What’s at Stake and at Risk in U.S.-Japan Trade Talks

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Nearly three years after U.S. President Donald Trump walked away from a regional Asia-Pacific trade agreement, a bilateral pact between the U.S. and Japan -- the world’s largest and third-largest economies -- is close to coming into effect. Though the two countries have signed limited deals on agriculture and digital trade, the threat of U.S. tariffs on Japan’s auto sector has not been definitively withdrawn. As evidenced by Trump’s tariff battles with China and the European Union, there’s potential for serious economic damage if things go bad.

1. What’s been agreed to?

The two sides signed a deal in October that covers about $55 billion of commerce. Under the deal, Japan will lower or abolish tariffs on some $7.2 billion of American farm products, including beef and pork, to match levels offered to Japan’s partners in an 11-nation Pacific Rim trade pact. The U.S. will cut tariffs on some Japanese imports, including certain industrial goods, but not cars or parts. Some $40 billion in digital trade is also covered, according to Trump.

2. Where does it stand?

The accord has passed the more powerful of the Japanese parliament’s two houses and doesn’t require U.S. congressional ratification, so it could go into effect as planned on Jan. 1. After that, the two sides are set to start talks on a second-phase agreement. It’s still unclear what will be on the table or how much progress can be made before Trump faces re-election in November 2020.

2. What about cars and currencies?

On the question of autos, U.S. Trade Representative Robert Lighthizer said Trump doesn’t intend to levy new tariffs on Japan for the time being. Trump abhors trade deficits and has expressed determination to reduce the one the U.S. has with Japan, much of which is due to the auto industry. Prime Minister Shinzo Abe wants to head off Trump’s threatened penalties on autos and auto parts, which could tip Japan into recession. No “currency clause” directed at the Japanese yen is included in the initial agreements.

3. What is a ‘currency clause’?

U.S. Treasury Secretary Steven Mnuchin has said the U.S. wants any trade deal with Japan to include language that would prevent competitive devaluations -- currency moves designed specifically to boost exports. The U.S. made sure similar language was included in its revised trade deal with Mexico and Canada, and that prohibition is expected to be part of any U.S.-China deal. Japan, though, wants to avoid any clause that might tie the Bank of Japan’s hands. It has argued that currency moves and export volumes no longer correlate. Foreign Minister Toshimitsu Motegi, Japan’s point person for the trade talks, has said that any discussion on currency is between Japan’s Finance Ministry and the U.S. Treasury Department, under an agreement reached in February 2017.

4. Why are these talks happening?

After Trump pulled the U.S. out of the Trans-Pacific Partnership, the 11 other members (including Japan) went ahead without the U.S. to form the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. That deal, which entered into force Dec. 30, and another that Abe struck in 2018 with the EU have resulted in U.S. farmers losing market share to rivals with lower tariffs. (America accounted for about a quarter of Japan’s agricultural imports in 2017.) Abe agreed to direct talks in September 2018 after Trump hit Japan’s steel and aluminum exports with tariffs and threatened to do the same on cars.

5. How big is the U.S. trade deficit with Japan?

In goods trade, it was 6.5 trillion yen in 2018 ($61 billion today). That was down 8.1% compared with 2017, the result of weaker car exports from Japan and more imports of aircraft and oil, according to Japan’s Finance Ministry. The U.S. actually has a trade surplus for services, which has slowly been increasing over the past decade.

6. What’s motivating Japan?

It wants to head off anything that would dent its already lackluster economy, which had been flirting with a technical recession even before an increase in the national sales tax in October. Goldman Sachs estimates that new tariffs on auto exports of just 10% (Trump has threatened 25%), would cut Japan’s gross domestic product by more than 0.2 percentage point. Opposition politicians have criticized Abe for giving away access to Japan’s farm markets without a written guarantee extra auto tariffs won’t be imposed. The initial agreement doesn’t lower barriers protecting Japan’s rice farmers, a powerful group that traditionally backs Abe’s ruling Liberal Democratic Party. That’s one significant difference with the original TPP agreement.

7. What about the U.S.?

Trump was eager to make a deal with Japan to help U.S. farmers, who have been largely shut out of the Chinese market as a result of the U.S.-China trade war. In May, he put off imposing tariffs on imported cars until November, seeking to use that as leverage, but the clock may now have run out on that option. Farm states were an important bloc of support for Trump in 2016, and as he seeks re-election in 2020, he will face questions on his achievements in rebalancing America’s trade relationships, a major campaign pledge. For now, the report card is full of incompletes: There’s resistance in the U.S. Congress to ratifying the U.S.-Mexico-Canada agreement. Talks with the EU haven’t gotten far. The trade war in China, meantime, has hurt both sides.

The Reference Shelf

• The text of the U.S.-Japan Trade Agreement.
• QuickTakes explaining why Japan is raising its sales tax, the new Asia-Pacific trade deal and the U.S.-China trade war.
• Competitive devaluations are explained in this QuickTake on currency wars.
• The New York Times wrote a postmortem on the original Trans-Pacific Partnership.
• Japan’s former currency chief Masatsugu Asakawa argued against a currency clause.

--With assistance from Jenny Leonard.

To contact the reporters on this story: Yuko Takeo in Tokyo at ytakeo2@bloomberg.net;Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Geitner, Laurence Arnold

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