Media Global Economy 2018.06.13
Urging Japan to reduce trade deficits through bilateral negotiations
US President Trump instructed the Secretary of Commerce to look into unilaterally increasing the tariff on cars on grounds of security in addition to steel and aluminium.
The Japanese government had been calling for the US to exempt Japan from the steel and aluminium tariffs but failed. The US only exempted countries with which it has a trade surplus or are negotiating FTAs. The US's tactic is now clear; they want to use the steel and aluminium tariff hike as a bargaining chip to pressure countries that have trade surpluses with the US (i.e. countries with which the US has trade deficits) into proposing measures to reduce the surplus in bilateral negotiations.
The US is telling Japan, which is currently rejecting bilateral FTA negotiations, to accept bilateral negotiations if Japan wants to be exempt from the steel and aluminium tariff hike.
The reason the US is moving to increase tariffs against China on grounds of intellectual property right infringement based on Section 301 of the Trade Act is also because they want to reduce China's trade surplus with the US.
The US stance is probably the same with respect to the recent decision regarding cars. They cite security as the reason, but what they actually want is for Japan to accept bilateral negotiations in order to reduce their own trade deficit.
Impact of increasing the tariff rate for automobiles by 10 times to 25%
Japan's steel industry does not export that much to the US, but exports to the US are extremely important for Japan's car industry. Car industry exports to the US are worth 4.6 trillion yen, which accounts for approximately 40% of Japan's total exports to the US.
The US currently imposes a 2.5% tariff on cars. The Trump Administration is reportedly considering increasing this tenfold to 25%. 2.5% may seem small, but it is extremely important for the American car industry, which includes carmakers such as Ford.
When discussions on abolishing this tariff were underway in the TPP negotiations, Ford strongly opposed it, saying that it would essentially mean gifting the Japanese car industry 1 billion USD (more than 100 billion yen). This is because Japan's car industry has been locally producing economy cars in the US but exporting luxury cars (for example Toyota's Lexus) to the US. Luxury cars have high unit prices, so even though the tariff rate is low, the actual amount of the tariff becomes substantial.
In the TPP negotiations, Japan and the US reached an agreement wherein the US would abolish the 2.5% tariff over the unbelievably long period of 25 years in return for Japan's maintaining its tariffs on agricultural products.
President Trump is saying that he wants to increase this tariff tenfold to 25%. This will deliver a huge blow to Japan's car industry, which is working hard every day to reduce costs as much as possible.
If the price of Japanese cars sold in the US rises because of high tariffs, Japan's car industry will suffer a double-punch of lower demand and increased competition from American cars.
The Trump Administration judged that while the Japanese government would not be shocked by the increase in steel and aluminium tariffs, they would accept bilateral negotiations if faced with high tariffs on cars. If the Trump Administration manages to begin negotiations for a Japan-US FTA, it will not only be able to use the high tariffs on cars as a bargaining chip, but it will also be able to demand the abolition of tariffs on agricultural products and pressure the Japanese government. If they can also make Toyota bring its production line for the Lexus brand cars to the US, it can kill two birds with one stone - reduce the trade deficit and increase employment at the same time.
America and North Korea are exactly alike: violating international rules to gain actual profits
The US's measure violates the WTO agreement, which states that signatories will not impose tariffs greater than what they have agreed (2.5% in this case).
Even though they say that they are implementing the tariff hikes for national security reasons, they have exempted some countries based on completely different standards and reasons. As such, they cannot claim that they can be exempt from the WTO agreement on the grounds of national security. The measure is in violation of the domestic laws of the US, too, which is the premise of the measure itself.
The problem here is the fact that the WTO's authority is declining or tarnished because of the failure to conclude the Doha Round of trade liberalisation negotiations, and because of the cases where they have not been able to correct acts that violate the WTO agreement though it admits retaliation by the countries affected by those acts.
Think of it like this. Let's say there is a country where an antisocial organisation is more powerful than the state. In this country, the antisocial organisation constructed a building on land owned by a private citizen without the owner's approval. When the owner demanded the removal of the building, the organisation demanded a huge amount of money from them. The owner wants to file a case with the court to resolve the situation, but the state is weaker than the antisocial organisation, so they have no choice but to accept what the organisation says. The US is the antisocial organisation, and the WTO is the state/court in this case.
North Korea engages in the same kind of behaviour. It violates the Nuclear Non-proliferation Treaty by possessing nuclear weapons and is trying to win benefits such as a guarantee of the safety of their regime from the US and the international community in return for denuclearisation.
To me, President Trump and Chairman of the Workers' Party of Korea Kim Jong-un look similar. Since they are so similar, they might get along at the summit meeting.
Do not demand exemption of application from the U.S.
If Japan asks the US for an exemption, that is just what the US wants. Asking for an exemption means acknowledging that the US's car tariff hike is legitimate. Japan should claim that the tariff hike itself is illegitimate.
As I wrote in an earlier article for Webronza titled 'Catch Trump's trade policy in a "pincer movement' (29 March 2018), we should counter the Trump Administration by taking legal measures, namely filing a case with the WTO and with the domestic courts in the US.
We should deal with rogue states on the basis of the "rule of law". The executive order banning the entry of persons from certain countries that President Trump issued as soon as his administration was inaugurated was taken to the Federal Court by state governments, forcing the Trump Administration to revise the order.
Japan can cooperate with the EU, which also exports cars to the US. We can also appeal to the American public by letting them know what exactly the Trump Administration is doing.