While much of the policies of new U.S. President Donald Trump remains shrouded in unpredictability, he has already made good on part of his protectionist campaign promises just days after taking office. The president’s executive order signed on Monday to pull the United States out of the 12-nation Trans-Pacific Partnership free trade pact, along with his plan to renegotiate the North American Free Trade Agreement with Canada and Mexico, should prompt the Japanese government to take steps to contain possible damage from the changes in the U.S. trade policies.
Just hours before Trump signed the order effectively killing the TPP deal, Prime Minister Shinzo Abe, who continued to call Trump a “trustworthy leader,” said he would keep up efforts to persuade the U.S. government into putting the deal into force. But now it’s official — with the withdrawal of the largest economy among its signatories, the TPP pact, which had been pushed by former President Barack Obama’s administration as an economic pillar of his Asia-Pacific “pivot” to counter the rise of China and concluded last year by the U.S. and 11 other Pacific Rim countries including Japan, will not take effect as it stands. Abe, who has viewed the TPP a key part of his efforts to drive up Japan’s stagnant growth, will need to review his trade strategy.
Trump has assaulted the TPP as a “disaster” that would kill American jobs since during the campaign, and his administration is instead likely to pursue bilateral trade deals that would benefit U.S. workers and industries in line with its “America First” policy. That could indeed be on the agenda when Abe holds his first meeting with Trump as early as next month. Abe’s administration will need to confirm the position that Japan would take in case the issue is raised by the U.S. side.
Indicating that he still would not give up on getting Trump to change his mind, Abe told the Diet on Tuesday that he believes the U.S. president “recognizes the importance of free and fair trade.” That may turn out to be wishful thinking — as far as Trump’s remarks and behavior suggest.
The problem with the new U.S. president’s views on trade issues, as far as can be inferred through his remarks, is that they may or may not be shaped on the basis of a correct assessment of facts. Meeting with business leaders before signing the executive order pulling the U.S. from the TPP, Trump singled out Japan along with China as countries that engage in trade practices that are “not fair” to American companies. Noting that he wants “fair trade” and claiming that countries such as Japan “charge a lot of tax” on U.S. products, Trump said, “If they’re going to charge tax to our countries — if as an example, we sell a car into Japan and they do things to us that make it impossible to sell cars in Japan. … It’s not fair.”
While the demise of TPP, which was to set future rules of trade and investment among its participants, may not cause immediate economic damage, possible changes to trade rules under NAFTA could have direct business impact of Japanese firms. Under the free trade pact introduced in 1994 among the U.S., Canada and Mexico, hundreds of Japanese firms, including major automakers and auto parts suppliers, have invested in Mexico to take advantage of the low local manpower costs and ship vehicles to the U.S. market tariff-free. In fiscal 2015, four Japanese automakers Toyota, Nissan, Honda and Mazda combined produced 1.35 million vehicles in their Mexico plants.
Trump has charged NAFTA with draining manufacturing jobs out of the U.S. Well before his inauguration last week, he tweeted his criticism of automakers and other firms that have investment plans in Mexico for sale to the U.S. market — Toyota included — and successfully got some of the firms to change their plans with his threat to impose heavy border taxes. Now he’s out to renegotiate the free trade agreement itself, and the impact on the Japanese firms operating in Mexico could be enormous if the pact is indeed altered in ways that spoil its advantages for their investments. The automakers in particular might be forced into reorganizing their manufacturing operations not only for the North American market but for their worldwide sales.
The U.S. talks to renegotiate NAFTA will likely proceed with Canada and Mexico, but the Japanese government should also explore ways for possible involvement in the process as a party with a stake in the free trade pact. There may be ways to cooperate with U.S. industries that would be affected by changes to NAFTA, especially in sectors where cross-border supply chains have been established and changes to trade agreements could raise the cost of domestic output. Abe can broach these points when he gets a chance to discuss trade issues with Trump — as well as caution him on his protectionist policies and press him to stand by free trade rules.
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