By Gary Clyde Hufbauer and Euijin Jung for Peterson Institute For The International Economics (PIIE)
President Trump’s objectives in launching bilateral trade talks with Japan in late April are clear. He wants to boost US agricultural exports to Japan and reduce US auto imports. The agricultural demands are understandable, since farm states missed out on access to the Japanese market negotiated in the Trans-Pacific Partnership. But restrictions on Japanese auto exports have no justification and are likely to backfire to the detriment of Japanese producers, US consumers (who would be hit by rising auto costs), and Japanese investment and employment opportunities in the United States.
To compel Japan’s acquiescence to US demands, Trump has threatened Section 232 national security tariffs or quotas on US auto imports from all sources, including Japan. On February 17, 2019, Commerce Secretary Wilbur Ross gave the president a still secret report that lays out the case, probably in terms akin to the Section 232 steel and aluminum reports Ross delivered on January 11 and 17, 2018, respectively. Trump may keep the auto report in his back pocket while US-Japan talks move forward but continue to threaten 25 percent auto tariffs, as he has done in the past.
Auto products play an outsized role in US-Japan bilateral merchandise trade (table 1). Thanks to its prowess in engineering and factory management, Japan has acquired a strong comparative advantage in the auto sector. Imports from Japan ensure a highly competitive US market, to the advantage of US households. But imports also make Japan a prime target of Trump’s misguided campaign to curtail US trade deficits through tariffs and quotas.
Following Mexico and Canada, Japan was the third largest exporter of autos and parts to the United States in 2018. And Japan was the leading exporter of passenger cars, accounting for 23 percent ($40 billion) of total US passenger car imports in 2018 ($173 billion). However, US imports of auto products from Japan have barely increased in nominal terms since 2000 (figure 1), in part because Japanese firms have invested substantially in the US auto sector over the last 20 years. Japanese foreign direct investment (FDI) stock in the United States increased seven-fold from $6.2 billion in 1990 to $42.1 billion in 2017, spurring US production and employment. Automotive production of Japanese firms in the United States more than doubled since 1990 to 3.8 million units in 2017. For example, Toyota produces 70 percent of US demand for its autos in US plants. According to Prusa (2018), Japanese brand auto companies directly employed 92,710 US workers in 2017, almost 30 percent higher than in 2011.Read More
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