Abe avoids the FTA trap at Mar-a-Lago, but U.S. pressure on Japan likely to mount

Tobias Harris

Publications Abe avoids the FTA trap at Mar-a-Lago, but U.S. pressure on Japan likely to mount

Japanese Prime Minister Shinzo Abe’s meetings with U.S. President Donald Trump on April 18 and 19 were unusually unpredictable for a summit between the leaders of the longtime allies, which are usually carefully choreographed with little left to chance. Much of the uncertainty was due to the Trump administration’s determination to reduce its bilateral trade deficits with major trading partners. While Trump’s use of unilateral trade remedies to attack China’s trading practices has understandably been subject to the most scrutiny, his administration has at the same time been ramping up pressure on Japan, which is the U.S.’s fourth-largest trading partner and with which the U.S. had its third-largest goods trade deficit in 2017, nearly $70 billion. As a result, given Trump’s preference for bilateral over multilateral trade agreements, a bilateral free trade agreement (FTA) with Japan has been at the top of the administration’s wish list–and in the months leading up to the summit, the U.S. administration was increasingly insistent in its demands for FTA talks, which Tokyo has been determined to avoid.

At the April summit meetings, Abe once again deflected demands for FTA negotiations. Instead, the United States and Japan agreed to launch a new dialogue—spearheaded by U.S. Trade Representative Robert Lighthizer, a veteran of U.S.-Japan trade disputes of the 1980s, and Japan’s Economic Revitalization Minister Toshimitsu Motegi–that will likely focus on sector-specific market access issues and the bilateral trade balance. In Wednesday’s joint press conference, Abe was extremely careful to note that they would be discussing “trade deals” as distinct from an FTA, stating, somewhat cryptically, that “they are interested in a bilateral deal…our country’s position is that TPP [the Trans-Pacific Partnership] is best for both of the countries. And based on that position, we shall be dealing with the talks.” In short, the Abe government will resist turning these talks into an on-ramp for FTA negotiations that it still does not want.

Pursuing free, fair, and reciprocal trade with Japan

If this new round of talks fails to deliver results quickly, however, the United States could once again ratchet up pressure on Tokyo to agree to FTA talks. Trump after all has made no secret of his belief that Japan is “unfair” to the United States. At a speech in Tokyo in November 2017, for example, he said, “We want fair and open trade. But right now, our trade with Japan is not fair and it’s not open, but I know it will be, soon. We want free and reciprocal trade, but right now our trade with Japan is not free and it’s not reciprocal.”

Since taking office, Trump and his administration have argued that a bilateral FTA that would open Japan’s market to more U.S. goods, especially automobiles and agricultural products, would fix the imbalance in the bilateral relationship.

Since taking office, Trump and his administration have argued that a bilateral FTA that would open Japan’s market to more U.S. goods, especially automobiles and agricultural products, would fix the imbalance in the bilateral relationship. The administration believed that it could secure a better deal with Japan than the Obama administration did in the bilateral talks with Japan as part of the multilateral TPP, from which the United States withdrew days after Trump’s inauguration.

However, for much of 2017, the Trump administration did not push Japan hard on rectifying its bilateral trade deficit. This likely reflected the administration’s pursuit of other trade priorities, including renegotiating the North American Free Trade Agreement (NAFTA) with Canada and Mexico, a process that is still underway, and updating the United States-Korea Free Trade Agreement (KORUS FTA), which was concluded in March of this year. It may also have reflected delays in staffing the U.S. Trade Representative’s office (USTR), since Lighthizer was not sworn in until May 2017 and his deputies were not sworn in until March 2018. As such, the administration was not ready to use the bilateral economic framework led by U.S. Vice President Mike Pence and Japanese Finance Minister Taro Aso, created when Abe and Trump held their first Mar-a-Lago summit in February 2017, to address bilateral economic issues substantively.

