On his first full weekday at the Oval Office, US President Donald Trump signed an executive order to officially withdraw from the Trans-Pacific Partnership (TPP). It was a big disappointment for the Abe administration, which had expected the TPP to be a pillar of Japan’s growth strategy and an effective means of strengthening Japan-US alliance and promoting Japan’s leadership in the regional integration of the Asia-Pacific region. Trump’s smooth rejection of the TPP brought the ambitious expectations of the Japanese government to an end.
Scrapping the TPP was not enough for Trump to express his dissatisfaction with the global trading system. On the same day, at the meeting with CEOs of major American corporations, including Ford, Trump singled Japan out and accused the Japanese government of protectionism. He complained that it was unfair that American cars could not enter the Japanese market while over a million cars from Japan are shipped to the US every year.
Former President Barack Obama regarded the TPP as an indispensable step of his Pivot to Asia strategy and a blueprint for future free trade agreements in the 21st century. However, Trump viewed the TPP as a disaster for America. It remains debatable whether the TPP was a terrible trade deal for America or not. Trump’s accusation of Japan’s protectionism on automobiles is unambiguously not true. Both Japanese government officials and automakers were puzzled by Trump’s criticism.
As early as 1978, the Japanese government cut tariffs of foreign automobiles to zero. There exist no non-tariff barriers to undermine the entrance of foreign automobiles either. American automakers complain Japanese safety standards are too high and actually function as a non-tariff barrier. These regulations, nonetheless, are non-discriminatively applied to Japanese cars too, therefore they do not qualify as non-tariff barriers, according to the rules of the WTO. On the contrary, the US still imposes a 2.5 percent tariff on passenger cars imported from Japan.
In addition, to protect the lucrative market of pickup trucks, the US government has been charging as high as a 25 percent tariff on imports of pickup trucks from Japan. Japanese automobile manufacturers rarely protest the extraordinarily high tariff and have never filed a case against it to the WTO. Instead, they jumped over the tariff wall and built production facilities in the US to manufacture pickup trucks. As a result, one out of every three pickup trucks sold in the US market is made by Japanese automobile manufacturers. Hence, it is not Japan, but the US which exercises protectionism in the automobile trade.
In the 1980s, the rapid growth of car imports from Japan threatened the US automobile industry and triggered the trade friction between the two countries. Since then, Japanese automakers have continuously expanded their production capacities in the US to localize the production of cars sold in the country. In 2015, the number of Japanese cars exported to the US totaled 1.6 million, much lower than the quota of 2.3 million voluntarily adopted by the Japanese government in 1985 to mitigate the trade friction. At the same time, the output of Japanese automakers in the US surged to 3.8 million, from less than 0.2 million.
The cumulative investment of Japanese automobile manufacturers also contributed significantly to employment in the US. According to the Japanese Automobile Manufacturing Association, Japanese automakers have established 26 production bases and 36 R&D centers in the US. Including car dealerships and part suppliers, Japanese investment in automobile industry has created more than 1.5 million jobs for America.
Unfortunately, President Trump is neither impressed with these numbers nor interested in the economic implications of these facts. What Trump cares about most is the huge imbalance in the auto trade with Japan. On one hand, more than 40 percent of cars running on American highways are Japanese; on the other, American cars almost do not exist on Japanese roads. In 2015, Japan exported over 1.6 million cars to the US, but imported less than 20,000 American cars. Last year, Ford finally terminated its operation and exited completely from the Japanese market, the “most closed car market in the world” as referred to by Ford.
From Trump’s point of view, it is extremely unfair that Japan exports over a million cars to the US every year while American automakers sell less than twenty thousand cars in Japan. Tariff or non-tariff barriers seem irrelevant to the fairness of trade. What matters most is the trade imbalance. This is the logic of Trump’s fair trade.
Trump has showed no interest in pressuring Japan to open its agriculture market, because an increase in the agriculture exports of the US adds little to employment.
