• U.S. and Japan agree to limited free trade agreement

    07 October 2019

    On September 25, the U.S. and Japan agreed to a limited free trade agreement that will cut tariffs on some agricultural and industrial products as well as add a new separate agreement on digital trade.

    The U.S. has pledged to reduce or eliminate tariffs on 42 tariff lines for USD 40 million (EUR 36.4 million) of agricultural imports as well as some industrial goods from Japan including certain machine tools, steam turbines, fasteners, and bicycles. In return, Japan will reduce or eliminate tariffs on over 90 percent of U.S. food and agricultural products (such as ethanol, beef and pork, wheat and barley, wine, and other agricultural goods) that will either be duty-free or receive preferential tariff access.

    The agreement also sets new provisions addressing priority areas in digital trade between both countries. These areas include measures that ensure firms have the flexibility to use encryption technology in their products, ensuring barrier-free cross-border data transfers in all sectors, and prohibiting data localization requirements and customs duties on electronically transmitted digital products.

    NO AUTO TARIFFS FOR NOW

    The most notable absence from the text of the agreement is definitive written immunity on whether Japanese auto imports will be exempt from U.S. tariffs. U.S. President Donald Trump has previously threatened to levy tariffs along national security grounds under Section 232 primarily targeting Japanese and E.U. automakers which could come into effect as early as November 13, 2019.

    For now, both countries have settled on a statement with vague commitments to “refrain from taking measures against the spirit” of the deal so long that it is “faithfully” implemented. Japanese Prime Minister Shinzo Abe has also reportedly received verbal assurances from President Trump that the U.S. will not impose previously threatened Section 232 national security tariffs.

    Although earlier media reports indicated that Japan was initially pushing for a ‘sunset clause’ which would cancel any agreement if tariffs were imposed on Japanese auto imports, the U.S. has explicitly refused to include auto tariff exemptions to arguably maintain leverage over Japan in any further trade deals. Japanese government officials confirmed that any further talks on a more comprehensive trade deal would seek to eliminate an existing 2.5 percent tariff from the U.S. on Japanese cars and would not result in the imposition of U.S. import quotas on Japanese autos.

    OUTLOOK

    The limited trade agreement is expected to go into effect on or around January 1, 2020 provided that the National Diet of Japanese approves the deal later this year. The Trump administration has also deliberately limited the scope of the agreement in order to avoid requiring approval from the U.S. Congress that has seen the U.S.-Mexico-Canada Agreement (USMCA) held up by U.S. House Democrats.

    The looming uncertainty on whether the Trump administration will impose auto tariffs targeting Japanese and E.U. automakers under Section 232 will likely remain a hot-button issue leading up to mid-November. Should the U.S. decide to enact tariffs on Japanese auto and auto parts – which make up 38 percent of Japanese merchandise exports to the U.S. – U.S. and foreign-based suppliers as well as multinational Original Equipment Manufacturers (OEMs) are expected to face considerable financial pressure.

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