In an anxiously awaited speech on his China trade war this week, US President Donald Trump spent a surprising amount of time talking about – well, Japan.
Then there was his self-congratulatory talk of how he “struck a deal, which is historic, with Japan.” Trump told the Economic Club of New York on Nov. 12 that “that deal was signed, and it’s a great deal but it’s only Phase One of the Japan deal, too.”
There are two problems with these remarks.
One, the US-Japan free-trade agreement is not gaining traction for full ratification in Japan’s parliament. Two, Trump is likely to find that Prime Minister Shinzo Abe’s government will be less pliant the second time around.
On the slow track
Depending on where you get your news, Japan’s lower house will pass the deal on Nov. 19 – or delay voting indefinitely. The odds of a delay are rising. The same goes for when the upper house might take up the bill.
What is most intriguing is why lawmakers are not fast-tracking the bill through the necessary processes.
After all, Abe’s Liberal Democratic Party and its coalition partners appear to have all the votes in place. Yet lawmakers have two main pre-conditions for voting “yes.”
One is to see the minutes of Abe’s Trump summit meetings, for Trump’s propensity to demand quid-pro-quos from world leaders – as officials in Ukraine can attest – is giving Tokyo pause for thought.
Two is to protect Japan come phase-two negotiation time.
The latter sticking point concerns automobile tariffs. Trump has long threatened 25% taxes on imports of cars and auto parts. When negotiating the first phase, Abe’s team failed to extract a firm commitment that Trump won’t suddenly ruin Japan Inc.’s 2020. Such levies would upend supply chains in unpredictable ways.
That failure could hold up what should otherwise be seen as a victory for Abe’s government. Team Abe, after all, outmaneuvered Trump’s White House at virtually every turn.
Debt of gratitude
For that, Abe owes a debt of gratitude to his lead negotiator Toshimitsu Motegi. In August, Motegi told Trump’s point man Robert Lighthizer: “You are the ones who want a quick agreement. I’m only offering things I can deliver on.”
Yet days later, China retaliated with $75 billion of tariffs on US goods – a clear sign a comprehensive US-China FTA wasn’t likely. That timing played right into Tokyo’s hands. Trump was suddenly desperate for a win.
Motegi prodded the US to scrap demands for low-tariff quotas on dairy and agriculture – access beyond what Abe had agreed to under the previous, multilateral FTA, the Trans-Pacific Partnership, or TPP. The extreme haste with which the US FTA was cobbled together let Japan off easy.
For now, at least. When Tokyo asked for reassurances on the auto tax specter, the most Trump’s team would say is that there are no such plans “at this point.”
The year ahead could be a very different story. It’s now Xi Jinping’s turn. It’s quite possible the Chinese president will agree to his own “phase one deal” with Trump to tamp down pressures. Odds are, it would have Beijing agreeing to buy tens of billions of dollars of US goods.
Trump will be disappointed, though, when Xi rejects a wholesale realignment of Sino-US commerce – including demands that Beijing stop subsidizing state-owned enterprises. The sting will be exacerbated by election-year dynamics.
Trump’s search for a face-saving victory will very likely have him calling on “Shinzo” once again. Yet here, too, Trump is likely to encounter disappointment.
Multilateral comfort zone(s)
Abe, remember, spent vast amounts of political capital joining the US-led TPP. It was a deal his party wanted no part of, but Abe – who is emerging as a free trade pragmatist of considerable note – stayed in even after Trump reneged on the deal and pulled out in one of the first acts of his presidency.
Tokyo is now seen as the key leader in the re-jigged pact.
Abe has also signed a giant FTA with the European Union. And Japan also is part of the promising Regional Comprehensive Economic Partnership, or RCEP, which groups Australia, China, South Korea, New Zealand and Southeast Asia.
The common thread here, and one that sets Abe’s Japan apart from Trump’s America, is the preference for multilateral deals.
With the EU and TPP, Tokyo sought to reduce its reliance on trade with China.
Japan Inc. is happy to ship loads of goods to Asia’s biggest economy, but worries about Xi’s unpredictable leverage. Abe watched how Xi’s China has economically retaliated against South Korea after it caved in to American pressure and set up a missile defense system on its own soil. And how Australia is now dangerously beholden to Chinese demand.
RCEP ensures fairer terms with China; a bilateral Beijing-Tokyo pact would almost certainly be a messy, history-infused, multi-year trauma. RCEP, by sharp contrast, is a group effort to harness Chinese demand without being subsumed by Asia’s fast-rising superpower.
All this offers Japan plentiful free trade in the years ahead. Even so, Abe is going to face quite a balancing act in 2020.
Giving away the store to Trump would imperil Abe’s hold over his party and its coalition partners. Not giving Trump more, though, opens Japan to other risks.
Trump knows how much global automakers rely on car-loving American consumers, and clearly hopes to recreate his auto success with South Korea. In the revised free-trade deal he and President Moon Jae-in signed in 2018, Seoul agreed to double the number of US vehicles that can be sold there annually to 50,000 from 25,000. Korea also agreed to accept US standards for auto parts.
Tokyo’s EU deal removed some US$1.1 billion of duties that Japanese carmakers used to protect their turf. In February, European Commission President Jean-Claude Juncker said the step would “turbo-boost the trade we already do together.”
Trump, meantime, also has had his share of success with EU negotiations, particularly in Germany. BMW and Daimler are investing in new US plants for sports-utility vehicle production. Volkswagen is plowing $800 million into a Tennessee facility.
The same with Trump’s renegotiation of the North America Free-Trade Agreement, which the White House claims, if ratified, would add about 28,000 US auto sector jobs. Most would come at the expense of Mexico. The common thread, though, is that Trump’s deals tend to tilt the benefits disproportionately toward the US. And Japan knows it.
The auto tax is risk No. 1, but Tokyo also worries that trade-manager Trump will make good on threats to weaken the dollar versus the yen. That would slam export-reliant Japan Inc.
Then there’s the quid-pro-quo angle – which impacts security as well as trade.
Trump has long complained that Japan and South Korea don’t pay enough for US protection. Current reports from Seoul and Washington allege that the US is demanding a colossal 500% increase in annual payments for US troops in South Korea.
And in his Nov. 12 speech, Trump said something that should give Abe pause. When Trump warned he would raise China tariffs “very substantially,” he added “and that is going to be true for other countries that mistreat us, too.”
Abe is Trump’s closest ally among democratic world leaders, but Japan could be just one step away from getting onto the enemies’ list. It is a risk hanging over all discussions about US-Japan trade mechanics.