The Implications of the China-US Trade War Given the Growing Importance of Japanese Subsidiaries to Japanese MNCs

The latest Japanese Ministry of Economy, Trade, and Industry (METI) Statistical Survey on Japanese overseas subsidiaries published on September 26 revealed their sales, facility and equipment investment, and employment all achieved significantly high growth. Sales growth in the second quarter of 2018 versus the same period in 2017 was 7.3 percent year-over-year (YOY), the ninth consecutive period of positive growth. This growth has been mainly led by the subsidiaries of transportation equipment firms in the Association of Southeast Asian Nations (ASEAN) and China. Facility and equipment investment growth during the same period was 41.5 percent YOY, the second consecutive period of positive growth, mainly led by the subsidiaries of transportation equipment firms in North America, ASEAN and China. Employment growth was 1.7 percent YOY, the seventh consecutive period of positive growth, driven by subsidiaries in India and ASEAN. This strong performance means Japanese multinational corporations (MNCs)’ subsidiaries overseas business activities have become critical for their overall business performance. Given the China-United States (US) trade war affects the global supply chain involving those subsidiaries, this will adversely affect the performance of Japanese MNCs. More specifically, US enhanced tariffs will apply to the exports of Japanese subsidiaries’ in China which means they will have to cease production in China, shutter their facilities, lay-off workers, and move operations to another country or even back to Japan. As the numbers above show, Japanese subsidiaries’ business has been a growing part of Japanese MNCs’ overall business. As such, the loss of their contribution will be enormously costly. Assuming the China-US trade war is derivative of the struggle for global hegemony between the two superpowers, it likely will persist for a while imposing a structurally high cost on Japanese MNEs. We need to bear this in mind in thinking about the implications of the trade war.