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Talking Trade blog

The other half: Dealing with U.S.-Japan auto disputes

Published 04 May 2015

My last post covered one of the most difficult topics in trade negotiations—the problems with agriculture. This issue is partially confounding a solution to the ongoing U.S.-Japan bilateral negotiations related to the Trans-Pacific Partnership (TPP) agreement.

But agriculture (specifically the fight over Japan’s five “sacred” items) is only half the battle.  In exchange for receiving more access to Japan’s important and protected agricultural markets, the United States is supposed to allow improved access to its auto market.   However, since the auto market barriers into the United States are not seen as sufficiently problematic to match the barriers in agriculture, the Americans are also asking for a number of changes to let more cars and auto parts flow into Japan.

This fight over autos between the United States and Japan has been underway for decades.  Literally.  Equally astonishing, there appear to have been very few changes along the way in the tone or tenor of the argument despite a radically different market environment over the same period.

My Ph.D. dissertation was partially about auto fights of the late 1980s and mid-1990s.  Sometimes, listening to the arguments made now around the topic, I could swear that nothing has changed in the past 25 years.  Many of the very same people who were present all those years ago are the same folks driving these negotiations.

The United States has two clear barriers to trade in autos.  For passenger cars, the tariff is currently 2.5%.  For trucks, the tariff rises to 25%.  Japan would like to see both removed.

What makes this whole argument rather surreal is that Japan exports almost no finished autos from Japan into the United States.  Instead, in the wake of NAFTA provisions on car manufacturing, Japanese auto manufacturers largely moved their production networks into NAFTA countries. 

About 85% of all Nissan autos sold in the United States are domestically produced.  For Toyota, the number is about 70%, with mainly just Lexus models built outside NAFTA.  Honda’s figures are higher at 95% production inside the United States, Canada and Mexico. 

Even if the auto tariff of 2.5% were eliminated tomorrow, it is unlikely to drive dramatically different trade patterns.  In spite of this, the Americans are apparently insisting on extraordinarily long phase out periods of up to 25 years. 

Think about that for a moment—a quarter century to phase out a 2.5% tariff on products that are largely domestically produced.

I would hate to think about the sheer number of hours spent arguing over this point across the decades.  Even in the past year, officials have invested hundreds of hours in conference rooms around the world hashing out how to make this tiny tariff go away.

Of course, the other piece of the equation is figuring out how to get more finished American cars into Japan.  This is an equally nonsensical fight.  

Take the specific case of General Motors.  After complaining about limited opportunities to sell cars in Japan for more than 3 decades, how many models does GM make with right-hand drive that could be sold in Japan?  Answer:  two

So the Americans are fighting vigorously to get more cars into the Japanese market that are just as unsuitable as they were decades ago. 

The company, I am sure, would argue that the math does not justify the tremendous investment in creating suitable products.  GM has 34 outlets in Japan.  (For comparison, Toyota has more than 4,700 dealerships in the United States.)  If GM sold 1400 cars in Japan, it would mean only 41 sales per outlet in an entire year. 

GM and Ford didn’t even bother to show up at the Toyota Motor Show for four consecutive years.  

Because the volume is so small, it is hard to justify the investment of a full garage to service the cars.  Without a garage, consumers that might take the plunge and buy a car with the steering wheel on the wrong side of the vehicle, also have to factor in very high prices for parts and servicing. 

In the last heated battles over autos, the American insisted that they could not sell more cars into Japan because of various barriers to entry, including an inspection system that favored local producers.  While many of these issues remain, it is worth noting that European car manufacturers have continued to experience market growth.

European brands made the decision decades ago to invest in their own dealerships and not rely on Japanese-brand outlets to hawk their goods like the Americans.  European brands brought in garages and auto parts.  And, critically, they built cars that were suitable for, and adapted to, the local market.

Now, European sales still fall short of what might be expected in a different type of market setting.  Total foreign auto sales still account for less than 5% of all autos sold in Japan.  But European sales leave American brands in the dust. 

BMW regularly alters models to meet customer needs, including introducing a range of diesel and hybrid autos that are in demand from consumers.  Volkswagen sells the largest number of foreign-branded cars in Japan, with a strong focus on economy to mid-range models.

Certainly, there are still obstacles to selling vehicles in Japan.  For example, Japan has a preferential tax system that rewards domestic vehicles with tiny motors.  Nearly a third of the market consists of autos with engines of less than 660 cc.  Neither the Americans nor the Europeans have models that fit this profile.

Japan also has its own safety standards that do not match either the EU or the United States.  (Although frankly, this could also be turned around--the EU and the U.S. do not have standards matching Japanese auto regulations making it difficult for Japanese brands to thrive in both markets without potentially extensive modifications.) Getting a new model certified in Japan can be extremely expensive.

They say that generals usually prepare to fight the last war.  This adage appears to be equally true in the auto debates.  Instead of focusing on competitive challenges, the Big 3 blame Japan’s supposed manipulation of currency as a key impediment to selling more cars.  Again—this is an incredible flashback to the fights of the 1980s and 1990s when the exact same arguments were used by the Big 3.

If currency values could somehow be adjusted only for autos and not for the economy as a whole, perhaps currency misalignments might be a genuine complaint.  However, it is certainly difficult to argue that currency stops American sales and not European sales.  Or that it somehow affects cars more than other goods.

In short, the United States auto industry has been making the same arguments about the closed car and parts markets in Japan, about currency manipulation, and about the necessity for tariffs to protect the domestic market for decades.  It is time to close the debate, sign the bilateral deal on the table for autos and move on to new, 21st century issues in the TPP.

© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).

Dr. Deborah Elms is Head of Trade Policy at the Hinrich Foundation in Singapore.  Prior to joining the Foundation, she was the Executive Director and Founder of the Asian Trade Centre (ATC). She was also President of the Asia Business Trade Association (ABTA) and the Board Director of the Asian Trade Centre Foundation (ATCF).

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