As China Trade War Cools, Japan Braces for Its Clash with Trump

Date: April 12, 2019
Source: Bloomberg
MEMA Industry News Editor's Note: Japan is an important trading partner for U.S. vehicle parts manufacturers as demonstrated by a highly interdependent supply chain. Last November, MEMA commented and testified about its support for this opportunity for the U.S. to strengthen its trading relationship with Japan. MEMA urged the parties to address non-tariff barriers to trade and the mutual recognition of existing regulatory standards without modification or additional certification. MEMA also advocated that, before all else, the parties must find a solution to current and potential Section 232 actions without quotas. These tariff actions negatively impact vehicle parts suppliers, the largest sector of manufacturing jobs in the United States. Visit the MEMA Trade Resources page for more information about trade talks or contact Ann Wilson or Leigh Merino.
 
Japan is finally stepping into the ring for a fight it had managed to dodge for more than two years: Bilateral trade talks with U.S. President Donald Trump.
 
The world’s third-biggest economy has a lot at stake in the talks, which are expected to start next week in Washington just as the U.S.’s negotiations with China appear to be winding down. Prime Minister Shinzo Abe is desperate to avoid tariffs or quotas on lucrative auto exports, while Trump wants to crack open Japan’s agricultural market and reduce a $60 billion trade deficit.
 
Abe has poured energy into courting Trump to maintain a strategic relationship that secures his country against potential threats from North Korea and China. But that doesn’t mean Japan will roll over on trade: Abe’s government is determined to avoid giving the U.S. a better two-way deal than the multilateral pacts he’s negotiated with Europe and Pacific Rim nations.
 
“It’s the U.S. who asked for these bilateral negotiations,” said Ichiro Fujisaki, a former Japanese ambassador to the U.S., who’s now president of the Nakasone Peace Institute. “So, it’s the U.S. who should put to us what they want, rather than us offering this and that before being asked.”
 
The talks add to worries among investors as Trump turns his gaze from China to trade grudges elsewhere. The U.S. leader, who will face questions on his success in rebalancing America’s trade relationships in next year’s presidential campaign, has signaled a willingness to continue market-disrupting tariff threats despite growing economic concerns.
 
Abe only agreed to bilateral talks after Trump hit Japan’s steel and aluminum exports with punitive tariffs last year and later threatened to impose levies of as much as 25 percent on all imported cars, including those made in Japan. Trump faces a decision in May on how to proceed with the auto tariffs.
 
“Japan is now negotiating,” Trump told reporters last month. “They haven’t wanted to negotiate for many years, but now they’re negotiating. It’s called ‘tariffs.’”
 
Still, Abe’s economy minister, Toshimitsu Motegi, has been able to observe the Trump administration’s previous battles with South Korea, Canada, Mexico and China before sitting down next week with U.S. Trade Representative Robert Lighthizer. In each fight, the U.S. adopted extreme positions that threatened to upend economic ties only to drift toward more modest changes.
 
Abe has also fortified Japan’s position by sealing trade pacts with the European Union and 10 other partners jilted by Trump when he abandoned the Trans-Pacific Partnership shortly after taking office. Those deals have left U.S. farmers, including beef and pork producers, at risk of losing their 22 percent share of Japan’s food import market to rivals with lower tariffs.
 
“For Japan, the government has no reason to hasten, to quickly wrap up the negotiations,” said Junji Nakagawa, a professor who researches trade issues at Chuogakuin University in Chiba prefecture near Tokyo. “The impetus for wrapping up negotiations quickly comes from the U.S. side, especially agricultural lobbyists.”
 
The scope of talks will be key. If the U.S. can accept parity with Europe and TPP nations on agriculture -- as the two sides suggested in a Sept. 26 joint statement -- Abe might settle quickly. Trump is expected to visit Tokyo next month for a state visit with the incoming emperor, Crown Prince Naruhito, and Japan doesn’t want trade disputes marring the pageantry.
 
“We will further expand trade and investment between Japan and the United States in a mutually beneficial manner,” Japanese Finance Minister Taro Aso told the U.S. Chamber of Commerce on April 11 in Washington, citing the September statement.
 
Problem is, the same joint statement also called for reducing Japan’s trade surplus -- and agriculture parity may not be enough for Trump. Abe could dig in to avoid a one-sided deal, especially with his ruling Liberal Democratic Party facing an upper house election in July.
 
“Trump has this illusion that somehow there is this unfairness because there are Toyotas lined up on the docks of Los Angeles and there aren’t any Fords or GMs on the streets of Tokyo,” said Matthew Goodman, who held National Security Council roles under presidents Barack Obama and George W. Bush. “There’s really very few other people in town who believe that this should be a central focus of U.S.-Japan negotiations. But the president wants it. So it’s probably going to happen.”
 
Japan, which continues to hold out hope for the U.S.’s return to the TPP, could insist on the market access it received under that pact. That means eliminating tariffs on the country’s auto parts, which comprised 6 percent of its exports to the U.S.
 
One scenario hinted at in last year’s joint statement is a swift agreement on easier issues, followed by a second, more comprehensive round. That would give Trump a win and allow Abe -- who will visit Washington later this month -- to focus on a rare series of historic events, including Emperor Akihito’s planned April 30 abdication and the Group of 20 summit in Osaka.
 
Wendy Cutler, who led the Obama administration’s final TPP push with Japan, said it was unclear whether Trump would adopt the same aggressive approach he was signaling with the European Union, which he called a “brutal trading partner” this week.
 
“That’s the key question,” Cutler said. “But there are different dynamics here that could lead the administration to recognize that the tactics it has used with other countries may not quite be in its interest this time around.”
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