Tar­iff Wars and the TPP: The Ja­pan-us Trade Face-off un­der Trump

Global Asia - - CONTENTS - By Yorizumi Watan­abe

Ja­pan doesn’t want a bi­lat­eral us trade deal. Do Trans-pa­cific Part­ner­ship talks hold an an­swer?

US Pres­i­dent Don­ald Trump’s war on the global trad­ing sys­tem has gen­er­ated anger and dis­be­lief among US al­lies and trad­ing part­ners — and nowhere more so than in Ja­pan. While the two coun­tries are largely in ac­cord on is­sues such as North Korea, threat­ened puni­tive tar­iffs on auto im­ports to the US have threat­ened to up­end cor­dial ties.

While Ja­pan does not want a bi­lat­eral trade deal with the US, the an­swer may lie in is­sues al­ready ne­go­ti­ated un­der ear­lier Trans-pa­cific Part­ner­ship talks, writes Yorizumi Watan­abe.

But first, Trump will have to de­cide to re-en­ter the pact he left dur­ing the first week of his pres­i­dency.

DON­ALD TRUMP’S May 23 threat to im­pose an ad­di­tional 25 per­cent tar­iff on top of the cur­rent 2.5 per­cent con­ces­sion­ary tar­iff on Ja­panese auto im­ports to the us has raised se­ri­ous con­cerns in Ja­pan. hi­roshige seko, Ja­pan’s Min­is­ter of econ­omy, Trade and In­dus­try, was un­usu­ally candid in say­ing that the pos­si­ble ad­di­tional duty could re­sult in ma­jor trou­ble for the world mar­ket and it was be­yond his com­pre­hen­sion how im­ports of Ja­panese cars into the us con­sti­tuted “a threat to na­tional se­cu­rity,” as in­di­cated by Trump. seko also said that any trade mea­sures should be con­sis­tent with World Trade Or­ga­ni­za­tion rules.

The us tar­iff threat came amid in­ter­na­tional scru­tiny of Trump’s puni­tive 25 per­cent tar­iffs on steel and 10 per­cent on alu­minum an­nounced in March, which were ini­tially to im­pact Ja­pan and China; the us’s NAFTA part­ners, Canada and Mex­ico, and the euro­pean union at first seemed pos­si­bly ex­empt from the im­me­di­ate ap­pli­ca­tion of the high tar­iffs. It now ap­pears that the Trump ad­min­is­tra­tion has de­cided to ex­tend the ad­di­tional tar­iffs to those coun­tries also, re­sult­ing in more crit­i­cism and tur­moil.

Ce­cilia Malm­strom, the eu’s Com­mis­sioner for Trade, said the us ac­tion would be against WTO rules and that the na­tional se­cu­rity jus­ti­fi­ca­tion cited un­der sec­tion 232 of the us Trade ex­pan­sion act of 1962 was “far-fetched” on im­ports from us al­lies.1 Jean-claude Junker, the Pres­i­dent of the euro­pean Com­mis­sion, sug­gested that the eu might bring the is­sue to the WTO dis­pute set­tle­ment mech­a­nism, while the eu re­served the right to re­tal­i­ate against the ad­di­tional du­ties.

all these re­ac­tions echoed the Chi­nese

re­sponse to the tar­iffs in March, when it took the first step in ini­ti­at­ing a le­gal chal­lenge at the WTO over the us na­tional se­cu­rity claims. China has al­ready im­posed re­tal­ia­tory tar­iffs on us prod­ucts, cit­ing its right to com­pen­sa­tion un­der the safe­guard agree­ment of the WTO, while the us main­tained that China had no le­gal ba­sis for com­pen­satory tar­iffs, be­cause the us tar­iffs were na­tional se­cu­rity mea­sures.2

all these ad­verse de­vel­op­ments sug­gest that a kind of trade war is forth­com­ing. Is there any so­lu­tion to re­solv­ing trade ten­sions among these ma­jor trad­ing part­ners? how can trade re­la­tions be re­stored to nor­mal­ity? and what will be Ja­pan’s re­sponse to the sit­u­a­tion?

