Japan:A Trade War That's Easy to Avoid

Tokyo just wants to get this fight over with.

By Phillip Orchard        

Shinzo Abe is set to become Japan’s longest-serving prime minister following his re-election as Liberal Democratic Party chief earlier this month, but he’s entering his third term with a fresh headache gifted from Washington. For the past two years, Tokyo has refused to enter formal bilateral trade negotiations with the United States. On Wednesday, Abe and U.S. President Donald Trump announced an agreement to do just that. The apparent about-face follows a month of threats from Trump that Japan was next on his trade hit list, warning that his warm relationship with Tokyo would end “as soon as I tell them how much they have to pay.” It also comes as Japan remains stuck on the sidelines in the North Korea nuclear negotiations, with Tokyo increasingly concerned that the U.S. will strike a deal that keeps the U.S. mainland safe from North Korean attack while hanging Japan out to dry. With friends like these, who needs the Kim family?

But Tokyo’s conciliatory turn is not motivated by fears that Japan is following China toward a full-blown trade war with the U.S. Nor is Tokyo under any illusions that concessions on trade will make the U.S. any more inclined toward or capable of striking a deal with Pyongyangthat secures the home islands. In reality, there’s a lot less to Japan-U.S. trade tension than meets the eye – not enough to keep a deal out of reach, and certainly not enough to jeopardize the future of the alliance by itself. Still, Japan’s strategic imperatives have left it with little appetite for any protracted feud.
A Trade Spat, At Most
The U.S. trade deficit with Japan and its accompanying political considerations have bedeviled the alliance since about as soon as Japan found its postwar economic footing as a low-cost exporter beginning in the 1960s. This led to a major showdown in the 1980s, when the U.S. and other countries were able to force Japan to strengthen the yen and make a number of structural adjustments. Trump himself has been critical of supposed unfair Japanese trade practices since the 1980s, and he hasn’t spared Japan — in particular, the millions of Japanese cars on U.S. highways — from his trade criticisms since launching his run for the White House.

In 2017, according to official figures, the U.S. deficit with Japan in goods ran just short of $69 billion – the third-largest U.S. trade deficit behind that with China and Mexico – or around 0.35 percent of U.S. gross domestic product. The steel and aluminum tariffs the U.S. slapped on Japan (which was denied the temporary exemptions given to several other countries) in the spring haven’t made much of a dent in the deficit; through August this year, the goods deficit totaled around $40 billion. This is nothing to sneeze at, but the imbalance is not growing rapidly, and it’s a far cry from what it was in the mid-1980s, when it soared to nearly 1.2 percent of U.S. GDP. Since then, moreover, outbound foreign investment has gradually replaced low-cost exports as a primary driver of the Japanese economy. Japan is now the second-largest source of foreign direct investment to the U.S. ($129.1 billion in 2017), supporting an estimated 1.5 million jobs in the U.S. auto sector alone. Meanwhile, as Japan’s economy has matured, the U.S. has built a services surplus with the country ($13.4 billion in 2017).


In other words, by most metrics, the two countries have settled into a mutually beneficial economic partnership – albeit with occasional points of contention of the sort that would be expected in any trade relationship – that plays largely to each other’s strengths. And the deficit in goods, coming at a time of near full employment in the U.S., illustrates in many ways the power of the U.S. economy.

The White House’s frustration really boils down to just two issues. The first is auto imports, which account for around two-thirds of the deficit. But Tokyo doesn’t have much room to make concessions here, and it thinks the U.S. may not have the leverage to force the issue. Japan has zero duties on imported cars; the Clinton administration was able to nix these. (The U.S., by comparison, places a 2.5 percent duty on imported cars, and 25 percent on light trucks.) U.S. auto sales in Japan are negligible primarily because Japanese consumers don’t want them (German cars, by comparison, perform just fine in the Japanese market), and there’s not a lot the Japanese government can do about that. So Tokyo can’t put increased market access on the table to bring down the deficit.

Trump could follow through with threats to impose 25 percent tariffs on all vehicle and auto parts imports, but there’d be no hiding the immense sticker shock for U.S. consumers at a politically sensitive time. According to the Center for Automotive Research, the price tag for the average vehicle sold in the U.S. would jump $4,400 nearly overnight, regardless of where it was built. Moreover, some 4 million Japanese vehicles are made primarily in the U.S., with parts from factories in dozens of states. Tariffs of this magnitude would kill off an estimated 750,000 U.S. jobs. Japan has used this footprint to curry considerable favor in the U.S. Congress, which is largely opposed to the proposed auto tariffs. The U.S. auto industry itself is uniformly and vocally opposed to the tariffs. Naturally, Tokyo thinks Trump may be bluffing here.

