Trump’s Japan Agenda Shows the Pitfalls of His Trade Strategy

President Trump’s insistence on negotiating one-on-one trade deals, rather than plurilateral or multilateral agreements with many countries, has produced a proposed new accord with Japan. Trump maintains that the United States enjoys superior negotiating leverage in bilateral talks. But if anything, the new US agenda for Japan shows the pitfalls of that approach. It demands many concessions from Japan that Prime Minister Shinzo Abe is likely to reject.

In a plurilateral setting, such as the erstwhile Trans-Pacific Partnership (TPP), which Trump walked away from, US concessions from Japan might have been offset by, for example, Canadian or Mexican concessions to Japan. In a bilateral deal, three-way compensation is not possible. It is also worth underscoring that the word “Free” is conspicuously omitted from both the United States-Mexico-Canada Agreement (USMCA) negotiated last year, as well as the negotiating objectives for the proposed US-Japan Trade Agreement, which Ambassador Robert Lighthizer delivered to Congress in December. This is no accident. Trump’s goals are closer to “one-way free trade,” with elements of “managed trade,” rather than “bilateral free trade.”

The ritual announcement of negotiating objectives, pursuant to the Trade Priorities and Accountability Act of 2015, permits the administration to commence negotiations after 30 days. Senator Ron Wyden (D-OR), ranking member of the Senate Finance Committee, immediately criticized Lighthizer’s handiwork for lacking specificity and for the suggestions that it be concluded in “stages.”

Prime Minister Abe had signed on to the TPP and has now agreed to retain the accord with the remaining 11 members after the US withdrawal in a new pact that has been renamed the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), with entry into force on December 30, 2018. Ironically, the US negotiating objectives announced in December attempt to get Japan to offer or expand on concessions to the United States that it made in the erstwhile TPP. For Abe, the concern is that Trump will insist on TPP-plus concessions on sensitive subjects like services, agriculture, and nontariff barriers without making any new concessions in return. Judging from the broadly stated objectives from Lighthizer, Abe’s fears are well founded. But the experience of the negotiations that led to the USMCA suggests that Trump may compromise.[1]

Familiar Trade Topics (in the Trump Era)

The foremost US objectives are to reduce the bilateral goods deficit with Japan, which was $69 billion in 2017, enact zero Japanese tariffs on all industrial goods, and “address” Japanese nontariff barriers. For agricultural goods, equally lopsided objectives are “reducing or eliminating” Japanese tariffs and eliminating Japanese nontariff barriers, while ensuring “reasonable adjustment periods for U.S. import sensitive agricultural products.” Lacking any reciprocal measures by Washington, these objectives justify the term “one-way free trade.” Dating to the Reagan administration in the 1980s, Lighthizer established a record of demanding and sometimes imposing unequal obligations on Japan, but in 2019 Japan may not prove as pliable as Mexico.

The United States also seeks using electronic data to the maximum extent to speed up border clearance and facilitate trade. A related goal is to secure a “more reciprocal” balance on de minimis thresholds, i.e. the highest value of goods that can pass through customs with simplified forms and no taxes or tariffs. The current figure is 10,000 Japanese yen (or $90) for Japan but $800 for the United States. To encourage auto production in the United States, Lighthizer will likely try to restrict third-country auto parts in Japanese vehicle exports through tighter rules of origin.

A chapter on technical barriers to trade (TBTs) in the US proposal would seek transparent and open procedures for setting national standards and observance of WTO rules for industrial goods. Not mentioned are common standards or mutual recognition of differing standards, which would go a long way toward facilitating trade. (There is mention of mutual recognition of “conformity assessment” bodies, like Underwriters Laboratories, however.) As stated, the objectives will make little difference in disciplining TBTs. A major irritant with Japan has been its practice of occasionally invoking doubtful sanitary and phytosanitary measures (SPS) to block US exports of fruits and other agricultural products.[2] Washington wants such measures to be science-based and nondiscriminatory—laudable goals.

An unstated objective in the investment chapter is to preclude an investor-state dispute settlement (ISDS) system, which US negotiators fear can override US law and lead to compensation for Japanese firms. US negotiators are less concerned about compensation for US firms doing business in Japan, even when they are treated unfairly A similar result was largely achieved in the USMCA. Meanwhile, a stated objective is to remove Japanese barriers on US investment. Nothing is said about US barriers on Japanese investment, a concern for Tokyo in the wake of tougher new scrutiny of foreign investments and acquisition of US firms in the new Foreign Investment Risk Review Modernization Act (FIRRMA).

