digital trade

Recent G7 Trade Ministers Meeting — WTO issues of interest

The United Kingdom has the presidency of the G7 (Canada, France, Germany, Italy, Japan, United States and United Kingdom, with European Union as a guest) in 2021. On March 31, trade ministers had a virtual meeting which included WTO Director-General Ngozi Okonjo-Iweala. On the U.K. G7 web page, the objectives of the Trade Track of the G7 during the UK Presidency is reviewed. See G7 Trade Ministers, https://www.g7uk.org/trade-ministers/

“The UK’s 2021 G7 Presidency will feature a dedicated Trade Track at the G7 for the first time, led by the Department for International Trade. The Trade Track will be an opportunity for the UK to work with our G7 partners to shape a bold global vision for economic recovery that sees us build back better together – greener, more prosperous, resilient, and fair. 

“To do so, the Trade Track will focus on four priority areas:

“- WTO reform

“- trade and health

“- digital trade

“- trade and climate policy”

The Chair of the G7 Trade Track released a statement on March 31. The Chair in 2021 is the U.K. Secretary of State for International Trade and President of the Board of Trade and Minister for Women and Equalities, the Rt Hon Elizabeth Truss MP. See G7 Trade Ministers’ Meeting – Chair’s Statement, https://www.g7uk.org/g7-trade-ministers-meeting-chairs-statement/. The statement is copied below.

G7 Trade Ministers’ Meeting – Chair’s Statement – G7 UK Presidency 2021

“Today, the G7 Trade Ministers held their first meeting under the inaugural G7 Trade Track. Trade Ministers underlined the vital role global trade has played in tackling the impacts of the Covid-19 pandemic, welcomed the contribution trade can make to a strong economic recovery, and emphasised the need to build back better. They reaffirmed the importance of the rules-based multilateral trading system and welcomed Dr Ngozi Okonjo-Iweala, the new WTO Director-General, to their meeting.

“The G7 Trade Track has a bold purpose – to make the case globally for free and fair trade. G7 Trade Ministers are convinced that when the world’s leading democratic trading nations unite behind a shared agenda to make the global trading system fairer, more sustainable, and responsive to the needs of our citizens, this is an agenda that partners across the world will be ready to share in and help shape.

“Free and Fair Trade

“G7 Trade Ministers support a global trading system that is free and fair and works for all countries and peoples. This year represents a clear inflection point for the world and the global economic architecture. G7 Trade Ministers recognised the importance of providing the leadership needed to respond to the challenges faced by the multilateral trading system. Trade Ministers expressed their determination to provide the sustained effort and momentum necessary to ensure progress is made in the reform of the WTO to help secure shared prosperity for all. Therefore, G7 Trade Ministers will use this year’s G7 to advance the agenda of the 12th WTO Ministerial Conference and provide vital political momentum to the WTO reform debate. Trade Ministers will explore reforms that can enhance the WTO as a forum for negotiations, recognising the positive role that the plurilateral initiatives have played in engaging a broad spectrum of WTO members. G7 Trade Ministers also acknowledge that important work on transparency, special and differential treatment, and dispute settlement needs to be undertaken in the WTO.

“The multilateral trading system can be a force for good. It has increased competition and economic growth, helped raise living standards, and lifted millions out of poverty. It must serve the needs of all its members and provide the basis for free and fair trade. G7 Trade Ministers recognised that global trade should work for democratic and open-market systems and that these should not be undermined by unfair trade.

“Yet, not all of our citizens have felt the benefits of trade. Moreover, practices that distort markets and competition lead to decreased efficiency and reduced perceptions of fairness and trust in the system. Echoing the G7 Leaders’ Statement at Charlevoix in 2018, G7 Trade Ministers recalled the importance of fostering a truly level playing field. Trade Ministers will discuss the impact market-distorting practices, such as harmful industrial subsidies, including those causing excess capacity in some sectors, are having on our economies and chart a way to address these collectively.

“Modernising Trade

“G7 Trade Ministers believe that the multilateral trading system is in need of reform to reflect changes in the global economy and environment. As the world transitions to net zero, Trade Ministers acknowledged the risk of carbon leakage to the environment and the potential ways of mitigating this. Acknowledging the role of trade in tackling the accelerating climate and biodiversity crisis, Trade Ministers recognised that 2021 will be a crucial year to drive international efforts to address climate change and protect nature, including at the UNFCCC COP26. Trade Ministers will therefore deepen discussions on the nexus between trade and climate and the environment with a focus on identifying opportunities for collaboration and facilitating sustainable supply chains. Additionally, G7 members are committed to reaching a meaningful conclusion in the WTO negotiations of fisheries subsidies – which have a clear impact on sustainability.

