The US-Japan trade deal is likely to be a boon to US-based automotive production but any reduction in imports from Japan may be modest, market observers and analysts told Fastmarkets on Friday July 25.
Key takeaways
- US-Japan trade deal reduces tariffs on Japanese cars from 25% to 15%, boosting competition in the US auto market
- Increased US auto production is expected to drive higher demand for steel, particularly galvanized and cold-rolled coil
- Japanese automakers may expand US-based production, intensifying competition for the Detroit Three and reshaping market dynamics
Any rise in US domestic automotive production will, in turn, push up demand for steel but the extent of production gains was still unclear, trade sources said.
The automotive sector consumes 40% of all flat steel output, principally galvanized and cold-rolled coil, and is responsible for about 40-50% of demand for special bar quality (SBQ) long steel products, according to Phil Gibbs, metals equity analyst at Keybanc Capital Markets.
Under the trade agreement, completed on July 23, Japan will pay a reduced 15% duty on autos made in Japan and shipped to the US, a reduction from the current 25% tariff rate.
Sectoral tariffs on imports of Japanese steel will remain at 50%.
The lower 15% duty on imported Japanese cars and other goods surprised market observers and pleased investors, leading to a big rally in the shares of Japanese auto companies, with a more modest increase in the share prices of the so-called Detroit Three – General Motors, Ford and Stellantis (formerly Chrysler).
The negotiations
US President Donald Trump said on July 24 the lower tariff rate emerged from negotiations that were “not easy,” and were resolved with Japan agreeing to provide $550 billion to fund a new US-based strategic industrial investment fund.
“They gave us $550 billion because they didn’t want to pay [the higher rate of 25% they currently pay],” Trump said during an impromptu press conference on his visit to view construction at the Federal Reserve renovation project.
The $550 billion will go into a US fund that will make new domestic investments, with 90% of the profits paid to the US and 10% to Japan, Trump said.
“It’s not a loan or anything. It’s a signing bonus, I called it,” Trump said. “They gave us $550 billion and took down the tariffs a little bit and they agreed to open their economy to everybody.”
The market opening will remove trade barriers that have prevented the export of US cars to Japan.
“The opening of the economy is worth more than the $550 billion,” Trump said.
A White House fact sheet published on July 23 provided more detail. “Longstanding restrictions on US cars and trucks will be [removed], granting US automakers access to the Japanese consumer market,” it said. “US automotive standards will be approved in Japan for the first time.”
The White House also said: “At President Trump’s direction, these funds will be targeted toward the revitalization of America’s strategic industrial base.” The White House fact sheet included detailed investments in “energy, semiconductors, critical minerals, pharmaceuticals and shipbuilding.”
The 15% tariff on imports from Japan does, however, come at higher price for buyers of imported Japanese cars, Arthur Wheaton, director of labor studies at Cornell University’s School of Industrial and Labor Relations, said.
“The good news is that the auto industry strongly prefers certainty, even if more expensive,” Wheaton said. “There may be more attempts to source US-based metals if the price is competitive. With a more definitive price on imported metals, procurement is much less of a headache.”
Shifts in market share
Any shift in domestic US production may benefit US-based but foreign-owned automakers rather than the Detroit Three, according to Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions.
“Additional production by Japanese original equipment manufacturers in the US will likely eat away at market share from the Detroit Three,” Fiorani said.
He outlined the prospects for each Japanese automaker with production based in the US.
“Companies such as Toyota and Subaru have struggled for years with capacity in North America and, especially, in the US, but have not found the need to expand their footprints,” he said.
“Honda does not import many vehicles from outside of North America, and has no reason to add more North American capacity. Nissan already has too much factory space,” Fiorani added. “Smaller automakers such as Subaru and Mazda can’t afford to take big risks. If any automaker [were to] make a new investment, Toyota could open a new plant at some point.”
More intense competition
Marick Masters, professor of business at Wayne State University in Detroit, expected the Japan trade deal to intensify competitiveness within the US industry and to lead to an increase in imports into the US of cars made in Japan.
“The US runs a sizable trade deficit overall, and in the auto sector specifically with Japan. It imports a large number of motor vehicles from Japan and the relatively lower tariffs for Japan on vehicles will encourage further imports,” Masters said.
“Japan-based auto companies also manufacture a large quantity of vehicles in the US, meaning that they compete directly with US-owned manufacturers on two fronts,” he said. “The announced trade agreement includes substantial Japanese investment in the US economy which will add more to Japan’s industrial capacity in the US.”
The Detroit Three will face heightened pressure from both new investment in US domestic capacity and increased imports from Japan, according to Masters.
“The major threat to the US-owned legacy auto companies remains the global acceleration to electrical vehicles, dominated by China, and the competitive disadvantage of the US firms in labor costs, production efficiencies and regulatory and bureaucratic burdens,” he said.
US production outlook
AutoForecast Solutions expected US automakers to produce 10.3 million light vehicles in 2025, about the same number as in 2024.
“Over the next few years, production is expected to slip slightly while manufacturers shift capacity from electric vehicles and toward vehicles with internal combustion engines,” Fiorani said. “Growth beyond the current level isn’t expected before 2028.”
Fiorani expected Japanese firms to increase US domestic production rather than increase exports from Japan to the US.
“Japanese automakers spent the past 45 years investing in production facilities in the US and were likely to continue that investment,” Fiorani said.
“Only a handful of models imported from Japan are in volumes large enough to warrant North American production, so we’re unlikely to see a flood of new local facilities,” he added. “Toyota may look into ways to produce the 4Runner in the US, and Mazda might seek a local source for the CX-5, but those are among the few options.”
Japan’s automakers have a strategy that makes it more likely that they will continue to export to the US and other nations, according to the analyst.
“The reason why the imported models are imported is that they need the volume for other countries, especially Japan, to make the business case for production,” Fiorani said. “Forcing many of those models to be produced in the US would stop their sales and eliminate choice for American buyers.
“Mitsubishi might have to take a hard look at the US market,” he added, “and Subaru buyers may need to pay a bit more for their Outback. Adding tariffs to these niche sectors means more expensive vehicles for consumers.”
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