US President Donald Trump has dumped on Japan for the huge imbalance in its bilateral automobile trade with the United States. Japan’s auto exports to the United States have outnumbered its imports by a large margin for many years. In 2016, Japan exported 1.75 million autos to the US, while Japan imported just under 20,000.
Trump claims that the auto trade imbalance is unfair. He says that his administration will increase tariffs on Japanese auto imports from 2.5 per cent to 38 per cent — which happens to be the tariff rate imposed on US beef imports by the Japan — to correct the imbalance. Japan and the United States are on the verge of reigniting their old trade battles over automobiles, which were at the heart of the bitterness in their trade relations in the 1980s and 1990s. .
What are the facts of the problem?
Japan’s auto imports have increased more or less continuously over the years and reached 351,382 in 2016. Imports then were 9.1 per cent of the Japanese market. Although the market share of imports in the Japanese auto market is significantly lower than the US where its around 30 per cent, it’s almost twice that in the EU at around 5 per cent. What stands out in recent years is the changing nature of imports from the US and the EU. The number of US automobile imports to Japan declined from 23,381 in 2013 to 19,933 in 2016, while imports from the EU increased from 239,090 to 251,115. Mercedes-Benz, BMW, Volkswagen and other European cars have become very popular brands in Japan.
Some claim that entry into the Japanese auto market is very difficult for foreign automakers. Ford Motor Company recently announced its withdrawal from Japan, citing difficult market conditions.
But Japan imposes no tariffs on imported automobiles. The US and EU impose 2.5 per cent and 10 per cent tariffs respectively. Foreign automakers face non-tariff measures such as environmental and technical standards in Japan, but these are measures applied equally to all the automobiles sold in the country, regardless of their origin.
The low level of US auto exports to Japan is attributable to the fact that US automobiles don’t suit the Japanese consumer. A survey conducted by kakaku.com, a company providing market information on Japanese consumers, reveals that among the top 100 most popular automobiles in Japan 71 are Japanese, 28 are European and only one US automobile, Tesla, made the list.
The US auto industry’s lack of competitiveness has caused the trade imbalance, not protection of the Japanese market. If he wants to change this, Trump should put pressure on US automakers to improve productivity and competitiveness, not protect them by imposing tariffs on Japanese auto imports. Protection does not improve competitiveness, it commonly lowers it. US auto producers were protected by import tariffs and voluntary export restraints on Japanese producers in the 1980s and 1990s, but competitiveness failed to improve. Protecting US producers won’t make the US auto industry great again.
Trump argues that Japanese imports are taking jobs away from US workers. He uses this same rhetoric about auto imports from Mexico. His solution? Increasing tariffs and renegotiating the North American Free Trade Agreement (NAFTA). NAFTA, which was enacted in 1994, provides free access to the US market for imported autos from Mexico. Major Japanese automakers, along with their European and US counterparts, have taken advantage of this preferential arrangement by manufacturing automobiles in Mexico and exporting them to the United States.
Currently, four Japanese companies are operating in Mexico with total production of 1.4 million. Since a large portion of these automobiles are exported to the United States, high tariffs on imports from Mexico will damage these Japanese companies. High tariffs may save displaced US workers temporarily, but in the longer term, they are likely to damage the US economy more as high tariffs lift American costs and auto protection may trigger a trade war.
In fact, the Japanese auto industry, far from taking away US jobs, contributes to the US economy by generating production and employment. Japan’s automobile exports to the US declined sharply from 2.9 million in 1988 to 1.6 million in 2015, while the number of automobiles produced by Japanese companies in the United States increased from 723,396 to 3.8 million during the same period. Japanese companies account for approximately 30 per cent of total automobile production in the United States.
The Japan Automobile Manufacturers Association estimates that Toyota generated 136,000 US jobs through manufacturing, sales and other operations in 2016. Employment generated by Japanese automakers totals 1.5 million if one includes ‘indirect’ employment in related sectors.
The auto industry has an important position in the US and Japanese economies not only because of its huge impact on production, employment and international trade but also because of its influence on people’s lives. Recognising the important role that the auto industry plays, the revival of a strong and competitive US automobile industry is doubtless a good thing. But the way to do this in both Japan and the US is to promote fair competition and avoid government intervention not to resort to old-fashioned, acrimonious protectionism.
Shujiro Urata is Professor of International Economics at the Graduate School of Asia Pacific Studies, Waseda University, Tokyo.
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