Key Takeaways
- Japan shares unique economic, security, and political relations with the United States that many other countries don鈥檛.
- However, tariffs on imports from Japan threaten this economic partnership and can undo a lot of the positive momentum between President Donald Trump and Japanese Prime Minister Shigeru Ishiba.
- Tariffs on automobile and automotive part imports from Japan may push Japan to suspend the US-Japan Trade Agreement, one of Trump鈥檚 successful trade agreements, harming US agriculture exports to Japan. Tariffs would also increase costs for US consumers.
- American and Japanese officials should approach negotiations with a mutual understanding that both sides want to address systemic problems with trade.
- Tokyo is preparing to negotiate a deal that would benefit both the US and Japan. Washington should avoid imposing tariffs on autos from Japan during negotiations as a sign of goodwill.
- Japan may be one of a few countries in a good position to strike a deal with the Trump administration.
- Washington and Tokyo should consider negotiating a deal that includes all matters concerning economic security, not just trade.
Introduction
In early February, President Donald Trump welcomed Japanese Prime Minister Shigeru Ishiba to the White House for what many consider a successful summit. The two appeared to get along well, managed to avoid publicly discussing controversial topics in the US-Japan relationship, and made a number of trade- and investment-related announcements. They also issued a that highlighted several important issues for continued cooperation.
At the same time, in the new Trump administration鈥檚 economic and foreign policies. And tariffs, or taxes on imported goods, have become the main tool for these negotiations.
No country seems safe from the threat of tariffs, including America鈥檚 closest trading and security partners. Japan, whose alliance with the US is the cornerstone of America鈥檚 security and prosperity in the Indo-Pacific region, may not be safe, either.
There is still a lot of uncertainty about the Trump administration鈥檚 trade policies. For example, the administration鈥檚 ultimate goal is unclear, whether it鈥檚 removing trade barriers to ensure fairer trade or collecting tariff revenue. It鈥檚 also not clear which countries or commodity imports will be the next targets of tariff threats. And there are still questions about what implementing regulations for new tariffs could look like.
The Trump administration is setting itself up to renegotiate trade relations with nearly every country in the world. It鈥檚 only natural that these negotiations will have mixed results. Meanwhile, Tokyo is currently in one of the best positions to negotiate a deal with this administration.
The government of Japan wants to maintain the positive momentum from the Trump-Ishiba summit in February and work closely with the Trump administration. It鈥檚 willing to discuss the White House鈥檚 trade-related concerns seriously. Such discussions may even include new areas of cooperation on matters that expand beyond trade and into economic security.
But if Washington moves too quickly and is too heavy-handed with tariffs on imports from Japan, specifically on auto imports, such actions would not only jeopardize its future working relationship with Tokyo, but could also undermine an important trade agreement that the Trump administration achieved during its first term.
US-Japan negotiations will be an interesting case study. In some ways, other governments can learn how to negotiate with the Trump administration on trade and economic matters. But the relationship between the US and Japan is also unique. Most countries do not share the same level of economic, security, or political relations that exist between the US and Japan.
Emerging Trade Initiatives
Even though Trump reentered the White House only around two months ago, his administration has announced an overwhelming number of new trade and investment initiatives. This paper highlights just a few that are relevant for US-Japan negotiations.
- (AFTP) memorandum directs members of the Trump cabinet to investigate America鈥檚 annual trade deficits in goods as well as their economic and national security implications. It further instructs them to make recommendations to the president . During his reelection campaign, President Trump suggested a global tariff rate of 10鈥�20 percent to address these trade deficits.
- and a subsequent Fair and Reciprocal Plan will attempt to address the tariffs and non-tariff barriers (NTBs) in other countries that limit US exports. This initiative will follow the findings of the AFTP memorandum with recommendations, potentially including new tariffs.
- Finally, there are national security initiatives. The president can direct the secretary of commerce to investigate the national security effect of certain imports under Section 232 of the Trade Expansion Act of 1962. Through this process, if the Commerce Department finds that certain imports pose a threat, the president may decide to impose additional tariffs.
