Tokyo, Seoul and DC Disagree On What $800 Billion Investment Pacts Say

Japan's Hopes Trump Will Accept List of $400 Billion In Private Projects

Japan’s chief negotiator wearing MAGA hat and giving Trump a thumbs up

Contradictory and ambiguous messages are coming out of Tokyo, Seoul, and Washington about exactly what was agreed to in mammoth investment packages, $550 billion from Japan back in July and $350 billion from Korea last week. Even though the negotiations are supposedly over, they’re actually still going on when it comes to implementation.

Here’s What We Know (Or Sort of Know) ….

Japan is supposed to initiate its $550 billion in investments over the remaining three years of Donald Trump’s term. Korea adamantly refused such a short timeframe, saying it would destabilize its currency. Instead, it won the right to take ten years at $20 billion per year. The remaining $150 billion consists of investments, presumably by private companies, to build up American shipbuilding over a period of 10-20 years.

There are great doubts about whether, in the end, either Japan or Korea will invest as much as the agreements say. For example, given the aging infrastructure of American shipyards and a shortage of tens of thousands of workers in the industry, it is doubtful the US can build that many ships. The $400 billion package on Japan’s list may include projects that might have been made anyway. Japan is still negotiating while pretending it is not.

While Tokyo chose a submissive manner to avoid provoking the beast—for example, Japan’s lead negotiator wearing a MAGA hat in the Oval Office (see photo at the top)—Korea’s seasoned negotiators took a tougher stance, albeit not an abrasive one. Perhaps they believed that earning Trump’s respect would secure a better deal. At the same time, the Korean President flattered Trump, even giving him a replica of a famous historical crown, just days after the “no kings” protests. Whether or not Korea’s tactical choice is the reason, some of the conditions of the investment pacts seem less onerous for Korea than for Japan.

While the Japan-US agreement allows Japan to propose projects, Trump will choose whatever projects he wants, even if they are not on Japan’s list. Should Japan refuse, the joint Memorandum of Understanding (MOU) says Trump can raise tariffs on any product to any rate he wants. Japanese officials dismiss this as a real risk, pointing out that the MOU says that Japan shall not be required to violate its laws. Japanese officials say the law prohibits the government-owned Japan Bank for International Cooperation (JBIC) from investing in any project likely to lose money or offering no benefits to Japan.

Meanwhile, Seoul and Washington are issuing very conflicting statements. Seoul insists that it, not Trump, will decide on the projects, and they must be shown to yield sufficient profits. By contrast, Commerce Secretary Howard Lutnick insists that Trump will decide on the projects. These disputes are delaying a written joint statement. Any pact may have to be ratified by Korea’s National Assembly, and the main opposition party is already criticizing it.

When it comes to profits, the deals are equally draconian for both countries. Initially, any operating profits will be divided 50:50 between the US and each Asian country until the latter are paid back. So, neither Korea nor Japan has a guarantee of repayment, and even if they are repaid, the time horizon is drawn out because the US takes half of the profits. Once Korea and Japan have been repaid, then any additional profits are split 90:10 in favor of the US. However, South Korea Policy Chief Kim Yong-beom claims that the US agreed to adjust the profit-sharing terms if Korea is unable to recover its principal within 20 years. We’ll see if the US confirms this.

…And What We Don’t Know

Although the atmospherics between Tokyo and Washington are less contentious, much remains very unclear. The MOU with Japan makes it look as if the Japanese government will hand over $550 billion to the US, something many experts deem a non-starter. However, when Trump visited Tokyo, he was handed a list of $400 billion in energy and semiconductor projects in the US that Japanese companies said they wanted to invest in through cooperation with US companies. It’s not clear whether these are new projects. In any case, are these projects part of the $550 billion?

Trump spoke as if that were the case. A “Fact Sheet” put out by the White House, in referring to that $400 billion list, says: “Today in Tokyo, President Donald J. Trump announced major projects advancing Japan’s previous $550 billion investment commitment [emphasis added—rk] to the United States.” Trump is named “The Dealmaker In Chief.”

Back in September, Ryosei Akazawa, Japan’s lead negotiator, who is now Minister of Economy, Trade, and Industry (METI), told the press that “an existing project could be counted toward the $550 billion total if the United States deems it to be appropriate.” Officials in Tokyo are being cautious as they await a formal US decision. “No specific projects have been finalized at this point,” Finance Minister Satsuki Katayama stated.

But here’s a question. It’s one thing for Japanese or Korean private companies to pony up hundreds of billions of dollars to invest in assorted projects that could lead to orders for their products. It’s another for them to tell their bankers and shareholders they’re only getting 10% of the profits from those projects, thereby losing tens of billions they could have made by investing in other projects. Perhaps these companies expect to be suppliers rather than investors and will make money from projects funded by other people’s money. At this point, who knows?

