The Trump administration’s trade policy has taken a rapid turn toward hawkish protectionism. In addition to the steel and aluminum import tariffs that took effect last Friday, the administration has announced a plan to slap punitive tariffs on imports from China to the tune of $50 billion as sanctions for intellectual property violations and restrict Chinese firms’ investments in the United States.
The U.S. government has explained to the World Trade Organization that the measure is aimed at defending against China’s unfair trade practices, but Beijing said it is preparing retaliatory action. The risk is rising of the U.S. and China — the world’s two largest economies — entering into a trade conflict.
During the 1980s and early 1990s, when Japan and the U.S. engaged in serious trade disputes, Japan accounted for roughly half of the U.S. trade deficit. Given that China is responsible for about half of the U.S. trade deficit today, the severity of the U.S.-China trade friction might make sense.
These days, Japan accounts for less than 10 percent of the U.S. trade deficit. But in the currency exchange market, concern over the Trump administration’s protectionism is propelling the yen higher against the dollar. A plausible theory goes that the U.S. deficit vis-a-vis Japan is still large enough to be an issue — Japan is the third-largest source of the deficit, closely trailing Mexico. Since President Donald Trump has succeeded in getting Mexico and Canada to renegotiate the North American Free Trade Agreement, Japan could be a potential target of his protectionist policy. U.S. Trade Representative Robert Lighthizer, who commands the administration’s trade policy, has a history of getting Japan to accept voluntary export restrictions when he served as deputy USTR in the mid-1980s. In recent testimony to the U.S. Congress, he expressed hope for bilateral free trade talks with Japan.
Such theories don’t make sense. They do not reflect the changes that have taken place in the Japan-U.S. economic relationship over the past three decades — the shift from Japanese companies exporting to the U.S. to investing in the U.S. market, as well as their progress toward consolidated management of their Japanese and U.S. operations.
Japan has maintained high levels of direct investment in the U.S. for the past several years. According to recently released U.S. statistics on inbound foreign direct investment in 2017, Japanese investment surged 34 percent from the previous year to $45.4 billion — second only to Canada’s $64.9 billion. The sharp increase from Japan stood out as total FDI in the U.S. declined as much as 40 percent.
Many American and foreign businesses were wary about the inauguration of the Trump administration with its “America First” agenda, but Japanese firms were convinced of the future potential of the U.S. market. While 2017 figures for investment stock are not yet available, outstanding Japanese investments are believed to have grown from $421.1 billion at the end of 2016 to surpass $450 billion, narrowing the gap with the top investor, the United Kingdom.
There was a boom in Japanese companies’ investments in the U.S. from the late 1980s to the early 1990s. But the investment stock stood at slightly above $100 billion as of the end of 1993. Since then, large numbers of Japanese firms have continued to bet on the future potential of the U.S. market and remained engaged throughout all the hardships on both sides of the Pacific — the collapse of Japan’s bubble boom and the subsequent “lost decades,” the burst of the IT bubble in the U.S. in 2000, the 9/11 terrorist attacks in the U.S. in 2001 and the 2008 “Lehman shock” — and spent the proceeds from their U.S. operation on fresh investments. From 2013 onward, their annual investments expanded to the range of $30 billion to $40 billion, thus multiplying the investment stock more than fourfold.
Japanese companies’ U.S. subsidiaries and plants built on these investments have created local jobs and added value — the numbers are large and continue to steadily increase. According to Commerce Department statistics, Japanese-affiliated firms in the U.S. employed 856,000 workers as of 2015, trailing only the 1.14 million hired by British companies. Since Japanese FDI continued at a heavy pace in 2016 and 2017, the number of employees at Japanese affiliates is likely to have topped 900,000, inching close to the figure for British-affiliated companies. What’s more, the Japanese affiliates generally offer attractive wages. The average stood at $84,300 a year in 2015, better than that at U.S. companies or foreign-affiliated firms.
The Trump administration’s America First agenda is supposed to be aimed at creating as many high-quality jobs as possible in the U.S. The problem is that aggressive protectionism will not achieve that goal and instead will bring all sorts of damage. Japanese companies operating in the U.S. invested in the future of the U.S. market since long before the Trump administration was inaugurated and without anticipating a rise in protectionism. This created jobs and added value, and the companies became embedded in the local economy and society.
Today, Japanese-affiliated companies are treasured by their host communities and residents as local businesses that generate the benefits sought by the Trump administration. If these companies’ operations are hurt by the administration’s protectionist policies, local communities, locally elected congressmen and state governors will no doubt press the administration to back off.
In the evolution of economic relations between Japan and the U.S., Japanese companies have shifted from export to investment and local production in the U.S. The stock of investments and experience accumulated through long years of local activities have established a strong foundation in the form of large numbers of Japanese-affiliated firms operating there. As a result, our relations are much closer and deeper than when they were strained over bilateral trade friction 30 years ago. The Japan-U.S. economic relationship is not so shallow as to be easily affected by a spillover of U.S.-China trade disputes. Today, more and more Japanese companies run their domestic and U.S. operations in consolidated ways. As long as the U.S. economy continues its steady expansion, Japanese firms will be able to maintain good performance by way of their U.S. units.
But if the Trump administration’s protectionist policies intensify, triggering not just trade disputes with China but a global trade war with exchanges of retaliatory measures, damaging the U.S. as well as the world economy, Japanese-affiliated companies in the U.S. won’t be immune from the damage and the value of their assets — the $450 billion stock of Japan’s FDI in the U.S. — may fall.
Recent declines in share prices in the U.S. and worldwide markets upon every indication of the Trump administration’s hawkish protectionism are likely warnings against such a risk. This needs to be taken seriously, and efforts need to be made to prevent the risk from materializing. Japan and other governments should press the Trump administration to rethink its protectionist steps in favor of wise policy choices and flexible judgment, and consumers and businesses that stand to lose from protectionist policies should make their case to the U.S. Congress.
Takashi Imamura is director of Marubeni Research Institute.