The US–Japan trade deal: small agreement, broad implications

Asia Politics World

Author: Takemasa Sekine, NUCB

The recent announcement of the US–Japan Trade Agreement (USJTA) must have come as a surprise to many in Japan given its unusual expeditiousness. The agreement was concluded just six months after negotiations began — a dramatic contrast to the EU–Japan Economic Partnership Agreement which took more than five years to achieve. One reason why the United States and Japan were able to conclude this deal so quickly was that they limited the agreement to two areas: tariff elimination and reduction and rules relating to digital trade.

Japan's new Economy, Trade and Industry Minister Hiroshi Kajiyama attends a news conference at the ministry in Tokyo, Japan, 25 October 2019 (Photo: Reuters/ Issei Kato).

Japan's new Economy, Trade and Industry Minister Hiroshi Kajiyama attends a news conference at the ministry in Tokyo, Japan, 25 October 2019 (Photo: Reuters/ Issei Kato).

With regard to tariffs, the highest priority for the United States was beef. Under the USJTA, Japan’s tariff reduction schedule for beef is almost exactly the same as that of the Trans-Pacific Partnership (TPP) which the United States withdrew from. The USJTA starts with commitments corresponding to the second year of the TPP. The same can be said for other products such as pork, wheat and wine.

At the same time, the USJTA stepped back from the TPP in certain aspects. Japan did not make any commitments on products such as skim milk, butter, forest products, fishery products and all types of rice. Overall, from the US perspective, the gains from the USJTA fall short of those it would have achieved through the TPP.

On the other hand, from Japan’s viewpoint, the agreement can be assessed as at best being ‘a defensive success’. Japan obtained little direct benefit from the agreement. Regarding its most prominent interest — tariff eliminations for automobiles and auto parts — the agreement only provided that those ‘will be subject to further negotiations’, without indicating any timeline (Paragraph 7, Annex II). This implies that the United States will maintain the upper hand in subsequent negotiations.

The main win for Japan lies outside the agreement — it escaped a tariff hike on Japanese automobiles that the Trump administration had threatened to impose under Section 232 of the Trade Expansion Act of 1962.

As the tariff reductions were modest, some see the digital agreement as the prominent achievement of the first stage of the USJTA. The digital agreement resembles Chapter 14 of the TPP but contains additional elements. One is a rule that prohibits the transfer of any proprietary information pertaining to cryptography as a condition for the entry of related products into the importing party’s market. This provision is new even compared to the US–Mexico–Canada Agreement. The successful conclusion of this digital trade agreement between the two major countries will have a strong impact on the discussion of this topic at the international level.

Another important aspect of the USJTA is its incremental approach. The agreement will be signed based on the areas where negotiations have been completed, with the understanding that talks in other areas are ongoing. The reaction to this cumulative approach has been divided.

Some approve since it speeds up the creation of agreements. But some fear that additional concessions might be made under subsequent agreements. For instance, as a quid pro quo for a tariff agreement on automobiles in the next stage of negotiations, Japan might be required to introduce the rice quota that it was able to avoid in the first agreement. There remains a concern in Japan that security issues might be brought into and connected to potential trade concession during later stages.

Recurrent rewritings of the agreement could erode confidence in the negotiations among domestic constituencies. For this reason, the USJTA may attract the attention of other countries who will be watching to see whether or not this negotiation style can be adopted as a model for new trade deals.

Finally, the USJTA may have broader implications for the trading system — some argue it is inconsistent with WTO rules. One such argument is that it does not meet the requirement of Article XXIV:8(b) of the General Agreement on Tariffs and Trade (GATT), which requires duties within a free trade agreement to be eliminated on ‘substantially all the trade’. As the coverage of tariff reductions under the USJTA is limited such a critical view seems to be correct.

This criticism may be addressed by categorising the USJTA as an ‘interim agreement’, but this still leaves a second contention — that the USJTA is not in compliance with the rule relating to interim agreements. This is because it does not contain ‘a plan and schedule’ for the completion of the agreement as prescribed under the WTO rules (Article XXIV:5(c) of the GATT). So far there has been no definitive interpretation of ‘plan and schedule’, and so this argument may not be easily resolved.

In any event, it would seem premature to draw a definitive conclusion on the implications of the USJTA at this initial stage given that the negotiations are clearly expected to continue. It would be more productive to focus now on how to make this agreement fruitful in terms of both its substance and its broader impact on international trade.

Takemasa Sekine is Professor at the Graduate School of Management, the NUCB Business School, Nagoya University of Commerce and Business (NUCB).

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