Japan: Ally Attack? Risk Free?

Dear Japan: Thanks for investing more and adding more jobs in the US than any other country over the last 4 decades.

Jul 07, 2025

I am thinking this calls for a response…

In this note, we do a quick update on the US-Japan import/export mix and give some context to the scale of trade volumes and the deficits with Japan.
The scale of the tariffs are brutal when stacked against the separate product related tariffs on products such as steel.
The 25% tariff even before the product tariffs (e.g. autos, steel) is a very painful penalty.

In the latest letters released to countries and notably to Japan, Trump appears to abandon all pretense that this is about “reciprocal” tariffs but instead is clearly about eliminating the trade deficit. After the embarrassing lack of conceptual foundation in the formula evident on Liberation Day, being clear on his goals was a good idea. The “formula” presented on Liberation Day concerned the markets because it was so absurd (see Tariffs: Diminished Capacity…for Trade Volume that is…4-3-25, Reciprocal Tariff Math: Hocus Pocus 4-3-25, Reciprocal Tariffs: Weird Science Blows up the Lab 4-2-25).

The above chart just offers food for thought. Our views on the tariff risks have been covered in detail across time going back to the Trump 1.0 period. The biggest target for the Japan tariffs is autos, a full line of auto supplier chain product groups, steel, an extensive array of capital goods equipment and machinery, and a material amount of pharma. The easy, pithy summary would be that the tariffs are a declaration of war on Japanese manufacturing.

While Trump waved the national security flag again as he usually does, such an attempt to destroy the economy of one of the largest trade partners and banking nations with a top 10 population among nations strategically located in the Pacific might not be seen as the smartest go-to move if you are worried about China.

We will let the military strategy trade rags and geopolitical wizards figure that one out, but from the cheap seats, Japan has been viewed as a critical ally in the Asia-Pacific region in the postwar/Cold War period. The “national security” hoax of a rationalization for these tariffs is for another day. It will not be hard for an expert to argue that national security will be damaged and not helped by this action.

The scale of investment in the US transplant belt has been a major factor in the expansion of the US industrial base and a buildout of skilled labor and the multiplier effects of supplier chains. This latest action could also stall the supposed $1 trillion investment pledge from Japan already cited in White House press releases. The hostile action also comes soon after Japan invested a record amount in the US in 2024. IT is an “interesting” strategy all tied to a half-baked, concept-lite view of trade deficits (see The Trade Picture: Facts to Respect, Topics to Ponder 2-6-25, Tariffs: Questions to Ponder, Part 1 2-2-25).

The above chart would in theory be the “target list” for retaliation, and the major groups are agriculture and energy. We will see how Japan reacts to a punch in the face that in cultural terms goes well beyond “losing face.”

As usual, Trump threatens escalation if any tariffs are put on the US in what can only be seen as a demand for surrender by the trade partners. The following language is mirrored in other letters.

“If for any reason you decide to raise your Tariffs, then, whatever the number you choose to raise them by, will be added onto the 25% that we charge. Please understand that these Tariffs are necessary to correct the many years of Japan’s Tariff, and Non Tariff, Policies and Trade Barriers, causing these unsustainable Trade Deficits against the United States. This Deficit is a major threat to our Economy and, indeed, our National Security!”

We saw similar commentaries sent to a range of nations including some other top 15 trade partners and much smaller nations. We will pick some of the most relevant to some major sectors and follow up. We expect life for trade partners will only get more difficult from here. The core of the message is “you are not an ally of the US if there is a material trade deficit.” Since the US has a trade deficit with just about every major trade partner, that makes for a distinct shortage of allies.

A few charts for context…

The above chart updates the history of trade deficits. Anyone who watched the Japan-US trade battles of the 1980s through current times know that Caterpillar took on Komatsu et al and came up victorious over time. Deere also remained a global juggernaut. In contrast, Japanese autos crushed the US Legacy Detroit 3 for many reasons and the Japan Big 3 (plus many suppliers) invested heavily in transplant capacity and have been major factors in red state booms across the transplant belt from Texas to the East and north to Kentucky Indiana and even Canada. They sure seem like an ally to those who pay attention.

The above chart offers another angle. Yes, there is a trade deficit. That said, the relatively stable patterns is less severe than what we see with many countries (China, Vietnam, Mexico).

One last question:

If Trump stated that Trump 1.0 was the “greatest economy in history” and he inked a trade deal with Japan in 2019, how is this current attack supposed to help? Was that not a great economy? Was Trump jeopardizing national security? Like most Trump policy inconsistencies, that one has no answer. The questioner would be a “nasty person” and banned from the press pool.

US Trade in Goods April 2025: Imports Be Damned 6-5-25

Tariffs: Testing Trade Partner Mettle 6-3-25

US-UK Trade: Small Progress, Big Extrapolation 5-8-25

Tariffs: A Painful Bessent Moment on “Buyer Pays” 5-7-25

Trade: Uphill Battle for Facts and Concepts 5-6-25

Tariffs: Amazon and Canada Add to the Drama 4-29-25

Ships, Fees, Freight & Logistics Pain: More Inflation? 4-18-25

Tariffs, Pauses, and Piling On: Helter Skelter 4-11-25

Tariffs: Some Asian Bystanders Hit in the Crossfire 4-8-25

Tariffs: Diminished Capacity…for Trade Volume that is…4-3-25

Reciprocal Tariff Math: Hocus Pocus 4-3-25

Reciprocal Tariffs: Weird Science Blows up the Lab 4-2-25