“Stressing that trade has to be at the service of citizens, G7 Trade Ministers underlined the importance of advancing women’s economic empowerment through trade, particularly to support the Covid-19 recovery. They shared the view that greater representation of women in trade as leaders, business owners, and fairly compensated workers will ultimately deliver more and better jobs and more growth in our economies. G7 Members will promote deepened studies and more cross-cutting analyses on trade policy and gender equality by international organisations, such as SheTrades Outlook. Recognising the progress that is being made on trade and gender equality at the WTO, Trade Ministers intend to use their next discussions to explore new opportunities to improve the evidence base to support women in trade and discuss their priorities in this area for the next WTO Ministerial Conference.

“G7 Trade Ministers also agreed to further consider the ways in which trade policy can develop to support trade in health products, and increased supply chain resilience, as we work to build back better from Covid-19. The scale and pace of the spread of the virus, and an uneven global recovery, are challenging all our economies. G7 Members also encourage cooperation among governments, manufacturers, and other industry players to identify policies which support ramped-up production and distribution of vaccines.

“Digital Trade

“G7 Trade Ministers recognised the importance of digital trade to growth, innovation, productivity, and prosperity. They recalled the immense opportunities that it offers to our people and our businesses, and they underlined the central role that it can play in the economic recovery from the pandemic. G7 Members are united in their support for open digital markets and their opposition to digital protectionism. As a group of market-based economies governed by the rule of law, they believe that digital markets should be competitive, transparent, and accessible to international trade and investment. They agree on the importance of data free flow with trust, safeguards for consumers and businesses, and digital trading systems that allow goods and services to move seamlessly across borders. G7 Trade Ministers resolve to promote digital trade worldwide and to pursue global governance that is fair and inclusive. They agreed to further develop a set of high-level principles during this Presidency that will guide the G7 approach to digital trade.

“Digital trade remains an important area for the creation of new rules at the WTO. The rules governing digital trade should be responsive to innovation and emerging technologies, so that businesses, consumers, and workers can harness their full potential. G7 Trade Ministers committed to redoubling their efforts to advance the Joint Statement Initiative on E-commerce at the World Trade Organization. They aim to achieve substantial progress by the 12th WTO Ministerial Conference.

“G7 Trade Ministers look forward to strengthening their dialogue and further advancing a shared agenda at their next meeting in May.”

The statement from the Chair was not surprising considering the composition of the G7 and the focus of the members on getting the pandemic under control, reviving economic and trade activities (“building back better), restoring relevance to the WTO by achieving positive developments at the 12th Ministerial Conference and pursuing WTO reform on a host of areas including updating rules to address distortions (e.g., industrial subsidies) not adequately addressed in current agreements, operation of special and differential treatment, transparency, and dispute settlement. Most G7 members also support the Joint Statement Initiatives on a range of topics, including digital trade, domestic services regulation, SMSEs, empowerment of women in trade and gender equality, and trade’s role in addressing the climate crisis.

While some G7 members have different views on specific issues, the opening G7 trade ministers meeting lays out a positive broad-based agenda for having trade help get the world through the pandemic, return to greater prosperity, and address longstanding challenges at the WTO both to relevance in the 21st century and to different economic systems rendering current rules only partially relevant.

Statements by several of the trade ministers who participated add some individual country focus. For example, USTR Amb. Katherine Tai participated in the meeting. A press release from USTR dated March 31 identifies the U.S. views. See USTR, Statement from USTR Spokesman Adam Hodge on Ambassador Katherine Tai’s Participation in the First G7 Trade Ministers Meeting, 03/31/2021, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/march/statement-ustr-spokesman-adam-hodge-ambassador-katherine-tais-participation-first-g7-trade-ministers

“WASHINGTON – United States Trade Representative Katherine Tai today virtually participated in the G7 Trade
Ministers Meeting hosted by the United Kingdom and chaired by Secretary of State Liz Truss. Ministers were joined in
this meeting by WTO Director General Dr. Ngozi Okonjo-Iweala. This was the first meeting of the G7 Trade Ministers.
Ambassador Tai and other G7 Ministers discussed the challenges facing the global trading system from non-market
forces and the need to work collectively to advance free and fair trade. Dr. Okonjo-Iweala and the Ministers discussed
pathways to achieving meaningful outcomes for the 12th WTO Ministerial Conference scheduled later this year.
Ministers also discussed their plans for future work on digital trade, women’s economic empowerment, and climate
change objectives. Ambassador Tai emphasized the Biden-Harris Administration’s objective to ensure that trade policy
focuses on benefitting workers, in addition to businesses and consumers. The Ministers are united in their desire to
support policies that will facilitate a rapid end to the pandemic and recognize that trade can contribute to a strong and
equitable recovery.”

