Trump Official Confirms US Will Correct Mistakenly High Tariffs on Japan

I Am Cited By New York Times About Tariff Impact on Japan

A senior Trump official told Bloomberg that the US is working with Tokyo to end the mistaken “stacking” of tariffs in Donald Trump’s original Executive Order issued on July 1^st. This “stacking” (explained below) resulted in higher tariffs on a myriad of Japan’s exports than had been agreed to during the negotiations. Bloomberg reported that a forthcoming announcement could take the form of a joint statement. Last night, Japan’s chief trade negotiator, Ryosei Akazawa, stated it was simply a “regrettable error” that caused Donald Trump’s Executive Order to impose higher-than-negotiated tariffs on Japan. He added that the US promised to issue a new Executive Order correcting the error and to compensate any importers who were mistakenly overcharged.

The higher tariffs will remain in place until Donald Trump issues a new Executive Order, but it’s not clear how long that will take. When Akazawa was asked, Kyodo reported that he replied that it was up to the US, but “it is impossible to go six months or a year without making any corrections. Therefore, I understand that they will respond within the bounds of common sense.” I, as well as some Japanese contacts, wondered why Akazawa talked of months instead of weeks, since it's simply a matter of changing some language. However, informed sources say that Tokyo expects a new Executive Order within a few weeks. Akazawa also noted that, when the new Executive Order is issued, it will be accompanied by another one lowering the tariff on autos and auto parts from the current 27.5% to 15%. Nonetheless, given the capriciousness and chaos of the Trump administration, no one really knows for sure.

My gut feeling is that Akazawa’s version of events is probably correct: that in its haste and incompetence, the Administration made an error that it will eventually correct. The mistaken Executive Order seems like a product of incompetence rather than malevolence. However, given that Trump is Trump, it’s not possible to breathe easy until the corrected Executive Order is actually issued. Distrust abounds because, as Prime Minister Shigeru Ishiba explained to anxious members of the Diet, “The other party [Trump] is not a normal person.”

What Was The “Error”

Tokyo and the EU had each secured a promise that they would get special treatment on Trump’s “reciprocal tariffs.” That is, they would be subject to a maximum tariff of 15% on virtually all items. Tariffs below 15% would be raised to 15%. Tariffs that were above 15% before Trump took office would go no higher. When Trump issued his official Executive Order on July 31, he kept his promise to the EU, but not to Japan. When it comes to Japan and every other nation outside the EU, the Executive Order says that 15% is applied in addition to existing tariffs, a procedure called “stacking.” For example, Japan’s beef exports to the United States are subject to a 26.4% Most-Favored-Nation (MFN) tariff that applies to almost all US trade partners. Instead of staying at 26.4%, as promised, the tariff has been increased to 41.4% due to the 15% “stacking.” Regarding textiles, the tariff has been lifted from 7.5% to 22.5%, rather than the promised 15%. Most manufactured goods have an MFN tariff of around 3.3%, and those have gone to 18.3% instead of 15%. These higher tariffs will remain in effect until a new Executive Order is issued.

Fortunately, this stacking only exerts a substantial impact on a small fraction of Japan’s exports. However, some of these occur in politically sensitive sectors, like farm goods.

Consequences

Even if the wrong Executive Order was a simple mistake, delay, distrust, and uncertainty could have serious economic consequences until the corrected Executive Order is issued. How will US importing companies respond to the higher tariffs? Will they believe they’ll be compensated, and can they afford to wait? Or will they import less from Japan until the new Order is published? Sometimes, uncertainty can cause more damage than bad news that is certain.

Moreover, each day of delay has personal consequences for Ishiba, who is fighting for his political life with other parties, as well as opponents within his own party. They are demanding that he step down after losing the ruling party’s majority in both houses of Japan’s Diet. The longer it takes the US to confirm Ishiba’s promise of “no discrepancy” between the US and Japan on the terms of the trade deal, the more opponents will claim he has mishandled the issue.

