Is Japan the next target in Trump’s trade war?

Nearly two and a half years after the election of President Trump, the sequence of negotiations initiated by him to tackle the US trade deficit has finally worked its way round to Japan—the US’ main ally in the Asia-Pacific region and the third largest economy in the world after the US and China, but a country with which the US has a $67bn trade deficit.

Prime Minister Shinzo Abe has put enormous effort into the relationship with Donald Trump, positioning Japan as the US’ key security partner in the region and Japanese investment in the US as central to American economic regeneration. But all the games of golf and weekends at Mar-a-Lago do not erase Trump’s long pre-election history as a critic of Japanese trade practices and of alleged Japanese free-riding on the US defence presence in east Asia. He has never made any attempt to play down his mercantilist instincts. Nor has Japan ever had illusions that it would avoid being placed in the firing line. Trump’s domestic electoral priorities of “America First” and the need to challenge the US’ trading partners, whether ally or adversary, were always going to win out.

It will not, however, be a straightforward process. Firstly, US attention at the moment is on finalising the deal with China, where March and April deadlines have already slipped several times. With arguments over whether the enforcement mechanism for the agreement should be reciprocal—and expose US companies to Chinese challenges—and the US trying to leverage fundamental structural changes in the Chinese economy, there are big issues unresolved. A US-driven trade war in east Asia on two fronts simultaneously does not make enormous sense.

And the Japanese negotiators will want to proceed step by step. First, there has to be agreement on the scope of the negotiations. Japan will want to limit these to trade in goods. The US will want to include services, particularly telecommunications, finance and intellectual property. Treasury Secretary Steven Mnuchin has said that currency manipulation must also be included, as in previous bilateral agreements with trade partners under the Trump administration. Japan’s starting point will be that the US is the demandeur in these talks: it is for them to set out what they want and what they might be prepared to concede to get it.

So the process of agreeing the agenda of the talks could itself be complicated. For the time being at least, this will be kept away from the level of president and prime minister, with Japan’s Economic Revitalisation Minister Toshimitsu Motegi and the US Trade Representative Robert Lighthizer in the lead. The plan is for Trump to visit Japan in the late spring to meet the new emperor, and again for the G20 in Osaka in June: trade rows will not interfere with diplomatic protocol.

But the US will not of course stand meekly by while the bureaucrats observe a steady pace. Demands from US farmers for improved market access in Japan have intensified since the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), between 11 Asia-Pacific countries, reduced Japanese agricultural import tariffs. This by any measure is a US own goal, since the first trade act of President Trump was to withdraw from the CPTPP’s precursor, the Trans-Pacific Partnership. Japan will not want to offer more to the US to solve the problem of agricultural tariffs than they would have got if they had stayed in the original trade deal. Abe faces his next elections (the Upper House of the Diet, in July) a long time before Trump.

If the US can swallow its pride and accept the CPTPP-level offer, early agreement may be possible. In their 26th September 2018 statement, Trump and Abe hinted at this, with the US “respecting” the Japanese position that the TPP offer was a maximum. But Abe also conceded in that statement that improved US access in the automobile sector designed to increase American jobs was a priority. Perhaps this might pave the way to a reduction in tariffs on Japanese car parts, and a corresponding boost to Japanese investment in the US in that sector?

The biggest worry for Japan is Trump’s threat to slap 25 per cent tariffs on imported cars and components if no progress can be made. Automobiles represent two-thirds of Japan’s trade surplus with the US. But US trade negotiations with other countries have followed a pattern—tough talking at the outset, more modest changes at the conclusion. Japanese negotiators have been watching this closely. A two-stage negotiating process—quick wins followed by longer-term structural issues—may be a way forward.

Trade and politics are inextricably mixed. Populist politicians present trade deals as simple. In Trump’s terms, you force a country to buy more from you and sell less. For Brexiteers, it’s a matter of the rest of the world lining up to sign trade deals with the UK that enable us to export to them (as if we couldn’t now…). The reality is different, with politicians evaluating the economic and political costs and benefits of prioritising one sector’s interests over another’s, before reaching a deal that delivers the highest level of increased trade and the lowest level of economic cost. The larger your economy, the more leverage you have, with the US, the EU, China and Japan leading the field. Japan will use every drop of economic leverage it has to avoid giving the US any more than they need to in securing an eventual deal.