The Gilded Age of the American Tariff: Choices Ahead for Japan

A Warm Start to Colder Days Ahead?

On February 7, 2025, US President Donald Trump and Japanese Prime Minister Ishiba Shigeru wrapped up a much-anticipated leaders’ meeting. The interaction between the two leaders was cordial, and potentially divisive issues (the trade deficit and defense burden sharing) did not steal the show. Moreover, the leaders’ joint statement not only reconfirmed the foundations of the alliance but spoke of a coming golden age for US-Japan relations.

During the summit, Prime Minister Ishiba played up the contributions that Japanese companies make to the US economy through foreign direct investment and offered a tantalizing milestone for Trump: Japanese FDI to cross the $1 trillion mark. Moreover, Japan promised to purchase more liquid natural gas and defense equipment from the United States as part of trade deficit reduction efforts. Key business deals appeared to have a new lease on life as Trump welcomed Nippon Steel’s investment in US Steel (but not an acquisition) and flaunted the strategic benefits of Japan investing in a natural gas pipeline in Alaska. Nevertheless, implementing these projects will be tricky since a minority stake may not be palatable to Nippon Steel and the Alaska pipeline carries a hefty price tag.

But even this carefully choreographed leaders’ meeting could not dispel the profound disquiet that comes from the realization that Trump’s tariffs are coming, Japan will not escape unscathed, and this time the American president is taking a wrecking ball to the multilateral trading system.

A New Heyday for the American Tariff

Trump has longstanding views on trade and tariffs, namely, that deficits result from the unfair practices of others while tariffs level the playing field and can deliver the renaissance of US manufacturing. Acting on these views in his first term, Trump’s protectionism had adverse effects on Japan: the United States withdrew from the Trans-Pacific Partnership agreement, Japanese multinationals got caught in the middle of the US-China trade war, and ally Japan was not spared from 25% steel and 10% aluminum tariffs imposed due to alleged national security risks. At that time, Japan displayed unprecedented leadership (rescuing the TPP) and pragmatism (negotiating a bilateral trade deal to avoid further trade friction). This time, however, Japan will be tested far more severely.

Just a month into Trump’s second administration, the barrage of trade policy announcements and tariff threats has sown confusion. But there is clarity on one score: we are entering a new heyday for the American tariff. Trump 2.0 trade policy will be qualitatively and quantitively different from his first term for several reasons.

One, domestic restraints on the President’s trigger-happy use of tariffs are much weakened. Congress has for years ceded its powers to regulate foreign commerce to the executive branch, but at the debut of Trump’s second term it has been entirely missing in action. The fusion of economics and national security has given American presidents freer rein in imposing trade restrictions through, for example, the use of the International Emergency Economic Powers Act. And Democratic and Republican administrations have rejected the notion that US national security tariffs can be subject to the WTO’s dispute settlement mechanism. Trump 2.0 has taken America further down this path through an America First Trade Policy Executive Order released on Inauguration Day stating that trade deficits undermine national security. This provides a blank check for any action the current administration deems fit to impose for the sake of “rightsizing” the trade balance.

Two, Trump has amped up the use of tariffs as tools of coercive diplomacy: 25% punitive duties against Colombia for not accepting the repatriation of immigrants in U.S. military planes; 25% tariffs against Canada and Mexico for issues related to immigration and fentanyl flows; and 20% against China for the shipment of fentanyl precursors. It is small comfort that Trump appeared satisfied with symbolic wins to stave off the tariff threats (Colombia provided its own transportation for repatriation), given that Mexico’s and Canada’s cooperation on drug and migration notwithstanding, he moved to slap tariffs on March 4, only to offer partial and temporary relief a day later. The harsh reality is that this American president is ready to exploit economic dependencies not only against strategic competitors or as tools of deterrence, but to pressure allies and partners.

