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Is Trump Constructing a Bumpy Road for Japanese Automakers?

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Japanese carmakers have reasons to worry after the Commerce Department, under President Donald Trump’s orders last week, launched a national security investigation to check if vehicles and auto parts’ imports are threatening national security. Almost half of Japan’s car exports are to the United States and if the Commerce Department decides to impose hefty tariffs on imported cars, Japanese carmakers are likely to suffer big time.

However, Japan’s prime minister Shinzo Abe on May 28 said that he will try to convince Trump of the integral role that Japanese carmakers play in boosting the U.S. economy. Moreover, Japan has been one of United States’ close business allies. Also, Japan’s exports in April grew majorly on car exports to the United States, which indicates growing demand for Japanese cars. Given this scenario, it needs to be seen what steps the Trump administration might take against Japanese carmakers in the days to come.

Japan’s Exports Ride High on Car Demand

Japan’s exports grew 7.8% in April on a year-over-year basis. This also marks the 17th consecutive monthly growth in exports. Primarily, exports were driven by robust demand for Japanese cars in the United States. In fact, the already huge market for Japanese cars in the United States is enjoying steady growth. Japan’s April exports to the United States rose 4.3%, faster than a 0.2% year-over-year increase in March.

Robust demand for Japanese vehicles in the United States saw exports of cars rising 15.3% in April from the year-ago period. Japan is an export-oriented country and in spite of the United States imposing a 25% tariff on iron and steel, Japan’s iron and steel export to the country grew 14%.

Trump Raises Worries for Japanese Automakers

Japan exported around 1.77 million units of cars worth approximately $40 billion to the United States in 2017. As a matter of fact, the United States is one of the most lucrative markets for Japanese carmakers like Toyota Motor Corporation (TM - Free Report) , Honda Motor Co., Ltd. (HMC - Free Report) , Nissan Motor Co. (NSANY - Free Report) , Mazda Motor Corporation (MZDAY - Free Report) . Toyota has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Commerce Department’s decision to launch an investigation last week to scrutinize if cars imports are posing a threat to the national security, which could lead to tariffs of 25% on imported cars, have made foreign carmakers anxious. More than 30% of the cars that Toyota sells in the United States are imported. This means Toyota might need to pay 25% import duty on nearly 724,000 cars. Mazda too exports more than 20% of its cars produced domestically to the United States.

Understandably, revenues of these Japanese automakers could be hit hard, which could compel them to shift their production to the United States, although producing cars domestically has been more viable. Moreover, the impact could go beyond the auto industry and hit Japan’s economy, as the country is highly export dependent.

Also, the domestic auto industry might suffer if tariffs are imposed on car imports, as a number of U.S. carmakers have their production units offshore. General Motors Company (GM - Free Report) sold 3 million cars in the United States in 2017. However, it produced only 2.2 million cars domestically, which means it imports thousands of cars. 

Abe Defends Japan’s Automakers

Japan has been one of United States’ close trade allies. However, the recent trade row has somewhat soured the relationship between Trump and Abe. However, Abe has said that he will try to convince Trump of the crucial role that Japanese carmakers play in boosting the U.S. economy. He also said that Japanese carmakers have been integral in creating a huge number of jobs in the United States.

In fact, the number of cars that Japan produces in the United States is double the size it exports annually to the country. This once again proves Americans desire to own a Japanese cars. Now it remains to be seen how the Trump administration reacts to Japan’s reasoning.  

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