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e-Magazine (For the Japanese version of this article)

Now is the Time for Japan-US Beef Negotiations “Cherry-pick” from the TPP? Hayato Ishii Senior Feature Writer / Editorial Writer Kyodo News [Date of Issue: 28/February/2017 No.0264-1033]

Date of Issue: 28/February/2017

Now is the Time for Japan-US Beef Negotiations
“Cherry-pick” from the TPP?

Hayato Ishii
Senior Feature Writer / Editorial Writer
Kyodo News
US President Donald Trump has signed a presidential memorandum withdrawing his country permanently from the Trans-Pacific Partnership Agreement (TPP), effectively unraveling the deal. With Abe and Trump agreeing at their recent summit to set up a new framework for economic dialogue, bilateral negotiations will now become the main vehicle for dealing with Japan-US trade issues.
Reducing beef tariffs in particular is an urgent issue for the US livestock industry.

America’s withdrawal from the TPP has surprised and shocked the other parties to the agreement, giving rise to concern over a possible swing toward protectionism, but it has long been reasonably obvious that the TPP would come unstuck. In the US, both Republicans and Democrats were already coming out against the TPP even before the presidential election campaign moved into top gear a year ago. Americans have been strongly apprehensive that the agreement would give even more power to companies and investors, benefiting a handful of global players in areas such as pharmaceuticals and finance even as workers in the manufacturing industry lost their jobs and wages fell. Trump won the election through his skillful manipulation of that fear.

Eighteen months ago, I noted pessimistically in this magazine that the TPP was already adrift (IIST e-Magazine, 30 September 2015, “Why are the TPP Negotiations Struggling?”). When agreement in principle was reached a month later, some readers suggested I should shave my head in penance. However, my assessment of the TPP was no stab in the dark. When it comes to US trade policy, I have focused more on developments in the Republican-controlled Congress than on the Obama administration’s position, for a very simple reason—under the US Constitution, Congress is where the power to conclude trade agreements lies (Article 1, Section 8, Clause 3).

Going into the details would rehash my subsequent “apology” (IIST e-Magazine, 30 October 2015, “Agreement in Principle Reached on TPP but Entry into Force Far From Certain”), but looking closely at the trajectory of the Trade Promotion Authority (TPA) deliberations in 2015 and the failure to clinch a deal at the TPP ministerial meeting on Maui, Hawaii, immediately after in July that year, while a formulaic “agreement in principle” might have been reached, it was clearly going to be a long and winding road indeed until the agreement actually entered into force.

In fact, the agreement which the 12 parties—the US and Japan included—signed in February 2016 contained many areas where unresolved issues had been temporarily shelved, ambiguous wording left the door open for subsequent complications over different interpretations, or future renegotiation had been promised in a side letter. In other words, even if Hillary Clinton had won the presidential elections, the TPP would never have gone into force without major revision.

So what will happen now to trade policy around the world? Many people are agreeing with Brandeis University Professor Peter A. Petri that even if the TPP goes belly up, priority should still be placed on pursuing other mega-FTAs as a means of forestalling the spread of protectionism and promoting trade and investment liberalization. The idea is that if agreement is reached on the Japan-EU Economic Partnership Agreement (EPA), the Transatlantic Trade and Investment Partnership (TTIP), and the Regional Comprehensive Economic Partnership (RCEP; includes Japan, China, Korea, India and Australia among the 16 countries party), it will pressure the US to return to the TPP, which will eventually enable the consolidation and expansion of these mega-FTAs.

However, I am skeptical of these other mega-FTAs. While it may well be possible to reach agreement on principle on them at government level, like the TPP, they too will take time to enter into force. In Europe in particular, with elections coming up in France and Germany, if leaders rush to sign off on agreements which are not up to scratch, they will be that much more difficult to amend, and could even end up suffering the same fate as the TPP.

Some pundits have suggested that Trump will call on Japan to conclude a bilateral comprehensive free trade agreement, but I think that likelihood too is limited. It would simply take too long to negotiate and then ratify a Japan-US FTA.

The most important thing in terms of preventing the spread of protectionism will be for the Trump administration not to institute retaliatory measures, because retaliation provokes further retaliation, and lip-service protectionism develops into actual protectionism. To that end, the first task is to clear up American apprehensions as soon as possible, even where these are politically unreasonable or economically irrational. Given President Trump’s emphasis on speed, he is likely to favor individual sector-specific negotiations tackled as short-term decisive battles, like the 1980s Market-Oriented Sector Selective (MOSS) negotiations.

In that case, Japan-US bilateral negotiations will probably focus on beef and automobiles. While President Trump’s comments are rife with misconceptions and contradictions, from the time of his election campaign, there is one phrase that he has repeated consistently and specifically in relation to Japan—that if Japan is going to impose a 38.5 percent tariff on American beef, America will levy the same tariff rate on Japanese cars. The figure 38.5 percent is firmly engraved in Trump’s brain, because there is a reason why the US side cannot afford to wait on beef.

In July 2014, back before the TPP, Japan concluded an EPA with Australia that will progressively reduce the 38.5 percent tariff which Japan generally levies on beef imports to 23.5 percent for chilled in the 15th year and 19.5 percent for frozen in the 18th year. The TPP would have set a beef tariff of 27.5 percent when the agreement entered into force, to be reduced to 9.0 percent in the 16th year thereafter. If the TPP doesn’t enter into force, a “timing device” will be in operation, whereby the tariff on US beef will hold at 38.5 percent even as the tariff on Australian beef continues to fall every year.

The longer it takes for the TPP to enter into force, the greater the disadvantage to US beef exports to Japan. As of April 1, 2017, the tariff on Australian beef was reduced another 0.6 points year-on-year to 29.9 percent, creating an 8.6 percentage-point gap on US beef. While exchange rate fluctuations may well have more impact than tariffs, US beef will still struggle with a handicap of almost 10 percentage points.

Another serious problem for the US is the dramatic improvement in the quality of Australian beef. In the past, most Australian beef was frozen meat for use as hamburger patties, setting it on a lower rung to US chilled beef, but now Japanese companies have set up operations in Australia and are exporting high-quality beef. The perception of Australian beef as cheap frozen hamburger is a complete myth.

The American livestock and meat industry has not taken this situation lying down. The industry has traditionally been strongly Republican, and in the 2016 presidential elections too, Trump took every one of those states where ranching is the primary industry.

In beef negotiations with the US, Japan should stick to a “unilateral concession” line, even if it is slightly unreasonable. In other words, rather than giving into pressure from the Trump administration and granting the US the same tariff rate as Australia, Japan should unilaterally frontload the beef tariff cut written into the TPP and institute for all signatories to the TPP, Mexico and Canada included, the same 27.5 rate that would have applied had the TPP entered into force.

Australia and the US are by far the biggest exporters of beef to Japan, with Canada and Mexico exporting only small volumes. Australia might lose its tariff rate advantage over the US, but it knew this would happen when the TPP went into force. Measures are also already in place to deal with the impact on Japan’s domestic livestock industry. If beef tariffs are going to be reduced at some stage anyway, the quicker and bolder the move, the better for the Abe administration. If we mark it down as the cost of forestalling an American swing toward protectionism, the “cherry-picking” of beef from the TPP may well be achieved surprisingly quickly.

(This article was written on 13 February 2017. The views expressed are those of the author and have no relation whatsoever to the institution with which the author is affiliated.)

(original article : Japanese)
(For the Japanese version of this article)


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