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Feb 11, 2019 | 12:00 GMT

8 mins read

Japan Drafts a Delicate Approach to U.S. Trade Talks

Cranes unload containers from ships at the international container yard in Tokyo's port on Jan. 23, 2019.
(TOSHIFUMI KITAMURA/AFP/Getty Images)
Highlights
  • When Washington begins trade talks with Tokyo in the upcoming months, its primary aim will be to pry open access to the Japanese market. 
  • Japan is likely to offer the United States the same access for some goods that Tokyo granted to the European Union and CPTPP countries in recent trade deals.
  • Tokyo could also agree to address currency manipulation and accept a provision requiring prior consultation before its signs any trade deal with China, since a concession on that front would not be too onerous.
  • But even if Japan is cooperative, it is unlikely to secure solid guarantees that protect it from U.S. automotive tariffs — although it could gain exemptions. 
 

Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Second-Quarter Forecast. These assessments are designed to provide more context and in-depth analysis on key developments over the next quarter.

It's no secret that Tokyo's export prowess is less than appreciated in the White House. With Japan long in U.S. President Donald Trump's crosshairs due to its trade surplus with the United States, the two countries have finally agreed to sit down this year to talk trade. The timing for the start of the talks remains unclear. In October 2018, Washington extracted an agreement from Tokyo to come to the negotiating table by threatening to impose steep automotive tariffs. On Dec. 21, 2018, the Office of the U.S. Trade Representative published its negotiating objectives, paving the way for talks to begin in late January. The two countries failed to convene, however, in part because of the long U.S. government shutdown, the increased tempo of U.S.-China talks and the beginning of Japan's ordinary Diet session. According to speculation, the U.S.-Japan talks may not begin until at least April. Nevertheless, the clock is ticking for Japan: Feb. 17 is the deadline for the U.S. Department of Commerce to submit its report on automotive imports and U.S. national security, after which Trump could impose tariffs within 90 days. With the deadline foremost in Japanese negotiators' minds, Tokyo will seek to steer a middle course to avoid both unleashing U.S. fury and making concessions that go above and beyond what the country has already granted others. 

 
The Big Picture

In its 2019 Annual Forecast, Stratfor highlighted Japan's efforts to reconcile its own domestic interests with U.S. trade pressure in forthcoming talks. Whatever the case, Tokyo's main focus will be to avoid drawing U.S. ire in the form of massive automotive tariffs. 

What the U.S. Wants

Given Tokyo's reluctance to come to the table and the U.S. market's relative openness to Japanese products, Washington's priorities will drive the talks as Japan plays a largely defensive role. In December 2018, the United States released a comprehensive list of what it hopes to gain in the negotiations. In the main, the United States is intent on lowering its $61 billion trade deficit with Japan — something that will require Tokyo to rebalance its massive automotive exports to the U.S. market, as Japanese cars account for two-thirds of the deficit. On this front, Washington will push for Japan to lower its nontariff barriers on U.S. auto imports and limit the number of third-country parts it sources for its vehicles from cheaper suppliers in third countries. In doing so, the United States will be reprising its tactics from the recently revamped United States-Mexico-Canada Agreement (USMCA). 

On top of this, the United States will seek greater access to Japan's large and growing market for imported agricultural goods. Also, as with the USMCA, Washington will push for a provision requiring periodic reviews of the deal. Japan, in fact, agreed to many of these conditions already as part of the Trans-Pacific Partnership — only for Trump to pull his country out of the talks. 

Additionally, the United States will push Japan to lower barriers to U.S. investment, particularly in the financial and telecommunications sectors, and ease pharmaceutical price mechanisms that place U.S. products at a disadvantage. Washington wants Tokyo to open up more room for U.S. goods and services sales to government institutions, albeit without reciprocating. But above all, the United States also wishes to pry open access to Japan's highly protected services sector. 

Most relevant for Japan, the USMCA includes an emphasis on provisions to obstruct any future deals with China through a so-called "anti-China clause" that would require signatories to inform Washington before engaging in talks with a nonmarket economy — i.e., China; failing to do so would trigger a renegotiation of the deal. Washington is also pushing for three provisions that are, in part, intended as a message to Beijing: A provision against currency manipulation, a requirement to bring intellectual property protection for U.S. companies up to U.S. legal standards and an obligation to curtail state support for economic actors.

