Japan Institute for National Fundamentals

　
After prolonged difficulties, the Japan-U.S. tariff negotiations suddenly took a dramatic turn and reached an agreement. U.S. President Donald Trump touted the agreement as “the largest trade deal in history,” promoting the achievement to domestic audiences.

Contents pass the mark

Content-wise, it can be considered a major achievement for Japan as well.

The reciprocal tariff rate for Japan was cut to 15% from the earlier proposed level of 25% that had been set to take effect on August 1. This is the lowest level among countries running a trade surplus with the United States.

The automotive tariff, which was the most important for Japan, was also reduced to 15% from the 27.5% level that took effect in April. Although the U.S. side had initially excluded automobiles from the Japan-U.S. tariff talks, the Japanese side persistently pushed for cutting the automotive tariff and achieved the cut. The deal resolved the Japanese auto industry’s uncertainties about the tariff, paving the way for the industry to remain competitive. In addition, it is commendable for Japan to have avoided accepting a low-tariff import quota that could lead to managed trade.

U.S. unilateral announcement over $550 billion investment

The decisive factor behind the deal was the establishment of a $550 billion investment framework for the U.S. In nine areas important for economic security, Japan’s government-affiliated financial institutions could provide up to $550 billion in actual investment, loans, and loan guarantees. The problem is what the U.S. government announced.

“Japan will invest $550 billion directed by the United States,” said the White House fact sheet. However, the investment is based on Japanese companies’ business decisions instead of any U.S. directions.

Furthermore, the fact sheet said, “The United States will retain 90% of the profits from this investment.” Economic Revitalization Minister Ryosei Akazawa, who was the chief Japanese negotiator, said that even if the profit distribution ratio of Japan and the U.S. were set at 1:9 for the Japan Bank for International Cooperation’s investment portion that would account for only 1-2% of the $550 billion amount, Japan’s loss would be tens of billions of yen at most, far less than a loss of 10 trillion yen that was avoided through the tariff cut. However, this explanation is not only quite different from the U.S. claim, but also problematic regarding the management of the JBIC, which is funded by the government’s fiscal investment and loan program. This will be inevitably questioned at the National Diet.

In any case, it is a serious problem that the U.S. government made a unilateral announcement that raises such serious doubts. The government announcement is characteristically different from domestic-oriented appeals such as Trump’s tweets on social media or remarks made by cabinet secretaries to the press.

Hard lessons from a sloppy finish

In diplomatic negotiations like these, it is only natural to produce a joint document immediately following an agreement. The negotiators on the ground who failed to fulfill this responsibility should be held strictly accountable.

First of all, the Japanese government, like the U.S. government, should release the contents of the agreement in written form. Otherwise, it may be seen as acquiescing to the U.S. version. So far, the Japanese government has only published a brief summary, which cannot dispel the doubts caused by the U.S. announcement.

Japanese Prime Minister Shigeru Ishiba has expressed his intention to produce an agreed document through his meeting with Trump. However, given Trump’s temperament, the risk of him changing his mind is high, making such a move inadvisable. The Trump administration has been disputing with Britain and Vietnam on their earlier announced tariff deals. Precisely because of these tendencies, negotiators should have adopted a far more cautious and tight approach. The contents of the agreement are commendable — but if the final steps are sloppy, the achievement itself risks being undermined.

Masahiko Hosokawa is a professor at Meisei University and a former director-general of the Trade Control Department at Japan’s Ministry of Economy, Trade and Industry. He is also a Planning Committee member at the Japan Institute for National Fundamentals.