The Art of the (Mini-) Deal: a New US-Japan Trade Agreement

The US and Japan have struck a new “mini” trade deal.  Japanese agriculture concessions mean that New Zealand exports will face increased competition in Japan from US beef, cheese and other products – as we would have done had the US remained in CPTPP – but more worrisome is the ‘demonstration effect’ of a less-than-comprehensive deal.

In the margins of the UN General Assembly this week, US President Donald Trump and Japanese Prime Minister Shinzo Abe at long last announced a new trade deal – an agreement that had been first signalled ‘in principle’ back in August. The detailed text will reportedly be finalised and signed at a later date, with the new agreement going into effect next January. 

Low-hanging fruit: Agriculture, some industrial goods and digital

According to factsheets from the US Trade Representative, the deal includes new market access for around $7 billion in US farm exports.  Japan will eliminate or lower tariffs, and in some cases create new US-specific tariff rate quotas, for a range of agriculture products including beef, pork, wheat and cheese.  In return, the US will reduce or eliminate tariffs on a few dozen Japanese agriculture exports such as cut flowers and soy sauce, and on a range of industrial goods including machine tools, fasteners, steam turbines and bicycles. 

The US and Japan have also concluded an ‘Executive Agreement’ on digital – aimed at a “high-standard and comprehensive set of provisions addressing priority areas of digital trade”.  Elements include free cross-border data flows and a prohibition on tariffs on digital goods.  Essentially this is the same ambitious outcome as CPTPP, but goes modestly further in some areas, reflecting additional nuance from the new NAFTA.

Auto tariffs stalled

Over the course of the last year, President Trump has regularly threatened to impose new tariffs on autos.  The ostensible rationale for this is “national security” but it also serves as a useful point of leverage: cars are the most traded product globally, and new trade restrictions would be a matter of deep commercial concern not only to Japan but also to the EU (with which the US is also negotiating bilaterally).  Japanese Foreign Minister Motegi is reported as noting that as part of this deal, President Trump has given assurances that he would not impose new auto tariffs, pointing also to the joint statement which affirms that both sides will “refrain from taking measures against the spirit of these agreements”.

What the mini-deal means for Kiwi exporters

The agriculture part of the deal explicitly replicates the earlier package in the CPTPP.   It means that, as we would have done had the US stayed in the TPP Agreement, New Zealand will face increased competition in the Japanese market from US farm products, including beef (New Zealand exports of fresh and frozen beef were worth over $166 million last year), cheese ($381 million), whey and whey products ($35 million last year), wine ($14.5 million) and a range of horticultural products including cherries ($381,000) and frozen processed potatoes ($3.3 million). 

None of this bodes well for tackling some of the more intransigent distortions in the global trading system – nor, indeed, for a producer of sensitive’ products like New Zealand.

More worrying is the demonstration effect.  Under GATT/WTO rules, FTAs must cover “substantially all the trade” in order to be excused from the otherwise fundamental rule of “MFN” (that is, not providing special favours to one trading partner over others).  The agreement reputedly covers over 90 percent of US food and agriculture exports to Japan – but agriculture exports accounted for less than 10 percent of total US exports of goods and services to Japan.  As we observed in a previous blog, it is hard to see how this deal meets the GATT benchmark.   How other (disadvantaged) trading partners react remains to be seen.

It may be that the US and Japan will argue that this is simply an interim step on the way to a more comprehensive package, which is allowed under GATT rules, and indeed the factsheet states that the US “looks forward to further negotiations with Japan for a comprehensive agreement that addresses remaining tariff and non-tariff barriers…”.  The signalling is clear, however.  Fundamental trade policy principles around non-discrimination, comprehensiveness and agreed rules (for example around enforcement) no longer seem to be a foregone conclusion.   We have already seen suggestions that the EU would want to exclude agriculture from any trade agreement with the US, and that the US would likewise contemplate post-Brexit “micro-deals” with the UK.   None of this bodes well for tackling some of the more intransigent distortions in the global trading system – nor, indeed, for a producer of ‘sensitive’ products like New Zealand.

This post was prepared by Stephanie Honey, Associate Director, NZIBF.