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Japanese firms face tough choices as U.S.-China trade war drags on

by Cory Baird

Staff Writer

Many Japanese businesses caught in the crossfire of the U.S.-China trade war are facing an unsavory dilemma: Either make massive changes to how their products are assembled or bide their time until a compromise between the world’s two largest economies is reached.

While many businesses have chosen the latter strategy, the U.S. decision Thursday to impose a 25 percent tariff on an additional $16 billion in Chinese exports — bringing the total levied by each side in excess of $100 billion — may continue to push businesses operating in China toward a more drastic route.

“If tariffs are instituted for a long period of time, some companies will have to make the management decision to move their manufacturing bases out of China,” said Hiroshi Kubotani, a senior economist at Nippon Life Insurance Research Institute.

In the meantime, Kubotani explained that companies may still wish to buy time by concocting other workarounds. For example, routing China-produced goods through other countries before shipping them to the U.S.

But no matter the next move, to some extent, the pain accompanying the trade war between Japan’s two largest trading partners is on the verge of rearing its ugly head, especially at small businesses, Kubotani said.

Japanese companies exported around ¥30 trillion ($300 billion) worth of goods to China and the U.S. in 2017, according to the Japan Foreign Trade Council.

And with the growing list of U.S. tariffs, which now target such allies as the European Union and Canada, even those not directly in the crosshairs may find themselves taking collateral damage as the tariffs weigh more broadly on global demand.

In a report released Thursday, Capital Economics noted “there are already signs that the prospect of a global trade war is weighing on external demand (for Japanese exports).”

While companies have so far remained mum about how to navigate the increasingly stormy trade waters, many large ones have deep institutional experience in shifting supply chains on a temporary basis.

“We will consider and respond to tariffs using all available options, including pushing costs down or changing procurement routes” said a spokesperson for Daikin Industries Ltd., a conglomerate whose chemical products may be hurt by Thursday’s new levies.

Others, however, may face difficulty simply coming to terms with how the latest round of tariffs will impact their bottom lines.

“Because our supply chain is long it is difficult to tell the effects of the tariffs at the moment,” said a spokesperson for petrochemicals giant Showa Denko K.K. “Any negative effects from tariffs take a long time to recover from. Thus we hope that the issue can be resolved soon.”

The tariffs were imposed by the U.S. Trade Representative to “address unfair Chinese economic practices and create a level playing field that will give all Americans a better chance to succeed.”

But many mainstream economists and other businesses have been highly critical of the Trump administration’s trade policies and say they could cause unintended consequences.

Yoko Takeda, chief economist at Mitsubishi Research Institute, said the latest tariff hikes threaten to drag down the global economy in more indirect ways as firms might decide to scale back investment in the uncertain business environment.Takeda said she thinks there is a chance that the tariffs could take a bite out of business investment in Japan as soon as next year.