Trade Wars and Sanctions: The Sino-American Confrontation and Japan Part 2 Presenter: Hiromi Murakami, Senior fellow at Economic Strategy Institute and Adjunct Professor at Temple University Japan Campus (TUJ)

1. CHINA-US TRADE WAR
~ HOW JAPAN WILLRESPOND?
Hiromi Murakami

2. Pushing down the world economy
Source: IMF July 2019 estimate,
( ) adjustment from April 2019
• China – 2nd Q the lowest
growth term since 1992
• US economy – estimate
up 0.3 point from 4/2019)
• Germany 2nd Q negative,
heading to recession?
• Japan – 2nd Q plus, but
affecting export and
investment
• Korea – 27% depending
exports to China
Growth % 2019 2020
US 2.6 (0.3) 1.9 (0.0)
Euro area 1.3 (0.0) 1.6 (0.1)
Japan 0.9 (▲0.1) 0.4 (▲0.1)
China 6.2 (▲0.1) 6.0 (▲0.1)
World
economy
3.2 (▲0.1) 3.5 (▲0.1)
World
trade
2.4 (▲0.9) 3.7 (▲0.2)

3. German & Korean >> Japanese dependency
on export (% GDP)
Source: world bank

4. The most affected are high-tech industries
22.4
1.7
29.5
16.1
2.4
19 20
-2.5
-42.8
-25.6
-16.2
16.3
0.9
-13.1
-50
-40
-30
-20
-10
0
10
20
30
40
China ROK Taiwan Thailand Philippines Vietnam Japan
Profit of ROK and Taiwan firms: hardest hit by US-
China Trade war (Nikkei, % change from previous year)
2018 first half 2019 first half

5. Global supply chain – impact on values added
is limited (Source: OECD 2015, Int’l Trade administration)
Japan, US
Asian
NIEs, etc.
• Export
$ 85.6
billion
China
• Exports
$ 489 billion
US market
$ 85.6 b +
$ 403.5b
(China part)
ROK $10.3b (2.1%)
US $9.6 b (2%)
Japan $8.3 b (1.7%)
…
• Japanese contribution to
Chinese exports to the US =
1.7% of total $489 billion
• In case of PCs, game
equipment, smartphones
 30% of inputs are from J
and other nations
Affecting to parts makers
• Chinese export to US has
declined 10%, US exports to
China also has declined 20%
compared to 2018

6. Global supply chain
~ originating locations no longer matter so much
• Japanese firms in the Philippines are exporting parts to
ROK; ROK moves productions in Vietnam; now P  V
Japan
Philippines
ROK
Vietnam
Thailand

7. Uncertainty drives J Investment down
(Source: MOF seasonally adjusted, excluding insurance/financial industry)
2018.4-6 2018.7-9 2018.10-12 2019.1-3 2019.4-6
Overall 6.0 ▲ 3.1 2.6 0.8 1.5
manufacturing 11.5 ▲ 8.0 8.3 ▲ 2.0 ▲ 4.3
Non-
manufacturing
3.0 ▲ 0.3 ▲ 0.5 2.5 4.7
J manufacturing firms in particular have reduced investment as they
saw uncertainty from US-China trade war.

8. Bigger concern is Global economic plunge
~ Lehman shock prolonged damage on J economy
(source: MOF)
Japanese exports plunged Yen substantially appreciated

9. J firms’ Response: Productions have
already been moving out from China
• Labor cost surge in Chinese coastal cities
• 25% business tax rate too high
• Political Risk

10. Triggered by Political risk? Japanese FDI
already shifting to SE Asia (Source: Jetro , US $ million)
△ 2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Thailand
Indonesia
Malaysia
Philippines
Vietnam
China
Nationalizing Senkaku
China’s Anti-Japan campaign

11. What is happening is Chinese productions
shifting to SE Asia
0
0.5
1
1.5
2
2.5
3
2000-2017 2018 2019
Chinese FDI (US$ billion)
Source: Japan Research Institute
Vietnam Indonesia

12. US deficit is structural
- While Chinese export to the US declines, other regions’
export to the US increases. As long as consumption-led
growth structure continues, deficit continues.
US deficit increased (US$ million) Rising Brazilian exports
to China and the US
0
10000
20000
30000
40000
50000
60000
70000
China
US

13. A hegemonic war - 5G War started
• US losing 5G war?:
• National defense authorization act pressures US allies
to conform with the rule  Japan & Australia agreed to
exclude Huawei from gov’t procurement
• Real Challenge?:
Large part of Global 5G infrastructure, including private
sector, is already planned and it will be difficult to
exclude Huawei products.
No real competitors to replace Huawei products

14. US – China multi-front war
1) Technology front
・Strengthen export control for US technology
・ National defense authorization act (Huawei, ZTE)
2) Security front
・Taiwan Travel Act – enabled exchange of gov’t officials
・Excluding China from Rimpac, US-led maritime warfare exercise
・Asia Reassurance and Initiative Act (Taiwan and strengthen ties
with Asian nations)
・Operation Freedom of Navigation (South China sea)
・The OPIC, the USG development finance institution to advance
foreign policy and national security priorities
3) Investment/Currency
・Strengthen CFIUS review process
・Designating China as a currency-manipulating nation
14

15. What is coming?
- More waves of protectionism
 old economies (Agriculture, materials, chemical,
machines), and new economies including IT
- More quotas, higher tariffs, subsidies for domestic
industries
- G20, APEC, not functioning properly
- Issues of Taiwan, North Korea, exacerbating trade friction
may trigger severe US-China confrontation

16. Japan’s challenges
• Exacerbating US-China trade friction
Should Japan follow the US?
• Chinese Economic plunge and/or Slowing down of
Global Economy China’s production growth (July) down to
the level of post Lehman shock, unemployment is rising
• Dealing with the US demand
National defense authorization act & Huawei
US-Japan bilateral trade vs. TPP
• Regional Security Concerns
US pays no attention to DPRK short-range missiles
Worsening of ROK-Japanese relations
Hong Kong escalation & Taiwan issue