Will Japan get a mulligan on trade with US?

By: | Issue #643 | at 12:03 PM | Channel(s): International Trade  

Japan’s Prime Minister Shinzo Abe is in the midst of an economic reset.

Abenomics 2.0.1

No doubt Japan’s a cornerstone in global trade. Japan has the world’s third largest economy at $4.73 trillion (in GDP terms) trailing only the US and China.

Japan is an industrial powerhouse that during the halcyon 70s earned the moniker Japan Inc., as the island nation’s manufactured products – particularly autos - flooded world markets. The export oriented drive made a lot of economic sense as a means of ratcheting up the nation’s GDP, offsetting inherent lack of natural resources and emphasizing the abundance of human resources – a massive workforce.

In many respects, Japan’s success as an “export oriented” economy made it a model for nearly all Asian nations and even the West to emulate. China and South Korea also used exports as the basis for building their economies. And now nearly all of Southeast Asia has followed suit.

But times have changed. Since the 2008 Great Recession (although it can be argued the seeds of the slow down were already well sowed) Japan’s economy has been tepid in the best of years.

However, unlike its two industrial rivals, the US and China, economic performance has been tepid since the Great Recession in 2008. In 2016, economic growth was again positive, albeit at only 0.5%, with the consensus forecasting less than one-percent annual growth over the next six years. Another positive marker for Abe’s policies is the improvement in the current account (a measure of trade and investment). Japan posted a nine-year high of ¥20.65 trillion ($183.66 billion), up nearly 26% from 2015.

Even these “positive” forecasts hold important caveats. Japan’s 2016 current account surplus was greatly aided by lower oil prices and a stronger Yen, which lowered import prices. For example, crude oil imports dropped 32.4% as the annualized average oil prices fell 24.4% in 2016. While Japan’s goods trade posted a surplus of ¥5.58 trillion, after a 2015 deficit of ¥628.8 billion in 2015, neither imports nor exports actually grew. Imports fell 16.6 to ¥63.31 trillion, while exports fell 8.5% to ¥68.89 trillion.

Since becoming Japanese Prime Minister five years ago, Shinzo Abe’s policy cocktail of fiscal expansion, monetary easing and structural reform has been aimed at increasing domestic demand, GDP growth while increasing inflation. This last goal in a nation that has grown little and been on the doorstep of deflation for nearly a decade is a remarkable scenario for a large mature economy.

There are a number of inherent challenges to Abenomics. Front and center is demographics. The working-age population has fallen by six-percent over the last decade and is still declining. Back in September 2015, Abe addressed this issue in his launch of Abenomics 2.0 policy with a “Womenomics” initiative to raise female employment from 68% to 73% by 2020 and a strategy to push up the birth rate. But it could be decades before the impact of these policies takes hold.

US-Japan Trade: “Not Fair” Affair

The dilemma of Abenomics 2.0 is that increasing domestic demand is strongly linked to export manufacturing. For example, the auto industry is dependent on a weaker Yen, which runs contrary to raising inflation.

It’s estimated Japan exported $645.2 billion worth of goods in 2016 up 3.2% over 2015, and ranks fourth behind China, the US and Germany.

For Abenomics this tally represents an 11.1% increase since 2009, a win for Abe’s industrial policies. But what is clear from the statistics is just how narrow an industrial-bandwidth these exports occupy. Japan’s top ten export categories accounted for nearly 78% of the overall export value. However, over 56% of the nation’s exports reside in three overlapping categories: vehicles, machinery/computers and electrical machinery. Notably, vehicle exports for the Abenomics period 2012-2016 is up over 38%.

But the export success has also made Japan a target, especially for the newly elected President Donald Trump. One of Trump’s first official acts was to pull out of the TPP (Trans Pacific Partnership), a move running contrary to Abe’s hopes for an ally to buffer China’s aspirations.

Perhaps even more significantly, the Trump administration has targeted nations notching trade surpluses with the US. This places Japan squarely in the cross hairs of the administration. In 2016, the US ran a $68.94 billion trade deficit with Japan, around 9.4% - slightly up from 9.2% in 2015 - of the total trade deficit. Much of this deficit is in auto sales. Japan is the second largest auto exporter to the US, after Canada. Japan’s auto imports accounted for $39.26 billion in 2016, as compared to the US auto exports of $518 million to Japan.

Trump said that Japan’s auto export is “not fair,” adding, “They [Japan] do things to us that make it impossible to sell cars in Japan.” The auto trade affair is a microcosm of the trade issues between Japan and the US.

As part of the lead up to TPP negotiations, Japan agreed to recognize more American auto safety standards and simplify certification procedures for US auto imports. Now with TPP prospects going flat, these measures which could have helped pave the way for more US auto exports are headed towards a dead end.

There is also the question of market awareness. Tokyo is among the world’s most densely populated cities and Japan’s own Kei cars – very small low powered autos and trucks – are better adapted than traditional US imports. The Japanese drive on the right, and few US automakers regularly build right-hand drive vehicles which adds to the difficulty of selling in Japan. Reportedly the best-selling US vehicle is Jeep, which offers right hand drive (a legacy from building US Postal Service vehicles).

A Mulligan?

Prime Minister Abe, met with President Trump in February at the Palm Beach Mar-a-Lago golf course. With TPP off the table, (although it should be remembered that Japan is a WTO member and works within the agreement’s rules) a new working relationship between Japan and the Trump Administration is being developed. From Abe’s perspective, if US companies are to be successful in Japan they must adapt – after all McDonalds and Kentucky Fried Chicken both have vastly different menus in Japan than in the US. You can’t get Fillet-O-Ebi at the drive-thru in Phoenix.

Another key point for Abe is Japanese investment in the US, which has for years soared with more auto plants and other manufacturing being shifted to the US. This direct investment in the US is key to both Abe and Trump. From Japan’s economic perspective much of the growth in Japanese manufacturing has come from overseas investments – many made in the heyday of Japan Inc. This new round in the US and North America is an investment in the future. For Trump this is about jobs.

Prime Minister Abe, in the February 10th joint press conference with President Trump, tried to make this point clear, “The United States is a country having the largest number of chances, opportunities in the world. That has always been the case right now, as well as going forward… And that is the reason why automotive industries and other Japanese businesses have built factories all over the United States, to engage in local production here. Last year, from Japan to the United States, there have been more than $150 billion of new investment being made into the United States. And those Japanese businesses have created a large number of jobs.”

Abe, more than any other world leader has managed to make his case to the new administration, and will at least for now, likely get a mulligan on the trade deficit issue. But in politics and golf, it takes only one swing to put yourself in the rough.

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American Journal of Transportation