trump’s bi­lat­eral trade pol­icy

The main feature of Trump’s trade pol­icy is “bi­lat­er­al­ism” and an over­whelm­ing fo­cus on the trade deficits the us has been run­ning for quite some time with such coun­tries as China (us$347 bil­lion in 2016), Ja­pan (us$68.9 bil­lion), Ger­many (us$64.9bil­lion), Mex­ico (us$59 bil­lion) and south Korea (us$27.6 bil­lion). In terms of eco­nom­ics, bi­lat­eral trade deficits may have no sig­nif­i­cant mean­ing, but from a po­lit­i­cal point of view, they have been used to fuel pro­tec­tion­ism among do­mes­tic con­stituen­cies.

since the be­gin­ning of his pres­i­den­tial cam­paign, Trump has been vo­cally hos­tile to mul­ti­lat­eral trade, whether em­bod­ied in the WTO or the Trans-pa­cific Part­ner­ship (TPP), from which he with­drew upon tak­ing of­fice. he con­demned both as bad for us work­ers. This trade bi­lat­er­al­ism seems deeply rooted in his con­vic­tion that us work­ers have been vic­tim­ized by trade agree­ments that have robbed them of their jobs. The deficits are a con­ve­nient jus­ti­fi­ca­tion for go­ing after “un­fair trade prac­tices” con­ducted by coun­tries en­joy­ing mas­sive trade sur­pluses with the us.

another im­por­tant feature of Trump’s trade pol­icy is “deal-mak­ing.” For this un­con­ven­tional us pres­i­dent, trade deficits are an evil that should be rec­ti­fied by bi­lat­eral pres­sure and pos­si­ble uni­lat­eral sanc­tions im­posed by the us. In­stead of mak­ing re­course to proper trade ne­go­ti­a­tions un­der the WTO or some other agreed fo­rum, Trump and his ad­min­is­tra­tion have been try­ing to force trad­ing part­ners to come up with mea­sures to re­duce the sur­plus with the us. Fail­ure to agree to a “deal” the us wants will lead to sanc­tions such as higher du­ties on steel/alu­minum or au­to­mo­tive im­ports.

This kind of trade pol­icy re­minds us of what we used to be known as “trade uni­lat­er­al­ism” in the 1980s and the first half of the 1990s, when the main tar­get was al­most ex­clu­sively Ja­pan, which ran roughly 40 per­cent of the us trade deficit at its peak, com­pared to about 9 per­cent at present. The us Congress then dis­cussed the “Trade Rec­i­proc­ity act,” which was de­signed to limit the mar­ket ac­cess of coun­tries with un­fair trade prac­tices.

There are some com­mon el­e­ments be­tween the trade uni­lat­er­al­ism of the 1980s and the Trump era. The no­tion of “fair­ness,” de­ter­mined by the end re­sults of trade com­pe­ti­tion, i.e. the bi­lat­eral trade ac­count, is at the heart of this ap­proach rather than mul­ti­lat­er­ally agreed trade rules. Trade in this view is a metaphor for a track race; there should be strict equal­ity among all run­ners at the start­ing line, but once the race starts, the end re­sults should sim­ply re­flect the strength and ca­pa­bil­ity of each run­ner and there should be no in­ter­fer­ence by any­body. like­wise, in in­ter­na­tional trade, con­di­tions pre­set by tar­iff con­ces­sions pre­vi­ously ne­go­ti­ated as a re­sult of “re­cip­ro­cal and mu­tu­ally ad­van­ta­geous con­ces­sions”

3 should be ap­pli­ca­ble on the ba­sis of the most­fa­vored-na­tion (MFN) prin­ci­ple in trade com­pe­ti­tion, but the re­sults of such com­pe­ti­tion should re­flect only the com­par­a­tive ad­van­tage of the

trad­ing part­ners and there should be no in­ter­fer­ence by the “vis­i­ble hand” of any coun­try in­volved.

