Japan Pushes the Speed Limit on Trade Talks

Tokyo wants to swerve past Trumpian pitfalls—and get a deal done.

US Secretary of State Mike Pompeo (R) listens while Japan's Foreign Minister Taro Kono speaks during a press conference after 2+2 meeting at the US Department of State April 19, 2019, in Washington, DC.
US Secretary of State Mike Pompeo (R) listens while Japan's Foreign Minister Taro Kono speaks during a press conference after 2+2 meeting at the US Department of State April 19, 2019, in Washington, DC. Brendan Smialowski/AFP/Getty Images

Trade talks with the United States pose a problem for Japan, largely because the Japanese don’t really want to be there. On balance they are happy with the status quo, have no real demands for concessions from Washington, and essentially wish they were not at the table. That makes it all the more remarkable that the talks between Japan’s Economy Minister Toshimitsu Motegi and U.S. Trade Representative Robert Lighthizer produced what appears to be a mutual agreement to work towards a quick deal. But it’s a canny tactical move from Tokyo, which has realized that, in this case, speed works to Japan’s advantage.

Until recently, Japan had been signaling that it would instead stick to its tried-and-true formula of dragging out talks for as long as possible. The Japanese ability to rotate negotiators and prolong discussions is nearly legendary among diplomats. U.S. Ambassador to Japan William Hagerty raised this concern as recently as February, when he said in an interview with Japan’s Asahi Shimbun that U.S. Vice President Mike Pence had stressed the need for a trade deal in 2017 and 2018 but had no response from Japan. “There was a great deal of frustration trying to get together with our counterparts in Japan,” Hagerty said.

The pattern is very familiar to those involved in the long-running trade conflicts in the 1970s and ’80s, when the Japanese economy appeared to be an export juggernaut that was resolute in erecting every possible barrier to imports. At that time, even as Japan’s Toyota, Panasonic, and Sony became strong U.S. brands, Japan resisted imports, principally to protect the important farm voting bloc and to buy time for domestic industrial producers.

These tactics still rankle in Washington today and appear to be at least part of the reason that U.S. President Donald Trump is stuck in a 1980s time warp that sees trade surplus countries as somehow taking advantage of trade deficit countries. The U.S. trade representative’s statement on the latest talks specifically noted, “In addition, the United States raised its very large trade deficit with Japan—$67.6 billion in goods in 2018.” Even more galling, the deficit was up 9.8 percent in March from a year ago, according to Japanese trade figures released on Wednesday.

U.S. officials also like to talk about creating a “level playing field,” suggesting a fairness issue that conveniently ignores the 25 percent tariff that the U.S. places on all truck imports and thereby provides Detroit with a lifeline as it struggles in the market for sedans. Japan has, to no avail, pointed out that its tariff on autos and trucks is 0 percent.

Japanese officials tend to be more pragmatic, which raises the question of why they have agreed to fast-track the talks with so little fuss. In a spirit that should appeal to Trump, they have switched gears because they see this as the best way out of their problem. At this stage, speed offers some clear advantages for Japan.

First, they know that the U.S. administration is under increasing pressure from American farmers who seem to have suddenly woken up to the fact that the vast and highly priced market for food in Japan (a rare combination) is now going to its competitors.

This is, of course, no surprise, because Australia, New Zealand, and Canada can now take full advantage of the sharply lower agriculture tariffs that have begun to kick in under the Asian free trade pact known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. This broad-based deal involving 11 nations covers not only trade but labor issues, intellectual property, and the role of state-owned companies.

That agreement, originally known as the Trans-Pacific Partnership (TPP), was meant to include 12 nations before Trump pulled out of the agreement almost immediately after taking office in January 2017. At the time, he said that the decision was a “great thing for the American worker,” although he later said that he would consider joining if the deal were reworked to better benefit the United States. Since then, Japan has repeatedly invited the United States to reconsider and studiously avoided any additions to the revised agreement that would make it problematic for Washington to sidle back into the talks.

Given his initial stance, however, Trump appears unlikely to walk back his oft-repeated stance that he prefers individual bilateral trade deals. “We already have BILATERAL deals with six of the eleven nations in TPP, and are working to make a deal with the biggest of those nations, Japan, who has hit us hard on trade for years!” he tweeted in April 2018.

Further pressure is piling on the administration. After rescuing TPP from the trash heap, Japan then kick-started its protracted discussions with the European Union, creating an Economic Partnership Agreement that is the largest bilateral trade agreement in history.

