GP Insights

GP Insights # 156, 28 September 2019

US and Japan: A limited trade agreement
Lakshman Chakravarthy N

What happened?

On Wednesday, 25 September, the United States and Japan agreed on a bilateral trade deal that relaxed tariffs on a limited set of products traded between the two nations. 

Dubbed as a ‘mini deal’, it involves tariff cuts by Japan on agricultural products like beef and pork from the US, in exchange for similar cuts by the US on Japanese industrial products such as steam turbines and machine tools. 

Japan received reassurances from the US that Japanese cars will be excluded from previously threatened THE US tariffs, although not mentioned as part of the current deal. The US President, Donald Trump, and the Japanese Prime Minister, Shinzo Abe, have signed the deal on the sidelines on the ongoing United Nations General Assembly meeting.   

What is the background?

The US decision to quit the Trans-Pacific Partnership in 2017 necessitated a bilateral trade agreement between the US and Japan, talks for which started a year ago. Given a trade deficit of US$ 67 billion with Japan, the US has sought to impose import duties on Japanese cars and auto-parts earlier this year, citing the US carmakers’ limited access to the Japanese market. The deal was finally signed after a compromise by the US whereby Japan received last-minute assurances to relax the proposed tariffs on Japanese cars and auto-parts.

The ongoing US-China trade dispute led to crippling tariffs on US agricultural products by China, forcing THE US to establish a deal around its agricultural exports as a way to ease its farm producers.

What does it mean?

The success of a limited trade deal may pave the way for a more comprehensive deal between the US and Japan, after proposed talks scheduled next April. Such ‘mini-deal’ option is being sought by the US to ease its trade tensions with China possibly. 

The failure of a similar option with India this week and the US businesses’ demand for fundamental structural changes in Chinese business policy may prove such watered-down deals to be inept.  

The current deal with Japan, which has a huge market for imported agricultural products, eases out the farmers and ranchers in the US, who form a key electoral base for Trump’s re-election next year. Although a minor step compared to comprehensive trade agreements, Trump is likely to hail this deal as a success with his superlative rhetoric in the upcoming campaign.

A limited deal disturbs global order as the World Trade Organization requires the inclusion of a majority of the two nations’ trade to be covered under a bilateral agreement. Given the fact that the world’s largest and third-largest economies choose to bend the international trade rules, it paves the way for other countries to follow the same.

This deal affects the signatories of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), especially countries like Australia and New Zealand, whose exports to Japan have risen since the enforcement of the CPTPP agreement. Despite having their exports taking a hit, these countries have to witness THE US gaining the same market access but without making any of the same trade-offs incurred by being members of the CPTPP agreement. Such ‘illegal’ trade deals will only discourage other countries from joining or even remaining as a part of CPTPP.

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