What Japan can (and probably will) do to satisfy the White House and eat into the deficit is pledge to buy more U.S. oil, liquefied natural gas and weapons. This is low-hanging fruit; Japan has negligible natural resources of its own, and securing steady supplies of oil and gas has been a geopolitical imperative for Japan since the Meiji Restoration. (See: World War II.) And Japan is likely to give in to U.S. demands that it end Iranian oil imports come November. Japan’s ongoing military modernization drive, meanwhile, is being done overwhelmingly with U.S. arms, and its efforts to build up a more robust domestic arms industry will center largely on joint production arrangements with U.S. firms. Notably, Abe in 2016 discarded Japan’s de facto 1 percent of GDP cap on military spending.

Somewhat trickier will be conceding on the second core area of focus for the White House: barriers to U.S. farm exports. Agriculture is Japan’s most tightly protected and politically powerful sector. Tokyo has reportedly offered to lower tariffs to levels agreed to as part of the negotiations over the Trans-Pacific Partnership, from which Trump withdrew on his first day in office. This makes sense for Tokyo, as it already spent the political capital needed to keep the sector at bay during TPP negotiations. And it appeals to the White House, which is looking for lifelines to throw to U.S. farmers, who have been targeted by Chinese counter-tariffs. But if the U.S. chooses to push for more, it’s not clear that Abe can deliver. Doing so would not only threaten his broader agenda at home, but it would also threaten the ratification prospects among signatories of the revived TPP, which may demand similar agricultural concessions from Tokyo.

In short, Tokyo has reason to believe the U.S. doesn’t have the economic, political or strategic rationale to escalate the dispute to a full-blown trade war. Japan is not China. And the recently revamped U.S. trade deal with another ally with a large bilateral trade surplus, South Korea, has furthered Tokyo’s belief that a largely symbolic deal may give the White House the political win it needs to move on. One of South Korea’s main concessions was a doubling of the number of vehicles each U.S. automaker can sell in South Korea without meeting Seoul’s safety standards, from 25,000 to 50,000. Last year, no U.S. automaker sold more than 10,000 vehicles in South Korea.
Japan’s Bigger Picture
Entering into formal negotiations is a concession on its own for Abe, who has pledged to refrain from pursuing a bilateral free trade agreement. (To get around this, Tokyo is labeling the talks as pursuing a “trade agreement on goods,” not a comprehensive free trade agreement that would also cover things like services and investment). Moreover, Tokyo’s push for multilateral, rather than bilateral, negotiations is not mere preference but a strategic goal as Japan attempts to build out a cohesive economic and security network of partners across the Indo-Pacific aimed primarily at containing Chinese assertiveness. So why, then, is Tokyo coming to the table?

For one, Trump’s willingness and ability to shrug off political risks and sectoral pressure in the U.S.-China trade war has made it so Tokyo can’t be sure that he’s bluffing on auto tariffs. If he follows through, the tariffs would dent Japan’s GDP by an estimated 0.5 percent in the first year at a time when Abe is still grappling for a way to shock the Japanese economy out of its decadeslong slump. And the U.S. has reportedly agreed to shelve auto tariffs so long as talks are ongoing. More important, Japan’s long-term goal is to entice Washington back to the TPP – or at least to present a united front against China on trade in some other form – and near-term bilateral concessions may help pave the way. Finally, Tokyo can’t be sure that trade will remain compartmentalized from bilateral security matters. In the past, Trump has indicated a willingness to link trade concessions to defense matters (such as basing costs, military aid, support for U.S. negotiating positions and so forth), as happened periodically during the bilateral trade spat in the 1980s.

None of these are major threats to the integrity of the alliance. If the alliance truly begins to crack, it will be because the two countries’ strategic orientations are diverging more widelyJapan is already preparing for the possibility that it will eventually need to better look out for itself. The North Korea detente has only underscored this reality. But Tokyo needs considerable U.S. support to get to the point where it can stand on its own, and it has an imperative to continue to prove itself indispensable to U.S. regional aims in the meantime. A protracted trade dispute is a complication that Tokyo is keen to avoid.

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