By Max Dowden
Last week, President Trump officially signed a new executive agreement on trade with Japanese Prime Minister Shinzo Abe’s government, having been confirmed by the latter country’s National Diet earlier this month. This was the final hurdle to clear ahead of the agreement’s planned implementation on January 1st of 2020, and represents a promising first step towards what the White House hopes to become a wider bilateral agreement creating “fairer, more balanced trade” between the United States and Japan. Though it possesses a relatively narrow sectoral focus, this deal has already proven to be as controversial as it has been expedient. The agreement’s precise long-term effects on the US-Japanese trade relationship are somewhat nebulous, and it has recently taken fire from skeptics concerning its international legality. This article will break down the relevant provisions and precedents at stake, as well as how this agreement fits into the wider pivot by Washington away from multilateral trade liberalization, and towards greater bilateralism in negotiations.
Implications for Trade:
In terms of actual changes to the current US-Japan trade dynamic, this deal is hardly a radical shift. Japan is already America’s fourth largest trade partner, with the two countries having done $217.6 billion worth of two-way trade in goods in 2018 (much of which relies on relatively lower tariff-and-non tariff restrictions). This agreement is solely concerned with two narrowly defined economic areas: a set of mutual concessions concerning US-Japan trade-in-goods in the agricultural and manufacturing sectors, and a separate agreement on digital trade between the two countries.
On the Japanese side, Prime Minister Abe’s cabinet has agreed to gradually, but substantively slash tariffs on over $7 billion of American agricultural products over the next few years, including such products as beef, pork, and wheat. In addition, the government of Japan will agree to give certain other products ‘preferential US-specific quotas’ in future importation. This means that once fully implemented, 90% of US food and agricultural products imported to Japan will be either completely duty free or receive preferential tariff access, in what President Trump has hailed as “a huge victory for America’s farmers, ranchers, and growers.” This perception is vital for his administration. Since President Trump pulled the United States out of the Trans-Pacific Partnership agreement with eleven large Asia-Pacific economies (including Japan) and began the ongoing trade war with China, US agricultural producers have seen their lowest trade surplus in over a decade. This deal promises to put American producers exporting to Japan back on the same competitive level as CPTPP (The TPP’s American-less successor agreement) member states who have been undercutting American products in the country due to lower tariff rates for CPTPP goods. In addition, given that existing Japanese tariffs were placed on American agricultural imports to protect the domestic market from their lower price than equivalent domestic goods (American imported beef versus Japanese domestic beef being a prime example), Experts expect that the likely flood of low-cost American goods into the market will work to reduce the $67 billion US trade deficit-in-goods with Japan. The deal also includes an agreement applying to $40 billion in current US-Japanese digital trade, which although theoretically large, essentially just formalizes a set of already broadly agreed-upon digital trade policies between the two countries, including prohibitions on customs duties for digital products (such as videos, music, and e-books), and ensuring firm flexibility in utilizing innovative encryption technology.
In Washington, the Trump administration has agreed to lower tariffs on a host of Japanese industrial goods like machine tools, steam turbines, and bicycles, and will eliminate or reduce duties on 42 Japanese agricultural imports equal to $40 million. However, disappointingly for Abe’s government, no provisions were included to address the current 2.5% tariff on Japanese auto exports to the US, a line item which Tokyo “desperately wants” and the US had granted under the TPP before its departure. White House representatives have instead merely stated that automobile issues will be “subject to further negotiations”. However, as stated by Foreignpolicy.com, Japan may be viewing such a meager concession through the lens of the ‘dog that didn’t bark’. Japanese auto imports account for 80% of the current US trade deficit with Japan, and more importantly, 20% of total Japanese exports to the US. Recognizing this, the Trump administration has repeatedly threatened to classify such imports as a national security threat, which would subject them to a brutal 25% tariff. This would cripple the current Japanese export market. At the very least, Japanese foreign Minister Toshimitsu Motegi (who supervised the negotiations) was able to secure agreement text which stipulates that “both nations will refrain from taking measures against the spirit of this agreement” (such a tariff hike would certainly fall in this category), and a verbal promise from President Trump to hold off on increasing auto tariffs as long as the agreement is implemented faithfully.
