Lost in translation: Trump doesn’t seem to understand the ‘massive’ deal he just made

Donald Trump has hailed the US trade deal with Japan as the opening of Japan’s markets to the US “for the first time ever”, depicting it as a victory for his use of “tariff power” and envisioning a flood of US cars and agricultural products being shipped to Japan. The reality is likely to be somewhat less than he imagines.

The deal which, like the other US trade agreements struck recently, is more a framework than a finalised agreement, has set a 15 per cent tariff rate on Japan’s exports to the US.

Trump says the deal with Japan is a “big” win for the United States.Credit: Bloomberg

That’s less than the 25 per cent Trump had threatened but, while lower than the 19 per cent tariffs in recent agreements with Indonesia and the Philippines and the 20 per cent rate on Vietnam’s exports, is massively above the less-than-2 per cent average rate on Japan’s exports to the US that applied before he launched his trade wars.

It’s also less than the 25 per cent rate on imports of autos and auto parts from Mexico and Canada, which is why Japan – which has agreed to open its market to US autos, without applying its own safety standards – believes it has struck a good deal in the circumstances.

It will be shipping an uncapped volume of vehicles into the US that have been built with steel and aluminium not subject to Trump’s 50 per cent sectoral tariffs or his 25 per cent tariff on auto parts even as autos built at GM or Ford plants in Mexico and Canada, or with imported components, face much higher effective rates. The US car manufacturers are already crying foul.

Japan’s concession? In theory the US companies will be able to sell more cars to Japan, now a tiny market for them. The Japanese, however, are unlikely to buy what America has to sell.

US car companies have essentially vacated the market for the small cars Japanese prefer, focusing on large cars, SUVs and utes. The US imports most of its smaller vehicles.

While Japan might have preferred a deal at Trump’s 10 per cent baseline tariff rate, the competitive advantage it has gained for an industry that employs about 8 per cent of its workforce and accounts for about 80 per cent of its $US70 billion ($106 billion) trade surplus with the US represents a positive outcome.

The other big “win” for the US was, Trump claims, the opening of its agricultural markets to US exports, particularly the market for rice, which has historically been extremely politically sensitive in Japan.

According to the Office of the US Trade Representative, American farmers will have the same advantage as countries within the Trans-Pacific Partnership free trade agreement in selling into the Japanese market.

In theory, US companies will be able to sell more cars to Japan. But the Japanese are unlikely to buy what America has to sell.Credit: Yuriko Nakao

During the Obama administration, America was going to be a party to the Trans-Pacific Partnership, whose members include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

It was Trump, within days of taking office in his first term in January 2017, who withdrew the US from the TPP. America’s farmers could have had the same trade terms with Japan as those countries eight years ago, if not for Trump.

As for rice, Japan already imports up to 770,000 tonnes a year (the amount is capped to protect its own rice farmers), with the US supplying about 45 per cent of that volume. Yes, the US may be able to sell more and perhaps displace other suppliers, but Japan has reserved the right to decide the additional volume and quality of any extra imports from the US.

The bottom line for the trade elements of the deal is that it does lift the tariff rate on Japan’s exports to the US – US consumers will pay more for Japanese products – but Japan has negotiated a deal that does only minor damage to its exports and economy in the process while presenting Trump with the ability to trumpet that he has opened up access to its domestic markets even though nothing material is likely to change.

Indeed, unless Trump is forced to lower the rates on other countries’ auto and auto parts exports to the US, along with his sectoral tariffs on steel, aluminium and copper, the Japanese negotiators have given their key exporters a competitive edge.

Trump says there’s never been anything like the deal with Japan. He may be right, even if it appears he doesn’t understand how it might play out in practice.

There is a very large non-trade element to the deal. Japan has promised, it seems, to invest up to $US550 billion ($830 billion) in the US, at Trump’s direction and with the US allocated 90 per cent of any profits the investments might generate.

The White House described the funding as the “centrepiece” of the agreement with Japan, with US Treasury Secretary Scott Bessent saying Japan had been awarded the 15 per cent tariff rate “because they were willing to provide this innovative financing mechanism”.

There are few details available on what is being loosely described as a Japanese sovereign wealth fund dedicated to investing in strategic sectors such as semi-conductors, pharmaceuticals, steel, shipbuilding, critical minerals and energy in the US.

The Japanese say the funds will come from their state banks and government agencies and will be in the form of equity, debt and guarantees. That suggests the $US550 billion, if it ever materialises, will be largely loans and loan guarantees for Japanese and US companies investing in projects Trump deems important.

The detail will matter. Having effectively been extorted into agreeing to provide the funding, they are hardly likely to hand over $US550 billion without conditions and safeguards to someone who has declared bankruptcy four times.

They also have China’s precedent to guide them. To end Trump’s 2018-19 trade war, China agreed to buy a massively increased volume of US products. It eventually bought a little more than half what it had agreed to.

Japan can slow-walk the handing over of the funds, knowing that, if it stretches the process out, a new administration in 2029 might have different views on trade.

The investment agreement – apparently the brainchild of Commerce Secretary Howard Lutnick as it became clear Japan wasn’t going to accede to Trump’s most aggressive demands for market access – is a peculiar one if Trump’s aim is, as he has always claimed, to reduce America’s trade deficit.

If Japan were to actually deliver $US550 billion of new capital inflows to the US, it would increase the trade deficit, not decrease it. It would also probably help push up the value of the US dollar, which has been tumbling, making US exports less competitive in international markets. Did anyone explain that to Trump?

The deal with Japan provides a benchmark for the European Union, which appears very close to either agreeing to its own deal or walking away and retaliating with punitive tariffs on US imports.

It could probably live with a 15 per cent rate and no cap on its auto exports, provided there is nothing in the US demands that relates to its valued-added tax system or its regulation of social media platforms and big technology companies.

Once Trump’s August 1 deadline for deals is reached, the larger picture of Trump’s trade wars will be clear, if still quite messy with its range of different tariffs, different rates and side-deals like the Japanese funding.

Crudely, however, the new “baseline” tariff rate for America’s major trading partners now appears to be 15 per cent. The average effective US tariff rate will have risen from about 2.4 per cent before he took office again to around 20 per cent.

Trade flows will be distorted, global supply chains severely disrupted, US companies and consumers will be paying a big new tax on their spending and the US inflation rate, and interest rates, will be higher than they would otherwise have been. Will that make America great again?

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