In the 1980s and the first half of the 1990s, prior to the es­tab­lish­ment of the WTO, there was a very use­ful de­vice to defuse trade ten­sions that was of­ten called a “grey-area mea­sure,” be­cause it was deemed nei­ther in­con­sis­tent with the Gen­eral agree­ment on Tar­iffs and Trade (GATT), the pre­cur­sor to the WTO, nor in con­form­ity with it. These were ex­am­ples of “vol­un­tary ex­port re­straints” (Vers), a Gatt-by­pass­ing process con­sid­ered mainly among pri­vate stake­hold­ers.

The first Ja­panese re­course to a VER was in the cot­ton tex­tile trade in the mid-1950s, and Vers have been used since then on var­i­ous prod­ucts where Ja­pan en­joyed com­par­a­tive ad­van­tages in its trade with the us and europe, up un­til the end of the GATT era on such prod­ucts as semi-con­duc­tors, elec­tric ap­pli­ances and cars. Vers con­trib­uted to calm­ing down trade fric­tions on those prod­ucts.

The pic­ture after the WTO’S es­tab­lish­ment, how­ever, has com­pletely changed, be­cause Vers are now con­sid­ered in­con­sis­tent with WTO obli­ga­tions. al­though they were use­ful to lower the vol­ume of ex­ports, they nev­er­the­less pe­nal­ized con­sumers in im­port­ing coun­tries as well as price-com­pet­i­tive late-com­ers to the im­port mar­ket, thus dis­tort­ing in­ter­na­tional trade. There­fore, even if the Trump ad­min­is­tra­tion for­wards the re­quest to cut short Ja­panese car ex­ports to the us in bi­lat­eral talks, Ja­pan will not be in a po­si­tion to ac­cept it, be­cause this could vi­o­late Ja­pan’s in­ter­na­tional obli­ga­tions un­der GATT ar­ti­cle XI, which pro­hibits quan­ti­ta­tive re­stric­tion on im­ports and ex­ports.

Want­ing to in­crease us ex­ports to Ja­pan, the Trump trade team might pres­sure the Ja­panese gov­ern­ment to lower agri­cul­tural tar­iffs on such prod­ucts as beef, wine and dairy prod­ucts in line with ben­e­fits al­ready given to TPP mem­bers and others, in ef­fect putting the us on the same footing as aus­tralia, New Zealand,

Chile and even euro­peans, once the Ja­pa­neu eco­nomic Part­ner­ship agree­ment (epa) comes into force as early as spring 2019.

It is not, how­ever, pos­si­ble for

Ja­pan to come up with this kind of agree­ment in fa­vor of the us, be­cause it would con­sti­tute a prima fa­cie vi­o­la­tion of the MFN prin­ci­ple stip­u­lated in ar­ti­cle I of the GATT. The only way to do so would be in a bi­lat­eral free-trade agree­ment be­tween Ja­pan and the us, to which Ja­pan has been adamantly op­posed.

a ja­pan-us ‘deal’ and the tpp

Prime Min­is­ter shinzo abe and Pres­i­dent Trump have met half a dozen times and spo­ken on the phone more than 20 times. They have played golf to­gether three times. On the is­sue of North Korea, both lead­ers share sim­i­lar con­cerns and ap­proaches. On trade is­sues, how­ever, they are far apart. Trump in­sists that bi­lat­eral trade deals are bet­ter than mul­ti­lat­eral agree­ments, loudly con­demn­ing the TPP and the WTO as bad for the united states, while abe has tried to per­suade the us pres­i­dent to come back to the TPP, which is a 21st-cen­tury ad­vanced form of a trade agree­ment in­tended to cap­ture the dy­namism of the asia-pa­cific re­gion.

as a com­pro­mise, Ja­pan and the us agreed to es­tab­lish a bi­lat­eral frame­work led by Taro aso, Ja­pan’s Vice Premier and Min­is­ter of Fi­nance, and us Vice Pres­i­dent Mike Pence to dis­cuss eco­nomic is­sues be­tween two coun­tries.

