A recent claim by Donald Trump regarding a Japan trade deal has been identified as a significant economic misrepresentation. The assertion centers around Trump’s statement that Japan’s government would provide him control over a $550 billion fund for investment at his discretion, with the United States receiving 90 percent of the profits.
While some news outlets initially treated this claim as credible, it has been widely recognized as demonstrably false. A basic analysis of Japan’s economic figures reveals the implausibility of this assertion. Japan’s GDP, measured in dollars, stands at $4.2 trillion. It would be unreasonable to believe that Japan would relinquish control of more than 13 percent of its GDP to any foreign leader.
Analyzing the situation from another perspective, Japan exports approximately $150 billion worth of goods to the United States annually. Even if Trump were to completely halt these imports, Japan would likely adapt by finding alternative markets or implementing economic adjustments rather than paying Trump’s claimed $550 billion.
Japan could potentially replace a significant portion of lost U.S. demand by offering discounts to other markets. If Japan implemented a 20 percent discount strategy, it could likely replace two-thirds of the U.S. imports at a cost of approximately $20 billion. Additionally, Japan could implement work-sharing programs to mitigate unemployment impacts, potentially costing another $20 billion annually.
Even in the most extreme scenarios, the financial burden on Japan would be significantly less than the $550 billion Trump claimed. These estimates, while approximate, provide a reasonable order of magnitude for potential costs.
An important consideration is the reliability of any commitments made by Trump. Past experiences with trade agreements demonstrate that Trump’s promises lack consistency. Mexico and Canada have experienced this firsthand with a trade deal signed five years ago that has since been subject to renegotiation.
Japan would face significant risks by entering into any agreement with Trump, as there would be no assurance that the terms would remain unchanged. Trump could arbitrarily decide to modify the agreement based on personal preferences or political considerations.
Given these factors, it is highly improbable that any rational government would agree to Trump’s $550 billion proposal. The financial implications would be unfavorable for Japan, and the lack of reliability in Trump’s commitments makes such an arrangement unwise from a strategic perspective.
— news from cepr.net
— News Original —
We have a hands down winner for Trump’s economic lie of the week. It’s his Japan trade deal. For all you prurient types, I know nothing in economics can compete with Trump’s latest coverup stories about Epstein, but we are narrowing the scope here at Beat the Press.
Anyhow, the big story on Trump’s trade deal was that he lowered the taxes he would charge us on items imported from Japan from 25% to 15%. While Trump seems to believe Japan pays his taxes, they don’t. We do.
This created the bizarre situation where U.S. manufacturers are paying taxes of 50 percent on imported inputs like steel and aluminum, while we can buy a finished Japanese car and pay just a 15 percent tax. It’s not clear how this tax structure is supposed to revitalize U.S. manufacturing, but we’ll leave that one for another day.
The big lie came when Trump told us that Japan’s government is giving him control over a $550 billion fund to invest wherever he likes. And the United States gets 90 percent of the profits.
While news outlets treated this investment fund boast as being plausible, it was a transparent lie. A bit of arithmetic would tell the story.
To start, Japan’s GDP (measured in dollars) is $4.2 trillion. Does anyone really believe the country would hand over more than 13 percent of its GDP to Donald Trump? Can a person who believes this actually write on economics for a major news outlet?
Taking the other side of the equation. Japan sells about $150 billion a year of stuff to the United States. Suppose Trump gets really tough and pushes this to zero. He’ll arrest anyone who buys a Japanese car, television, or computer and send them Alligator Alcatraz.
So now Japan has $150 billion of stuff that it doesn’t know what to do with. It could let the factories shut down, which would create unemployment and be bad news for the larger economy. But people do move to other jobs, even if not overnight. They could sustain demand in the economy with generous unemployment benefits and pay for transitional assistance as well as start-up funds for new businesses.
What’s the price tag on this? Maybe $75 billion in the first year, dropping at the rate of something like 10% annually over a decade. (Yes, these are arbitrary.) That gets us around $400 billion over a decade. Would Japan pay Trump $550 billion to prevent this?
But that is almost certainly the least desirable option. Suppose Japan rushed to find other markets, including its own, by offering big subsidies, which take the form of discounts. Let’s say those are 20 percent.
They could likely replace much of the demand that way. Many people would likely be happy to buy Toyota’s $40,000 SUV for $32,000. Maybe these 20 percent discounts are sufficient to replace two thirds of the U.S. imports. That costs Japan $20 billion.
To avoid substantial hardship, suppose Japan’s government encourages work-sharing. Instead of putting in 40 hours a week, workers can put in 32 hours a week and get roughly the same pay. Other things equal, this should employ 25 percent more workers, likely making up for most of the lost demand.
Let’s say this costs the government another $20 billion a year, putting the tab at $40 billion a year. This expense would again decline fairly rapidly over a decade, let’s say coming to $200 billion. Would Japan pay Trump $550 billion to prevent this?
But let’s factor two other items into consideration. In almost no scenario would Japan’s exports to the U.S. fall to zero. Even a drop of 40 percent would be extreme. That would almost certainly be larger than the impact of Trump’s 25 percent tariffs, especially since he is imposing comparable taxes on imports from everyone else.
That would mean Japan is looking to replace demand for $60 billion of their exports. Cut the above estimates by 60 percent. In the complete shut down story, we’re looking at a cost of $160 billion over a decade. Would Japan pay Trump $550 billion to prevent this?
In the case of government subsidies and work-sharing we are looking at a cost of $80 billion. Would Japan pay Trump $550 billion to prevent this?
These are crude estimates, but they likely give the right order of magnitude. Japan’s government would almost certainly come out far worse financially, in addition to looking like fools to the world, by handing this sort of money to Donald Trump.
But there is one other important factor to consider. A deal with Donald Trump is worthless. Just ask Mexico and Canada about the trade deal they signed with Donald Trump five years ago.
Japan can hand Donald Trump his $550 billion fund and then next year he could still decide that he wanted to double taxes on our imports from the country because he didn’t like something its prime minister had said. Nothing would stop Trump from doing this.
Surely Japan’s government knows that Trump’s commitments mean nothing to him. Any deal they make can be reversed any time Trump feels like it.
For this reason, no serious government would hand Trump a large pot of money in exchange for his promises to stick by a deal. In fact, no serious government would pay any amount of money a commitment from Donald Trump.