Japan Braces For A Trump Trade War It Can Ill Afford

Latest stories

US Typhon missiles ignite a China-fueled feud in Philippines

Snubbed by Nobel, Japan's AI pioneers being written out of history

Trump's back: East Asian allies must adapt to the MAGA world

The problem is that Trump might not find China , Japan or Korea as compliant as he hopes. Something that's changed since 2017 is that Asia is less reliant on the US today as it was then. At the same time, Trump might find Ishiba and Korea President Yoon
Suk Yeol less willing to roll over to his demands due to their respective domestic dynamics.

From 2017 to 2021, Trump 1.0 tried to browbeat Abe's government into a bilateral trade deal that few in Tokyo saw in Japan's best interest. Trump also attempted to shake Tokyo down for $8 billion a year in protection payments to maintain US troop levels in Japan. Yoon's predecessor, Moon Jae-in, faced a similar set of Trump demands.

Yet with approval ratings poised to fall into the 20s, it's not clear Ishiba's LDP will be as keen to buckle to Trump as it was during Abe's day.

The conventional wisdom affords too much credit to Abe's efforts to placate Trump. In November 2016, Abe was the first world leader to race to Trump Tower in New York for an audience with the then-incoming president. Abe also backed many of Trump's whims on the international stage.

Yet Trump's first big decision was to leave the US-led Trans-Pacific Partnership trade deal, a cornerstone of Abe's efforts to contain China. Nor did Abe's acquiescence win Tokyo a pass on Trump 1.0 tariffs, which slammed the Japanese economy.

Moreover, Trump's odd bromance with Kim Jong Un shocked the Tokyo establishment. By giving the North Korean leader space to accelerate his nuclear program, Abe's pal in the White House hurt Japan's broader national security interests. And Trump humiliated Abe by disclosing the gushing letter Abe penned on his behalf to the Nobel Committee.

As Ishiba mulls whether to prostrate his government before Trump World, his policy team will assess how few deliverables, if any, Abe secured by doing so.

Any calculation also must include how the Trump 2.0 trade war will wreck Ishiba's plans for Asia's second-biggest economy.

Arthur Kroeber, an analyst at Gavekal Dragonomics, notes there are too many imponderables for leaders from Tokyo to Frankfurt to know what's really coming.

“The economic policy whipsaw of the past few days validates what Yogi Berra might have said had he lived long enough: It's difficult to predict the future, especially if Donald Trump is involved,” Kroeber says.

Yet, he adds,“no sooner had Trump calmed markets by appointing Wall Street veteran Scott Bessent as his treasury secretary than he riled them up again by threatening to impose immediate tariffs of 25% on Mexico and Canada, as well as a 10% hike on China - swiftly contradicting Bessent's many assurances that tariffs would be layered on gradually, and for well-defined purposes, rather than unleashed all at once.”

The lesson here, Kroeber notes,“is that the range of possible trade policies in Trump's second term is wide, and bets on any particular outcome right now are speculative.”

What's not speculative is that Japan's economy isn't exiting 2024 on sound footing. Ishiba's party, for example, is almost linearly focused on raising the minimum wage to a level that would still be too low to boost demand: 1,500 yen ($9.8) per hour.

Yet even this low average hourly wage has business groups complaining it's too high.

“Small business owners in rural areas cannot pay if the pace of wage hikes is too fast,” says Ken Kobayashi, chairman of the Japan Chamber of Commerce and Industry. Adds Masakazu Tokura, head of the business federation or Keidanren:“It takes time for management to make improvement efforts.”

Along with slamming economic confidence and global supply chains, Trump's tariffs will boost global inflation. That would complicate efforts by the Federal Reserve in Washington to continue cutting rates, as global markets fully expect.

It also puts the BOJ in a difficult spot. On the one hand, higher consumer prices would give Team Ueda greater latitude to normalize rates that have been near zero for 25 years. On the other, the yen might skyrocket in ways that tank the Tokyo stock market.

Trump playing Canada off Mexico has currency analysts buzzing about unintended consequences.

“Canada is one of the largest trading partners with the US where its exports are mostly energy-related,” says Kelvin Wong, analyst at currency broker Oanda.“Hence if such tariff measures are followed through by the incoming Trump administration, Canada export revenues are likely to take a significant hit which in turn trigger a negative feedback loop in the Canadian dollar.”

Most of Trump's taxes on North America tariffs would be passed along to consumers. The odds of automakers suddenly increasing productivity to offset tariffs aren't promising, argues C J Finn, an auto sector analyst at PwC.

Daniel Roeska, an analyst at Bernstein thinks Volkswagen, General Motors, Ford and Stellantis would be hardest hit.“A 25% tariff on Mexico and Canada would severely cripple the US auto industry,” he says. That, Roeska adds, would damage US industrial production so much that“we expect this is unlikely to happen in practice.”

The tariffs Trump has already detailed“could affect the profitability of Korean and Japanese automakers with imports from domestic facilities or Mexico and could also hold Chinese automakers back from investing in Mexico,” says Jeong Min Pak, an analyst at Fitch Ratings.

The EU's high import duties against Chinese battery electric vehicles, Pak says,“are also likely to temper China's exports. Fitch expects the shift in gear to developing markets to boost competition, and with the potential to accelerate electrification of these markets.”

Then there are the ways BOJ policy might collide with Trump's own stated desire to devalue the dollar , including by exercising direct control over Fed rate decisions. The ways that could trash the dollar's credibility are hard to calculate.