By Eric Vandenbroeck and co-workers

How Japan, and Other U.S. Allies, Can Work Around America: A Plan to Survive Trump’s Trade War

President Donald Trump’s tariffs have forced a global reckoning. For Japan and many other countries, the vulnerability that comes with relying on U.S. markets has become startlingly clear. First came tariffs on Canada, China, and Mexico. Then, in February, the administration introduced a 25 percent tariff on steel and aluminum (this week, it raised those tariffs to 50 percent). In March, it imposed a 25 percent tariff on automobiles and auto parts. And in April, Trump announced so-called reciprocal tariffs that imposed a base tariff of ten percent on imports from all countries, plus additional duties on a country-by-country basis. The country-specific tariffs were paused for 90 days, until July. Along with various tariffs targeting Canada, China, and Mexico, they are now in legal limbo after a U.S. federal court ruled last week that the president had overstepped his authority in imposing them.

For the countries affected by U.S. tariffs, the potential economic harms are far too great to simply hope that an American court will make the problem go away or that the president will change his mind. Japan, in particular, is dangerously exposed to the U.S. market—but as the fourth-largest economy in the world, with relationships across the globe, Japan also has the resources and opportunity to craft an effective multilateral strategy for coping with Washington’s obstructionist approach to trade.

If all of Trump’s proposed measures enter force, Japan faces a 25 percent tariff on automobiles and auto parts, a 50 percent tariff on steel and aluminum, and a 24 percent tariff on all other goods it exports to the United States. Japan’s economy depends on exports. The United States is its second-largest market, after China (including Hong Kong), accounting for roughly 20 percent of all exports, and steep tariffs would make many Japanese goods too expensive for American consumers. Tariffs on automobiles and auto parts are especially damaging, as these goods represent more than a third of Japan’s exports to the United States. Japan’s top 1,000 companies expect a seven percent drop in their total profits between April 2025 and March 2026, after making continuous gains since 2020.

Even if Tokyo can negotiate with Trump to secure tariff exemptions, significant harm has already been done. Many countries, including Japan, have lost confidence in the long-term openness of the U.S. market. It has become too risky to rely too much on trade with the United States. The erosion of multilateral institutions under both Trump administrations has slowed the expansion of trade and weakened the enforcement of trade rules for all. And the effort to build secure supply chains for critical minerals and clean energy products, reducing dependence on China for these vital goods and inputs, has grown more challenging as the United States puts up trade barriers.

Japan and other countries in a similar position now need to take action that does not depend on working with the United States. Trump may be hostile to trade, but that does not change the fundamental economic reality that trade fuels growth. Nor needs to reduce critical dependencies disappeared. To offset the damage of Trump’s tariffs, Japan will have to expand its trade relationships and collaborate with other countries to strengthen the global trade system with or without the United States, at least for now.

At a container terminal in Tokyo, Japan.

 

Filling the Gap

A key part of Japan’s strategy must be to make up for a potentially substantial loss of exports to the U.S. market by increasing trade elsewhere. Outreach efforts can lay the groundwork. The Ministry of Economy, Trade and Industry and the Japan External Trade Organization must organize more business networking events, trade shows, and other trade promotion activities to help build new connections in non-U.S. markets. Sending cabinet ministers can demonstrate Japan’s commitment to develop economic relationships with countries where Japanese companies have previously had fewer ties. India, for example, and many countries across Africa, Latin America, and the Middle East represent opportunities for trade expansion, once official visits smooth the way. China must be included on the travel agenda, too. In the past few years, political disagreements have strained economic relations between Japan and China; foreign direct investment from Japan to China has been shrinking since 2021. Hosting senior Chinese leaders in Tokyo and sending senior Japanese leaders to Beijing can help rebuild warmer relations and encourage businesses in both countries to expand their ties. There are already signs of such improvement: at a high-level meeting in Beijing last week, China agreed to resume imports of Japanese marine products, which China had banned in 2023, citing concerns about the release of treated wastewater from Japan’s Fukushima nuclear power plant under the supervision of the International Atomic Energy Agency.

