Japan Braces for Trump 2.0

Tokyo is bracing for a sharp turn in U.S. international economic policy in the second Donald Trump administration. A week of meetings in Japan following the U.S. election revealed that the prospect of broad tariffs, forced decoupling from China, and further disruption of the global economic order has left many Japanese officials and businesspeople stoic, but clearly worried.

When asked privately what worries them most about the return of Trump to the presidency, many Japanese officials point first to security concerns: Will the new administration pursue a less robust response to North Korea’s missile provocations or China’s aggression in the East and South China seas, accommodate Russia’s aggression in Ukraine, or provoke an escalation of conflict in the Middle East? But economic concerns also loom large, especially Trump’s promise to impose tariffs of 60 percent on Chinese imports into the United States, 25 percent or higher on goods from Mexico, and 10 to 20 percent on everything else.

Officials in Tokyo have heard that the incoming Trump team plans to group countries into three buckets—allies, adversaries, and others—and to assess tariffs on each depending on how countries perform on four criteria:

• the level and direction of their defense spending
• the level and direction of their bilateral trade imbalance with the United States
• how many U.S. Treasury securities they purchase
• whether they manipulate their currency

Japan stacks up reasonably well on some of those criteria but could be at risk on others. Tokyo has committed to ramping up defense spending in response to regional security threats, but a weakening yen has undermined these efforts—as well as prompting the U.S. Treasury Department to keep Japan on a monitoring list for possible currency manipulation. As the largest foreign buyer of Treasurys, Japan would normally get credit for helping finance the massive U.S. debt, but some in the Trump team see such inbound capital flows as a driver of U.S. trade deficits and have aired the idea of taxing them. And perhaps most likely to eventually draw Trump’s attention, Japan’s trade surplus with the United States remains stubbornly high.

It is cold comfort in Tokyo that Japan probably ranks fourth or fifth on Trump’s list of targets for increased tariffs, after China, Mexico, Vietnam, and perhaps Europe. Beyond the direct cost of 10 to 20 percent tariffs on Japanese exports to the United States, tariffs on products from China and Mexico would disrupt Japanese supply chains by hitting their products assembled in those countries. They would also divert Chinese and Mexican exports to other advanced markets, creating pressure on Japan to erect its own protectionist barriers.

Tokyo is still formulating plans on how it will respond to new Trump tariffs. Retaliation seems unlikely, based on past Japanese practice. There is little confidence in Tokyo that a weakened Prime Minister Ishiba Shigeru will be able to win favor with President Trump as Abe Shinzo did at the start of the first Trump term. Ishiba will probably offer to purchase more U.S. exports of agriculture and energy products and to encourage more Japanese direct investment in the United States—although the prospect that Nippon Steel’s acquisition of U.S. Steel could be blocked by either President Joe Biden or Trump is likely to have a chilling effect on at least some new inbound investment (and not only from Japan).

Tokyo has other concerns beyond tariffs. It is worried that Trump will force Japan to align with expanded U.S. efforts to limit exports of critical technologies to China and perhaps to support a broader economic decoupling from that country. Tokyo also sees a second Trump administration as disruptive to the global and regional economic order. Although not acted on in the first term, the threat that the United States will pull out of the World Trade Organization over the next four years still looms large. Meanwhile, as a candidate, Trump vowed to kill the Biden administration’s signature economic initiative in Asia, the Indo-Pacific Economic Framework for Prosperity (IPEF), in which Japan is deeply vested. More broadly, Japan is worried that the new Trump administration will further alienate the strategically important countries of Southeast Asia, pushing them closer to China.

To be sure, Tokyo sees silver linings in a second Trump administration. Japanese companies operating in the United States will benefit from likely tax cuts and deregulation measures. According to one Japanese official, while Japan remains committed to the clean energy transition, a possible phase-out of subsidies for electric vehicles will give Toyota and other Japanese automakers that have invested in hybrid and hydrogen technologies some breathing room. And Trump’s commitment to “drill, baby, drill” offers the prospect of more U.S. liquid natural gas exports to energy-starved Japan.

Nor is Trump’s disdain for multilateralism entirely a bad thing for Japan. One official in Tokyo admitted that the Trump administration’s likely indifference to reform of the International Monetary Fund and World Bank could help Japan by preserving its disproportionate share in governance of those institutions. And even where important plurilateral bodies such as the Group of Seven (G7) are likely to take a hit, some groups in which Japan is a member—notably the Quad, which brings together the United States, Japan, Australia, and India—could remain in favor in a second Trump administration.

But for all of that, one thoughtful Japanese corporate leader noted that Trump 2.0 policies that benefit Japan in the short term—from tax cuts to a renewed emphasis on fossil fuels—could damage the country’s longer-term interests, including in a fiscally stable United States and a slowing of climate change. Meanwhile, he added, the likely tariffs are “a real headache.”

Prospects for cooperation between the United States and Japan on economic policy in a second Trump administration are mixed at best. A phase-two bilateral trade deal, building on the one negotiated by Trump and Abe in 2019 (mainly to restore lost U.S. agriculture sales in Japan as a result of Trump’s decision to pull out of the Trans-Pacific Partnership) is possible, but not likely to be an early priority for the new Trump team. As mentioned, IPEF is likely dead in the water, and other forms of affirmative U.S.-Japan economic cooperation in Southeast Asia do not appear to be on the horizon.

Bilateral cooperation on economic security—a subject that Japan championed during its G7 host year in 2023—offers more promise, as a second Trump administration is likely to share many of Japan’s concerns about supply-chain resilience, China’s nonmarket practices and economic coercion, and protection of critical infrastructure. But the appetite in Tokyo for an aggressive push to constrain—let alone decouple from—China is likely to be limited.

Japan is the fourth-largest economy in the world, the United States’ most important ally in the Indo-Pacific, and critical to advancing U.S. interests in the region and the world. How Tokyo navigates the choppy waters ahead will be a test of its leadership—and of the Trump administration’s.