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.
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.
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.
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.”
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.”
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.
