US-Japan Trade Talks: The Dog that Did Not Bark

April 26, 2018 9:45 AM
Photo Credit: 
REUTERS/Kevin Lamarque

The atmosphere was fraught leading up to President Donald Trump's meeting with Prime Minister Shinzo Abe of Japan at Mar-a-Lago in mid-April. Abe's government was unhappy over a range of issues, including the US refusal to exempt Japan from steel tariffs and what Tokyo perceived as the danger of Trump making a deal with North Korea jeopardizing Japanese security. As it happened, however, trade took a backseat at the talks, and that was a good thing for both countries.

Trump and Abe Agree to Disagree on Bilateral Trade Talks

The meeting was the latest episode of Trump and Abe seeking to keep a lid on long simmering trade tensions, despite the US president's desultory tweets and unconventional demands irritating other allies. Trump has bigger bones to pick with China and seems to be willing to go easy on Japanese trade—despite Japan's $69 billion merchandise trade surplus with the United States last year—to secure Japanese cooperation in dealing with China on curbing the global steel glut, and regional investment and security issues.

The two leaders essentially agreed to disagree on the course of bilateral trade talks. Abe stated that Japan would engage in "free, fair, and reciprocal trade deals," meaning that he hoped to work with the United States to revisit regional pacts like the Trans-Pacific Partnership (TPP) as well as bilateral talks, which Washington favors. Trump had earlier indicated an interest in joining the TPP, but in Florida he again insisted on bilateral free trade talks, which the Japanese have long resisted. Going forward, US-Japan trade talks likely will focus on detailed transactions and be led by Robert Lighthizer, the United States Trade Representative, and Toshimitsu Motegi, Minister in charge of Economic Revitalization.

No Sparks over US-Japan Auto Trade or Steel Tariffs

Given Trump's single-minded focus on trade deficits, it was perhaps surprising that US-Japan auto trade did not spark new controversy. The United States runs a large global trade deficit in autos, trucks, and parts. In 2017 the overall deficit was $200 billion; Japan accounted for $53.5 billion (Bureau of Economic Analysis, FT-900, exhibit 18, February 6, 2018). Most of these products are subject to very low US most favored nation tariffs and are not tied to requirements (i.e., rules of origin) on where components are sourced. If the United States had stayed in the TPP, the tariff would have been phased out, but assembled cars would have had to source about 45 percent of components from TPP countries (using the net-cost method; see Trans-Pacific Partnership: An Assessment, p. 134).

Japanese companies still export a large volume of cars and parts to the United States, but they also have invested in production plants in nine states—California, Ohio, Alabama, Indiana, Tennessee, Mississippi, Kentucky, West Virginia, and Texas. Honda, Nissan, Subaru, Hino, and Toyota have made a combined investment of $45 billion to produce vehicles and parts plants in the US market; in 2016, they produced almost 4 million vehicles and exported about 10 percent of their US production. Those plants also employ 64,000 US workers (Japan Automobile Manufacturers Association, Annual Contributions Report, 2016–17 and 2017–18). This record plays into the fact that Trump likes non-Chinese investors to build in America and hire American.

Similarly, Japan did not complain loudly about the new 25 percent US tariffs on Japanese steel. As a strong US ally, it was surprising that Japan did not get an exemption from the US steel tariffs imposed on March 23, 2018, to support US industry, ostensibly for national security reasons.1 But the affected trade is relatively small; Japan sells less steel to the United States than Turkey, and its exports have already been hit recently with antidumping duties that reduced shipments to 1.7 million metric tons in 2017, or only 1.6 percent of Japanese production. That may be why Abe did not press Trump very hard for an exemption from the 25 percent steel tariffs. Strategic issues, and Japan's role in the talks with North Korea, were much higher priorities for the Japanese side.

Possible Bright Future: Energy Trade

So what next for US-Japan trade talks? Japan will not say no to US demands for bilateral talks but is unlikely to agree on the type of bilateral trade agreement that Trump has in mind. And US participation in the TPP is not an alternative option to bilateral talks, even if Trump changed his mind on the regional pact yet again, until the pact enters into force and is open to new members, probably in early 2019. The focus of bilateral talks will thus likely involve big ticket transactions that produce large increases in US exports, possibly giving what Trump could claim as a "win."

The most promising area for expanding US exports to Japan may be in the energy sector. Japan's energy imports from the United States were $1.9 billion and $5.6 billion in 2016 and 2017, respectively.2 Imports of liquefied petroleum gas (LPG) increased by 138 percent in 2017 to $3.1 billion from the 2016 level of $1.3 billion. Japan also is expected to boost purchases of US liquefied natural gas (LNG) over the next few years. These sales benefit from preferred financing and insurance from the Japan Bank for International Cooperation and the Nippon Export and Investment Insurance Corporation. Reportedly, Japanese trading companies shipping US LNG to other countries also will soon have access to these preferential programs, which should spur infrastructure investment in LNG terminals in East and Southeast Asia to further boost US exports (see Nikkei Asian Review).

In sum, the trade talks at Mar-a-Lago were notable for what was not done: no new negotiations, no new US demands to limit Japanese auto exports, and no threats by Japan against US steel tariffs. In an era of hyperbolic trade rhetoric, the summit was both pragmatic and cordial.

Notes

1. Surprising because of the alliance and because Japan is not a contributor to global steel overcapacity. Over 2016–17, the nation's steel industry ran at an 80 percent utilization rate, with a capacity of 130.5 million tons and a production of 104.7 million tons of crude steel. Production data come from the World Steel Association. Capacity data come from the Organization for Economic Cooperation and Development (OECD) Steelmaking Capacity database. The most recent capacity data is for 2016.

2. Energy imports include Liquified Petroleum Gas (HS codes 2711.12, 2711.13, 2711.14, and 2711.19), Coal (HS codes 2701.11, 2701.12, 2701.19), Petroleum (HS code 2709), and Liquefied Natural Gas (HS code 2711.11). Data comes from UN Comtrade.

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