A chart showing the United States' trade objectives with Japan.

The Goals for Japan

Japan might have agreed to many of the U.S. demands on automotive and agricultural protections while negotiating the Trans-Pacific Partnership, but Washington's demands for concessions on rules of origin and other aspects would exceed this. Tokyo's main goal — and one it managed to include in the joint statement with the United States in the fall — is to ensure that Washington does not secure concessions in excess of the provisions of the TPP's successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), or the EU-Japan trade deal. 

For Japan, the priority in the trade talks is to maintain trade with the United States and avoid the specter of auto tariffs, albeit without conceding much more than what it and the United States agreed to in the erstwhile TPP. As it is, rules of origin clauses in any U.S.-Japan deal would likely prohibit the East Asian giant's carmakers from benefiting from its supply chains in low-wage markets in Southeast Asia to sell to the U.S. market. Yet outright auto tariffs present a far bigger worry for Japan given that the ruling Liberal Democratic Party (LDP) will face upper house elections in July, while a potential consumption tax hike could begin to dampen economic growth in October. 

But while the United States could threaten to tear up an existing (and vital) agreement with Mexico and Canada in its talks on the USMCA, Washington's sole leverage with Tokyo is the threat of tariffs. On the anti-China clause and the other China-related provisions, Japan does not have much to fear. As formulated in the USMCA, the clause requires that a party to the deal inform the other if it plans to enter free trade talks with a nonmarket economy, but that does not amount to a U.S. veto. And given that Japan would like to retain the long-term option of negotiating a deal with China — while perhaps including South Korea as well — Tokyo may calculate that a future U.S. administration may be more amenable to discussing such a move. And as for currency manipulation, Japan can agree to the U.S. demands with relatively little risk. The currency manipulation clause in the USMCA, like the anti-China clause, only requires disclosure and consultation rather than spelling out any repercussions. Furthermore, Japan's currency policies do not fit most U.S. criteria regarding currency manipulation, meaning Tokyo is in no particular danger of drawing Washington's wrath on the topic. Because the U.S. push on intellectual property exceeds what the countries previously agreed to in their TPP talks, however, the heading could become a bone of contention between the sides. 

The looming U.S. threat of auto tariffs has backed Japan into a corner.

Looking Ahead 

The looming U.S. threat of auto tariffs has backed Japan into a corner; in response, Tokyo appears to have calculated that sitting down for talks will blunt any U.S. action, at least in the near term. At the same time, it is playing its cards carefully and not threatening (unlike Brussels in its talks with Washington) to walk away or retaliate. Japan has every reason to take a slow approach to the negotiations, offering easier concessions in the near term so as to buy time until there is a change in U.S. policy — or even in administrations. 

Japan, however, is unlikely to secure any firm guarantees on auto tariffs if past U.S. behavior is any indication. First, it is unclear whether Democratic lawmakers in the U.S. House of Representatives would approve any U.S. trade deal given their opposition to the president’s agenda and their track record of disapproving of new trade agreements. Trump has repeatedly emphasized that tariffs are his main tool for shaping trade and, until now, he has not repealed any that he has imposed — even after signing trade deals with the targets in question. 

Instead, the best Japan can hope for may be a temporary and renewable exemption from tariffs. The relatively weak USMCA auto tariff protections provided no guarantee that Washington will not impose such measures in the future, as negotiators only included the protections in side letters that were not signed by top leaders or even submitted for lawmakers' ratification. Furthermore, the USMCA did not provide full guarantees to Mexico on its auto exports, meaning automakers in the country could still face 25 percent tariffs if any new facilities fail to meet certain requirements. For Japan, even if the United States holds off on its threatened tariffs, Washington might still insist on quotas that limit the number of Japanese vehicles and parts that enter the U.S. market. And then there's the near certainty that the United States will demand that Tokyo reduce nontariff barriers that have long shielded the Japanese domestic market (even if that will be less of a concern for an industry that has made major efforts to move manufacturing to the United States and dominates its internal market). In the end, Japan's priorities are clear: avoid tariffs on the industry that drives the island nation's economy — automobiles — all while taking care to ensure it doesn't cede too much ground elsewhere. 

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