Evaluating the US-Japan Trade Deal on Mercantilist Terms

Short Version: it’s bad, even by the preferred metrics of protectionists.

On July 23, US and Japanese trade negotiators reached a deal on tariffs, investments, and other international transactions.  Much has been written about how bad the deal is from a standard economic perspective (see, for example, here).  But President Trump and his administration, who negotiated the deal, are mercantilist.  So here, I evaluate the trade deal from the mercantilist perspective, focusing primarily on the trade deficit.

A few notes first:

Details of not only this deal, but the others negotiated, are sketchy and subject to dispute.  In order to give the Trump Administration the benefit of the doubt, I will be using their announced conditions.
These are not deals in the traditional sense of legally binding agreements.  As best we can tell, they are verbal assurances of a potential framework for a legally binding agreements down the line.  But, for the sake of argument, I will treat this deal as if it were a formal, legally binding agreement between the two nations.

With the preliminaries out of the way, let us begin.

Trade Deficit

For mercantilists in general, and President Trump in particular, a trade deficit is a major concern.  Indeed, for the Trump administration, it is the overriding concern.  He invoked the authority to do these deals by declaring the mere presence of a trade deficit to be a national emergency. Therefore, let us begin our analysis by looking at what effect this deal will have on the trade deficit.

This deal will necessarily increase the US trade deficit with Japan.  Part of the deal is a $550 billion investment by Japan into the United States.  When a foreign investor invests in the US, that necessarily increases the trade deficit, because that is how the transaction is recorded in the National Income Accounts.  So, this investment part of the deal will increase the trade deficit.

Furthermore, the Japanese will need US dollars to accomplish this investment.  The only way they can get those dollars is by selling goods to Americans.  That means American imports from Japan will necessarily have to rise, and American exports to Japan will necessarily either not change or fall.  Since a trade deficit is defined as when exports are less than imports, under this scenario, the trade deficit must rise.

There is another, indirect way in which the trade deficit will likely worsen.  The US tariff on Japanese cars is now 15%.  US automakers face a rash of higher taxes, including steel tariffs (50%) and auto parts tariffs (various).  Japanese automakers do not face such tariffs.  Consequently, Japanese imported cars will now be relatively cheaper than their American-made competitors.  On the margin, Americans will purchase more imported cars than domestic cars.  Similarly, American auto exports to Japan are now relatively more expensive, which will reduce exports.  Again, the trade deficit rises.

Thus, given the mercantilist concern about the trade deficit, this deal is a bad one.

Protecting Jobs

A lesser concern for mercantilists is protecting jobs.  The effect the deal will have on jobs is ambiguous.  Assuming the investment deal goes through and doesn’t turn into a significantly scaled-back project like Foxconn, some jobs will be created in the United States, intended to be in LNG exports.  But, as discussed above, American auto manufacturers now face significant competition from Japanese auto firms.  And so, some jobs will be created.  Others, destroyed.  The net effect is probably close to zero.  Thus, from the mercantilist perspective on jobs, this deal is potentially bad, especially since autoworkers are another industry the American mercantilists wish to protect.

Conclusion

Other details of the deal are still obscure, so there is not much more to write.  But, given the information we do have based on the announcements from the Trump Administration, this is a bad deal by their own metrics.