“I see, this is more than just posturing.”

Today China, tomorrow Mexico and Canada, next the EU. Japan’s turn isn’t far off either. Countries, products—it’s all on the table. And day after day, “tariffs” dominate the headlines. Of course, companies in trade partner countries take a hit from tariffs. But so do US importers that receive those goods, passing them on down the chain. No one walks away unscathed. Someone’s going to end up shouldering costs that weren’t necessary until now—that much seems clear. And the general prediction seems to be that this will ultimately lead to rising inflation rates.

Let’s think about this for a moment. For example, if a 25% tariff is imposed on a Japanese car that was exported wholesale for $30,000, the tariff alone will be $7,500 (let’s place aside the fact for now that a 2.5% tariff has been imposed up until now). I don’t know the exact figure, but let’s say the retail price is roughly double. If the full amount is passed on, that would mean a 12.5% price increase—at current exchange rates, that’s an extra million yen or more.

At that point, US consumers will change their behavior. They might turn to the no-tariff option—purchasing domestically produced cars. But people have preferences, and price alone isn’t what drives most buying decisions. Also, even US-made cars won’t escape unharmed, as steel and aluminum already face 25% additional tariffs.

Looking at these factors, we get a good sense of how US consumers are likely to respond when it comes to cars: they’ll put off buying a new one. “I was thinking of trading my car in, but maybe I’ll stick with it a little longer.”—that kind of thinking. A shift like this in the massive auto industry would likely dampen domestic consumption in the US.

This will not be isolated to the automotive sector, either. If the US continues to impose tariffs on imports from trading partners across various industries, we’re bound to see these kinds of disruptions popping up elsewhere. The general effect of such disruptions—and we’ve seen this pattern before—is that they drive inflation upward while forcing consumers to tighten their purse strings. So, even an economics novice like me can see how this could lead to weaker consumption and a broader economic downturn.

One can’t help but wonder: why? President Trump aside, the core of the administration is stacked with capable people who bring deep experience to the table—Treasury Secretary Bessent among them. And yet, they continue pressing forward with this tariff-driven approach to correcting trade imbalances, seemingly unfazed by—perhaps even indifferent to—the mounting pushback from nations across the globe. Why would they pursue policies that risk dragging the economy down?

Apparently, it’s all part of a larger “structural reform.” The US has, throughout the postwar era, not only championed the international free trade system but also played a central role as the standard-bearer of the liberal order. Yet there seems to be this growing preoccupation with the scale of the burden they carry and the imbalance with other countries. They now appear determined to reshape that framework at a fundamental level. This isn’t just posturing. The prevailing stance within the current administration seems to be one of genuine resolve—to press ahead with these initiatives, even if it means accepting some degree of economic slowdown.
It’s not just about correcting the trade deficit through tariffs. They’re also signaling an aggressive push to rein in the fiscal deficit. Elon Musk is heading up the newly created Department of Government Efficiency (DOGE), tasked with making major spending cuts. So perhaps what we’re really witnessing here is structural reform.

I can’t say whether the structural reform the Trump administration seems to be aiming for is the right one. And that’s not what I’m here to judge.

Let’s return to the automobile industry example mentioned above. For Japanese automakers, a 25% tariff hike would deal a serious blow to their business performance. That might push them toward a “local production for local consumption” model—manufacturing in the US what they intend to sell in the US. However, it would take considerable time to build or expand factories, hire workers, and establish a supply chain that covers procurement, production, and distribution. A system that took years to refine for optimal performance won’t shift easily, and reaching the next point of balance will take just as long.

Now, to my main point. Structural reform is a long process, and the pain always precedes the payoff. Only after enduring, withstanding, and persevering through that pain can reform truly be achieved. Perhaps the real test for the Trump administration will be whether the American people can bear that hardship.

Raising tariffs across the board would drive up inflation and drag down consumption. Add in the chill to consumer sentiment, and the economy is almost certain to slide into recession territory. Prices continue to rise, and if things take a turn for the worse, the markets could slide too. And all of this is unfolding with next fall’s midterm elections on the horizon. Even then, will a majority of Americans still be shouting, “Go Trump!”? Losing the fall election would render Trump a lame duck, derail the structural reform, and bring him to the doorstep of a presidential election just two years later. The trillions in investment by figures like SoftBank’s Mr. Son and Taiwan’s TSMC will take time to bear fruit. Likewise, any contribution to US jobs and industry from Japanese automakers shifting production from Mexico or Canada to the US likely won’t materialize until sometime after the next presidential election, at the earliest.

In a democracy, decisions are made by majority rule, and the majority of the people instinctively resist immediate hardship. The effects of structural reform take time to surface, but the pain comes immediately. And as I always say, the “short term” and the “longer term” are constantly at odds with each other. It seems fair to say that structural reform is a high-difficulty endeavor.

Related reading
CEO Column_The “short term” and the “longer term” are constantly at odds with each other (first half) 2021/03/01

CEO Column_The “short term” and the “longer term” are constantly at odds with each other (second half) 2021/04/01

Hirotaka Shimizu
Chairman and CEO
Kamakura Shinsho, Ltd.

Image: Hirotaka Shimizu / Morning Scenery