Economist and China expert Long Ke during an interview with JAPAN Forward in Tokyo. (©Kenji Yoshida)
President Donald Trump's sweeping tariffs have been sending ripples across the global trading system. Even a longtime American ally, Japan, was not spared.
On July 23, Japan reached a deal with Washington under which the baseline tariff on Japanese goods was reduced to 15% from the initially proposed 25%. Sector-specific levies will remain in place, while Tokyo has committed to investing billions in the coming years.
What impact will this have on Japan's export-driven economy, and what are Trump's ultimate motives? To explore these questions, JAPAN Forward sat down with Long Ke, an economist and senior fellow at the Tokyo Foundation.
Excerpts of the interview follow.
How do you assess Japan's recent tariff deal with the US?
Since Tokyo was chosen as the Trump administration's first negotiating partner, there was a tendency toward overly optimistic expectations. Prime Minister Shigeru Ishiba himself probably believed that reaching an agreement would be straightforward, and the media suggested that if Japan secured a deal first, it would set a standard for other countries.
Ishiba likely misread the situation, believing that Trump would lower tariffs as Japan was ready to invest heavily in American businesses. Looking back, Japan should have made concessions where necessary. For example, it initially refused to make any adjustments to expanding agricultural imports. Even in the automobile sector, it might have been better had the Japanese side offered to remove non-tariff barriers first.
Is the US winning its trade war?
A tariff war is often a minus-sum game. The Trump administration believes the US has won because it's collecting substantial tariff revenue. That may be partially true, but some American companies are absorbing the tariffs themselves to avoid raising prices and shifting the burden onto consumers.
In industries where Japanese companies are strong, Japan can pressure American trading firms to take on more burdens. But in sectors where Japan is weak, Japanese companies will need to manage the burdens themselves. With overall balance, it cannot be said that the US has achieved a complete victory.
What would be the effect on the Japanese economy?
There are over 4,800 items traded between Japan and the US, and the impact of tariffs on each industry will need to be assessed individually. The "big deal" is set. Officials from relevant departments will now need to sort out the details.
That said, a 15% baseline tariff would deal a good blow to Japan's export-driven companies, squeezing profit margins and undermining market competitiveness. Companies would likely struggle to raise general wages as a result.
Regarding Japan's $550 billion USD investment in the US, Trump claims that 90% of the profits will accrue to the US. In investment, however, it is common sense that profits largely go to the investor. It's an enormous sum of money. And this isn't a lump-sum cash payment but rather a long-term investment in various projects.
The two sides will settle on a project, build a factory, install and test the equipment, and only then will production begin. This isn't a process that can be completed in two or three years, and by the time the $550 billion investment is fully realized, Trump may no longer be in office.
Despite warnings, US inflation appears stable for now. How might the ongoing trade war impact the American economy?
It depends on the time frame you're considering. Whether you focus on the short term or the long term makes a big difference. Many American companies still have inventory stockpiled after Trump's initial tariff threats, and some products remain untaxed.
For now, major retailers like Walmart have generally not raised prices, making it difficult for small and mid-sized supermarkets to do so. However, once the Christmas and Thanksgiving season kicks in around November, inflation could start to accelerate.
Another factor is that Washington and Beijing have yet to reach a full agreement, and only provisional measures are in place. For now, the risk of high inflation remains low. But what is likely to come first is a slowdown in the global economy.
The US initially imposed a 145% tariff on China but gradually reduced it over time. Without this adjustment, inflation might have spiraled out of control. Most countries are expected to reach tariff agreements with the US by autumn. The key question is how these tariffs will ultimately be reflected in consumer prices.
Will Trump's policies succeed in containing China's rise?
When discussing this issue, it's important to discern the true intentions of the US. When the US-China trade talks concluded in Stockholm in July, Treasury Secretary Scott Bessent stated that the US does not want to decouple from China but is seeking to rebalance unequal trade. Trump, on the other hand, seems primarily focused on maximizing tariff revenue and boosting the American economy.
First, although US officials insist this is not a decoupling, in reality, the process is already underway. Factories assembling Apple iPhones, for example, are relocating to India, and its stores in China that sell iPhones directly have recently closed.
What about addressing the trade imbalance? While China's direct exports to the US are declining due to tariffs, shipments routed through third countries such as Vietnam, Malaysia, Indonesia, and others in Southeast Asia are rising. To that end, the US's overall trade deficit with the rest of the world may not shrink significantly.
Meanwhile, Beijing is working to mitigate the impact by deepening trade with other nations, such as Brazil, which has also been hit with steep tariffs. If Trump's trade war aims to contain China, tariffs should not have been imposed on allies like Japan, South Korea, and the European Union.
How do you assess China's current economic situation?
China imposed extremely strict lockdowns during the COVID-19 pandemic. Even after vaccines became available and the virus became less infectious, the measures were tightened further.
As a result, roughly 4 million small and medium-sized businesses closed over the course of three years. Employment also deteriorated, making it difficult for many to find work. In June of this year, 11 million university students graduated, and about 60% of them were unable to secure a job.
Adding to that, in 2021, major Chinese real estate companies went bankrupt. This triggered the collapse of its real estate bubble, and the sector's downturn has been prolonged. While foreign exports normally help offset a weakening domestic market, Trump-era tariffs have made that path highly uncertain.
As an authoritarian state, China presents its statistics in a polished manner. For example, economic growth for the first six months of this year was reported at 5.2%, but I believe the actual rate is closer to 2%–3%.
Amid the harsh reality, rumors swirl that the Xi Jinping administration might collapse under the downturn. That, however, is an exaggeration. While the situation is certainly teetering on shaky ground, I don't see the Xi reign falling anytime soon.
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Author: Kenji Yoshida
