Japan cannot let go of TPP due to automotive industry

Japan cannot let go of TPP due to automotive industry

Japan showed its willingness to carry forward the completion of the Trans-Pacific Partnership (TPP) deal without the US (TPP11) by the end of 2017 even though it exports only about 10% of its total exports to the remaining countries. The rationale of Japan’s willingness to pick up the baton where US dropped is both strategic and economic. As the US is revisiting is trade deals and pursuing bilateral ones and China is pushing the Regional Comprehensive Economic Partnership (RCEP), TPP provides Japan with its own sphere of trade influence.

Automotive industry key for Japan place in TPP

The automotive industry is possibly the main reason why Japan is keeping TPP alive:  the hope that US will reconsider its participation in the future and the advantageous deal they were getting for the automotive industry. The Japanese automotive OEMs have never succeeded in opening the American market from afar. Americans buy Japanese cars which, by all measures, are not Japanese anymore since they are manufactured and assembled in North America ( a consequence of high FDI investment in the past decades) by subsidiaries of the Japanese companies.  However, under the umbrella of the TPP, Japan would have obtained incredible advantages. The TPP contained rules of origin for the automotive sector that required 45% regional value added content for finished vehicles and between 35-45% for auto parts. Among the auto parts that would have required 45% regional value added content were engines and transmission parts, chassis, bumper systems, and larger assemblies like axles which per the Mexican and Canadian representatives were identified as sensitive. The bilateral agreement between the US and Japan (part of the TPP) regarding the rules of origin for vehicles and vehicles parts was of great concern to both Mexico and Canada. Comparatively, NAFTA imposes a 62.5% requirement for passenger cars, light trucks, engines, and transmissions, and 60% for other vehicles and automotive parts. The potential signing of such an agreement between Japan and US would have put Mexico and Canada at a competitive disadvantage with Japan.

The official position of the Japanese automotive industry was that the agreement would not bring breakthroughs since there are 26 Japanese capital assembly plants in the US and about just as many in Mexico, all established to avoid tariffs, hedge currency risks, and shorten supply chain.  However, the discussion goes further than that because Japanese auto-makers in the US actively seek Japanese suppliers. If we look at the top importers in kilogrammes imported from Japan, the first importers are: Kubota, Komatsu, Hitachi, Mitsubishi, JTEKT Automotive Group (Koyo and Toyoda), Aisin World Corporation of America, NTN Corporation, Keihin North America, and Sumitomo. All of them are Japanese tier 1 and 2 suppliers to the OEMs in the US and preferred suppliers to the Japanese capital ones.

Exports of Japanese cars

Issues linked to a reciprocity based agreement

The alternative, a reciprocity based bilateral agreement with the US will be hard. When President Trump withdrew from the TPP, he invoked an argument that Japanese leaders have been struggling with since the 1980s: Japanese don’t buy American cars.  In 2016, US exported to Japan $458 million worth of vehicles and parts (NAICS 3361), almost $100 million less than in 2015. Comparatively, the exports to Kuwait were 50% higher and the ones to UAE, 400% higher. Japan on the other hand exported to the US over $39 billion worth of vehicles, more than $3 billion more than the year before, $10 and $7 billion more than Mexico and Canada respectively.

The problem is not the tariff or non-tariff barriers that the American cars are facing on the Japanese market (there are no tariffs imposed and no hindrances of other nature). The problem is a consumer taste one, harder to fix from a political level. Among reason invoked by Japanese consumers: US cars are too big for the Japanese streets and parking spaces, unreliable, unsafe, not fuel efficient, not made in Japan (unlike “Made in the USA” with the American customers, “Made in Japan” carries traction with the Japanese consumers). Some are real issues, some are just a matter of perception.

The TPP11 is taking shape with little hope of US involvement now or in the future. While it will buy Japan some influence in Asia, counterbalancing China, a bilateral agreement between US and Japan looks improbable. Since Japan cannot accommodate US on a more equitable trade in terms of automotive, a sharp thorn for the American Presidential Administration, it must make numerous other concessions to correct this imbalance.

Categories: Asia Pacific, Economics

About Author

Alina Harastasanu

Alina Harastasanu works as a business analyst and has over 7 years experience in consulting and international business. She holds a B.A. in Political Sciences from the University of Bucharest, a M.A. in Geopolitics and Global Security from University of Rome “La Sapienza” and an MBA degree focused on International Business and Strategy from The Ohio State University.