In any case, Japan’s interpretation of the MOU it signed is very different from the MOU’s actual wording. Here’s the stance of the person who negotiated it for Japan, Ryosei Akazawa: “Some may argue that if Japanese banks were to raise as much as ¥80 trillion, it would immediately trigger a weaker yen — but that’s a misunderstanding. NEXI [a governmental body] will provide loan guarantees, yet there is no problem at all if US banks provide the actual financing. In that sense, this $550 billion investment framework is quite open-ended. It’s not confined to Japanese or US companies alone — firms from third countries may also participate, and funds from third-country institutions could likewise be involved.”

Is Tokyo correct in its hope that Trump will accept almost anything he can portray as a “win?” As the Japanese saying goes, “Six inches ahead is darkness.”

Mussolini Economics Strikes Again

Trump’s Asia trip produced yet another case of the Mussolini economics I discussed last week. The administration just signed an $80 billion deal with Westinghouse (ironically owned by a Canadian company) to build a bunch of AP1000 nuclear reactors and small modular reactors (SMRs) in the US. In return, the US government will get a 20% share of any cash distributions above $17 billion owed to the parent, as well as a 20% equity stake in Westinghouse if its value surpasses $30 billion by 2029.

As part of the deal, Trump will arrange financing. Where will the money come from? Perhaps from Japan. A White House fact sheet says Japan will invest up to $332 billion in US energy projects, one of which is the Westinghouse AP1000.

Moreover, Trump intends to rush approvals through the regulatory process, a move that worries those concerned about safety. US News and World Report noted that, “Westinghouse also had a slew of problems related to the modular design of its AP1000 reactors, such as some parts’ dimensions being wrong when they arrived on site.” Will any Westinghouse competitors also get rushed approvals? Fukushima should have taught us what can happen when the safety process becomes corrupted.

If you recall, it was the fiasco of Westinghouse’s efforts to build the AP1000 that drove it into bankruptcy in 2017. That bankruptcy brought Toshiba, its parent company at the time, to the brink of insolvency. To survive, Toshiba had to exit the nuclear business and sell off its most profitable division, memory chips. Two Westinghouse reactors begun before 2017—the last two begun by anyone in the US— were completed seven years behind schedule and, at $35 billion, more than double the original budget.

Tariffs

The tariff levels imposed on Korea and Japan are similar. In general, tariffs are set at 15% for both countries. But there are a few differences in impact because economic conditions in Korea and Japan differ.

Japan’s global exports of goods and services totaled $922 billion in 2024, or 21% of GDP. Autos were its biggest export, accounting for 20% of total exports, and they accounted for almost 30% of Japan’s exports to the US. Computer chips totaled only $26 billion. So, Tokyo’s primary concern was that auto tariffs be reduced to 15% and that the same rate apply to most exports. But because some items face higher tariffs, e.g., 50% on steel and aluminum, analysts believe the effective tariff rate on Japan is closer to 18%.

Korea’s global exports totaled $686 billion, or 44% of GDP, making it twice as export-dependent as Japan. Its biggest export is semiconductors, accounting for 20% of total exports. One company, Samsung Electronics, accounted for a fifth of Korea’s exports. That’s a lot of eggs in one basket. Autos comprised 10%. So, Korea is happy that it seems to have secured a commitment that any tariffs on semiconductors would not exceed those on its main competitor, Taiwan. However, Taiwan and the US have not concluded a tariff deal, and Lutnick insists that “semiconductor tariffs are not part of this deal [with Korea].” Korean sources counter that the provision regarding semiconductors is not yet in the draft MOU but is in a joint “fact sheet” yet to be released. Meanwhile, Trump has said he would not impose tariffs on companies that build plants in the US, or on companies that plan to do so. Taiwan’s TSMC, as well as Samsung and other companies in both countries, do produce in the US. So, the picture for semiconductors remains very cloudy.

Overall, the effective tariff rate on Korea, according to the Yale Budget Lab, is about 18%, the same as Japan.

The 50% tariff on steel and aluminum could be a big problem for both countries because Trump is also applying it to the steel and aluminum portion of 500 products, including autos, home appliances, and even the aluminum in soup cans. So, Korea may wish further talks on this.

Finally, tariffs placed on China hurt Japan and Korea because so much of what they export to China ends up as capital equipment or parts for China’s own exports. So, a 20% percent tariff on imports from China is, in effect, a 20% tariff on the Japanese and Korean content in that product. It seems tariffs on China go up and down with every passing month. And some goods, like many electronic products, are currently exempt. As a result, the Yale Budget Lab says the effective tariff rate on China is now around 20%, far below the 47% statutory rate applied to some products.

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