After TPP: The Future of US-Japan Trade Relations

When Japanese Prime Minister Shinzo Abe met with U.S. President Donald Trump in February, they agreed to convene a bilateral economic dialogue – led by U.S. Vice President Michael Pence and Japanese Deputy Prime Minister and Finance Minister Taro Aso – to “[explore] cooperation across sectors that promote mutual economic benefits to the United States and Japan.” This framework would enable the two governments to draft a new economic agenda following U.S. withdrawal from the Trans-Pacific Partnership (TPP), the 12-country trade agreement that had dominated the bilateral agenda since Japan entered TPP negotiations in March 2013.

Despite Tokyo’s fears that the dialogue would lead to a new round of trade disputes, the first meeting, which was held on April 18, was cordial. Both Aso and Pence suggested that the two governments seek opportunities for “win-win” economic cooperation, and they established working-level groups in three areas – trade and investment rules, cooperation on economic and structural policies, and sectoral cooperation – ahead of a second round of talks later in 2017.

The friendly discussions, however, obscured the extent to which Japan and the United States are pursuing conflicting visions of the U.S.-Japan economic relationship. Ahead of the dialogue, it was apparent that the Trump administration wants to pursue a bilateral free trade agreement (FTA) with Japan. Commerce Secretary Wilbur Ross, for example, suggested that a U.S.-Japan FTA was “a very high priority,” perhaps second only to renegotiating the North American Free Trade Agreement (NAFTA). Ahead of the first Aso-Pence dialogue on April 18, as well as side meetings between Ross and Japanese cabinet officials, U.S. administration officials reportedly sought to use the dialogue to lay the groundwork for subsequent talks on an FTA.

However, the joint statement following the talks did not specifically refer to the possibility of an FTA, mentioning only “a bilateral framework for setting high trade and investment standards.” The reason for this omission is plain. Japan, locked in a competition with China to support the development of Asia’s emerging market economies and determined to craft regional institutions that force China to compete fairly with its neighbors, had until recently depended on the United States as an ally in the struggle to shape the economic future of the world’s fastest-growing region. Tokyo would prefer that Washington remained engaged on these issues. Revisiting an FTA, particularly after the United States abandoned TPP, a multilateral agreement wrapped around a U.S.-Japan bilateral agreement, is a backward step for an Abe government determined to play a leadership role in Asia and the global economy – especially if the Trump administration were to demand concessions that went beyond the already historic concessions Japan offered to the United States in TPP negotiations.

While there is still a risk that the United States and Japan will find themselves engaged in bitter disputes regarding the terms of trade, the greater risk could be a period of drift, as Washington and Tokyo talk past each other on an FTA, settle for minor victories on bilateral cooperation (Japanese infrastructure projects in the United States, for example), and fail to outline a common strategy for, in former President Barack Obama’s oft-used phrase, “writing the rules” to govern trade and investment in Asia and promoting regional development. Instead, the Abe government could pursue its own initiatives – including the revival of TPP without the United States – while hoping that Washington recommits to economic leadership in the region in the future.

U.S. Trade Policy Uncertainty

At the heart of the tension between U.S. and Japanese visions for the economic relationship lies uncertainty about how the Trump administration plans to approach foreign trade and economic policy.

Throughout the 2016 presidential election campaign, Trump criticized multilateral trade agreements – NAFTA, TPP, and the World Trade Organization (WTO) – and accused major U.S. trading partners, including Japan, of violating rules to amass large trade surpluses with the United States to the detriment of its companies and workers. Candidate Trump was not a recent convert to economic nationalism: in the late 1980s, Trump criticized U.S. officials for letting allies run trade surpluses with the United States while benefiting from security guarantees, and, when he considered a presidential run in 2000 as a Reform Party candidate, he proposed that if elected he would serve as his own trade representative. ("Our trading partners would have to negotiate across the table from Donald Trump, and I guarantee you, the ripoff of the United States would end,” he said in a 1999 television appearance.)

The president’s nationalistic instincts on trade have been reinforced by some of his key advisers. Ross, who has emerged as the administration’s leading trade strategist, has echoed the president’s comments on trade deficits and the unfair trading practices of major trading partners. Economist Peter Navarro, the head of a newly created Office of Trade and Manufacturing Policy, made his name as a vociferous critic of Chinese trade policies and has become an outspoken trade deficit hawk and opponent of outsourcing more broadly. Stephen Bannon, the White House strategist and self-described “economic nationalist,” has characterized the withdrawal from TPP as “one of the most pivotal moments in modern American history.” Finally, U.S. Trade Representative (USTR) Robert Lighthizer, whose office has statutory responsibility for trade negotiations, is a veteran of 1980s trade disputes with Japan, having served as a deputy USTR during the Reagan administration, and has since advocated on behalf of U.S. steel producers for protection from Chinese imports.