The first Trump administration initiated eight Section 232 investigations, which looked at the threat of imports of steel, aluminum, automobiles and automotive parts, uranium, titanium sponge, electrical transformers and electrical steel components, mobile cranes, and vanadium.
Only the imports led to new tariffs at that time. Several countries, including Japan, negotiated tariff-rate quota agreements to avoid some of these tariffs. But the White House recently amended the 2018 steel and aluminum tariffs, revoking any prior agreements. As a result, imports of steel from Japan were no longer exempt from the 25 percent tariff from March 12, 2025.
There is potential for more national security鈥搑elated tariffs soon. Not only can the White House modify existing Section 232 investigations, but it also recently announced new investigations to examine the national security effects of and imports. But from Japan. In fact, the US exports far more of them to Japan than it imports. So, any new tariffs on copper or lumber won鈥檛 have a significant impact on US-Japan trade.
More concerning, according to some reports, . The administration hasn鈥檛 taken any official action yet, but targeting these goods from Japan would have a greater impact on US-Japan trade than tariffs on copper or lumber. Roughly $10 billion worth of imports from Japan in 2024 (or 7 percent of the total) were semiconductor or pharmaceutical鈥搑elated products. In comparison, imports of copper and lumber from Japan amounted to only $36 million.
Tariffs on Autos and Auto Parts
Of the major trade initiatives underway in the new Trump administration (AFTP, RTT, and Section 232), Japan is at risk of seeing new tariffs from all three. Of these, Section 232 tariffs, specifically on autos and auto part imports, are the most contentious for Tokyo.
During the first Trump administration, a Section 232 hat foreign auto imports鈥攎ost of which come from Japan, the European Union, South Korea, Canada, and Mexico鈥攖hreaten US national security. Specifically, the Commerce Department determined that imports impaired domestic production and that the loss of revenue harmed US companies鈥� research and development. It recommended that the president try to address these security risks through ongoing trade negotiations or impose tariffs on auto imports of as much as 25 percent.
Around that same period, the US and Japan began negotiating a new trade agreement. Eventually, they signed the (USJTA), which focused mostly on increasing US agriculture access to Japan, and the . During the implementation of these agreements, the two countries any new tariffs on each other. So, the US refrained from new tariffs on auto imports from Japan.
Now Trump has already suggested there could be as early as . The authority to apply these tariffs would likely come from the previous Section 232 investigation, which names imports from Japan as a threat to US production. It鈥檚 unclear whether the policy will make any exemptions for allied countries like Japan. But given the recent removal of Japan鈥檚 exemption from national security鈥搑elated tariffs on steel imports, it鈥檚 unlikely.
A 25 percent tariff on autos and auto part imports from Japan would take a significant toll on US-Japan trade. Autos and auto parts made up $55 billion, or 37 percent, of imports from Japan in 2024.
The Trade Deficit and Reciprocal Trade
Concerning US-Japan trade, the other White House initiatives on trade (AFTP and RTT) are mostly auto-related as well. The majority of America鈥檚 goods deficit with Japan (78 percent) comes from the trade in autos and auto parts (see table 1). In 2024, the goods deficit was worth roughly $68.5 billion, making it the seventh largest deficit the US has with any trading partner.
By comparison, while autos and auto parts imports from Japan totaled $55.5 billion in 2024, this represents only around 12 percent of the total $474.3 billion worth of auto imports in the US last year.
Several points on US-Japan trade are worth mentioning. While the US normally has a trade surplus in services with Japan, the Trump administration appears focused on America鈥檚 trade deficits in goods. The US has goods surpluses with Japan in the export of agricultural goods and industrial products, and the US is a significant exporter of military equipment and vehicles to Japan. Unfortunately, the surplus from these goods is not enough to balance the overall goods deficit.
Japan is not the only country with which the US has a trade deficit in goods. In 2024, the US had a total goods deficit (goods deficits and surpluses combined) with the world worth roughly $1.203 trillion. Ignoring the countries the US had goods surpluses with, the trade deficit in goods increases to $1.420 trillion.
The goods deficits of the 10 countries with which the US has its largest goods deficits (see table 2) totaled roughly $1.081 trillion combined. This represents about 76 percent of the total $1.4 trillion deficit (with deficit countries only) or 90 percent of total $1.2 trillion deficits (with deficit and surplus countries combined).