Nonetheless, since late 2017 the Trump administration has appeared increasingly frustrated with Japan’s inaction on the bilateral trade balance and determined to, as the USTR’s annual National Trade Estimate Report noted, “[expand] the presence of U.S. products and services in the Japanese market.” It is for this reason that, when the Trump administration announced Section 232 tariffs on steel and aluminum in March, it did not grant Japan the exemption that it granted to other major U.S. allies. The steel tariffs–Japan is a sizable exporter of steel but not aluminum to the United States–would give the United States a lever with which to bring Japan to the table to discuss greater market access for U.S. goods in more substantive terms. Indeed, the steel tariff decision served to heighten the drama surrounding the forthcoming summit with Abe, which the prime minister had initially sought in response to Trump’s decision to meet with North Korean leader Kim Jong-un.

Meanwhile, days before Abe arrived at Mar-a-Lago, Trump furthered muddied the waters in his pursuit of “free, fair, and reciprocal” trade with Japan when he ordered Lighthizer and Larry Kudlow, his newly appointed National Economic Council (NEC) chairman to study U.S. reentry into TPP, although the president quickly reverted to opposition to TPP after Abe’s arrival, tweeting after the summit’s first day, “While Japan and South Korea would like us to go back into TPP, I don’t like the deal for the United States.”

Japan’s pursuit of leverage

Abe, having already risked backlash from farmers and other key constituencies of his Liberal Democratic Party (LDP) to bring Japan into TPP talks in 2013 and then conclude a historic bilateral agreement with the United States as part of those talks in 2015, made clear from early in the Trump administration that his government was wary of the prospect of bilateral FTA talks with the United States. After all, the likelihood that the Trump administration would demand concessions–particularly regarding market access for U.S. automobiles and agricultural products–that went beyond what Japan accepted in TPP negotiations could leave Abe either having to say no to Japan’s most important ally or betraying his party’s core constituents.

Updating TPP and concluding an FTA with the European Union enabled Japan to step forward as a leading advocate for the global trading system.

Instead, in 2017 the Abe government pursued a multi-pronged approach to reduce the risks of being drawn into bilateral trade talks that would be a tough sell at home. Perhaps the main pillar of Abe’s Trump-era trade strategy was Abe’s decision to lead the process of updating TPP to account for the U.S. withdrawal. The prime minister was initially reluctant to revive TPP: shortly after Trump’s victory, he stated that the agreement would have “no meaning” without the U.S. in it. By the spring of 2017, however, his government had reversed course and would eventually play a critical role pushing the process forward, not least by resisting calls from other members to renegotiate considerable portions of the 2016 agreement. Instead, Japan insisted that the eleven remaining members preserve as much of the original agreement and pushed a compromise whereby the bloc would negotiate “freezes” to controversial provisions–many of which had been pushed by the Obama administration–that would suspend parts of the agreement but would enable them to be activated if the United States returned to the agreement in the future. This approach enabled the TPP-11 to move quickly to update the pact; a new version, now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was signed in early March.

Updating TPP and concluding an FTA with the European Union–an agreement in principle was signed in July 2017 and a final agreement is expected to be signed in July of this year–enabled Japan to step forward as a leading advocate for the global trading system. But these agreements also gave Japan some leverage when pressed by the United States for bilateral talks, which explains why Japan has rushed to conclude both agreements in hopes that both will enter force by 2019. Both the new TPP and the Japan-E.U. FTA will give privileged access to Japan’s market to the U.S.’s major competitors, particularly in agriculture. Australian ranchers, French vintners, Danish pork farmers, and Canadian and New Zealander dairy farmers will all have advantages in Japan not enjoyed by U.S. producers; the Abe government seemed to recognize that by denying the U.S. market share, U.S. exporters would pressure the Trump administration to moderate its demands or perhaps even return to TPP.