The next step is formalizing new and deepened trade relationships with free trade agreements. A good place to start would be to build on an existing regional deal, the Regional Comprehensive Economic Partnership Agreement (RCEP), which includes all ten members of the Association of Southeast Asian Nations plus Australia, China, Japan, New Zealand, and South Korea. The signatories to RCEP represent around 30 percent of global GDP and 30 percent of the global population. Trade liberalization under RCEP is modest compared with other free trade agreements, but multiple bilateral arrangements within it have reduced tariffs on a broad range of products, and it is the only existing framework for reducing tariffs among China, Japan, and South Korea.

The sense of alarm that the first Trump administration’s trade restrictions generated across Asia played a key role in building support for the RCEP in 2020. Today’s concerns are far greater and could drive a renewed effort to strengthen the trade agreement. The question is, how? Endless product-by-product negotiations to reduce tariffs among RCEP members will not help countries now facing severe economic harm from U.S. tariffs. To speed up the process, the signatories should start with negotiations to establish a formula for tariff reduction. RCEP already divides goods into four categories. Tariffs on some products, often those that member countries do not produce in meaningful quantities, are eliminated right away because no special interests block their removal. In another category, political considerations make it difficult to reduce tariffs—Japan’s farm lobby strongly opposes tariff reductions on rice, for instance. In the final two groups of products, tariffs will be either reduced or eliminated over an agreed timeframe.

Using this structure, RCEP countries can negotiate a formula to set more ambitious goals. They can pledge to shorten the timeframes for reducing or eliminating tariffs by a certain percentage, lower tariff reduction levels further by a certain percentage, and shift a certain percentage of products from the tariff reduction category to the tariff elimination category. These commitments would be accepted by all members and applied to them equally. If a country cannot satisfy these conditions for tariffs on a particular product, it could request an exception in exchange for concessions on other goods. Recognizing that not all RCEP signatories are starting with the same degree of openness to trade, this approach—unlike an attempt to apply a single tariff rate cut across the board—would accommodate the different political sensitivities and stages of development of member countries. Ultimately, lowering tariffs on a broad range of products will help RCEP members quickly diversify their markets and expand their trade.

Japan should also look beyond RCEP. Previously, Japan had not had highly developed trade ties in Latin America or the Middle East because of geographical distance and the lack of strong historical ties. But Trump’s tariffs could push Japan to explore these markets as it seeks opportunities to expand and diversify its trade. In particular, Tokyo should pursue trade agreements with the South American trade bloc Mercosur (composed of Argentina, Bolivia, Brazil, Paraguay, and Uruguay) and the Gulf Cooperation Council (composed of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates), both of which boast vibrant economic activity, population growth, and rising living standards, making them attractive trade partners.

 

Playing By the Rules

Another part of Japan’s strategy must be to strengthen international trade rules and institutions that have been weakened by Trump. In Trump’s first term, his administration blocked the appointment of new members to the World Trade Organization’s appellate body, which is the core of its dispute settlement process. Those seats remain unfilled. The first Trump administration also imposed tariffs on China in the name of national security, but in doing so, grossly overstretched the exceptions allowed for national security under WTO rules. When the world’s biggest economy disregards the norms of the international trade system in this way, other countries will find easy excuses for not following the same rules.

Today’s tariffs further undermine the WTO-based system. But the WTO, although imperfect, is still important. A foundational principle of the agreements undergirding the WTO is “most favored nation” status, which requires all WTO members to apply the same trade terms to all their trading partners, with some limited exceptions. Before Trump unveiled his “reciprocal tariffs” in April, according to the WTO, 80 percent of global trade was conducted under “most favored nation” terms. That figure dropped to 74 percent with Trump’s announcement, still the vast majority of global trade.

