Japan's Auto Industry Struggles to Meet All Demands

Recently, U.S. President Trump announced the latest trade agreement with Japan, imposing a 15% tariff on imported Japanese cars. Although this rate is lower than the previously threatened 25%, it is still much higher than the original 2.5% and the 5% that Japan had hoped for.

Facing domestic doubts, Japanese officials argued: "A 25% tariff is an 'economic death sentence,' while 15% is 'manageable pain.'"

Behind this helpless defense lies the fate of Japanese car companies being subject to others and having to compromise. Because the Japanese automobile market is relatively small, it has long regarded North America as its primary target market. As a result, it can only dance in the shackles of American trade protectionism.

The rapid development of Japan's automotive industry began after World War II. At that time, Japan had established an initial development path for the automotive industry through policies such as repairing imported European and American cars, restricting the import of complete vehicles, and assembling imported auto parts and equipment. After a period of exploration, Japan decided to focus on the passenger car industry as the leading sector of its industrial development and provided preferential policies in terms of funding, equipment, raw materials, and taxation.

Meanwhile, two geopolitical conflicts brought business opportunities to Japanese car manufacturers. In the 1950s, the outbreak of the Korean War enabled the then weak and struggling Japanese automobile companies to rapidly develop by taking on orders from the US military. By the late 1960s, Japan’s car production had risen to third place in the world, behind only the United States and Germany. During this period, the US tariff rate on Japanese cars was still less than 10%.

In 1973, the first oil crisis broke out, and fuel-efficient, durable Japanese cars became very popular in the US market, with their market share constantly increasing. Statistics show that in 1979, Japanese automobile exports to the US reached 1.9 million units, accounting for about 20% of the US new car market and 80% of US car imports. The US trade deficit surged from $36 billion in 1980 to $123 billion in 1984, with the deficit with Japan accounting for over 40% of the total, and the automotive trade deficit reaching $21 billion.

In retrospect, during the 1970s and 1980s, Japan gradually surpassed the United States in various fields such as automobiles, steel, and home appliances, leading to an increasing trade surplus with the U.S., which caused unease in America. It was from this time that, in order to alleviate pressure on domestic industries and shift social contradictions within the country, the Japanese automobile industry became a target of continuous suppression by the United States.

In the early 1980s, faced with the increasing volume of Japanese car exports to the United States, the three major American automakers strongly urged the U.S. government to impose restrictions on foreign automobile imports and lobbied Congress. Subsequently, the U.S. Congress proposed multiple trade protectionist measures and established the "Automobile Caucus" to pressure the government to take action. American television media also broadcast scenes of Americans wielding sledgehammers to angrily smash Japanese cars, conveying public dissatisfaction and blaming Japanese car brands for impacting American automakers and taking away American jobs.

In March 1981, a U.S. delegation visited Japan, and both sides held consultations on the issue of automobile trade. In May, the Japanese government announced measures to restrict car exports to the United States (VER), agreeing to voluntarily limit automobile exports to the U.S. According to the measures, the Japanese side pledged to cap the number of cars exported to the United States at below 1.68 million units starting from 1981, and to make dynamic adjustments to this figure in the future.

In order to thoroughly reverse the U.S. trade deficit and restrict Japan's economy and exports, the U.S. government, together with multiple countries, forced Japan in 1985 to sign the Plaza Accord, which aimed to promote the appreciation of the yen. A main provision of the agreement was that Japan should closely monitor exchange rates, implement flexible monetary policies, and achieve yen exchange rate liberalization "so that the yen exchange rate can fully reflect the underlying strength of the Japanese economy." Within three years of signing the agreement, the yen appreciated by more than 50% against the U.S. dollar, severely impacting Japanese automobile exports.

In this round of confrontation, the response strategy of the Japanese automobile industry can be roughly divided into two aspects.

On one hand, there was a continuous strengthening of the transfer of industrial chains to the United States. For example, in the early 1980s, Honda established its first U.S. factory in Ohio; in 1988, it expanded the capacity of the Ohio plant to 300,000 vehicles and added an engine factory, and also established its first complete vehicle plant in Kentucky with an annual capacity of 200,000 vehicles. By 1990, Japanese car companies’ exports to the U.S. had decreased from 4.52 million vehicles in 1985 to 2.6 million vehicles, but domestic production in the U.S. increased from 820,000 to 1.8 million vehicles, thereby making up for the significantly reduced export volume. At the same time, these direct investments not only increased employment opportunities for Americans but also raised American workers’ incomes, helping to avoid further deterioration of the Japan-U.S. trade disputes.

