Stratfor's Fourth-Quarter Forecast highlighted that, in the face of U.S. pressure on automotive exports, Japan could explore trade talks with Washington. Moreover, the forecast further asserted that Japan — which recently lowered trade barriers elsewhere — would leverage its long-standing manufacturing presence in the United States.
Japan and the United States are a step closer to achieving direct, bilateral negotiations on a trade agreement. Following a meeting with Japanese Prime Minister Shinzo Abe on Sept. 26 on the sidelines of the U.N. General Assembly, U.S. President Donald Trump announced that the two countries have agreed to begin trade negotiations. He did not, however, give specifics.
The White House released a joint statement saying that the two countries will enter talks for a U.S.-Japan trade agreement after appropriate domestic procedures are carried out. Such talks are intended to give way to discussions on trade and investment, with an eye toward early results. The statement further indicated that while such discussions are underway, neither country will enact trade measures against the other but will instead seek to solve tariff-related issues.
Why It Matters
Trade talks between Japan and the United States are nothing new, but Tokyo has long resisted entering discussions about a free trade agreement. This appears to have changed. While initial reports indicated that the talks will largely focus on the narrow issue of automotive trade, the White House statement suggests that Tokyo has acquiesced to Washington's demands to at least explore a bilateral trade deal. Japan has long been a major target in the White House's efforts to lower the U.S. trade deficit and revitalize domestic manufacturing. However, Japan has instead pushed for the United States to join the multilateral Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which grew out of the ashes of the Trans-Pacific Partnership (TPP) that Trump withdrew from.
Wherever negotiations lead, Abe's recent success in winning a third term as prime minister will give him free reign in talks with his country's longtime ally.
Yet Japan will still be cautious when it comes to bilateral talks with the United States. Tokyo's willingness to negotiate is in part a response to U.S. threats to impose section 232 25 percent tariffs on automotive imports. By entering into talks, Japan could avoid being hit with U.S. automotive tariffs or, at the very least, delay their implementation — a strategy the European Union has also pursued.
All of the United States' trade partners have been working to avoid being hit by the looming U.S. tariffs on automobiles. The results have been mixed. Canada has yet to make leeway while Mexico, despite failing to secure an exemption, made a side agreement on automobile quotas. Meanwhile, South Korea signed a revised version of the U.S.-Korea Free Trade Deal (KORUS) on Sept. 24 but doesn't appear to have secured an exemption.
Washington is likely to push Tokyo hard, mainly because vehicles and parts account for three-quarters of the United States' overall trade deficit with Japan. Still, Japan will be able to tout its massive manufacturing presence in the U.S. while maintaining insulation thanks to recent successes in lowering trade barriers with the European Union, China and other members of the CPTPP. And on agriculture, where talks will likely focus on non-tariff barriers, Japan has already managed to gain greater leeway because it weakened the agricultural lobby's influence before signing the TPP. But wherever negotiations lead, Abe's recent success in winning a third term as prime minister will give him free reign in talks with his country's longtime ally.