Much attention has been paid to see-sawing U.S.-China negotiations over a bilateral trade agreement. But a U.S. trade agreement with Japan is even more essential for us wheat producers in the Pacific Northwest because Japan is a key market for our soft white wheat variety. I, as just one small wheat grower, am fretting about it. We need it before we market this year’s crop.
The good news is Japan, agonizingly slow in negotiations traditionally, has decided it’s a good idea to complete soon a first phase agreement with the U.S. on agricultural and auto products. Bilateral negotiations with Japan, promised originally in January, are just now beginning.
Remember that the U.S. already had the benefit of reduced agricultural tariffs in Japan in the 12-nation Trans-Pacific Partnership agreement signed in 2016. The agreement was intended strategically, not just for trade but as an economic and diplomatic counterweight to China. It would have represented 40% of the world economy if the U.S. had joined. But, unfortunately in my view, it had too few supporters among either Republicans or Democrats in Congress for quick ratification. Preferring bilateral agreements, the Trump Administration immediately withdrew from TPP in early 1017.
Perhaps we didn’t anticipate that the remaining 11 Asian and Latin American countries would so quickly ratify TPP, now called Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP 2.0), but they did. It came into effect at the end of December 2018.
That means that starting this year and over the next seven years, our major competitors in soft white wheat exports, Canada and Australia, will be enjoying increasingly reduced tariffs on wheat exports to Japan — and we won’t. In spite of the years that the PNW wheat growers spent building a prime market in Japan, there is the risk of losing market share. And growing U.S. wheat markets in Chile, Vietnam and Malaysia, also signatories to TPP 2.0, may also be threatened.
Further, Japan has negotiated the same tariff rates on agricultural products with the European Union, another significant wheat producer, and those rates came into effect in January 2019.
Originally, Japan’s Prime Minister Shinzo Abe sought to persuade the Trump Administration to join TPP. Last fall, heavy U.S. pressures finally convinced him to agree to a bilateral agreement. Those pressures included the U.S. tariffs already imposed on steel and aluminum for which Japan, to its surprise, was not exempted. More seriously, the threat that on May 18 the U.S. will impose a 25% tariff on foreign autos truly scares Japan because its trade surplus with the U.S. is two-thirds autos, and finding alternative markets would not be easy.
There are factors that help the bilateral negotiations. One is that the 11 years it took to negotiate TPP ironed out many difficulties with Japan, including opening up their highly protected agricultural sector. Indeed, the U.S. and Japan spent one whole year on just agriculture and their agreed terms went to the other TPP members. Encouragingly, Japan has said recently that it would give the U.S. the same rates as TPP and EU partners, although not more.
Another favorable aspect is how assiduously Abe has courted President Trump. He has had at least 40 calls or meetings with Trump and shared many golf games. He has sided with tough U.S. sanctions toward North Korea. He has reportedly nominated Trump for a Nobel Peace Prize. The last week of April, he was in Washington, D.C., to help celebrate First Lady Melania’s birthday at the White House. He has invited Trump for a three-day state visit to Japan in late May, to include a meeting with the new emperor. Trump may return once again to Japan in June for the G-20 Summit.
What are the issues? Japan will want a lifting of the tariffs on steel and aluminum. It will certainly balk at a 25% new U.S. tariff on autos — or a quota system. It may offer other ways to reduce the trade imbalance, such as buying more U.S. defense equipment or U.S. liquid natural gas.
The U.S., for its part, may ask for even lower tariffs on agriculture products than TPP 2.0. It will want something dramatic about regulating auto imports. It will recommend more Japanese investment in auto plants in the U.S. (Japan already has a number of them). It may also want provisions that came out of NAFTA negotiations. One is on currency manipulation and the other the “poison pill” provision that allows the U.S. to withdraw from an agreement if the other partners negotiate with a non-market economy (i.e. China).
At this time, the issue of Japanese auto imports appears to be the thorniest. And there are other factors that commonly slow trade talks, including domestic politics (e.g., the upper house elections in Japan in July), negotiation tactics and national interests. And then our Congress has to approve a two-stage trade agreement with timing always an unknown.
With all these considerations, we will be very lucky to have a bilateral agreement with Japan on agriculture in place by this fall.