As a matter of fact, American automakers should be blamed for their poor performance in the competitive Japanese car market. Japanese consumers generally have no positive images about American cars. They think of American cars as big and having low gas mileage and high maintenance costs. Relatively narrow roads, small parking lots, and high gasoline prices in Japan imply that big American cars are not suitable for ordinary Japanese families. These are the major reasons Japanese consumers drive few American cars.
Having said that, it does not mean there is no demand for foreign cars in Japan. Actually, foreign cars dominate the luxury segment of the Japanese automobile market. Even though the quality and performance of Toyota’s luxury brand Lexus can match traditional European luxury brands such as BMW and Mercedes-Benz, rich Japanese still prefer imported luxury cars. It remains a popular phenomenon in Japan that successful business owners drive Mercedes-Benzs, medical doctors buy BMWs, and car fans favor Italian sports cars. Despite the shrinking of the Japanese auto market due to an aging population, the sales of imported luxury cars rose 19 percent last year. However, there exists no presence of American cars in the luxury car market.
Well, it is almost impossible to convince President Trump, who has been so successful in his life so far, that it is American automakers, not Japanese protectionism, that should be blamed for the failure. Exchange rate manipulation is another excuse cited by Ford for its withdrawal from the Japanese market. Senior executives of Ford have often criticized the Japanese government for manipulating exchange rates to support Japanese automakers. President Trump has bought this argument.
Recently he claimed that the Japanese government deliberately devalued the Yen with quantitative easing when he met with CEOs of US pharmaceutical companies. The comment immediately trigged the dollar falling one Yen. It is true that the fluctuations of exchange rates significantly affect the operating profits of Japanese automakers, as more than 50 percent of their sales are generated from overseas markets. For instance, Toyota’s operating profit would increase 40 billion Yen for a one yen appreciation of the dollar.
Japan is also not a country without protectionism. The Japanese government is notorious for protecting domestic farmers. Japan imposes a 35 percent tariff on beef imported from the US; foreign rice is subject to a 315 Yen tariff per kilogram. Given such a high tariff, foreign rice will completely lose its price competitiveness once it enters the Japanese rice market. President Trump, however, has showed no interest in pressuring Japan to open its agriculture market, because an increase in the agriculture exports of the US adds little to employment. It cannot create jobs for his voters in the rust belt. Those voters do not want to be farmers either.
Facing Trump’s hostile attitude, the Japanese government has not directly refuted his accusation of protectionism, as the US remains the largest market for Japanese cars — the single largest item of Japanese exports to the US. With the vivid and unpleasant memory of the trade friction of the 1980s, the Japanese government is worried that the Japanese automobile industry might be targeted by Trump’s fair trade policy. The Abe administration has attempted to cautiously explain Japan’s side of the story: the Japanese auto market is open and fair, and American automakers should do their homework if they are willing to enter the market. Whether Trump will eventually be convinced by the story remains an open question.
Regardless of Trump’s arguments being true or not, it remains a fact that the US is the largest overseas market of the Japanese automobile industry. It is Japan who needs the US market, not vice versa. As an experienced business negotiator and dealmaker, President Trump has the upper hand in the game. Before his presidential inauguration, Trump warned Toyota on Twitter that he would impose a big border tax on the company if it built a new plant in Mexico. In response to Trump’s criticism, Toyota announced that it will invest USD 10 billion in the US over the next five years. Unequivocally, Trump has won the first round without a fight but with an angry Twitter message.
Toyota President Akio Toyoda once emphasized that the auto industry is the backbone of the Japanese economy and maintaining a minimum 3.5 million annual output in Japan is crucial for domestic employment. If Toyota and other Japanese companies increase their investment in the US and reduce domestic production accordingly, it will undermine the growth of the Japanese economy, which has been struggling to move out of the deflationary spiral.
Trump’s fair trade logic has hence created a dilemma for Japan — the US’ most reliable ally in Asia.