lead and transform itself into a Japanese version of the “USTR.” It is wrong that Japan does not have a “USTR” even though it is a major economic power.