Japan’s exports have been falling throughout 2019, declining for seven consecutive months. The most recent figures, released Thursday, show a 6.8 percent drop in exports in June (compared to the year before). For a country dependent on external markets for economic growth and well-being, these numbers are harrowing, and it is imperative that politicians and business strategists understand the causes of this decline and what they can do about it.
Sadly, the answer is not much. Japan’s economy — like many others — is being battered by events beyond its control, chief among them the U.S.-China trade war and the simultaneous slowdown in China, the world’s second-largest economy. While there is more at work than the current discord, leading trade nations, Japan among them, must redouble efforts to stabilize and shore up the world trade system.
Japanese exports to China fell 10.1 percent in June (again, compared to a year ago), the fourth consecutive monthly decline. Hard hit were electronic components and chipmaking equipment companies: Their exports to China dropped 21.3 percent and 27.1 percent, respectively. Total exports to China declined 8.2 percent in the first half of 2019, a fall that well outpaced the deceleration of the Chinese economy overall: It posted 6.25 percent growth in the quarter from April to June, its slowest expansion in 27 years. The slowdown has rippled across Asia, with Japanese exports dropping to every other country on the continent except India.
Most economists anticipate increasing headwinds. There is no sign of a resolution of the trade war between Washington and Beijing — the two sides have not resumed talks despite the declaration of a truce at the Osaka Group of 20 meeting last month — and Japan is now embroiled in its own dispute with South Korea, with Seoul warning that it will impose sanctions on Japanese goods if Tokyo does not reverse course.
More ominous is the prospect of U.S. President Donald Trump fixing his sights on Japan. He has long insisted that Japan is an unfair trader with the United States and he has already imposed tariffs on steel and aluminum. He now threatens even more measures if Tokyo does not strike a bilateral trade deal with Washington. The most recent trade figures are likely to fuel calls for more action: Japanese exports to the U.S. rose 5.2 percent to ¥7.8 trillion in the first six months of 2019, while imports from the U.S. increased 1.7 percent to ¥4.4 trillion. In June, exports to the U.S. grew 4.8 percent, the ninth straight increase.
There are some bright spots on the horizon. The International Energy Agency forecasts a drop in oil demand (because of a slowing global economy). The IEA now anticipates oil demand in 2019 will increase by 1.1 million barrels per day (bpd), down substantially from its prediction last year of growth of 1.5 million bpd. Lower energy prices will help cushion blows caused by a decelerating economy.
In addition, the U.S. Federal Reserve has assumed a more cautious outlook, with Fed Chairman Jerome Powell signaling that he is ready to cut interest rates to sustain economic growth. In congressional testimony, he said the economy is in a “very good place” and that the Fed is prepared to do what it can to “keep it there.”
There have also been positive developments in global trade. Earlier this year, the Japan-European Union economic partnership agreement, which created the world’s largest open economic area, went into force. At the G20 summit, the EU concluded a free trade agreement with Mercosur (the association of Latin American states), after two decades of negotiations. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) went into effect at the end of 2018 and participating countries continue to ratify that deal.
Structural changes in the global trade system are vital since there is evidence that the slowdown in global trade is not the result of recent developments. Hyun Song Shin, chief economist of the Bank for International Settlements, argues for example that the expansion of global trade ran out of steam years ago, predating “the retreat into protectionism and trade conflicts in the last couple of years.” He blames changes in international finance in the aftermath of the global financial crisis that make it more difficult for companies to secure funding for trade.
The message to policymakers is clear. In addition to a quasi-Hippocratic reminder — first do no harm (i.e., do not start trade wars) — they need to clear out the underbrush that inhibits the growth of trade. While a global trade deal is ideal, it is too much to ask now. In its place, there should be emphasis on regional agreements that promote natural trade areas. Meanwhile, work must be done to fix and adapt the World Trade Organization to new challenges. This month’s trade figures are proof that there is no time to waste.
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