agriculture

Potential U.S.-U.K. Free Trade Agreement — Potential Upside issues for the United States

The Trump Administration alerted Congress in 2018 of its intention to negotiate a free trade agreement with the United Kingdom at such time as the U.K. withdrew from the European Union. Letters of October 16, 2018 to Congress, https://ustr.gov/sites/default/files/20181017004930805-3.pdf. In February 2019, USTR released its intended negotiating objectives for an FTA with the U.K. See https://ustr.gov/sites/default/files/Summary_of_U.S.-UK_Negotiating_Objectives.pdf. While a working group has been in place for the last several years between the two countries, with the U.K. withdrawal from the EU last month, there is significant interest in both countries in moving the talks forward.

With the U.K. leaving the EU, the U.K. is obviously anxious to secure trading relationships with its major trading partners on its own terms as quickly as possible. While the U.K. has announced continuation of FTAs under the same terms as the EU had negotiated with a few countries, 2020 will see great focus on its negotiations with the EU and with the United States.

For the United States, a free trade agreement with the United Kingdom would not only be important as the U.K. is the fifth largest economy in the world, the 8th largest source of imports into the U.S. and fifth largest export market for the U.S., but also an important opportunity to address challenges in the trading relationship that were not addressable while the U.K. was part of the EU. To the extent that the U.S. seeks to address such issues, doing so ahead of any EU-U.K. agreement will probably be critical to ensuring the U.K. can commit to regulatory and other issues meeting U.S. needs or objectives.

In the WTO last week, the EU had its 14th Trade Policy Review. On February 18th, the United States outlined a series of concerns with EU policy that will certainly be a focus of U.S. negotiations with the U.K. to see such policies are not continued by the U.K. in its independent trade policy. Excerpts from Ambassador Dennis Shea’s comments are provided below reviewing U.S. concerns with the EU trade policies:

“First, the United States remains deeply concerned by unjustified EU barriers to our agricultural exports. Recently, dozens of WTO Members have expressed concerns in the SPS and TBT Committees and in the Council on Trade in Goods regarding EU pesticide policy, which restricts trade without scientific justification or benefit to human health.

“Beyond pesticides, we are equally troubled by the EU’s unjustified non-tariff barriers that impede the use of modern agricultural tools and technologies such as biotechnology, veterinary drugs and pathogen reduction treatments, all of which help to ensure a safe, sustainable food supply.

“More disturbing, the EU is foisting its misguided domestic policy on other countries through regional trade agreements and development assistance initiatives. This approach will have global consequences, including impeding the ability of least developed and African countries to modernize their agricultural systems to feed a booming population and develop their
economies.

“With respect to dairy, despite efforts to reform EU policy by eliminating milk production quotas, the Commission’s market intervention actions during the 2016-2019 period interfered with market adjustments and had a serious impact on the price of skim milk powder on the world market. These market interventions reduced export revenue and domestic milk prices for the United States and other dairy-exporting countries. As it considers further changes in its Common Agricultural Policy, we encourage the EU to avoid programs that distort world markets to the detriment of other exporters.

“Second, as we regularly raise in the TBT Committee and the Council on Trade in Goods, the United States also has concerns about the proliferation of EU TBT measures that affect U.S. manufacturers and producers in a wide range of sectors, including medical devices, chemicals and high tech products.

“These barriers derive in large part from the EU’s TBT policies that result in a closed, regional approach that discriminates against U.S. – and other foreign – manufacturers by relying on regional, instead of international standards, and by requiring local testing of products.

‘Even worse, the EU exports trade-restrictive elements of its own standards and regulatory system to countries with which it negotiates trade preferences and to which it provides technical assistance. The EU also presses these policies in international organizations, such as the International Laboratory Accreditation Cooperation (ILAC), which will undermine those organizations and the benefits they have for the international trading system.

“Third, we are deeply troubled that EU member states’ fisheries subsidy policy is heading in the wrong direction. Last year, the European Parliament not only voted to reintroduce subsidies for fishing vessel construction, but also increased fisheries funding by more than one billion euros annually– totaling close to 8 billion euros over a six-year period and placing the EU in the #2 slot as the world’s largest subsidizer of its fisheries.
European Council Ministers then upped the ante by proposing to subsidize as much as half the value of these new fishing vessels. This is particularly concerning. Just as the WTO is seeking to finalize a multilateral agreement to constrain capacity-enhancing fisheries subsidies, the EU is not only proposing ways to maintain and even increase these subsidies without limits, but also suggesting that the WTO should explicitly label them as ‘green.’

“Likewise, the EU’s newly announced ‘green deal’ is also cause for serious concern. The combination of legislative and nonlegislative so-called ‘green’ policy initiatives creates a strong risk of additional trade restrictions in the EU market. These policies, while citing laudable environmental objectives, risk disrupting global supply chains.

“Fourth, regarding services, the United States is extremely disappointed that a number of governments in the EU have adopted or are moving closer to adopting unilateral digital services taxes (“DSTs”) that appear designed to tax revenues earned by particular U.S.-based firms.

“The United States conducted a formal investigation of the French DST, and we concluded that this measure is discriminatory due to the selection of services covered and the revenue thresholds for applicability. It also contravenes a number of prevailing international tax principles.

“Countries that enact a unilateral DST are jeopardizing the OECD effort to reach consensus on a multilateral solution for new international tax rules. We strongly support the OECD process. But in the event a country moves outside the OECD process and unilaterally imposes a DST, the United States will take all appropriate action to defend our interests.”

https://geneva.usmission.gov/2020/02/18/u-s-statement-at-the-eu-trade-policy-review/

Addressing these types of issues are part of the U.S. negotiating objective with the U.K. and are important for U.S. agricultural and industrial sectors and for U.S. digital service providers.

Outside of agriculture where existing tariffs can be significant and products can be subject to tariff rate quotas, most of the additional liberalization will be through addressing non-tariff barriers, addressing regulatory differences through mutual recognition agreements or harmonization, by further liberalization in services and adopting agreed rules on e-commerce.

For example, U.S. imports from the U.K. in 2019 resulted in duties being collected in the amount of $628.6 million, roughly 1% on imports for consumption of $63.2 billion. Close to 40% of the ordinary customs duties collected on imports from the U.K. are on autos entered under HS 8703, a category of sensitivity to the United States based on its Section 232 investigation in 2018.

Based on the EU statements on negotiations with the U.K. going forward, any desire by the U.K. to not comply with a wide range of EU regulatory regimes will likely lead to a different type of free trade agreement being offered to the U.K. than a broad FTA. The U.K.’s size and proximity have led members of the EU Parliament and the EC Trade Commissioner to indicate that FTA models such as those between Canada and the EU will not be available to the U.K. absent an acceptance of core regulatory approaches used by the EU. At the same time, the U.K. has indicated that it does not intend to comply with all EU regulations going forward. The interplay between the two sets of negotiations (EU-U.K.; U.S.-U.K.) will present challenges and opportunities for both the U.K. and the United States.

An Opportunity for the United States Not Likely to Be Pursued

USTR’s February 2019 summary of negotiating objectives for talks with the United Kingdom did not include any objectives addressing treatment of border taxes. In the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, there was a principal negotiating objective on border taxes which focuses on negotiations at the World Trade Organization:

“(18) BORDER TAXES.—The principal negotiating objective of the United States regarding border taxes is to obtain a revision of the rules of the World Trade Organization with respect to the treatment of border adjustments for internal taxes to redress the disadvantage to countries relying primarily on direct taxes for revenue rather than indirect taxes.”

19 U.S.C. 4201(b)(18).

While the U.S. has state sales taxes, the United Kingdom, like nearly every other major country in the world relies heavily on value added taxes (VAT) (or their counterpart) on goods and services. Such VATs are 20% in the U.K. on most goods, are rebated on export from the U.K. and are assessed on imports upon entry into the U.K. The United States is one of the few major countries without a national value added tax. In the early days of the GATT, it was agreed that the rebate of indirect taxes like VATs or sales taxes was not an actionable subsidy but that the rebate of direct taxes (income taxes) was an actionable subsidy. This differentiation has discriminated against countries with a direct tax orientation and eventually licensed massive subsidies that cannot be addressed for countries principally relying on indirect taxes. The assessment of the tax on importation also has imports effectively covering a significant part of the importing country’s revenue needs. The Johnson Administration back in the 1960s made a major effort to get GATT Contracting Parties to eliminate this bias in its rules but without success. Every trade promotion/fast track legislation enacted since then has included a negotiating objective similar to what is contained in 19 U.S.C. 4201(b)(18).

The United States could pursue with the United Kingdom a change in the U.K. system, not to eliminate the use of VATs or to reduce the VAT rate, but rather to introduce flexibility in how it applies VAT to imported goods from other countries and what, if any VAT it rebates on export. For example, it could apply its VAT up to the level of indirect taxes rebated by the exporting country and it could limit the rebate to the level of indirect taxes that would be imposed on importation by third countries. Such a change in approach could be a template for other trade negotiations by the United States.

The U.S. could also have the correction of the distinction between direct and indirect taxes addressed as part of the current WTO reform discussions, but has not to date introduced such a proposal in Geneva.

The history of the distinction between direct and indirect taxes and the efforts of the United States to address the distortions to U.S. trade was compiled in a paper prepared for the U.S.-China Economic and Security Commission back in 2007.

TLAG-Report-Discrimination-on-Taxation

If the Administration is serious about addressing the massive trade deficit, within the trade arena, the damage to the U.S. from the distinction between direct and indirect taxes if addressed would likely have a far larger effect on U.S. trade flows than other actions that have been taken by the Administration.

Conclusion

Both the U.K. and the U.S. want a trade deal now that the U.K. has withdrawn from the EU. Each is an important trading partner to the other, and both want to advance from the relationship when the U.K. was part of the EU.

