This year, 2024, has been a good one for Japanese business, with profits strong and the Tokyo stock market finally returning to its peak level from way back in 1989-90. However, if President-elect Donald Trump carries out the promises that helped him win re-election, next year, 2025, is looking likely to be a lot less comfortable, at least for exporters in Japan and other trade-surplus countries. The key questions concern how uncomfortable it will become, and what businesses can do about it.
Throughout his campaign, Trump promised to impose at least a 10% tariff on all goods imported from abroad, and sometimes threatened to make the tariff 20%. As average US import tariffs are now less than 2%, this would represent a big increase. Some argue that American businesses might successfully lobby him to reduce or delay these tariffs. But this looks very unlikely. As this second term will be his final period in office under the US Constitution, he no longer needs businessmen’s support.
Robert Lighthizer, his close advisor who was US Trade Representative during the 2017-20 Trump administration, published an opinion article in the Financial Times on November 1 justifying Trump’s proposed trade policies by blaming those foreign countries that had for years run surpluses in their trade with the United States. Obviously, that includes Japan, a country he battled against as deputy US trade representative under President Ronald Reagan in the 1980s. He wouldn’t have published that article if Trump had not authorized him to do so. And Trump on Tuesday picked Lighthizer’s former chief of staff and protege Jamieson Greer for the USTR job in the new term.
It is therefore highly predictable that this tariff will be imposed, probably quite early in the new administration, because the Trump team believe the tariff will raise new tax revenue, which is something they will badly need –given that the fiscal deficit in 2024 was 8% of GDP, given that Trump has promised to cut taxes especially for corporations and given that he is expected to seek a big increase in the defense budget in order to counter China.
Two other important factors are not predictable, however. One is the response of the countries targeted by these tariffs, which means the responses of all the countries in the world including, notably, those of two trading giants, the European Union and Japan. The other is the reaction of the US dollar on world currency markets.
The indications from the trade authorities in the European Union in Brussels are that they intend to respond to American tariffs in an immediate way. Their approach will be to hit back hard, on the view that this will strengthen their negotiating position with a man who seems to respect only toughness. In Japan’s case, much will depend on the strength of the new government, but a similar response would make a lot of sense.
If other countries in Asia, Europe and elsewhere follow the same policy, this will mean that not only will American imports decline owing to the Trump tariff but so will America’s exports. Meanwhile, trade among other countries may well increase, since tariffs on trade within the European Union, within the Comprehensive and Progressive Trans-Pacific Partnership and between those blocs will have stayed low. The Trump tariff plan might even encourage such blocs to further liberalize their own trade rules, in the hope of compensating for the reduction in exports to the United States.
We can therefore predict that this trade war will break out, but we cannot predict how it will develop, over time. There may well be negotiations, which could help a country such as Japan that is important for America’s military stance in the Indo-Pacific. Businesses must nonetheless prepare for a sharp change in the terms on which they trade goods across American borders, whether they are exporters to America or importers from it.
In terms of America’s trade connections with the rest of the world, this could be a genuine period of deglobalization. However, trade between other countries may well remain strong and even increase. Businesses will be looking for opportunities in markets that, unlike America, are remaining open to them.
The currency markets will also play a vital role in setting the new terms of trade, in ways outside Trump’s control. If the US dollar’s value increases sharply when the tariffs are imposed, this could reduce or even negate the tariff’s true impact on import prices into the US. But if it were to decline, as it might if markets feared that the US might face a recession thanks to the tariffs or even a financial crisis, this could further penalize exporters to the US.
The American economy has outperformed the rest of the rich countries in recent years, making it an attractive market for exporters. In 2025, that is poised to change.
Formerly editor-in-chief of The Economist, Bill Emmott is currently chairman of the Japan Society of the UK, the International Institute for Strategic Studies and the International Trade Institute.
First published in English on Bill Emmott’s Global View, this article is the original of an article in Japanese published by Nikkei Business. It is republished with permission.
