Japan's Entry Into Free Trade Talks Presents Challenges for the Automotive Sector

Japanese Prime Minister Shinzo Abe’s announcement that Japan will join talks on the Trans-Pacific Pacific Partnership (“TPP”) presents potential challenges for the U.S. automotive sector. Together with Canada and Mexico’s entry in October 2012, the decision could transform the TPP into a major trade pact spanning some of the largest economies on the Pacific Rim. The outcomes for U.S. companies are still uncertain, however. With Japanese lawmakers pushing to preserve protections for certain domestic producers, U.S. automotive exporters may see only modest changes in terms of market access and a more level playing field.

The TPP currently represents one of the most significant elements in the U.S. trade promotion agenda. Parties to the negotiations currently include Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. Together these economies represent 8.6 percent of world trade and nearly 40 percent of global GDP. With Colombia, Costa Rica, Laos, the Philippines, Taiwan, and Thailand also expressing an interest, the TPP could eventually evolve into a Free Trade Agreement of the Asia-Pacific (“FTAAP”), further opening markets for U.S. exporters.

The TPP has a strategic dimension as well, one that reflects the Obama Administration’s so-called “pivot” from protracted conflicts in the Middle East in favor of greater political and economic engagement in the Asia-Pacific region. With China expanding its own economic influence in Africa and Latin America, and with the World Trade Organization’s Doha Round of trade negotiations now moribund, the TPP marks a broader effort to re-invigorate existing U.S. partnerships and re-energize the global trade agenda.

Prime Minister Abe’s agenda reveals similar motivations. Speaking on national television last Friday, he described TPP membership as Japan’s “last chance” to grow its inward-looking economy and “remain at the center of the Asian-Pacific century.” A recent policy paper from the ruling Liberal Democratic Party (“LDP”) echoed similar themes, arguing that trade liberalization will allow Japan to benefit from Asian economic growth while strengthening its ties with the United States and other key allies.  

Reaction from Japanese parliamentarians has been mixed, however. Faced with strong opposition from powerful domestic interest groups, the LDP has also adopted a set of negotiating conditions aimed at preserving existing protections in the agricultural and insurance sectors. These measures are widely seen as a prelude to the July 2013 elections for the House of Councilors, the upper house of the Japanese Diet. With the LDP currently in the minority, Abe’s party may be unwilling to endorse the kinds of reforms that would alienate their own rural electoral base.

Similar pressures could also emerge from Japan’s automotive sector, where a broad constellation of Non-tariff Barriers to Trade (“NTBs”) limits U.S. market access.  According to a recent statement by Acting U.S. Trade Representative Demetrios Marantis, U.S. and Japanese officials have been negotiating on these and other sensitive issues for more than year. While the substance of those talks is not yet public, some reports indicate that Tokyo and Washington have already agreed to a tentative deal that would allow Japan to maintain its current NTBs in exchange for preserving current U.S. tariffs on Japanese automobiles for the next ten years. 

Compromise on these issues may make sense given domestic pressures on both sides of the Pacific. Deferring controversial concessions until after the TPP’s implementation would give Prime Minister Abe space to address more contentious agricultural issues. It might also mitigate Congressional criticism in the United States, including concern regarding Japanese NTBs and possible reductions in existing tariff rates. With the next round of TPP talks scheduled for May in Lima, Peru, manufacturers and suppliers in the automotive sector would be well advised to monitor any changes in the parties’ negotiating positions.