Trump Versus Abe: The Trade End Game

Amid all the bluster and distraction, there has always been one claim at the heart of President Donald Trump's trade policy—he could bring home deals that were better for the United States than those negotiated by his predecessors. He would use America's strength, in one on one negotiations with the country's largest trading partners, to extract concessions that other presidents had been too feckless to demand.

Now, more than two years into a presidency in which Congress and U.S. companies have shown extraordinary patience in allowing Trump to try to make good on his promise, it is clear that Trump has been unable to change the laws of trade negotiating physics. One-sided negotiations of the sort he prefers are likely to fail simply because they are one-sided.

Nowhere has this been clearer than in the U.S. trade relationship with Japan. No leader has done more than Prime Minister Shinzo Abe to try to placate Donald Trump and allow him to claim victories on trade. When the United States slapped tariffs on steel and aluminum imports in March, 2018, Japan was the one of the few countries—and the largest U.S. trading partner—not to retaliate. Japan has gone furthest in following the U.S. lead in banning Chinese telecoms giant Huawei from bidding on future contracts, even as Germany, Britain, Canada and others have equivocated. And Japan agreed to Trump's demand to open bilateral trade negotiations with the United States despite its strong preference for regional or global trade deals.

But U.S. companies and farmers have less than nothing to show for these Japanese gestures. Instead, because of Trump's decision last year to pull out of the Trans-Pacific Partnership, or TPP, trade agreement on the claim that he could get better bilateral deals, U.S. farmers are quickly losing market share in Japan. With the U.S. outside of TPP, and the Japan-European Union Economic Partnership Agreement that entered into force February 1, other countries are now capturing market share from the United States. France, Italy, Australia and Chile are taking wine sales away from California producers that still face a 15% tariff in Japan. Japan's pork imports from the EU, Canada and Mexico are surging while U.S. pork sales are plummeting. U.S. beef exports are losing ground to Canada, New Zealand and Australia. Other U.S. losers include wheat, dairy and variety of fruits and vegetables.

The Abe-Trump summit in Washington last weekend showed how Trump has driven U.S. trade policy into a dead end. Having left the TPP, the United States now wants a quick bilateral deal in which Japan will agree to cut tariffs and put U.S. farmers back on at least an equal footing with Europe and the TPP countries. But the Trump administration has refused to offer any trade openings in return. U.S. ambassador to Tokyo William Hagerty told the Financial Timesthat the goal of the negotiations is to "achieve a more reciprocal relationship with Japan," which is Trump administration code for a one-way agreement. That would put Abe in the politically impossible position of trying to sell the Japanese public on a one-sided deal, something he likely to refuse in advance of Upper House elections in July and probably thereafter as well.

Abe was able to offer historic agricultural market opening to the U.S. in the TPP because it was a conventional give-and-take negotiation, in which the U.S. had balanced Japan's concessions by opening its market to more Japanese auto exports. In the EU deal, similarly, tariffs on Japanese cars will fall from 10% to zero in a decade. Trump's theory was that if the U.S. just pushed harder, it could win concessions without having to make its own. So far, even a pliant partner like Japan has been unwilling to go along.

The overall Trump record on trade looks no better. The administration was able in the new U.S.-Mexico-Canada Agreement (USMCA) to force both Mexico and Canada into some concessions they would have preferred not to make. But that deal is now stalled in the Democratic Congress, and Mexico and Canada are unwilling to ratify unless the U.S. lifts its tariffs on steel and aluminum. The U.S. and EU are starting new bilateral negotiations, but Brussels has refused to include agriculture unless the U.S. moves on other issues like its "Buy America" government procurement restrictions.

The only trade "victory" the Trump approach has notched to date is with South Korea. Under U.S. pressure, Korea agreed last year to a quota on steel exports, offered modest new access to U.S. auto exports, and allowed the U.S. to keep its 25% tariff on light trucks for another two decades beyond the deal previously negotiated with the Obama administration.

Trump supporters will argue that the game is not over yet. The biggest trade negotiation, with China, is still under way and could perhaps produce significant results. Trump could also choose to increase pressure on Japan and the EU; he must decide by mid-May whether to slap new tariffs on auto imports following an investigation under Section 232, the same law used in the steel and aluminum case. But Trump has stalled for the same reason he blinked in March and did not put additional tariffs on Chinese imports. The U.S. financial markets hate trade wars, and the president is at the beginning of a re-election campaign in which the strong U.S. economy is the best card he has to play.

Trump is now scheduled to meet twice with Abe over the next two months—at a state visit in Tokyo in May and again in June for the G-20 summit in Osaka. Perhaps Abe will back down in yet another attempt to mollify the president on trade. The more likely outcome is that the laws of trade physics will win out. Trade deals have always involved some balance of concessions because that is the political necessity for doing any deals at all.

"No deal is better than a bad deal" is the phrase that has tripped off the tongue of every U.S. trade negotiator for decades. It turns out that other countries can speak the same language.