By Antoni Slodkowski and Linda Sieg
TOKYO (Reuters) - The United States put last-minute pressure on Japan to compromise in tough trade talks on Wednesday, shortly before President Barack Obama was to arrive for a state visit.
The two-way talks - focusing on Japan's agricultural market and both countries' car markets - are key to reaching a multilateral trade pact that is central to Obama's strategic shift towards Asia.
Japanese Prime Minister Shinzo Abe has touted the broader trade deal as vital for growth in the world's third biggest economy.
"This a moment for Japan to take an elevated view and to choose a bold path of economic renewal, revitalization and regional leadership," U.S. Trade Representative Michael Froman told reporters after negotiating with Economy Minister Akira Amari ahead of Obama's evening arrival.
Obama, kicking off a four-nation Asian tour, is to dine with Abe on Wednesday and hold a summit meeting on Thursday focusing on security issues as well as trade. Both sides have said the summit is not a deadline for the bilateral trade talks, but experts say that if Obama and Abe do not show substantive progress the impetus for a deal could wane.
Talks have been snagged largely on Japan's insistence on protecting politically powerful farm sectors such as beef. Japanese Prime Minister Shinzo Abe told parliament the talks were tough but Japan was trying to keep some tariffs.
Officials have played down the chances of a deal in time for Thursday's summit between Obama and Abe, but some experts said an 11th hour agreement could not be ruled out.
Potentially one of the world's biggest trade pacts, the TPP would connect a dozen Asia-Pacific economies by eliminating trade barriers and harmonizing regulations in a pact covering two-fifths of the world economy and a third of all global trade.
Tokyo and Washington have also stressed the trade pact would have strategic implications as well, creating a framework for business that could entice China to play by global rules.
The Trans-Pacific Partnership talks are at "an important crossroads", Froman said in brief remarks. He did not take questions. "Its economic and strategic importance is clear."
After four years of talks and missed deadlines, negotiators from several TPP countries say they hope Thursday's summit will lay the groundwork for tough concessions, including a possible easing in Japan's protectionist stance on beef, sugar, dairy and wheat — a step that could breathe life into the struggling TPP.
"Hopefully this will provide some clarity about the level of ambition we can expect in a hopefully successful TPP," New Zealand Trade Minister Tim Groser said.
The White House had hoped to complete the deal last year but has faced disagreements over barriers such as Japanese import duties on agricultural products. Tokyo is fighting to maintain import tariffs in five agricultural categories: rice, wheat, dairy, sugar, and beef and pork products.
Japan has been hoping that a basic deal clinched with Australia, including a halving of Tokyo's tariff on frozen beef to 19.5 percent, would put pressure on Washington to compromise to avoid U.S. beef exporters losing out to Australian rivals.
Washington, meanwhile, has sought ways to protect U.S. carmakers from their Japanese rivals.
Trade pact advocates are looking for signs of concessions, especially from Japan given its staunch protection of its agricultural industries. Under one scenario, the leaders could announce they expect concrete outcomes soon, perhaps next month, when TPP negotiators meet in Vietnam.
A senior U.S. official said the summit would likely produce a statement giving a nudge for the negotiations to move to the next stage, a view shared by some industry groups.
"I think it will be something artfully worded to say we have made significant progress and our negotiators continue to work on this with a goal of concluding," said James Fatheree, senior director for Japan and Korea at the U.S. Chamber of Commerce in Washington and president of the U.S.-Japan Business Council.
Others, though, have said at least the outlines of a deal were still possible. "I have been wondering to what extent it is a question of expectations management, and to what extend it is describing a very tough situation," one former Japanese diplomat said. "I am hoping there is some element of the first."
The stakes are high for both Obama and Abe.
Failure to unveil a significant advance could stall the ambitious pact, undermining the trade-policy arm of Obama's so-called "pivot" of U.S. military, diplomatic and trade resources to the Asia-Pacific region.
An agreement between the United States and Japan is crucial for setting the tone for other countries engaged in the TPP: Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
"We all want to be optimistic about reaching a deal, but the reality is on the basis of the declarations made by officials from one country or the other, there are still important differences to be resolved," said an official from a developing country involved in the negotiations ahead of Wednesday's talks.
Some countries such as Malaysia are still a long way from signing up to a TPP pact.
"We are not ready and I think some of the other countries are also not ready," Paul Low, a minister in the Malaysian Prime Minister's Department, was quoted as saying by The Edge financial daily.
Failure would also hurt Abe's "Third Arrow" plan to kick-start Japanese economic growth through structural reforms.
"It would probably be worse for Obama because he would be seen as not able to deliver, whereas Abe would be seen as defending national interests," said Aurelia George Mulgan, Japanese politics professor at Australia's University of New South Wales. "However, internationally, failure could be bad because the ‘Third Arrow' looks even floppier."
U.S.-Japan talks have intensified in the run-up to the summit and are likely to continue through Wednesday. Japanese media have floated one possible outcome: Japan will be allowed to maintain tariffs on rice and wheat in exchange for a larger import quota for U.S. producers. Tariffs on beef would be cut over time, likely to around 9 percent, reports said.
The senior U.S. official, who declined to be identified, cautioned that it would take some months to translate a final TPP agreement into a proposal for lawmakers. But judging from the Japanese leaks, progress seems likely at least on beef.
Yukio Okamoto, a former diplomat and adviser to two Japanese prime ministers, said farmers could receive subsidies to make up for lower tariff protection.
"Of course there is opposition in the Diet (parliament) but the Japanese government should not make that a pretext not to advance, because what awaits is our being excluded from this free, prosperous market in the Pacific," he said in Washington.
U.S. beef and pork lobby groups are urging the White House to insist on complete tariff elimination, warning they may oppose the TPP if it does not go far enough.
(Additional reporting by Krista Hughes in Washington, Billy Mallard in Tokyo, Gyles Beckford in Wellington, David Graham in Mexico City, Nguyen Phuong Linh in Hanoi and Stuart Grudgings in Kuala Lumpur)
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