Putt Option

A version of this article was also published by the Nikkei Asian Review on April 9, 2019.

Long-awaited trade talks between the United States and Japan finally begin on April 15, when U.S. Trade Representative Robert Lighthizer meets Japan's Economy Minister Toshimitsu Motegi in Washington. The timing seems to be Tokyo's idea, since it's hard to believe Lighthizer wants to be pulled away from critical trade negotiations with China. But the two sides need to prepare the ground for Prime Minister Shinzo Abe's expected visit to Washington later this month.

Why is Abe so eager to talk to President Donald Trump? Surely not about trade, one of the few areas of discord in an otherwise friendly relationship. Trump has railed against Japan's "unfair" trade practices for over 30 years and continues to complain about the large bilateral deficit, which reached $58 billion in 2018. Japan was one of the U.S. allies hit by last year's steel and aluminum tariffs, and Trump continues to hold the threat of tariffs on automobiles and auto parts over Abe's head. Moreover, in one of his first acts as president, Trump famously pulled out of a historic joint endeavor with Japan on trade, the Trans-Pacific Partnership (TPP).

Abe nevertheless agreed to Trump's demand for bilateral trade negotiations when they met in New York last September. The talks have been slow to get started. They were first delayed by the government shutdown in Washington. Then U.S. Trade Representative Robert Lighthizer got distracted by a raft of other priorities, from the China negotiations to pushing for congressional passage of the United States-Mexico-Canada Trade Agreement (USMCA), which replaces the North American Free Trade Agreement (NAFTA).

The U.S.-Japan talks have also been complicated by disagreement between the two sides over the structure and end point of the negotiations. Tokyo has argued for a more limited "trade agreement on goods," or TAG, followed by talks of unspecified scope and duration on "other issues." The Trump administration says it ultimately wants a comprehensive free trade agreement (FTA).

But what Trump really wants is a deal. He needs one, soon, to mollify U.S. agriculture exporters, who have lost market share in Japan's lucrative market since the start of the year, when Tokyo began implementing its obligations to the other 10 members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Japan's tariff on imported beef from CPTPP countries, for example, dropped from 38.5 percent to 27.5 percent on January 1 and will eventually fall to 9 percent. Canadian exports of beef tripled in January compared with the same month in 2018, and overall Japanese beef imports from CPTPP countries grew 60 percent in the same period. U.S. cattle farmers are the losers.

Trump wants a trade deal with Japan for three other, more dubious, reasons: he thinks it will dent the bilateral trade deficit; he needs to deliver on his campaign promise to supporters to negotiate new, "best-ever" bilateral trade deals, with Tokyo the most promising target; and he has a bee in his bonnet about the persistent imbalance in automotive trade with Japan.

Does Trump need an FTA to achieve these objectives? A comprehensive agreement will almost certainly take time, stretching out the pain for U.S. agriculture exporters. Any deal involving concessions on the U.S. side will require congressional approval, opening a Pandora's box of political pressures and further delaying the process. Trump would surely prefer to avoid all these complications and strike a quick deal.

What about Abe's incentives? Clearly, he doesn't want to be seen at home as making too many concessions to the United States on sensitive agricultural or automotive issues, particularly under threat of tariffs. But Abe also wants to get these trade tensions behind him and refocus Trump's attention on more critical priorities for the U.S.-Japan alliance, from resolving tensions on the Korean Peninsula to managing a rising China.

Imagine if Abe were to say to Trump on his upcoming visit to Washington, "Donald, let's play a round of golf and try to work out our differences on trade." On the front nine, Abe could offer the following deal: he will deliver the same agriculture market access in Japan as enjoyed by CPTPP and EU exporters; Tokyo will relax its automotive certification system to allow Trump to claim credit for a "historic opening" of the Japanese market, although few new GMs or Fords are likely to be sold there; and Japan will step up large-scale purchases of natural gas and military equipment to reduce, temporarily, the bilateral trade deficit.

In exchange, Abe would ask Trump for just two things: lifting the Section 232 steel and aluminum tariffs and the threat of new auto tariffs; and shifting the focus of U.S.-Japan economic discussions from bilateral trade to regional and global rule-making on critical issues such as digital commerce, state-owned enterprises, and infrastructure investment.

If Trump were to sneer at this offer, Abe could add a couple of sweeteners on the back nine: currency disciplines akin to those in TPP or USMCA, overriding likely vehement objections from Japan's Ministry of Finance, and, in extremis, a high quota on Japanese auto exports to the United States. Both steps are politically difficult, both of questionable policy merit, but both would be helpful in assuaging Trump's particular concern about autos.

Given the pressures on both leaders, this kind of deal would be win-win for Trump and Abe. There would be political pushback on both sides, including from Japanese agriculture interests and from key U.S. sectors not included in the deal, such as pharmaceuticals and logistics. But Abe still has enough political juice to overrule his bureaucracy and win over the Diet, by persuading them that his deal would produce a more productive alliance with the United States. And as for the U.S. Congress, the old animosity toward Japan on trade has been replaced by a broad appreciation for the swell of Japanese investment over the past 30 years that has created jobs in almost every district in the country.

Few people in Washington or Tokyo would admit it openly, but many would quietly cheer if Trump and Abe walked off the 18th green later this month shaking hands on a bilateral trade deal. By contrast, observers in Beijing would be given pause for thought by the prospect of a more focused alliance between the world's first- and third-largest economies.

Matthew P. Goodman is senior vice president and holds the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C.

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