A Good Friend
Free, fair and reciprocal trade talks are what Japan is looking forward to in the upcoming negotiations with the US chief trade war lord. Japan knows that there’s a trade deficit in its advantage (i.e. the US importing more from Japan than exporting to Japan), and understands that the US’ strategy is purely focused on reducing such benefit and using import taxation as the weapon of preference.
In 2017, Japan exported goods and services worth US$ 136 billion and imported goods and services from the US worth US$ 67 billion. This delivers a trade deficit of almost US$ 69 billion in favour of Japan. For January 2018 to July 2018, the deficit is already at US$ 40 billion.
For a couple of months now, Japan’s car exports to the US are dropping. Reuters noted a 5.2% decline, paced by a 12.1 percent fall in car shipments.
Japan is recovering from an economic slowdown and is finally showing sustainable growth of 1.9% for the second quarter in a row. Growth comes mainly from household and business spending, but is supported by export to – mainly – US, China and other Asian countries. Japan is therefore extremely cautious about the effects that Trump’s policies might have on its main export regions, such as China.
Trump quit the TPP (Trans-Pacific Partnership trade pact) soon after taking office, opening the way for bilateral negotiations. Japan’s PM, Abe, does not feel comfortable with this situation, as he has engaged himself in Parliament not to exceed the concessions Japan has made in the TPP. Trump, however, will be squeezing Japan, especially on agriculture and car industry. His objectives are to obtain better conditions than what the TPP was offering the US.
Japan is now looking for alternatives to reduce the trade deficit; in other words, Japan is looking for goods and services to buy from the US in order to leverage its negotiation power. One concession plan calls to buy more American defence equipment and more liquefied natural gas, whilst the Japanese automakers could increase production in the US. Unfortunately, even in a maximum effort scenario, this would only solve one seventh of the trade deficit.
Expected doom scenario
It’s almost impossible to solve the trade deficit without touching the car industry, which accounts for almost 40% of the trade deficit. It’s therefore likely that Japanese cars will be submitted to a 25% import tax, which will have an immediate impact on the car sales. Even a 10% reduction of the car production in Japan will slash GDP with JPY 4.3 trillion and cost up to 40,000 jobs.
PM Abe is nervous. He described Trump previously as a good friend and Trump has been generously commenting on his positive relationship with Japan, but as he mentioned to the Wall Street Journal, "Of course, that will end as soon as I tell them how much they have to pay."