Potential US Trade Agreements with Japan, the EU, and the UK: What US Exporters Should Expect

​In the past two months, USTR has requested comments from US stakeholders on the negotiating objectives for US trade agreements with Japan, the EU, and the UK. At TradeMoves, we have been busy analyzing these potential agreements and opportunities for US exporters as well as the policy implications should these agreements come to fruition. For all of the trade disruption that we have seen in 2018, it is refreshing to hear some good news on US trade policy and market access for US manufacturers. We applaud the Administration for pursuing bilateral negotiations with these three very important markets. 

A US-Japan Trade Agreement
 
Japan is the US’s fourth largest trading partner, with 2017 trade in goods between the US and Japan totaling more than $204 billion. President Trump and his Administration have been laser focused on eliminating US trade deficits, which explains why Japan has become an instrumental target in the Administration’s trade strategy. US exporters shipped just under $68 billion of goods to Japan in 2017 while the US imported more than $136 billion in the same year, putting the US trade deficit with Japan at just under $69 billion.[1]
 
Japan has long resisted US entreaties to negotiate a bilateral trade agreement, preferring to engage in regional and multilateral fora like the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). However, President Trump’s threat to impose Section 232 tariffs on autos has forced Japan to the negotiating table given the importance of the auto sector in Japan and its significant market presence in the United States.[2] What is clear from the joint statement from 26 September 2018 by President Trump and Japanese Prime Minister Shinzo Abe is that however this agreement unfolds, it will not be comprehensive. The statement expresses a desire to approach the agreement in stages, with early focus on an agreement on goods and some services followed later by a more extensive agreement covering other trade and investment issues. The theme here seems to be quick wins over improved market access for substantially all trade.
 
We join many in industry that support either the United States joining the CPTPP or pursuing a comprehensive free trade agreement with Japan.  However, absent those two options, what is a smaller US-Japan agreement likely to cover? US exporters have been frustrated by high Japanese tariffs on agricultural products and costly non-tariff barriers in the auto sector that have restricted US market presence in Japan. Based on the joint statement, these will be key objective areas for US negotiators.[3] Japan has insisted that it will not grant the US any greater liberalization in the agricultural, forestry, and fisheries sector than what Japan has agreed to in its most recent trade agreements, such as CPTPP and the EU-Japan Economic Partnership Agreement. US exporters should shape their expectations accordingly. The US side has already been putting public pressure on Japan to grant more concessions than it gave to the EU. The Japanese side has continued to push back, asserting that CPTPP and EU-Japan access is the best the US is going to get.[4]
 
Analysts have predicted that any future agreement on goods will most likely be transactional, consistent with President Trump’s approach to trade and other issues of foreign policy. The United States would likely spare Japan from auto tariffs so long as Japan affords the US more access to its auto market. Japan also seems willing to make some concessions on agriculture in line with previous commitments. Finally, in order to appease the President by decreasing the trade deficit, Japan will likely agree to purchase more US liquefied natural gas.[5]
 
The unfortunate consequence of such transactional and “early harvest” agreements is that the benefits are sectorally limited. US exporters across the economy would have been much better off in trade with Japan under the more comprehensive TPP. Nevertheless, a bilateral with Japan can begin to open Japan’s market to US goods and provide some tariff relief for industrial exporters of all sizes.  And, an agreement – even if limited in scope – can provide a framework of open trade as a good first step for other sectors. US exporters should continue to watch the state of play on the negotiations closely as there is still the potential for talks to falter over sensitive issues like agriculture and autos.
 
A US-EU Trade Agreement
 
The trans-Atlantic commercial relationship is the largest in the world. The EU taken as a whole is by far the US’s largest trading partner with total trade in goods and services topping $1.1 trillion in 2016.[6] The EU refers to the trans-Atlantic relationship as “the most integrated economic relationship in the world.”[7] The irony is that despite the interconnectedness of the two economies, they are not actually integrated in the economic sense of the word. Previous efforts to hammer out an FTA between the US and the EU have all failed, most notably the TTIP negotiations which began in 2013 and petered out in 2016. The US and the EU have and continue to trade on MFN (non-preferential) terms.
 