The administration’s trade policies are still a work in progress; after all, the Senate only confirmed Lighthizer on May 11 and it is unclear how influential the nationalists are relative to other, more orthodox advisers like National Economic Council chairman Gary Cohn. Nevertheless, Trump’s long-standing beliefs about trade and U.S. competitiveness and the presence of these advisers in key administration posts means that nationalist priorities and policies will influence the administration’s trade policy agenda. As Treasury Secretary Steven Mnuchin, not generally included among the administration’s nationalists, said after the G7 finance ministers’ meeting on May 13: “We do not want to be protectionist but we reserve our right to be protectionist to the extent that we believe trade is not free and fair.”

While the nationalist turn has thus far not resulted in the major trade conflicts that some warned about based on Trump’s campaign rhetoric – withdrawal from NAFTA or the WTO, labeling China as a currency manipulator, or a blanket tariff on all Chinese imports – the makings of a nationalist agenda have been apparent since early in the administration. These steps include the withdrawal from TPP; executive orders to study bilateral trade deficits and strengthen enforcement of anti-dumping and countervailing duties; new tariffs on Canadian lumber and threats against Canadian dairy as part of a broader push to renegotiate NAFTA; pushback against anti-protectionist language in multilateral statements; and an investigation of Chinese steel exports on national security grounds.

Japan in Washington’s Sights?

Given Washington’s focus on bilateral trade deficits, it is not surprising that the U.S. trading relationship with Japan – the United States’ $69 billion trade deficit with Japan in 2016 was second only to its deficit with China – would be a priority for the Trump administration.

There have been hints that Japan could face some of the same pressure that has been applied to Canada, Mexico, South Korea, Germany, China, and other major U.S. trading partners running bilateral surpluses. In his confirmation hearing, for example, Lighthizer described Japan as “being a primary target for a place where increased access for agriculture is important.” Meanwhile, in March, the U.S. delegation to the WTO, in a comment on a WTO review of Japanese trade policy, criticized Japan’s trade barriers for automotive goods, agricultural goods, and government procurement. (Although the same comment also noted, “the United States acknowledges and welcomes Japan’s broad support for expanding global trade and supports concrete measures by Japan to contribute to this goal by undertaking further, aggressive structural reform and further market opening at home.”) Not surprisingly, the administration also included Japan as a trading partner that will be subject to its review of bilateral trade deficits.

For Japan, this hardline approach to trade has sparked fears of a return to the trade friction of the 1980s and 1990s, when U.S. administrations used unilateral actions and contentious bilateral negotiations to punish Japanese producers and pressure Tokyo to open protected sectors to competition. Those trade disputes threatened the broader bilateral relationship and hindered efforts to upgrade the security alliance for the post-Cold War era, an experience Japan would prefer not to repeat in a more threatening security environment.

The Trump administration is by no means the first U.S. administration to raise these issues, and clashes between U.S. and Japanese negotiators over market access for agricultural and automotive goods complicated the process of finalizing TPP. But, having already engaged in contentious bilateral discussions with Washington as part of TPP negotiations, the Abe administration is understandably reluctant to enter a new round of bilateral negotiations that would lack the broader rulemaking and strategic benefits that were part of that multilateral deal. Bringing Japan into TPP and then convincing key constituencies from his Liberal Democratic Party (LDP) to support the final agreement – Japan ratified the pact in December 2016 – was challenging enough for Abe. Revisiting bilateral negotiations with the United States when the Trump administration is eager to use a more aggressive approach to secure gains for U.S. producers would be difficult for Abe to sell at home, especially during a period in which he intends to devote significant attention to constitutional revision. It would also be difficult for Abe to make new concessions without Washington making new concessions of its own, especially on automobiles. It would be impossible for Japan to offer better terms on agriculture, for example, unless the United States agrees to shorter phase-outs for its tariffs on Japanese cars, trucks, and auto parts than Tokyo secured in TPP.

The importance of context for Japan’s willingness to engage in bilateral talks with the United States cannot be overstated. The bilateral negotiations within TPP were heated, but they were embedded in a multilateral framework in which the United States and Japan were in broad agreement on the need for a high-standard trade and investment regime in the Asia-Pacific. In addition, both governments recognized the strategic value of TPP as a vehicle for binding the United States more closely to Asia. In this framework, even if Japan had to make politically sensitive concessions on, for example, market access for agriculture, it would benefit from intellectual property rights provisions, regulations on the behavior of state-owned enterprises, and the liberalization of key sectors of Japan’s economy that had otherwise proved difficult to reform. For these reasons, Japan would have been among the biggest beneficiaries of TPP: economists Peter Petri and Michael Plummer estimated that Japan’s economy could have been as much as 3.1 percent larger in 2030 had TPP been implemented.    