While the agenda presented by USTR in February 2019 addresses many of the core issues included in 19 U.S.C. 4201, the U.K. will be struggling between its desire to be free from EU regulations, the importance of the EU market to U.K. exporters, and its desire to do a comprehensive agreement with the U.S. which will want the U.K. to modify its approach from past EU approaches on a number of important issues. The possibility of achieving a good agreement in a reasonably short period of time is certainly there although the time to conclude a deal with the EU for the U.K. will be a challenge to what it can or will do with the U.S. The sooner the U.S. concludes a deal with the U.K., the more likely that the U.K. will accept obligations on regulatory and other issues important to the U.S. Such obligations will be contrary to EU existing regulatory approaches. The EU has made clear that it will be pushing the U.K. to maintain EU regulatory policies for the best EU-UK deal.

Moreover, the U.S. has not teed up what is arguably the most important trade liberalization issue between the U.S. and the U.K. (and with any country with a significant VAT tax), and based on its actions to date is unlikely to do so either bilaterally or within the WTO.

Achieving reciprocal trade involves ensuring that all forms of discrimination are addressed along with internal domestic policies that don’t support global competitiveness. While economists argue that the discrimination based on the direct-indirect tax difference in treatment is corrected by currency movements, observers of the mounting U.S. deficit during a period when more and more countries have shifted to indirect taxes and many have increased their indirect tax rates would argue the theory doesn’t hold up.

So look for 2020 to be an interesting year in our trade relationship with the United Kingdom.

Trade between the United States and the European Union – What Will 2020 Bring?

There have been strong trade and investment ties between the United States and the European Union for decades. Now that the United Kingdom is outside of the EU (with an interim status quo during 2020), the EU (27 countries) is still the largest trading partner of the United States in goods ($719.6 billion in total trade in 2019), followed by Mexico ($614.5 billion), Canada ($612.1 billion) and China ($552.8 billion). China is the largest source of U.S. general imports ($452.2 billion) compared to the EU which is a close second at $451.7 billion. Canada is the largest destination for U.S. total exports i($292.4 billion in 2019), the EU is second at $267.9 billion.

While this post does not look at services trade, the US and EU are also major trading partners in services, and services are subject to negotiations at the WTO and in ongoing bilateral talks.

Both the U.S. and the EU are major players in the World Trade Organization. Since both the U.S. and the EU are leading developed countries with huge investments in each other, one would expect relations to be close and the opportunity for joint leadership in trade liberalization and addressing distortions in global markets to be the normal course. That has been true to some extent in the past and even today, but there has been a larger focus on differences in regulatory regimes, different views of the role of dispute settlement, different approaches to addressing major distortions in global markets and a decades-old concern in the U.S. about EU agricultural policies and efforts to keep U.S. agriculture out of the EU markets. More recently there has been conflict over France’s efforts to impose a tax on digital services (a move being reviewed by other countries within the EU and elsewhere), action that the U.S. strongly objects to and has threatened retaliation if adopted.

For the EU, the current US Administration’s use of Section 232 of the Trade Expansion Act of 1962, as amended, to impose or threaten to impose large tariffs on significant manufacturing sectors of trading partners have been viewed as unilateral actions contrary to WTO obligations. The U.S. willingness to use aggressive tactics to obtain leverage on trading partners and the U.S. willingness to enter partial trade agreements and/or to agree with trading partners for minimum purchases are viewed as threatening to the global trading system. Moreover, the withdrawal of the U.S. from the Paris Climate Agreement runs contrary to EU efforts to speed up actions to address climate change and the EU’s current policy of having new agreements include a chapter addressing climate change.

While there is agreement between the U.S. and the EU that state-directed, nonmarket economies are creating major distortions in global markets (massive industrial subsidies, role of state-owned enterprises, forced technology transfer, excess capacity in many sectors driven by state planning and subsidies), the U.S. and EU have been at loggerheads on the need for reform of the WTO dispute settlement system. There are broad areas of agreement on e-commerce with the exception of privacy rules. However, there has been long-term disagreement between the U.S. and the EU on the consistency of actions by each other and subcentral governments in supporting various aspects of their major civil aircraft manufacturers — Boeing and Airbus.

The U.S. has imposed tariffs on steel and aluminum products from the EU and many other countries pursuant to the national security statute, Section 232 of the Trade Expansion Act of 1962, as amended, and has recently imposed duties on various EU products following WTO disputes on Airbus subsidies and whether changes made by the EU brought the EU into compliance. While the U.S. has the argument that Section 232 investigations are covered by GATT Art. XXI, the EU has retaliated on the theory that the U.S. action was a safeguard. It has adopted other provisions to permit the EU to retaliate against actions that it considers unjustified. On the civil aircraft dispute, the EU has stated that it is seeking negotiations but believes the U.S. is waiting until the final decision on the Boeing case is issued this summer and has threatened its own retaliation on the U.S. when the decision is issued.

The July 2018 Joint Statement on US-EU trade negotiations (goods and services)

Faced with increased tariffs on steel and aluminum and the threat of automotive products, the EU had a meeting with President Trump in July 2018 and issued a joint statement at the end on the road forward:

“Joint U.S.-EU Statement following President Juncker’s visit to the White House

“Washington, 25 July 2018

“STATEMENT/18/4687

“European Commission – Statement

“We met today in Washington, D.C. to launch a new phase in the relationship between the United States and the European Union – a phase of close friendship, of strong trade relations in which both of us will win, of working better together for global security and prosperity, and of fighting jointly against terrorism.

“The United States and the European Union together count more than 830 million citizens and more than 50 percent of global GDP. If we team up, we can make our planet a better, more secure, and more prosperous place.

“Already today, the United States and the European Union have a $1 trillion bilateral trade relationship – the largest economic relationship in the world. We want to further strengthen this trade relationship to the benefit of all American and European citizens.

“This is why we agreed today, first of all, to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods. We will also work to reduce barriers and increase trade in services, chemicals, pharmaceuticals, medical products, as well as soybeans.

“This will open markets for farmers and workers, increase investment, and lead to greater prosperity in both the United States and the European Union. It will also make trade fairer and more reciprocal.

“Secondly, we agreed today to strengthen our strategic cooperation with respect to energy. The European Union wants to import more liquefied natural gas (LNG) from the United States to diversify its energy supply.

“Thirdly, we agreed today to launch a close dialogue on standards in order to ease trade, reduce bureaucratic obstacles, and slash costs.

“Fourthly, we agreed today to join forces to protect American and European companies better from unfair global trade practices. We will therefore work closely together with like-minded partners to reform the WTO and to address unfair trading practices, including intellectual property theft, forced technology transfer, industrial subsidies, distortions created by state owned enterprises, and overcapacity.

“We decided to set up immediately an Executive Working Group of our closest advisors to carry this joint agenda forward. In addition, it will identify short-term measures to facilitate commercial exchanges and assess existing tariff measures. While we are working on this, we will not go against the spirit of this agreement, unless either party terminates the negotiations.

“We also want to resolve the steel and aluminum tariff issues and retaliatory tariffs.”

The approach outlined above would not be consistent with the US tabled negotiating objectives submitted to Congress in January 2019 for possible trade promotion authority eligibility, where tariff reductions on agricultural products is specifically identified on the first page of the objectives. https://ustr.gov/sites/default/files/01.11.2019_Summary_of_U.S.-EU_Negotiating_Objectives.pdf. And the approach ignores the longstanding concerns in Congress about agricultural market access, regulatory barriers in agriculture, including whether EU actions are science based and other agricultural related matters. The US negotiating objectives from January 2019 are included below.

01.11.2019_Summary_of_U.S.-EU_Negotiating_Objectives

Not surprising, in the U.S., there has been strong pushback from the members of Congress with strong agricultural interests, including by the Chairman of the Senate Finance Committee.

The EU viewed the US-EU joint statement as representing an agreed narrower-than-all-trade-topic agreement. The EU did not get government procurement, geographical indications or other issues of interest to them in the joint statement, and the European Commission’s mandate does not include negotiating to liberalize agriculture tariffs. The new DG Trade Commissioner Hogan during a hearing before the European Parliament’s INTA Committee meeting on February 19, 2020 confirmed that the EU would not be negotiating to change EU standards in areas viewed as relevant to consumer safety, food safety, etc. despite receiving from the U.S. a list of regulations, the U.S. wishes to have as part of the negotiations.

Ongoing Talks and the Visit of EU Parliament INTA Committee Members the week of February 24, 2020

With a new EC trade Commissioner, the EU and U.S. are increasing their efforts at finding a path forward on a host of issues. The EU has indicated recently a recognition of many of the issues of concern to the U.S. in the WTO’s dispute settlement impasse. The U.S. did not expand the range of products (at least for 30 days) that would be subject to retaliatory tariffs for Airbus subsidies. There are more frequent meetings at senior levels. Work continues on issues of mutual interest within the WTO as well. These are all positive signs.

For the first time in nearly seven years, a delegation from the International Trade Committee of the EU Parliament will be visiting Washington this coming week (Feb. 24) to meet with Congressional leaders and with the Administration. In other words, significant efforts by all sides are being made to see if closer relations can be developed. But the challenges are many.

A review of the EU Parliament INTA hearing with EC Commissioner Hogan from February 19th shows deep commitments by the Parliament to current agricultural policies and regulatory approaches, to inclusion of climate change chapters in all negotiations, to efforts to establish a carbon tax to address situations where trading partners are not contributing to a sustainable environment and more. There is significant concern about the U.S.-China Phase 1 agreement and its implications for diversion of EU sales and a deep skepticism of the current Administration’s commitment to the rule of law. Such views and positions will test the ability of the U.S. and the EU to find meaningful solutions to enough issues to justify an agreement.

