Japan hopes low-key strategy averts US trade flare-up

[TOKYO] Economic talks between the United States and Japan, tackling topics from persimmons and potatoes to energy and infrastructure, have helped keep Tokyo clear of protectionist moves such as those that recently hit Chinese solar panels and South Korean washers.

Japan hopes that "let's talk" approach - plus warm personal ties between Prime Minister Shinzo Abe and President Donald Trump - will keep friction in check. But officials and lawmakers say the outlook could change if the unpredictable US leader turns his attention to Tokyo's seven trillion yen (S$83.8 billion) trade surplus ahead of US congressional elections in November.

"Naturally, America wants an early conclusion to what to do about its trade deficit (with Japan). Of course, they are concerned about the mid-term elections and may say various things," said a ruling party lawmaker well-versed in US-Japan economic ties, one of eight officials and lawmakers interviewed by Reuters who declined to be identified because of the sensitivity of the subject.

"Suga is worried," he added, referring to Mr Abe's close aide, Chief Cabinet Secretary Yoshihide Suga.

Efforts to showcase the US-Japan security alliance in the face of North Korea's nuclear and missile threats will probably take precedence over trade when US Vice-President Mike Pence visits Japan from Tuesday, officials on both sides said.

Mr Pence will not hold a formal third round of the so-called "economic dialogue" with Deputy Prime Minister Taro Aso while in Tokyo. The two last met for a second round in October, when, among other things, they agreed to lift restrictions on Japanese persimmon exports and US Idaho potato imports as well as streamline noise and emissions testing for US car imports.

"Japan's strategy could be said to be very simple - keep this channel of economic dialogue open," said one Japanese government source familiar with the government's thinking.

US Treasury Secretary Steven Mnuchin's comments late last month that a weak dollar would help US trade imbalances in the short term boosted the yen sharply against the dollar. It was a reminder of how currency could come into focus if trade friction revives.

Japan is waiting to see what decision the White House takes on an inquiry into steel imports under Section 232 of a 1962 US trade law allowing restrictions to protect national security. Action against an ally like Japan or South Korea, two of the sources said, could be problematic.

Japan's largest steelmaker, Nippon Steel and Sumitomo Metal, has said Japanese exports are not hurting US rivals. "We hope the US will make a wise decision," a company official said.

William Hagerty, the US ambassador to Japan, has said Washington wants to see progress on cutting Japan's trade surplus and forging a bilateral framework - which Tokyo opposes - by spring.

Mr Hagerty, in an interview with NHK last month, flagged liquefied natural gas (LNG), medicines and farm products as sectors where Washington wants to boost exports. Increasing LNG exports to Japan, however, could be tough: Japanese buyers have already agreed to buy more US gas than they need. And boosting pharmaceutical exports would run up against Japan's efforts to cut drug prices to curb the rising medical costs of an ageing population.

Washington also pushed again for fewer restrictions on beef shipments and car exports during working-level talks in late January. Japanese officials argue such problems would have been resolved if the United States had remained in the 12-nation Trans-Pacific Partnership (TPP) trade deal forged under Mr Trump's predecessor.

"We can say, 'Why did you leave TPP? If you were in TPP, these wouldn't be a problem,'" the ruling party lawmaker said.

Mr Trump surprised many last month by saying he might be willing to rejoin the multilateral trade pact - if it were renegotiated to benefit the United States.

Mr Abe has rejected the idea of reopening talks on the delicately balanced pact, though some sources said Tokyo might eventually act as a bridge to lure Washington back with minor changes that Trump could sell back home as a victory.

One option, sources said, is to present plans already in the works to buy more US military gear as a gesture to please Mr Trump, who brought up the sector during a November visit to Tokyo.

Japan plans to buy 410.2 billion yen worth of US military equipment in the year starting in April and is working on a new five-year overall procurement plan that would start in 2019.

Still, some politicians expressed frustration with a US playbook that appears to hark back to the 1980s, when Japan accounted for a much bigger chunk of the US trade deficit and its companies had yet to step up their direct investment in America.

Trade in Japanese goods accounts for less than 10 per cent of the US deficit, compared with China's more than 40 per cent.

"When it comes to what to do in concrete terms, everyone is at a loss," the lawmaker said. "The situation is completely different from the trade friction of the 1980s."

REUTERS