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Trumped on Trade: Prospects for Bilateral Trade between the U.S. and Japan

By Alex Leader | January 31, 2017



On January 23rd, President Trump all but defeated the Trans-Pacific Partnership (TPP) with an executive order mandating the United States’ withdrawal from the regional trade compact. His new administration would be best-suited to meet its campaign promises by not abandoning free trade, but rather embracing it. A recommended strategy would be to swiftly, albeit incrementally, fill TPP’s void with a series of bilateral free trade agreements (FTA) if the White House wants America to continue writing the rules of trade in the Asia-Pacific. Pursuing such an agreement with Japan would serve as the ideal opening gambit.


Responding to slowing growth rates, Japan has pursued a policy of trade liberalization since the 1990s, yielding significant reductions in import tariffs and quotas. In fact, the U.S. International Trade Administration ranks Japan’s tariff rates among the lowest in the world. However, many foreign exporters and investors continue to struggle with numerous restrictive non-tariff barriers that include: unique standards, previous experience requirements (prohibitive for new entrants), protectionist official regulations, exclusive licensing powers, cross stock holdings, and closed supply chains. This litany of qualitative barriers has impeded the opening of trade primarily in three sectors – agriculture, automotive, and information/communication technology (ICT). Deregulating the byzantine trade relations between Japan and the U.S. became a hallmark of the TPP, which many had lauded for its long-awaited bilateral framework within a sweeping regional one. With no conceivable future for the agreement and the resulting continuation of existing barriers, chances for expansion into Japan will have eclipsed American farmers and manufacturers alike.


The Trump administration’s abandonment of TPP is a double-edged sword, robbing the Japanese economy of an opportunity to bolster competitiveness through globalization, for which many of its policymakers had advocated. In fact, the partnership would have likely served as the linchpin for badly needed economic reform among many of its signatories. Its enforcement mechanisms made these domestically unpopular reforms possible by avoiding the protracted, law-by-law approach if delegated to individual legislatures. Prime Minister Shinzo Abe’s plans to revitalize Japanese markets, or “Abenomics,” relied heavily on such mechanisms to circumvent a national debate over agricultural export policies.


With both nations having much to gain from TPP’s provisions, restoring them in a bilateral context would further the stated policy aims of the Abe and Trump administrations. While the latter has yet to demonstrate the extent of its commitment to free trade, President Trump’s “America First” platform would benefit more from pursuing an agreement with Japan over any other nation. In 2014, despite two decades of stagnating trade in commodities, the two nations still exchanged over $283 billion in total goods and services. These exports to Japan average $100 million annually per state, with 31 of them sending $1 billion or higher. American farmers, in particular, notwithstanding the recent slump and Japanese agricultural restrictions, still rely on Japan as a critical market. The nation is the world’s largest importer of U.S. beef, purchasing $1.6 billion despite a tariff of 38.5%, and a chief destination for both pork and soy, which face 21% tariffs. Many tech companies profit from this economic integration, as their value-added products comprise the next largest share of U.S. exports.


Flows of services, on the other hand, have increased substantially in the wake of Japan’s “Lost Decade”. Nowhere is this more apparent than U.S. foreign direct investment (FDI), which doubled from 1998 to 2011. As an FDI recipient, the U.S. maintains a vested interest in further liberalization through orchestrating a bilateral investment treaty (BIT). Following the United Kingdom, Japan provides Americans with the second-largest quantity of FDI, totaling $373 billion, which primarily manifests as electronics, machinery, and various medical instruments. In terms of U.S. job creation, Japan again ranks second behind the UK. The Japanese auto industry has lead the way on this front since the 1980s, when it first began relocating production to the states. This sector now employs, both directly and indirectly, 1.36 million Americans workers. However, there remain plenty of low hanging fruit to further ease longtime restrictions on American exports to Japan.


The TPP, in its current form, acts as a comprehensive jumping-off point, as it already provides a preliminary framework for reducing automobile import barriers and removing tariffs on American agricultural products (chief among these being dairy, meat, and soy). Working with the progress that has been made, rather than substituting it, would deliver a quick and feasible foreign policy achievement for the Trump administration. Negotiators would likely find the myriad commonalities between the U.S. and Japan, such as similar environmental and labor standards, a welcome contrast to the heterogenous composition of TPP’s signatories. While irrelevant aspects of the existing agreement can be easily scrapped. In fact, this is a common pattern within FTA negotiation, which frequently involves relatively minor modifications to preceding documents (much of TPP’s contents and language are recycled from NAFTA).


Deepening the already symbiotic alliance between Japan and U.S. through a bilateral FTA would not only yield significant economic gains for both parties, but would lay the foundation for renewing the imperative integration of commerce in the Asia-Pacific.


Alex Leader is a first year MIA student at GPS, focusing on International Development and Nonprofit Management. This winter, Alex and a group of GPS students traveled to Japan as a part of the Kakehashi program to learn about Japanese-U.S. relations and Japanese business. The Japanese government created the Kakehashi program to strengthen the bonds between Japan and the U.S. through personal connections, business exchange and mutual understanding. GPS was fortunate to be chosen in 2016 to participate in the annual program, which brings students from the U.S. to Japan to see the businesses, experience the culture, and get to know the Japanese personally.


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