The Effects a U.S. Free Trade Agreement with Japan would have on the U.S. Automotive Industry

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Automotive trade has always been an important aspect of the United States and Japanese trading relationship. The value of Japanese manufactured vehicle exports and related parts to the United States peaked most recently at nearly $60 billion in 2006. Due to the unbalanced nature of automotive trade between the two countries there is and continues to be a large deficit in automotive trade between the United States and Japan. The automotive trade deficit with Japan of $42 billion constituted 67 percent of the total U.S trade deficit with Japan in 2011.

In the past, the ability of the Japanese government to intervene in currency markets kept the real value of the yen at predictable levels, thereby keeping the Japanese auto industry cost competitive. This can provide the Japanese auto manufacturers with both a stable planning horizon and a competitive advantage. However, the Japanese government’s recent attempt to reverse the strong appreciation of the yen through intervention in currency markets (at least four times in the last year) has met with limited or no success.

In addition to currency intervention there are other measures recently called for by Japanese automobile executives to reverse the effects of the high yen. One of these is for Japan to enter into free trade agreements (FTAs) with markets that would eliminate tariffs on Japanese automotive imports. The reduction of tariff rates on Japanese automotive products would increase their profit margins since tariffs are assessed by customs officials on declared retail values in the import market. The effect of such tariff reductions almost always leads to an increase in exports of the products subject to tariff reversal.