Of these 10 countries over the past decade, Japan is the only one whose trade in goods deficit with the US has seen no significant change. Except for a decrease in the goods deficit with China, the deficit with the other eight countries has doubled since 2015.
The US dollar鈥檚 value has a significant impact on US trade and therefore affects these deficits. A stronger currency generally increases imports, which become relatively cheaper, and hurts exports, which become relatively more expensive鈥攊ncreasing trade deficits.
The US dollar has strengthened against most currencies since the last time Trump was in office. Adjusting for 2017 US dollar exchange rates (see table 2), the goods deficit with the top 10 deficit countries decreases from $1.081 trillion to $1.001 trillion, or by roughly 7 percent.
Adjusting the dollar against the value of the Japanese yen decreases the goods deficit with Japan more than 25 percent, from $68.5 billion to $50.7 billion. This would lower Japan鈥檚 position from the seventh largest goods deficit holder to the ninth largest.
Even when adjusting for exchange rates, the US has consistently had a large trade deficit in goods with Japan. For this reason and in the spirit of the AFTP, the Trump administration may decide to apply blanket tariffs on all imports from Japan. But because this goods deficit comes mostly from auto trade, this means blanket tariffs would disproportionally punish non-auto trade with Japan.
As for the reciprocal tariffs and their implications for US-Japan trade, the RTT memorandum instructs Trump officials to look at all tariffs and NTBs of foreign countries. This potentially includes a line-by-line comparison of Japan鈥檚 tariff schedule鈥攁 commodity-specific list of tariff rates on imports for different trade partners鈥攁gainst America鈥檚 tariff schedule.
The administration is suggesting that if Japan鈥檚 tariff schedule rate on a specific commodity is higher than the US tariff schedule rate, the Trump administration wants the power to raise tariffs to match. If Japan decides to lower its rate, it can avoid a tariff. Meanwhile, it鈥檚 unlikely the Trump administration or Congress is concerned about lowering US tariff schedule rates that are higher than foreign tariffs.
In 2019, former Representative Sean Duffy (R-WI, now secretary of transportation) introduced the (), which would have begun a process to identify foreign tariffs and non-tariff barriers and give the White House the legal authority to address them. The Trump administration released at the time supporting the proposal, and Representative Riley Moore (R-WV) recently introduced under the same name.
Every country imposes tariffs on specific commodities it wishes to protect from foreign competition. Some countries have higher tariffs on agricultural goods, while others might have higher tariffs on industrial or commercial goods. For example, the US has higher tariff rates compared to some countries on certain commodity imports like steel, aluminum, textiles, footwear, sugar, and trucks.
, US exporters face higher tariffs more than two-thirds of the time. Only a few countries, like Japan, have fewer commodities with higher tariff rates. Japan has a higher tariff than the US on only 30 percent of commodities. For 41 percent of commodities imported from Japan, the US had a higher tariff, and 29 percent had a similar tariff.
But the RTT initiative will also look at foreign NTBs, whether they are regulations, subsidies, or preferential taxes or treatment, and at other barriers to US trade. In theory, the Trump administration will estimate the loss of exports from any foreign NTBs and impose an equivalent tariff on imports from that country.
The Office of the US Trade Representative (USTR) publishes a list of NTBs every year in its . While the report may not include all foreign trade barriers, it offers a comprehensive look at some of America鈥檚 major exporting destinations. It could give some guidance regarding which NTBs the Trump administration may apply tariffs against.
In the 2024 report, the USTR highlighted Japanese import barriers including quotas on animal and leather imports, phytosanitary restrictions on certain imports, domestic subsidies for industries such as logging, and a variety of concerns regarding the auto industry. These include Japan鈥檚 refusal to accept US Federal Motor Vehicle Safety Standards, subsidies that favor domestic production, and other policies that create a mismatch between US and Japanese vehicle technology and transportation infrastructure requirements.