Three, the scale of tariffs contemplated today dwarfs Trump’s first term. On February 10, Trump announced the reinstatement of the steel and aluminum tariffs (now both at 25%), with no exclusions and no exemptions for US trade partners like Korea, Japan, the EU, Mexico, and Canada. The metal tariffs, which now will affect some downstream products, are coming into force on March 12. Other key sectors in the world economy—from automobiles, pharmaceuticals, and semiconductors—are also in the crosshairs of U.S. tariffs. Trump has raised the prospect of a 25% tariff on autos as soon as April 2. But the boldest policy pronouncement, one with global reach, is the proposal currently under review to adopt “reciprocal” tariffs. The goal is for the United States to match the higher tariffs that other countries impose in a new system that would also factor in exchange rates, value-added taxes, subsidies, and/or government regulations.

This proposed tariff regime will not only be unwieldy and inefficient (creating unique tariff schedules for each trading partner that will cover thousands of products), it will not deliver the fairness it propounds to achieve. For Washington is not planning to lower its own tariffs to match others and will unilaterally set new tariff levels by choosing at its own discretion from a sundry list of partners’ economic policies it objects to.

The new age that America First trade policy heralds is not golden but gilded, reminiscent of earlier times when crony capitalism thrived and raw market power structured trade among nations. At home, lobbying will flourish as businesses seek to curry favor with politicians to push for higher tariff walls or to carve out tariff exclusions. Abroad, Trump is setting himself up as the master deal maker by letting trading counterparts know they can avoid the higher “reciprocal” tariffs by giving concessions at the negotiation table.

Japan’s Choices

Trump’s tariffs will have adverse effects on Japanese companies and economy. The cost of higher auto duties will be steep, considering that one third of Japanese exports to the United States are in the automotive sector. Some models predict almost a 14% decrease in Japan’s automobile production and 0.34% decrease in real GDP. Direct tariffs imposed on Japan are not the only disruption on the horizon. Japanese firms have invested heavily across North America, creating highly integrated production networks. For that reason, losses to Japan’s six largest auto companies more than double to reach $21 billion when taking into account not just direct auto tariffs but also the levies on products shipped from Canada and Mexico. It is no wonder that in a recent Reuters survey, 86% of Japanese companies expect deterioration in the business environment from Trump’s policies, with tariff hikes a top concern.

America’s revived mercantilism will also hobble Japanese economic diplomacy. During its G7 chairmanship in 2023, Tokyo pushed for the adoption of a common economic security platform. But now that Trump has weaponized trade against allies, it will be much harder to maintain unity in fighting economic coercion. Moreover, America First’s rejection of the core tenets of the global trading system—nondiscrimination and respect for international rules—erodes a north star of Japan’s diplomacy: its commitment to multilateralism.

Japan responded to the first Trump administration by positioning itself as a leader of free trade. As such, it bears today greater responsibilities but also faces more daunting challenges. Tokyo’s familiar playbook in coping with Trump is already coming into view: deflection of trade friction by emphasizing Japan’s contributions to the US economy and negotiation to escape the brunt of tariffs. Diversification through the crop of mega trade agreements Japan has brokered over the past few years will continue apace. It is the unfamiliar territory that presents the hardest choices. Last time around, Tokyo refrained from litigation and retaliation to avoid tension with its security guarantor and mindful of the risks of spiraling trade wars. While combatting unilateralism with unilateralism is futile, Tokyo should reconsider seeking WTO-sanctioned countermeasures—both because it will be a vote of confidence on the trading rules under attack and because the only feasible restraint on Tariff Man is the political cost to be paid at home from higher inflation and lost export markets for important constituencies.

De-risking from America is an entirely new proposition. A new consciousness is now forming about the perils of overdependence on the United States. This will be a quiet but profound transformation. The merits of doubling down on tight economic bonds with the United States are now tempered by the prospect of fostering dependencies that a mercurial American president can exploit in the future. This is far from a recipe for American greatness, for it only encourages our closest partners to step into a multipolar world.

(Originally written in English. Banner photo: Japan-produced automobiles await export to markets including the United States in Kawasaki, Kanagawa Prefecture, in February 2025. © Kyōdō.)