Sino-US Trade War Alarms Japan

Sino-US Trade War Alarms Japan
The recent trade tensions between the U.S. and China has been escalating, with detrimental effects on Japan and other countries that trade extensively with the two. Manufacturers in Japan are rallying by moving their production out of China to factories in other regions, thereby minimizing the adverse effects of the tariffs. The United...

The recent trade tensions between the U.S. and China has been escalating, with detrimental effects on Japan and other countries that trade extensively with the two. Manufacturers in Japan are rallying by moving their production out of China to factories in other regions, thereby minimizing the adverse effects of the tariffs.

Background

The United States and China are two of the largest economies in the world. Both countries consider the other as a partner in trade and an adversary in geopolitics. However, tensions have risen as the two countries take an adversarial approach to their trade relations.

In recent months, experts have begun sounding the alarm about an impending trade war between the US and China, the two largest economies in the world. These fears solidified in March when Trump announced global import tariffs of 25% on steel and 10% on aluminium. The President cited “national security” in order to circumvent WTO commitments. Since then, tensions have escalated. The US has imposed tariffs worth over $150 billion; Beijing responded with $50 billion worth of tariffs.

IMF Managing Director Christine Lagarde warned that a trade war could have a "serious" impact and lead to "losers on both sides". "These measures… are likely to move the globe further away from an open, fair and rules-based trade system, with adverse effects for both the US economy and for trading partners," the IMF said.

In the midst of trade tensions between two economic powerhouses, other Asian countries are taking steps to mitigate the risk of escalating tensions. Asian manufacturers that are involved in the production of goods targeted by the tariffs are making efforts to move production out of China to other regions.

To read more of our China-U.S. trade tension coverage, click here and here.

Analysis

With significant tariffs levied on Chinese goods by the Trump administration, Japan and other Asian countries are finding it more economical to move their production out of Chinese factories. By manufacturing the goods in their other regions, they can avoid the tariffs and maintain their bottom line. Smaller companies are investigating the possibility of moving production as well.

In the meantime, companies are looking into ways of working around the tariffs, including routing the products made in China through another country before reaching the U.S. The full effect of the tariff on the Asian economies remains to be seen as countries adapt their production models. In addition, several manufacturers have long supply chains, making it harder to determine the effect of the tariff on specific parts of it immediately.

The reactions by the other Asian countries were taken relatively fast because manufacturers have production facilities in several countries, making it easier to move operations quickly. In some countries – like Thailand and Taiwan – the government has taken an active role and encouraged companies to avoid the tariff by moving production away from China.

Despite the various measures taken by companies to prevent being affected by the tariff, the ongoing tensions will be detrimental to countries like Japan, where the majority of the country’s exports are sent to the U.S. and China. The Japanese government has been vocal about ending the Sino-US trade war and cited it as a barrier to global growth. They have said that the tariffs will cause trade to decrease significantly, resulting in the contraction of affected economies.

The U.S. has ongoing trade tensions with other regions, like Canada and the EU as well. This adds to the burden on Asian countries that are highly dependent on exports for their economy. Additionally, there is a risk that Japan will be the next target of tariffs as the Trump administration has expressed its displeasure with its trade deficit with Japan.

Assessment

Our assessment is that the measures taken by manufacturers to limit exposure to the tariffs will prove to be unfruitful. We feel that with the U.S.’s propensity to increase trade barriers with major trade partners, moving production out of China will not be sufficient since other regions will soon be affected by tariffs by or towards the U.S. We feel that the trend towards limited global trade will have an unfavourable impact on the economies of the Asian countries. We think it will be in their best interest to explore other options, including signing agreements with China or highlighting Japan’s commitment to strong relations with the U.S.

Comments