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In the short run, trade uncertainty has helped some Southern states win new projects from Japan.
Unable to escape the Trump administration’s steel and aluminum tariffs, many firms have deepened their already strong exposure to the region.
Joint ventures giving steel makers a foothold in the U.S. have taken off, and auto parts plants have doubled down on existing factories to blunt the impact of threatened 25 percent tariffs.
Japanese firms have invested $25 billion in the U.S. since the Trump inauguration in 2017, creating 50,000 American jobs in three years, according to the Consulate General of Japan in Atlanta.
But the hard-won integration between these longtime partners may be at risk over the longer term without a more durable reduction in trade tensions and thorough understanding of their complementarity, two experts said at an event hosted by the Japan-America Society of Georgia just before the coronavirus outbreak blew the lid off the global economy and postponed the Tokyo Olympic Games for a year.
The Trump administration has arbitrarily turned its back on the multilateral system that has seen trade used as both a precursor and a sustaining force for foreign investment, Associate Professor Eric Reinhardt from Emory University said during the forum at the Federal Reserve Bank of Atlanta.
In particular, Mr. Trump’s use of unilateral steel and aluminum tariffs based on national security, in apparent contravention of World Trade Organization rules, is a “radical departure and opens up a giant loophole that any country is now free to use in the global trade system in a way that is entirely arbitrary,” Dr. Reinhardt said during the March 2 U.S.-Japan Now luncheon, part of an annual series coordinated around the country by the National Association of Japan-America Societies.
He added that the U.S. has used arbitrary exemptions and alterations to existing rules, threatening suits against countries that challenged these actions even while undermining the WTO’s appeals body by blocking the appointment of judges.
The first phase of a U.S.-Japan bilateral trade agreement signed in September shows how much the U.S. has shunned multilateral cooperation, he said.
The deal did bring U.S. market access on farm products back up close to levels negotiated in the 12-country Trans-Pacific Partnership, (which Mr. Trump promptly exited after his election), and it included a landmark section on digital trade.
But it addressed few of the more contentious issues in the relationship — namely, cars and auto parts. The best Japan got was a temporary reprieve from the threatened tariffs in that sector. But the deal bypassed the normal legislative process that would have made it more resilient.
“This is not a legal, institutionalized trade agreement like all those others that we have used in the past, so the United States can throw it aside at any point in practice without any recourse for Japan,” Dr. Reinhardt said.
Whatever Mr. Trump’s rationale, undermining the global rules also threatens the bilateral relationship, because the two sides are so interlinked in global value chains, Dr. Reinhardt said.
The trade war with China has had unintended consequences for friendlier nations like Korea and Japan, whose companies work with American firms to make complex products in China, Dr. Reinhardt said.
He gave the example of the iPhone, which is assembled in China but contains more Japanese value by components. One calculation found that capacitors and other parts from Japan made up $176 of the most expensive iPhone’s value, while Chinese suppliers only account for $155 — and that includes the costs for operating the massive assembly plants that employ thousands of workers there. That same phone provides Apple Inc. about $400 in profit; meanwhile, Japan was a $6.2 billion market for Apple in device and services sales in 2019.
“The global trade regime is the foundation of this trading relationship, especially considering the importance of the value-chain ties between the two economies and other parties,” noting that trade talks between developed nations are often more about rules than tariffs, which are usually relatively low.
“This forum doesn’t just add new market access … Most importantly it makes this policy environment predictable and transparent, and therefore it makes private traders and investors more secure and able to plan for the longer run.”
Japan’s Southern Exposure
Any deterrents to Japanese investment would have a disproportionate effect on the South, the country’s manufacturing foothold, which is soon to be further strengthened by a joint Toyota-Mazda plant planned for Huntsville, Ala.
The Japanese stock of investment in the U.S. stood at $125 billion last year, contributing $32 billion in income to Japanese corporates while supporting hundreds of thousands of American jobs — including some 40,000 at 600 facilities in Georgia.
If the “China price” has put many Americans out of work, what Dr. Reinhardt terms the “Japan jolt” locally has created a war for the most skilled among them. He cited the case of Honda’s in Lincoln, Ala., which a study showed has raised the median manufacturing wages in the broader Talladega County. Another study put the plant’s broader impact at $12 billion and 45,000 jobs.
Professor Motoshige Itoh from Gakushuin University remembers studying how protectionism in a U.S. distrustful of Japanese quality in the 1980s drove many companies to set up shop here. Something quite similar is happening now.
“The Japanese companies have had to make more commitments to the United States because of this negotiation,” he said at the event, noting that most executives want to maintain the status quo, just without the threat of tariffs hanging over their heads.
“The important thing is we not go back to that period,” Dr. Itoh said, noting that the auto sector needs stability in this time of transition to electric vehicles. “It is not very easy to predict the future trends of trade and investment in this industry. We have to just move forward to have more integration between the two markets.”
The TPP provided such forward momentum, allowing Japanese Prime Minister Shinzo Abe to open up Japan’s agricultural market. Previously, promoting its own large food companies’ exports had taken a back seat to protecting from global competition small farmers whose lobbying power belied their economic output.
The key now is to keep talking, he said, citing the “bicycle theory” of international relations.
“In order for you to be on a bicycle, you have to keep moving; otherwise you have a problem. And similarly, in order to have a forward-looking trade and investment relationship, we have to keep the negotiations.”
That may be tough in the United States of today.
“Unfortunately there are a lot of voices not about gains from trade, but about pains from trade.”