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US-Japan trade deal leaves exporters itching for more

With a trade deal between the U.S. and Japan finally signed, not everyone is as thrilled as the Trump administration.

While the agreement eliminates or reduces tariffs on roughly $7.2 billion of U.S. agricultural exports and smooths the path of digital trade between the two nations, many industries feel left out and some analysts are skeptical of a comprehensive deal in the near future.

The so-called mini-deal was signed by President Donald Trump at the White House on Oct. 7. It will see U.S. farm product shipments to Japan, including beef, pork, cheese, poultry, wheat, wine and ethanol, will be either duty-free or receive preferential tariff treatment, said the White House. In return, the U.S. has promised to lower tariffs on certain industrial goods, including machinery, from Japan.

Auto sector uncertainty

Most notably, the deal did not include the auto sector, which accounts for 78.5% of the deficit, according to Panjiva, a division of S&P Global Inc. that focuses on supply chains. The Trump administration has been vocal about its wishes to see more U.S. cars shipped to Japan, while Tokyo has been adamant about permanent relief from the White House's potential up to 25% tariffs on global auto imports, leaving auto producers from both sides uneasy about future developments.

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The lack of assurance that Japan will be exempt from any potential U.S. auto tariffs further subjects global automakers — including those in Japan — to prolonged uncertainty, fostering an even more unpredictable climate that has now existed for several years under the Trump administration, said Charlie Chesbrough, senior economist at Cox Automotive.

Above all else on trade policy, including in any future agreement with Japan, automakers want certainty to be able to make long-term production and supply chain decisions, Chesbrough said in an interview. Tariffs on global auto imports would be "devastating" to Japanese luxury brands like Lexus, Subaru and Infiniti, he said.

A decision on any potential tariffs on global imports of cars by the U.S. is due by mid-November and an affirmative decision would likely complicate future matters.

"The automotive dealers in U.S. markets selling Japanese cars wanted this figured out a long time ago and would be happy for any kind of agreement that can settle this," Chesbrough said.

U.S. automakers have long faced export issues in a market dominated by domestic and European brands and a lack of demand for American cars.

Ford Motor Co., for instance, pulled its production operations from Japan in 2016, even as the Trans-Pacific Partnership was slated to go into effect, citing a lack of demand for imported cars and no clear path to profitability, BBC reported at the time. But even if a deal does not boost U.S. car shipments to Japan, previous threats by Japan to retaliate against any tariffs could further erode prospects of a comprehensive deal.

Even some sections of the U.S. agriculture are not happy with the deal as it stands. For instance, it does not go as far as the U.S. Dairy Export Council, a trade group, would have liked for a U.S. industry that exported $270 million worth of products to Japan in 2018.

'Full access'

"While this is clearly an important step forward for several of our exported products and a sizable improvement upon today's status quo situation with Japan, the deal does not deliver the full range of access to the Japanese dairy market that we have been seeking," Shawna Morris, vice president of trade policy for the U.S. Dairy Export Council, said in an interview.

For dairy, the signing was welcome. The industry has been vocal about the need for a deal with Japan, especially as other dairy-producing areas like New Zealand, which signed a trade deal with Japan earlier this year, have swooped in to fill the Japanese demand for dairy products.

Still, it does not provide quite the benefits that the Trans-Pacific Partnership, the 12-country trade deal that Trump pulled the U.S. out of in his first days in office, would have, a sentiment echoed by other U.S. interests.

"While the current deal is welcome news for American farmers and ranchers and the digital economy, we still need a comprehensive, high-standard trade agreement with Japan," Aiko Lane, executive director of the U.S. Chamber of Commerce's U.S.-Japan Business Council, said in an interview.

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The U.S.-Japan mini-deal is in some ways similar to the "Phase One" of the detente in the U.S.-China trade spat that was announced Oct. 11.

According to Panjiva, the deal could at the minimum help to address the growing U.S. goods trade deficit with Japan, which stood at $69.9 billion in the year ended July 31, according to the firm.

But the mini-deal may have a "miniature" effect for Japan's exports due to its limited scope on primarily agricultural goods and a small range of Japanese capital goods, said Chris Rogers, senior researcher at Panjiva.

Overall, trade between the nations has soured in recent months. According to Panjiva, U.S. exports to Japan fell at 11.5% in September, while U.S. imports from Japan fell by 8.0% in September after a 4.4% decline in August.

Intellectual property, regulations

The group is pushing for something more in line with the United States-Mexico-Canada Agreement, or USMCA, or the Trans Pacific Partnership, which include provisions for intellectual property protection, promote regulatory cooperation and safeguard investments.

"We don't have anything like this with Japan yet," Lane said.

The U.S. Trade Representative's Office said in a statement that the "early outcomes" will be followed up with further negotiations to address any remaining areas of interest and an eventual comprehensive trade deal.

However, the agency is entrenched in resolving a trade spat with China with far-reaching implications as well as trying to push through ratification of the pending USMCA and lingering trade tensions with the European Union.

'Pleasantly surprised'

"I would be pleasantly surprised if the mini-deal turned into something larger in 2020," Gary Hufbauer, nonresident senior fellow for the Peterson Institute for International Economics, said in an interview. "A larger deal, if it had significance, would require Congressional approval. And look how USMCA has been bogged down. Hard to imagine the Dems approving a Trump-signature deal in an election year."

Likewise, Simon Lester, the associate director of the Cato Institute's Stiefel Center for Trade Policy Studies, is not hedging his bets on a deal being completed before the 2020 election. The potential for a comprehensive deal is certainly there, but a lack of announcements by the U.S. or Japan is quite telling, he said.

"Maybe they start negotiating on some of these issues, but a final deal seems like it is a long way off," Lester said in an interview.

The Japanese government on Oct. 15 signed off on a bill that would ratify the current deal, according to the Japan Times, with a planned implementation date of Jan. 1, 2020. The deal is not subject to U.S. Congressional approval and can be implemented by the executive branch.