For strategic reasons, Japan cannot entirely dismiss the possibility of bilateral FTA negotiations with the United States. Washington is too important an ally to spurn outright for fear that doing so could lead to a recrudescence of the trade friction that marred the broader relationship in the 1980s and 1990s. Explicitly rejecting FTA talks would likely undercut Abe’s efforts to build a personal relationship with Trump. But as has already become apparent, the Abe government will try to deflect or delay U.S. demands for concessions that go beyond what Tokyo had already accepted in TPP. Aso, for example, said in Diet deliberations on April 25 that the concessions Japan accepted in TPP were the “maximum concessions Japan could make” in agriculture and other areas. Without more clarity from Washington regarding how it intends to pursue “free and fair trade” with Japan, the Abe government will resist making specific commitments to bilateral FTA negotiations.

Japan’s New Trade Strategy

As the Trump administration debates how to pursue an “America First” trade strategy and also a bilateral FTA with Japan, the Abe government is not standing still. On the one hand, if the Trump administration were to accept a bilateral FTA that largely resembled the agreement reached with Japan as part of TPP, it is unlikely that the Abe government would resist. Naturally, it would also gladly welcome the United States back to TPP. On the other hand, Tokyo is clearly articulating a strategy for advancing regional and even global integration even if Washington remains disengaged.

Thus, while playing defense in its bilateral relationship with the United States, Tokyo is now pursuing a multi-pronged trade strategy that includes energetic pursuit of an economic partnership agreement with the European Union; a stronger commitment to concluding the Regional Comprehensive Economic Partnership (RCEP) with the Association of Southeast Asian Nations (ASEAN), China, South Korea, Australia, New Zealand, and India as well as a trilateral FTA with China and South Korea; and, most recently, acting as a leading protagonist in the effort to bring TPP into force without the United States.

Bringing a TPP-11 – or perhaps even a five- or six-country mini-TPP – into force now appears to be the top priority for Japanese trade policy. Although Abe once described TPP without the United States as “meaningless,” his government has now decided that even without Washington TPP will boost Japanese growth, provide a high-standard agreement to serve as a foundation for future integration across the Asia-Pacific, and, with Japan as the bloc’s largest economy, give Japan a leadership role in regional economic affairs. Not insignificantly, it could also give Japan leverage in bilateral talks with the United States, since a TPP that excluded the U.S. could give agricultural producers in, say, Australia, New Zealand, and Chile privileged access to Japan’s market at the expense of U.S. producers. Bringing TPP into force without the United States would also leave open the possibility of U.S. participation in the future.

For these reasons, the Abe government will continue to lead the search for a legal fix to implement the agreement – it currently cannot come into force without the approval of six members with a total GDP at least 85 percent of the TPP-12 group, impossible now without the United States – and fight for as few changes to the agreement as possible to maximize its chances of survival. Japan is expected to lead a push to finalize a TPP-11 agreement by the end of 2017 when TPP trade ministers meet on the sidelines of the Asia Pacific Economic Cooperation (APEC) meeting in Vietnam on May 21.

The more success Japan enjoys with this approach, the harder it will be for the Trump administration to entice Japan into bilateral negotiations that go beyond the TPP agreement.

The U.S.-Japan Economic Relationship at a Crossroads

In Article II of the U.S.-Japan security treaty the two governments agreed to “[promote] conditions of stability and well-being… eliminate conflict in their international economic policies and… encourage economic collaboration.” How the two governments have pursued this goal has varied over time: support for Japan’s development and reintegration into the global economy during the early Cold War; friction as they adjusted to Japan’s rapid growth; benign neglect mixed with tacit encouragement for policy experimentation from the United States as Japan struggled with its “lost decades.” With Japan’s embrace of the TPP, it appeared as if the long-time allies were prepared to inaugurate a new era of bilateral collaboration in which the United States and Japan would not only deepen ties between their economies but would also work together to shape regional economic architecture as both confronted the challenges posed by China’s plans to move up the global manufacturing value chain and to use its economic clout to promote regional development.

The Trump administration, by withdrawing from TPP and weakening the U.S. commitment to promoting development in the region’s emerging markets, has raised doubts about whether the possibilities for a broader U.S.-Japan strategic economic partnership will be realized. It is, however, still early in the life of the new administration and many of the key Asia policy posts and ambassadorships remain unfilled. There is still time to build a U.S.-Japan economic relationship that does not let longstanding bilateral disputes stand in the way of cooperation to shape the future of the Asia-Pacific region.