Conclusion

If there is going to be an agreement between the U.S. and the EU in 2020, it will likely have to be along the lines of the joint communication from July 2018. While such an agreement could meet the FTA requirements of GATT Art. XXIV (substantially all goods test is the issue – excluding autos and agriculture would raise questions), such an agreement would not likely be viewed by Congress as meeting the U.S. negotiating objectives under TPA or as presented by the Administration in January 2019. An agreement that covers what is in the joint communication also could not colorably be presented as a Phase 1 agreement like the U.S.-Japan tariff reduction package, with agriculture to be addressed in a Phase 2. Thus, Congress will be presented with an agreement with our largest trading partner where agricultural liberalization is unlikely.

Hopefully, there will be additional convergence on issues at the WTO so a more united front on more issues can be presented. As well, it is hoped that 2020 will see the resolution of some of the longstanding disputes or unilateral actions by either side that are of concern to the other. While such outcomes are not certain, the U.S. and EU have too much to lose not to find a broader area of consensus in trade going forward. 2020 may be the year to see the start of greater cooperation.

U.S.-China Phase 1 Agreement – Details on the Expanding Trade Chapter

The retaliation that China has pursued against U.S. exports in response to the U.S. 301 investigation and resulting U.S. actions reduced total US domestic exports of goods by some $10 billion between 2017 and 2018 and a further $15 billion in the first eleven months of 2019.

While the U.S.-China Phase 1 Agreement does not include obligations for China to reduce retaliatory tariffs on U.S. exports, the Chapter 6 Expanding Trade obligations that China has assumed would not be plausible if China doesn’t unilaterally reduce retaliatory tariffs on many products. It has done that on some products in 2019 and it is assumed when the agreement takes effect in mid-February 2020 a significant number of retaliatory tariffs will be reduced at least temporarily to permit China to honor its purchase commitments.

The U.S. and China agreed to different levels of ambition in terms of increased U.S. exports depending on four broad categories of goods and services – manufactured goods, agriculture, energy and services. What isn’t immediately apparent is that the increases in goods exports does not cover all U.S. export categories but rather refers to levels of ambition for the categories shown in Annex I and detailed in the Attachment to Annex 6-1 of the Agreement (pages 6-4 to 6-23).

But in fact, manufactured goods (8 subcategories), agriculture (6 subcategories) and energy (4 subcategories) account for less than 60% of all U.S. domestic exports of goods to China in 2017 (59.17%). This suggests both larger percentage increases for the products that are covered to achieve the growth in goods exports and an unknown future for the 40.83% of export products not included in the Attachment, products which saw sharp declines in the first eleven months of 2019 of over $12 billion (a decline of 28.12% from the comparable period in 2018). While the service categories covered in the Attachment are also not inclusive of all service sectors, the select categories account for 98.97% of all service exports to China reflected in U.S. statistics for 2017.

Thus, the level of stretch in achieving the very ambitious figures in Annex 1 depends on a number of factors, including whether one compares increases to the products and services identified versus total goods and services and how one factors in U.S. exports of goods and service not covered by specific commitments.

For example, in 2017 total US domestic exports and U.S. service exports were $175.9 billion. From page 6-3 of the US-China Phase 1 Agreement, the total commitments for increased purchases by China over 2017 levels are $76.7 billion in the first year (Feb. 14, 2020-Feb. 13 2021) and $123.3 billion in the second year (Feb. 14, 2021 – Feb. 13, 2022). The level of increases versus 2017 total exports of goods and services would be 43.6% and 70.0%.

However, only $126.9 billion of goods and services are included in the Attachment to Annex 6-1. If the increases presented are against those smaller numbers, the level of increase needed is obviously greater — 60.4% and 97.2%.

And there doesn’t appear to be any level of trade projected for the $49 billion of goods exports and $600 million services exports not included in the Attachment to Annex 6-1. Since many of the goods exports are subject to retaliatory tariffs, there is not likely to be a rebound in exports from the U.S. to China of these non-specified goods in the near term suggesting that the experience in 2019 (data through November) is likely the best scenario for those products. If so, total U.S. goods exports would be $12 billion lower (services not covered are minor and unlikely to be negatively affected). Increases over 2017 actual (adjusted for the decline for non-covered goods in 2019) would represent an increase of 40.02% in the first year and 68.62% in year two.

Below is a review of the four categories to see the level of ambition being undertaken in each.

Manufactured goods

The manufactured goods listed in the Attachment to Annex 6-1 are broken into the following eight subcategories: industrial machinery, electrical equipment and machinery, pharmaceutical products, aircraft (orders and deliveries), vehicles, optical and medical equipment, iron ad steel, and other manufactured goods. The HS categories listed show total U.S. domestic exports to China in 2017 of $42.521 billion (and most non-covered US exports of goods would be in this grouping). The level of increase in exports of manufactured goods is $32.9 billion in year one and $44.8 billion in year two – increases over actual 2017 of 77.37% and 105.36% respectively.

Agriculture

The agriculture category in Annex 6-1 has six subcategories: oilseeds, meats, cereals, cotton, other agricultural commodities, and seafood. The 2017 U.S. domestic exports for the HS categories included under agriculture in the Attachment to Annex 6-1 were $20.851 billion. Annex 6-1 calls for increased U.S. exports of $12.5 billion in year one and $19.5 billion in year two, increases of 59.95% and 93.52% respectively.

Energy

The energy group products is broken into four subcategories: liquefied natural gas, crude oil, refined products and coal. The increased exports are the largest percentage wise for this category as 2017 exports are relatively modest, just $7.57 billion. With growth of $18.5 billion in year one and $33.9 billion in year two, the rate of increase needs to be 244.23% in year one and 447.53% in year two over actual 2017 levels. Presumably the aggressive increases reflect China’s energy needs and the developments in the U.S. energy sector in recent years.

Data on each of the goods categories is contained in the table below. For simplicity, year 1 is referred to as 2020 and year 2 as 2021.

Services

Data on U.S. trade in services with China show growing U.S. exports from 2016 to 2017 and continuing to grow in 2018. Data for 2017 show U.S. exports to China of $56.009 billion growing to $57.140 billion in 2018.

The service sectors covered in Annex 6-1 include charges for use of intellectual property, business travel and tourism, financial services and insurance, other services, and cloud and related services. These categories in 2017 accounted for $55.434 billion with one of the BEA categories not showing exports to China to preserve confidentiality. The growth objectives included in Annex 6-1 are for $12.8 billion additional US exports in year one and $25.1 billion in year two representing growth rates over 2017 action of 22.85% and 44.81% respectively. U.S. data are presented below.

As reviewed in the post on January 15, there are significant commitments by China in a number of the chapters which should make a significant expansion of exports from the U.S. doable in the short run. Such a result is envisioned in Chapter 6 of the Phase 1 Agreement with specific commitments on Chinese purchases broken down by categories and possibly by subcategories. Such commitments will require a reduction or elimination of retaliatory tariff on many products to permit results in the first two years of the agreement.

While a lot of attention understandably is focused on what remains to be done with China on a host of critical issues (industrial subsidies, SOEs, China 2025 policies, etc.), a strong growth in demand from China for U.S. products and services is important if achieved. Let’s hope that the Agreement surprises many by its early and complete implementation.

U.S.-China Phase 1 Trade Agreement Signed on January 15 — An Impressive Agreement if Enforced

There has been a lot of anticipation for what the Phase 1 agreement between the U.S. and China actually contains. Earlier today, following the signing ceremony at the White House, The Economic and Trade Agreement Between the United States of America and the People’s Republic of China, Phase 1 was released. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf

I’ve just finished reading through the agreement.  My first blush read is that the agreement has a lot of positive potential for the United States. While enforcability is always a critical consideration and particularly based on the U.S. experience with other commitments made by China in the past, there are some chapters which have both great specificity on obligations and specific timeline commitments that should make at least those chapters potential important improvements.

A quick overview of the agreement follows.

Intellectual Property

Chapter 1 on intellectual property is quite interesting as it lays out a large number of obligations China is taking on by individual IP issue and confirms that US system already has such obligations.  The chapter is broken into the following topics:

Trade secrets and confidential business information;

Pharmaceutical-related intellectual property;

Patents;

Geographical indications;

Manufacture and export of pirated and counterfeit goods;

Bad-faith trademarks;

Bilateral cooperation on intellectual property protection;

Implementation;

The specificity of commitments and timing for action are important in hopefully making this a really important chapter for companies with intellectual property needs and current concerns in China’s performance on such matters. USTR’s fact sheet on the IP chapter presents the Administration’s view of what was achieved. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-IP_Fact_Sheet.pdf. My own view is that Chapter 1 is an important plus for the U.S.

Forced Technology Transfer

The technology transfer chapter is limited and doesn’t appear to be more enforceable than the multiple laws, etc. China has had for years. While the chapter states the obligations, China has historically been of the view that technology transfer is not enforced in fact. The Administration understandably views the chapter as important, and the pressure of the 301 investigation and tariffs that remain may make the chapter more valuable than the general statements it consists of suggest. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Technology_Transfer_Fact_Sheet.pdf In my view, this is more of a placeholder chapter. Hopefully it will be honored in fact but the past doesn’t show that as a high probability.

