The Trump Administration’s Trade Objectives with Japan and the European Union
January 18, 2019
This winter, the Office of the United States Trade Representative (USTR) published negotiating objectives for upcoming trade negotiations with the European Union and Japan. The objectives lay out specific outcomes the Trump administration will seek in its trade negotiations with each country. The European Union and Japan agreed to separate trade negotiations with the Trump administration in exchange for a pledge that the United States would not impose additional tariffs on products from the European Union and Japan while the talks were underway.
Q1 : What are USTR’s key negotiating objectives with each country?
A1 : In line with the Trump administration’s overarching trade goal, the top negotiating objective for talks with the European Union and Japan is to “improve the U.S. trade balance and reduce the trade deficit,” with each trading partner. President Trump has made reducing the U.S. trade deficit with trading partners around the world his top trade priority since stepping foot in the Oval Office, although many economists believe that trade deficits do not cause economic harm and are caused by factors beyond those included in a trade agreement. Whatever the outcome of the negotiations, a reduction in the U.S. trade deficit with either country is not guaranteed.
Both sets of objectives include traditional goals in trade negotiations: to reduce economic barriers U.S. exporters and companies face abroad whether it be by eliminating tariffs, non-tariff measures, investment restrictions, or other by other means. However, the Trump administration has included some less conventional objectives as well. An objective to include a “mechanism to ensure transparency and take appropriate action if the EU negotiates a free trade agreement with a non-market country” is a likely reference to a novel provision in the United States-Mexico-Canada Agreement (USMCA) that allows a party to withdraw from the agreement if another member enters into free trade agreement negotiations with a non-market economy, a jab at China. Another departure from previous administrations is the absence of any mention of a mechanism to settle disputes between investors and governments. The Trump administration sought to eliminate the North America Free Trade Agreement’s investor-state dispute settlement regime in the USMCA and partially succeeded.
Q2: Which objectives with Japan are likely to be sticking points?
A2: USTR has resolved to take aim at the longstanding U.S. motor vehicle trade deficit with Japan. In addition to enhanced regulatory compatibility in the motor vehicle sectors and other areas, USTR has bluntly said it aims to negotiate rules “to obtain fair and more equitable trade,” in the automotive sector. The administration said it would seek rules to address non-tariff barriers in Japan that stifle U.S. automobile exports and boost U.S. auto production and jobs. The United States has for years accused Japan of maintaining a web of cumbersome standard and testing requirements, low levels of transparency, a close relationship between the Japanese government and Japanese automakers, and restrictions on Japanese auto dealers selling foreign vehicles. The Japanese government has denied that non-tariff barriers are responsible for U.S. automakers’ lack of success and instead claims that Japanese consumers simply prefer Japanese brand automobiles.
In 2017, Japanese car companies dominated the domestic market in Japan, making up about 90 percent of the sales there. Meanwhile, Japanese companies accounted for 38 of auto sales in the United States in 2018. For years, Japan has claimed that non-tariff barriers are not responsible for U.S. automakers lack of sales in Japan—instead, Japanese consumers simply prefer Japanese brand automobiles. President Trump could also insist that Japan agree to a quota to cap its auto exports to the United States in order to avoid potential U.S. national security tariffs. Although Tokyo has accepted U.S. steel and aluminum tariffs, it might be less willing to roll over on U.S. measures that restrict its automobile exports.
USTR has also made it an objective to include rules that ensure Japan does not manipulate its currency. This objective could ruffle feathers in Tokyo and the United States. The Treasury Department has resisted including binding currency rules in trade agreements over concerns that it would make certain U.S. monetary policy tools, such as quantitative easing, a violation of its free trade agreement obligations. Japanese media reacted with alarm over the inclusion of the currency objective, fearing that it would give Washington an excuse to label Japan as a currency manipulator if it moves to prevent its currency, the yen, from dramatic hikes. Japan is currently on the Treasury Department’s currency watchlist—essentially one level below being labeled a currency manipulator—and has a history of intervening in its currency market. The Trump administration managed to secure rules against currency manipulation in the USMCA, the first trade agreement to include such rules, although only provisions regarding transparency are subject to dispute settlement and neither Canada nor Mexico has a history of currency manipulation.
Q3: Which objectives with the European Union are likely to be sticking points?
A3 : EU officials are already frustrated over the insistence of Trump administration officials that agriculture be part of trade negotiations with the European Union despite President Trump and President Jean-Claude Juncker of the European Union leaving agriculture out of the framework they negotiated for the talks last year. USTR’s inclusion of securing “comprehensive market access for U.S. agricultural goods in the EU by reducing or eliminating tariffs,” and other objectives related to agricultural market access will only fan the flames directed at the United States from across the Atlantic. The European Union’s own mandate for the negotiations is unlikely to include agricultural market access.
European Union rules regarding geographical indications (GIs) will be another area of conflict that USTR hopes to tackle. GIs are used to identify products that come from a specific location that conveys a certain history, quality, and reputation. Examples of GIs include, Parmigiano Reggiano cheese from Parma, Italy, Champagne from the region in France, Irish Whiskey, Idaho Potatoes, and Napa Valley Wine. U.S. food associations and lawmakers have raised concerns over the European Union’s use of GIs to discriminate against and disadvantage U.S. cheeses, such as provolone, feta, and parmesan, and certain spirits, among other foodstuffs. The United States views the use of those common names as a generic term, while the European Union has attempted to impose branding and labeling restrictions and requirements on those products due to its GI protections. U.S. food groups and lawmakers, as well as administration officials, have also warned that the European Union is using trade agreements with third countries to lock in GI protections that disadvantage U.S. producers. GIs and agricultural market access were both major points of contention in the now-suspended U.S.-EU negotiations for a Transatlantic Trade and Investment Partnership.
USTR does not mention automobiles in its negotiating objectives with the European Union, but similar to Japan, the administration could push for quotas to put a ceiling on automobile imports from the European Union. Compared to Japan, the European Union has been more outspoken in pushing back against the Trump administration’s steel and aluminum tariffs and Brussels would likely put up a fight over any proposed restrictions on automobile exports.
Q4: What’s next for the negotiations?
A4: Publication of negotiating objectives is the final requirement that must be fulfilled by the administration before trade negotiations can formally begin, per the Trade Promotion Authority (TPA) law passed by Congress in 2015. TPA states that official negotiations can begin 30 days after the release of the negotiating objectives. That puts the earliest date for talks with the European Union to kick off as February 10, and the earliest dates for talks with Japan to start as January 20. The European Union must jump through some procedural hoops of its own before talks with the Trump administration can begin. The European Commission, akin to the Executive Branch of the European Union, must draft a negotiating mandate that then must be approved by the EU member states before the European Union can enter negotiations. The drafting process is underway, but it is not clear when the mandate will be finalized and approved. Satisfying each member state may also be a challenge. For example, French president Emmanuel Macron has said trade agreements should not be signed with countries that are not parties to the Paris climate treaty, although he left himself some wiggle room by stating that he could back deals on individual sectors as long as they do not impact the climate. The Trump administration withdrew from the Paris treaty in 2017.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jack Caporal is an associate fellow with the CSIS Scholl Chair in International Business.
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