Over the past few decades, Japan-based automaker Toyota has spent billions of dollars to expand its manufacturing and assembly plants in the United States. Those plants now employ over 64,000 people across North America and have churned out millions of vehicles.
For politicians who fetishize blue-collar work, this ought to be tremendous news. Indeed, it also illustrates one of the underappreciated aspects of globalization and free trade: The flow of capital and goods often gets blamed for the outsourcing of American jobs overseas, but it also means the creation of jobs in America that are backed by investments from foreign firms.
Now, however, the Trump administration seems to be trying to undo that. With a series of short-sighted tariff maneuvers, the president has effectively told Toyota (and other Japanese carmakers) that it should do more of its manufacturing in Japan and stop trying to create jobs in America.
Earlier this week, President Donald Trump announced a new trade deal with Japan that will include a 15 percent tariff on Japanese goods, including imported cars. The details of the deal remain somewhat vague, but that’s a significant discount compared to the 25 percent tariff the administration has imposed on cars imported from everywhere else.
The reduced tariffs for Japanese cars are significant because of how that provision interacts with the Trump administration’s other trade policies that are aimed at making it more expensive to manufacture cars in the United States. The president has imposed a 50 percent tariff on steel and aluminum (both of which are essential for automakers) and has slapped a 25 percent tariff on imported cars and car parts. Those tariffs are already dinging the profits of American carmakers—General Motors reportedly lost more than $1 billion in the second quarter of the year—and auto industry experts say they will raise prices, reduce demand for new cars, and generally make American cars less globally competitive.
In short, the Trump administration is offering an incentive to import finished cars from Japan, while making it more expensive to buy the stuff you need to build cars in America.
The 15 percent tariff on Japanese imports is “unfair for American automakers,” who are facing a 25 percent tariff on auto parts and finished cars imported from Canada and Mexico, David Whiston, an analyst for market research firm Morningstar, told The Washington Post. Matt Blunt, president of the American Automotive Policy Council, has also called it a “bad deal.”
So far, the White House has shaken off those complaints. Commerce Secretary Howard Lutnick told CNBC on Thursday that tariff complaints from the American auto industry were “just so silly” and repeated the Trump administration’s claim that “there’s no tariff if you build it in America.”
That is simply untrue, as long as the Trump administration is charging tariffs on the raw materials and component parts needed to build cars in America.
Instead of trying to obfuscate about the consequences of tariffs, Lutnick ought to consider the message being sent to Toyota executives. They are being given a choice. Continue building the Camry and the Highlander in America, where every component is subject to 25 percent tariffs and where steel prices have spiked as a result of the tariffs (which have pushed prices higher even for domestically produced metals not subject to the import taxes).
Or you can build those same cars in Japan, then import them to the United States and take advantage of a favorable relative tariff rate. What would you do? What would that mean for the hundreds of thousands of Toyota employees in the United States?
Of course, it is not just Toyota that is dealing with the higher costs incurred by Trump’s tariffs. International automakers have invested $124 billion in the U.S. and support more than 2.4 million American jobs, according to Autos Drive America, an industry group. As the Center for Strategic and International Studies warned in May, foreign car companies that had invested in production in the United States would be “devastated” by Trump’s new tariffs on car parts. Now, at least Japanese automakers have been given an inadvertent escape hatch.
Ultimately, the problem here is not the specific tariff rates the Trump administration is seeking to charge on steel, car parts, or cars imported from Japan or Mexico. (Those rates are likely to change anyway, if the past few months of the trade war are any indication.)
No, the real problem here is the Trump administration’s belief that it can use tariffs to shape the global trading system toward contradicting goals with no tradeoffs or distortions. In reality, each new tariff move causes both. The market responds to incentives, and right now, the Trump administration is creating a set of incentives that will raise costs for American manufacturers while driving investors overseas.
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