In addition, possibly in exchange for a lack of Japanese pressure for immediate auto tariff reduction, the White House has chosen to omit a critical piece of the Trump administration’s normally hawkish trade outlook: currency manipulation. Since Prime Minister Abe took office in 2012, the Bank of Japan has undertaken an ‘unprecedented campaign’ to reflate the domestic economy through aggressive monetary expansion. This has sharply lowered the value of the yen against the dollar, with the dollar-to-yen ratio going from 1:86 in 2012 to 1:109 today. Such a devaluing has proven to be a major boost to Japanese exports, to the continued detriment of the US trade balance. For example, the Japanese automaker Toyota has seen its exported cars become 24% less expensive the minute they roll off of ships at US ports. Given that President Trump has been extremely vocal in criticizing similar monetary behavior by other major US trade partners like China and Brazil, the lack of a mention with regards to Japan surrounding these negotiations is an intentional, and likely tactical silence.
Bilateralism and the WTO:
However, despite productive bilateral discussions between Tokyo and Washington, this agreement has proven controversial for its larger legal implications. Under the current global trading system, in order for an economic agreement between two or more countries to be consistent with World Trade Organization (WTO) rules, it must satisfy two important stipulations: it must not treat non-party members less favorably than before the agreement was established, and it must eliminate or reduce tariffs and other trade barriers on “substantially all trade” between the member countries. The latter rule is the most important for this particular case, due to the fact that the explicitly narrow scope of the US-Japan deal does not satisfy “substantially all trade”. There is, however, an exception to the rule provided in Article XXIV of the WTO’s ‘General Agreement on Tariffs and Trade (GATT)’: countries may sign more limited deals if they represent ‘interim agreements’ pursuant to a wider future deal. Such an interim agreement must include a formalized “plan and schedule” for the formation of said future deal within a “reasonable length of time”. This is where the legality of the US-Japan agreement gets sticky. The text of the deal and public statements by negotiators on both sides have referred to future comprehensive negotiations, and repeatedly asserted that this agreement is merely a “step one along the road to a [wider] eventual free trade agreement”. However, given the lack of a concrete time-frame for such discussions, the argument that such statements represent a legally qualifying ‘plan and schedule’ is shaky. In light of this, it begs the question: how forcefully will the multilateral trading community challenge this deal? Particularly for countries still in the CPTPP, whose exports will be directly harmed by the re-opening of Japan to US agricultural products, to what extent will they seek to bring this issue to the WTO? Answers to these questions are heavily affected by a parallel development in the world of international trade: Washington’s recent blocking of the appointment of new judges to the WTO’s Appeals court. Put simply, this move has effectively dismantled the organization’s primary dispute resolution mechanism for international trade issues for the time being. Any multilateral legal challenge by opponents of the agreement would therefore likely be indefinitely mired in the courts, and the trade agreement would meanwhile continue as planned.
As discussed in a recent analysis by the Atlantic Council, the convergence of this agreement with a weakened WTO has potentially drastic implications for both the future of the multilateral trading system and the future of American trade policy in Asia. If the US and Japan are able to successfully implement this deal without serious opposition, it will likely establish a precedent for the global proliferation of more limited-scope trade agreements, provided that the signatories make vague promises of working to conclude a WTO-qualifying agreement at some point in the future. It will also further encourage the United States to act outside of WTO structures in its future trade negotiations, continuing US Trade Representative Robert Lighthizer’s explicit re-positioning of American foreign policy towards prioritizing more bilateral, ‘reciprocal’ trade relationships. Supporters of such a shift in both the US and Japan claim that greater reciprocity in trade would be beneficial for creating meaningful economic partnerships, as well as sidestep a WTO that has become hopelessly mired in gridlocked negotiations among opposing national actors. This latter point is especially important within the context of the Chinese trade war, as it would allow the US to build a set of substantive two-way trade alliances which completely circumvent Beijing’s influence or dissent. However, skeptics claim that this may lead to an inefficient complication of trade regulations and regimes, leading to confusion and instability for firms which operate internationally. In either case, the US-Japan agreement will likely be closely scrutinized in the coming months, hopefully providing clues into the economic and political precedent it may create.