President Trump's new trade offensive is forcing Japan and South Korea to pay a high price. With little room for negotiation, the two countries have been forced to commit to billions of dollars in investments to gain tariff reductions.

These demands are based on Japan and South Korea being at the top of the long-term trade surplus with the United States.

Japan and South Korea reached a trade agreement in July in exchange for investment commitments. However, the framework was complex, and disputes over the scale, scope, and structure of the investments continued in the following months.

Japan has almost reached an investment framework, and the focus is now shifting to specific projects that need to be considered. Meanwhile, South Korea continues to resist American demands, citing the large proposed investment size and concerns about the appreciation of the Korean won.

What did Japan agree to?

Japan has agreed to invest up to $55 billion (about 8.355 trillion yen) through government funds to the United States.

According to the memorandum signed by the two countries in early September, if Japan does not fund the investment projects approved by President Trump within 45 days, the U.S. may consider raising tariffs again. Trump will choose the projects based on recommendations from the investment committee led by Commerce Secretary Rattner.

The investment committee will collect opinions from Japanese side through separate advisory groups. The deadline for implementing the project is January 19, 2029, when Trump's presidential term ends.

The U.S. said it has no intention of raising tariffs unless Japan genuinely implements the agreement and fails to provide funding. On the other hand, if they don't provide funding, tariffs may be raised again.

Under initial conditions, the final distribution of investment profits is 90% in the U.S. and 10% in Japan.

What did South Korea agree to?

South Korea committed to investing $35 billion in the U.S., but has yet to decide how to implement it.

Before Trump's visit to South Korea, President Lee Jae-myung said he was struggling with "everything" related to major projects, such as the scale and timing of investments and the distribution of profits.

The Japan-U.S. agreement and its terms shocked South Korean government officials. Prime Minister Kim Min-seok warned that fulfilling this commitment would severely impact the South Korean economy unless the U.S. provides dollar supply through currency swaps.

Additionally, the surprise inspections of battery factories in Georgia, U.S.A. belonging to Hyundai Motor Company and LG Energy Solution, as well as the detention of hundreds of Korean workers in September, shocked South Korean society and even sparked doubts about existing U.S. investments.

Other uncertainties surrounding the agreement

Trump claimed that the agreement requires Japan and South Korea to make upfront payments, but Japanese and South Korean officials explained that the investments would take the form of loans and loan guarantees, with relatively small direct contributions.

Why did Japan and South Korea agree to such large investments?

The commitment to large-scale investments allowed the two countries to reach an agreement on a 15% tariff instead of the 25% that Trump had previously suggested. However, individual tariffs on cars and car parts remained at 25% before Trump issued an executive order.

Japan started to decline in political standing under then-Prime Minister Ishiba Shigeru, but quickly took action to negotiate lower auto tariffs. According to industry estimates, the automotive industry accounts for about 10% of Japan's GDP and around 8% of the total workforce is engaged in related industries.

What percentage of GDP is the committed investment?

For Japan, the committed investment is approximately 14% of GDP at the end of 2024. The required amount is slightly less than half of the foreign exchange reserves.

South Korea's relative burden is much heavier than Japan's. As of 2024, the committed investment amount is about 20% of GDP, roughly 80% of the foreign exchange reserves.

Japan's trade surplus with the U.S. last year was $68.5 billion, ranking seventh. Assuming the trade surplus remains unchanged, the scale of Japan's investment commitment would be about twice the total trade surplus Japan created during Trump's second term. South Korea's trade surplus with the U.S. is slightly less than Japan's, at $66 billion.

What specific projects is Japan considering?

The Japanese Ministry of Economy, Trade and Industry published a list of companies and projects interested in investing in the U.S. during Trump's visit, indicating that it has actually started moving toward investment. There are more than 20 projects, including listed companies such as SoftBank Group, Westinghouse, and Toshiba.

According to the Ministry of Economy, Trade and Industry, these companies are exploring joint ventures in areas such as energy, artificial intelligence (AI), and critical minerals.

According to Akira Akiyama, the minister in charge of the U.S. tariff negotiations, the scale of each project can range from $350 million to $10 billion, with the total potentially reaching around $40 billion.

What potential impact on the economy and financial markets?

Market analysts believe that the surge in Japanese investments in the U.S. will depress the yen exchange rate.

On the other hand, Akiyama explained that these investments mainly use dollars already held by Japan and are conducted through special accounts of the foreign exchange fund, so the impact on the foreign exchange market is minimal, if any.

Japan is already the largest investor in the U.S., and there are concerns that if new funds are injected, companies will increasingly choose to produce in the U.S. rather than export from Japan, leading to further industrialization of Japan. In response to these concerns, the government is considering countermeasures.

South Korea also has similar concerns, and the impact on the exchange rate is likely to be greater than Japan.

The Bank of Korea (central bank) acknowledged that it can supply an annual limit of $20 billion without affecting the foreign exchange market. According to media reports, South Korea insists on keeping annual investments below this level, while the U.S. is asking for more.

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