A win-win deal for Abe and Trump?

In the run-up to the meeting, the new US president has pulled out of the Trans-Pacific Partnership, a multilateral trade deal built largely around the US-Japan economic axis. He has railed against Japan for deliberately undervaluing the yen. He has bemoaned the lack of US-built cars on Japan’s roads. He has complained about the cost of providing Japan with US defense cover. And he has mused openly about imposing punitive tariffs on imports from Japan.
Yet despite all the tetchiness ahead of their meeting, the two leaders have clear interests in common—interests that suggest the likely shape of US-Japan relations in the Trump era.
As ever with Trump, sifting the president’s actual intentions from his political posturing is no easy task. Nevertheless, reducing Trump’s various pronouncements to first principles, it is clear he regards revitalising US manufacturing industry as one of the main planks—if not the over-riding policy objective—of his presidency. And it is also clear that he wants America’s strategic allies to shoulder a greater burden of the defense costs now borne disproportionately by the US.
Meanwhile, Abe’s objective as he heads off to his White House meeting is simple: if he is to continue to pursue his own policy aim of reinventing Japan as a strong and self-reliant national power, he must avoid a trade war with the US.
The two leaders’ objectives may appear at first to be at odds, but there is enough congruence between them to permit a deal that will allow both Abe and Trump to claim a win.
Abe will bat away accusations that Japan is a currency manipulator by pointing out that the Bank of Japan does not habitually intervene in the foreign exchange market, and that it has not done so since 2011. As evidence, he can point to the yen, which is currently trading at a two-month high against the US dollar. Challenged on the BoJ’s policy of quantitative easing, he will reply that it is necessary in order to buy time for his “Abenomics” reflationary structural reform policies to take effect, and that the strong Japanese economy these are designed to achieve will be very much in America’s own economic and strategic interests.
There is little Abe can do to address Trump’s complaints that Japan imports too few US-made automobiles. Contrary to US accusations, Japan no longer erects non-tariff barriers against imports of American autos. It is simply that there is minimal demand in Japan for the sort of big-bodied, large-engine cars that US factories produce.
However, Abe can reassure Trump that Japanese manufacturers will continue to invest in US-based production facilities. Cumulatively, Japanese companies have made direct investments of more than US$400bn in the US, where they employ hundreds of thousands of workers directly, and many more indirectly. Just last week, Abe met with the president of Toyota, which reiterated plans to invest at least a further US$10bn in its US plants over the next five years. Moreover, Abe can offer his support for Trump’s planned US$1trn infrastructure investment programme, pledging that Japan’s giant Government Pension Investment Fund will buy US infrastructure bonds.
But perhaps the biggest inducement Abe can offer to Trump to avert a trade spat is a promise to ramp up Japan’s defense spending. Currently Japan’s annual defense budget is around 1% of GDP, which is comparable with Germany’s. Talk in defense circles is that Tokyo plans to increase spending by 20% over the five-year period beginning in 2019. However, according to one senior Japanese official, a doubling of Japan’s military budget to 2% of GDP is well within the bounds of policy consideration.
That would amount to a major rearmament programme, of exactly the sort Trump has demanded from America’s strategic allies. What’s more, given the lacunae in some areas of Japan’s defense industries, notably in advanced aeronautics and missile systems, there would be plenty of lucrative work for specialist US defense contractors.
Such a deal could work for both sides. Although it could be argued that by dropping his insistence that Japanese companies should build new plants at home, and instead encouraging them to invest in the US, Abe would be sacrificing a key element of his economic revitalisation plan. But to the extent that Abe’s economic goals were always subordinate to his strategic goal of restoring Japanese self-reliance, the result would still be a win for the Japanese leader.
In short, come Friday, Trump can achieve his aims of greater investment in US manufacturing and more defense spending from a key ally. And Abe can avoid a trade war and realise a long-nurtured dream. Assuming method behind each man’s mania, a win-win looks eminently possible.