GM and Ford Get a Raw Deal in Trump’s Trade Pact With Japan

Toyota stock soared after President Donald Trump announced a trade deal on Tuesday that lowered tariffs charged on vehicles imported from Japan. (Courtesy MotorTrend)

President Donald Trump’s trade deal with Japan is great news for the Japanese auto industry, but it isn’t a win for Ford Motor and General Motors. In fact, it’s a scary outcome for domestic car manufacturers.

On Tuesday, Trump announced details of the deal. “Japan will invest, at my direction, $550 billion dollars into the United States…This deal will create hundreds of thousands of jobs,” he wrote in a post on Truth Social. “Japan will pay Reciprocal Tariffs to the United States of 15%.”

The 15% rate, however, also applies to cars and car parts, according to people familiar with the deal. That means it is cheaper for Japan to export cars to the U.S. than for Ford or GM to import vehicles from their plants in Mexico. The U.S. is charging 25% on those imports, part of Trump’s sectoral tariffs on the auto industry.

The Japanese trade deal simultaneously lowers costs for Japanese auto makers and reduces the pressure on them to build more cars in the U.S. It works to the disadvantage of U.S.-based auto makers with facilities in Canada and Mexico.

And while the overall tariff will be higher than the 10% levy charged on cars coming from the United Kingdom —which has a trade deficit with the U.S.—there will be no annual quota.

What is more, U.S. auto makers are paying more for steel, aluminum, and copper than foreign auto makers because of Trump’s tariffs on imported metals.

The president’s stated goal is to build more things in the U.S. But Barron’s recently warned that U.S. trade policy could end up making cars more expensive to produce in the U.S. compared with foreign auto makers manufacturing them overseas and paying a tariff. That might have seemed far-fetched, but the Japanese trade deal makes that scenario more likely.

The new deal includes access for American cars in Japan, but that isn’t much of a carrot. American companies sold only 16,000 cars in Japan, a mere 0.35% of that country’s total market.

The Japanese market is roughly one-quarter the size of the U.S. market. It would take billions of dollars and years for U.S. auto makers to start selling a relatively small number of cars in Japan.

Japanese companies sold 5.3 million vehicles in the U.S. last year, representing around one-third of the entire market. Roughly half were imported.

GM didn’t respond to a request for comment. Ford referred Barron’s to the American Automotive Policy Council.

“American automakers still need to review the details of the U.S. Japan agreement but any deal that charges a lower tariff for Japanese imports with virtually no U.S. content than the tariff imposed on North American built vehicles with high U.S. content is a bad deal for U.S. industry and U.S. auto workers,” said Matt Blunt, president of the AAPC and former governor of Missouri.

The trade deal with Japan also makes life more difficult for investors, who now have to understand how each country’s deal affects previously announced sectoral tariffs.

All companies, regardless of their origin, will face 25% tariffs on steel and aluminum imports into the U.S. But a car made in Japan could use cheaper metals, reducing its cost base and making it more attractive on a unit price basis.

Toyota Motor stock soared 14% in overseas trading on Wednesday. Honda Motor shares were up 11%. Shares of Ford and GM were up 8.7% and 1.7%, respectively, while the S&P 500 and Dow Jones Industrial Average rose 0.8% and 1.1%, respectively.

While the U.S. auto stocks were higher, that doesn’t mean investors were welcoming the news. GM stock was also recovering after its recent earnings announcement. On Tuesday, shares fell 8.1%, despite the company reporting better-than-expected second-quarter earnings. It took a $1.1 billion hit tied to tariff costs.

The moves left GM shares down about eight cents over the past two days.

Investors might also be hoping for a similar deal with South Korea. GM imports cars from that country. Lower tariffs on South Korea would be a big benefit for the Detroit-based auto maker.

European auto makers were also rising firmly in hopes that the deal struck with Japan would provide a framework for talks between Washington and Brussels.

The Japan trade deal marks the second time U.S. auto makers have felt let down by the Trump administration, even though United Auto Workers President Shawn Fain earlier this year praised it for taking “aggressive action on ending the free trade disaster that has dropped like a bomb on the working class.”

One component of the U.S.-Japan trade deal that could alleviate some of those concerns, however, is the proposed commitment of $550 billion investment in the U.S. through companies backed by the Japanese government.

Trump said he’ll be able to direct those investments domestically, with the U.S. taking “90% of the profits,” although details—as with most of his recent trade agreements—remain sketchy.

Japanese Prime Minister Shigeru Ishiba, said the fund will help build “resilient supply chains in key sectors like pharmaceuticals and semiconductors.”

But it’s likely that cash will find its way into the automotive sector, as Japan’s auto sector supports around 1.6 million U.S. jobs, according to a recent estimate from the Center for Automotive Research.

For the moment, however, the president’s latest trade agreement seems to have left American auto makers with more questions than answers.

Write to Al Root at allen.root@dowjones.com and Martin Baccardax at martin.baccardax@barrons.com