Japanese companies collateral damage in US-EU trade war

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In the wake of the recent melodrama at the Group of Seven meeting in Canada, US President Donald Trump’s attitude on tariffs appears to have only hardened. In response, Canada and the European Union have called for retaliatory tariffs, further raising the specter of a trade war.

Trump is targeting countries and industries he views as undermining Washington’s trade balance, touting his “Made in America” campaign in the process. Already impulsive, Trump lacks dissenting voices to temper his knee-jerk responses, and Rex Tillerson’s exit from the administration has removed what would have been a key anti-tariff voice at the top echelons of the Trump White House.

No one wins in a trade war, and while companies and consumers on both sides of the Atlantic will suffer, other players have been caught up in the fray as well. One such victim of collateral damage will be Japan, as its companies own a range of US brands that will now be the targets of tariffs, boycotts and other retaliatory measures.

While the goods and services of Japanese-owned US firms may be made in America, any geopolitical fallout will hurt the bottom line of boards in Tokyo and Osaka, not Ohio or Tennessee. Speaking on the impact of a US-EU trade war, Barclays notes that “most at risk from [a trade-war escalation] are Asian economies, particularly those deeply intertwined in global value chains.”

Having riled Canada by adopting aluminum tariffs (and an uncouth manner at the G7), Washington is now faced with a trans-Atlantic anti-Trump bloc mobilizing to counter the president’s bellicose attitude. Both Canada and the EU have listed a range of products that will be subject to tariffs, primarily foodstuffs, textiles, luxury goods and automobiles. Many of the items on European and Canadian tariff lists constitute not only important US exports, they also have important political connotations.

This careful selection of items subject to tariffs by the EU not only hurts US firms, but also puts political pressure on key Republicans, who will face anger from constituents forced to bear the brunt of these targeted reprisals. For instance, by slapping tariffs on motorcycle maker Harley-Davidson, EU legislators are putting pressure on the state of Wisconsin, which Speaker of the House Paul Ryan represents in Congress.

Similarly, Canadian magazine Maclean’s is advising patriotic Canadian consumers to do the same, urging them to boycott American dairy products, another key Wisconsin export.

Various flagship US liquor brands have also found themselves in the EU’s and Canada’s crosshairs, with various whiskey and bourbon labels set to suffer sales slumps. Why whiskey, you ask? Because Kentucky, the main seat of production, also happens to be the home state of Mitch McConnell, the Republican Senate majority leader.

This kind of targeted pressure on key Republicans makes good sense to Canadian and European legislators, but unfortunately Japanese companies are being caught in the middle.

This is because iconic Kentucky spirit brands Maker’s Mark and Jim Beam are actually owned by Japanese beverage giant Suntory, while Four Roses bourbon is part of the portfolio of Japan’s Kirin Brewing Company. Suntory is also likely to feel the pinch from efforts to target oranges and orange juice from Florida – a volatile swing state – with its signature product turning up in Orangina, for which Suntory holds the European and Asian licenses.

What ‘Made in America’ actually means

Along with Harley-Davidson and bourbon, other iconic symbols of Americana are also coming under fire, such as textile imports, notably the United States’ famous Levi’s. Retaliatory tariffs on American jeans, clothing and footwear only drag Japanese companies further into the fray, with Fast Retailing owning 80% of Los Angeles-based J Brand jeans, as well 100% of contemporary US fashion firm Theory.

Then you have ABC-Mart’s ownership of White’s Boots and LaCrosse Footwear, as well as Velvet by Graham & Spencer, another Los Angeles fashion company, which was acquired by Adastria in 2017.

Higher-ticket items such as cosmetics are also in the sights of European regulators, which in turn means bad news for companies such as Shiseido and Sumitomo, both of which own US manufacturers of cosmetics materials.

Sumitomo’s New Jersey-based Presperse produces cosmetic elements for a range of products sold both in the United States and internationally, while Shiseido owns (since 2016) Houston-based Gurwitch Products, which in turn supplies various brands including Laura Mercier Cosmetics, a major US player in beauty and skincare.

Tariffs on US metals production will also add further woes to companies such as Sumitomo, which owns Arkansas Steel Associates, as will EU restrictions on US pleasure-craft exports, a move that will hurt Japanese outboard-motor producers such as Honda Marine, Suzuki Outboards and Tohatsu.

Undoubtedly, the most prominent Japanese victim of any trade rancor will be the slate of Japanese automobile manufacturers who produce vehicles for export in the United States. Robust investment by Japanese companies in US production capacity has seen the likes of Toyota, Honda and Nissan greatly expand their manufacturing presence in the United States.

By way of example, in recent years Toyota has sought to turn its North American operations into a global export hub for worldwide deliveries, and in 2013 Honda became a net exporter  – meaning the company exported more US-made cars than it imported from Japan.

Overall, Japanese manufacturers exported 472,000 cars and 130,000 trucks from the United States in 2015. Production has only increased, with US-made Japanese cars playing an important role in the approximately 256,000 vehicles exported by US companies to the EU27 in 2017 alone. Various American-made Japanese models have found export success overseas, such as sales of Indiana-made Toyota Highlanders to Eastern Europe.

The deterioration in relations between Washington and the EU puts the multibillion-dollar investments by Japanese auto companies under undue pressure, as they will face the same hostile tariffs as domestic manufacturers such as Ford or General Motors. Trump’s unpredictability in turn lends US trade policy an equal share of uncertainty, something Japanese companies have recognized as a key risk to their business plans, with Toyota managing officer Tetsuya Otake lamenting in 2017 that “it’s extremely difficult at this point to forecast the impact of the Trump administration.”

As Trump continues to carve his own path on the world stage, he is angering many traditional allies in the process: The fact that the powers of the Western world are engaging in a trade war with one another speaks volumes. In the midst of this debacle, third parties like Japan that own US companies are finding themselves in the firing line as their US operations are caught in the crossfire.

The realities of our globalized world means that “Made in America” does not necessarily mean “made by Americans.”

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