2018 has been a rocky year in trans-Atlantic relations from all angles, but particularly from a trade perspective. Despite the EU’s best efforts to receive a carve-out, President Trump slapped Section 232 tariffs on steel and aluminum on EU member states. More significantly for the EU, President Trump has repeatedly threatened to impose Section 232 tariffs on autos, frequently citing the inequity in the EU’s 10% tariff on imported cars compared to the 2.5% applied on imports into the US. In order to calm the seas, European Commission President Jean-Claude Juncker traveled to Washington in July to negotiate a truce with the US President. In a joint statement after their meeting, President Trump and President Juncker agreed to begin negotiations on a bilateral agreement on “non-auto industrial goods,” chemicals, pharmaceuticals, medical products, and soybeans. The EU also agreed to strengthen cooperation with regards to energy, notably US liquified natural gas.
 
Like the US-Japan agreement, this US-EU agreement is expected to progress in stages with the focus again on quick wins. Already the EU and US have sparred over the scope of the negotiations. The US wants to include agriculture in any future agreement, but the EU has been adamant that agriculture is off the table for these initial talks.[8] High agricultural tariffs and strict regulations such as GMO-labeling and tracing rules have limited US ag exports to the EU.
 
Again, these transactional and sectoral specific agreements will not benefit US exporters across the economy. Like Japan, the EU is coming to the table in order to spare itself from what seems to be inevitable US auto tariffs, which have the potential to significantly impact Germany and its powerful auto industry.[9] From our perspective, the EU is calculating the bare minimum it needs to concede to appease President Trump and avoid future US tariffs. While there are clear upsides to US exporters in the specified industries under consideration, those benefits will not be felt by US exporters in key sectors like agriculture.
 
All in all, there are a lot of political and regulatory policy forces working against a US-EU trade agreement, no matter how limited in scope it may be.[10] That Brussels and Washington are negotiating at all, however, is a positive development considering how relations have deteriorated throughout 2018.
 
A post-Brexit US-UK Trade Agreement

Perhaps the trickiest of all of these deals to analyze is the potential US-UK trade agreement. The difficulty stems from the reality that so much is still unknown on the outcome of the Brexit negotiations between the EU-27 and the UK. Earlier this month, we witnessed a leadership challenge within the ranks of Prime Minister Theresa May’s Conservative Party over her proposed divorce agreement with Brussels, a deal which has seemed to unite nearly all sides in British politics against the Prime Minister. The chances of a “no-deal” Brexit or even a second referendum over Britain’s EU membership have only increased in recent weeks, making it anyone’s guess as to what eventually happens in the end.
 
Many US exporters may be asking why EU-UK negotiations could impact the scope of a potential US-UK trade deal. The answer is multifaceted and requires an in-depth analysis of the current state of play in the Brexit negotiations, which is out of scope for this post. Put simply, the UK will not be able to enter into a trade agreement with the US if it remains in a customs union with the EU long term. Furthermore, even if the UK removes itself from a customs union, the scope for a US-UK deal will ultimately depend on the future relationship arrangement between the EU and UK. For the UK, the EU is its largest trading partner; 44% of UK exports go to the EU and 53% of imports into the UK come from the EU.[11] Based solely on the numbers, the UK has a strong incentive to align itself closely with EU regulatory standards after it leaves the EU. That will impact how much regulatory wiggle room the UK has to negotiate with in a trade agreement with the United States.
 
With so much uncertainty surrounding the outcome of Brexit, it is hard to predict what opportunities could come out of this agreement for US exporters. Nevertheless, the United Kingdom is a large market and an important one for US companies. The UK is the US’s seventh largest trading partner with total trade in goods at more than $109 billion in 2017. US exports to the UK in 2017 totaled just over $56 billion.[12] In stark contrast to the language used in government statements on the US-Japan and US-EU negotiations, the US has called for an “ambitious” trade agreement with the UK.[13] Between Japan, the EU, and the UK, the United Kingdom is probably most willing to negotiate a comprehensive agreement with the United States as it seeks to reassure its exporters that they will continue to have access to large markets after they leave the European Union. There will surely be opportunities for US exporters in any potential US-UK trade deal, but the extent of those benefits are dependent on the final Brexit outcome. In the end, the US and UK are likely far off from completing a deal given the complicated Brexit timeline.
 