Trade in Food and Agricultural Products

The third chapter on agriculture could be very important for changing the U.S. agricultural export scene as the chapter goes through a large number of products, establishes timelines and standards against which US products will be evaluated and or requires acceptance of various US products that have met US standards. The Administration gets straight A’s for the breadth and depth of this chapter in my view. There are seventeen annexes that take up the following topics or products:

Annex 1, agricultural cooperation

Annex 2, dairy and infant formula

Annex 3, poultry

Annex 4, beef

Annex 5, live breeding cattle

Annex 6, pork

Annex 7, meat, poultry and processed meat

Annex 8, electronic meat and poultry information system

Annex 9, aquatic products

Annex 10, rice

Annex 11, plant health

Annex 12, feed additives, premixes, compound feed, distillers’ dried grains, and distillers’ dried grains with solubles

Annex 13, pet food and non-ruminant derived animal feed

Annex 14, tariff rate quotas

Annex 15, domestic support

Annex 16, agricultural biotechnology

Annex 17, food safety

The chapter also includes an Appendix which lists beef, pork and poultry products considered not eligible for import into China which US producers will need to review. There are also side letters released with the agreement that address products and producers who will have immediate access to China consistent with the chapter. The Administration has a fact sheet on agriculture chapter in total and then on individual products. The chapter fact sheet’s link follows. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Ag_Summary_Long_Fact_Sheet.pdf

Financial Services

The fourth chapter on financial services is also quite interesting and is the one chapter where there are specific US obligations identified (typically considering expeditiously pending applications by Chinese financial service providers in specific areas).  US companies have had many problems for the last 20 years in terms of China’s permitting access.  Looks to me that the chapter, if implemented (and there are timelines, etc.) could be important for US companies. Subjects covered include banking services, credit rating services, electronic payment services, financial asset management (distressed debt) services, insurance services, and securities, fund management, futures services. The Administration’s fact sheet on financial services provides its views on the importance of the chapter. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Financial_Services_Fact_Sheet.pdf

Macroeconomic Policies and Exchange Rate Matters and Transparency

The fifth chapter on currency contains four articles. One is on general provisions. The second is on exchange rate practices. The third addresses transparency. And the fourth article covers the enforcement mechanism. While China was widely viewed as engaging in reducing the value of its currency for many years and was last year found by the Trump Administration to be a currency manipulator, most economists have viewed China as less problematic on its currency in recent years.  It is important to have a chapter focused on transparency and currency practices. Unclear how effective the enforcement provisions outlined will be in fact. But hopefully, China’s actions will not raise concerns under this chapter going forward. The Administration’s fact sheet presents its views of what was accomplished in the chapter. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Macroeconomic_Fact_Sheet.pdf

Expanding Trade

The sixth chapter is potentially commercially important as it addresses China’s commitments to increase purchases from the United States in both goods and services. The actual text clarifies that the $200 billion additional imports by China over 2017 levels are the combination of increases over 2017 in 2020 and 2021 versus being a requirement for each year.  Such growth is more achievable and less unrealistic in my view.

The targets for growth are presented in four groups – manufactured goods, agricultural goods, energy, services and then the categories that are considered within each of the four groups are shown on pages 6-4 – 6-23 of the Agreement.  The growth above 2017 levels for the four broad categories is shown below.

Products/Services20202021Total
manufactured goods$32.9 BN$44.8 BN$77.7 BN
agriculture$12.5 BN$19.5 BN$32.0 BN
energy$18.5 BN$33.9 BN$52.4 BN
services$12.8 BN$25.1 BN$37.9 BN
Total$76.7 BN$123.3 BN$200.0 BN

A lot of attention will be focused on whether the purchases actually happen.  Actions under Chapter 3 will directly improve US exports of agricultural goods and those of Chapter 4 will improve the financial services portion of the services target.  The IP chapter could be affect manufactured goods, etc. So much of the Phase 1 Agreement should result in a natural increase in imports from the U.S. as longstanding barriers are removed or otherwise overcome.

The Administration’s fact sheet on expanded trade can be found here. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Expanding_Trade_Fact_Sheet.pdf

Bilateral Evaluation and Dispute Resolution

A lot of focus will be given to Chapter 7 because of the importance of enforcement. However, as noted above, enforcement should be easier where there has been the level of detail/specificity as to obligations and timelines for implementing individual obligations that exists in many of the chapters.

On enforcement, Chapter 7, lays out the basic purpose of the bilateral evaluation and dispute resolution arrangement in Article 7.1. Paragraph 2 of that Article provides the objectives, reflecting both the U.S. desire for speed and the Chinese desire for mutual respect and avoidance of escalation.

“The purpose and madate of the Arrangaement are to effectively implement this Agreement, to resolve issues in the economic and trade relationship of the Parties in a fair, expeditious, and respectful manner, and to avoid the escalation of economic and trade disputes and their impact on other areas of the Parties’ relationship. The Parties recognize the importance of strengthened bilateral communications in this effort.”

There are various elements to the chapter including a high level Trade Framework Group (USTR and designated Vice Premier of the PRC).  Each country will have a Bilateral Evaluation and Dispute Resolution Office which will, inter alia, handle disputes and includes opportunities for appeals on short time lines, referral to USTR and the Vice Premier and the ability of the complaining party to take action if not resolved with either no retaliation (complained against party views action taken as in good faith) or the need to withdraw from the agreement for the party complained against if the belief is that the action was not taken in good faith.

I believe that the Chapter will effectively help the Parties resolve disputes particularly with regard to the commitments in Chapter 1, 3,  4 and 6. 

Conclusion

The Phase 1 Agreement is an important agreement that will achieve some significant market access opening for U.S. producers into the Chinese market, improved intellectual property protection in China, expanded market access for U.S. financial service providers and hopefully make some progress on reducing or eliminating forced technology transfer and limit concerns about currency misalignment. My hat’s off to the negotiators for an impressive result. There remain important issues not yet addressed bilaterally that will hopefully be taken up in Phase 2 talks, but Phase 1 is an important accomplishment.

U.S.-China Phase 1 Agreement — What to Look for When the Agreement is Released on January 15, 2020 after the signing

The U.S. Administration has indicated that the Phase One trade deal with China is “historic and enforceable”. President Trump tweeted on New Year’s Eve that the agreement would be signed by him and the Chinese at the White House on January 15. The Chinese have reportedly modified their travel schedule to accommodate the President’s desired signing date although the Chinese delegation will be headed by Vice-Premier Liu He, not President Xi Jinping. See South China Morning Post, 5 January, 2020, Trade war: China to travel to US on January 13 to sign phase one deal.

According to a fact sheet released by USTR on December 13, 2019, the Phase One agreement has at least seven chapters dealing with (1) intellectual property, (2) technology transfer, (3) agriculture, (4) financial services, (5) currency, (6) expanding trade and (7) dispute resolution. The fact sheet is attached below.

Dec.-13-2019-Fact-Sheet-from-USTR-on-Agreement-between-US-and-PRC

The agreement between the U.S. and China is reportedly 86 pages in length. This compares to the draft agreement that was being circulated in mid-2019 that was 150 pages before major revisions were made by China reducing the text to 105 pages and which led to increased tariffs being imposed by the United States and additional retaliation by China. Important issues remain for phase two including cybersecurity issues, China 2025 related issues on state owned or invested enterprises, state subsidization and other matters.

I. Chapters on Intellectual Property, Technology Transfer, Agriculture, Financial Services and Currency

Because the first five topics have been the subject of bilateral discussions and dispute settlement between the countries for years, the value of the chapters will depend both on the specificity of the obligations identified, the extent to which such obligations go to the provinces and local governments as well as the central government of China and, most importantly the nature and automaticity of the dispute settlement provisions that apply to the obligations undertaken. As reviewed in many USTR reports, China has a long history of making commitments in these areas which have not been implemented or only partially implemented. See, e.g., USTR, 2019 National Trade Estimate Report on Foreign Trade Barriers, pages 97-117, [“2019 NTE Report], https://ustr.gov/sites/default/files/2019_National_Trade_Estimate_Report.pdf.

II. Chapter on Expanding Trade

The expanding trade chapter as the Fact Sheet indicates “includes commitments from China to import various U.S. goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion.” USTR’s 2019 NTE Report indicated that U.S. exports of goods to China were $129.9 billion in 2017 and the U.S. exports of services were $57.6 billion in 2017. Thus, the agreement apparently calls for US exports of goods and services in 2020 and 2021 of at least $387.5 billion/year vs. $187.5 billion in 2017, a level more than twice the 2017 actual levels. The fact sheet suggests that commitments are product specific in terms of increased purchases. Industries will be looking carefully at what is included in this chapter on products or services of interest, seeing whether China waives any retaliatory tariffs on particular products during 2020 and 2021, and evaluating early signs of improved market access. Presumably the Administration and Congress will be monitoring on a monthly basis how commitments are being implemented in both goods and services.

Considering the large decline in U.S. exports of goods to China during the first 10 months of 2019 ($16.1 billion or 17.17%) and for some products in 2018 vs. 2017 or 2016, one may expect “commitments” in a variety of products where a return to 2017 levels or significant increases would appear to be manageable. See e.g,. HS 8800, civil aircraft (2019 10 month decline of $5.3 billion in U.S. domestic exports); HS 1201, soybeans (decline 2016-2018 of $11.1 billion); HS 8701, motor vehicles for transporting people (decline 2017-2018 of $3.7 billion); HS 2709 petroleum oils from crude (2019 10 month decline of $2.7 billion); HS 2707, petroleum gases and other gaseous hydrocarbons (2019 10 month decline of $1.3 billion); HS 8708 parts of tractors and motor vehicles (2019 10 month decline of $813 million); HS 7404, copper waste and scrap (2019 10 month decline of $633 million); HS 4407. wood sawn or chipped more than 6 mm thick (2019 10 month decline of $612 million) ; HS 4403, wood in the rough (2019 10 month decline of $504 million); HS 1007, grain sorghum (2019 10 month decline of $403 million).

Other factors, such as existing or available expanded capacity, needs for worker expansion vs. greater utilization of existing workforce, competitiveness of U.S. products, diversion from third countries or from the U.S., will obviously all have some potential effect on whether commitments can be achieved at a micro level if purchase orders are placed.

For services, it is assumed that significant increases to China are possible with liberalized markets in China.

