U.S.-Japan Trade Talks: What Could They Yield?

After roughly a year and a half of overtures from the Trump administration, Japanese Prime Minister Shinzo Abe has agreed to enter into talks for a “United States-Japan Trade Agreement on goods,” and other key areas. The joint statement announcing the negotiations was released on Sept. 26 on the sidelines of the United Nations General Assembly after a bilateral meeting between President Trump and Prime Minister Shinzo Abe. Questions remain, however, about the scope of the negotiations, the resolution of U.S. national security tariffs on steel, aluminum and automobiles, and what either side may be willing to give to the other to reach a deal.

Q1: What were the parameters the United States and Japan agreed to for the negotiations?

A1: According to the joint statement, the United States and Japan have agreed to a phased negotiation on trade. First, the two governments will seek a “trade agreement on goods, as well as on other key areas including services, that can produce early achievements.” After such an agreement is struck, the two governments will negotiate on “other trade and investment items.” Prime Minister Abe has said the framework for the agreement is “completely different” than the outlines of Free Trade Agreements that cover a wider range of issues, including services and investment rules.

The United States and Japan have agreed on additional initial parameters and positions on core, sensitive issues for the first phase of the talks. The United States will accept auto market access outcomes, “designed to increase production and jobs in the United States” in that sector. In 2017, the United States held a $39 billion deficit in motor vehicle trade with Japan and an overall trade deficit of roughly $69 billion. The United States exported just $604.5 million worth of motor vehicles to Japan in 2017 while it imported $39.9 billion worth of motor vehicles that year. In 2017, Japanese car companies dominated the domestic market in Japan, making up about 90 percent of the sales there. In the United States that year, the Big Three—composed of General Motors, Ford, and Fiat Chrysler—made up about 45 percent of auto sales in the United States while Japanese companies made up about 38 percent of sales there. In essence, Japan’s auto market is subject to very little import penetration while Japanese automakers export vehicles to the United States and elsewhere around the world with relative success.

For its part, Japan has taken the position that it will not provide market access in the agricultural, forestry, and fisheries sectors beyond what it has agreed to in previous trade agreements. Those sectors are politically sensitive in Japan and making concessions there could be difficult for Prime Minister Abe, especially given the Trump administration’s aggressive trade tactics. In the Trans-Pacific Partnership (TPP), Japan agreed to eliminate tariffs on most agricultural products, either immediately or over several years. Japan agreed to significantly reduce tariffs on sensitive products, such as beef and pork, and expanded access for rice, dairy products, and other products Japan had traditionally protected.

Q2: Why have U.S. automakers been unable to export more automobiles into Japan?

A2: For decades, successive U.S. administrations have tried to pry open the Japanese auto market and expand the presence of U.S. motor vehicles and parts there. After World War II, Japan protected its auto industry with tariffs on foreign automobiles and domestic taxes on certain cars that tended to be foreign-made. Japan lowered its auto tariffs and removed other restrictions in the 1970s after Japanese automakers grew their presence at home. But successive U.S. administrations and the Big Three auto companies have argued that high Japanese tariffs were replaced with a web of non-tariff barriers that kept foreign cars out of its market. Those barriers included arduous safety inspections by the Japanese government, a suite of technical regulations and requirements, a close relationship between the Japanese government and Japanese automakers, and restrictions on Japanese auto dealers selling foreign vehicles. Japan has also been accused of manipulating its currency to encourage exports and make imports less competitive. The Japanese government has consistently denied that those measures are responsible for U.S. automakers’ lack of success and instead claims that Japanese consumers simply prefer Japanese brand automobiles.

U.S. complaints boiled over in the 1990s when President Clinton threatened to hit Japanese luxury cars with a 100 percent tariff if Japan didn’t open its auto market to imports. In a bid to escape the tariffs, Japan and the United States negotiated a memorandum of understanding aimed at ensuring U.S. automakers were given a share of the Japanese market, but the benefits of that agreement were never realized.

The United States aimed to eliminate the alleged barriers its auto companies face in Japan through a bilateral side agreement it negotiated with Japan alongside TPP. The side agreement, which included outcomes on transparency in Japan’s auto regulations, would have allowed the acceptance of some U.S. motor vehicle standards, provided a less onerous certification process, and sought to address other non-tariff barriers. The side agreement also contained specific, accelerated dispute settlement procedures to deal with auto complaints which could result in delays to U.S. tariff cuts or tariff snapbacks. TPP, however, did not include disciplines on currency manipulation subject to dispute settlement, which led the Big Three U.S. auto companies not to endorse the deal, although they never formally opposed it. The American Automotive Policy Council, which represents the Big Three, said this week that any U.S.-Japan Trade Agreement must address non-tariff barriers in Japan and include enforceable currency provisions.

Q3: Were tariffs on steel and aluminum, and potential tariffs on autos resolved?

A3: The joint statement does not specifically detail a resolution to the Section 232 national security tariffs the Trump administration has imposed on steel and aluminum and the tariffs it is considering on automobiles and parts; however, it does suggest that the United States will not impose tariffs on Japanese autos and parts while negotiations are ongoing and seek a solution to the steel and aluminum tariffs. The arrangement is similar to the agreement reached earlier this month between President Trump and European Commission president Jean-Claude Juncker in which President Trump agreed to hold off on additional tariffs while the two sides negotiate towards short-term tariff reductions and market access openings. There is a thought that the Europeans and Japanese may be aiming to avoid the auto tariffs over the long term by providing the Trump administration relatively small, short-term trade concessions while dragging out negotiations over more sensitive issues. On steel and aluminum, several countries have negotiated export quotas with the United States to escape the tariffs, and Mexico has reportedly reached quota arrangements with the United States on auto and auto parts exports to avoid any potential tariffs on those items.

Q4: Why did the Trump administration push for negotiations with Japan for a bilateral trade agreement instead of rejoining the TPP?

A4: President Trump and his trade team have repeatedly stated their belief that TPP was not a good deal for the United States and that they can negotiate more advantageous arrangements bilaterally. Japan has bristled at the idea of bilateral talks with the United States and had consistently urged the administration to rejoin TPP. The idea that the Trump administration would be able to extract concessions from Japan beyond what it agreed to in TPP appears to have been put to rest in the joint statement, but the administration may believe that it can strike a deal that requires the United States to give up less for those concessions compared to what it agreed to in the TPP deal negotiated by the Obama administration.

Q5: What are the next steps in the U.S. domestic process?

A5: The Trump administration has said it will follow the Trade Promotion Authority (TPA) law in its negotiations with Japan. That law, passed by Congress in 2015, gives the president the authority to negotiate trade agreements and present them to Congress for an up-or-down vote without lawmakers offering amendments. It also lays out Congressional negotiating objectives for the Executive Branch to follow. Additionally, the TPA law also requires the Executive Branch to consult with Congress throughout the negotiations and requires that the U.S. International Trade Commission produce a study of the final agreement’s economic impact before it can be considered by Congress. The TPA process begins with the Executive Branch formally notifying Congress of the intent to negotiate an agreement, which U.S. Trade Representative Robert Lighthizer said would occur in the future.

Jack Caporal is an associate fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies.

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Jack Caporal