President Donald Trump welcomes Japanese Prime Minister Shinzo Abe at the White House in Washington, June 7, 2018.

President Donald Trump's meeting Thursday with Japanese president Shinzo Abe was billed as a conversation about upcoming peace talks with North Korea.

But with steep tariffs on imports of Japanese steel and aluminum and threats of levies on Japanese cars, the topic of tense trade relations between the two countries was the elephant in the Oval Office.

The meeting with Abe comes as Trump prepares for a gathering in Quebec on Friday of the heads of state of the world's seven largest economies, including Canada, the United States, Japan, Britain, Italy, France and Germany. Officials from the European Union also attend.

Trump and Shinzo Abe agree to step up trade talks
Trump and Shinzo Abe agree to step up trade talks  

Faced with Trump's belligerent stand on imposing new tariffs to force those partners into making trade concessions, U.S. allies have begun closing ranks against him.

"We can't wage a trade war between friends," French President Emmanuel Macron told reporters after a meeting Wednesday with Canadian Prime Minister Justin Trudeau.

Macron said that while G-7 leaders will try to convince Trump to drop his unilateral approach, the remaining six members continue to be a powerful trading bloc that could survive if the United States erects trade barriers.

As part of his "America First" agenda, Trump has vowed to protect U.S. workers and businesses from what he claims is unfair international competition. In advance of the summit, the administration continued to press for trade concessions.

"He's sticking to his guns," Larry Kudlow, Trump's top economic advisor, told reporters Wednesday.

That puts Abe in a difficult spot. Since he first met with Trump, just days after the 2016 presidential election, Abe has cultivated a warm relationship with the U.S. president. The two leaders have met 10 times, sharing hamburgers and playing golf together, and spoken frequently by phone.

So far, Japan has not joined China, Canada and Mexico in retaliating against U.S. steel and aluminum tariffs. The European Union has also threatened retaliation and has promised to challenge the U.S. tariffs before the World Trade Organization.

But the White House's hard line on trade is placing a major strain on Abe's bromance with Trump, who has also denounced the Trans-Pacific Partnership. The TPP, a multilateral trade deal, had been promoted by Abe and others as a means of countering China's increasingly prominent role in the Asian Pacific economy.

Abe also faces a domestic political scandal that has weakened his popularity at home. On Monday, Japan's Finance Minister Taro Aso announced he was taking a one-year salary cut after 20 officials were penalized for tampering with documents related to a government property sale linked to Abe's wife. Abe has denied any wrongdoing by himself or his wife.

That could leave Abe with little political room to maneuver as the odd man out among U.S. trade partners striking back with countervailing tariffs. If Tokyo does impose tariffs, it has plenty of U.S. products and services to choose from.

That means the losers in any trade war with Japan would include American farmers and manufacturers for whom Japan represents a major exports market.

American exporters already face the growing headwind of rising interest rates driving up the value of the dollar, which makes U.S. products more expensive to foreign buyers. Those headwinds would grow even stronger if Japan joined the rest of the major American trade partners in adding tariffs and raising the cost of American products to Japanese consumers.

source: CNBC