The countries that operate under WTO rules should now try to make those rules work better, even if that means working without the United States for now. The first step is to address the nonfunctional dispute settlement mechanism. Because Washington will not lift its block on appellate body appointments, other WTO members will have to agree to be bound by the decisions made through an alternative process. A new appeals system for trade disputes known as the Multi-Party Interim Appeal Arbitration Arrangement already has 56 members on board, including Canada, China, Japan, and the European Union. The larger economies—such as India, Indonesia, South Korea, and the United Kingdom—that participate, the stronger this alternative process will become.

Member countries can also create new rules within the WTO, as they have done in agreements on e-commerce and facilitating investment for development. Further discussions should explore additional rules to balance climate, development, and trade priorities, such as a code of conduct for carbon border adjustment mechanisms. The problem, however, is that these processes are time-consuming and incremental, and that, in the end, formalizing WTO rules requires consensus. Dozens of WTO members have signed on to the e-commerce and investment facilitation agreements, and in both cases, a few countries, including India and South Africa, have blocked that process. It may not be possible to convince these countries to accept new agreements, even if accepting them does not require that they participate in them.

Nor is it possible to develop an alternative system to the WTO from scratch within any reasonable timeframe. But an existing trade pact can complement its functions: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) can provide a framework for ambitious trade liberalization and rigorous rules, covering a broad swath of the world. The CPTPP is the successor agreement to the Trans-Pacific Partnership, a trade agreement signed in 2016 by 12 countries—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The United States never ratified the agreement, and Trump formally withdrew the country in 2017. In 2018, the 11 remaining members, led by Japanese Prime Minister Shinzo Abe, revived the deal as CPTPP. Even without the United States, CPTPP members represent a combined 14 percent of global GDP. The pact significantly reduces barriers to trade, including tariffs, and enforces rules governing intellectual property, government procurement, investment, and more. It also has a process for settling trade disputes among its members. In a sense, CPTPP is an alternate WTO, or a “super WTO”—a much smaller club, but with deeper trade liberalization and higher regulatory standards.

CPTPP is already expanding beyond the Pacific region, adding the United Kingdom in 2024. Countries in Asia, such as Indonesia, the Philippines, South Korea, and Thailand, are natural candidates and should be encouraged to participate. They will have to satisfy entry criteria and be accepted by the current members, which should be achievable. To serve as a global trade framework, however, CPTPP will need to expand further, particularly to EU and non-EU countries in Europe, such as Norway and Switzerland, all of which should be able to qualify for entry. The EU itself is a rule-making institution, which may make its members wary of joining CPTPP. But the benefits of participating in a much larger trade bloc that supplements the weakened WTO system should outweigh any downside for Europe of negotiating trade rules with CPTPP members.

 

Keeping the Door Open

Bold but pragmatic measures are necessary to strengthen the multilateral trading system amid the latest U.S. efforts to undermine it. No country can achieve economic security alone, not even the United States; resilient supply chains depend on having reliable partners to trade with. Trade is the best way to avoid overdependence on any one country, whether that is dependence on exports to the United States that may impose steep tariffs at any time or dependence on China for supplies of critical minerals and clean energy products.

Trump’s tariffs complicate international efforts to reduce this dependence on China. In recent years, the United States has been leading multilateral efforts to develop alternative supply chains for critical minerals and clean energy technologies. But tariffs will erect walls that break those links. If Washington will not be a reliable partner, other countries will need to build these supply chains among themselves. Japan has already been working with Australia and India to source rare earths. But Tokyo should be doing more. Japan’s friends in Asia, as well as Canada and countries across Africa, Europe, Latin America, and the Middle East, could all play a role in developing critical mineral and clean energy supply chains.

All of these measures to strengthen global trade rules and shore up critical supply chains would have a much greater effect if the United States were to join. That door should remain wide open, but merely hoping for the United States to change its thinking is not a strategy. Japan and like-minded countries need to mitigate the damage of U.S. tariffs—current and potential—and in the process find ways to expand trade and boost their economic security while augmenting the international trade system.

If the rest of the world demonstrates that it can cooperate and prosper without the United States, future American leaders and the American people may come to see the benefits of participating in global initiatives once again. That outcome would be good for Japan, good for the world, and even good for the United States.

 

 

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