Sectoral Tariffs

All of the above refers only to the so-called “reciprocal tariffs.” In this case, Trump is calling America’s trade deficit a national emergency under the International Emergency Economic Powers Act (IEEPA) and imposing across-the-board tariffs on almost all products exported by each country. (This use of the IEEPA is being disputed in court.) There is a separate group of “sectoral tariffs” on a few other products, including autos and auto parts, steel, and aluminum, with forthcoming ones on semiconductors and pharmaceuticals, and perhaps more to come. These are being justified by a separate law: the national security provision of US trade law called Section 232. Trump is arguing that overreliance on imports of these products poses a threat to national security.

Akazawa also reportedly discussed these products. On Wednesday and Thursday, Akazawa spent a total of 4 1/2 hours with Commerce Secretary Howard Lutnick and an additional half hour with Treasury Secretary Scott Bessent. Sources indicate that only a small portion of this time was devoted to correcting the error regarding reciprocal tariffs. Most was devoted to other issues. For example, Akazawa again pressed Washington to issue an Executive Order as soon as possible to lower the auto tariffs from 27.5% to 15%, as agreed upon. This is vital to Japan, since vehicles and auto parts account for approximately one-third of all Japanese exports to the US. Every day of delay costs the automakers more money. Nikkei reported: Seven major Japanese automakers lose an estimated 3 billion yen ($20.3 million) in combined profits each day that the U.S. delays lowering auto tariffs …with concerns about demand discouraging them from passing on the cost to customers.” (For more on this, see my previous post).

Another issue is the promise of special treatment of Japan, as well as the EU, on upcoming sectoral tariffs on semiconductors and pharmaceuticals. Tokyo believes it has been promised that no matter how high those tariffs may be—and Trump is talking about 100% for computer chips—the tariff on Japan will only be 15%. For other countries, the 15% sectoral tariff on cars and auto parts will be added to the existing MFN tariff of 2.5%, resulting in a total of 17.5%. Similarly, for most countries, but not Japan and the EU, the 15% sectoral tariff on light trucks, e.g., SUVs, would be added to the current MFN tariff of 25%, bringing the total to a prohibitive 40%. Akazawa may have sought assurance on all these issues, as well as quick action on a formal Executive Order to bring the sectoral tariff down from the current 25%.

Without a written agreement between Japan and the US, no promise or claim of mutual understanding is secure until it appears in an Executive Order.

Japan’s “Ire Index” Rising

The Japanese government is increasingly irate over what it believes are breaches of contract by Washington. A few days ago, Akazawa publicly stated what many leaders in the government and business have been saying privately: “We are in a situation where a hegemonic nation is trying to change everything from diplomatic rules to the world order. I believe that both the economy and the geopolitical situation are being placed in a turbulent situation. Navigating through this with precision is a challenging task that can’t be accomplished with a simple solution.”

“Washington is just randomly shooting, and they are shooting some like-minded countries from behind,” warned Taro Kono, a leading member of the ruling Liberal Democratic Party (LDP)..

An editorial in Yomiuri, a conservative newspaper traditionally very supportive of the US-Japan relationship, stated, “It is necessary to devise a strategy to reduce dependence on the United States, expand sales channels to other countries and regions, and continue economic growth.”

And yet, Japanese leaders have also learned not to get too worked up about every nonsensical claim and boast Trump makes. When Trump told CNB that Japan was going to invest $550 billion, that it was the equivalent of a baseball signing bonus, i.e, the cost of getting a deal on tariffs, and that Trump had the power to invest it any way he wanted, Akazawa dismissed it as “just typical Trump talk.”

New York Times Cites Me on Tariff Impact on Japan

The New York Times cited me in an article on the impact of Trump’s tariffs on Japan, particularly on the auto sector.

The initial feeling for some in Japan was “the tariffs are lower than we feared, and the issue is over. It’s resolved,” said Richard Katz, an economist and longtime observer of the Japanese economy. “My take was: you threaten to cut off both my legs, but you only amputated one. So we’re happy?”

Big and profitable Japanese automakers, like Toyota, can absorb a 15 percent tariff on their exports and avoid raising prices for international customers and losing business, according to Mr. Katz. But this is a luxury not afforded to smaller exporters which have slimmer profit margins “and are far more vulnerable,” he said.

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