Short Version: it’s bad, even by the preferred metrics of protectionists.
On July 23, US and Japanese trade negotiators reached a deal on tariffs, investments, and other international transactions. Much has been written about how bad the deal is from a standard economic perspective (see, for example, here). But President Trump and his administration, who negotiated the deal, are mercantilist. So here, I evaluate the trade deal from the mercantilist perspective, focusing primarily on the trade deficit.
A few notes first:
- Details of not only this deal, but the others negotiated, are sketchy and subject to dispute. In order to give the Trump Administration the benefit of the doubt, I will be using their announced conditions.
- These are not deals in the traditional sense of legally binding agreements. As best we can tell, they are verbal assurances of a potential framework for a legally binding agreements down the line. But, for the sake of argument, I will treat this deal as if it were a formal, legally binding agreement between the two nations.
With the preliminaries out of the way, let us begin.
Trade Deficit
For mercantilists in general, and President Trump in particular, a trade deficit is a major concern. Indeed, for the Trump administration, it is the overriding concern. He invoked the authority to do these deals by declaring the mere presence of a trade deficit to be a national emergency. Therefore, let us begin our analysis by looking at what effect this deal will have on the trade deficit.
This deal will necessarily increase the US trade deficit with Japan. Part of the deal is a $550 billion investment by Japan into the United States. When a foreign investor invests in the US, that necessarily increases the trade deficit, because that is how the transaction is recorded in the National Income Accounts. So, this investment part of the deal will increase the trade deficit.
Furthermore, the Japanese will need US dollars to accomplish this investment. The only way they can get those dollars is by selling goods to Americans. That means American imports from Japan will necessarily have to rise, and American exports to Japan will necessarily either not change or fall. Since a trade deficit is defined as when exports are less than imports, under this scenario, the trade deficit must rise.
There is another, indirect way in which the trade deficit will likely worsen. The US tariff on Japanese cars is now 15%. US automakers face a rash of higher taxes, including steel tariffs (50%) and auto parts tariffs (various). Japanese automakers do not face such tariffs. Consequently, Japanese imported cars will now be relatively cheaper than their American-made competitors. On the margin, Americans will purchase more imported cars than domestic cars. Similarly, American auto exports to Japan are now relatively more expensive, which will reduce exports. Again, the trade deficit rises.
Thus, given the mercantilist concern about the trade deficit, this deal is a bad one.
Protecting Jobs
A lesser concern for mercantilists is protecting jobs. The effect the deal will have on jobs is ambiguous. Assuming the investment deal goes through and doesn’t turn into a significantly scaled-back project like Foxconn, some jobs will be created in the United States, intended to be in LNG exports. But, as discussed above, American auto manufacturers now face significant competition from Japanese auto firms. And so, some jobs will be created. Others, destroyed. The net effect is probably close to zero. Thus, from the mercantilist perspective on jobs, this deal is potentially bad, especially since autoworkers are another industry the American mercantilists wish to protect.
Conclusion
Other details of the deal are still obscure, so there is not much more to write. But, given the information we do have based on the announcements from the Trump Administration, this is a bad deal by their own metrics.
READER COMMENTS
Jose Pablo
Aug 14 2025 at 6:08pm
Furthermore, the Japanese will need US dollars to accomplish this investment. The only way they can get those dollars is by selling goods to Americans
FDI in the U.S. is considered good, but trade deficits are considered bad. I’ve always found that part extremely amusing.
No matter whether your economist of reference is Cochrane or Krugman (which certainly spans a wide spectrum of viewpoints), this is simply and plainly wrong… but undeniably useful if you want to get elected President (or simply brag about your “amazing” negotiation skills).
Jon Murphy
Aug 14 2025 at 6:26pm
For some. I’ve seen many Trump supporters argue that FDI is bad because we are “selling off our country” to foreigners.
Jose Pablo
Aug 15 2025 at 7:14am
Well, the good thing about not worrying about the coherence of your opinions is that you can hold almost any set of them at the same time.
If you hold both a position and its opposite simultaneously, you’re almost certain to be at least partially right.
