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Hitachi

Hitachi Research Institute

Executive Column

Commentary by our General Manager, Keiichi Shimada

Executive Column #4: Digital and Friction

 I was settling into the workplace where I started my career as an export sales person of home appliances to North America, when my boss asked me to do him a favor. When I glanced at him to see the look on his face, he was sitting in his chair in front of his desk with a somewhat confused look. “I know it’s troublesome but could you help do some work for TVs for the American market? It will only be for a short time. I would like you to take out the files that contain shipping documents from the storage in the basement, make as many copies as necessary, and send them to the U.S. side. I will let you know the period to cover in due course.” My work duties did not extend to TVs, the star products of home appliance exports. Looking back, the group next to me that was in charge of TVs and videos had been busy working the previous few days. I wondered why? Without any time to find out the answer, I, as a new employee, went to the basement as I was instructed. For about one week thereafter, I was stuck in the basement storage.

 Trade friction between Japan and the United States dates back to the textile wrangle of the 1950s, and the targeted goods have since shifted to steel, color televisions, automobiles and semiconductors. Color televisions came to the center of attention after the U.S. Electronic Industries Association (EIA: currently Electronic Industries Alliance) filed an anti-dumping lawsuit in 1968. Thereafter, the situation should have calmed down, given that the U.S. alleged dumping and Japan set voluntary export restrictions in 1977, and Japanese manufacturers expanded local production in the U.S. (1980s). But that wasn’t the case. This time it was the Internal Revenue Service (IRS). The IRS asserted "transfer pricing." The IRS claimed that we were avoiding paying taxes to the US authorities by inflating the shipping prices of products and parts from factories in Japan and elsewhere in Asia, and deflating the profits made by U.S. distributors and manufacturers who were our business partners to transfer the profits to be generated in the United States back to Japan.

 This meant that I was stuck in the basement storage in the Tokyo office to assist activities to address this issue at the very lowest level. After finishing the basement work and being informed of the situation by my boss, I was still unable to clarify my thoughts and asked questions without thinking. "It doesn’t make sense, does it? By engaging in dumping, we are supposed to be unfairly occupying the market with a product price lower than its cost; on the other hand, by engaging in transfer pricing, we are supposed to be inflating costs and unfairly depressing the margins of local companies. If we look at this situation from factories in Japan and Asia as a starting point, prices are lowered below their cost on one hand, and yet raised on the other hand. Both sides target the same product but the logic they use is completely contradictory. How can this be tolerated?” My boss then replied with a resigned smile on his face. "The Department of Commerce says that they are just doing their job and the IRS says the same on their part. That's America for you.” I felt that I could understand the reason he had a confused look on his face back then.

 Time has passed and at present, China and the United States have become the main players in the trade friction. And this time, it is apparently a trade “war,” not trade “friction.” Indeed, it may be more appropriate to call it a war, not friction. In March 2018, the United States imposed additional tariffs of 25% and 10% on Chinese steel and aluminum products, respectively, for national security reasons. In response, China decided in April to place additional tariffs on primary products such as fruit, pork, steel and aluminum imported from the United States. Thereafter, the United States imposed tariffs on Chinese products one after another from July to September under Section 301 of the Trade Act, which was used against Japan in the past, while China has enacted retaliatory tariffs against U.S. products each time. The additional tariffs will cover half of China's $500 billion in exports to the United States, and 2/3 of China's $150 billion in imports from the United States. If you look at these numbers, China is worse off in the exchange of retaliatory tariffs.

 For the United States, the emergence of a country like China may constitute a situation it has never faced before. The U.S.’s targets in economic and trade friction have been Japan and the EU until now. With respect to national security, the targets have been the Soviet Union and Russia. China is now becoming both an economic/trade and national security threat to the United States. The recent strengthening of CFIUS (Committee on Foreign Investment in the United States) authority by FIRRMA (Foreign Investment Risk Review Modernization Act of 2018) is one indication of such concern. To address national security risks associated with foreign investment, it enabled the expansion of the scope of transactions reviewable by the Committee to include not only defense technology but also critical digital technology, infrastructure and personal data that would be of interest to the Chinese government and companies. As a new employee at the time, while I was working on the “basement work,” I got the feeling that the United States would do absolutely anything if it became serious, regardless of logical consistency. Looking at the current situation with this in mind, the tensions over geopolitical friction between the United States and China due to political, economic and social security issues seem likely to continue.

 The friction among countries and regions, particularly between the United States and China, is spreading to digital technology and data beyond trade. While there is no obvious clue to a solution at present, and the friction will probably persist, I personally think it is not entirely negative. In the past, the trade friction between Japan and the United States gave the impression that the United States was unilaterally attacking Japan (even though I was only a staff member at the very bottom of the pyramid), and it is still painful to recall, but it is also true that it accelerated the globalization of Japanese companies’ supply chains by expanding production bases in North America on the assumption of the former NAFTA (North American Free Trade Agreement) or by advancing into Asian growth markets, for example. While conflicts of interest among countries and regions, including data localization policies, may intensify, at the same time, there should also be a move towards exploring ways to build global data supply chains. We should acknowledge that the time has come when companies are strongly required to consider friction to be an opportunity and to think positively about how the future of global digital business should look.

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