Month: March 2017

Trump and Japan: 1980s Redux?


Its unfair…(that Japan does) things to us that make it impossible to see cars in Japan, and yet, they sell cars into us and they come in by like the hundreds of thousands on the biggest ships I’ve ever seen.” Donald Trump, January 2017

“Try as he may, Abe can’t convince Japan’s 126 million people to buy American cars…” William Pesek, Barron’s Asia, February 2017.”

While Japan has not approached China’s status as a Trump trade bogeyman, it has certainly come in for its share of criticism.

The President has called out Japan’s interventionist exchange rate policy, despite the fact that Japan has not intervened in the foreign exchange markets for number of years. A potentially more meaningful critique of the yen could be made, based on continued enormous monetary accommodation by the Bank of Japan, and we may see this get more play if, as expected, US and Japan interest rate policies continue to diverge.

At the same time, Trump has called out Toyota and other Japanese corporates for not building “enough” of the products they sell in the US in the US. However, Japan has increasingly outsourced its manufacturing to the US and others, to the point that, for example, Honda is now a net exporter of cars from the US. It should be noted as well that efforts  to ensure that those that manufacture in the US also buy parts within the US (or pay punitive tariffs) will serve to make US production more costly and less attractive to Japanese and other foreign investors.

Finally, as quoted above, Trump has alluded to still-to-be-spelled-out unfair trade practices by Japan. While tariffs can’t be the main problem–for most products Japan’s tariff rates are similar to those of the US and other WTO members–there are other practices that straddle a line between differences in culture, consumer preferences,  and regulatory environments. While some practices may be construed as protectionist, its also clear that US industries would need to do a better job of making product attractive to Japan. For example, building cars with the steering wheel on the right side would be a good start!

Prime Minister Abe has made a major effort to engage President Trump early and often, meeting before the inauguration and then again shortly afterward. Trump appears to have reciprocated at least superficially, including by spending a golfing weekend with the Prime Minster and his wife. There is a sense that Abe may have been clever in providing Abe with “tweetable” successes, in particular with plans for increasing jobs at Toyota and other companies, even if there is little actually additional in any of these promises.

Nevertheless, we should not assume that all is, and will remain, well between the two countries. Closing the trade and/or current account deficit appears to be a goal of at least part of the Trump Administration. This will likely prove difficult, as external imbalances reflect differences between national savings and investment. With large infrastructure spending and rising fiscal deficits likely in the coming years, the pressures will be for a rising–not falling–trade deficit. Once Trump suffers a defeat at the hands of math, it is likely he will double down on claims of unfair trade and exchange rate practices, and quite possible that Japan will be caught up in all that.

How might this all turn out?  A look at the trade frictions of the 1980s may provide some clues. At that time, the US had a sizable bilateral trade deficit with Japan while Japan ran large current account and trade surpluses with the world. Again, this largely reflected macro developments–Japan was still in a demographic sweet spot, keeping its savings high, while the US saved little and was experiencing growing fiscal imbalances under the Reagan tax cuts. (More recently, Japan has run global trade deficits or small surpluses, with positive current account balances reflecting mainly net income from previous investments in assets abroad, notably in the US.) But that did not stop either angry demonstrations (such as that shown in the photo above) or efforts by the US and EU to seek redress. In the end, the efforts took several forms:

  • Restrain yourself. Japan agreed to a series of voluntary export ceilings from the mid-1970s through the mid-1990s on a wide range of products, including textiles, steel, TVs and cars. This can be seen as a result that served the political purposes of both sides–Japan headed off more draconian steps while the US/EU could be seen as responding to domestic interests without turning away from essentially free trade. It is unlikely that these restraints had much impact on bilateral trade–such limits can be easily circumvented e.g. by moving production away from Japan or moving toward higher quality/cost products–but that was perhaps not the point.
  • Increasing access to Japanese markets. Trade negotiations later focused on increasing US access to Japanese markets by removing perceived non-tariff barriers. Again, it appears that this did not decisively change trade dynamics, and it is notable that the TPP, which could have increased US presence in Japan’s services sector, has been killed by the new Administration.
  • Realignment of exchange rates.  The Plaza Accord of 1985 looked to coordinated forex intervention to reduce current account imbalances. Any return to such a scheme would appear extremely unlikely at this stage. In any case, a weak yen (to the extent that it is actually below its unknowable long-term equilibrium) is more a reflection of Japan’s monetary policy. Would the global economy benefit from a sustained rise in Japanese interest rates? That is debatable to say the least.

What we may see instead is a Japanese effort, if pushed, to create something analogous to the voluntary export restraints of its past, but in the sphere of FDI in the US. As before, these would likely have little real impact and would simply codify plans already in train or else represent mutually beneficial agreements, such as Japanese participation in a US infrastructure push. In any case, with Japan’s population declining and labor shortages emerging across a range of industries, further outsourcing–including to the US–is very likely in the cards.