Trump was right, at least about this
Japanese carmakers are eating the bulk of the 25% tariffs the administration slapped on its exports to the US, in a remarkably Trumpian violation of the laws of economics.
Sometimes it seems like there’s no law — economic, political, constitutional, societal, you name it — that can withstand President Donald Trump’s reality distortion field.
For instance, economists and journalists steeped in the economic theory that dominated pre-Trump American policymaking almost universally dismissed his assertions that foreigners would pay for the massive on-again, off-again tariffs that whipsawed the markets and consumer sentiment recently.
The president’s stance, they said, betrayed his basic ignorance about how tariffs work, which is that the tariffs are paid by US importers when they take possession of the foreign goods they’ve ordered at US ports. The importers then pass those costs along to US consumers in the form of higher prices.
As a technical matter, all true. But it was too simple of a story, implying a near automatic pass-through of tariffs to higher consumer prices and ultimately inflation.
That story ignored another potential. It’s quite possible that some part of the tariffs would, indeed, be more or less paid by foreign producers who are worried that high tariffs would make their goods too expensive for Americans, costing them market share in the US.
One solution: they could cut their prices, essentially paying for some of the tariffs by reducing their profit margins.
And that seems to be what some of the world’s most sophisticated exporters, Japanese automakers, are doing. Goldman Sachs analysts following the Japanese economy recently spotlighted this chart showing the plunge in the price of Japanese passenger car exports to North America compared to prices in the rest of the world.
The export price index for vehicles exported to North America plunged nearly 20% in June, the largest drop on records going back to 2016, according to The Japan Times.
Goldman analysts remarked that the price cut “suggests that, at least for now, Japanese automakers have chosen to absorb the majority of the +25 percentage point additional tariff themselves, thereby mitigating a rise in US selling prices.”
This sort of decision is “inconsistent with the view in recent years that US consumers and businesses ultimately bear the full burden of US tariffs via higher US domestic prices.”
So, what gives? Well, Goldman analysts poked through broader data on Japanese exports and found that few other Japanese exporters cut prices like this in response to the tariffs.
Perhaps, they wrote, the decline in car export prices reflects the retail nature of the car market, where shoppers experience price hikes personally. Or maybe it has to do with the fact that price adjustments are typically done during model year changeovers. Or it could be that “Japanese automakers may be adopting a wait-and-see approach, avoiding price revisions in the US until diplomatic negotiations between Japan and the US are concluded.”
At any rate, there are likely to be limits to how long it can last before profitability plunges, forcing a shift in management strategy.
But investors — and economists — might want to reflect on what all this means.
If Japanese companies are willing to eat some of Trump’s tariffs, it seems likely some US companies, which have seemingly bowed to the government on any number of fronts since Trump took office, would also sacrifice some profits rather than risk attracting the president’s ire. Trump has already personally demanded automakers and Walmart refrain from raising prices. If they comply, it would mean bad things for Corporate America’s bottom line.
And for those economists out there, it would obviously have implications for whether the widespread tariff-driven inflation that everyone was predicting a couple months ago ever actually materializes. (So far, it hasn’t.)
At any rate, it’s all worth keeping an eye on as we go through earnings season.
