When U.S. President Donald Trump met Japanese Prime Minister Shinzo Abe in New York on Wednesday, September 26, he was jubilant. Abe, he told reporters, had agreed to open trade negotiations with the United States. “This was something,” he said, “that, for various reasons over the years, Japan was unwilling to do, and now they are willing to do so.” For Abe, it appeared to be a significant defeat. Despite repeatedly insisting that he would not enter bilateral free trade agreement (FTA) talks with the Trump administration, it appeared that – faced with the threat of 25 percent tariffs on Japanese automobiles – Abe caved to U.S. pressure.
Opposition lawmakers were quick to hammer this point home. “It is a massive failure of economic and trade policy to be drawn into a bilateral framework,” said Yukio Edano, president of the Constitutional Democratic Party, the largest opposition party. “Shameful, submissive diplomacy,” added Kazuo Shii, chairman of the Japanese Communist Party.
However, the outcome was not nearly as dire for Abe as Trump’s jubilation or the lamentations of Japan’s opposition lawmakers would suggest. The reality is that not for the first time Abe escaped an encounter with the U.S. president with his country’s trading relationship secure and his much-vaunted personal relationship with Trump intact. The forthcoming negotiations with the Trump administration could still be fraught. Nevertheless, Abe leaves New York having deflected a serious threat to Japan’s economy, reinforced his political standing, and bolstered his credibility as the world’s single-most important advocate for the global trading system.
Abe’s Art of the Deal
The biggest source of uncertainty ahead of Abe’s summit with Trump – and the talks between U.S. Trade Representative Robert Lighthizer and Japanese Economic Revitalization Minister Toshimitsu Motegi that immediately preceded the summit – was how aggressively the U.S. administration would wield the threat of tariffs on automobile tariffs to extract concessions from Tokyo. The Japanese government has been anxious about the Trump administration’s threat ever since the administration announced in May that it would initiate a Section 232 investigation that could enable the U.S. to impose tariffs of up to 25 percent on automobile and auto parts imports in the interest of national security.
The Abe government had little choice but to take this threat seriously. As of 2016, 31 percent of Japan’s exports to the U.S. – worth $40 billion – were automobiles. Another 6 percent, worth nearly $8 billion, were auto parts. These numbers do not include Japanese automobile production in Mexico, which depending on the fate of North American Free Trade Agreement (NAFTA) talks could also be affected by threatened tariffs. If implemented, Japan’s automakers could lose billions in revenue, a significant blow to Japan’s economy. Given the potential impact, the Abe government, unlike in the case of the 232 steel tariffs earlier this year from which Japan was not exempted, would likely have little choice but to retaliate against automobile tariffs, which could risk a wider trade dispute that could spill over into the broader U.S.-Japan alliance.
But, having wielded the threat, it was unclear just how hard the Trump administration would use it to pressure Japan at the negotiating table. After all, ever since Trump withdrew the U.S. from the Trans-Pacific Partnership (TPP) – the regional pact that included a significant U.S.-Japan bilateral agreement – Japan had been at the top of the administration’s wish list for the bilateral free trade agreements. During the weeks before the summit, Trump, Vice President Mike Pence, U.S. Ambassador to Japan William Hagerty, and other officials repeated their desire for an FTA with Japan and Trump warned in early September that his good relationship with Abe could end “as soon as I tell them how much they have to pay.” It was certainly plausible that the administration would use the threat of automobile tariffs to convince Japan to join talks for a comprehensive bilateral FTA that would address not just market access for goods but also trade in services, investment, e-commerce, and other areas that were the focus of the TPP’s 30 chapters. It was also plausible that the Trump administration would view the concessions Japan made on agricultural tariffs and quotas in TPP negotiations – concessions that at the time left Abe vulnerable to accusations from members of his own party that he had betrayed a promise to preserve trade barriers for “sacred” agricultural goods in talks – as the starting point for bilateral FTA talks, with the expectation that Japan would offer even steeper tariff cuts on products like beef and pork.
As it happened, however, the joint statement announcing the beginning of bilateral trade talks was significantly more limited than the Abe government had reason to fear. The Trump administration agreed that talks would focus primarily on trade in goods, resulting in the Japanese press immediately christening the forthcoming negotiations as the TAG – trade agreement in goods – talks. The U.S. agreed to refrain from raising automobile tariffs on Japan as long as talks are pending, and, recognized that the talks should be “mutually beneficial,” and promised to respect Japan’s desire for agricultural market access terms not to go beyond “previous economic partnership agreements.” Finally, the statement stressed that the talks would focus on “goods, as well as on other key areas including services, that can produce early achievements,” what Lighthizer referred to in a press call as a “early harvest.” In short, the Trump administration accepted talks that would be narrower in scope, compressed in time, and less ambitious in its targets for Japanese concessions than expected. While the U.S. will likely treat any agreement as an FTA – Lighthizer will notify Congress of his intention to negotiate with Japan in accordance with “fast track” procedures – it is not unreasonable that both Abe and his Chief Cabinet Secretary Yoshihide Suga said in press conferences after the summit that the Abe government had not in fact agreed to bilateral FTA negotiations.