In bilateral discussions with the United States, meanwhile, Japan has pursued a variety of tactics to draw the Trump administration’s attention away from a bilateral FTA. It pushed the Aso-Pence dialogue to compartmentalize economic discussions and protect the overall bilateral relationship. It has highlighted the contributions made to the U.S. economy by the investments of Japanese companies. It has increased spending on liquefied natural gas (LNG) and military purchases from the United States, an approach particularly appreciated by Trump. It has joined with the U.S. and the E.U. to oppose China’s trading practices. And it has pursued cooperation with the U.S. on regional issues like high-quality infrastructure investment as part of their shared embrace of the “Free and Open Indo-Pacific” concept. These proposals may not have been sufficient to convince Trump to drop his focus on the U.S. trade deficit with Japan or to abandon the pursuit of a bilateral deal, but they could buy Japan time with which to pursue other agreements in the hopes that the overall effect would lead the Trump administration to moderate its demands.

The road from Mar-a-Lago

To a certain extent, Abe’s approach has failed. The United States is as focused as ever on the bilateral trade balance with Japan. Moreover, the desire for trade victories ahead of the November mid-term elections and during the run-up to the 2020 presidential election will likely lead the Trump administration to intensify pressure on Japan for either significant market access concessions or for an agreement to open FTA negotiations. The United States, in order to preserve some leverage, declined to grant Japan an exemption from the Section 232 tariffs, and will resist efforts by Japan to use the new dialogue to stall.

These efforts may result in something more substantial than the Aso-Pence dialogue but less ambitious than full FTA negotiations, perhaps akin to the market access talks of the late 1980s and early 1990s in which the United States pressed Japan for sector-specific reforms and, eventually, quantitative targets for imports of U.S. goods. The Nikkei Shimbun, Japan’s leading financial newspaper, alluded to this possibility by referring to the return of “managed trade,” a pejorative term for import targets. It is virtually certain that Lighthizer will press Japan to remove non-tariff barriers on automobile imports as well as tariffs and quotas on beef and other agricultural exports. It is revealing that the Abe administration sees the potential return of sector-specific market access talks, which were a bitter pill for Japan to swallow in the past, as preferable to FTA negotiations with the Trump administration.

For now, Abe has earned Trump’s respect as a “very tough negotiator,” having played a difficult hand well.

However, while these talks look like a setback for Abe, they may be preferable to the alternatives, either unwanted FTA negotiations or a breakdown in talks that could undermine the broader U.S.-Japan relationship at a particularly sensitive moment in East Asia. The new dialogue not only gives Japan time to search for concessions that might satisfy the United States without entering into FTA talks but also will give it time to implement other pieces of its trade policy agenda, including bringing the two new “mega-deals” into force. Meanwhile, it avoids a rupture with the United States just when Japan needs to be able to trust that its ally will consider its interests as the U.S. president prepares for a historic summit with North Korean leader Kim Jong-un.

But it may only get harder from here, particularly since Abe’s approval ratings have plummeted to their lowest levels since his return in 2012 amidst allegations of influence peddling, weakening his hand domestically and jeopardizing his chances of winning another three years as party leader and prime minister in the LDP’s September election. For now, Abe has earned Trump’s respect as a “very tough negotiator,” having played a difficult hand well. But the collision between a Trump administration in search of wins and a Japanese government increasingly preoccupied with domestic woes could increase U.S. frustrations to the point that it is willing to consider more radical steps, perhaps even using Japan’s dependence on the United States for its security to extract trade concessions.

In the meantime, as Robin Harding of the Financial Times has noted, U.S. fiscal and monetary policies could exacerbate the bilateral trade imbalance. The Trump administration’s 2017 tax reform is expected to swell the U.S. government’s deficit and, in turn, the current account deficit. Moreover, the divergence between the U.S. Federal Reserve, which is expected to tighten monetary policy this year, and the Bank of Japan, which is determined to pursue its unconventional easing policies until inflation reaches 2%, could contribute to yen weakness and further bolster Japan’s trade surplus with the United States The critical question for Japan’s government is what will happen if the Trump administration tires of waiting for Japan to offer satisfactory concessions even as the trade imbalance worsens.

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