3 - The US–China Trade War: Implications for Japan’s Global Value Chains

Summary

The US-China trade war has a major impact on third countries. Using unique micro data from Japan, evidence is provided of the impact of the trade war on Japanese companies and their supply chains. First, it is found that tariffs and geopolitical risks in the USA and China are important factors affecting business plans of Japanese companies. Importantly, the share of Japanese companies reporting that tariffs and geopolitical risks affect the degree of uncertainty about their business plans increased significantly from 2017 to 2020. Second, Japanese affiliates in China with higher exposure to the North America-China trade saw a significant decline in sales and their parent firms had a drop in stock prices after the trade war. In addition, a recent firm survey shows that since the escalation of the Covid-19 pandemic, Japanese companies engaging in importing/exporting or having production bases in China tend to have higher subjective uncertainty over their future sales. These results suggest that the shocks of the trade war and the Covid-19 pandemic propagate across borders through global supply chains. Diversification of sourcing and sales may increase the resilience of supply chains.