Reinventing the Wheel: Phase One of the US-Japan Trade Pact
Hailed by President Donald Trump as a major breakthrough, the US-Japan trade deal announced on September 25, 2019, actually does little more than partly restoring the benefits that Trump recklessly threw away when he pulled the United States out of the Trans-Pacific Partnership (TPP) in January 2017. The pact is limited. It provides for a staged reduction of Japanese tariffs on walnuts, almonds, blueberries, wine, cheese, beef, and pork. In return, the United States cuts tariffs on mostly industrial products. Both sides intend to return to the negotiating table in spring 2020 for a second phase of talks on a more extensive agenda of trade and investment reforms in goods and services.
The most important aspect of the pact is probably the provision that is not included. Autos and auto parts represent about 38 percent of Japanese merchandise exports to the United States, yet the deal makes no changes to existing US auto import restrictions and no commitments to exclude Japanese auto shipments from prospective US trade barriers, which remain a threat, at least nominally. The Trump administration could impose these tariffs against Japan and Europe (among other countries) under a Section 232 national security case as early as mid-November 2019.
Japan had insisted on assurances against new auto protectionism, but Japanese negotiators settled for the vague commitment in the Joint Statement of the United States and Japan that “both nations will refrain from taking measures against the spirit of these agreements…[and] will make efforts for an early solution to other tariff-related issues.” Nevertheless, Japanese leaders are taking that statement to the bank. “Between President Trump and I, myself, this has been firmly confirmed that no further, additional tariffs will imposed,” Prime Minister Shinzō Abe declared at a news conference. US trade envoy Robert Lighthizer echoed Abe’s statement in part, saying there were no plans for auto tariffs. But these assurances have to be viewed against the backdrop of President Trump’s mercurial record on tariffs and tariff threats over the last two years.
Deal on Farm Products Mirrors TPP Commitments
The agriculture section in the US-Japan deal substantially revives what was in the TPP, which has survived as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) among the other 11 Asia-Pacific trading nations while excluding the United States. As a result, American farmers have been losing export markets to the CPTPP countries, from Mexico to New Zealand. The Trump-Abe accord in fact seems to fall short of matching TPP access for US dairy products and rice. It thus only partly heals the self-inflicted wound of withdrawing from the TPP.
On dairy, US exporters expressed concern that the deal was not as valuable as the TPP because it omits important provisions that prevent US exports of specialty cheeses from running afoul of Japanese restrictions on the use of certain geographical indications (GIs). Some US cheeses might be blocked if they don’t meet the GI requirements. Japan’s GI catalogue reflects its trade deal with the European Union, which prohibits calling cheeses by certain geographical names used in Europe (like feta or Roquefort) unless they are from the region of origin. TPP had provisions that required accepting US GIs for some controversial products (like Philadelphia cream cheese and Wisconsin cheddar).
On rice, Japan reportedly refused to offer a country-specific import quota for US exporters because US liberalization in other areas of the pact did not match what was offered to Japan in the TPP. In a press gaggle after the announcement of the pact, Ambassador Lighthizer maintained that his deal was better than the TPP because he made fewer concessions in return for Japan’s farm access. It is true that US concessions were more limited, but so was the return from Japan.
Importantly, US beef and pork exporters get TPP-parity once the deal enters into force, presumably on January 1, 2020. That does not necessarily mean that these US exporters will regain their market share in Japan, which they have lost since the United States walked away from the TPP. The CPTPP has given a head start to Australian, Canadian, and New Zealand exporters to Japan; the EU-Japan Free Trade Agreement has given European exporters similar advantages. Both deals have been in force for nearly a year, allowing those exporters to wrest sales away from their US competitors. The appreciation of the US dollar, driven in part by massive US fiscal deficits, has also made it harder for US exporters to compete for sales with Europe, Mexico, New Zealand, and others. The United States has also agreed to modify its global tariff-rate quota on imports of Japanese beef, which should increase US imports of Japanese specialty beef products.
First Trump Agreement to Cut Tariffs
Two specific results are noteworthy.
First, the separate US-Japan accord on digital trade is TPP-plus, including useful upgrades via provisions that prohibit data localization, barriers to cross-border data flows, and customs barriers on digital products. These revisions seem to mirror obligations adopted in the United States-Mexico-Canada agreement (USMCA) negotiated earlier in 2019. USMCA augmented the TPP chapter on these issues, a welcome step. But that accord awaits congressional approval at a time when Congress is preoccupied with other matters, to put it mildly.
Second, the US-Japan pact is the first Trump deal that includes cuts in US trade barriers. Tariff lines covering 42 farm products and certain industrial goods that are not import-sensitive will have tariffs either eliminated in stages or reduced by 50 percent (the maximum allowed under existing tariff-cutting authority provided by Congress, so there is no need for implementing legislation for this mini agreement). Japan insisted on reciprocity for its farm trade concessions; what US officials offered were small potatoes but more than they have extended to other countries in Trump-era bilateral trade deals.
Because of the limited scope of the current deal, concerns have been raised at home and abroad about whether the preferential tariff cuts violate the most-favored nation obligation of the United States under the World Trade Organization (WTO), which holds that tariff cuts be applied to all WTO members unless they are part of a comprehensive free trade pact that covers “substantially all trade.” The first phase of the US-Japan deal clearly fails that test, but US officials argue that the combined agreement, once completed, will be WTO-compliant. In any event, the second phase needs to be done quickly and comprehensively if the US-Japan trade deal is to pass muster in the WTO.