III. Dispute Resolution

The chapter of Dispute Resolution appears to contain consultation processes at “both the principal level and the working level” and procedures for handling disputes with provisions that “allow each party to take proportionate responsive actions” that a party views as appropriate. This chapter is important both for the specifics and timing of the consultation process and the specifics of how disputes will be handled, the timing of such disputes and any parameters on “responsive actions”. At the end of the day, an agreement with China that is not enforceable will lead back to increased tensions in the near future.

IV. Conclusion

The Phase I agreement has the potential to be an important step in the U.S. efforts to establish a more sustainable trade relationship with China. The Administration deserves credit for aggressively pursuing a reset. Breaking the negotiations into phases carries risks as the more difficult issues remain on the table and are very important in terms of long-term viability of the bilateral trade relationship. Not finding solutions in a single agreement will be viewed by many as weakening the chances for achieving a breakthrough on these critical issues that are left for phase 2.

At the same time, the chapter on “Expanding Trade” is highly unorthodox in terms of its (at least temporarily) invoking managed trade to address the hundreds of barriers that have haunted the ability of the U.S. and others to have market-based results in trade with China. Because several decades of efforts to get China to actually operate on market principles have been unsuccessful and because the WTO rules do not address many of China’s economic system distortions, the chapter and underlying commitments that have been made are an experiment is finding a way forward for economic systems that don’t rationally coexist where there are major countries employing each economic system. The next two years will show whether the experiment provides a possible approach to the coexistence of such different systems in a global economy where companies are already operating in both systems.

U.S. – China Phase 1 Agreement; Opportunities and Challenges for U.S. Agriculture

President Trump and Vice Premier Liu He will sign the Phase 1 Agreement between the U.S. and China on January 15, 2020 according to press reports. While the specifics of the phase 1 agreement are not yet public, the agreement has been reported as having China agree, among other provisions, to increase imports from the U.S. over two years by as much as $200 billion including upping agricultural imports to $40-50 billion/year. If achieved, such purchases would help reduce the massive trade deficit that the U.S. has with China.

There is no doubt that China’s retaliation against U.S. exports, including importantly U.S. agricultural exports has reduced the role of U.S. products in the Chinese market. Thus, Administration efforts to achieve movement by China on its purchases of goods is understandable, particularly with a country with an economic system so different than a market economy. Presumably, China will construe its purchasing obligations as a best efforts one, and the U.S, will view the commitments as more binding. While the latter construction indicates the U.S. is seeking at least partially managed trade with China, that outcome is understandable in light of the failure of China to actually become a market economy since joining the WTO.

To the extent that China in facts ramps up procurement of U.S. agricultural goods, that will obviously be helpful to U.S. agricultural interests. Questions have been raised as to whether $40-50 billion/year in purchases by China are achievable based on past procurement levels and U.S. existing production/exports.

For example, the highest exports of agricultural products from the U.S to China since 2003 were in 2013 and 2014 when domestic exports of HS Chapters 01-24 were $22.6 billion in each year. Soybeans accounted for some 67% of total U.S. agricultural exports in 2016 when U.S. domestic exports were $21 billion. U.S. exports of all agricultural products in 2018 were down to $7.8 billion with soybeans down from $14.2 billion in 2016 to $3.1 billion in 2018, thus accounting for the vast majority of the decline is U.S. agriculture exports to China. Because of some efforts by the Chinese to increase agricultural imports from the U.S. during the second half of 2019, U.S. exports will likely be around $12-13 billion for 2019 (possibly higher depending on actual levels of state directed purchases that ship in the last two months of the year).

The ability to generate exports to China of $40-50 billion depend on market demand in China, competitiveness of U.S. products (or state direction) and the capacity within the U.S. agricultural sector to either ramp up production, ship from inventory or divert product from third countries. With growing per capita GDP in China and with internal production issues on products like pork flowing from disease, it should be the case that Chinese demand for imported agricultural products will increase in the 2020-2021 period.

While U.S. producers have been suffering from low commodity prices for a number of years, total U.S. agricultural exports have not changed significantly during the 2016-October 2019 period, raising questions on the ability of the U.S. to dramatically expand exports to China without diverting product from third countries. For example, total U.S. agricultural exports were $134.9 billion in 2016, $137.1 billion in 2017, $138.5 billion in 2018 and $115.8 billion in the January-October period of 2018 down to $111.0 billion in the first ten months of 2019.

When the U.S. shipped $21.0 billion of agricultural products to China in 2016, China accounted for 15.6% of U.S. exports. For there not to be diversion of exports from other countries, U.S. exports in 2020 would need to $170.7 billion for the U.S. to export $40 billion of agricultural products to China and $180.7 billion for the U.S. to export $50 billion to China with China accounting for 23.4% – 27.7% of total exports. The total dollar value of exports can fluctuate based on level of commodity prices as well as changes in volume shipped. When commodity prices were higher, US exports had been as high as $149.2 billion in 2014. Moreover, when there was strong upward global demand and upward pressure on prices, U.S. agricultural exports increases from $69.0 billion in 2006 to $112.8 billion in 2008. Thus, there is at least one period where dramatic growth in US global exports of agricultural products was achieved over a two year period.

The U.S. will continue to face significant competition for sales in China of agricultural products, making the large growth identified in the press about the agreement more challenging, though partially offset by the role of the state in China particularly in many agricultural products. For example, a number of important agricultural exporting countries have FTAs with China (New Zealand and Australia) which will likely leave many U.S. agricultural products less competitive even assuming that retaliatory tariffs on particular products from the U.S. are waived to permit expanded U.S. exports. Beef and wheat would be two likely product areas affected by the FTA tariff differential. Similarly, other major exporters, like Brazil, have provided alternative sources for key agricultural products like soybeans and will likely compete hard to remain important suppliers based on their expanded production levels and supply record in the 2018-2019 time period.

USDA has published several GAIN reports looking at (1) 2020 reduced MFN tariff rates on agricultural products and (2) the current retaliatory tariffs on U.S. agricultural products. The latter can be waived by China if it chooses to increase U.S. competitiveness. The two GAIN reports are embedded below and show the relatively high MFN tariffs on many agricultural products applied by China and the large retaliatory tariffs U.S. agricultural producers currently face on many agricultural products.

China-Lowers-Applied-MFN-Tariff-Rates-on-Selected-Agricultural-Products_Beijing_China-Peoples-Republic-of_12-25-2019

China-Calls-Off-Additional-Tariffs-on-US-Products-Planned-for-December-15_Beijing_China-Peoples-Republic-of_12-15-2019-1

Changing weather patterns and the uncertainty of future direction on retaliatory tariffs (U.S. and China will have the ability to reimpose tariffs or add tariffs based on implementation) may make expanding U.S. production problematic at least in the immediate future.

Thus, there is at least a fair amount of uncertainty as to how the targeted purchase levels in agriculture by China will be achieved by U.S. producers/ exporters in 2020-2021 and what the agreement will mean for opportunities going into the future.

That said, there is no doubt that the Chinese market is an important one for agricultural goods. China has used retaliatory tariffs to drastically reduce U.S. exports in 2018-2019, and the U.S. has had many ongoing challenges with SPS (sanitary/phytosanitary) or TBT (technical barriers to trade) issues in China shutting out competitive U.S. products. The phase 1 agreement when signed and implemented offers important opportunities for U.S. producers. Soybean producers, wheat producers, pork and beef producers, tree nut producers and many others will hopefully find significantly expanded opportunities in China. The Administration has been clear that any agreement must be enforceable and has indicated that there are enforcement mechanisms in the new agreement. Time will tell how the new agreement, when it enters into force in the second half of February 2020, works in fact and whether the U.S. and China have managed to find a way forward that will work for both countries at least on the Phase 1 agreement issues.

U.S.-Japan Trade Agreements to Go Into Effect on January 1, 2020

The two trade agreements that Prime Minister Abe and President Trump announced on September 25, 2019 and that were signed on October 7, 2019 will go into effect at the beginning of 2020.

The U.S. having notified Congress of its intent to enter into negotiations with Japan in 2018, limited what it negotiated in these current agreements to tariff reductions and digital trade (presumably requiring no U.S. law changes) and thus will be handled by Presidential Proclamation. Questions about compliance with consultation requirements have been raised by House Ways and Means Democrats, and there are questions about whether such partial agreements are consistent with U.S. and Japanese obligations under the WTO (GATT 1994 Art. XXIV). Nonetheless, USTR Lighthizer has indicated that following completion of the Japanese approval process last week that President Trump will be issuing a Proclamation this week (week of December 9).

In Japan, the Lower House of the Diet approved the deal in November and the Upper House last week.

The two countries will implement the agreements on some tariff reductions/eliminations and on digital trade on January 1, 2020.

As reported in the Japanese press, Japan is lowering or removing tariffs on various agricultural products to put the U.S. on a level playing field with other countries who continued with the Trans Pacific Partnership agreement after the U.S. withdrew. The value of U.S. agriculture exports covered by reductions or eliminations was listed at $7.2 billion. See The Japan Times, Upper House approves U.S.-Japan trade deal, https://www.japantimes.co.jp/news/2019/12/04/business/economy-business/upper-house-approves-united-states-japan-trade-deal/#.Xe-8w-hKiUk.

In an earlier post, the loss of market share by U.S. agriculture exporters of key commodities in 2019 because of the disadvantage in tariff rates vs. other major agricultural exporters was reviewed. The reduction in US exports has continued through October based on data now available. Thus, U.S. exports of corn (HS 1005) to Japan are down 24.7% in the first ten months of 2019; pork exports (HS 0203) are down 7.58%; fresh or chilled beef exports (HS 0201) are down 8.55%; wheat/meslin exports (HS 1001) are down 13.25%; frozen beef exports (HS 0202) are down 18.05%; frozen fish exports (HS 0303) are down 29.85% and fresh or dried nut exports (HS 0802) are down 7.39%.

