Plan to bypass Congress

Trump’s plan to bypass Congress on trade with Japan

The administration’s emerging strategy indicates negotiators are putting political gains on agriculture ahead of a comprehensive deal.

By BRUCE HIRSH

The Japanese space agency recently landed a spacecraft on a miniscule asteroid traveling nearly 14,000 miles per hour relative to Earth. Many observers have concluded that it will take a similar feat to land the U.S.-Japan trade agreement negotiations expected to kick off in the next several weeks. Congress and the private sector have been pushing for a traditional, comprehensive agreement covering all trade topics. Skeptics note that such a comprehensive agreement would involve tough issues like currency manipulation that could make for a drawn-out and difficult landing, and any such deal would need congressional approval to take effect.

But what if the Trump administration has in mind a staged approach that would avoid the need for congressional approval in the first stage? There are growing signs that the administration might be considering this approach as a way to address its most pressing political need—assuaging President Donald Trump’s agricultural base, which has been buffeted by retaliation for Trump’s metals and China tariffs and by lost opportunities due to his withdrawal from the Trans Pacific Partnership.

While it may prove tempting for the administration to harvest short-term political gains from a narrow trade deal with Japan centered on agriculture, I believe there could be significant costs to U.S. interests and the global trading system long term. That’s because a narrow, first-stage agreement is likely to rely on relief from the threat of unilateral U.S. tariffs as the principal driver of a deal, which could spur protectionist moves by trading partners and further destabilize a global trading system already tottering under the effects of Trump’s trade policies.

The administration has been signaling since last July that it might take this approach, when it first broached the idea of a two-stage approach to negotiating a trade agreement in the context of talks with the European Union. The U.S. announcement last September of negotiations with Japan likewise referred to seeking an agreement that can produce “early achievements” on goods and other key areas, to be followed by talks on additional matters. Both an initial notification to Congress on the Japan talks and a subsequent notification of objectives for the talks also referred to the possibility of a two-stage approach.

Lately there have been numerous rumors in the trade community that U.S. Trade Representative Robert Lighthizer intends to follow through on a two-stage approach. He seemed to confirm this at a Senate Finance Committee hearing last month, when he explained, "It’ll take a while to get an entire [free trade agreement], but my own view has been that we have to take care of the agricultural part of it and some others so it’s balanced at an earlier stage.” Lighthizer emphasized that an agriculture deal with Japan is urgent, given the benefits our competitors are receiving through the successor agreement to the TPP and through the EU-Japan Economic Partnership Agreement.

But skeptical observers in the United States—which is to say, virtually all of them—have been dismissive of such a two-stage approach. They have flagged a number of concerns, including the challenge of persuading some stakeholders to defer their asks until a second stage, and the sheer novelty of departing from the decades-old U.S. model of pursuing comprehensive free trade agreements with cutting-edge commitments. That model has been rooted both in a desire to provide global leadership in establishing high-standard rules and in the political necessity for broad domestic support when seeking congressional approval. Further, Congress is unlikely to want to undertake the challenging approval process not just once but twice.

Under these circumstances, how can the administration hope to succeed in a two-stage approach? A clue might lie in how the administration recently negotiated modifications to the U.S.-Korea Free Trade Agreement. In the Korean deal, the U.S. specifically avoided topics that would involve legislative changes requiring approval from Capitol Hill, instead including several commitments only affecting the Korean side.

THERE ARE SEVERAL topics the administration could address without needing congressional approval for an agriculture-focused first stage. For instance, Japanese market access concessions that lower tariffs on U.S. agricultural products would not require formal Hill approval. Nor would certain disciplines the U.S. recently included in USMCA that might be of mutual interest to Japan, such as those preventing barriers to digital trade and those requiring commercial behavior of state-owned enterprises. Also not requiring congressional approval would be Japanese concessions on services and pricing for medical equipment and pharmaceuticals, which are priorities for other key U.S. companies.

Would Japan agree to such a deal? Japan also is interested in a limited-scope agreement, although it had hoped to focus exclusively on trade in goods, without the services-related and other provisions of a typical agreement. Japan’s trade strategy remains TPP-focused, including the possibility of the United States someday rejoining the pact, so it wants to avoid a comprehensive agreement with the U.S. that suggests it has given up on that approach. And in the September 2018 announcement of the negotiations, Japan and the U.S. essentially agreed that the deal would provide the U.S. with agricultural market access comparable to access under TPP, and the Japanese government already weathered the domestic political challenge of agreeing to such access in the context of the TPP negotiations.

Still, the ledger in such a deal might appear too heavily weighted in favor of the U.S. to be palatable to Japan. That could change if the deal addresses Japan’s most pressing need— exclusion of Japanese goods from current and potential U.S. duties on steel, aluminum, automotive products, and titanium sponge. Duties are currently in place on Japanese steel and aluminum products as a result of Trump administration investigations under a little-used trade provision intended to ensure domestic production of items critical to U.S. national security. Duties could be imposed as early as mid-May on automotive goods under the same statute. In addition, the administration recently initiated a similar investigation on titanium sponge imports, most of which comes from Japan.

Japan would of course like to avoid these duties, but it also has resisted a solution that would replace duties with quotas, which has been the Trump administration’s preferred alternative. Still, with more than $40 billion of passenger vehicle exports at risk, Japan, like others before them, might agree to some limits.

Congress would be conflicted in the face of such a deal. Many members are very uncomfortable with the Trump administration’s unconventional and aggressive use of national security tariffs as leverage in trade negotiations. However, many of the same members have been just as adamant about the need for urgent action to open Japan’s agricultural markets. A “down payment” agreement with Japan that does so, and that purports to be only the first stage toward a comprehensive agreement, could prove tempting.

But this highlights a broader danger for U.S. interests. In the name of short-term leverage in current negotiations large and small, the U.S. is validating a strategy of unilaterally erecting trade barriers without regard to global trade rules and multilateral enforcement processes. This provides a green light to other trade partners to raise trade barriers not only for leverage, but for simple protection, to the detriment of U.S. exporters and the predictability of the trading system more generally.

The indiscriminate nature of the approach exacerbates this concern. It may be one thing to employ unilateral tariffs to address Chinese trade practices not squarely addressed by existing trade rules. While many have been uncomfortable with the tactic, there is broad recognition both in the U.S. and abroad that something needs to be done about the China problem. It is another thing entirely for the threat and application of unilateral tariffs to be used as a first-choice tactic to gain leverage in trade negotiations that are intended to produce win-win outcomes. The sustainability of such gains is highly questionable. Gains obtained through this kind of duress have a way of producing short-term headlines but resistance on the ground that undercuts long-term benefits. And this treatment strains alliances in the economic sphere and beyond.

The administration may very well pursue a limited-scope agreement with Japan backed by the offer of withdrawing unilateral tariffs. However tempting the short-term gains are, the approach could cost U.S. exporters and their workers in the long term, when they face similar barriers and a unstable global trading environment unconstrained by rules.