September 26, 2019 / 5:23 AM / 5 months ago

Breakingviews - Japan's deal with Trump clears economic decks

U.S. President Donald Trump greets Japan's Prime Minister Shinzo Abe during a meeting on the sidelines of the 74th session of the United Nations General Assembly (UNGA) in New York City, New York, U.S., September 25, 2019. REUTERS/Jonathan Ernst

HONG KONG (Reuters Breakingviews) - Japan’s trade reset with Washington is welcome. Prime Minister Shinzo Abe on Wednesday won an accord covering agriculture, machine tools and digital products. Critically, Tokyo’s automotive sector may have evaded the punishing 25% tariffs U.S. President Donald Trump had threatened. It frees up Abe to focus on shoring up his weak economy, and Trump on cutting a deal with China.

    In retrospect, much of the spat was political theatre and wasted negotiating energy better spent elsewhere. Had Trump not abandoned the Trans-Pacific Partnership treaty upon taking office, for example, American farmers would already be getting the treatment they will receive under the new agreement. 

Nor will it rebalance trade much. Around two thirds of Japan’s $68 billion trade bilateral surplus comes from its export of cars. These were not included in the deal. Trump may have accepted that the imbalance reflects less on barriers and more on taste: the American marques’ specialty of giant sports utility vehicles are simply not popular in Japan. And Japanese brands, such as the $223 billion Toyota, are increasing their manufacturing footprint in the United States anyway. 

Japan’s benchmark Topix has risen 10% since the end of August on hopes of such an outcome. Automakers pulled up further on Thursday, signalling hope that Trump will indeed move on. A deal makes it easier for Abe to focus on a potential backlash against a planned increase in sales tax which he hopes to offset by cutting the cost of education, telecommunications and the like. Exports, which have fallen for nine straight months, also require attention. And Japan Inc. is vulnerable to any rally in the yen if the central bank miscalculates its response to monetary policy easing elsewhere. That could do more harm to earnings than tariffs.

    Easing off another trade war front allows American negotiators to refocus on China. Trump could, in theory, sign a similar “mini-deal” with Beijing as with Tokyo, but settling scores with Japan will also free up hands to apply more pressure. The president himself has fresh political challenges, in particular, a formal impeachment inquiry launched this week. For both countries, it’s past time to move on. 


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