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Japan-US Deal in September: ETFs to Shine

Sweta Jaiswal, FRM

President Trump recently announced reaching a trade deal with Japan “in principal” on the second day of the G7 meeting held in France (read: ETFs in Focus on Japan's Dull Preliminary Manufacturing Data).

The Backdrop

Since Trump took over as the President, he has been criticizing America’s trade imbalances with certain countries, Japan being one. Investors should note that Japan’s trade surplus with the U.S. economy rose 8.4% from January to July 2019.

Trump has been trying to revitalize the agricultural sector, which has been massively hit by his America first propaganda. Japan is a very large market for U.S. agricultural exporters. In 2018, the United States exported around $13 billion  worth of agricultural products to Japan, which stood out to be the third-largest agricultural export market. U.S. farmers have been facing disadvantages and competitive pressure since Trump opted out of the Trans-Pacific Partnership (TPP).

In return, Japan has been bargaining with the United States to lower the 2.5% tariff on cars and 25% tariff on trucks. Notably, the United States is a very important market for Japan’s automobiles and parts. In 2018, the export of motor vehicles and parts to the United States amounted to $56 billion, out of the $68-billion  bilateral trade deficit the United States had with Japan (read: Trade War Gets Uglier: Here Are the ETF Winners & Losers).

Bargain Points Met for Trump & Abe?

The proposed trade deal has been largely applauded by America’s agricultural sector. Japan has agreed to lower tariffs on U.S. agricultural products such as as beef, pork, wheat and dairy products to bring them on par with the existing tariff levels in the revised TPP. For instance, U.S. beef exporters currently see a tariff of 38.5%  in Japan in comparison to 26.6% seen by their Australia, Canada and New Zealand counterparts as of April 2019. The tariffs on beef for the  revised TPP members will come down to 9% over a 16-year period. Japan has also agreed to import around 2.5 million tons of surplus corn  from the United States. It is worth noting here that in 2018, Japan stood out as the second-largest purchaser of U.S. corn.

Meanwhile, the Trump administration has not agreed to lower the 2.5% tariff on Japanese automobiles but the discussion on it may continue. However, America is considering waiving tariffs on certain Japanese auto parts out of the 400 types, according to the list provided by Japan. Also, Trump has agreed to not impose tariffs on Japanese autos for the time being. It is worth noting here that the Trump administration was considering invoking Section 232 of the Trade Expansion Act of 1960, which will enable it to levy tariffs of up to 25% on autos exported to the United States on national security grounds.

Cheers or Thumbs-Down to the Deal?

The final draft of the deal is yet to be prepared and is expected to be signed during or close to the 74th session of the UN General Assembly, which opens on Sep 17. For any trade deal to be effective, it has to be presented before the parliament in Japan for approval. Therefore, it is necessary for the leaders to sign the deal in September so that it can be presented before the Diet's extraordinary session beginning in October.

Per source, Abe has to face criticism in Tokyo on the deal as it is expected to do little good to the Japanese economy and reduce protection to Japanese farmers, provided United States allows some respite from automobile tariffs. However, for Trump, this deal is expected to boost his position in the 2020 presidential election campaign as the U.S. farm lobby holds major influence in Washington.

ETFs to Snap Up

US Agricultural/Livestock ETFs

The agricultural sector in the United States can reap benefits from a trade between Japan and United States. In fact, U.S. Secretary of Agriculture, Sonny Perdue praised the proposed agreement and stated that they can sell more in Japanese markets as the move will be "removing existing barriers for our products."

Thus, investors can keep an eye on a few ETFs like the Teucrium Wheat Fund WEAT, MLCX Grains ETN GRU, Teucrium Corn Fund CORN, iPath Bloomberg Grains Subindex Total Return ETN JJG and iPath Dow Jones-UBS Livestock Subindex Total Return ETN COW (see: all the Agricultural ETFs here).

S&P 500 Growth ETFs

Investors can also grab a few growth-oriented ETFs replicating the S&P 500 index as improved export levels and enhanced agricultural sector business can drive these funds. For example, Vanguard S&P 500 Growth ETF VOOG, SPDR Portfolio S&P 500 Growth ETF SPYG and iShares S&P 500 Growth ETF IVW.

US Small-Cap ETFs

Due to their higher domestic exposure and more volatile nature, micro-caps can be poised to gain from the trade deal. Here are a few: iShares Russell 2000 Growth ETF IWO, iShares S&P SmallCap 600 Growth ETF IJT, SPDR S&P 600 Small Cap Growth ETF SLYG and Vanguard S&P Small-Cap 600 Growth ETF VIOG.

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ELEMENTS Linked to the ICE BofAML Grains Index - Total Return (GRU): ETF Research Reports
 
Teucrium Corn Fund (CORN): ETF Research Reports
 
Teucrium Wheat Fund (WEAT): ETF Research Reports
 
SPDR S&P 600 Small Cap Growth ETF (SLYG): ETF Research Reports
 
iShares Russell 2000 Growth ETF (IWO): ETF Research Reports
 
iPath Series B Bloomberg Grains Subindex Total Return ETN (JJG): ETF Research Reports
 
iShares S&P Small-Cap 600 Growth ETF (IJT): ETF Research Reports
 
iShares S&P 500 Growth ETF (IVW): ETF Research Reports
 
SPDR Portfolio S&P 500 Growth ETF (SPYG): ETF Research Reports
 
Vanguard S&P 500 Growth ETF (VOOG): ETF Research Reports
 
iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW): ETF Research Reports
 
Vanguard S&P Small-Cap 600 Growth ETF (VIOG): ETF Research Reports
 
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