Adjustments of Multinational’s Production Activities in Response to the US-Sino Trade War : Evidence from Japanese affiliate-level data

Using factual affiliate-level data of Japan’s multinational firms from 2017 through 2019, this study investigates the impact of a trade shock (the 2018 US-Sino trade war in this case) on multinational firms’ overseas production activities. Focusing on Japanese affiliates in the Association of Southeast Asian Nations (ASEAN) countries, we find evidence of a potential production shift from China to the ASEAN member countries. According to our empirical results, in response to the trade war, those affiliates in the ASEAN with vertically integrated Chinese siblings belonging to the same multinational parent’s value chains may increase their export to North America and see a growth in total sales. Fast substitution of export and production occurs through the production network within Japanese multinationals when a part of which is negatively affected by the trade shock. In addition, this group of affiliates are also likely to increase both the share and value of local procurement. The study highlights the positive role of setting up a diversified production network for multinationals.