Japan and South Korea are already engaged in tense, intricate, and ongoing negotiations to obtain tariff relief. Each country’s distinct internal and external contexts have brought these discussions to the fore. As Japan crafts a comprehensive package that includes non-tariff barriers, foreign direct investment (FDI) incentives, and defense contributions, South Korea faces political uncertainty following its recent leadership change, which hampers its negotiating capacity.
The backdrop for these negotiations is multifaceted. Reproduced from Japan’s economic outlook still looks dire amid soaring Japanese Government Bond (JGB) yields and escalating fiscal jitters. This has once again raised concerns about the country’s debt sustainability, raising alarms about the country’s economic calamity. At the same time, on tariffs, South Korea continues to hold the line, a wise tactical choice to keep the most leverage possible in their ongoing discussions.
Political dynamics are at play. Japan assuaging fears Japan is staring down a potentially historic upper house election, a consideration that could play a key role in shaping its approach to negotiations. In short, Prime Minister Ishiba is walking on thin ice. He keeps one eye on the powerful domestic lobbies at home, such as the rich rice farmers, who will be against any change. The security environment has forced Japan to adopt a more restrained attitude. Today, it favors red tape over rapid response time.
South Korea has surged ahead under its new president, with the wind at his back of a willing National Assembly. This political capital positions South Korea favorably. It can leverage its strengths, such as its shipbuilding industry, to negotiate favorable terms. We should expect the South Korean government to push hard for exemptions or sector-specific quota deals. Their hope is to glean trade concessions in less important areas.
These negotiations have included a whole lot more than just tariffs. They address incredibly important topics such as military alignment with industry, technological barriers to innovation, and regional ecosystems strategies. A pivotal moment for Japan and South Korea. Their decisions on these interrelated issues will determine their long-term economic and security fortunes.
Japan’s strategy involves leveraging its heavyweight industries. Nippon Steel and SoftBank will be indispensable partners in strengthening Japan’s investment approach. Specifically, they are intended to ensure that Japan continues to be the United States’ largest foreign investor. Nationally, Japan’s considerable economic clout provides it significant added leverage. As it seeks to increase U.S. exports, it is targeting liquefied natural gas (LNG), grains, and aerospace components.
Across the past several weeks, those market indicators have taken a turn in the right direction. South Korea’s KOSPI index rallied by 1.8%, while Japan’s NIKKEI index edged up by 0.3%. Analysts say unlike the looming August 1 deadline negotiated in 2011 the next round will have more of a threat. They don’t treat it as an urgent wake-up call. This optimism speaks to the faith many have in both countries to rise and meet the challenges before them. Individuals count on the fact that they will not have to suddenly go to the extreme.
Japan continues to be cautiously optimistic on tariff negotiations. This effort plays out against a politically-inflamed backdrop that poses myriad challenges. The nation is aware that it should move with caution. It needs to counter domestic pressures and it needs to do so while earning the best possible terms from South Korea.