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

Between 1978 and 1989, the top seven Japanese carmakers each set up production in the United States — an acceleration that gathered momentum with production of Japanese cars climbing from 620,000 units in 1986 to 2.15 million by 1994. This trend of increased Japanese manufacturing in the United States has continued to strengthen. The number of vehicles manufactured by Japanese carmakers in the U.S. rose from 3.3 million to nearly 4 million between 2006 and 2016. And of the 20 most popular light-duty vehicles sold on the U.S. market, five were Japanese models containing upwards of 50 percent of components produced in the United States.

The strong onshore presence of Japanese production facilities will partly blunt the effectiveness of the tariff tactics as the United States presses Japan to enter a bilateral dialogue. Japan still holds out hope that it can persuade the United States to reverse course on its abandonment of the CPTPP. This trade agreement fits more into Japan's overall strategy in the Asia-Pacific to counter China's rise by pulling the Asia-Pacific region's economy more closely into both the U.S. and Japanese orbits. During the most recent high-level meeting of U.S. and Japanese trade officials on Aug. 9 — more than two months after the auto tariff threat — Japan continued to seek a U.S. return to the CPTPP, and the United States continued to push for bilateral talks. Instead of caving to U.S. pressure, Japan has offered up expanded investment, increased purchases of U.S. natural gas and large-scale military procurements in hopes of mollifying Washington by chipping away at the trade deficit.

While Japan is not irrevocably opposed to a bilateral trade deal, Tokyo does not want to lose its leverage as it continues to try to lure the United States back to the CPTPP. But that has become an ever more unlikely prospect. Now, the multilateral trade structure faces opposition not only from the Trump administration but also a likely insistence by Washington to renegotiate much higher automobile rules of origin with all CPTPP members — a proposal few would entertain. Even if Japanese-U.S. bilateral trade talks did begin, they would take up to a year, giving Japan a great deal of room to negotiate terms that would protect the flow of automobiles into the U.S. market.

At the same time, the trend toward U.S. protectionism may spur Japan to build on current efforts to knock down export barriers to other economies. While the United States holds the preeminent position for Japanese car exports (35 percent by value), the combined markets in China (8.4 percent), the European Union (10.4 percent) and CPTPP members (12.2 percent) come close.

While Japan is far from curbing its reliance on the United States, tariffs in other markets are trending lower. The CPTPP stipulates that its members lower their automotive tariffs to zero over the next four years — further opening up markets in Mexico, Canada, Australia and in other Pacific countries, not to mention potential future members. Additionally, the economic partnership agreement Japan signed in July with the European Union requires that auto tariffs drop from 10 percent to zero over the next seven years.

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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.