Donald Trump’s trade wars: is Japan the next ally in the US president’s sights?
Trump has frequently grumbled about a ‘very high deficit’ with Japan, the world’s third-biggest economy
While the US takes aim at China, Canada and Mexico over perceived trade imbalances, Japan has kept a low profile, hoping Prime Minister Shinzo Abe’s friendship with golf buddy Donald Trump will keep Tokyo out of the firing line.
But as Abe and Trump prepare to hold talks that will touch on trade frictions, there are signs Japan could be next in the US president’s sights, with the country’s greatest fear being higher tariffs on cars.
What’s Trump’s beef with Japan?
Trump has frequently grumbled about a “very high deficit” with Japan, the world’s third-biggest economy. In comments to The Wall Street Journal, he stressed his good relations with the Japanese, before adding menacingly: “Of course, that will end as soon as I tell them how much they have to pay.”
Last year’s deficit in goods traded with Japan was US$68.8 billion, third behind China (US$375 billion) and Mexico (US$71 billion), and less than one-tenth of the total US deficit with the rest of the world (US$796 billion). The deficit amounted to US$40 billion in the first eight months of this year, according to official US statistics.
Vehicle and parts exports from the auto sector account for 80 per cent of the imbalance and it is the sight of “millions of Japanese cars” on American roads that raises Trump’s hackles, while few US brands are driven in Japan. That has little to do with tariffs – Japan has no duties on imported cars, unlike the United States which imposes a 2.5 per cent levy.
Analysts say with their larger sizes, US vehicles are not well suited to Japan’s roads or the tastes of its consumers. Critics argue, however, that Japan imposes a raft of non-tariff barriers – including what they say are overly rigorous safety standards – that make importing difficult.
How are talks going?
Initial negotiations between US Trade Representative Robert Lighthizer and Japanese counterpart Toshimitsu Motegi have already taken place without a breakthrough and a second round is expected later on Monday.
The two sides have opposing points of view: Tokyo wants to settle trade disputes in a forum like the Trans-Pacific Partnership, a multinational trade pact, whereas Washington wants a bilateral deal.
Tokyo may accept the bilateral approach if Washington holds off on imposing additional tariffs on the Japanese auto sector, according to Kyodo News.
For the moment, hostilities have not broken out in earnest but this could soon change, said IHS Markit economist Harumi Taguchi.
“It is highly likely that Donald Trump will move his focus to Japan once he reaches some settlement or deal regarding US trade tensions with China and Nafta talks,” the analyst said.
Would car tariffs hurt?
“The Trump administration’s most effective weapon in talks with Japan remains the threat to impose tariffs of up to 25 per cent on automobile imports on national security grounds,” said Tobias Harris from Teneo Intelligence.
Such a move would have a “considerable” impact on the Japanese economy, he added.
Car giants like Toyota and Nissan sell millions of cars in the United States, many of which are produced elsewhere – for example in Japan, Mexico or Canada. Taguchi said a 25 per cent tariff could cut Japan’s GDP by as much as 0.5 per cent.
Manufacturers have already warned they will be unable to absorb the cost and it will be passed onto US consumers – in Toyota’s case, this could cost a buyer as much as US$6,000 per car.
Trump will probably demand more Japanese cars made in the US, but the room for manoeuvre is limited.
Japanese companies already produce nearly 4 million units per year in the US and employ 1.5 million workers there, Taguchi said. A China-style tit-for-tat tariff battle is also unlikely, as Abe has already said such a move would benefit nobody.
Instead, Japan will probably petition the World Trade Organisation, as it threatened to do when the US imposed steel tariffs.
Can Japan escape?
What Abe should do is promise to increase purchases of “shale gas, military items, and some other items that will not substantially affect domestic production,” Taguchi said.
Japan has already announced the purchase of the costly Aegis Ashore missile defence system, produced by US contractor Lockheed Martin. However, this is not likely to prove sufficient and Abe will have to use his negotiating skills.
If Japan offered a “satisfactory package of concessions on market access in the near term, particularly one that included agricultural concessions”, it might escape Trump’s wrath, said Harris. But this is a very sensitive subject in Japan which already has tariffs in place to protect its farmers.