Will Japan Go Against U.S. And Sign China's 'Free Trade' Deal?

Kenneth Rapoza
Senior Contributor

President Donald Trump with Japan’s Prime Minister Shinzo Abe in the Rose Garden of the White House in Washington, D.C., in June, his second U.S. visit since Inauguration Day. Japan is inching towards a China-led trade deal. Photographer: Andrew Harrer/Bloomberg

Will China and Japan ink a free-trade deal? If so, it would be a Beijing rope-a-dope to Washington, creating the biggest free trade zone in Asia. The South China Morning Post (SCMP) of Hong Kong reported Monday that the two sides—Japan and China—were discussing a free trade arrangement.

Japan is not the only partner in the China trade deal. Some 16 likely signatories of Beijing’s Regional Comprehensive Economic Partnership, or RCEP, reportedly agreed on key elements of an Asian trade deal in Singapore last week. More details are expected when leaders from the 16 countries meet again in November.

“We are looking for that broad agreement, that milestone to be achieved, or what we call substantial conclusion, when the leaders meet at the end of the year,” Singaporean Trade and Industry Minister Chan Chun Sing said.

Other U.S. allies, including India, Australia—and South Korea, which has a bilateral trade agreement with the U.S.—are part of China’s RCEP.

The biggest misnomer in the SCMP story may be in describing it as a “free-trade deal.” The biggest sticking points in Beijing's trade war with Washington is China’s default position of being more closed, than open.

China has been opening over the years, now allowing for foreign banks to participate in mainland China's financial services market without having to partner with a local. Google was welcomed back to the mainland after being kicked out over a disagreement over censorship. This happened at a time when Forbes billionaire Robin Li was still building up his own search engine, Baidu. Google is now allowed back to town but must adhere to Chinese censorship laws.

China is an important market for Japan. A trade deal between the two sides would be more positive for Japan than China, though if RCEP did see the light of day it would be a political hit against President Trump, who rejected the Trans-Pacific Partnership as his first order of business after Inauguration Day. Japan was a member of that trade agreement. The country has been moving to sign similar trade deals with Europe, and now China, following TPP’s demise.

Huo Jianguo, a former director of a research institute under China’s Ministry of Commerce, told the SCMP that China needs RCEP as both political win and as a means to weather the Trump trade storm.

“China has to take the initiative in the forming a new international trade order,” Huo said. “The RCEP negotiations have dragged on for too long and China can’t afford another year of delay.”

China may get another push this week as the Trump administration is expected to charge tariffs on another $200 billion worth of imports. China faces over $50 billion in tariffs currently. Beijing said they would respond by adding tariffs on another $60 billion of U.S. goods.

Up until now, the market believes the U.S. is winning the trade war against China. That could change if RCEP proves to be a success in the years ahead, possibly reducing market share for U.S. exports in the world’s fastest-growing consumer market.