Cryptocurrency Should Be Included in US-Japan Trade Agreement

When the United States and Japan reached a digital trade agreement at the end of 2019, the two sides excluded cryptocurrency and blockchain technology management. But part of the cryptocurrency market originated in Japan, and the United States is also the birthplace of many major companies, this decision is somewhat surprising.

Today, there are many cryptocurrencies and related financial blockchain technologies, such as smart contracts and NFTs, and the total supply of various tokens exceeds one-third of the total US monetary base.

As the Biden administration begins to determine the way forward for international trade and the Suga administration seeks to further strengthen cooperation with the United States, it may be necessary for both sides to reconsider the exclusion of cryptocurrencies from the U.S.-Japan trade agreement. If both sides reconsider the issue, they can negotiate separate conditions for the existing agreement or redefine the interpretation of the agreement to cover cryptocurrency regulation.

The 2019 Digital Trade Agreement is a landmark document that touches on a range of topics not typically covered in previous international trade discussions.

Algorithms can be digital representations of photos, movies or songs, and now they are part of bilateral trade under an agreement to prevent new tariffs. The digital economy accounts for one-tenth of total U.S. output, reaching $1.8 trillion in 2018, according to the U.S. Bureau of Economic Analysis.

Although the agreement is specific to US-Japan relations, it also serves as a benchmark for low or zero tariffs in the digital sector, and it was developed before other major international digital trade agreements. The COVID-19 pandemic has affected people’s daily lives to a large extent, so even if the pandemic is eventually brought under control at some point in the future, it seems likely that the trend towards the digital economy will continue, and this agreement seems prescient.

Under the agreement, certain aspects of blockchain, particularly those not related to tokens or financial instruments, may fall within the tariff-free structure, although technically the agreement only states that no new tariffs will be imposed on these aspects. However, the reality is that blockchain systems are often deployed alongside more established networks, such as Ethereum or Cardano, which use tokens.

Based on these networks, developers around the world do not need to build new P2P networks, but only need to design on the existing basis, which gives them more motivation to develop. In addition, the network system uses digital currency to represent memory and storage fees. Related blockchains and digital goods can be defined as financial instruments, so tariffs that are not exempted by the Digital Trade Agreement will be imposed. This is a policy trade-off because people believe that these open source cryptocurrency systems have very good security performance and can resist network intrusions and hackers. In Article 19 of the Digital Trade Agreement, some important security issues are also addressed.

In addition, people are increasingly considering the escrow function of blockchain, that is, the blockchain will temporarily keep funds or bonds until the contract between the two parties is resolved. This situation is not only common in real estate, but also often occurs while shippers and suppliers are waiting for settlement. Some companies want to keep a tariff "back door" if they want to engage in both digital and physical trade, as long as the agreement does not involve digital currency. This is a real possibility.

If the United States and Japan are interested in reaching an agreement covering cryptocurrencies, there are at least two potential possibilities for the two sides.

First, the United States and Japan could simply negotiate a separate agreement or use the existing digital trade agreement's proviso to cover cryptocurrencies and digital representations of financial instruments. Another option is to reinterpret the 2019 Digital Trade Agreement to address the problem, since the existing document already covers the details of cryptocurrencies, related smart contracts, digital authentication, signatures, and algorithmic codes.

The respective trade representatives could make it clear that they agree to consider aspects such as cryptocurrencies and smart contracts as part of the digital trade agreement.

Ultimately, no matter which approach the United States and Japan decide to take, both sides face a lot of economic interests at stake, as the total trade in goods and services between the United States and Japan will reach $252.2 billion by 2020. In addition, given the continued growth of digital currencies and e-commerce between the two countries, it is likely that cryptocurrencies and related blockchain technologies will play an increasingly important role in the trans-Pacific economic relationship.

In addition to the above considerations, a U.S.-Japan agreement on digital currencies could establish a clear and consistent regulatory framework to govern the role of digital currencies in trade, thereby developing new technical norms and rules to help develop a free international trade order. For a variety of reasons, it may be an idea whose time has come for the U.S. and Japan to jointly reach a clear agreement on the use of cryptocurrencies in international trade.