The TAG talks will not be without risks for Japan. The Trump administration is still determined to reduce the nearly $70 billion trade deficit the U.S. had with Japan in 2017. More significantly, the joint statement made clear that the Trump administration will focus on increasing U.S. automobile production and employment in negotiations, similar to its approach to contentious trade talks with Canada and the European Union. The administration could still wield the threat of automobile tariffs in case talks break down. But compared to the alternative – either steep automobile tariffs or wider-ranging trade talks that could sour the bilateral relationship – this week’s outcome may have been the least bad outcome Abe could have hoped for ahead of the summit.
Honeymoon for Abe?
Abe’s willingness to accept limited bilateral trade talks despite having promised not to engage in bilateral FTA negotiations with the U.S. was driven in part by his September 20 reelection as leader of Japan’s ruling Liberal Democratic Party (LDP), which will enable him to serve as prime minister for an additional three years. With the party election behind him, Abe likely had an easier time accepting the TAG framework. But the concessions he secured from the Trump administration may also give him a boost as he begins his third and final term as LDP leader and as he faces challenging elections for Japan’s upper house in 2019.
By dodging automobile tariffs and securing a bilateral framework that he can credibly describe as less than an FTA, Abe has shown Japan’s voters that his much-touted personal relationship with Trump – which began days after the 2016 election when Abe visited the president-elect bearing a golden golf club as a gift – can deliver positive outcomes (or at least mitigate negative outcomes) for the Japanese people. Wednesday’s agreement is an implicit rebuke to critics, including Shigeru Ishiba, the man Abe beat handily in his reelection bid, who have accused Abe of “toadying up” to Trump.
Of course, it will not be sufficient for Abe to have secured favorable terms for negotiations; he will have to continuously manage his relationship with Trump to ensure that Japan avoids the adverse outcomes that could result from failing to reach an agreement with the U.S. while still appearing to be a staunch defender of Japan’s national interests. But the timing of Wednesday’s announcement still means that Abe will start his final term with the wind at his back, notwithstanding the defeat of the government-backed candidate in Okinawa’s September 30 gubernatorial election.
Abe Leads on Trade
Finally, Abe’s trip to New York not only marked the launch of new negotiations with the U.S. but also marked the Japanese prime minister’s emergence as the world’s foremost advocate for and defender of the global trading system. In his speech before the UN General Assembly, Abe openly assumed this mantle. “Japan,” he said, “has now taken on the mission of imparting to the world the benefits of trade.”
In the year since Abe’s last address to the UN, Japan guided negotiations for the U.S.-less TPP – the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership – to a successful conclusion and concluded long-standing FTA negotiations with the EU, both agreements that sought to pioneer high standard trade and investment rules for the twenty-first century. Meanwhile, Japan is increasingly committed to concluding negotiations for the Regional Comprehensive Economic Partnership (RCEP), which also includes the ten countries of ASEAN, China, South Korea, India, Australia, and New Zealand, and a trilateral agreement with China and South Korea to their conclusions. Abe will also seek closer cooperation with Beijing on infrastructure development in Asia when he travels to China in late October.
But Abe’s Japan is not only seeking closer economic ties with China. It is also committed to working with both the U.S. and the EU to reform the World Trade Organization’s rules and monitoring capabilities to address “non market-oriented policies and practices of third countries,” including industrial subsidies, state-owned enterprises, forced technology transfers, and digital protectionism, an agenda that is clearly aimed at China’s trade and industrial policies. The three trade ministers issued an ambitious statement on September 25 outlining a broad set of WTO rule changes they will propose later this year, language that was repeated in this week’s U.S.-Japan statement. Indeed, the Trump administration’s desire to build a multinational coalition to challenge China may explain why the administration was willing to accept a more modest framework for talks with Japan.
Japan therefore is at the heart of virtually every effort to write new rules governing the global trading system in the 21st century. The CPTPP will likely come into force in 2019 and could begin talks with new members soon thereafter; Japan’s commitment to concluding RCEP could help nudge the pact in the direction of higher standards, which could encourage China to undertake some reforms to its trading practices; and its participation in the trilateral WTO reform talks with the U.S. and the EU lend the effort more credibility and clout.
Abe and Japan have come a long way since the prime minister cautiously brought Japan into TPP talks in 2013, warning the U.S. and other negotiating partners that he would steadfastly defend Japan’s interests in talks. Now, as Abe faces his final three years in office, he will have the opportunity to use Japan’s power to write new rules governing the global trading system, while pursuing more stable ties with the world’s two largest economies and Japan’s most important trading partners.
Tobias Harris is a Japan analyst at Teneo Intelligence.