The impact of the US-China trade war on Japanese multinational corporations

Chang Sun, Zhigang Tao, Hongjie Yuan, Hongyong Zhang 03 November 2019



The trade war between the US and China has had widespread impacts on both parties. In the US, both consumers and producers have suffered welfare losses as prices of intermediate and final goods have increased (Amiti et al. 2019, Fajgelbaum et al. 2019). US and Chinese firms that are dependent on US-China trade have had lower stock returns (Huang et al. 2018). Investments have been diverted from China to other south-east Asian countries, including Vietnam (Casselman 2019). 

The nature of trade and multinational production linkages across countries means the impact has been felt far beyond these two countries. In Japan, the world’s third largest economy and one of the most important trading partners of both the US and China, firms have been negatively affected by the trade war. The impact on Japan’s multinational corporations (MNCs) illustrates how the trade war's effects ripple along the global value chain. 

We have assessed the impact of the US-China trade war on Japanese firms by analysing quarterly data on the foreign affiliates of Japanese MNCs, and also the stock price data of Japanese listed firms (Sun et al. 2019):

  • Affiliates in China with high exposure to trade with North America have experienced a drop in sales since the trade war began. 
  • Firms exposed to China-North America trade saw a decline in stock prices around 22 March 2018, when the Trump administration announced its proposal to impose tariffs on $50 billion of Chinese imports. Among firms exposed to China-North America trade, those with affiliates that rely heavily on inputs from Japan saw the largest decline in stock prices. This finding highlights the importance of global value chains in propagating the trade shocks. 

This is new evidence on how a trade war impacts a third country that sheds new light on firm-level responses to trade policies, showing how the US-China trade war negatively affects the operation and stock-market performance of Japanese MNCs.

Impact on sales of foreign affiliates of Japanese MNCs

The Ministry of Economy, Trade and Industry collects affiliate-level data in the Quarterly Survey of Overseas Subsidiaries. It covers actual figures for sales (local, to Japan, and to third countries), capital investment, and number of employees in a period ending on the last day of each quarter. 

We divided the Japanese affiliates into two groups: a treatment group of all Japanese affiliates in China, and a control group of Japanese affiliates elsewhere in Asia, excluding China and Hong Kong. The treatment group of Japanese affiliates in China was further separated into two groups, reflecting their level of reliance on trade with North America: affiliates with a trade share (ratio of trade to total sales) with North America below 0.03 (the median trade share of affiliates with positive trade), and affiliates with a share larger than 0.03. 

A difference-in-difference approach for the period between 2017 Q1 to 2018 Q3 suggests that sales for affiliates in China with high trade with North America dropped sharply from the beginning of the trade war, whereas sales for affiliates in China with little or no trade with North America remained roughly the same. Figure 1 shows the estimated coefficients of each quarter separately for the two treatment groups.

 Figure 1 Estimated coefficients by quarter for log total sales

Source: Sun et al. (2019)

In the figure we added affiliate, year-quarter, and country-QoY (quarter of the year) fixed effects, and so we normalised the five coefficients to zero. We chose to normalise the coefficients of 2017 Q1 to 2017 Q4 for affiliates with no or low trade with North America, and the coefficient of 2017 Q1 for affiliates with high trade shares with North America. The dashed lines indicate the 95% confidence interval.

In addition, sales to third countries for affiliates in China dropped sharply after the trade war began, but remained largely unchanged for affiliates elsewhere in Asia. Taken together, it is likely that the drop in total sales was driven by a drop in sales to third countries.  

Stock market performance of parent firms of Japanese affiliates

Here, the treatment group comprised Japanese firms with China-North America trade, plus a control group of those with no China-North America trade. The focus is on the three days around 22 March 2018, when tariffs on Chinese goods were proposed.

Stock market returns for listed Japanese firms with some amount of China-North America trade was 0.4% lower than the listed firms without China-North America trade during the three-day window. This suggests that Japanese MNCs with China-North America trade were more harmed by the US-China trade war than those without China-North America trade. 

Japanese firms with China-North America trade suffered even greater market value declines in this period if they had a higher import share from Japan. This is because the affiliates in China would purchase fewer inputs from their parents in Japan as a result of the trade war, further lowering the value added and profit of the parent firm and putting downward pressure on its stock price. 

On two other dates – 18 June 2018 and 5 May 2019, when president Trump proposed a longer list of tariffs and an increase in the tariff rate – the stock market return of the listed Japanese firms with China-North America trade was significantly lower than others.

The impact on Japan

The operations in China of Japanese MNCs have been negatively affected by the trade war, especially when Chinese affiliates rely heavily on trade with North America. This led to a reduction in their stock prices. The impact is amplified when the Chinese affiliates are more integrated in the value chain of the MNCs – that is, if they have a higher import share from Japan. 

These findings show that the impact of the trade war has been felt beyond the two countries that are directly involved. To get a fuller picture of the trade war’s impact on the global economy, we must take into account trade and multinational production linkages across countries.


Casselman, B (2019), “Trade War Starts Changing Manufacturers in Hard-to-Reverse Ways”, New York Times, 30 May.

Amiti, M, S J Redding, and D Weinstein (2019), "The impact of the 2018 trade war on us prices and welfare," NBER technical report.

Fajgelbaum, P D, P K Goldberg, P J Kennedy, and A K Khandelwal (2019), "The return to protectionism", National Bureau of Economic Research technical report.

Huang, Y, C Lin, S Liu, and H Tang (2018), "Trade Linkages and Firm Value: Evidence from the US-China Trade War", working paper.

Sun, C, Z Tao, H Yuan, H Zhang (2019), "The Impact of the US-China Trade War on Japanese Multinational Corporations", RIETI discussion paper 19-E-050.



Topics:  International trade

Tags:  Japan, trade war, tariff war, US-China trade war, Trump, protectionism, global value chain

Assistant Professor, Faculty of Business and Economics, University of Hong Kong

HSBC Professor in Global Economy and Business Strategy, Director of the Institute for China and Global Development, University of Hong Kong

PhD candidate, Faculty of Business and Economics, University of Hong Kong

Senior Fellow, RIETI; Research Fellow, Center for East Asian Economic Studies, Kyoto University; Research Fellow, Research Institute for Oriental Cultures, Gakushuin University


CEPR Policy Research