For instance, the U.S. Ambassador to Canada now seems to be defending open markets — after all, mercantilism is “mean and nasty
U.S. Ambassador to Canada Pete Hoekstra told a conference in Washington state last month that the U.S. booze boycott is one of the reasons Trump and White House officials have called Canada “mean and nasty to deal with
https://www.wsj.com/business/us-alcohol-industry-canada-boycott-71dbd1e0?mod=hp_lead_pos9
Andrew_FL
Aug 15 2025 at 9:53am
Though, these are actually good things, so this more shows the weaknesses of the Mercantilist worldview than that the deals are bad.
Jon Murphy
Aug 15 2025 at 12:02pm
Depends on what the “these things” you’re referring to. FDI isn’t per se bad, but when compelled (like this is), it should be considered per se bad.
Warren Platts
Aug 19 2025 at 1:07pm
This seeming contradiction goes away entirely once one recognizes that: (a) mercantilism and protectionism are two different animals; and (b) the Trump administration’s economic philosophy is American System-style protectionism, not mercantilism.
How do we know this? Because that’s what they say. So why second guess what they say? The overriding goal is to reverse the working class wage stagnation that’s taken place over the last 50 years. Reducing the trade deficit is considered a means to that end, not an end in itself. In the first hundred years of this country, we ran chronic trade deficits that rival in size in terms of percent GDP the trade deficits of the last 50 years. But since we were a developing country in the 19th century, the trade deficit was a good thing. That is no longer the case, however.
As for the contention that no jobs would be created on net, that is pretty much irrelevant. Wages would go up as people in crappy service jobs switch to blue collar manufacturing jobs that are far more productive.
Yes, I agree that in the short-run FDI in greenfield factories would increase the trade deficit — assuming the dollars came from exports and not Japan’s vast stockpile of foreign exchange reserves that consist mainly of USD. But in the long run, American consumers would be buying the products produced in USA, these factories might produce exports, and thus in the long run, the foreign investment in domestic production would reduce the trade deficit.
Personally, I have mixed feelings regarding such “transplants” for two reasons: (1) the profit stream would redound to foreign owners; (It is kind of interesting that nowadays Japan is actually running a goods trade deficit, yet still running a current account surplus, thanks to the returns on their foreign investments, presumably); and (2) the top of the employment pyramid is chopped off. That is to say, the engineering and upper management positions would remain in Japan. So the highest an American worker could hope to rise would probably be line leader. This is quite different from the days when a kid could start off in the mail room and then through hard, smart work eventually rise to become the CEO.
Jon Murphy
Aug 20 2025 at 6:35pm
That’s obviously not true. How do we know this? They said it.
The executive order on the tariff explicitly says the trade deficit is the problem. The Administration even said so in court.
Indeed, even you said so:
And elsewhere:
So no. Your post hoc attempt to reconcile the blatant contradictions do not hold.
Warren Platts
Aug 22 2025 at 1:00pm
From your colleague, Scott Lincicome at CATO:
There is no contradiction in saying that the primary goal is to raise working class real wages. As I pointed out, trade deficits can be a good thing under certain circumstances but are not now. Why? Because the trade deficit reduces the demand for domestic labor (that, and it also represents increasingly untenable debt levels that will eventually result in a financial crisis that will put American workers even further on the skids). Other things being equal, reducing the demand for labor will put downward pressure on wages. You combine that with mass unauthorized immigration that increases the supply of labor, then you have a double whammy hammering down wages. Thus, ending the trade deficit is a means to ends (higher wages, getting the national debt under control).
Let me put it this way: if trade deficits don’t matter, then there would be no need to worry about the trade deficit at all. Trump and his fellow populists and economic nationalists, such as myself, however, dispute the contention that trade deficits do not matter. What makes trade deficits matter is their effects, not because they are somehow intrinsically bad in and of themselves. The ends-in-themselves are American workers who are getting squeezed by free trade.
Jon Murphy
Aug 23 2025 at 10:59am
Look, whatever you choose to call your mercantilist scheme, it doesn’t matter. A rose by any other name still smells the same. The bigger problem, the one you fail to address, is that this deal works against the stated goals of reducing the trade deficit and creating jobs. That’s not a problem of a name change. It’s a fundamental problem with your world view and this deal.
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