Tariffs and Negotiations
In summary, Japan is at risk of seeing new tariffs through several White House initiatives on trade. These include, but are not limited to, the following:
- 25 percent tariffs on auto and auto parts imports
- 25 percent tariffs on steel
- Tariffs on other national security鈥搑elated goods, such as copper, lumber, semiconductors, and pharmaceuticals
- 10鈥�20 percent tariffs on all imports from Japan because of the goods deficit
- Tariffs on specific commodities with high tariff schedule rates and NTBs
Of these possible tariffs, a 25 percent tariff on auto and auto part imports from Japan is the most consequential.
If the US imposes these tariffs, Ishiba could be in political trouble as Japanese politicians begin to question his apparently good relationship with Trump. At the same time, the Japanese Diet may suspend or even terminate the USJTA, which would harm US agriculture exports to Japan.
Japan has no tariffs on auto or auto part imports from the US that it can reduce, unlike the 2.5 percent passenger vehicle tariff or 25 percent light truck tariff the US has on auto imports from Japan. While Japanese law allows Tokyo to terminate the USJTA, getting the Japanese Diet to reduce tariff schedule rates on other commodities would require new legislation and time for implementation. Therefore, Japanese officials would prefer not to see new auto tariffs as they negotiate with Trump officials.
More importantly, Japanese officials are willing to address many of the US trade concerns, and they have talked about a deal that benefits both the US and Japan.
To this end, Japanese officials have considered:
- Regulatory changes, such as recognizing US Federal Motor Vehicle Safety Standards, which could help boost US auto exports to Japan.
- .
- Offsetting the goods deficit with purchases of US goods, such as liquefied natural gas (LNG), other gases and minerals like hydrogen and ammonia, aircraft, and semiconductors and semiconductor-manufacturing machines and tools.
- Accept lower tariffs on lesser-traded commodities, such as copper and lumber.
- Not ask the US to lower its current tariffs on passenger vehicles and light trucks.
- Work with the US on strategic issues, through joint development or investments, in critical areas such as energy infrastructure, minerals extraction and processing, shipbuilding, defense, space, semiconductors, and artificial intelligence.
- Partner on more effective regulatory tools such as sanctions, investment screening, and export controls.
A new US-Japan deal can both boost the two economies and support the long-standing US priority of reshoring supply chains back to the US or friendshoring them to US allies and partners.
A Snapshot of the US-Japan Economic Relationship
America鈥檚 economic relationship with Japan has seen a lot of positive momentum since Trump first became president in 2017. Trade, investment, and other measures of economic cooperation have continued to increase at a steady pace.
US-Japan total trade (imports and exports of goods and services) has averaged over $250 billion every year for the last 10 years. In 2024, it reached $307 billion (see figure 1).
The top three US imports from Japan were passenger vehicles, vehicle parts, and industrial machines, totaling $59.7 billion, or roughly 40 percent of total goods imports (see table 3).
Japan is one of the largest sources of foreign investment in the US. Since Trump was reelected, Japanese companies have announced large, new investments in the US. Softbank鈥檚 Chief Executive Officer Masayoshi Son announced over the next four years; the company already plans a of Ampere Computing and is a founding partner of a . Additionally, and announced they will increase their production in the US. Prime Minister Ishiba told Trump .
Not only do , but they are also the largest collective owner of US Treasury securities, holding over $1 trillion of US government debt (see figure 2).
The quality of investment from Japan is also important. Among all investment inflows from Japan, there tends to be higher reinvestment of earnings rather than equity investments. And compared with investments from other major foreign sources, Japanese firms tend to have higher rates of reinvested earnings (see figure 3). Meaning, the earnings of Japanese companies in the US are more likely to stay in the US.
While these investments are significant, the uncertainty of tariffs is actually preventing Japanese investors from investing more.
Conclusion
Numerous factors lead to trade imbalances. Trade negotiations can help lower the barriers to trade but cannot always balance the differences in demand between nations. While the Trump administration may be interested in reducing the US trade deficit in goods with Japan and other countries, American consumers continue to benefit from imports from Japan, and American exporters benefit from access to Japan鈥檚 market.
Washington and Tokyo are in a good position to negotiate a new trade deal, avoid significant tariffs on auto and auto part imports from Japan, protect the USJTA, continue to focus on areas of shared interest like competition with China, and continue the positive relationship between President Trump and Prime Minister Ishiba.