A less than satisfactory trade agreement

The Diet last week approved the trade deal struck by Prime Minister Shinzo Abe and U.S. President Donald Trump. An agreement was inevitable given Trump’s trade fixation, his insistence that only he can negotiate a deal that would benefit the United States, and Abe’s need to maintain good relations with Washington. The result is a limited, seemingly interim deal, that leaves both sides wanting more.

One of the few constants in Trump’s worldview is that the U.S. has been exploited by its trade partners, and he has long seen Japan as a grievous offender. It was taken as given that he would act on that frustration when he became president and soon after taking office he began talking about a trade agreement with Tokyo.

The two leaders agreed to begin trade talks a little over a year ago, and negotiators moved rapidly forward, reaching agreement in October. The Diet quickly approved the deal. The U.S. needs no legislative approval, and the agreement will go into effect on Jan. 1.

The pact focuses on two areas, agricultural and digital trade, which generate two-way trade of about $55 billion. Under the agreement, Japan will lower tariffs on $7 billion worth of U.S.-grown agricultural products to match levels on farm products sold by members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the successor to the Trans-Pacific Partnership from which Trump withdrew the U.S. upon taking office. The U.S. agreed to cut its tariffs on Japanese exports ranging from tea to manufactured goods, such as machine tools and musical instruments.

The rest of the deal seeks to protect and expand digital trade between the two countries. It sets rules that prohibit duties on digital products, ensures the free flow of data across borders and prohibits governments from arbitrarily accessing sensitive source code and algorithms.

By all accounts, the deal is suboptimal. It is limited in scope, omitting the biggest components of the bilateral trade relationship, and both sides readily admit that a second round of negotiations is needed — and should soon begin. Washington was pressing for a quick agreement that featured agricultural concessions because its farmers were losing market share in Japan to competitors from CPTPP countries. Those farmers now have equal access — after having lost market share for two years — but the terms that were agreed were less than those offered in the original TPP as the new pact omits dairy products and rice.

More disappointing for Japan is the failure to get the 2.5 percent tariff on car exports to the U.S. lifted and Washington’s refusal to promise that Trump — who likes to refer to himself as “tariff man” and only last week threatened new sanctions on imports from France, Brazil and Argentina — will not impose more auto tariffs in the future. Instead the two governments released a statement in which they pledged to “refrain from taking measures against the spirit of these agreements” and “make efforts for an early solution to other tariff-related issues.”

The agreement continues Abe’s aggressive campaign to protect and sustain an open trade order. While in office he has resuscitated the TPP and concluded a trade agreement with the European Union. He has been pushing another regional trade deal (the Regional Comprehensive Economic Partnership), and is engaged in negotiations with a number of other countries. On Jan. 1, when the deal goes into effect, the proportion of Japan’s global trade that is subject to trade deals will top 50 percent, up from about 37 percent now.

While the next round of talks is anticipated to begin next spring, that is not certain. Trump is first focused on concluding a deal with China. That was expected before the end of this year but the deadline has slipped. The president is supposed to impose another round of tariffs on Chinese imports Dec. 15: If he follows through, a deal will become less likely. He is also threatening European and Latin American partners. It is unlikely that the U.S. has the bandwidth to fight on that many fronts — and the administration may not have the will if political headwinds intensify during the impeachment fight.

Equally important are regional developments. If North Korea loses patience with the lack of progress in nuclear talks with the U.S. and tries to provoke Trump, then he is likely to be less concerned with trade fights that could antagonize a key regional ally. Next year, Japan will also commence talks with the U.S. on financial support for U.S. forces in this country. If negotiations with South Korea are any example, they will be contentious. The Japanese government will also be worried about a sluggish economy and there will be no appetite for liberalization measures that impose pain on Japanese businesses. This trade deal, inadequate is it is, may be all that is possible during the first term of a Trump administration.

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