Business / Corporate | ANALYSIS

Prospect of U.S. tariffs on auto imports too close for comfort, Japan carmakers warn

by Kazuaki Nagata

Staff Writer

The protectionist trade policy of President Donald Trump’s administration is of increasing concern for Japan, and it seems the U.S. government might be seriously considering raising tariffs on imported vehicles and parts.

Automakers and industry experts say that the auto levies, if implemented, would surely hit Japan’s signature industry hard, with thousands of dollars of additional costs for every single imported car expected to land on manufacturers’ shoulders.

Makers are in fear of being left to deal with possible losses of tens of billions of yen, without any leverage in order to defend themselves.

“The impact (of the tariffs) would be huge,” said Nobuyuki Nakatsuka, chief economist at Mitsubishi UFJ Research and Consulting.

According to the Japan Automobile Manufacturers Association, the country exported about 1.74 million cars in 2017 while the Finance Ministry’s data shows that the value of the exported vehicles and parts that year totaled ¥5.5 trillion. So additional U.S. auto tariffs — reportedly 20 percent or 25 percent — would cost more than ¥1 trillion.

“If the automakers do not cover all the cost increases by themselves, the burden would be on the U.S. consumers and companies. That could slash the volume of exports,” said Nakatsuka.

Some automakers voiced concerns about the potential harm of such a move as they held news conferences recently to disclose their April-June earnings.

“Toyota cannot shoulder the cost increase by just itself,” said Moritaka Yoshida, executive vice president at Toyota Motor Corp., last week.

Japan’s largest carmaker revealed that the cost for importing vehicles to the U.S. would shoot up by about $6,000 for each vehicle if the Trump administration applied the tariffs.

Toyota has production bases in America, but still shipped about 710,000 vehicles to the U.S. market last year. With the auto levies, simple math shows that the firm would face a ¥460 billion cost hike.Yoshida stressed Toyota’s intention to keep contributing to the U.S. economy, saying the firm had announced last year that it planned to invest in $10 billion over the next five years. But in order to do that, Toyota hopes that the values of free trade will be respected, he said.

Like Toyota, fellow auto giant Nissan estimates that the cost of imported cars would go up by $6,000. “We think the impact of the 25 percent tariffs, which would also likely to be imposed on auto parts, would be tremendous,” said Joji Tagawa, a Nissan executive, during a news conference last month.

Even the average cost of vehicles manufactured in the U.S. would see about a $2,000 hike, as some parts still have to be imported, Tagawa said. “We can’t just add that cost to the sales price. But it’s not that we can stop selling cars (in the U.S.),” he said. He did not elaborate on how Nissan plans to deal with the situation if the worst comes to pass, but he said the firm would continue to proceed with localizing its production overseas.

Whether the U.S. government, which is now considering the tariffs, will make such a move is still anybody’s guess, but some experts warn that the possibility should be taken seriously. Daiju Aoki, chief Japan economist at UBS Securities Japan Co., said many people seem to think that the Trump administration is only bluffing, but he believes that the hike is likely to be implemented.

That is because a recent UBS survey indicates many business owners in the U.S. are backing Trump’s protectionist policy. The poll of 300 business owners shows a majority support additional tariffs on China, Mexico, Canada and Europe.

Despite opposition from the auto industry, “I think it’s unlikely that (the Trump administration) will back down from the auto levies,” said Aoki. He added that the tariffs would slash major carmaker operating profits by about 25 percent.

While the U.S. government has applied tariffs to other imported goods, such as steel and aluminum, this time “(Japan) needs to be cautious on a different level,” he said.

Nakatsuka of Mitsubishi UFJ Research and Consulting said that since the auto sector is one of the most prominent industries in Japan, such moves would impact not only automakers but also their subcontractors, such as parts-makers, hard. The cost increase could inflict serious damage to small and midsize auto-related companies who are unable to match the financial strength of auto giants, he said. Plus, if the carmakers accelerate to move production bases overseas, that would affect employment.

Toyota and Nissan both said they intend to maintain current production volumes, 3 million and 1 million units respectively, in Japan.

“If it’s just about one company, moving production bases to the U.S. is a rational choice. But when thinking about the Japanese economy, it becomes a dilemma,” said Nakatsuka. “It’s a tough choice for automakers.”