Economic Aspects of Geopolitical Risk: America Under Trump 2.0

Serious Impact on the Global Stage

Former President Donald Trump prevailed in the American presidential election on November 5, 2024, by winning all seven battleground states—albeit by a narrow margin in each. In addition to defeating Democratic nominee and Vice President Kamala Harris in the electoral college, Trump also won the popular vote by eating away at Democratic advantages in Democrat-leaning “blue states.” With majorities in both the Senate and House of Representatives, thus “redwashing” US politics across the board, Republicans are clearly in charge of the political agenda.

Trump’s victory has inevitably heightened concerns about the future of international order. During his first term, his administration was willing to disregard international rules and norms—particularly in the trade domain—on the grounds that they were contrary to American interests. President Trump also questioned American alliances that he felt placed a disproportionate burden on the United States and demanded that allies step up if they wanted to continue to enjoy American support. The first Trump administration was also hesitant when it came to international cooperation on such issues as human rights and the environment.

In anticipation of Trump’s return to the White House, there has been preemptive action to “Trump-proof” various forms of international cooperation. For example, Japan, South Korea, and the United States institutionalized trilateral economic and security cooperation in 2024. American President Joe Biden also committed the United States to provide climate-related funding to the United Nations Framework Convention on Climate Change at the recent twenty-ninth Conference of the Parties (COP29).

Nevertheless, there are doubts as to whether such agreements will restrain Trump’s actions once he is inaugurated once again.

Based on Trump’s campaign rhetoric and statements by potential members of his cabinet, a second Trump administration will be even more hostile toward China than the first. Trump will differentiate himself further from the Biden administration on issues of economic security. While President Biden did implement semiconductor export controls, President Trump will strengthen controls on a wider range of technologies, including biotechnology. This may not solely be focused on China, either—during the recent presidential campaign Trump went as far as accusing Taiwan of “stealing” semiconductor technology from the United States and raising the possibility of imposing tariffs on Taiwan.

Indeed, Trump repetitively identified the use of tariffs as a diplomatic tool during his campaign. For example, he floated the possibility of a flat 60% tariff on Chinese goods. Tariffs, however, in the Trump worldview are not solely to protect or develop American industries, but can be wielded as a punitive tool to compel countries to act in line with American interests more broadly. For example, he said he would impose a 200% tariff if China were to invade Taiwan even as he avoided staking out a strong supportive stance for Taiwan. This suggests that Trump is strongly aware that the use of tariffs can force other countries to bear substantial costs, although he seems to lack awareness that it would ultimately be the American consumer paying the bill due to increased consumer costs.

The Impact on Japan of Tariffs on Mexican Goods

How might the imposition of tariffs affect bilateral US-Japan economic relations? Trump’s tariffs would be applied to items imported into the United States, meaning the larger the volume of bilateral trade with America, the greater the potential impact of tariff policies will be.

Japan’s trade volume with the United States is $151.6 billion, which only amounts to a third or less of the amounts of the European Union ($561.1 billion), Mexico ($480 billion), or China ($448 billion). Compared to other parts of the world, Japan’s exposure therefore is neither large nor small. This smaller volume is the result of Japanese companies having incrementally moved their production bases to the United States following US-Japan trade frictions in the 1980s to rebalance the terms of trade. On the face of it, a broad-based tariff policy is therefore unlikely to substantially impact Japanese companies that are already producing and selling goods in the United States.

However, Trump’s policies toward Mexico could be more problematic for Japan. With the passage of the North American Free Trade Agreement in the 1990s, tariffs between the United States and Mexico have been virtually zero. Japanese companies took advantage of this, along with the lower costs of production and labor in Mexico, to supply their American factories with parts and materials. This enabled Japanese automobile manufacturers, for example, to produce competitively priced products for direct sale to the American market.

During his first administration, Trump made significant changes to the trade relationship with Mexico when he negotiated the US-Mexico-Canada Agreement to replace NAFTA. The USMCA is up for review in 2026, during his second term. Trump has often argued that as long as illegal migrants, drugs, and criminal elements continue to cross into the United States from Mexico, he reserves the right to impose a 25% tariff on Mexican goods. It is unclear whether he will actually take such a measure, but his frequent emphasis on these issues suggests that they are a more pressing priority for the Trump administration than ensuring that free-flowing trade continues across the southern border.

If the Trump administration were to build a tariff “wall” with Mexico, it would be a major blow to Japanese companies manufacturing in the United States. Furthermore, it would cool Japanese investment into the market where Japan has developed into the largest foreign investor. This cannot be taken for granted in the future, however, should a more extreme approach to tariff imposition be adopted during the second Trump administration.

The risk for the Japanese economy therefore arises not only from bilateral tariff issues. How Trump impacts trading relations between the three North American countries will alter US-Japan relations as well as the global economic order.

The “Weak Ishiba, Strong Trump” Implications

As Trump places American interests above international rules and norms, conducting diplomacy with the United States will become fraught. The US president-elect likes to emphasize his negotiating skills, developed during his time in the real estate business, as his strength. Those leaders seeking to influence the president will have to adopt a consistent and strong position themselves before engaging with Trump.

Trump’s domestic position is relatively stronger compared to his first administration. Not only is he in the White House, but Congress is under the control of Republicans and the Supreme Court has a strong conservative majority. Trump will be able to approach negotiations with a great deal of discretion and confidence that he will be able to implement his promises—or threats.

In Japan, however, the ruling parties lost their majority in the October general election, and now the Liberal Democratic Party and Kōmeito coalition rule as a minority government. Furthermore, Prime Minister Ishiba Shigeru has long been an outsider in the LDP and has a relatively weak internal support base. Therefore, Ishiba is vulnerable to attacks from both inside and outside the ruling coalition.

This contrasts with the first term of the Trump administration, when Prime Minister Abe Shinzō was in power. Not only did Abe control a majority in both houses of the Diet, but he was also backed by the strongest faction in the LDP and generally could generally count on party unity when implementing government policy. This is not a luxury currently available to Ishiba, and it will hamper his ability to confidently negotiate with Trump.

Moreover, unlike his first term, Trump is much better prepared for his second term in office. He has already begun nominating appointees for cabinet positions at a pace much faster than most incoming presidents. He has also begun diplomatic activities related to his future policy priorities, such as meeting with NATO Secretary General Mark Rutte. Trump is even demonstrating leadership in policy areas where he depended on Republican Party heavyweights and advisers during his first term.

Clearly, Trump is in a much stronger domestic position in the United States than Ishiba is in Japan. This in turn means Trump is likely to have the upper hand in bilateral negotiations—and it is far less likely that he will take Japan’s interests into consideration. Quite possibly, he will push for policies that put American interests first even at the expense of the US-Japan relationship. It is an open question how Prime Minister Ishiba can stand up for Japan’s interests when facing the White House in the years to come.

Japan will need to prepare for various economic security contingencies. Trump will almost certainly push Tokyo to increase pressure on Beijing by participating in tighter restrictions on its own exports to China. If Japan does not comply, or if other tensions arise, Trump may also use economic security policy tools, such as the Committee on Foreign Investment in the United States, to treat Japan as a hostile nation. Japan has already had a taste of this with Nippon Steel’s failed acquisition of US Steel.

Tokyo may have to start treating the United States as a geoeconomic risk, much in the same way it does China. It is therefore time for Japan to start thinking about the role of the United States in its economic security policy to avoid such geoeconomic risks now and into the future.

(Originally published in Japanese. Banner photo: Japanese Prime Minister Ishiba Shigeru, left, and incoming US President Donald Trump. © Reuters.)