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Japan Holds the Advantage as U.S. Begs for Trade Talks

President Trump's decision to pull out of the Trans-Pacific Partnership has left the U.S. in a weaker trade position with Japan and other partnership members.
By ALEX FREW MCMILLAN
Apr 15, 2019 | 09:30 AM EDT

You've gotta feel for Japan. 

Often cast in China's shadow, my northern neighbor remains the world's third-largest economy. It's a powerhouse in electronics, automobiles and emerging fields such as biotechnology and artificial intelligence. 

Yet you would think the entire trade war was a two-sided affair. "Hey, what about us, we want to be punished by petty punitive tariffs, too!" You can almost hear Japanese Prime Minister Shinzo Abe in the background demanding that fair's fair. 

Of course, President Donald Trump has half-heartedly threatened Japan on trade, too, particularly over imports of U.S automobiles into Japan. Forget that almost all American vehicle models are way too big for Japanese roads and consumer tastes. Forget also that companies such as Toyota and Honda are some of the biggest U.S. manufacturers of cars, providing thousands of jobs in U.S. factories. 

Trump doesn't mean his posturing, and even has a budding bromance with Abe, the first foreign head of state to come calling to Trump Tower after he won election. Indeed, Trump is desperate to restore trade relationships after he tanked them. 

Japan and the United States start two days of trade talks on Monday in Washington. U.S. Trade Representative Robert Lighthizer sits across the negotiating table from Japanese Economy Minister Toshimitsu Motegi. Besides autos, U.S. agricultural shipments will be another point of contention, with Japan historically doing all it can to protect its "five sacred" farm products: rice, beef, wheat, dairy and sugar. 

The two sides wouldn't need trade talks at all if Trump hadn't made the colossal blunder of pulling the United States out of the Trans-Pacific Partnership with his very first act in office. 

He has been regretting it ever since. 

Far from torpedoing the TPP, Trump instead shot the United States in the foot. The TPP has gone ahead without him, newly named the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or TPP-11. One less participant, same old deal, a few extra letters in the name, which went into effect in March 2018. 

It still incorporates 13.4% of the world's economy, valued at US$11 trillion, and still excludes China. U.S. inclusion would have negated the need for an updated NAFTA, because both Canada and Mexico are part of the TPP. 

The basis of the deal remains the same, although it stripped out 22 provisions that largely related to the United States. 

Investors will want to note that the changes scaled back the ability of investors to resolve disputes under the investor-state dispute settlement system. This makes it, in the eyes of Commerzbank analyst Charlie Lay, "marginally riskier for foreign investors." 

Still, the primary point of the TPP is that it goes well beyond the mere trade in goods. It is the widest-ranging trade deal to incorporate protections for services and intellectual property, one of the main reasons China can never join its current form. The investment and IP provisions "are still the most detailed and advanced in any trade agreement to date," Lay notes. "It still provides ample protection to companies on their innovation in foreign countries." 

The members range from large to small: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. They now have checks on unfair government support of state-owned enterprises and government intervention into the markets. Government procurement in member nations must now be open to bidders from the other countries, too. 

Vietnam, Malaysia and Singapore are the largest beneficiaries of a deal that continues the rest of the world's march toward globalism. The trade bloc as a whole will get a boost of about 1% on gross domestic product. The United States would have seen a gain of around 0.5% in GDP, and now suffers a slight economic decline as a result of not participating.

South Korea and Thailand also lose out by virtue of not being included. They may well push for inclusion now the deal has gone into effect. Indonesia, the Philippines and Taiwan are also likely to see the benefits of joining. 

Forget Brexit and Trump; these nations are in the business of being good for business, both domestically and abroad. They recognize that fewer restrictions and lower taxes on the exchange of goods and services are good for all involved. 

By pulling the United States out of the deal, Trump diminished the nation's importance in Asia and reversed the "Pivot to Asia" that began under Barack Obama. Although the TPP grew out of a deal involving only Singapore, Brunei, Chile and New Zealand, it gained massive importance when it subsumed existing bilateral talks between Japan and the United States. 

I reckon these current trade talks are a stalling mechanism. Motegi, the economy minister, indicated that the first stage of the talks is simply to decide "which areas we will discuss, chiefly in the field of goods," suggesting the chief outcome of these talks will be more talks. 

After spending so much political capital getting the Japanese farm lobby to give way on the TPP, Abe is pretty peeved, to put it politely, that Trump betrayed him. If he's got any sense, he'll wait either until Trump departs the White House or until Trump recognizes his mistake and begs to get back into the TPP before giving much ground on U.S. trade. 

It is the United States that has asked for these talks. Japan not only has joined the TPP but also negotiated and implemented a trade deal with the European Union.

U.S. farmers now account for 22% of Japanese food imports, but they are at a sudden disadvantage to competitors from Europe and the TPP bloc. And indeed, U.S. shipments of beef to Japan fell in January and February compared with the same months last year, while beef imports into Japan from TPP nations rose by an essentially equal amount. 

Trump believes he has succeeded by installing punitive tariffs on imports of Japanese steel and aluminum and threatening 25% tariffs on imports of cars. The best the U.S. side can probably expect out of these talks is for American farmers to trade on the same terms as those from TPP and EU nations. 

Japan may insist on receiving the same treatment in a bilateral deal that it would have received under the TPP. It is looking to limit these discussions just to a "trade agreement on goods," or TAG, tackling only tariffs and not services, intervention in the currency markets in particular and intellectual property. 

Meanwhile, Japan also has been negotiating with China, for good measure. Japan will insist on similar treatment from China and the United States based on whatever is agreed out of the U.S.-China talks.

Three can play at that game, it seems. Japan holds the trump cards as this hand is dealt in Washington this week.

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TAGS: Politics | World | Australia | United States | Canada | Mexico | Emerging Markets (South America, Asia, Middle East) | Japan | Real Money

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