The United States is reducing or eliminating tariffs on imports from Japan that in 2018 were around $7.1 billion. There are a few agriculture products but most are manufactured goods. The two countries have committed to starting negotiations on a broader deal (phase 2) to begin in April or May 2020. Total imports from Japan in 2018 were $143.7 billion, so the phase 1 coverage addresses only 4.9% of U.S. imports from Japan. Many other imports from Japan are already duty free. Thus, the products from Japan covered by the phase 1 agreement subject to reductions or eliminations in tariffs accounted for 9.8% of the calculated duties on total U.S. imports from Japan in 2018.

Nearly half of all duties the U.S. collected on imports from Japan occurred on motor vehicles and parts (HS Chapter 87)(49.1% of total collected duties in 2018). While elimination of duties on motor vehicles is a high priority for Japan, any reduction will be part of the phase 2 negotiations.

For U.S. agriculture producers who have had a very difficult time from trade retaliation by many trading partners over the last two years. the phase 1 tariff agreement is welcome news.

As both the U.S. and Japan have high level digital trade systems, the main importance of the digital trade agreement will be as a model for efforts with other countries going forward.

Conclusion

The Trump Administration’s push for a phase 1 deal with Japan to offset significant disadvantages suffered by U.S. agriculture exporters from the U.S. withdrawal from the TPP has received buy-in from Japan (presumably in part to limit the likelihood of action against Japan from the Section 232 investigations on automobiles and parts)and despite the questions on how this piecemeal approach comports with international obligations of both countries.

In what is looking to be a busy finish to 2019 for the United States on trade issues — USMCA appearing close to consideration by the U.S. Congress (the revisions to the agreement to be addressed in Mexico today (Dec. 10) and reportedly sufficient to have the revised agreement go to the House next week); a possible phase 1 US-China deal still possible ahead of new tariffs kicking in on imports from China on December 15 — the U.S.-Japan trade agreement is a market opening event of some importance for U.S. agriculture and the agreement on digital trade is one with a major trading partner and reflects U.S. ambitions.

The Continued Problem of Inconsistent Transparency at the World Trade Organization

The World Trade Organization has attempted over the years to improve its transparency both for the benefit of Members and for the needs of the public in many countries with active interests in the issues being discussed within the WTO. Because the WTO is a member driven organization, there has been a long standing tension between the desire of some for greater transparency and the unwillingness of others to make their submissions available to the public.

Back in 2010, I wrote a trade flow for my law firm which reviewed how the WTO was failing to honor the objectives of greater transparency through the wholesale adoption of a category of documents labeled “JOB” which largely were not made available ever for public review. Nine years later, there has been some improvement and some backsliding in transparency at the WTO.

JOB documents are not the only documents hidden from view in many situations. There is a category of documents called “room documents” (“RD”) that similarly are never released for public review. The classification of documents as JOB documents (or as other unavailable types) is a matter of self-selection by the WTO Member submitting the document and can lead to essentially irrational differences. For example, during the WTO Doha negotiations, the chairs of all negotiating groups except dispute settlement released draft negotiating texts as public documents, and many/most/all of the submissions by members of positions, etc. were also available to the public. For many years, the dispute settlement negotiation group was alone in not releasing the draft text or many of the negotiating proposals.

Similarly, the resort to “informal meetings” means that there are no minutes of the meeting that are kept or released to the public after some period of delay. Looking at the Fishery subsidy negotiations, many documents of submissions by parties are available, but there are no minutes for the many informal meetings, just very abbreviated “summaries” provided.

When there is an inconsistent approach to the treatment of similar documents or when there is movement from formal to informal with a loss of transparency, the public loses and there can be a dimunition in trust of how the WTO is functioning.

Look at the area of agriculture negotiations. There are 202 documents that are shown in the WTO document system with a “JOB/AG” number (these include corrections or revisions) going back to July 1, 2010. Before that time, JOB documents were not broken out by area or typically listed but would occasionally be referenced in statements by the Director General or in Committee reports. Of the 202 JOB/AG documents listed on the WTO document file, 141 are not available to the public. Many of the public documents date from 2017 but there are documents in the last three years that are also not public even if earlier documents of a similar nature were public. For example, JOB/AG/163 is a Report of the Chairman of the Committee on Agriculture in Special Session (31 July 2019) and is not public. Yet another report by the same Chairman from 12 days earlier is public (JOB/AG/162). Moreover, to the extent types of documents are now treated as public, there is no system for going back and correcting classification of earlier submissions. And for categories like room documents there is no system for ever making such documents public.

Despite some progress in the first twenty-five years, the WTO has a lot of room for improvement in ensuring that the public can monitor and understand developments in all areas of its operation. WTO Members need to develop more consistent policies on how they treat their own submissions and work with trading partners to maximize transparency.

Below is a trade flow I posted on my law firm’s website on May 12, 2010:

Opening Up the World Trade Organization: How the Promise of Greater Transparency Has Been Compromised By the Wholesale Use of “JOB” Documents

The World Trade Organization (“WTO”) is an intergovernmental organization that came into existence in 1995.  Its predecessor, the General Agreement on Tariffs and Trade (“GATT”), had received relatively little notice and operated largely out of public view.  However, the growing importance globally of trade, the expansion of rules to areas traditionally viewed as domestic in nature, and a dispute settlement system that was more binding on participants all increased the pressure on the WTO to improve its transparency to the public. 

Indeed, when the U.S. Congress was considering implementing the Uruguay Round Agreements that created the WTO into U.S. law, increasing the transparency of the new organization was of great importance.  This is reflected in section 126 of the URAA and the House Report and Statement of Administrative Action on the section:

Sec. 126.  Increased Transparency

The Trade Representative shall seek the adoption by the Ministerial Conference and General Council of procedures that will ensure broader application of the principle of transparency and clarification of the costs and benefits of trade policy actions, through the observance of open and equitable procedures in trade matters by the Ministerial Conference and the General Council, and by the dispute settlement panels and the Appellate Body under the Dispute Settlement Understanding.

19 U.S.C. § 3536.  House Rep. No. 103-826(I) at 35 (1994):

Section 126.  Increased transparency

Present law.

No provision.

Explanation of provision

Section 126 of H.R. 5110 directs the USTR to seek adoption by the functional bodies of the WTO of procedures that will ensure broader application of the principle of transparency.

Reasons for change

Through the adoption of more open and equitable procedures, it is the intention of the United States to improve our ability to assess the costs and benefits of WTO trade policy actions.  Members have been concerned, particularly with respect to dispute settlement panels and the Appellate Body, that closed meetings and the lack of public availability of documents upon which decisions are based serve to undermine confidence in the decisions of these functional bodies.

Although it is more traditional in international bodies to conduct meetings and make decisions behind closed doors, the Committee believes that the WTO will gain more respect and build confidence if they follow the U.S. experience of providing more open access to the public with respect to key policy or dispute-settlement determinations.  It has become a high priority for the U.S. to persuade other member nations of the WTO to work with us to open the process, provide greater access, provide for voices of dissent and differing views to be heard, and in general make the WTO more accountable to those who are affected by international decision-making.

See also Statement of Administrative Action accompanying the Uruguay Round Agreements Act, H.R. Rep. No. 103-316, 103d Cong., 2d Sess., vol. I, 678-679 (1994).

            The United States was not the only country interested in greater transparency, and the WTO early on did adopt a number of steps to improve transparency.  One such step was the creation of a broader system for derestricting documents so there would be greater public awareness of issues.  See, e.g., WT/L/160/Rev.1 (26 July 1996) (procedures for the circulation and derestriction of WTO documents); WT/L/452 (16 May 2002). 

While WTO meetings generally have not been opened to the public, there has been movement, where disputing parties consent, to open at least some dispute settlement meetings and hearings to public viewing.  The WTO has also done some outreach to the public through formal meeting days in Geneva, the opportunity to submit comments on their webpage, improved access to the public portion of ministerial meetings, briefings on ministerials, and other events, and through other means.  So the WTO can fairly be said to be more transparent than its predecessor, the GATT.  Although many countries continue to have concerns about increased transparency, there are various proposals being considered as part of the ongoing Doha Round —  both within the review of the dispute settlement system and in the Rules negotiations — for additional steps to increase transparency.

But there is one growing problem, in particular, within the WTO that undermines at least some of the progress made in increased transparency that is neither necessary nor, in this author’s view, desirable.  It is the growing presence of “JOB” documents within the system.  Under the WTO classification system, documents which are given a “JOB” number do not become part of the “official WTO documents” and hence escape either categorization, listing, or derestriction to the public.  Indeed, members of the public only know such documents exist because they are referenced in official documents that are public.  Whatever the merits of having documents that are never derestricted, the “JOB” classification is a matter of self-selection, resulting in situations impossible for the public to comprehend.  Thus, a chairman’s draft text [JOB(08)/81 of July 2008] in the dispute settlement negotiations is not available to the public (though it is referenced in the Chairman’s report to the Trade Negotiations Committee, TN/DS/24 (22 March 2010)), while chairmen’s draft texts are available publicly in agriculture, non-agricultural market access, Rules and other areas.  What is the logic of this differential treatment of chairmen’s texts?  There is no obvious answer.

Similarly, in an area like “trade and environment,” some proposals from WTO Members are public while others – including from the United States — are “JOB” documents and not publicly available.  See TN/TE/19 note 19 listing JOB(09)/132 (Canada; European Communities; Japan; Korea; New Zealand; Norway; Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu; Switzerland and United States) (9 Oct. 2009); JOB(09)/169 and Add.1 (Saudi Arabia (6 Nov. 2009 and 15 Dec. 2009); TN/TE/W/75 and Add. 1 (Japan, 27 Nov. 2009 and 16 Feb. 2010) and JOB/TE/2 (Philippines (16 Feb. 2010).  For years, one couldn’t find a public summarization of the competing lists of goods and services that would potentially qualify as environmental for the Doha negotiations, although such summaries are now part of the annual reports.  See TN/TE/19 Annex III.  Why is this permitted?  How can Members square such actions with activity in areas like Rules where all papers have been made public or like agriculture where virtually every country has public submissions?