European farmers (and vineyards) are now joining the TPP nations with preferential access to Japan, and initial trade numbers show increased imports from both groups. Pork imports from the European Union jumped 54 percent on the year in February, and Mexico and Canada each shipped nearly 20 percent more, according to government trade figures. Meanwhile, U.S. pork imports fell 14 percent in that time. “U.S. pork producers are losing market share in Japan to international competitors that have recently negotiated more favorable trade terms in our most valuable market,” the National Pork Producers Council said in an April 1 statement.

Facing these grim numbers, it is no surprise that Washington needs a quick deal. The problem is that trade agreements are highly complex and often take years of detailed work. Talks on TPP began in 2008, and the final document grew to a fearsome 5,600 pages. That is not surprising when you consider that tariffs are needed for each type of product, and even at the retail level alone the average U.S. supermarket has more than 30,000 items on the shelf. In addition, everything is interlinked. As one Tokyo-based American attorney put it, “Nothing is settled until everything is settled.”

With that background, the two sides cannot start from scratch—an off-the-shelf solution is needed. Enter the TPP.

“In essence, TPP was already a U.S.-Japan bilateral trade deal, since the two countries were the largest economies involved,” said Martin Schulz, a senior research fellow at the Fujitsu Research Institute. That perfectly fits what Japan has been proposing all along. It has said that the United States can get all the benefits of the TPP tariff levels, but nothing more. That would be a tempting offer to U.S. agriculture interests, which will find it potentially expensive to win back market share they are losing on a daily basis.

What it doesn’t do is give the U.S. president something tweetable. For that, Schulz says, you need some “trophy projects” that look good but do not run afoul of the broader rules.

Those are harder to see at this point. Japan could dangle more auto plants, a way to reduce the overall surplus, an estimated two-thirds of which is represented by automobiles and auto parts. Japan is already a major U.S. investor, especially in the blue-collar regions that Trump favors. Data from the U.S. Commerce Department shows fresh Japanese investment into the United States totaled $43.9 billion in 2017, second only to Canada. Cumulative investment was $477 billion in 2017, with 860,600 jobs created in 2016.

But the Japanese government has been touting its numbers on this, without gaining much PR traction. New plants would also not help cut the short-term number and could be reversed as the auto industry adapts to driverless cars and ride-hailing platforms such as Uber.

To help massage the numbers, Japan could also further boost its defense spending, which is almost entirely with the U.S. industry, or it could simply shift purchases of commodities such as liquefied natural gas to the United States.

Taking a leaf from other nations’ playbooks, another common Japanese diplomatic practice, the government will likely propose a big announcement on something that it was planning to do anyway.

A quick deal has other advantages for Japan. Any quick deal would be only interim, known fittingly in this case as an “early harvest” agreement in the trade world. That means the deal is not permanent and could be reversed at a later stage, possibly after the Trump era has come to an end.

Another potential advantage is to hash out an agreement while the U.S. trade representative is tied up with the higher-profile and long-running trade talks with China. Japan is happy to take a back seat as the world’s two biggest economies exchange blows.

The biggest goal for Japan is pain avoidance. The most immediate risk is that the Trump administration imposes additional tariffs on the key Japanese auto sector on the logically challenged argument of national security. That in itself would raise the issue of how that jibes with the idea of the strength of the U.S.-Japan security relationship. The Japanese are also loath to see any return to the euphemistically named voluntary export restraints that throttled exports of cars from Japan to a fixed level. The restraints had been agreed in 1981 for what was supposed to be a three-year period, only to last through 1994 as Detroit continued to complain about fuel-efficient Japanese cars.

At a more personal level, Japanese Prime Minister Shinzo Abe will also want to avoid any blowup by the U.S. president when Trump visits Japan in late May as the first foreign leader to meet the new Japanese emperor. The G-20 summit in Osaka on June 28 and 29 offers another chance for Trump to undercut his hosts, perhaps with trade sanctions.

Abe will get a chance to smooth the course of Trump’s trips when he heads to the United States for a quick summit on April 26. He is also scheduled for a round of golf with the president on April 27, which also happens to be the day after first lady Melania Trump’s birthday. With the talks looking increasingly sewn up, selecting a gift that meets with the president’s favor may be Abe’s most formidable short-term challenge.

William Sposato is a Tokyo-based writer who has been following Japan’s economy and financial markets for more than 15 years.

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