The Price of Winning the Trade War

Hindustan Times

4 days ago

The trade deal President Trump announced with Japan Tuesday evening is good news—in the narrow sense that it defuses what could have been an extended tariff war with America's most important ally in Asia. But if this is winning a trade war, we'd hate to see what losing looks like.
Mr. Trump hailed the pact with characteristic modesty as 'perhaps the largest Deal ever made.' Details remain sparse, but the core appears to be a Japanese commitment to invest $550 billion in the U.S. while reducing barriers to imports of American agricultural products such as rice. In exchange, Mr. Trump will reduce his 'reciprocal' tariffs on Japan to 15% from 25%—including, apparently, on autos.
The new tariff rate is good news only as relief from 25%. This is still a 15% tax increase on imports from Japan. And don't believe the White House spin that Japanese exporters will pay this tax. They might absorb some of it, depending on the product and the competition. But American businesses and consumers will pay more too and thus be either less competitive or have a lower standard of living.
That $550 billion in new Japanese investment also sounds better than it may be once we know the details. Japanese Prime Minister Shigeru Ishiba suggested Tokyo will offer government loans and guarantees to support these 'investments,' with the aim 'to build resilient supply chains in key sectors.'
This raises the prospect that this money, if it arrives, will be tied up in Japanese industrial policy. And American industrial policy, since Mr. Trump said Japan will make these investments 'at my direction' and the U.S. 'will receive 90% of the Profits.' Yikes.
By the way, more investment inflows by definition mean a larger trade deficit in the U.S. balance of payments. Has someone told the President about this?
The U.S. could have had more Japanese investment all along, except Mr. Trump helped chase it away. The current President and President Biden did their best to thwart a $14.9 billion acquisition of U.S. Steel by Nippon Steel ahead of last year's election, before Mr. Trump acquiesced in June. Perhaps if Japanese companies were more confident they'd get a fair shake in the U.S., we wouldn't need all these loan guarantees and trade deals to unlock capital commitments for American jobs.
One positive development is the apparent reduction in U.S. auto tariffs from 25%. Perhaps the Administration is noticing that forcing Americans to pay higher prices for the cars they want to buy isn't a political winner. Yet the 15% rate still marks a substantial increase over the 2.5% tariff that applied to passenger cars before Mr. Trump took office. The U.S. already applies a 25% tariff on imported trucks.
This highlights the economic bramble into which Mr. Trump has stumbled with his tariffs-first-negotiate-later approach to trade. U.S. auto makers are worried that Japanese companies will enjoy preferential tariff rates while Detroit could be stuck paying 25% on imports of cars and parts that U.S. companies ship from Mexico and Canada.
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As for the claim that Mr. Trump is 'winning' this trade war, that depends on how you define victory. It's true Mr. Trump is showing he can bully much of the world into accepting higher tariffs. The size of the U.S. market is powerful negotiating leverage. The pleasant surprise so far is that most countries haven't retaliated, which has spared the world from a 1930s-style downward trade spiral.
But Mr. Trump is showing the world that the U.S. can change access to its market on presidential whim. Countries will diversify their trading relationships accordingly, as they already are in new bilateral and multilateral deals that exclude the U.S. China will expand its commercial influence at the expense of the U.S. Beijing has also shown that two can play trade bully ball. It retaliated against Mr. Trump's 145% tariffs with export restraints on vital minerals, and Mr. Trump agreed to a truce.
By the time this trade war ends, if it ever does, the average U.S. tariff rate may settle close to 15% from 2.4% in January. That's an anti-growth tax increase. The question for Trumponomics now, as in the first term, is whether the pro-growth elements of his tax and deregulatory agenda overwhelm the tariff damage. The Japan deal is at least one step toward removing harmful trade uncertainty.
An important question is what this augurs for talks with other trading partners, and especially the European Union. The Japan deal in some ways has been easier, especially since a big sticking point was agricultural protectionism Tokyo can reduce if pushed. Talks with Brussels encompass thornier problems, such as Europe's tech-and-pharma excess profits taxes, and Europe's chronic complaints about U.S. financial regulations.