US-Japan trade agreement poses accidental threat to US auto sector
- Donald Trump teased a trade deal with Japan that will see a 15% “reciprocal” tariff.
- An increasingly complex tariff scheme leaves wide cracks for US companies to fall into.
United States (US) President Donald Trump is racing to secure preliminary trade deals ahead of his own self-imposed tariff deadline of August 1, following a self-imposed delay of President Trump’s “liberation day” tariffs that were initially announced in early April. The Trump administration is reportedly inching toward a major trade package with the European Union (EU), but details remain light.
Key trade deals on the table
The key trade announcement (which remains equally light on firm details) this week was a tentative agreement between the Trump team and Japan, which will include a 15% “reciprocal” tariff level on all goods exported from Japan into the US. The announcement has been a general boon for global markets, but as the Trump administration barrels through slapdash trade negotiations, chasms are beginning to appear that could pose newfound problems for US companies.
Donald Trump’s tariff-fueled tirade since taking office in January has been sold mainly as a way to protect and rebuild US industries, specifically manufacturing and production that have been offshored to foreign countries for decades. Now, a mismatch between tariffs is poised to clash, and the US automotive sector is set to pay the price.
Metals tariffs are a key complication for US-based production
The Trump administration imposed a steep 50% tariff on all foreign steel and aluminum imports, citing a need to protect and rebuild the US car industry. A similar 50% tariff on all copper imports is expected, currently slated for August 1. Major carmakers are already reporting deep chunks being taken out of their headline earnings, with General Motors (GM) noting a $1.1B shortfall in Q2 thanks to metals tariffs. Overall, GM expects to eat between $4-5B in total tariff penalties through the remainder of 2025. GM’s adjusted cash flow and Earnings Before Interest and Taxes (EBIT) also plunged around half YoY in Q2 as tariffs take an increasing chunk out of an industry that Trump claimed to be a champion for.
The US’s newfound trade deal with Japan, with its 15% flat rate import rate, will make the choice about where Japanese automakers will produce their cars an easy one. Despite Trump’s grand strategy of trying to force global companies to re-shore or move their production within the borders of the US, Japanese auto producers are faced with an easy choice: make all of their cars in Japan and eat a 15% tariff, or go through the effort and expense of building all new manufacturing facilities in the US and suffer through a doubling of input material costs. With an accidental advantage on protectionist tariffs poised to be cooked into the books, the Trump administration may have accidentally made it harder, not easier, for auto companies to choose America.
Investors in key sectors have already noticed: Toyota Motor Corp (TM), the American arm of the Japanese auto manufacturer, surged over 13% on Wednesday following the Japan trade deal announcement, climbing to its highest valuation since December of last year, a seven-month high.
Further complications: Copper tariffs, EV battery costs
Incoming copper tariffs will only complicate matters further, and the recent addition of steep tariffs of over 90% on all battery-grade graphite imported from China will pose a significant problem for foreign automakers that have recently taken the plunge in moving some manufacturing to the US. Hyundai recently announced plans to rapidly expand its production of Electric Vehicles (EV) in the US, and the added cost to imported vehicle batteries, for which there is no feasible US-based alternative, will be an unwelcome surprise.
Tariffs on commodities could easily prove to be the largest thorn in the Trump administration's side. The New York Stock Exchange's (NYSE) American Steel Index has risen 25% YTD, and the US Copper Index Fund has also surged 42.5% YTD, rising to its highest valuations ever recorded as investors bet big on a sharp increase in input costs for US manufacturers.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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