It's been quite the task keeping up with rapidly changing policy when it comes to incentives for electric vehicles and tariffs slapped on many products from many countries. Just as investors, analysts, and automakers were getting familiar with tariffs, things are being shaken up again with the administration's trade deal with Japan. The problem? This deal might not be good at all for General Motors (GM 1.06%) and Ford Motor Company (F 0.49%), while it benefits Japanese rivals. Let's dig in.
What's going on?
As maybe only President Donald Trump would do, the announcement was made via social media: "We just completed a massive Deal with Japan, perhaps the largest Deal ever made," President Trump announced on Truth Social, according to Yahoo Finance. Trump added that Japan would pay a "reciprocal" tariff on imports of 15%, as well as invest $550 billion into the US "at my direction," Trump said, without further details.
So, what does this mean, you ask? The 15% tariff rate will apply to cars and car parts, meaning that Japanese automakers will be able to import vehicles from Japan cheaper than U.S. automakers, such as Ford and General Motors, can import vehicles from Mexico or Canada at a 25% rate. While Canada's tariff rate was recently raised to 35% for Canadian imports, goods that comply with the United States-Mexico-Canada Agreement, including most vehicles and auto parts, are exempt.
Further, not only does the trade deal with Japan lower the costs for their imports, but it only reduces the incentive for them to build more cars in the U.S. region. Adding insult to injury, U.S. automakers are also paying more for crucial components such as steel, aluminum, and copper because of the administration's tariffs on imported metals.
Image source: General Motors.
What was the goal?
President Trump's goal was to have more production and jobs flow to the U.S., but this policy could end up making it more expensive for U.S. automakers compared to foreign automakers paying a lesser tariff on imports. Another goal was also to open access to the Japanese automotive market, but that comes with serious caveats.
For instance, it would take several years to build infrastructure to sell even a small amount of vehicles in Japan. U.S. automakers sold only 16,000 vehicles in Japan last year, which is less than 1% of the total market, compared to Japanese automakers selling 5.3 million vehicles in the U.S. market last year, roughly one-third of the market, and half of those were imported, according to Barron's.
Trying to bulk up the Japanese manufacturing capacity in the U.S. market isn't the worst of goals -- the Center for Automotive Research estimates that Japan's automotive sector supports around 1.6 million U.S. jobs. That said, any deal that charges Japanese imports, with barely any U.S. content in the vehicles, less than tariffs of Ford or GM vehicles coming from Mexico raises more questions at best, and is simply a bad deal for U.S. autos at worst. And this entire development could change again before automakers even have time to grasp the potential impact from this trade pact, as President Trump's tariff threats and negotiations are ongoing.
Ultimately, for investors, this development is just the latest signal that patience will be required in the near term as automakers grapple with the changes and try to offset increased costs while figuring out what production changes to make within an incredibly complex supply chain. It's likely to be a bumpy ride, especially if the administration agrees to more trade deals that could benefit U.S. rivals more than domestic autos.
