The U.S.-Japan Trade Deal

On Wednesday, Japanese prime minister Shinzo Abe and U.S. president Donald Trump met on the sidelines of the UN General Assembly meetings and announced a bilateral trade agreement. While Trump praised the outcome as “phenomenal,” and Abe called it a “win-win solution,” the agreement is limited in scope. The U.S. Trade Representative’s (USTR) fact sheet on the agreement mentions “further negotiations,” leaving the door open for a second phase of talks between the world’s largest and third-largest economies.

Q1: What did the two sides agree on?

A1: At its core, the deal is a subset of what the United States and Japan agreed to in the Trans-Pacific Partnership (TPP), which Trump withdrew from upon taking office. Under the Trump-Abe deal, Japan will gradually lower or eliminate tariffs and quotas on approximately $7 billion of U.S. agricultural products, including beef, pork, and wheat. In return, Washington will reduce or remove tariffs on Japanese industrial products, including machine tools and steam turbines but not autos—Japan’s main export to the United States. These terms represent a fraction of the market-access provisions in the original TPP, which also included a timetable for U.S. removal of tariffs on Japanese vehicles and auto parts and increased access to the Japanese market for U.S. farmers.

The two countries also signed an “executive agreement” on e-commerce and other areas of digital trade covering $40 billion of digital trade. According to the U.S. fact sheet, this side-agreement ensures “barrier-free cross-border data transfers in all sectors” and prohibits data localization requirements, as well as “arbitrary access to source code and algorithms.” These steps build on the Japanese-led Osaka Declaration on Digital Economy issued at the G20 summit earlier this year. Finally, Trump said negotiators would continue talks towards a broader trade agreement, which will likely focus on other areas encompassed in the TPP but left out of the deal announced today.

Q2: What was missing from the deal?

A2: Abe failed to secure an ironclad assurance from Trump that the United States would not impose threatened national-security-based tariffs on Japanese autos and auto parts. Reports emerged earlier this week that Japanese negotiators requested a “sunset clause” that would void the agreement if Trump imposed the tariffs, but this does not appear to be in the final deal. Auto tariffs were not mentioned at all during the signing press appearance or in the USTR fact sheet. But in a joint statement the two governments agreed to “refrain from taking measures against the spirit of these agreements” and address other tariff-related issues, language similar to that in the September 2018 joint statement announcing trade talks. The United States also did not set a formal timeframe for removing existing tariffs on Japanese vehicles and auto parts, which was a Japanese priority for the talks and previously agreed to under the TPP. For its part, Japan did not agree to expand quotas on U.S. rice and avoided making concessions on other sensitive issues, such as pharmaceuticals and digital platform regulations.

Q3: What’s the significance of the deal?

A3: The deal is a boon to U.S. farmers and ranchers who have been battered by the U.S.-China trade war and a loss of market share in Japan. Although they won less access to the large Japanese market than they would have under TPP, the terms of the Trump-Abe deal place them on a more level playing field with Australian, Canadian, and European producers who have gained market share under TPP’s successor, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), and the 2019 European Union-Japan Economic Partnership Agreement. This will relieve some political pressure on Trump going into an election year. While the economic gains outside of the agricultural sector are limited, Trump will tout the agreement—his first and only new bilateral deal—as a major victory and a validation of his hard-charging approach to trade.

Japan achieved its primary objective of delaying threatened U.S. auto tariffs for the short term. Despite the limited U.S. concessions, the deal will still boost a Japanese manufacturing sector that is struggling amid a nine-month slide in exports, contracting domestic factory activity, and global trade tensions. Abe hopes this will put trade on the backburner of the bilateral relationship and allow Japan and the United States to focus on other pressing issues for the alliance, such as China and North Korea. But he could continue to face political pressure at home until the Trump administration makes a final decision on auto tariffs.

On balance, the agreement is good for the global economy. The deal proved that Trump can cut a deal that lowers tariffs and expands trade. The digital chapter is valuable and could provide momentum for plurilateral e-commerce talks at the World Trade Organization (WTO), which aspires to reach consensus by the 2020 WTO ministerial in Kazakhstan.

Still, the Trump-Abe agreement does not end the threat of U.S. auto tariffs, which Trump could announce as soon as November. Had that been included in the deal, it could have set a precedent that could help facilitate a U.S.-EU agreement, or at least help manage tensions. Finally, the deal as written does not meet the WTO requirement that bilateral or plurilateral trade agreements cover “substantially all trade.” Japanese and U.S. negotiators will point to further rounds of talks to assuage this concern, but a perceived disregard for WTO rules could further test the embattled international trading system.

Q4: What happens next?

A4: The final details of the agreement and standard legal scrub will be completed over the next several weeks. U.S. officials have claimed the initial agreement could enter into force as soon as January 1. Since the U.S. tariff cuts are limited and there are no other legislative changes required, Trump does not need approval from Congress before implementing the agreement under proclamation authority, though Congress may challenge this. In Japan, Abe likely has enough political strength to push this deal through the Diet in the extraordinary session beginning October 4, although the opposition will grill him on failing to close the door on potential U.S. auto tariffs.

Going forward, major U.S. industries that have outstanding interests in Japan, especially the pharmaceutical and technology sectors, will want a broader deal on market access, technical barriers to trade, and regulatory cooperation, among other issues. The joint statement mentions that the two nations will enter into negotiations on “other restrictions on trade, barriers to trade in services and investment, and other issues” four months after the initial agreement enters into force. However, given the U.S. political environment and other trade priorities, Trump could declare victory and move on. The deal announced today is a net positive in terms of reducing bilateral trade friction but does not completely mitigate uncertainty about the prospects for strengthening U.S.-Japan economic ties and joint leadership on international trade more broadly.

Matthew P. Goodman is senior vice president, senior adviser for Asian economics, and holds the Simon Chair in Political Economy at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Dylan Gerstel is a research assistant with the CSIS Simon Chair in Political Economy.

Nicholas Szechenyi is deputy director of the CSIS Japan Chair. Michael J. Green is senior vice president for Asia and Japan Chair at CSIS.

Critical Questions are produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2019 by the Center for Strategic and International Studies. All rights reserved.

Matthew P. Goodman

Matthew P. Goodman

Former Senior Vice President for Economics
Dylan Gerstel

Dylan Gerstel

Research Associate, Economics Program