The U.S. and Japan have laid out the groundwork for a possible trade deal during the G7 summit on August 25. The move, which comes after the latest round of escalation in the U.S./China trade war, offered some relief to both parties, which have been in various trade battles.
The U.S. has been trying to reduce its trade deficit with Japan (Figure 1). In the agreement, Japan will lower the tariffs on U.S. beef and pork to the same levels offered to countries in the current Trans-Pacific Partnership. This will likely offer much-needed relief for U.S. farmers, who have been hurt by the ongoing U.S.-China trade war. Japan imported about $15 billion worth of U.S. agricultural goods in 2018 and the agreement will help to reduce tariffs on about half of the imports.
For Japan, it managed to at least avoid the worst-case scenario of 25% U.S. auto tariffs, which has been a major threat to its automobile industry. The U.S. currently has 2.5% tariffs on Japanese cars, which are set to remain. U.S. Trade Representative Robert Lighthizer said that tariffs on some Japanese industrial products will be reduced, but no further detail was mentioned.
Through the trade deal, both sides have avoided the worst-case scenarios in our view, though it seems like a bigger win for the U.S. As the U.S. intensifies its pressure on China, a deal with Japan will help to reduce some of the impacts. Further details of the deal still remain to be seen, and eyes will be on the final agreement planned at United Nations meetings in September.
Figure 1: Stable Japan-U.S. Trade Surplus From Resilient Export Growth, Despite Slower Import Growth (% y/y on LHS and JPY billion on RHS)
Source: CEIC, Continuum Economics.