The us side pushed for a bi­lat­eral us-ja­pan Free Trade agree­ment to be dis­cussed un­der the frame­work, but Ja­pan did not want to talk about

a bi­lat­eral “deal,” and the aso-pence frame­work was re­duced to dis­cus­sions around mi­nor is­sues such as safe­guards on beef im­ports or eco­nomic co-op­er­a­tion. Fol­low­ing the sum­mit talks be­tween abe and Trump in april 2018, the two coun­tries agreed to set up a new plat­form un­der the aso-pence frame­work for talks co-chaired by Toshim­itsu Motegi, Ja­panese Min­is­ter of eco­nomic Re­cov­ery, and Robert lightheizer, the united states Trade Rep­re­sen­ta­tive (ustr). The main task given to Motegi and lightheizer was to dis­cuss trade is­sues be­tween the two coun­tries, in­clud­ing ways to re­duce the us trade deficit with Ja­pan.

This new min­is­te­rial frame­work is called the Free, Fair, and Re­cip­ro­cal (FFR) talks and the first meet­ing is due to be held some­time in July fol­low­ing the abe-trump sum­mit just be­fore June’s G-7 sum­mit.

abe’s per­sis­tent ef­forts to tout the mer­its of the TPP to the us leader were echoed by his clos­est ally in the rul­ing lib­eral Demo­cratic Party, akira amari, the for­mer Min­is­ter of eco­nomic Re­cov­ery and chief ne­go­tia­tor of the TPP, when he ap­peared at the brook­ings In­sti­tu­tion in Wash­ing­ton, DC, on May 2. “Pres­i­dent Trump crit­i­cizes China about be­ing un­fair on in­tel­lec­tual prop­erty theft, forced technology trans­fer, forced dis­clo­sure of source code, re­stric­tions on the free flow of in­for­ma­tion and sub­si­dies for agri­cul­tural prod­ucts. but these are all the things that are cov­ered by TPP. so what is ad­vo­cated by Trump is re­ally the rules of [the] TPP,” amari said.4

amari ex­plained that fol­low­ing the us with­drawal from the TPP in Jan­uary 2017, Ja­pan helped lead the 11 re­main­ing par­tic­i­pants to con­clude ne­go­ti­a­tions for a mod­i­fied ver­sion of the deal by the Novem­ber 2017 apec meet­ings and sub­se­quently signed the deal in santiago, Chile, in March 2018. The 11 par­ties agreed to sus­pend 22 pro­vi­sions that the us strongly backed, such

as data pro­tec­tion for bio-med­i­cal prod­ucts and 70-year copy­right pro­tec­tion, with the un­der­stand­ing that these sus­pended pro­vi­sions could be re­opened once the us re­joins the TPP.

amari also said that the new Com­pre­hen­sive and Pro­gres­sive TPP (CPTPP), com­monly known as TPP-11, would go into ef­fect prob­a­bly in early 2019, once six out of the 11 coun­tries rat­ify the agree­ment. Ja­pan has been push­ing to rat­ify the deal as soon as pos­si­ble, per­haps dur­ing the sum­mer ses­sion of the Diet.5 even in the ab­sence of the us, Ja­pan was quite de­ter­mined to go ahead with TPP-11 for two rea­sons: 1) Ja­pan did not want to lose mo­men­tum on mak­ing rules to cover its pro­duc­tion net­work across the asia-pa­cific re­gion with a higher level of mar­ket ac­cess; and, 2) Ja­pan wanted to pre­pare a com­mon plat­form to ac­com­mo­date the us when the cur­rent ad­min­is­tra­tion al­ters its po­si­tion on in­ter­na­tional trade pol­icy or in the event that Trump is suc­ceeded by a more Tpp-friendly pres­i­dent.

It is my view that the orig­i­nal TPP was ac­tu­ally a de facto bi­lat­eral Ja­pan-us FTA dis­guised by the par­tic­i­pa­tion of the other 10 coun­tries in the orig­i­nal deal. among the 12 par­tic­i­pat­ing coun­tries, only the us and New Zealand did not al­ready have an FTA or epa with Ja­pan, and Ja­pan and the us were en­gaged in ex­ten­sive bi­lat­eral mar­ket-ac­cess ne­go­ti­a­tions on both man­u­fac­tured goods and agri­cul­tural prod­ucts.

