The U.S. is mulling the imposition of additional tariffs on imported automobiles. If Washington goes ahead with these, the impact on the Japanese auto industry would be profound. At the same time, as Japanese auto companies are increasingly expanding their operations in the U.S., it would also affect the U.S. economy. We want the Japanese government to bring this in an effective and strategic way to the attention of the U.S. government in order to dissuade Washington from imposing the additional tariffs.
The second round of the new trade talks at the cabinet-minister-level between Japan and the U.S. will start as early as this month. U.S. President Donald Trump believes that imported cars are impacting the U.S. auto industry. Bearing in mind the midterm elections scheduled for November, the president apparently intends to play up for the public the favorable results of the new bilateral trade talks. He recently warned Japan in a strong tone, “If Japan does not agree with the U.S., there will be a serious problem.”
The U.S. administration is considering raising the import duty on automobiles up to 25%, a tenfold increase over the current level. If Washington imposes this tariff, one Toyota model imported from Japan to the U.S. would be $6,000 (about 670,000 yen) more expensive. As Toyota exported a total of approximately 700,000 cars to the U.S. last year, the additional tariff could result in a cost increase of about 470 billion yen.
A private think tank estimates that such an additional tariff on automobiles including auto parts could cost the entire Japanese auto industry over one trillion yen. If car companies bear the additional costs, their profits will suffer. If they pass additional costs on to consumers, sales will decline. It would inevitably impact not only the auto industry but also the whole Japanese economy.
During the 1995 talks on automotive trade between Japan and the U.S., the Japanese government promised to expand production in the U.S. and evaded what could have been a forty-fold increase in import duty on Japanese luxury cars from 2.5% to 100%.
At present, leading Japanese auto companies manufacture more than twice as many cars in the U.S. than they export from Japan. After the Trump administration came into office, those companies have announced plans to expand overseas production. In fact, Toyota and Mazda are scheduled to start construction of a new plant in the U.S., which will be jointly operated by the two companies. However, market growth in the U.S. is limited compared with China and it is difficult for them to significantly increase production. Even if Japanese auto companies can increase their production in the U.S., if their production in Japan drops, it could impact employment in Japan.
There is a view that the U.S., with the import duty on automobiles as a bargaining chip, will press Japan to buy more American agricultural products. In order to prevent the U.S. from taking the lead in bilateral negotiations, Japan should stress to Washington that its contribution to the U.S. economy is not limited to the expansion of car production in the U.S.
According to the Japan Automobile Manufacturers Association, Inc., leading Japanese auto companies employ over 90,000 workers at plants and other facilities in the U.S. Forty percent of new car sales in the U.S. are Japanese cars, which provides more than 350,000 jobs through the retail network. The Japanese government claims that Japanese auto companies have created as many as 1.5 million jobs including those for auto parts supply.
Washington took a remarkably uncompromising stance in trade negotiations with Mexico and Canada, which is alarming to Japan. If the Japanese auto industry declines, it would have a detrimental effect on the U.S. economy in both employment and consumption. The negotiations depend on how effectively Japan can convey this to the U.S.