ANALYSIS: Japanese factories in China unfazed by U.S. tariffs

By Max Sato

TOKYO, NNA - Japanese companies producing in China have been largely insulated from recent U.S. tariffs because they manufacture mainly for the Chinese market, company officials and economists said.

“Only 1 percent of Japanese firms’ output in China is shipped to the U.S. market,” said a senior Japanese government official in charge of assessing the economy. “They are producing goods in China mostly for local consumption, which is a huge market.”

He said roughly 70 percent of output is sold locally, with most of the remaining 30 per cent going to other non-U.S. markets.

Meanwhile, those companies with exposure to the U.S. tariffs are moving U.S.-bound production out of China to existing production centers in Southeast Asia.

Leading office equipment maker Ricoh Co. is shifting production of its multifunction printers for the U.S. market to Thailand to minimize fallout from the escalating U.S.-China trade dispute. The company says it may also consider moving some production for markets other than the U.S. from Thailand to China.

Electronics manufacturer Sharp Corp. is planning to shift manufacturing of laptop computers, digital signage and multifunctional copiers destined for the U.S. out of China to avoid the tariffs.

If the U.S makes good on its threat to apply more tariffs on a wider range of Chinese goods, Sharp said it would first move production of U.S.-bound laptops to its existing factory in Taiwan, then transfer that to a new factory in Vietnam slated for completion in the second half of fiscal 2019.

These shifts are accelerating due to a variety of factors, not just the U.S.-China trade war, according to Japanese government officials and private-sector economists.

“The move from China to other countries had already been happening. The tariffs are the last push,” said Shunsuke Kobayashi, economist at Daiwa Institute of Research. “Labour costs are rising and business taxes are not cheap in China.”

Wages in China’s coastal cities have surged, and are now closer to those seen in Japan, while China’s 25-percent business tax rate is not competitive with the U.S. and other advanced economies that are cutting their rates.

The U.S.-China trade war has so far had a limited impact on lukewarm economic growth in Japan, but that will worsen if Washington imposes further sanctions on Chinese imports, economists said.

The downward pressure on Japanese growth over the last year has less to do with the trade war and more to do with declining global demand for smartphones, which has hurt Japanese exports. The lingering effects of China’s deleveraging to reduce debt and risky lending has also played a part by cooling Chinese investment in new equipment, much of which is manufactured in Japan.

“The U.S.-China trade dispute has so far had hardly any impact on Japan,” said an economist with Mitsubishi UFJ Research and Consulting, Shinichiro Kobayashi. “If anything, Chinese companies expecting the trade row to escalate have been cautious about capital investment, reducing demand for Japanese machines.”

The pressure could increase if the U.S. imposes new tariffs on $300 billion worth of Chinese exports this summer, on top of raising duties last month from 10 percent to 25 percent on $200 billion worth of goods.

But the actual impact could be relatively modest if Beijing adds fiscal and monetary stimulus as expected to ensure domestic growth does not slow significantly, economists said.

“Looking ahead, there will be a greater impact if the U.S. imposes higher tariffs as planned, because they will target smartphones, laptop computers and apparel,” which are made with Japanese machinery and electronic parts, said Kobayashi. “But stock market investors are largely optimistic that the U.S. will delay [the tariffs] or make exceptions to avoid hurting its own companies like Apple, Dell, Hewlett-Packard and Gap, all of which produce in China.”

Japan’s economy has become less reliant on exports for sustained growth, but a sharp decline in Japanese consumer spending or business investment in China would still hurt Japanese firms directly and indirectly.

The U.S. and China are still the top destinations for Japanese exports, with shipping patterns varying according to product cycles. While U.S. demand for Japanese cars remains healthy, the appetite for semiconductors and chipmaking equipment in China and other Asian economies has waned along with declining smartphone demand.

In April, Japanese exports to the U.S. rose 9.6 percent from a year earlier, the seventh straight monthly gain, while shipments to China were down 6.3 percent, the second consecutive monthly decline.

The impact of U.S. tariffs on Chinese growth so far has been modest due to the stimulus measures provided by Beijing. Growth stabilized at 6.4 percent in the first quarter, the same rate as in the fourth quarter, and Japanese analysts expect the U.S. tariffs impact to remain modest.

“The U.S.-China trade dispute could dampen spending on smartphones and automobiles in China, but the Chinese government is likely to offset the slowdown with targeted tax cuts for small businesses and households,” said Yuji Miura, senior economist at the Japan Research Institute.

To date, the trade war’s impact on the Japanese economy has occurred mostly through the slowdown in global growth. Economic growth in Japan in the first quarter of 2019 was higher than forecast, at 0.6 percent, or an annualized 2.2 percent, led by the first net-export gain in a year. But that gain was due to a sharp drop in imports.

Economists see modest but sustained Japanese growth of around 0.5 percent over the next several years, supported by improving employment conditions and spending for the 2020 Olympic Games in Tokyo.

“Until six months ago, we saw a 70 to 80 percent chance that the economy would grow at 0.8 percent in fiscal 2019 [through March 2020] on the assumption that there would be no huge external shocks, like a global slump and a sharp yen appreciation,” Mitsubishi UFJ’s Kobayashi said. “Now we see that chance is down to around 60 percent.”

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