Ja­pan is, of course, highly sen­si­tive on agri­cul­ture, in par­tic­u­lar five cat­e­gories: rice, wheat, dairy, beef/pork, and sugar and prod­ucts con­tain­ing sugar. The big is­sue for the us is au­to­mo­biles. Through in­tense ne­go­ti­a­tions be­tween Ja­pan and the us, the us ob­tained a 15-year dis­pen­sa­tion on the tar­iff elim­i­na­tion of 2.5 per­cent du­ties, while Ja­pan in re­turn could get fairly sub­stan­tial ex­emp­tions for tar­iff elim­i­na­tion on roughly 19 per­cent of agri­cul­tural prod­ucts. Thus, it was a work­able ex­change of con­ces­sions on sen­si­tive is­sues be­tween the two coun­tries. For both sides, it was the best “deal” they could both live with. This is the rea­son why the re­sults of the TPP ne­go­ti­a­tions were of­ten de­scribed as be­ing made of “ar­ti­sanal crys­tal glass,” mean­ing they were frag­ile and easy to destroy.

Con­clu­sion: is a tpp u-turn pos­si­ble?

Ja­pan’s agri­cul­tural mar­ket has be­come in­creas­ingly open as a re­sult of its var­i­ous Ftas and epas. For in­stance, since 2016, Chile has been No. 1 in wine sales in Ja­pan, ahead of tra­di­tional mar­ket leader France, thanks to the Ja­pan-chile epa, which came into ef­fect in 2007, phas­ing out tar­iffs in stages over 10 years. aus­tralian beef is tak­ing over from us beef in the Ja­panese mar­ket be­cause of pref­er­en­tial du­ties that are lower than the 38.5 per­cent MFN duty that still ap­plies to us beef. The Ja­pan-eu epa is ex­pected to come into ef­fect in March 2019; it will give pref­er­en­tial mar­ket ac­cess to euro­pean agri­cul­tural prod­ucts over us prod­ucts. In order to over­come this dis­ad­van­tage, the us agri­cul­ture lobby has been fiercely cam­paign­ing for the even­tual us re­turn to the TPP.

There are two ways that the us could make a u-turn on TPP — ei­ther by go­ing back to the orig­i­nal 12-na­tion TPP that the us signed in 2016, or by join­ing the new TPP-11 through re­newed bi­lat­eral ne­go­ti­a­tions with the 11 mem­bers. The for­mer is sim­pler and more straight­for­ward, but the prob­lem is that TPP is a ma­jor legacy of for­mer us Pres­i­dent barack Obama, and Trump would pre­sum­ably have to make the whole thing seem like his idea. The lat­ter ap­proach is more pro­ce­dural and has the prob­lem that few coun­tries would want to restart la­bo­ri­ous ne­go­ti­a­tions in which the us would be even more de­mand­ing than pre­vi­ously.

In Jan­uary, at the World eco­nomic Fo­rum in Davos, Trump spoke pos­i­tively for the first time

about the TPP, and said that he would con­sider the pos­si­bil­ity of ei­ther in­di­vid­u­ally ne­go­ti­at­ing with the mem­bers or ne­go­ti­at­ing with a group of coun­tries, pro­vided that the agree­ment was good for the us. Trump also floated the idea of the us re­join­ing the TPP in a White house meet­ing with law­mak­ers in april, but he and his ad­min­is­tra­tion quickly low­ered these ex­pec­ta­tions.

It is, there­fore, up to Trump’s ad­min­is­tra­tion to make up its mind on whether the us wants to be in­te­grated into the well-de­vel­oped pro­duc­tion net­works of the asia-pa­cific re­gion, or turn its back on higher qual­ity mar­ket ac­cess and more ad­vanced trade rules. Ja­pan, for its part, should be in no rush to agree to bi­lat­eral FTA talks with the us and should in­stead keep press­ing the us to re­join the TPP as soon as pos­si­ble.

yorizumi watan­abe is pro­fes­sor of in­ter­na­tional po­lit­i­cal Econ­omy, fac­ulty of pol­icy Man­age­ment, keio univer­sity, tokyo, ja­pan.

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