The White House's ongoing negotiations with Japan have provided a relative bright spot amid the host of trade wars the United States has now embroiled itself in — the largest and most volatile being with China. Tokyo and Washington are now slated to have a concrete trade agreement on the table by late September, carrying with it the potential for a boost in Japanese purchases of U.S. agricultural exports.
On Aug. 25, U.S. President Donald Trump and Japanese Prime Minister Shinzo Abe announced an agreement in principle for a trade deal to be signed around the next U.N. General Assembly session on Sept. 24. While many of the details remain unknown, under the reported framework, the deal would put U.S. agricultural access to Japan on par with the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreement, including up to $7 billion worth of U.S. products such as beef, pork, dairy, wine and ethanol.
Crucially for the White House, Trump noted that Japan will also make unspecified large purchases of U.S. wheat and corn. For Japan's part, its main goal in trade talks has been to avoid the blow of a threatened 25 percent U.S. automotive tariff, with a secondary hope of greater access to the U.S. market for industrial goods. But while the framework deal would reportedly lower industrial tariffs on unspecified Japanese products, it most notably would not include automobiles. Neither side has confirmed whether or not Tokyo will now be exempted from the White House's automotive tariff threat. According to leaks, Washington's existing 2.5 percent tariff on Japanese automotive exports is slated for a separate discussion between the two countries.
Why It Matters
Trump is looking for victories, symbolic as they may be, for U.S. agricultural producers beleaguered by the setbacks born of the U.S.-China trade war. While much of the U.S. CPTPP-level access will be gradually rolled out over the coming years, near-term purchases by Japan can nonetheless provide quick relief to U.S. agriculture. The U.S. soybean industry has received the most attention with respect to the loss of the Chinese market. But while Japan cannot plug the soy gap left by China, it can help alleviate challenges for U.S. corn and wheat producers who are struggling as well.
Japan is currently the largest market for U.S. wheat and the second-largest market for U.S. corn, purchasing nearly 13 percent of U.S. wheat exports and 22 percent of corn exports in 2018. Amid the trade war, U.S. corn shipments to China dropped 98 percent year-on-year in the first four months of 2019 — amounting to a loss of roughly $39.5 million in exports. But since then, a 19 percent increase in Japanese corn purchases have already more than made up for this loss, accounting for an additional $158 million in exports.
Trump is looking for victories, symbolic as they may be, for American farmers beleaguered by the U.S.-China trade war.
Unconfirmed reports indicate that under the new deal, Japanese businesses will buy an additional 2.5 million tons of feed corn from American farmers, which would be equivalent to roughly 25 percent of Japan's typical U.S. feed corn imports. Japan's failures to make hoped-for gains in domestic feed corn production, combined with the higher prices of alternative suppliers like Brazil, will make this feasible as long as U.S. prices remain low. But given the recent rises in Tokyo's corn purchases, and the fact that the United States already accounted for nearly 92 percent of Japan's total corn imports in 2018, there's only so much more Tokyo can increase its corn purchases under any deal.
When it comes to wheat, China's U.S. imports dropped nearly 89 percent by $77.9 million over the first third of 2019. Meanwhile, Japan's U.S. wheat imports rose by $18 million to $246 million during the same period. In 2018, the United States only accounted for 48.3 percent of Japan's total wheat imports, followed by Canada and Australia. Thus, compared with corn, Japan has more room to further edge up its U.S. wheat imports.
Any increase in Japanese corn purchases would be a welcome relief to American corn producers, who continue to face challenges that go beyond just the U.S.-China trade war. Poor weather conditions during the planting season have compounded a simmering debate over supplementing crude oil with biofuel produced from corn (also referred to as "corn ethanol").
The Trump administration has promised to increase U.S. oil refiners' blending quotas for ethanol (produced from corn) in 2020 and 2021, with announcements for exact amounts due by Nov. 30. But for now, the White House said it will maintain controversial exemptions from ethanol blending mandates.
The outcome of the biofuel debate will be indicative of Trump's prioritization of agricultural votes versus industrial ones. Alternative export markets (such as the promised volume from Japan) could, in theory, provide the White House additional leeway in this balancing act by starting to appease some U.S. corn farmers.