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Motivations for discussing “digital trade” in U.S.-Japan trade talks

By Masahiko Hosokawa, professor at Chubu University

 

Japan and the U.S. have finally entered full-blown trade negotiations. President Donald Trump is looking to win quick results to convince American voters to keep him in office for a second term. He may perceive Japan as an “easy partner,” because he finds it easier to produce results with Japan than with China or the European Union (EU). But the present Japan-U.S. relationship is different from when Japan focused on “dodging pressure from the U.S.”

 

In fact, the U.S. side is more anxious than Japan. The enforcement of the Trans-Pacific Partnership (TPP) pact, which the U.S. is not a member of, ended up making U.S. exports of beef and other farm produce less competitive than other nations’ in the Japanese market. Discontent is escalating within livestock groups from the U.S. Midwest, a crucial battleground for the presidential campaign. Thus the issue needs to be addressed as soon as possible.

 

Japan does not need to take the U.S. demand for “concessions beyond what was agreed on in the TPP negotiations” seriously, because it is the U.S. who wants to rectify the unfavorable situation as soon as possible.

 

In the auto sector, which is the most important subject for the Japan-U.S. trade talks, the U.S. has long called for ramping up domestic auto output and employment. To achieve this, it is seeking to subject Japan to a “quantitative cap” by threatening to impose a higher tariff on Japanese auto shipments.

 

But this “sword” of higher tariffs on imported vehicles cannot be unsheathed. The U.S. economy would take a substantial hit and stock prices would fall if auto duties were raised. It is also estimated that personal spending would drop off and about 1.5 million jobs would be lost. Since President Trump is seeking reelection, he cannot choose this option.

 

The most important point is that President Trump’s interest is now focused on the Midwest as he is seeking reelection. The best approach would be to play up the contributions that Japanese automakers can make to U.S. auto production and employment by investing more in the Midwest. Instilling this idea in his mind over and over again will be crucial.

 

Two keywords have emerged from the negotiations that Japan and the U.S. have held thus far: “package deal” and “win-win.” These phrases cannot be overlooked.

 

If countries seek to lower tariffs for a particular nation, they must eliminate tariffs on “practically all trade.” That is the rule upheld by the World Trade Organization (WTO). In addition, tariffs must be negotiated based on a give-and-take principle. This means that the U.S. cannot unilaterally make demands. Japan also needs to be able to make demands. Tariff demands must be negotiated in a two-way direction.

 

In the TPP talks, Japan and the U.S. had reached a “package deal,” in which Japan had agreed to lower tariffs on farm produce and the U.S. had agreed to lower tariffs on automobiles as a result of tough negotiations. Therefore, the scenario of the U.S. not experiencing any pain and only Japan agreeing to lower tariffs on farm products in the upcoming trade talks is inconceivable.  

 

“Win-win” is the same thing as “give and take.” The Japanese media must also recognize that the auto issue is not only an area in which Japan will come under attack from the U.S. but also an area where Japan can make demands of the U.S. For Japanese automakers to increase U.S.-bound investments, which I mentioned earlier, the elimination of U.S. tariffs on autoparts will become important too.

 

It is also noteworthy that not only automobiles and farm products but also digital trade will be discussed in the Japan-U.S. trade negotiations. Why has this subject emerged all of a sudden? Both Japan and the U.S. have their own motives for taking it up.

 

On the part of the U.S., the government wants to show that it is trying to accommodate demands from Congress. For this reason, it is seeking an actual example to showcase that industry-wide demands, which do not only focus on goods but also cover IT and other sectors, are subject to negotiations. In addition, President Trump, who is seeking a second term in office, wants to produce quick results, so it is preferable for him to focus on an area in which it will be easy to make a deal. Fortunately, Japan, the U.S. and Europe are already taking the lead in the international debate on this subject.

 

Japan, on its part, has a strategic interest in digital trade. It is leading international efforts for global rule-making and has in mind a two-track strategy with an eye on China, which is trying to gain access to data.

 

One element of that two-track strategy is to establish WTO rules involving China at the G20 summit, which will be held in Osaka. The other element is to set up standards for the creation of a global data distribution zone among nations that trust each other under the leadership of Japan, the U.S. and Europe. This is aimed at containing China. Japan wants digital trade to be a topic in Japan-U.S. trade negotiations simply because it needs to enhance cooperation with the U.S. for the latter reason.

 

I have been asserting that Japan and the U.S. should aim for an economic partnership agreement (EPA) that includes new rules that take into consideration the international situations in a post-TPP era if they seek to sign a trade accord. Discussions on digital trade will help them to move in that direction.

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