On the other hand, accelerating technological upgrades is also key for Japanese automakers to cope with challenges. In the early 1990s, Toyota’s R&D investment reached over 5% of its revenue, focusing on hybrid technology; Honda developed VTEC variable valve timing technology to improve fuel efficiency; Nissan developed the “Super Torque Converter” transmission to reduce energy consumption... These technological upgrades not only offset some of the exchange rate shocks but also established the leading position of Japanese automakers in related fields, gradually moving them toward high-end products. For example, Toyota launched the Lexus brand to enter the U.S. luxury car market with a high-end image; Honda also founded Acura; Nissan introduced Infiniti. These moves marked the shift of Japanese automakers from “cost-performance competition” to “brand competition,” further enhancing revenue, profits, and the international status of Japanese automobiles.

However, American trade protectionism did not stop there. Although many Japanese automakers assembled "American cars" in the United States, most of their parts were still imported from Japan. As a result, trade frictions arose again between Japan and the U.S. over auto parts. Ultimately, in June 1995, after the U.S. declared it would impose a 100% punitive tariff on luxury cars and their parts from Japan, Japan once again compromised, agreeing to increase the localization ratio of auto parts for North American production to 56% by 1998; the five major Japanese automakers would raise total production at their U.S. bases from 2.1 million units per year to 2.65 million units per year before 1998; and import $6 billion worth of foreign-made parts before 1998, among other measures.

These measures have further accelerated the localization of production by Japanese automakers in the United States. By 2023, the production volume of Japanese automakers in the U.S. reached 3.27 million vehicles, with a localization rate close to 70%, and their market share in the U.S. rose to 35%. However, Japanese automakers have also maintained their core profits through continuous innovation and by leveraging their core technologies. For example, Toyota has filed over 15,000 patents for hybrid technology, and Honda remains a leader in the engine field. Through "technology premium + lean production," Japanese automakers have maintained profit margins that are consistently higher than their European and American counterparts. From fiscal years 2013 to 2017, the combined net profit margin of Toyota, Honda, and Nissan was 6.2%, with Toyota’s margin stably ranging between 8% and 10%. In fiscal year 2023, Toyota’s operating profit margin reached as high as 11.9%, far exceeding Volkswagen’s 7% and Tesla’s 8.2%.

Imposing additional tariffs to force the return of the automotive industry does not establish real market competitiveness for the U.S. automotive sector; simply compromising does not mean that the U.S. will abandon the big stick of trade protectionism.

In April of this year, Japan's automotive industry was once again hit hard in the global tariff disputes triggered by the current U.S. administration, with corporate profits shrinking significantly. According to industry estimates, the new tariff policy, referred to by Japanese media as the "New Plaza Accord," could result in a profit shortfall of 1.89 trillion yen for Japanese car manufacturers in the fiscal year 2025.

At the beginning of August, the Japanese government urgently convened a closed-door meeting with senior executives from Toyota, Honda, and other automakers. However, this time, the conventional strategies of Japanese car companies are likely to be significantly less effective.

On one hand, the United States is no longer satisfied with merely transferring the automotive parts supply chain; it now hopes that Japanese automakers will establish more R&D centers and key parts supply chains in the United States in order to lock in technology and profit repatriation to the U.S., ultimately granting American companies a competitive advantage. If Japanese automakers comply with these demands, it may hollow out the foundation of Japan's manufacturing industry and accelerate the hollowing-out process of Japan's industrial base.

On the other hand, competition in the global automotive market has become increasingly fierce. In recent years, as the wave of electric vehicles has swept the market and non-Japanese brands have rapidly improved in quality and design, the leading advantage of Japanese cars in the US market has been gradually eroded.

Moreover, in response to the global trend of the automotive industry shifting towards electrification, Japanese car manufacturers have been relatively slow. It is only in recent years that Toyota and Honda have accelerated the launch of pure electric models. In contrast, Tesla already holds an overwhelming advantage in the U.S. electric vehicle market, and American automakers such as Ford and General Motors have also stepped up their efforts.

From the "Plaza Accord" of the past to today's "New Plaza Accord," Japanese car companies have repeatedly compromised under pressure from the U.S. to survive. This strategy of "controllable pain" has resolved short-term crises and even achieved partial prosperity, but like a chronic poison, it has eroded their industrial foundation—core technological advantages and strategic autonomy. Currently, the challenges faced by Japanese car companies are no longer simply market issues but a comprehensive test of technological choices, market adaptation, social change, and major power games, with the logic of competition rapidly being restructured. Under the inertia of the "controllable pain" compromise mindset, there are still many variables in the future of Japan's automotive industry.