Japan's Auto Sector Is Poised To Weather A U.S. Tariff Storm

For more than four decades, automobile manufacturing has been a key pillar of Japan's industrial sector. And today, auto exports are a mainstay of the Japanese export economy, with exports to the United States accounting for a significant share. As with all other exporters that ship autos into the U.S. market, Japan's carmakers are facing down the threat of a tariff of up to 25 percent on their products. But unlike some other auto-exporting countries, Japan, which has car manufacturing operations spread across the continental United States, is positioned to absorb some of the damage that auto tariffs could bring.

Citing concerns about national security, the White House is considering auto tariffs in its efforts to reduce the overall trade deficit and shore up the U.S. domestic auto sector. The U.S. trade imbalance with Japan, a target of Donald Trump's ire long before he became president, totaled $72 billion in 2017, the third largest of major U.S. trading partners, just behind China and Mexico. The $54 billion trade deficit in automobiles and parts accounts for three-quarters of that overall deficit. Unlike earlier tariffs under Section 232 of the Trade Expansion Act of 1962 that targeted steel and aluminum, these new protectionist measures would target a key manufacturing sector.

For the United States, throwing up protectionist barriers to Japanese automotive exports would in some ways serve as a means to an end: The White House has made it clear that the end it seeks would be a bilateral trade agreement with Japan. But Tokyo has maintained stalwart opposition to an exclusive trade agreement, hoping instead to lure Washington back to the multilateral Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) — although that appears to be an increasingly faint prospect. And while the new U.S. threats to the Japanese auto sector may compel it to rethink its resistance to a bilateral deal, Japan does have some insulation, given its strong auto-manufacturing presence within U.S. borders and its recent successes in breaking down trade barriers to other markets.

Growing Together

Beginning from a low post-World War II level, Japanese carmakers built themselves up on the strength of U.S. military equipment demand and foreign partnerships, initially catering to Japan's nascent consumer market. The period from the mid-1950s to the mid-1970s brought the so-called Japanese Economic Miracle: The country rode a wave of rapid growth and industrialization to become the world's No. 2 economy by 1970.

In the mid-1960s, Japan began exporting automobiles at a frenzied pace, which took the country from last place in auto export rankings in 1964 — among the six leading industrialized nations —to first by 1974 with an output of 2.6 million vehicles per year. By 1970, Japan's automotive sector was responsible for 10 percent of the country's manufacturing output, and by 1974, 40 percent of auto production was exported. The U.S. quickly became the top consumer of Japanese vehicles, and oil crises in 1973 and 1979 helped to accelerate that trend. Although the oil shocks stalled Japanese domestic demand, the country's automakers aggressively promoted their fuel-efficient vehicles in the United States, pushing sales sharply higher. At about the same time, Japan zeroed out tariffs protecting its domestic automotive sector, but it threw up steep non-tariff barriers to protect it from foreign competition. Today, Japanese carmakers command 96 percent of the domestic market.

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Gary Anderson 1 year ago Contributor's comment

Japan can reap rewards of lower tariffs with other nations, making up as big a chunk of auto exports from Japan as does the USA. Trump has underestimated Japan. Great article.