What to Expect from the U.S.-Japan Economic Dialogue

April 14, 2017

Q1: How did the dialogue come about?

A1: At his Mar-a-Lago summit with President Donald Trump in February, Prime Minister Shinzo Abe of Japan had two main policy objectives: to win reassurance on the U.S. commitment to the U.S.-Japan security alliance and to deflect possible economic tensions in the relationship. Throughout the 2016 presidential campaign and in his early days in office, President Trump had criticized Japan for what he perceived as a pattern of currency manipulation and unfair trade barriers that exacerbated the U.S. trade deficit with Japan. Prime Minister Abe wanted to subsume these possible sources of tension into a new dialogue led by Vice President Pence and Deputy Prime Minister Aso, allowing Abe and Trump to focus on developing a strong personal bond. The dialogue was announced by the two leaders at their joint press conference on February 10 and mentioned briefly in a subsequent joint statement.

Tokyo views Vice President Pence as a much friendlier figure on bilateral economic issues than other members of the Trump administration. As a U.S. congressman, Pence was supportive of free trade, and as governor of Indiana, he made two trips to Japan to court investment. Indiana has the highest Japanese investment per capita among U.S. states, and Japanese companies employ more than 50,000 workers in Indiana. The economic dialogue framework was proposed by the Japanese side, and the Trump administration originally responded by proposing that Commerce Secretary Wilbur Ross and National Trade Council director Peter Navarro lead for the United States, but Abe prevailed on the president to tap Pence since he would be Aso’s counterpart in protocol terms.

This is not the first such dialogue aimed at resolving disputes in the bilateral economic relationship. The administration of President Ronald Reagan began the first multisector bilateral negotiating framework with Japan in March 1985, called the Market-Oriented Sector-Specific (MOSS) talks. This was followed by the Structural Impediments Initiative (SII) launched by President George H. W. Bush and his Japanese counterpart in 1989, targeting Japanese macroeconomic policies and nontariff barriers that deterred U.S. exports and investments. President Bill Clinton proposed Economic Framework talks in 1993 to tackle trade barriers in Japan, and President George W. Bush launched the Economic Partnership for Growth to encourage economic reform within Japan. For President Barack Obama, TPP became the focus of the administration’s economic policy toward Japan. The biggest difference with the new Pence-Aso dialogue is that it was almost entirely conceived of and proposed by the Japanese side as a way to shift away from the adversarial rhetoric of the U.S. presidential campaign and begin a deliberate process of rebuilding trust and cooperation on the many areas of mutual economic interest.

Q2: What is on the agenda, and what outcomes can be expected?

A2: When the dialogue was first discussed in February, Pence and Aso agreed to focus on three topics: macroeconomic and financial policy, cooperative projects in areas such as infrastructure and energy, and trade and investment. Few details have been released, and there is some tension between the two sides over priorities. U.S. officials have taken to calling the economic dialogue a framework for “negotiations,” while Japanese officials have stayed focused on “dialogue.” In the first basket of issues, the talks will likely center on currency issues, with the Japanese expected to push back on any Trump administration charges of manipulation or effort to target a stronger yen. In the infrastructure discussion, Aso hopes to emphasize the opportunities for expanded Japanese investment in the U.S. economy. Japan is already the largest foreign investor in the United States in terms of flow, number two in terms of stock, and number one in terms of foreign direct investment (FDI)–related manufacturing jobs. Japanese firms are poised to make major investments in high-speed rail and other sectors with Japanese government backing, but Tokyo will have only limited opportunities to invest in roads, bridges, and more basic infrastructure projects if that is the direction the Congress and the Trump administration go.

On trade issues, Abe has expressed his personal willingness to discuss a bilateral free trade agreement (FTA) with the United States, but his trade officials worry that this would bog down the two sides on legacy issues such as agriculture and autos (which were already significantly addressed in TPP). They would rather focus on continuing to work together, as the two sides did in TPP, to establish a set of twenty-first-century rules in the Asia Pacific on the digital economy, state-owned enterprises (SOEs), and other behind-the-border issues. Japan is working with the “TPP 11” countries on a way to entice the United States back to a multilateral agreement, and some officials see the bilateral economic dialogue as a means to that end.

By contrast, U.S. officials have signaled they intend to focus on the bilateral trade deficit and specific areas of contention. The inclusion of Commerce Secretary Ross in the meeting has also raised the likelihood the United States will focus on difficult trade issues, in particular automobiles and agriculture, two sectors where Washington has long complained of market access barriers in Japan. Ross has been meeting with U.S. CEOs and will bring with him a list of specific concerns in other areas as well. Ross has taken the lead in the Trump administration on trade issues thus far, but with the confirmation of Robert Lighthizer as U.S. trade representative still pending, launch of FTA discussions during the Pence visit to Tokyo is unlikely.

No major outcomes are expected from this opening round of the dialogue, though Vice President Pence may be under some pressure to bring back some concrete deliverables—say, major new Japanese purchases of U.S. exports or investments in manufacturing jobs in the United States—to demonstrate progress in reducing the bilateral trade deficit.

Q3: What else are Pence and Aso likely to talk about?

A3: The larger geopolitical context in East Asia is likely to dominate the message Vice President Pence delivers on this trip. North Korean provocations, including even a nuclear test, could color the entire visit. Pence will likely make the larger theme of the visit alliance solidarity with Japan and other U.S. allies. He will arrive in Korea on the eve of a presidential election that will likely shift Korean policy to the left on North Korea at a time when U.S. policy is moving to the right. In Indonesia, Pence will have an opportunity to highlight American friendship with a major Islamic leader in the region and a key pillar of a more stable Southeast Asia at a time of Chinese assertiveness in the region. In Australia, he will have to reassure a skeptical Australian public about the new U.S. administration, while highlighting the deep strategic and economic cooperation already underway with Canberra. These geopolitical issues will be the main “deliverables” from the trip, but the U.S.-Japan economic dialogue will be a critical early indicator of how well the administration can manage U.S. economic engagement in the most dynamic region of the world.

Matthew P. Goodman is senior adviser for Asian economics and holds the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Michael J. Green is senior vice president for Asia and holds the Japan Chair at CSIS. Nicholas Szechenyi is senior fellow and deputy director of the Japan Chair at CSIS.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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