Japan’s Nikkei reported on July 13th an article titled “Why Japan is Ignored by Trump,” authored by Takuma Inoue, a member of the editorial board. The excerpt is as follows:
President Donald Trump has issued a high tariff notice to Japan, which President Yoshihide Suga, despite his anger at the United States for treating Japan so indifferently, found futile.
The Prime Minister has consistently requested that the US withdraw the previously announced 24% tariffs on Japanese goods, as well as the 50% steel and aluminum tariffs and the 25% automobile tariffs. Despite the fact that the Suga administration has repeatedly demonstrated that Japan continues to increase its investment in the US at a scale higher than its exports to the US, contributing more to American employment than any other country, requesting reassessment of the tariffs on Japan, these requests have not been met with a response from Trump. On the 7th, the adjusted tariff rates on Japanese goods increased by one percentage point, reaching 25%.
Trump’s negotiation style is based on something known as the “madman theory,” whereby unpredictable actions lead opponents into a state of uncertainty about their own moves, thereby forcing them to concede. However, some have summarized it as “Trump always backs down (TACO),” which has become popularly known as such. So, what exactly are Trump’s weaknesses?
The United States is the hegemonic nation that issues the dollar, the base currency. As a supplier of the dollar, the United States has an advantage over any other country. To obtain dollars, countries like Japan actively engage in trade and investment with the US. On the other hand, the United States is the world’s largest debtor, with domestic consumption exceeding domestic production. In other words, if funds used to offset trade deficits and other current account deficits do not flow into the US from abroad in the form of investment and loans, the US economy would become extremely unstable.
The “Trump Tariffs” aim to reduce the US trade deficit while replacing overseas exports with domestic production, but this also comes with side effects.
Imposing high tariffs on imported goods can drive up their prices, thereby sparking inflation concerns.
Given that imported goods account for over half of the personal consumption in the United States’ GDP, which is around 70%, this situation becomes even more severe. Inflation is a major factor contributing to financial market volatility in the United States. When interest rates face upward pressure, stocks are sold off, and capital flows overseas, the situation becomes even worse. Typically, selling stocks encourages capital to flow into safe-haven assets such as U.S. Treasury bonds. However, when U.S. Treasuries, the dollar, and stocks all decline simultaneously, it essentially amounts to “selling off the U.S.” which impacts the foundation of the American economy.
Despite the implementation of high tariffs, consumer prices and import prices in the United States have remained extremely stable, mainly because major exporting countries like Japan have not raised their prices for exports to the U.S. but rather reduced them. The majority of the 25% tariff will be absorbed by Japanese companies themselves.
Another matter of concern for Trump was the implementation of large-scale tax cuts. Some argue that large-scale tax cuts would expand the U.S. fiscal deficit and trigger inflation concerns, but Trump aimed to use tariff revenue as the source of tax cuts.
The tax cut bill passed and became effective at the beginning of July. The financial markets did not experience any turmoil. Accordingly, Trump issued a final demand to Japan and other countries for “equal tariffs.” From Trump’s perspective, the financial markets were not greatly impacted, and he was brimming with confidence, ready to fully implement the high tariff policy.
What should the Yoshihide Suga administration do? The Japanese government and private institutions will invest funds equivalent to over 30% of the U.S. current account deficit in U.S. dollar assets. There are some hidden concerns in the U.S. financial market, such as inflationary concerns triggered by high tariffs and a sharp increase in the U.S. fiscal deficit. Japan serves as the last barrier supporting the stability of the U.S. market. The Prime Minister should convey this message to Trump and advance dialogue accordingly.