Japan is one of the few countries who has been willing to step into the batter’s box and take whatever Trump throws at them. This time at the plate, they were tossed a 15% tariff on Japanese goods (with some big caveats).
Tariffs on some of the most important exports, like cars and semiconductors, have been deferred for future negotiations. Which means Japan will be back at the plate in no time. The Japanese also pledged investment into US infrastructure via state-linked commodity institutions. Trump claims most of the profits will go to American pockets, but the Japanese disagree with that interpretation.
As is the running theme with most of Trump’s “trade deals”, this is predominantly fluff and the real talks are yet to begin.
Peter Zeihan here, continuing our series on the new deals that the Trump administration has announced for trade with our major trading partners. Today, we’re going to tackle Japan. The Japanese situation is very similar to the European situation. And then it looks like the Trump administration, Donald Trump personally came up with a few numbers, walked into the room, said, I want this, this and this and this.
And the Japanese nodded their head and smiled and say, sure. The headline figure for tariffs going, for, for goods coming from Japan. The United States is now 15%. And unlike in Europe, where there’s not a lot of back and forth in manufactured goods, to the degree that industrial substitution might happen with Japan, there’s a fair amount.
Japan is an industrialized economy that doesn’t have a lot of consumption because of their demographic bomb. And so they export basic goods. Intermediate goods, processed goods and finished goods to the United States. So there’s a lot of room for things to move around if that ends up being the final number for the long term.
But that’s probably not going to be the final number for the long term. The most interesting piece of the trade deal, as it’s currently been announced, is that on things like cars and semiconductors, those are going to be pushed off to another day. So even the Trump administration is saying that this is the beginning of the negotiations, not the end.
Here’s the problem. Japan doesn’t make a whole lot of semiconductor, and the United States doesn’t make a huge number of semiconductors. But both of us absolutely dominate certain pieces of the supply chain. So the United States makes the silicon dioxide that basically goes into all of the world’s semiconductors. And we also do almost all of the design. The Japanese do some design, but they absolutely dominate the photo mask, which is, for lack of a better phrase, really fancy sunscreen.
So when you were throwing the lasers at the chips, you can trim to different depths to achieve different things. These steps are not replicated in either country to the same degree that they would need to be. If you wanted to have a purely national semiconductor supply chain system. So the Trump administration, by pushing this off, is leaving unresolved the question of what the United States is.
Semiconductor policy is going to be are we only interested in the last step, fabrication, which is what the Taiwanese do? Is that what we want? And we still want to bring in all the inputs that we need from the rest of the world, or do we want to completely indigenous semiconductor system. The first one is $100 billion question that would take 10 to 15 years.
The second one is a $5 trillion question. That would take 20 to 40 years. And the Trump administration, to this point, hasn’t figured out how it wants to approach that, because that’s a huge tax, no matter which version of the question it’s going to be. And so things with Japan in that regard are being put off. Something similar is happening with drug manufacturing because the Japanese aren’t the ones that make the really cheap drugs.
They make the more advanced drugs. And if you want to do that at home, you need a whole support chain going up to it. Okay, that’s kind of piece one. Piece two is a promise of investment, unlike the Europeans, where everything is done at the nation state level. And so negotiating with the European Union is a little loosey goosey.
Japan is a sovereign nation. when you negotiate with Tokyo, you’re negotiating with Tokyo. And Japan is a country that over the course of the last 50 years, has realized that they have a poor system for raw material production and processing. So they’ve built a number of state entities to basically compensate for that. You basically throw state money at entities who are kind of relieve from the normal laws of supply and demand, and go out into the world and make investments that under normal circumstances, Americans wouldn’t make in order to source lithium or oil or whatever it happens to be, according to the terms of the current deal, those institutions will now start investing
in American infrastructure in order to produce products in the United States. And 90% of the profits from those institutions will go to American entities. So two problems with that. Number one, these Japanese financial institutions that are government linked, they usually go into raw commodity production and processing. That’s not what Donald Trump said they’re going to do.
He says they’re going to go into high end manufacturing. So already you’re talking about a significant shift in their mission and outside of their normal realm of expertise. The second problem is the idea that the Japanese will provide all of the money, but take hardly any of the profit. That’s a stretch. And as soon as Trump made these announcements, the Japanese like, that’s not what we agreed to at all.
So unfortunately, in a similar manner to what we have going on with the European situation, this is the start of talks. This is the Trump declaration of what they want. Here we are. When this all started back on April 2nd. We’re now see May, June, July. We’re now three and a half months later. And we’re only now getting the initial declaration of what Donald Trump actually wants to see.
Now, this is progress. But if you’re talking about the re fabrication of financial entities at the government level in Japan as the starting point for whatever this later deal is going to be, you’re still talking about projects that are going to be realized over the course of a decade or more. Not the sort of thing that can have any impact on things like the trade deficit on any meaningful time frame.
We are once again, at the beginning of this process. We are nowhere near the end.
