Japan and US sign limited trade deal - what's next?

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Japan and the US have at last signed a free trade agreement, albeit a limited one.

The US and Japan have this week signed what has been described as a 'limited trade deal' that will see certain tariffs between the two nations eliminated or reduced, as well as market access expanded on agricultural, industrial and digital products.

Here, we'll take a closer look at the free trade agreement (FTA) and see what it means for Japan and America, as well as for the wider world.

Background to the deal

US president Donald Trump and Japanese prime minister Shinzo Abe signed the deal at the UN General Assembly on Wednesday (September 25th 2019), with Mr Trump calling it the "first stage of a phenomenal new trade agreement".

"This is a big chunk, but in the fairly near future we're going to be having a lot more comprehensive deals signed with Japan," he commented, adding that it demonstrates the steps the US is taking towards "a fair and reciprocal trade agreement".

US Trade Representative Robert Lighthizer said he expects Japan to pass the preliminary deal in October or November, with the associated tariff reductions set to come into effect early in 2020.

Mr Trump has been eager for a bilateral agreement with Japan since he pulled the US out of the Trans-Pacific Partnership not long after taking office in 2017.

Japan had made it clear that would have preferred for the US to join the resulting Comprehensive and Progressive Agreement for Trans-Pacific Partnership, but talks began regarding a FTA nonetheless.

FTAs had already been reached between Japan and a number of other countries, as well as one with the European Union bloc that came into effect at the start of 2019.

The two sides seemed to reach a consensus in late August, but the automobile industry proved to be a sticking point and negotiations stalled somewhat. Japan was concerned Mr Trump would add new tariffs to its automobiles, which currently make up a significant amount of its exports to the US, plus it wanted existing tariffs to be removed.

Now, though, the US Congress has been notified that the US and Japan are prepared to enter a limited agreement and that some levies will be lowered.

What the FTA includes - and doesn't include

As part of the FTA, Japan is to open up new markets for trade and has promised that tariffs would "now be significantly lower or eliminated entirely" on goods such as pork, cheese, wine and blueberries.

It also covers commitments on billions of dollars' worth of digital trade between the two nations by barring customs duties on products such as videos, music and e-books.

However, the new deal fails to address the automobile industry, which has already been mentioned as a sticking point during the negotiations.

Instead, Mr Trump has suggested the two sides are working on a broader agreement that could address this at a later date.

Indeed, Reuters quoted a joint statement as saying further talks would be concluded within around four months and that "while faithfully implementing these agreements, both nations will refrain from taking measures against the spirit of these agreements".

This means that while carmakers were hoping for an elimination of tariffs, they have only managed to ensure a promise of 'no more for now' rather than a full resolution.

The FTA and trade going forward

The news has already been welcomed by farmers and producers, but understandably less so by carmakers. It's likely that the FTA could see more agricultural products heading to and from Asia in the coming years, plus the removal of some digital customs duties may make it easier for traders in this area to make sales and purchases.

It might also be interesting to see how the battle over electronics between Japan and South Korea plays out now a limited FTA is in place. According to the Korea Economic Research Institute, the number of Korean exporters in the electronics sector may decrease 11.6 per cent once Japan and the US have a full-scale FTA, so Koreans could well be concerned in this regard.

China has been trying to mediate between Japan and South Korea, but now its old adversary the US is involved with the former, this may no longer be the case.

As with all trade deals we've witnessed in recent times, the only thing we can really do is wait and see what happens next - and whether the auto industry will get what it wants, or get in the way of a full FTA in future.