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

A Critical Sector

Even after economic diversification and its so-called Lost Decades of stagnation in the Japanese economy, automotive production remained a powerhouse of its manufacturing sector and of the economy as a whole. Exports continue to drive the sector: Japan today is the world's top vehicle exporter, sending abroad 4.6 million vehicles — double that of the next largest exporter, the United States. Motor vehicle manufacturing accounted for about 3.3 percent of Japan's total gross domestic product in 2016. The impact of trade tariffs would resound through the automobile sector and related industries, which employ upwards of 5 million people, although the portion of the workforce directly exposed to the export market would be closer to 2 million maximum — or around 3 percent of the working-age population. In 2016, motor vehicles constituted nearly 22 percent of Japan's total goods exports by value, more than electronics, machinery or chemicals.

Japan's steel and aluminum industries were affected by the same Section 232 tariffs that the United States slapped on its foreign competitors (Japan was the only U.S. ally not to be granted an exception to those tariffs). But since steel and aluminum make up only 4 percent of Japanese goods exports, they did not affect its economy enough to force Japan to the bargaining table. But since Japanese carmakers are heavily reliant on exports, and the U.S. market is far and away the most important export market for them, there's no guarantee that Tokyo will view auto tariffs the same way if they are imposed.

In 2016, the United States accounted for 1.73 million units — nearly 40 percent of Japan's vehicle exports and 5 percent of total exports. This compares to the approximately 1.41 million units shipped to all of Asia and Europe combined. For the United States, Japan is the second-largest source of automotive exports (parts and vehicles included) by value, just behind Canada. This heavy reliance leaves Japan vulnerable to tremors in the U.S. market and trends toward protectionism. Preserving this access will be a priority for the Japanese automotive sector, which will become only more reliant on external demand as demographic decline shrinks the Japanese domestic consumer market. Even as global automotive demand rose 4.7 percent overall in 2016 to 93.86 million units, Japanese domestic sales contracted 1.5 percent overall to fall below 5 million units. And Japan is bracing for the effects of a long-delayed domestic consumption tax hike that is now expected to take effect in 2019, bringing with it immediate impacts on the economy and making external markets, particularly the United States, an even more critical part of its economy.

Japan's Built-in Resistance to Pressure

Past protectionist pushes by the United States prompted Japan to build up a degree of insulation that could help it weather the current tariff threat. Even as it pursued its Cold War-era strategy to build up the Japanese economy as a U.S. bulwark in the Pacific, the United States moved to protect the U.S. domestic sector from Japanese competition. In the 1970s, the United States piled pressure on Japan, which ultimately agreed to self-imposed voluntary export restrictions on automobiles, which lasted from 1981 to 1994. This squeeze on Japanese automakers spurred a flurry of joint ventures and the movement of Japanese production onto U.S. shores.

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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.