Business

From exemption to escalation: Japan's options on U.S. metals tariffs, set to be applied from Friday

by Yuko Takeo and Connor Cislo

Bloomberg

Japan will probably be able to avoid the worst effects of U.S. President Donald Trump’s sudden decision to raise tariffs on metal imports, but the move has rattled the U.S. ally and would hurt its economy if it leads to a broader trade war.

Implementation of the tariffs is slated for Friday. Australia has secured an exemption but so far Japan has been left out in the cold. If the duties are fully imposed on domestic steel and aluminum exports, the direct effect may still be limited as the country is not a big exporter to the U.S.

But the proposal from Japan’s closest ally and second-largest trading partner comes at a bad time for Prime Minister Shinzo Abe, who is weakened by plummeting support over a cronyism scandal and was also kept out of the loop over a planned meeting between Trump and North Korea’s Kim Jong Un. The larger concern is that the tariffs may lead to retaliation from other countries, and damage global trade and the domestic economy.

The Trump administration is pressing countries to ally with the U.S. against Chinese trade policies in exchange for relief from the tariffs, according to a European official.

Speaking at the Group of 20 finance ministers’ meeting in Buenos Aires, State Minister of Finance Minoru Kihara said that protectionism would not prove beneficial to any country, and that other nations at the meeting had voiced concerns about the issue.

Here are some of the possible outcomes regarding the extent to which the U.S. metals tariffs will be applied to products from Japan:

Exemption

As a treaty ally, Japan may be able to make a persuasive case that its exports do not imperil U.S. national security. Moreover, Japan only accounted for about 5 percent of U.S. steel imports in 2017, according to the U.S. Department of Commerce.

“I would expect Japan to get exempted without any particular conditions being established, because it is such an important ally,” said Matthew Goodman, senior adviser for Asian economics at the Center for Strategic and International Studies in Washington.

Soft commitment

Another possibility would be for Japan to offer some kind of commitment with the understanding that the U.S. would exclude it from the tariffs. “There may be some sort of implicit deal, given that Abe has been willing to do a lot of things to make Trump happy,” said Goodman, who has also worked for the U.S. Treasury and the National Security Council. He highlighted promises of additional investment by Japanese manufacturers in the U.S. as a possibility, while noting that it’s difficult for the government to control such flows.

No but yes

While Japan may not be exempted from the list of countries facing the tariffs, exceptions could be made for specific high-quality products that the U.S. won’t be able to procure otherwise.

Japan is likely to receive such exemptions for specific products, trade minister Hiroshige Seko said at a news conference in Tokyo on Tuesday. The nation is also coordinating with the EU on how to address the tariffs.

“Steel used for oil pipelines, for train tracks — the U.S. can’t make those types of expensive goods, so they have no choice but to buy from Japan,” said Masahiko Hosokawa, a Chubu University professor and former trade ministry official who has worked on trade policy with the U.S. “It’s highly likely those products will be exempted from the tariffs.”

Escalation

Japan has thus far eschewed the more confrontational approach of the EU, which has already released a list of proposed products that could be hit with retaliatory tariffs. However, raising a complaint at the World Trade Organization remains an option. This would likely enable Japan to implement their own tariffs to compensate for the lost trade, depending on the WTO’s findings.

“I expect Japan to join the EU if and when it asks for WTO consultations,” said Jun Okumura, a former trade ministry official who is a visiting scholar at the Meiji Institute of Global Affairs. “However, I believe that the Abe administration will refrain from any retaliatory actions until the WTO process runs its course.”

WTO dispute settlement proceedings take at least several months, and could drag on for longer than a year. Depending on what happens to U.S. negotiations over the North American Free Trade Agreement, Japan’s steel-makers could also suffer further setbacks. At least some of Japan’s steel exports initially dispatched to other nations — Mexico, for example — likely later reach the U.S.