The U.S. Can Neither Ignore nor Solve the Israeli-Palestinian Conflict
Washington Must Actively Manage a Dispute It Can’t End
Japanese Prime Minister Shinzo Abe got even more out of his February 19–20 summit with U.S. President Donald Trump than he had expected. The question is how long their apparent goodwill can last, especially given the anti-Japan mood of much of Trump’s voting base.
During the meeting, Abe won virtually all the affirmations on security issues that he had sought, including a repeat of former U.S. President Barack Obama’s commitment to defend Japan if China tried to seize the Japanese-controlled Senkaku Islands (known by the Chinese as Diaoyu Islands) in the East China Sea. Trump also reaffirmed the United States’ commitment to the defense of Japan in response to a missile test by North Korea. In addition, Abe avoided being publicly criticized by Trump on any of the issues on which Trump had lambasted Tokyo prior to the summit, including accusations of currency manipulation and security freeriding. In fact, according to the Japanese press, “Abe led the conversation while Trump remained mostly a listener.” And prior to the summit, Abe had enlisted Japanese multinationals to compile a list of their already planned investment projects in the United States so that Trump could, if he wished, issue tweets claiming to have convinced Japan to create 700,000 new American jobs. (Thus far, we’ve seen no tweets.)
A Japanese official told the press that the two men spent no time discussing Trump’s pre-summit accusation that Japan was devaluing its currency, the yen, to win exports at the expense of American jobs. There was no mention of currency issues in the joint communique and no criticism from Trump on the yen or any other trade issue at their joint press conference. The closest Trump got was when he said, “I believe that we will all eventually—and probably very much sooner than a lot of people understand or think—be at a level playing field.” But that was in response to question about China, not Japan. During the Remarks, Abe also noted that the president had agreed to have currency issues handled by the U.S. Treasury and Japan’s Ministry of Finance, just as they had been in the past. This process is less likely to lead to strong U.S. pressure.
Abe also apparently evaded entanglement in Trump’s notion of a bilateral free-trade agreement, in which binding rules against alleged currency manipulation would be a prominent feature. Tokyo believes Japan has much more to lose than to gain from any bilateral trade pact. For Japan, the whole purpose of the Trans Pacific Partnership (TPP) was to encourage the United States to play a more activist role in the Asian rules of the game as a counterweight to China. That’s the only reason the country gave the United States assorted concessions on agriculture while also agreeing to allow the United States to take 25 years to eliminate its 2.5 percent tariff on Japanese cars and 30 years to eliminate its 25 percent tariff on Japanese pickups and other light trucks—longer periods than for other countries.
Instead of a bilateral free trade agreement, Trump accepted Abe’s proposal that the two nations create a new format for “economic dialogue”—led by Vice President Mike Pence and Japanese Deputy Prime Minister Taro Aso—to discuss issues, including monetary policy, trade, and cooperative projects. The prime minister’s office is well aware that Pence, as governor of Indiana, had a good relationship with Toyota, the very firm Trump had blasted in a tweet for its investments in Mexico. There was a vague reference in the joint statement to a “bilateral framework,” which Abe contended referred to the Pence-Aso dialogue but which some on Team Trump might think refers to a possible trade agreement. If there is a perception gap on this point, it could spell tension down the road.
In yet one more victory for Abe, at the press conference, Trump even thanked Japan for hosting U.S. bases in Japan, a far cry from his threats during the campaign to withdraw U.S. forces unless Japan paid 100 percent of their costs.
The problem for Abe is that Trump cannot permanently abandon his tough posture with Japan (and other countries) without being criticized as “all talk, no action” by the blue-collar voters in five pivotal Rust Belt states that these voters swung from Obama in 2012 to Trump in 2016. And the problem for Trump is that there is no way he can deliver on his promise to end trade deficits and “bring back” jobs supposedly taken by Japan and others. Trump has argued that the only reason Japan and other countries run big, chronic trade surpluses with the United States is that they “cheat,” through what Trump called “the currency devaluation game” among other techniques.
Trump’s idea was justified in a preelection paper by Wilbur Ross, Trump’s nominee for secretary of commerce, and Peter Navarro, director of Trump’s National Trade Council. In their paper, Navarro and Ross asserted, “According to textbook theory, balanced trade among nations should be the long-term norm, and the chronic and massive trade deficits the US has sustained for over a decade simply should not exist. This textbook state of balanced trade would exist because freely floating currencies would effectively adjust differences in national domestic cost structures to bring about balanced trade.”
In fact, standard economics says no such thing. But this “alternative theory” allows Trump to claim that getting the BOJ to stop weakening the yen would eliminate much of the American trade deficit with Japan. The reality is that the BOJ does not control the yen rate. The BOJ has attempted to do so by pumping cash into the economy but has failed. Today, the BOJ continues to print planeloads of money, but the yen is up ten percent vis-à-vis the dollar from mid-2015. Besides, Japan has run a trade surplus with the United States for decades, whether the yen was strong or weak. Trump might soon learn that markets are stronger than central banks or presidents are. If he goes ahead with massive tax cuts, the dollar could easily rise against the yen.
But Abe went too far when he assured the Diet that “I think Trump shared the view that our monetary policy is not for currency manipulation but for ending deflation,” Silence does not mean agreement. Here, too, a perception gap could spell trouble down the road.
Most important of all, no matter what the BOJ does or doesn’t do, Trump cannot “bring back” millions of factory jobs, because trade is not what took them away. In the United States, auto jobs have fallen by 30 percent since 2000, but productivity growth, not trade, is the “culprit.” During 2000–2015, the price-adjusted U.S. output of autos and auto parts rose 44 percent. Suppose there had been no trade deficit at all, but auto purchases by Americans remained the same. In that case, auto output would have risen 50 percent instead of 44 percent, not a big difference. The main reason the jobs number fell is that, in 2015, the United States could produce that 44 percent additional output with 30 percent fewer workers. If Americans had bought the same number of cars and trucks but there had been no trade deficit, jobs would have fallen 27 percent instead of 30 percent.
Faced with data like these, Navarro and Ross retort, “To those who would blame automation for the decline of manufacturing, one need only look at . . . Germany and Japan . . . Despite declines in recent years, Germany still maintains almost 20% of its workforce in manufacturing while Japan has almost 17%.” What Navarro and Ross fail to mention is that, despite running big trade surpluses, Germany has lost one-third (3.5 million) of its factory jobs since 1991, and Japan has also lost a third (5.4 million) since 1992.
Launching a trade war through sky-high tariffs would make things even worse for the blue-collar workers who voted for Trump. Delicate supply chains built up over decades make many American firms dependent on the imports that come from China, Japan, and Mexico. A trade war would disrupt this supply chain, bankrupting tens of thousands of firms and putting hundreds of thousands of people out of work. This is a classic case of the proverb “Be careful what you wish for.”
If Trump recognizes this reality, he will try to give his supporters the show of having done something without launching an actual trade war. It will not be easy for him to figure out how to strike the balance. Nor can the outcome of this one meeting tell us whether he has learned anything of these realities. If he has not, then he has the legal authority to impose the punitive tariffs and other harsh measures that he has threatened to enact.