Final Take

It is encouraging to hear that the US is opening negotiations with several of its largest trade partners, and especially so in a year dominated by tariffs and trade disruption. However, President Trump’s  focus on early harvest and transactional agreements limit the potential gains from these deals to specific sectors of the US economy. US trade policy is shifting away from the precedent of pursuing ambitious and comprehensive free trade agreements that cover most economic activity. What’s more telling is that two of our largest trade partners and key allies, the EU and Japan, are also reluctant to negotiate comprehensive deals with the United States. This reflects the strategic limits of placing and threatening tariffs on allies. Tariffs may bring parties to the negotiating table as the auto tariffs have done with Japan and the EU, but they are also proving to instill distrust between the US and its trade partners and dampening the political will to negotiate comprehensive trade agreements that would benefit US exporters in all sectors of the economy.
 
US exporters of all sizes should remain engaged in trade policy, especially with USTR and Congress, to make sure that their voices are heard and to ensure that they can benefit from new trade opportunities that these three important agreements have the potential to afford to US businesses.

We would love to hear from you. Send us your thoughts on these potential agreements or US trade policy on our LinkedIn or Twitter.

​Happy Holidays!

Scott McCallum
[email protected]
240.389.9003

[1] U.S. Census Bureau, “Top Trading Partners – December 2017,” <https://www.census.gov/foreign-trade/statistics/highlights/top/top1712yr.html.>
[2] Solis, Mireya, “Is Japan a leader of free trade? Negotiations with the US will tell,” Brookings, 27 September 2018,  <https://www.brookings.edu/blog/order-from-chaos/2018/09/27/is-japan-a-leader-of-free-trade-negotiations-with-the-us-will-tell/.>
[3] Caporal, Jack, “U.S.-Japan Trade Talks: What Could They Yield?,” Center for Strategic and International Studies, 28 September 2018, <https://www.csis.org/analysis/us-japan-trade-talks-what-could-they-yield.>
[4] Kuwako, Katsuyo and Isabel Reynolds, “U.S. Pressures Japan to Cede More Ground on Trade Ahead of Talks,” Bloomberg,  5 October 2018, <https://www.bloomberg.com/news/articles/2018-10-05/u-s-pressures-japan-to-cede-more-ground-on-trade-ahead-of-talks.>
[5] Schott, Jeffrey J., “US-Japan Trade Talks: The Dog that Did Not Bark,” Peterson Institute for International Economics,  26 April 2018, <https://piie.com/blogs/trade-investment-policy-watch/us-japan-trade-talks-dog-did-not-bark.>
[6] USTR, “European Union,” Office of the United States Trade Representative, <https://ustr.gov/countries-regions/europe-middle-east/europe/european-union.>
[7] European Commission, “Countries and Regions: United States,” European Commission, <http://ec.europa.eu/trade/policy/countries-and-regions/countries/united-states/.>
[8] Fortnam, Brett, “ Malmström: EU won’t engage with U.S. if trade objectives include agriculture,” Inside U.S. Trade, 14 November 2018, <https://insidetrade.com/daily-news/malmstr%C3%B6m-eu-won%E2%80%99t-engage-us-if-trade-objectives-include-agriculture.>
[9] Stearns, Jonathan, “EU Eyes Quick U.S. Trade Pact to Avoid Trump Car-Duty Threat,” Bloomberg, 5 October 2018, <https://www.bloomberg.com/news/articles/2018-10-05/eu-eyes-quick-u-s-trade-pact-to-avoid-trump-s-car-tariff-threat.>
[10] Ewing, Jack and Milan Schreuer, “Between Trump and Brussels, Trade Talks Face Myriad Challenges,” New York Times, 10 September 2018, <https://www.nytimes.com/2018/09/10/business/europe-us-trade-lighthizer-malmstrom.html.>
[11] House of Commons, “Statistics on UK-EU trade,” UK Parliament, 30 November 2018, <https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7851#fullreport.>
[12] U.S. Census Bureau, “Top Trading Partners – December 2017,” <https://www.census.gov/foreign-trade/statistics/highlights/top/top1712yr.html.>
[13] Lighthizer, Robert E., Letter to Congressman Orrin Hatch on a U.S.-UK Trade Agreement, Office of the United States Trade Representative, 16 October 2018, https://ustr.gov/sites/default/files/20181017004930805-3.pdf