US and Japan in focus ahead of G20 meet – BBH

Analysts at BBH note that the EU and Japan reportedly have reached an agreement on a free-trade pact ahead of the G20 meeting.  

Key Quotes

“It is important not just as a trade agreement between the two that account for a quarter of the world's GDP.  It is important because even though negotiations began several years ago (2013), it suggests that the potential defection of the US from the liberal trade regime that it was instrumental in creating will not necessarily mean the end of that regime.”

“The trade agreement will eventually eliminate 99% of the tariff barriers to trade, according to reports.  At the heart of the agreement is a phasing out of the EU's 10% duty on auto imports, while Japan opens up its agricultural market.  Japan's Prime Minister Abe had seen in the TPP an opportunity to the agriculture coops which remain resistant to his reform agenda, and this agreement with the EU achieves perhaps on a smaller scale the same effect.”

“The theme of the G20 summit in Hamburg is free and fair trade.  North Korea's test of an intercontinental ballistic missile threatens to overtake the agenda.  The US strategic goal of denying North Korea nuclear capability and a delivery mechanism appears to have largely failed.  None of the key stakeholders have much of an appetite for military action to remove that capability.  Effectively tightening and enforcing sanctions requires cooperation for which the US does not appear inclined to offer fresh inducements.”

“Separately, and looming over the G20 meeting, is the US threat of imposing tariffs (and possibly quotas) on steel imports on the grounds that they pose a national security risk.  The investigation has reportedly been completed, and the debate has shifted to the precise policy response.  There appears to be a small window of opportunity to persuade US President Trump to use the WTO's conflict resolution mechanisms.  It may take a bit longer, but the US does win the lion's share of cases it brings.”

“There are already around 200 countervailing tariffs or anti-dumping duties already "protecting" the US steel industry, pushing domestic prices above world prices.  Defense needs absorb a small part of US capacity, and so additional unilateral action will likely be contested.  In some ways, the US appears to be trying to decide if this is a good test case for its trade initiative.”

“There can be two outcomes.  The WTO finds against the US, and the US chooses to ignore the ruling, which it has threatened to do.  This could potentially spur a crisis of the multilateral institution.  Alternatively, the WTO could grant a liberal interpretation to its national security exemptions, which would likely spur copycat behavior elsewhere, creating a new loophole for protectionism.”