The problem exists within the Secretariat, which routinely marks summaries as JOB documents.  The problem extends to the Director General, who frequently references in his comments to the General Council or Trade Negotiations Committee one or more JOB documents (e.g., TN/C/M/29 at 2 (referring to JOB(08/132)).  Indeed, the problem exists for all Members, including the strongest advocates of increased transparency like the United States.

The public has no idea how many documents are so marked.  Just from the numbers on some of the JOB documents referenced in other public documents, it appears there may be literally thousands of documents a year that avoid public disclosure or scrutiny.  In addition, the public cannot find a listing of all such documents to be able to at least understand what was submitted even if it is not made public.  Historically in the GATT days, the public could reference an index of documents with full titles even if the document was restricted and not publicly available.  Why should the WTO permit such a retreat from public dissemination of basic information?  Why should the public, increasingly affected by actions of the WTO, accept this state of affairs?  Are there steps that can be taken to drastically reduce if not eliminate this practice?  Why shouldn’t JOB documents that do exist be derestricted just like all “official” documents?

The answers would seem obvious.  For many in the public, there is no justification for the secrecy and “black box” approach to the creation or maintenance of “JOB” documents.  Thus, the best course of action would be to eliminate the use of such categories and require all documents circulated to members to be part of the WTO document collection and subject to derestriction rules.  At a bare minimum, the WTO and its Members should circumscribe which type of documents can legitimately be claimed as such, require prior JOB documents to be reclassified if they don’t meet the criteria, provide a public catalogue of all existing and future “JOB” documents, and determine why a derestriction process should not be applied.

Under the current approach, the WTO and the WTO membership permit entire topics to disappear from public view.  Such an outcome is not acceptable to many Members.  It should be corrected for the good of the system and to honor the public’s right to know what is being discussed by the Members in the WTO.  Correction doesn’t require the completion of a round.  It just requires common sense and the will to keep the promises to make the organization more transparent and more accountable to the people of the world. 

Two Initial U.S. Trade Agreements with Japan – What They Cover and What Will Follow

On October 16, 2018, US Trade Representative Robert Lighthizer sent letters to Congress informing Congress of the President’s intent to enter trade negotiations with Japan.  Section 105(a)(1)(A) of the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 was referenced in the letters.  The letters indicated that negotiations with Japan could proceed in phases, that the administration would consult with Congress and that Administration negotiating positions were consistent with the priorities and objectives contained in section 102 of the 2015 law.  In December 2018, USTR published a summary of the Administration’s specific negotiating objectives with Japan.

Less than one year later, on September 25, 2019, President Trump and Prime Minister Abe announced that agreements had been reached on certain market access issues (agriculture and some other products by Japan; a large number of industrial goods and a few agricultural products by the U.S.) and a digital trade agreement between the two countries.  The two agreements and a series of side letters were signed on October 7.  It is expected that the two agreements will take effect on January 1, 2020, following action by the Diet in Japan and the publication of tariff reductions by the Administration in the U.S. pursuant to existing tariff reduction authority (and assuming the obligations of the U.S. under the digital trade agreement do not require any changes to U.S. law).   As indicated in the original notification, the negotiations are being undertaken in phases, with additional negotiations to commence four months after the two initial agreements take effect as reviewed in language on USTR’s webpage.

On October 7, 2019, USTR Robert Lighthizer and Ambassador of Japan to the United States Shinsuke J. Sugiyama signed the U.S.-Japan Trade Agreement and U.S.-Japan Digital Trade Agreement. In addition, as announced in the September 25, 2019, Joint Statement of the United States and Japan, the United States and Japan intend to conclude consultations within 4 months after the date of entry into force of the United States-Japan Trade Agreement and enter into negotiations thereafter in the areas of customs duties and other restrictions on trade, barriers to trade in services and investment, and other issues in order to promote mutually beneficial, fair, and reciprocal trade. Entry into force of the U.S.-Japan Trade Agreement and U.S.-Japan Digital Trade Agreement is currently pending finalization of domestic procedures in both countries.

https://ustr.gov/countries-regions/japan-korea-apec/japan/us-japan-trade-agreement-negotiations

Help for U.S. Agriculture

Having pulled out of the Trans Pacific Partnership [“TPP”] agreement in 2017, the U.S. has been anxious to achieve an agreement with Japan – a country that the Administration has indicated accounts for 95% of GDP of countries within the Comprehensive and Progressive Agreement for Trans-Pacific Partnership [“CPTPP”] with whom the U.S. does not presently have an FTA.  Japan has been a large market for U.S. beef, pork and wheat among other agricultural products.  With the CPTPP having entered into force on December 31, 2018 for Japan and many of the major agricultural export members of the CPTPP (Australia, Canada, Mexico and New Zealand) and with the Japan-EU FTA (entered into force February 1, 2019), U.S. agriculture has been concerned with loss of market share with the significant differences in tariff rates applicable to imports from Japan’s CPTPP partners and available to the EU.  In addition, U.S. agriculture has been buffeted over the last two years by retaliation by various countries in retaliation for US actions under section 232 on steel and aluminum products (China, EU, Canada, Mexico, India, Turkey, Russia) and under section 301 for intellectual property and other issues by China.

Looking at domestic exports to Japan of a few U.S. agricultural products, it is clear that U.S. exporters were seeing reduced volume and value of products in 2019.  Volume data are shown below along with the percent change between the first eight months of 2018 and 2019 (quantities are in metric tons):

Product 2016 2017 2018 Jan.-Aug. 2018 Jan-Aug. 2019 % Change
Beef –HS 0201 & 0202 203,852.8 258,193.7 278,800.7 191,672.7 173,023.5 -9.73%
Pork – HS 0203 361,530.9 365,130.6 366,626.0 245,970.0 233,698.2 -4.99%
Wheat – HS 1001 2,700,066 3,049,369 2,860,624 1,942,929 1,678,292 -13.62%
Corn – HS 1005 11,891,952 12,390,152 15,276,106 10,972,609 8,874,393 -19.12%

In contrast to declining U.S. exports to Japan in the first eight months of 2019 compared to the comparable period in 2018, total imports into Japan from all countries increased for three of the four products reviewed.  For beef, Japan imports increased by 1.13% on a volume basis.  Similarly, imports of pork products into Japan increased by 4.29% on a volume basis.  Total imports of corn into Japan also increased slightly (0.79%) on a volume basis.  While the volume of wheat imports from all countries declined by 7.91%, the rate of decline was significantly smaller than the contraction of US exports to Japan of wheat.  Thus, the U.S. saw reduced market share in all four of these major product categories and in many others as well.  Indeed US domestic exports of all agricultural products (HS Chapters 1-24) grew 15.28% on a value basis between 2016 and 2018 from $11.89 billion to $13.71 billion before declining 7.75% in the first eight months of 2019.  There were many US export categories that saw declines in value  during the first eight months of 2019 (HS 0201, fresh or chilled beef, -6.7%; HS 0202, frozen beef, -18.8%; HS 0203, fresh, chilled or frozen pork, -6.2%; HS 0303, frozen fish other than fish fillets, -28.4%; HS 0802, nuts, -8.0%; HS 1001, wheat, -18.3%; HS 1005, corn, -16.2%; HS 1201, soybeans, -1.7%).

Annex I to the U.S.-Japan Trade Agreement identifies the various commitments on liberalization that Japan is making, almost all on agricultural products. 

https://ustr.gov/sites/default/files/files/agreements/japan/Annex_I_Tariffs_and_Tariff-Related_Provisions_of_Japan.pdf 

USTR’s fact sheet provides the following summary of benefits for U.S. agriculture:

“In the U.S.-Japan Trade Agreement, Japan has committed to provide substantial market access to American food and agricultural products by eliminating tariffs, enacting meaningful tariff reductions, or allowing a specific quantity of imports at a low duty (generally zero). Importantly, the tariff treatment for the products covered in this agreement will match the tariffs that Japan provides preferentially to countries in the CP-TPP agreement.

“Out of the $14.1 billion in U.S. food and agricultural products imported by Japan in 2018, $5.2 billion were already duty free. Under this first-stage initial tariff agreement, Japan will eliminate or reduce tariffs on an additional $7.2 billion of U.S. food and agricultural products. Over 90 percent of U.S. food and agricultural imports into Japan will either be duty free or receive preferential tariff access once the Agreement is implemented.

KEY ELEMENTS: U.S. AG EXPORTS TO JAPAN

Tariff Reduction:  For products valued at $2.9 billion, Japan will reduce tariffs in stages. Among the products benefitting from this enhanced access will be:

  • fresh beef
  • frozen beef
  • fresh pork
  • frozen pork

Tariff Elimination: Tariffs will be eliminated immediately on over $1.3 billion of U.S. farm products including, for example:

  • almonds
  • blueberries
  • cranberries
  • walnuts
  • sweet corn
  • grain sorghum
  • food supplements
  • broccoli
  • prunes

“Other products valued at $3.0 billion will benefit from staged tariff elimination. This group of products includes, for example:

  • wine
  • cheese and whey
  • ethanol
  • frozen poultry
  • processed pork
  • fresh cherries
  • beef offal
  • frozen potatoes
  • oranges
  • egg products
  • tomato paste

Country Specific Quotas (CSQs): For some products, preferential market access will be provided through the creation of CSQs, which provide access for a specified quantity of imports from the United States at a preferential tariff rate, generally zero. CSQ access will cover:

  • wheat
  • wheat products
  • malt
  • glucose
  • fructose
  • corn starch
  • potato starch
  • inulin

Mark Up: Exports to Japan of wheat and barley will benefit from a reduction to Japan’s “mark up” on those products. Japan’s imports of U.S. wheat and barley were valued at more than $800 million in 2018.