A separate chapter on trade remedies would protect US antidumping, countervailing duty, and safeguard actions, and now “national security” measures invoked by the Trump administration to bar certain imports. This could be a subject of sharp contention with Japan, as it often finds itself on the receiving end of US restrictive trade measures. Another instance of lopsided US objectives can be found in the government procurement chapter, which calls on Japan to “increase opportunities” for US firms to sell goods and services to Japanese government bodies but keeps Buy America, federal set-asides, and restrictive state and local procurement rules intact. It is hard to imagine Japanese trade officials agreeing to such a one-sided deal. More likely, in the end government procurement will be excluded from the agreement—regrettable since competition is badly needed in this sphere, which accounts for around 10 to 15 percent of advanced economies.

The most disappointing objective in the entire document—but a familiar theme in the Trump era—concerns dispute settlement. The unstated goal is to eliminate binding arbitration as a means of resolving disputes, since the agreement would ensure that “parties retain control of disputes.” As in the USMCA, and seemingly in the WTO, Trump and Lighthizer prefer that disputes be resolved, if at all, by diplomatic means rather than adjudication by independent bodies, obviously hoping that superior US economic power will ensure favorable outcomes. The absence of a meaningful arbitration system could overwhelm diplomats with complex disputes they are ill equipped to resolve.

Finally, there are two unfortunate but familiar proposals in the general provisions chapter: first, to provide periodic reviews of the new agreement—with the unstated threat of termination, not a feature that fosters business certainty—and second, to deter Japan from negotiating a trade agreement with a nonmarket economy, meaning China. Both features mirror regrettable elements of the USMCA.

21st Century Issues

A major source of contention is likely to focus on the liberalization of trade in services. Japanese service markets—finance, telecommunications, and the like—are walled off by barriers to foreign entry. The Organization for Economic Cooperation and Development (OECD) assesses national service trade barriers in 22 sectors using a Service Restrictiveness Index (SRI). The SRI is reported on a scale of 0 (completely open) to 1 (completely closed). The average SRI for Japan across all sectors was 0.205 in 2017 versus 0.232 for the United States. Since the United States enjoys an enormous competitive advantage in exporting business services and locating service facilities abroad, the objectives laid out in the services chapter are among the most consequential in the entire document. President Trump seldom mentions service exports—instead he is fixated on industrial exports—but if Ambassador Lighthizer can lower Japanese barriers, that will be an accomplishment. But to reach that goal, Lighthizer will probably need to relax US restrictions on service imports—not something the United States was willing to do in the USMCA.

Digital trade is another area where the US objective is to recover gains that were an essential part of the TPP: no data flow restrictions, no localization requirements, no duties, no disclosure of source code, and no liability for online platforms. In addition, US objectives on labor and environment repeat almost word-for-word erstwhile TPP obligations, now enshrined in the USMCA text. Similar to the TPP, the environment objectives do not cover greenhouse gas emissions.

The US proposal covers three objectives with China in mind as the ultimate target of discipling international trade. First, Trump wants Japan to give intellectual property right (IPR) holders the same level of protection and enforcement as US laws. This is more ambitious than the TPP text that required the other 11 members to approach, but not quite meet, US standards for protecting biologic data, copyright terms, and trade secrets. Related, the United States seeks to curb monopoly health system practices that discriminate against US pharmaceutical and medical device firms. Second, as in the TPP, the United States seeks to ensure that state-owned and controlled enterprises (SOEs and SCEs) conform to commercial behavior—neither discriminating against foreign firms in purchases nor in sales—and to curtail public subsidies that support state firms. The unspoken goal is to establish international standards that eventually discipline Chinese SOEs and SCEs. Third, as Japan has not manipulated the yen in recent years to gain a trade advantage, the goal on currency manipulation is to ensure good behavior in the future—once again as an object lesson for China (though China has not manipulated the yuan in recent years).

Finally, US objectives on competition policy amount to no more than “good housekeeping” for competition (antitrust) standards and enforcement, a common feature of recent US trade agreements. Even if Japan agrees to every phrase tabled by the United States, neither Japanese nor US officials will modify their approaches because of a trade agreement. Bureaucrats and judges in this domain have an established history of independence from trade ministries.

Chapters on transparency and anti-corruption offer similar bromides, common to most US trade agreements, with no practical effect. Lastly, objectives on small and medium-sized enterprises (SMEs) are recitals of “feel good” objectives that will do little to engage SMEs in international commerce. The digital objectives mentioned above will be far more consequential, especially if augmented by higher Japanese de minimis thresholds.

Many of these goals are laudable, but apart from any congressional opposition likely to arise, this will be a difficult negotiation. Japan will not readily agree to one-way concessions, and the Trump administration is disinclined to offer terms that would enlist enthusiasm from the Japanese public or business firms. Negotiation and ratification during Trump’s first term in the White House seems problematic. If the administration succeeds, the practical effect will be to restore US opportunities in the Japanese market to what would have been achieved by US membership in the TPP.

Notes

1. For example, in the final USMCA, the United States softened the termination clause and kept Chapter 19 for US-Canada disputes on antidumping and countervailing duty matters.