US and Japan in race to finalise partial trade deal

US and Japan in race to finalise partial trade deal

The US and Japan are dashing to clear the final hurdles on the way to a partial trade deal that could be finalised as early as next month, potentially delivering some relief from the commercial tensions battering the world economy. 

Toshimitsu Motegi, Japan’s economy minister, is due in Washington on Wednesday for pivotal talks with Robert Lighthizer, the US trade representative, that could determine the chances of a deal being agreed soon, according to people familiar with the matter. 

The agreement that is being discussed would fall short of a comprehensive trade deal, which would be pushed to a later stage. This “early harvest” or “mini-deal”, as some negotiators have described it, would involve Japan further opening up its agricultural market to American goods in exchange for some cuts to US industrial tariffs.

Japan is also expecting some form of immunity, or an exemption, from possible tariffs on automotive imports that US president Donald Trump has threatened to impose on national security grounds later this year. 

But US expectations that a place holder deal can be reached imminently challenges the Japanese government position that a rushed or partial deal is unacceptable to Tokyo, according to people close to Japanese negotiators.

The discussions are taking place on the eve of the G7 summit in France, where Mr Trump and Shinzo Abe, Japan’s prime minister, could give their high-level political blessing to an accord with the aim of completing it at the United Nations General Assembly meetings in September. Although this timeline is realistic, people familiar with the talks cautioned that the negotiations could stall or fall apart. 

The push for a deal has intensified as Mr Trump has come under mounting political pressure to show some results from his disruptive trade agenda.

Farmers have complained of losing market share in Japan to competitors in the Asia-Pacific region and the EU that have inked trade deals with Tokyo in recent years, on top of the pain they are feeling from the trade war with China. “The administration recognises the political situation it finds itself in,” said Tom Vilsack, the former governor of Iowa and president of the US Dairy Export Council. “Producers are looking for good news and the administration understands they’ve got to deliver.”

The Japanese side is motivated by the fear of being hit by auto tariffs, which would deal a serious blow to the country’s carmakers. The introduction of punishing levies could also be politically damaging for Mr Abe, who has devoted much time and energy to forging a close relationship with Mr Trump. 

“The leaders get along well, they both have a lot to gain in terms of trade, and it’s critical to the administration to start banking trade wins with key allies like Japan,” said Clete Willems, a former Trump administration trade official now at law firm Akin Gump Strauss Hauer & Feld.

“However, I’d temper enthusiasm for a big announcement this week or at the G7. These things take time and a deal late next month at UNGA is probably the shortest they could get it done.”

One of the thorniest issues to resolve is whether the US will accept agricultural concessions at the same level that Japan granted in the TPP agreement abandoned by Mr Trump in 2017 or insist on access along the lines offered by Tokyo to the EU in their trade agreement, which was more generous in some areas. Japanese officials have said they are unwilling to offer anything beyond the TPP level. 

Japan would also like to see tariffs reduced on its industrial exports to the US, including in the automotive sector, in exchange for any farm concessions. But while the US has been increasingly willing to make concessions on manufacturing goods generally, it is unclear whether Mr Lighthizer will place a red line around the auto sector and the form of any Japanese immunity from further tariffs — whether it is written or informal — still needs to be ironed out.

“What Japan is willing to concede to is clear, what the US is able to offer in return still remains very murky,” said Shihoko Goto at the Wilson Center, a Washington-based think-tank. 

Although digital trade could be part of the early agreement, vast sections of US-Japanese trade, mainly in services, would be left out. 

Business groups are generally pleased with the prospects of a deal but worry that if a small deal is signed the momentum will be lost to finalise a broader agreement.

“We welcome reports that the administration is nearing the first stage of a bilateral trade deal,” said Aiko Lane, executive director of the US-Japan Business Council at the US Chamber of Commerce. “But we want to emphasise our desire for a truly comprehensive, high-standard trade deal.” 

A reduced agreement could also face criticism from trading partners of the US and Japan on the basis that it violates World Trade Organisation rules that “substantially all trade” must be covered in any deal. 

The agreement would be structured in a way that does not require US congressional approval, thanks to a provision in US law allowing the president to cut tariffs where they are below 5 per cent. It would, however, have to get the green light from the Japanese Diet. A deal next month would allow Tokyo to seek parliamentary approval for the trade pact during the extraordinary Diet session that begins in October, but missing that window would mean the US-Japan trade deal would only become effective later next year.

Tobias Harris, senior vice-president at Teneo, a corporate advisory firm, says that “it’s all about making the best out of a bad situation” for Mr Abe. “This is the situation Japan is in — having to mollify a US president who is unpredictable, mercantilist and protectionist. Abe is doing what he has to do. It doesn’t have to be a perfect deal, but it has to be defensible.”

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