Safeguards: This agreement provides for the limited use of safeguards by Japan for surges in imports of beef, pork, whey, oranges, and race horses, which will be phased out over time.”

https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2019/september/fact-sheet-agriculture%E2%80%90related

There are also five side letters on specific agricultural products and one on safeguard provisions.  The specific products covered by such letters are alcoholic beverages, beef, rice, skimmed milk, and whey.  These side letters can be found here:  https://ustr.gov/countries-regions/japan-korea-apec/japan/us-japan-trade-agreement-negotiations/us-japan-trade-agreement-text.

What Japan Gets from the U.S. in terms of Tariff Reductions

Annex II contains the list of liberalization commitments on tariffs on goods the U.S. is providing Japan under the agreement.

 https://ustr.gov/sites/default/files/files/agreements/japan/Annex_II_Tariffs_and_Tariff-Related_Provisions_of_the_United_States.pdf 

The U.S. agreed to some liberalization of a limited number (42) of six-digit HS categories.  USTR indicated in its fact sheet that imports from Japan in these 42 categories had been $40 million in 2018.  Twelve of the forty-two categories involve plants and cut flowers, two deal with yams, six deal with melons of various types, one covers fresh persimmons, two with green tea, ten with confectionery products, one with chewing gum, one covers soy sauce, and seven cover various other items.

The bulk of what Japan obtains in tariff liberalization occurs in industrial goods (chapters 25-99) though motor vehicles and parts are not part of the liberalization.  There are some chemicals, a few rubber products, mirrors, some steel products and the vast majority from HS Chapters 84 and 85. 

As the Administration is not intending to submit implementing legislation, the Administration is limited to the tariff reduction authority contained in Section 103(a)(3) of the Bipartisan Congressional Trade Priorities and Accountability Act, 19 U.S.C. 4202(a)(3).  Thus, for  any of the products on which liberalization is to occur where Column 1 tariffs are greater than five percent ad valorem,  tariffs will be reduced but not eliminated.  Most products in HS Chapters 84 and 85 included for tariff reductions are below 5% but many agricultural products and certain industrial tariffs (e.g., bicycles and parts, HS 8712 and HS 8714) are above 5%.

WTO Compatibility

Both the U.S. and Japan intend to pursue further negotiations starting in early May 2020.  Certainly the Administration summary of negotiating objectives articulate aims which comport with obtaining a comprehensive trade agreement that would be comparable to other FTAs in terms of trade in goods coverage.  But the U.S.-Japan Trade Agreement dealing with tariffs does not by itself qualify as a Free Trade Agreement (“FTA”) within the meaning of GATT Article XXIV:8(b) where substantially all tariffs on goods trade are eliminated within a reasonable period of time.  The Agreement’s failure to provide for duty-free treatment for substantially all trade in goods is true for Japan’s treatment of imports from the U.S. as well as the U.S.’s treatment of imports from Japan.  For example, U.S. exports to Japan in 2018 were only 20% in agricultural goods, with fully 80% of exports in industrial goods.  With few exceptions, industrial goods are not the subject of the current agreement in terms of Japanese liberalization (though Japan has zero tariffs on many industrial goods already).  Similarly, motor vehicle goods and parts are not part of the trade liberalization.  There are Column 1 tariffs for most HS Chapter 87 goods.  Excluding bicycles and parts which are part of the current agreements, imports from Japan under just Chapter 87 were more than $53 billion in 2018 or some 37% of total imports.  Thus, the current agreement, absent a future enlargement would likely be viewed as violating MFN requirements of the WTO as not a permissible FTA under GATT Art. XXIV:8(b).

There have been no disputes over whether particular FTAs  fail to satisfy the requirements of Article XXIV, and it is novel for a trade agreement to be done in phases.  Assuming the U.S. and Japan complete their negotiations and implement the resulting enlarged agreement in the next year or two, the final agreement will likely be WTO consistent, regardless of views of the phase approach and initial agreement reached.

U.S.-Japan Digital Trade Agreement

Digital trade is a rapidly growing part of international commerce.  The U.S. has been seeking either a digital trade chapter (e.g., U.S.-Mexico-Canada Agreement [“USMCA”]) or where negotiations are done in phases, as a stand-alone agreement.  The latter is what has emerged from the talks to date with Japan.  The U.S.-Japan Digital Trade Agreement has been described by the Administration as the “gold standard” and similar to the chapter in the USMCA.  The USTR fact sheet lays out what the agreement achieves as perceived by the Administration:

“FACT SHEET U.S.-Japan Digital Trade Agreement

“As two of the most digitally-advanced countries in the world, the United States and Japan share a deep common interest in establishing enforceable rules that will support digitally-enabled suppliers from every sector of their economies to innovate and prosper, and in setting standards for other economies to emulate.

“The United States-Japan Digital Trade Agreement parallels the United States-Mexico-Canada Agreement (USMCA) as the most comprehensive and high-standard trade agreement addressing digital trade barriers ever negotiated. This agreement will help drive economic prosperity, promote fairer and more balanced trade, and help ensure that shared rules support businesses in key sectors where both countries lead the world in innovation.

“Key outcomes of this agreement include rules that achieve the following:

  • Prohibiting application of customs duties to digital products distributed electronically, such as e-books, videos, music, software, and games.
  • Ensuring non-discriminatory treatment of digital products, including coverage of tax measures.
  • Ensuring that data can be transferred across borders, by all suppliers, including financial service suppliers.
  • Facilitating digital transactions by permitting the use of electronic authentication and electronic signatures, while protecting consumers’ and businesses’ confidential information and guaranteeing that enforceable consumer protections are applied to the digital marketplace.
  • Prohibiting data localization measures that restrict where data can be stored and processed, enhancing and protecting the global digital ecosystem; and extending these rules to financial service suppliers, in circumstances where a financial regulator has the access to data needed to fulfill its regulatory and supervisory mandate.
  • Promoting government-to-government collaboration and supplier adherence to common principles in addressing cybersecurity challenges.
  • Protecting against forced disclosure of proprietary computer source code and algorithms.
  • Promoting open access to government-generated public data.
  • Recognizing rules on civil liability with respect to third-party content for Internet platforms that depend on interaction with users.
  • Guaranteeing enforceable consumer protections, including for privacy and unsolicited communication, that apply to the digital marketplace, and promoting the interoperability of enforcement regimes, such as the APEC Cross-Border Privacy Rules system (CBPR).
  • Ensuring companies’ effective use of encryption technologies and protecting innovation for commercial products that use cryptography, consistent with applicable law.

“Together, these provisions will set predictable rules of the road and encourage a robust market in digital trade between the two countries – developments that should support increased prosperity and well-paying jobs in the United States and Japan.”

https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2019/october/fact-sheet-us-japan-digital-trade-agreement

The agreement represents the U.S. achieving the negotiating objectives that it identified for digital trade in USTR’s summary of negotiating objectives (page 6) – no customs duties on digital trade (Art. 7 of Agreement), non-discriminatory treatment of digit trade in Japan (Art. 8 of Agreement), rules to limit interference with transborder flows of data (Art. 11 of Agreement), rules preventing governments from disclosing computer codes or algorithms (Art. 17 of Agreement), and limiting non-IPR civil liability for online platforms for third party content (Art. 18 of Agreement).  https://ustr.gov/sites/default/files/2018.12.21_Summary_of_U.S.-Japan_Negotiating_Objectives.pdf

There are, of course, many other provisions in the Agreement, some dealing with privacy, some dealing with access to government information, some dealing with cybersecurity.  In light of the stand-alone nature of the Agreement, the U.S. has also included exclusion provisions for national security and other purposes (e.g., GATT Art. XX, prudential purposes).

The Administration’s ability to enter into the agreement and have it take effect on January 1 is premised presumably on the agreement being consistent with existing U.S. law and practice and hence not needing legislative amendments to address.

WTO Consistency

Because the WTO’s primary agreements flow from the Uruguay Round, there is limited coverage of digital trade within the WTO (there has been a moratorium, extended at each Ministerial on imposition of customs duties on digital goods).  Thus, there are no WTO-consistency issues with the Agreement Between the United States and Japan Concerning Digital Trade Agreement.

Conclusion

Japan is the world’s third largest economy and an important trading partner for the United States.  The intention to start negotiations with Japan was one of three notifications of intended negotiations sent to Congress by the Trump Administration (Canada and Mexico, the EU being the others).  USMCA is awaiting final amendments to permit a Congressional vote and the EU talks have not advanced significantly at this point.  The Administration has adopted the novel approach of doing negotiations with Japan in phases.  The first phase of tariff liberalization has focused on U.S. agricultural interests and offsetting disadvantages for US agricultural exporters from the CPTPP entering into force at the beginning of the year and the Japan-EU agreement which took effect on February 1, 2019.  The agreement appears to move U.S. agricultural producers back to a competitive position with the other major agricultural exporters covered by the CPTPP and Japan-EU agreements.  The legitimacy of the first agreement depends on there being a broader agreement with Japan that the U.S. reaches in reasonably prompt fashion. 

The second agreement on digital trade reflects the continued growth and importance of digital trade to both the U.S. and Japan and the adoption of provisions the U.S. has been pursuing in recent years.

In short, concluding the two agreements should be helpful to U.S. trade interests.  However, there is a lot of work left to do with our important trading partner and ally, Japan, to achieve an overall result that is consistent with our WTO obligations.