Needing quick trade war wins, US president will take his fight to Tokyo

William Pesek

Two years ago, Shinzo Abe placed an audacious bet on behalf of Japan: befriending Donald Trump.

That wager at Trump Tower in November 2016 has since grown ever-riskier. No other world leader stepped forward to join Abe. Meanwhile, Trump’s reign is growing exponentially more chaotic. Now Abe’s Trump bromance is about to be put to the test in ways that imperil Japan’s economic prospects in 2019.

As subpoenas fly, scandals deepen and legislative prospects dwindle in Washington, U.S. President Trump is hungry for some big international successes.

Hopes for a U.S.-Beijing cease-fire are dimming by the day as Beijing challenges Trump’s version of events at the Group of 20 summit in Buenos Aires. So that leaves Abe and Japan in the line of fire.

The prime minister’s 2019 diary is already teeming: revising the pacifist constitution; liberalizing immigration; hiking sales taxes; ushering in a new Emperor; and sorting out the Renault vs. Nissan Motor brawl (Carlos Ghosn, the former chief of the Franco-Japanese alliance, is in prosecutorial custody).

If Trump now takes his trade campaigning to Tokyo, Abe’s year would look even worse — nothing less than Japan’s longest economic expansion since the 1980s would be under threat.

So far, Abe has been extraordinarily pliant toward a White House that treats Japan with more ambivalence than respect. So, Trump has good reason to think Abe will prove an easier mark than Chinese president Xi Jinping.

This puts Tokyo in a seemingly impossible position. Trump’s trade war is taking a toll on Abenomics. Abe’s six-year-old campaign to reflate the economy and boost wages was supposed to start paying off in 2018.

Then came Trump’s trade war. First 25% tariffs on steel and 10% levies on aluminum. Next, 25% taxes on $250 billion of Chinese goods … and threats to double that amount. As the year draws to a close, so does China’s run of 6.5% annual growth.

The downshift in Japan’s biggest trading partner is an added headwind against Abe’ persistent efforts to boost domestic consumption. There were moments of optimism this year. Sony, for example, raised base pay for the first time in 15 years in fiscal 2018 — by an average 2%. Much of the rest of Japan Inc., though, went the bonus route. One-time payouts do not influence consumption the way permanent base pay gains do.

Trump’s trade war reduced the confidence among executives to share hefty profits with workers. It also is complicating the Bank of Japan’s 2% inflation quest. The 30%-plus jump in exports since late 2012 did not get Japanese executives to open their wallets. Now, as the trade war crimps Chinese demand, they might scale back on bonuses and investments.

Japan Inc.’s biggest fear is the U.S. slapping 25% tariffs on imports of cars and auto parts. Even though Japan makes millions of cars in the U.S., autos and parts accounted for about 75% of the $69 billion 2017 trade deficit with Tokyo. Such taxes would slam the Asian supply chains on which Abe’s economy relies.

The risks may have increased with layoffs at General Motors. Trump took news last week that GM is cutting 14,000 North American jobs very personally. As he looks for scapegoats, how long will it take for Toyota Motor, Nissan and Honda Motor to become daily targets of Trump Twitter tirades? The same goes for Japan’s farm lobby, as the @realdonaldtrump feed agitates for lower Japanese tariffs on rice, beef and other goods.

Team Trump, meantime, created a mess in Buenos Aires. On Twitter, Trump touted a big deal with China on limiting auto tariffs that Xi’s government did not remember making. Markets, initially euphoric about Trump’s claims, have since fallen to earth amid signs it was all bunk.

This is the faithless negotiating team Abe’s men will face as early as mid-January. In his Nov. 30 Buenos Aires meeting with Abe, Trump called the U.S. trade deficit with Tokyo “massive.” He said: “We hope that we are going to be balancing it very quickly.” It is language similar to that used when Team Trump members deride China.

Yet “balancing” means something unique in Trump’s vocabulary, far removed from its usual connotations with fairness and equality. His is a zero-sum-game approach honed over decades of getting allegedly the better of business partners. Trump, for example, has no intention of a trade deal on goods alone, as Tokyo requests. He wants to prise open Japanese services as well. He is not above using Tokyo’s reliance on Washington’s security blanket for leverage. Nor its fears over North Korea. And as Chinese officials who tangoed with Trump’s men in Argentina can attest, this White House will willfully misrepresent what was agreed.

A key Abe success has been signing free-trade deals with leaders not named Trump. Abe cajoled his Liberal Democratic Party into joining the Trans-Pacific Partnership with Trump’s predecessor Barack Obama. Post-Obama he has persuaded other TPP countries to go ahead with the pact even after Trump pulled out. In July, Abe agreed a free-trade deal with the European Union, one covering a third of the global economy and markets involving more than 600 million people.

So far, Abe’s plan has been to slow-walk formal negotiations with Trump’s White House. A key delaying tactic has been pledging to buy U.S. military hardware, including state-of-the-art F-35 stealth fighters.

Yet the zero-sum president will be expecting so much more from his only real pal in the world, further imperiling Abenomics. Abe needs to preserve an expansion that, depending on your metrics, is now in its 73rd month. One sizable threat: Trump demanding a no-currency manipulation clause in any deal. That could reverse the yen’s 33% drop versus the dollar on Abe’s watch, slamming Japan’s giant exporters.

Tokyo’s stalling strategy is becoming less operative. It has options, of course. Japan could recruit new members to the current TPP roster of 11 economies. It could double down on the European markets.

It could even pivot toward China. Yet betting on Beijing has its pros and cons. It means choosing a predatory trader that undercuts neighbors on price and with state subsidies on industries from steel to pharmaceuticals to electric-vehicles and an erratic mercantilist with an itchy Twitter finger. That’s a wager that might backfire.

The odds are that Abe’s Japan will stay in the U.S. orbit. But Abe has his work cut out to keep his Trump bet from going bust — and to safeguard Japan’s expansion.


William Pesek is an award-winning Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.

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