The US-Japan ceasefire…for now

Another day, another deal. The US had threaten 25% across-the-board tariffs but lowered that to 15%. This caused a relief rally in the Japanese equity market. However, the 15% compromise  is still a significant blow to the Japanese economy. In that sense this deal is a solid ”win” for the Trump Administration.

Other aspects of the deal are ambiguous. While Japan is opening its markets to US cars, rice and other agricultural products, it is doing so by exempting them from strict local regulations. The problem is: who is going to buy them? Rice has a special place in the Japanese diet and culture. Rice imports will rise, but likely be priced below their domestic counterparts. They will also be reluctant to buy US made vehicles designed for the US consumer and that don’t have to pass the same safety standards as other cars sold in Japan.

Japan also agreed to provide up to $550 bn in investments and loans in the US. However, it is not clear what that means in practice. How much is “up to” enough? Who does the investing? Over what period? And what share of the investment would have happened anyway? Time will tell.

Anyway, the deal seems consistent with the broader picture for the trade war. Big tariff threats lead to a compromise increase, pushing up tariffs in an “two steps forward, one step back” pattern. Other ambiguous concessions are made. Details are released with a lag.

Trump Always Tries Again

As my readers know, I think TATA (Trump Always Tries Again) is a better acronym for the trade war that TACO (Trump Always Chickens Out). In this instance Japan now faces 50% tariffs on steel and aluminum and 15% on everything else. Looking ahead, I would be surprised if the “war” with Japan is over. The Administration argues that balancing trade with Japan would require 46% unilateral tariffs. This gets them only about a third of the way there.

Moreover, I don’t tariffs will fix the trade imbalance. Prior deals have not stopped a choppy increase in the bilateral deficit (Chart). The problem is that the main driver of the trade deficit is not unfair trade practices, but the fact that the US tends to consume a lot more than it produces. That, in turn, is a product of (1) a massive federal deficit, (2) low private savings and (3) the attractiveness of the US as a place to invest. That imbalance will persist and could get worse. The budget deficit is getting worse, not better. An aging population suggests a falling private saving rate, particularly as immigration is curtailed. On the other hand, on net Administration polices seem to make the US less attractive to investment. However, that is offset by investment into the booming tech sector.

The upshot is that I see this as a temporary “ceasefire” rather than an end to the trade war vis-à-vis Japan. Japan is in a weak negotiating position due to its dependence on the US for security and as an export market. Hence, over the years, Japan has made a series of concessions under pressure, including shifting car production to the US and now two rounds of trade concessions under Trump. Like other countries I would expect them to be subject to industry-specific actions by the US Commerce Department, based on alleged "dumping" and "unfair" practices. Indeed, the broader deal just reached could be back on the table at some point as the trade deficit persists.

On to the next battle.