Surprise China-Japan Alliance Brings Asia Together in Landmark Trade Agreement

The trade war between the US and China has pushed two former foes closer than ever, in a major regional partnership which could dominate world trade for decades to come.

Japanese Prime Minister Shinzo Abe, a surprise prime mover in the Regional Comprehensive Economic Partnership negotiations in 2018. Photo: Dick Thomas Johnson, flckr, CC

On September 1, Singaporean Trade and Industry Minister Chan Chu Sing announced that representatives from the 16 countries likely to sign off on the China-backed Regional Comprehensive Economic Partnership (RCEP) agreed on the key elements of the treaty this past week. “We are looking for that broad agreement,” he said, “that milestone to be achieved…when the leaders meet at the end of the year.”

RCEP is a long-in-the-making trade agreement which brings together the 10 members of the Association of Southeast Asian Nations (ASEAN, which includes Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam), and adds to it China, Japan, Australia, India, New Zealand and South Korea. When signed, the agreement would cover half the world’s population, much of it in some of the fastest-growing markets in the world. It would also encompass roughly a third of the world’s GDP.

Since Donald Trump moved the US deeply into an isolated position from most of the rest of the world with regard to trading agreements and now tariffs with much of the world, many of the headlines have been about China, Canada, and European Union reaction to Trump’s steep tariffs on imported goods. All three have been economically harmed to some extent, with none more than China, who seemed to occupy much of Trump’s Tweets about unfair trade practices, dumping, and theft of intellectual property.

Japan has also been hurt, however, first by the steep levies on steel and aluminum shipped into the U.S. Japan has also reacted to US threats of 25% tariffs on automobiles imported into the U.S., something which could damage the Japanese economy significantly.

Trump did this against Japan despite, according to the US government’s own data, Japan being the fourth largest export market for the US in 2016. That amounted to over $100 billion in sales by US suppliers in Japan. Those sales covered many kinds of goods, with the top five categories being food, aircraft, machinery, pharmaceuticals and services.

Japan hoped to address some of these issues in direct negotiations with the US, but trade representatives there kept putting Japan at bay. Japan then looked into filing claims of one sort or another via the World Trade Organization (WTO), but appears to have backed off. That may have happened as it saw Trump denounce the WTO on more than one occasion. It may have also been affected based on leaks from the White House and US Cabinet that the US was considering exiting being a part of the WTO for one reason or another.

Japan even appealed to logic with the Trump administration, especially in the case of the potential for auto and auto part import tariffs from the U.S. As Hiroshige Seko, the minister of economy, trade and industry for the country said, “Japanese carmakers are a major contributor to the American economy. If the Japanese auto industry is weakened, it will not be able to invest in the U.S.”

What Trump appears not to understand about this is that Japanese companies manufacture 3.8 million cars in the United States. That is over twice the number of cars shipped into the US from Japan. Parts from Japan are also shipped into the U.S. to support the American-based manufacturing there. Auto part tariffs, which are also part of what Trump has proposed, would raise those costs too. In the end car prices would go up and jobs would be lost in the U.S. – for Americans.

Seko made other comments about the interconnected nature of world trade and how Trump attacking one country, such as China, very hard can damage another rather quickly. As he said in statements a few weeks ago, “[The tariff on China’s exported technical goods] works as absolutely no plus for the world economy, and Japanese companies are shipping parts to China to finish them as products there that are exported to the US, and the effects are already being felt. Ultimately, it will hurt the US and Chinese economies.”

With Japan forced to fight for free trade on its own, it found a surprising close ally in China. For a long time, Japan had seen China as more than just a rival in international business. A fateful meeting with a key high-level Chinese official at just the right time appears to have changed all that. In May 2018, just as the US had already put in place its first tariffs and others were looming not far ahead, China reached out to Japan in a big way – and it paid off.

As Japanese Prime Minister Shinzo Abe said in a newspaper interview about that meeting, “Premier Li Keqiang visited Japan in May and the Japan-China relationship has completely returned to a normal track.”

That brought Japan together with China in fighting hard for the free trade oriented RCEP agreement in Asia. China too was on board in seeing the importance of this agreement especially so in consideration of the havoc the US was creating in international trade. As Huo Jianguo, former director of one of China’s Ministry of Commerce’s research institutes said, “China has to take the initiative in the forming of a new international trade order. The RCEP negotiations have dragged on for too long and China can’t afford another year of delay.”

That brought the two parties together on what could be one of the most important trade agreements in the world.

Japan itself also has been pursuing other trade agreements. This includes one signed in July 2018 with the European Union. That one cut 99% of the tariffs which used to be in place between the two parties. It amounts to a savings of $1.17 billion annually for those enterprises which used to have to pay those fees.

Recent parts of the RCEP negotiations have slowed recently on precisely how open the signatories to the agreement need to be to free trade. Japan, for example, is in favor of a substantial percentage of free trade, just as it did in the EU treaty. India, on the other hand, is more guarded in how open it wants to become.

For most parties involved, the tariff wars the US has launched are – just as they have with Japan and China – bringing countries together on this agreement in a way not considered possible even just a few months ago. Interim agreements are also now being put in place to handle what are now considered minor differences of opinion on how free trade must be when RCEP is initially signed. As the Singaporean Trade Minister Chan Chu Sing said on September 1, everything is looking positive for final signoff on the RCEP before the year is out.

As Prime Minister Abe of Japan noted in July, “As we are faced with concerns of the rise of protectionism in the world, all of us in Asia must unite.”