Similarly, Canadian Minister of Small Business, Export Promotion and International Trade Mary Ng participated in the G7 trade ministers meeting. The following press release was issued on March 31 by the Canadian government. See Government of Canada, Minister Ng participates in first G7 trade and investment ministers’ meeting, March 31, 2021, https://www.canada.ca/en/global-affairs/news/2021/03/minister-ng-participates-in-first-g7-trade-and-investment-ministers-meeting.html

“As the Government of Canada continues to address the COVID-19 pandemic, collaborating with international partners is essential to fighting the virus and ensuring a sustainable and inclusive global economic recovery from the pandemic.

“Today, the Honourable Mary Ng, Minister of Small Business, Export Promotion and International Trade, participated in the first G7 trade and investment ministers’ meeting, which was hosted by the United Kingdom under its G7 presidency for 2021. The ministers agreed to pursue an ambitious G7 trade and investment agenda that responds to the challenges posed by the pandemic and to support an inclusive and sustainable recovery with the WTO at its core.

“Minister Ng welcomed the discussion with Ngozi Okonjo-Iweala, the new WTO director general, on the future of the WTO. The G7 ministers agreed to work together to advance concrete outcomes in advance of the 12th WTO Ministerial Conference in November.

“Pursuing trade and investment policies that support women and Indigenous and racialized communities is key to ensuring Canada’s economic recovery from COVID-19 is inclusive and meaningful. During a session on women’s economic empowerment, Minister Ng highlighted initiatives that Canada has undertaken to support women’s success in international trade. The Minister encouraged G7 members to participate in the implementation of the WTO trade and gender initiative and, as a specific example, encouraged member countries to use the SheTrades Outlook, an interactive policy tool that helps governments put in place policies to improve women’s participation in international trade.

“During the meeting, Minister Ng also emphasized the importance of digital trade and highlighted Canada’s work on a number of initiatives, such as the ongoing WTO negotiations on e-commerce.

“Minister Ng reiterated Canada’s support for the United Kingdom-led G7 work plan to enhance the capacity of the trading system to respond to public health emergencies. Ministers discussed the Ottawa Group’s Trade and Health Initiative, which seeks to strengthen the resilience of global supply chains and facilitate trade in essential medical supplies and vaccines.

“The trade ministers acknowledged the impacts of unfair trade practices on their economies and agreed to work together to address them. Recognizing the important role that trade has in tackling climate change and ensuring a sustainable environment, the ministers agreed to continue their efforts to take action on climate change through initiatives such as the WTO trade and environment sustainability initiative.”

The Canadian press release also provided a quote from Minister Ng:

“’Canada continues to work closely with our international partners to support Canadian businesses, workers and communities as we fight the pandemic and support an inclusive, sustainable economic recovery through rules-based international trade that works for everyone. We will make sure that the interests of Canadians across the country are at the forefront of our discussions as we work toward ensuring a strong, sustainable, and inclusive economic recovery.’

“- Mary Ng, Minister of Small Business, Export Promotion and International Trade”

The press reported reactions within China to the G7 trade ministers meeting with a focus on G7 concerns with addressing reforms to industrial subsidies. See, e.g., South China Morning Post, G7 pressure on China over subsidies ‘doomed to fail’ even as Biden administration gathers coalition, 1 April 2021, https://www.scmp.com/economy/china-economy/article/3128006/g7-pressure-china-over-subsidies-doomed-fail-even-biden (“Trade ministers from the Group of 7 (G7) – the United States, Germany, Britain, France, Canada, Italy and Japan – on Wednesday pledged collective action against ‘harmful industrial subsidies’ without naming China directly. China responded by saying it ‘won’t accept any accusation’ of its trade practice as it ‘has always honoured its commitments since it joined the World Trade Organization (WTO) at the end of 2001.”).

Conclusion

The G7 is a potentially important grouping, particularly to articulate a vision for the future of the multilateral trading system. While the changes in global trade over the last quarter of a century ensure more voices need to be considered than those in the G7 (or those aligned with them), there is no forward movement without them.

The WTO, if a static organization, will continue its slide into irrelevance. The organization suffers a myriad of structural problems which have reduced the effectiveness of all of its core functions. There is a lack of common purpose among the WTO Members. Its rules reflect the world of the 1980s with no significant update in the rules since then.

The pressing global challenges flowing from the pandemic, from climate change and changing technology need a World Trade Organization that is up to date, nimble and driven by an agreed vision to promote sustainable development and greater equitable participation and benefits.

The initial articulation of G7 objectives from trade ministers is a step in the right direction. Time will tell whether the G7 can internally agree on the details of a trade agenda, can translate that into support among a large group of WTO Members and lead to meaningful agreements and reform. The opposition to meaningful reform from China and others within the WTO and the consensus principle of decision making renders it highly unlikely that the WTO will prove up to the needs of the moment. But efforts of the G7 and other groups is critical if a global trading system is to survive. One can only hope for success from the G7 efforts.

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.

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.