Asia Business Correspondent
US President Donald Trump has called the agreement he reached with Japan the “largest trade deal in history”.
It might be premature to make such claims, but it’s certainly the most significant deal since Trump announced his so-called Liberation Day tariffs in April which roiled stock markets and created chaos for global trade.
After months of negotiations, Japan’s Prime Minister Shigeru Ishiba said he expects the deal will help the global economy.
It is a big claim. The BBC examines whether it will and if so, how?
Japan Inc
Japan is the world’s fourth largest economy, meaning it accounts for a large part of global trade and growth.
Tokyo imports a great deal of energy and food from overseas and is dependent on exports including electronics, machinery and motor vehicles.
The US is its biggest export market.
Some experts had warned that Trump’s tariffs could knock as much as a percentage point off Japan’s economy, pushing it into recession.
With lower tariffs, exporters will be able to do business in the US more cheaply than if Trump had stuck to an earlier threat to levy higher taxes.
And the deal brings certainty, which allows businesses to plan.
The announcement also strengthened the Japanese yen against the US dollar, giving manufacturers more purchasing power to buy the raw materials they need to expand their businesses.
The US agreement is particularly good for Japan’s auto giants like Toyota, Honda and Nissan. Previously, American importers had to pay a 27.5% levy when they shipped in Japanese cars.
That is now being reduced to 15%, potentially making Japanese cars cheaper compared to the likes of rival China.
Having said that, US automakers have signalled they are unhappy with the deal.
They are concerned they have to pay a 25% tariff on imports from their plants and suppliers in Canada and Mexico compared with Japan’s 15% rate.
Jobs and more deals
In return for reduced tariffs, Japan has proposed investing $550bn in the US to enable Japanese firms “to build resilient supply chains in key sectors like pharmaceuticals and semiconductors,” Ishiba said.
Japan is already a major investor in the US, but this amount of money should create jobs, make quality products and foster innovation.
Under the deal, Trump said Japan will increase purchases of agricultural products such as US rice which could help the country’s rice shortage – even if it might rattle local farmers concerned about losing market share.
The 15% tariff is also a benchmark for other countries like South Korea and Taiwan who are holding their own trade negotiations with the US.
South Korea’s industry minister said he will take a close look at the terms of what Japan has agreed with the US as he headed to Washington for crunch trade talks.
Japan and South Korea compete in industries like steel and autos.
More broadly, the US and Japan deal will put more pressure on other countries – especially major Asia exporters – to secure better agreements before a 1 August deadline.
Deals with Indonesia and the Philippines have already been announced
But some Asian countries will suffer.
Smaller economies like Cambodia, Laos and Sri Lanka are manufacturing exporters and they have little to offer Washington in terms of trade or investment.
Did the US get what it wants?
There were reports that the US had called on Japan to increase military spending.
But Tokyo’s tariff envoy has clarified that the deal does not include anything on defence spending.
Ryosei Akazawa added that steel and aluminium tariffs would remain at 50%.
These both may be wins for Japan, since it exports more vehicles to the US than it does steel and aluminium.
The pressure is also on the US to get as many of these deals over the line before its self-imposed tariff August deadline.
Alongside negotiations with the US, countries might start looking for more reliable partners elsewhere.
On the same day as Washington and Toyko announced their agreement, Japan and Europe pledged to “work more closely together to counter economic coercion and to address unfair trade practices,” according European Commission President Ursula von der Leyen.
The European Union is yet to agree a trade deal with the US.
“We believe in global competitiveness and it should benefit everyone,” said Ms von der Leyen.
