There has already been a lot of coverage about President Trump, but I feel like there are still issues that haven’t been explored in depth. In this article, I would like to talk about trade, including Trump’s tariffs, and related exchange rates. Hideo Kumano’s column. Photo taken on the 6th in West Palm Beach, Florida (2024 Reuters / Brian Snyder)
[Tokyo, 14mh]- There has already been a lot of news about President Trump, but I feel that there are still issues that have not been explored in depth. In this article, I would like to talk about trade, including Trump’s tariffs, and related exchange rates.
First, Trump plans to impose tariffs of 10% to 20% on imported goods, with an additional 60% tariff on China in particular. These measures are not only imposed unilaterally by the United States on the other country, but they may also impose retaliatory tariffs by the other country. Indeed, China and the European Union (EU) retaliated under the previous Trump administration. Not only does this cause Americans to pay higher costs when they buy imported goods, but it also puts American exports at a disadvantage. -opportunity due to retaliatory tariffs. In other words, they will be hit by the import factors of inflation and the negative effects of downward pressure on exports.
If your country has been hit with high tariffs by the Trump administration, and you believe that retaliatory tariffs are not enough of a countermeasure, what will that country do next? The answer is currency devaluation. It is inconceivable that policy incentives should be made to depreciate the domestic currency sufficiently to offset or reduce the level of high prices. If several countries promote it, the dollar will appreciate as a result. Will Japan follow suit and accept a move towards a weaker yen? In that case, Japan will put pressure on increasing import prices. Trump’s tariffs will understandably be inflationary for Japan.
Trump’s tariffs are a literal example of America First. The idea of placing a 100% tax on cars imported from Mexico was based solely on the convenience of the United States. From Mexico’s perspective, this is a major concern. Until now, no tariffs have been imposed within the framework of the free trade agreement “United States-Mexico-Canada Agreement (USMCA).” Due to low labor costs, Japanese and European car makers have established factories in Mexico to produce and export to the United States.
There is hope that stock prices will rise with Trump becoming president, but this could have a negative impact on Japanese stock prices. This will harm companies that have supply chains in Mexico, which are centers for the international labor division. This problem not only puts Mexico at a disadvantage, but also Japanese companies that have supply chains in China and export to the United States.
In the case of China, the economic slowdown also has negative consequences. Placing an additional 60% tariff on products exported from China to the United States would worsen the Chinese economy. It imposed a tax of 25% from 2017 to 2019. At that time, China’s real economic growth rate was in the 6% range. The economy is currently accelerating to the 4% level, and if a 60% tariff is added to that, the economic slowdown will get worse. As a result, the performance of companies exporting from Japan to China will be adversely affected. Trump’s tariffs are not good for Japanese companies. It cannot be said that there is only a positive effect on Japanese stock prices.
This is not specific to Trump, but there is a belief that it would be better to remove China from the supply chain and build a trade bloc with other countries. Especially in the field of electronics related to national security, there is concern that there is a risk that China could use the technology for military purposes. In order to compete with China, the government supports industries in innovative areas such as semiconductors with large subsidies. Pushing forward into advanced areas leads to copying the ways of the Chinese government.
I have long preached the benefits of free trade and consistently opposed protectionism. A little over a decade ago, people who supported free trade based on the theme of “the economic benefits of the Trans-Pacific Partnership (TPP)” are now keeping quiet about it, and some now speaking of economic security he began to sing. It really feels like a world away.
It is true that we must be careful about the transfer of technology to the military. However, this is a very limited area, and talking about trade specifically in terms of economic security seems to be putting the card before the horse. In addition, the infusion of government subsidies is not economically justified. Mr. Trump supports foreign companies that locate in the United States and support them.
Based on economic principles, the competitiveness of industries that can be improved with large subsidies is limited to industries with large investment costs (fixed costs), such as semiconductors. Firms with fixed cost support can improve profitability by reducing average costs. In order to reduce average costs, it is necessary to greatly expand the sales channels and enjoy the benefits of mass production as much as possible.
However, if we uphold the banner of economic security and trade within a narrow range, it will be difficult to realize the benefits of mass production. Free trade allows us to pursue the benefits of mass production by expanding overseas sales channels as much as possible. In other words, there is a contradiction in principle with economic security.
As long as economic security is kept within a narrow range, there will be little harm. However, attempts to expand the scope of what is considered military use or to limit trade to a wider range of items will gradually do more harm than good. For example, placing high tariffs on electric vehicles (EVs) made in China while giving preferential treatment to EVs made in the United States is a sign that protectionism is gradually become wider. This trend is likely to grow even stronger under the next Trump administration.
If this movement were to increase, what would Mr. Trump do? I think Japan needs to buy more American products. I don’t know if they will ask us to import more US-made EVs, but it is possible that they will push for sales in areas related to industries that the US supports with subsidies. For example, it is possible that Japan will sell American-made equipment under the policy to further strengthen Japan’s defense capabilities. Mr Trump wants Japan to improve its trade surplus with the United States. It is expected that they will use this introduction to sell products from military industries that they have supported as part of their national policy. The Japanese government may be forced to make difficult choices, both diplomatically and financially.
Editing: Erika Mune
(This column was posted on the Reuters Foreign Trade Forum. It is written based on the personal views of the author)
* Hideo Kumano is a chief economist at the Dai-ichi Life Economic Research Institute. He joined the Bank of Japan in 1990. After working in the Research and Statistics Bureau and the Information Services Bureau, he retired in July 2000. He joined the Dai Life Economic Research Institute -ichi in August of the same year. Current situation as of April 2011.
* The content such as news, trade prices, data and other information in this document is provided by the columnist for your personal use only and is not provided for commercial purposes. The content of this document is not intended to solicit or encourage investment activity, and it is not appropriate to use this content to make decisions when trading or buying or selling. This content does not provide investment, tax, legal, etc. advice that constitutes investment advice, nor does it provide any recommendations regarding specific financial stocks, financial investments, or financial products. Use of this document is not intended to replace investment advice from qualified investment professionals. Although Reuters uses reasonable efforts to ensure the reliability of content, opinions or views expressed by columnists are their own and not those of Reuters.
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2024-11-14 19:46:00
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