The United States and Japan recently agreed to the outline of a so-called “mini” trade agreement. On first blush, there are several positives about the deal and a few problems. A more thorough analysis will be necessary once more details and the actual text emerge.
On the positive side of the ledger, the deal with Japan is the first real trade liberalization from the Trump administration. As R Street has documented, American farmers and ranchers, facing narrowing market access due to retaliatory tariffs, are bearing the brunt of the president’s trade wars. The deal with Japan will begin to liberalize agricultural trade between the two countries. Once fully implemented, American farmers and ranchers will have the same access to Japanese agricultural markets as the remaining members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This is a welcome relief for a struggling sector of the economy.
Another positive development is on the issue of digital trade. The deal will prohibit tariffs on digitally transmitted products “such as videos, music, e-books, software and games.” Likewise, the deal prohibits discriminatory “treatment of digital products, including coverage of tax measures.” It ensures free data flows between the two countries and prohibits data localization requirements, a favorite protectionist tool for the 21st century. In other words, the digital trade provisions mirror the high-quality digital trade chapter of the United States-Mexico-Canada Agreement (USMCA). While flawed, the USMCA is still workable, although it remains to be seen whether Congress will ratify the agreement.
Perhaps more beneficial is the precedent this agreement sets on digital trade rules going forward. A group of countries at the World Trade Organization (WTO) are currently negotiating rules covering the future of digital trade and e-commerce. The views of China and India, for instance, are wildly divergent from those of the United States, which has staked out a liberalized vision for the future of digital trade. The more countries the United States can bring on board with its position, the better.
There are drawbacks to the agreement. First and foremost, it would have been unnecessary had the United States simply remained a party to the Trans-Pacific Partnership (TPP). TPP encompassed more markets and provided rules for virtually every sector of the economy. As a result of the Trump administration’s ill-advised decision to abandon the TPP, American exporters have lost ground in vital Asian markets, while American consumers are paying more than necessary for goods and services imported from TPP countries. Likewise, if the strategic goal of U.S. economic policy in the Asia-Pacific region is aimed at raising China’s commercial standards, as it should be, walking away from the TPP was a catastrophic blunder. The United States would have considerably more leverage to influence Beijing’s behavior if it were still a member of the TPP trading bloc.
The mini deal may also run afoul of basic WTO rules. As the Cato Institute’s Simon Lester notes, agreements like the deal between the United States and Japan offer preferential treatment for goods traded between the two countries, which violates the Most Favored Nation (MFN) principle found in GATT Article I. There is an exception to MFN allowed by GATT Article XXIV, which permits countries to offer preferential treatment to one another if the agreement covers “substantially all trade” between them. By agreeing to eliminate tariffs and liberalize trade for only agricultural products, a limited number of industrial goods and e-commerce, the United States and Japan are likely falling short of the “substantially all” requirements established under GATT Article XXIV. It remains to be seen whether other WTO members will challenge this preferential arrangement between the United States and Japan as inconsistent with MFN, but they would be on solid footing if they did.
Overall, the U.S.-Japan mini deal is a step in the right direction, particularly with respect to digital trade, but it is a stark reminder of missed opportunities for U.S. trade leadership and another blemish on the United States’ commitment to multilateralism through the WTO.