World Economy

Faced with Trump's tariffs, Tokyo is wary as it enters trade talks with US

Key Points
  • Japanese Prime Minister Shinzo Abe and U.S. President Donald Trump agreed to start trade negotiations on Wednesday.
  • The move is expected to shield Tokyo from Trump's proposed tariffs on Japanese vehicle imports that are seen as likely to damage the Japanese economy.
  • But entering talks was considered a major concession for Abe, who is expected to keep his guard up during bilateral discussions, experts said.
President Donald Trump welcomes Japanese Prime Minister Shinzo Abe at the White House in Washington, June 7, 2018.
Mandel Ngan | AFP | Getty Images

Japan has long been resistant to a free trade agreement with the United States but faced with the threat of harsh tariffs, the Asian giant appears to have changed its mind.

Japanese Prime Minister Shinzo Abe and President Donald Trump agreed to start trade negotiations on Wednesday in an move that will likely shield Tokyo from Trump's proposed 25 percent duty on imports of Japanese vehicles and automotive parts. But entering talks was considered a major concession for Abe, who will now have to carefully manage U.S. demands to open up his country's sensitive agriculture sector.

"This was something that, for various reasons over the years, Japan was unwilling to do and now they are willing to do," Trump said at a meeting with Abe in New York.

Before Trump's threat of auto tariffs, Tokyo had previously made clear that it preferred the multilateral framework of the Trans-Pacific Partnership, which Trump exited in 2017, over a two-way arrangement. As the countries now prepare to discuss goods, services and investment, Abe is widely expected to keep his guard up to prevent criticism at home.

Abe to stay cautious

Given Japan's precarious position — appease Trump or get hit with duties that target a large chunk of Japanese exports headed stateside — Abe's government "will still be cautious when it comes to bilateral talks with the United States," analysts at research firm Stratfor said in a Wednesday note.

In a joint statement, Washington and Tokyo said they were aiming for "a United States-Japan Trade Agreement on goods, as well as on other key areas including services, that can produce early achievements."

The road ahead for US-Japan trade talks

The fact that the statement didn't include the phrase "free trade agreement" is significant, according to Glen Fukushima, senior fellow at the Center for American Progress, a nonpartisan policy institute. "The Japanese side will hesitate using the word FTA because it will make it appear as if they're switching from a multilateral approach to a bilateral approach," he told CNBC.

Other experts offered a more optimistic take on Wednesday's news, arguing that talks were not so much a concession as a change of heart on Tokyo's part.

Japan now believes it can lead on multilateral pacts like the now-11-nation Trans-Pacific Partnership while simultaneously striking a deal with the world's largest economy, said Robert Holleyman, who served as deputy U.S. Trade Representative from 2014 to 2017.

"It's good to know that we are moving at least past the notion that it's either one or the another," he continued. In fact, Holleyman said, a U.S.-Japan deal could lead to Washington rejoining the Trans-Pacific trade deal.

US to push on agriculture

Trump's team — led by Trade Representative Robert Lighthizer — is expected to push Tokyo hard, especially on agriculture, where U.S. producers have been disadvantaged by high Japanese import duties.

For example, American beef entering Japan currently faces a 38.5 percent tariff rate, but Australia, which has a bilateral trade deal with Japan, has a 27.2 percent rate on its beef. And with Canberra's rate set to decrease to 19 percent, the need for Washington to ink its own deal with Tokyo is even more urgent, said Fukushima.

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"If the U.S. had stayed in TPP, the tariffs for U.S. and Australian beef would have gone down to 9 percent, but because we withdrew, we're now suffering from this gap," he said.

Abe, however, still has some bargaining power, according to experts.

"On agriculture, where talks will likely focus on non-tariff barriers, Japan has already managed to gain greater leeway because it weakened the agricultural lobby's influence before signing the TPP," the Statfor note said.

Japan can also leverage its massive manufacturing presence in the U.S., it continued, adding that "wherever negotiations lead, Abe's recent success in winning a third term as prime minister will give him freer reign in talks with his country's longtime ally.