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Supply Chain Risk

Trump’s Deals Leave Japan With Nothing

Japan hardly needed a reminder of the risks in attempting to negotiate with U.S. President Donald Trump. But it got one anyway. Despite agreeing to a trade deal in which it appeared to gain nothing, Tokyo is now facing even more strident demands on upcoming negotiations about paying for the privilege of housing U.S. military bases.

On both trade and basing, Japan is facing the difficult task of playing a weak hand as well as it can. In the trade agreement, Japan opened access to U.S. agriculture imports, prized access for American farmers to a previously sheltered market where consumers pay well above the average. In exchange, Japan took home little, beyond a vague promise that Washington would not declare Japanese auto imports to be a national-security threat—which would have rendered them subject to punishing import duties of 25 percent.

The United States, on the other hand, is walking away happy. In a range of commodities, U.S. producers now have the same access that they would have enjoyed under the 12-nation Trans-Pacific Partnership that Trump had walked away from soon after taking office. This is a boon to ranchers in particular, who have been suffering from the trade war with China and are now able to take better advantage of the much lower costs compared to domestic Japanese beef. In  all, the United States says that the lower tariffs will cover $7 billion in agricultural products annually. The benefits will not offer an immediate lifeline, however. Beef tariffs will drop gradually to 9 percent from the current 38.5 percent but only over a period of 15 years. Vineyards will do slightly better with the 15 percent duty on wine imports to be eliminated by 2025.

The benefits for Japan, on the other hand, are much less clear-cut. Aside from a reduction on duties for some fairly specific products such as steam turbines, musical instruments, and bicycles, there is not a lot for Japanese Prime Minister Shinzo Abe to show domestically.

The main demand from Japan was for a concrete assurance that Trump would not carry out his threat to impose potentially crippling auto duties. That’s been a possibility since the administration made the determination in May that auto imports from Japan and Europe posed a national-security threat to the United States. This was met with some incredulity in Japan, which has long been assured that the U.S.-Japan security relationship is the strongest of any.

Although Japan’s auto exports to the United States are now at just half the level seen in 1986 (before Japanese companies began large-scale manufacturing within North America), they still represent 20 percent of Japan’s total exports to the United States, and a tariff at the level Trump threatened would cause considerable damage.

Japan failed to get anything in writing on this sensitive topic beyond a vague statement that “both nations will refrain from taking measures against the spirit of these agreements.” Japanese Foreign Minister Toshimitsu Motegi, who had supervised the talks, told reporters that Trump had made a verbal commitment to Abe that he would hold off “as long as the agreement is implemented faithfully.”

Giving that level of trust to an increasingly unreliable United States—let alone the president himself—raises a lot of questions. Japanese media has long questioned whether Abe’s assiduous courting of Trump has produced any benefits. Abe had jumped on the Trump bandwagon quickly and remained a loyal supporter, at least in public. He was the first foreign leader to meet the president after Trump’s surprise election win and the two have held at least 10 meetings since then. Trump was also given pride of place as the first foreign leader to meet Emperor Naruhito after he acceded to the throne in May.

This has created its own controversies. Japanese liberals decry actions that appear to support populist and nationalistic policies. Conservatives may be more in touch with the Trump administration’s anti-immigration and anti-China policies, but at the same time they hate to see a Japanese leader so openly obsequious. Abe’s groveling reminds the nation that Japan has always been the junior partner in the alliance.

Even Trump does not appear to take all the fawning at face value. “I’ll talk to Prime Minister Abe of Japan and others—great guy, friend of mine—and there will be a little smile on their face. And the smile is, ‘I can’t believe we’ve been able to take advantage of the United States for so long.’ So those days are over,” he warned in 2018.

As could be expected, the Trump administration has quickly shifted gears, moving from the issue of trade to the sensitive topic of Japanese payments for U.S. military personnel and bases. The United States has around 54,000 troops in Japan, about one-half in Okinawa and occupying 18 percent of that prefecture’s main island. Not surprisingly, this has been a long-standing grievance to local residents.

The massive presence is part of the U.S.-Japan military alliance, which first came into force in 1960 and has been regularly updated and strengthened in scope. It gives Japan the promise of U.S. protection, including the nuclear umbrella, a vital element in keeping the nation’s pacifist constitution and willingness to forego its own nuclear force.

For the United States, the agreement gives it an unshakable ally that could not walk away amid nuclear-armed neighbors Russia, China, and now North Korea. In addition, it provides forward basing, which came in handy in both the Korean and Vietnam wars and is now a strategic gift, as the United States sees China as its next military rival. For Trump, however, the bases in Japan, as well as South Korea, have costs that he would like to turn into a profit stream for the U.S. balance sheet.

As reported in Foreign Policy, Washington has demanded a fourfold increase in Japan’s contribution, from $2 billion to $8 billion. In addition to that, Japan also pays indirect costs, estimated at around $1.2 billion, as well as the cost of base construction. While neither government discloses exact cost breakdowns, previous spending by Japan has been estimated at covering 75 percent or more of the total cost, meaning that a four-fold increase would result in a fairly nice profit. Aside from the issue of whether military personnel could now get profit-sharing bonuses, it makes even clearer the transactional nature of current U.S. foreign policy.

Dollar- (or yen-) driven diplomacy is not an alien concept to Japan, which has long used foreign policy as an extension of its economic interests. In the trade talks, Abe has shown that a bit of groveling is a low-cost way to protect Japanese automakers. The Japanese leader has in effect borrowed the famous (if misquoted) line on the joining of the state and capitalism from Eisenhower-era Defense Secretary Charles E. Wilson and concluded that what’s good for Toyota is good for Japan. In this context, what are a few uncomfortable hours of self-deprecation with a self-absorbed golf partner?

In the trade agreement, Japan was also able to focus on “the dog that didn’t bark.” While allowing Trump to brag about the benefits to U.S. farmers, it kept quiet about the fact that there was no mention about the value of the yen.

Since Abe took office in late 2012, the Bank of Japan has gone on an unprecedented campaign to reflate the economy through monetary expansion. This has also sharply lowered the value of the yen, with the dollar rising from 86 yen when Abe took office to around 109 yen today.

Japan has insisted, with a fair amount of justification, that the Bank of Japan’s actions are meant to combat 25 years of deflationary pressures in the economy. At the same time, the decline in the yen has been a major boost to exporters. It has in effect made every Toyota (and other exports of course) effectively 24 percent less expensive when they roll off the ships of U.S. ports.

And while Japan failed to get an explicit promise on future auto tariff decisions, it might not have made a difference anyway. If Trump has made one thing clear in three years in office, it is a willingness to change his position to suit the needs of the moment. In the end, negotiating power takes precedence over the perceived fairness of a policy.

Perhaps more ominously for Japan, the two sides have agreed to continue talks. This at least puts Tokyo back in a game it knows well, allowing it to dust off its favored strategy of dragging out negotiations until the other side grows weary or the underlying issues go away. The long-running issue during the 1980s of whether Motorola cell phones could be sold in Japan is now a historical footnote after years of extended negotiations. Bureaucrats in Japan’s Ministry of Economy, Trade, and Industry are used to the concept that no deal is ever final—and prepared for a long, slow fight.

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