October 8, 2019 10:40AM

The New U.S.-Japan Trade Deal

The United States and Japan signed a trade agreement yesterday. The U.S. Trade Representative's Office has provided the legal texts here. Based on the various fact sheets released along with those texts, it looks like the agreement contains a modest amount of tariff liberalization. In this post, I'll look briefly at what's in the deal, focusing on four questions: (1) How much liberalization is in there? (2) Is this deal legal under World Trade Organization rules? (3) What is the impact of doing a U.S. trade deal as an executive agreement without Congressional approval? And (4) without dispute settlement provisions, how will the agreement be enforced?

First, with regard to how much liberalization is in there, it is much less than a comprehensive free trade agreement, as services, procurement, etc. are not covered by this deal. In terms of the liberalization on trade in goods, any precise quantification of the benefits will take some time, but from what I can gather so far from the fact sheets, the liberalization on trade in goods is less than what would have existed in the Trans-Pacific Partnership. Japan is lowering tariffs on some agricultural sectors (as it would have under the TPP, but slightly less in this deal), and the United States will lower tariffs on a few industrial products, as well as some agricultural products.

With regard to other tariffs, during the negotiations on this agreement, there was talk of a promise by the Trump administration not to use Section 232 to impose additional tariffs on imports of Japanese autos/auto parts, something the administration is currently considering in relation to several countries. But I don't see any such promise in the texts released yesterday. The practical answer might be that if the Trump administration imposes these auto/auto parts tariffs, Japan will just withdraw from the agreement, pursuant to Article 10 ("Either Party may terminate this Agreement by providing written notice of termination to the other Party. The termination shall take effect four months after the date on which a Party has provided that written notice to the other Party, or on such other date as the Parties may decide.")

Lastly on liberalization, there is a separate digital trade agreement, which at first glance roughly mirrors the digital chapters of the Trans Pacific Partnership and the renegotiated NAFTA (the USMCA) currently awaiting approval by Congress. My sense is that nobody expects this part to have much impact on current Japanese or U.S. policy in this area, as these countries are in general agreement on the issues.

Second, there is the question of how an agreement with such limited coverage could be consistent with WTO rules, which allow such bilateral agreements only if they cover "substantially all trade." Would this deal qualify as an "interim agreement" under GATT Article XXIV? Article XXIV:5(c) says: "any interim agreement referred to in sub-paragraphs (a) and (b) shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time." So far, I don't see "a plan and schedule" for a comprehensive FTA, but perhaps one is coming (a fact sheet says only this: "The United States looks forward to further negotiations with Japan for a comprehensive agreement that addresses remaining tariff and non-tariff barriers and achieves fairer, more balanced trade").

A related issue is, what will other governments think of all this? For all of the products at issue, there are likely to be producers in other countries who will be adversely affected by the U.S.-Japan tariff reductions. Will they be aggressive about enforcing WTO rules against both Japan and the United States? Or will they just be happy the Trump administration is liberalizing and too afraid to complain?

Third, what exactly is the significance of not having Congress sign off on this? One clear implication is that the president can withdraw from the agreement without getting the permission of Congress, which seems like a power President Trump would want, given his frequent threats to withdraw from this or that trade agreement. I can see why the Trump administration would prefer this type of short-term, political agreement.

This arrangement is also interesting in terms of the digital trade agreement. One could imagine that, for example, a future President Warren would want to regulate the tech sector in a way that infringes on these digital trade rules. Having this agreement as an executive agreement would be less constraining (not that I think the Trump administration had this in mind; I'm just saying that would be the impact).

And fourth, what we have here seems to be a bilateral agreement to reduce tariffs, but without all the usual governance chapters, such as a chapter on dispute settlement. In terms of disputes, it appears that there is only this:

Article 6

No later than 30 days after a request by either Party, the Parties shall enter into consultations regarding any matter that might affect the operation or interpretation of this Agreement, with a view to arriving at a mutually satisfactory resolution of the matter within 60 days.

Without a full set of litigation, implementation, and compliance provisions, will any of these new legal obligations be enforceable? Perhaps the idea is that these tariff commitments are so narrow and clear that there are not likely to be any violations, so a full dispute settlement chapter is not necessary. Or perhaps the idea is to continue the push away from international dispute settlement, and rely instead on negotiations and/or unilateral tariffs as the enforcement mechanism.

Clearly, there are still some open questions about this deal. As of this moment, it looks like the deal will be implemented, but whether it will expand into a comprehensive trade agreement, and even how long it will last, remains unclear.