Former White House Trade Negotiator Says Phase Two for China or Japan Deals Unlikely

The U.S.-Japan mini-deal is not consistent with World Trade Organization rules, a former White House trade negotiator said, so the two sides mentioned a future phase two deal to cover substantially all trade to convince Japan's parliament to pass the accord. Because of the way the deal was structured, with small tariff reductions for Japanese exporters, it did not require a vote in Congress, Clete Willems, speaking recently on a webinar for University of Nebraska students, said. In calling the mini-deal phase one, “I think both sides were playing it cute, to be honest,” Willems, now at Akin Gump, said. He said Japan was not interested in a comprehensive bilateral trade deal, because it still wants the U.S. to rejoin the Trans-Pacific Partnership.

“They had a problem with the Diet. They had a problem with the WTO. We also had a problem with Congress. So we came up with phases,” he said. “Did any of us really think we were going to get to phase two? No. We did what we had to do.”

Willems said the press coverage of the collapse in negotiations with China in April 2019 was very good, explaining that President Xi Jinping refused to go as far as lead negotiator Liu He had thought Xi might be willing to go on forced technology transfer, state-owned enterprises, industrial subsidies, currency manipulation and market access in agriculture and financial services. “It wouldn’t have solved all the problems,” Willems said.

The phase one deal made progress on a few of those -- it's not just purchase commitments -- but Willems said the text that China backed away from was a better text on both forced technology transfer and financial services access. Willems said the press focuses on the purchase commitments, but the negotiators spent very little time on that, believing that if China removed its market barriers, purchases would flow naturally.

He said that on one trip, U.S. Trade Representative Robert “Lighthizer said, Crap, we better talk about the purchases for a while, so the president doesn’t think we forgot about them.” But, Willems said, once the president hiked tariffs on List 3 of Section 301 goods to 25% and took action against Huawei, China was not going to do a more comprehensive deal. “With both those deals, I don’t think phase two is ever going to happen,” Willems said. The USTR didn't comment.

Willems believes the best approach to China is to rejoin the TPP, if possible, and to work with Japan and Europe on a united approach to China, with the hopes of someday getting the WTO to push China to stop trade-distorting practices.

Willems said getting back to the TPP wouldn't be easy but not because President Donald Trump is completely sour on it. “He literally asked me point-blank one time, what do you think about the TPP? Did I make a mistake?” Willems said. “I sort of said, 'Look, there are some problems in the agreement, but you should try to fix it like you did with NAFTA.”

But Willems said that Lighthizer is completely opposed, because he thinks that the weaker auto rules of origin in TPP -- which includes Japan, Mexico and Canada -- would undermine USMCA auto rules of origin. The TPP does not allow duty-free entry for Japanese autos until 25 years after entry into force, but does reduce tariffs on imported auto parts.

Fellow panelist Wendy Cutler, vice president of the Asia Society Policy Institute and a former lead TPP negotiator at the Office of the U.S. Trade Representative, thinks it would be very difficult to get Japan to agree to a USMCA-style auto rule of origin, though she said that if Thailand joined the TPP, that might change the calculus. “Japan and Thailand have very integrated commercial relationship in the auto sector, the automotive [chapter] could become less of a problem for Japan,” she said.