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US-Japan Trade Meeting Begins: ETFs in Focus

Sweta Jaiswal, FRM

Another trade war is the last thing investors would want to witness. Hoping for the officials to reach a common platform, all eyes are on the two-day meet between Japan’s Minister of Economy Toshimitsu Motegi and U.S. Trade Representative Robert Lighthizer (read: Japanese Exports Under Pressure: Tough Time for ETFs?).

The Backdrop

"Trade-wise, I think we will be announcing some things probably in August that will be very good for both countries," said Trump at a news conference held in Tokyo on May 26.  The importance of this two-day meeting is immense for both the countries. Japan and the United States will be trying to reach a common ground for tariffs on agricultural products, including beef, pork, and wheat and auto parts (read: Global Stimulus & Huawei Relief Boost Markets: ETFs in Focus).

Trump’s Bargain Points

President Trump has been trying to revitalize the agricultural sector, which has been massively hit by his America first propaganda. It is worth noting that the U.S. farm lobby holds major influence in Washington and with the 2020 Presidential Elections in sight Trump is trying hard to come to a consensual decision with his Japanese counterpart.

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.

U.S. exporters are not only being unable to access additional market opportunities in Japan, Malaysia, Vietnam and other countries that moved forward with the Comprehensive and Progressive Trans-Pacific Partnership, or CPTPP, but they are also seeing a tariff disadvantage in comparison to other agricultural producers like Australia, Canada and New Zealand. For instance, U.S. beef exporters 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 CPTPP members will come down to 9% over a 16-year period.

Abe Eyeing Auto Tariffs?

Japan’s Prime Minister, Shinzo Abe, is ready to accept U.S. proposal for agricultural tariffs provided the tariffs levels are not below that promised to the CPTPP members, per the source. In return, Japan will be bargaining with the United States to lower the 2.5% tariff on cars and 25% tariff on trucks.

Notably, the United States stands as 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. Adding uncertainty to the trade negotiations, the Trump administration is 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.

What to Expect?

The trade representatives will try to construct a deal that can be signed by Trump and Abe before they meet for the U.N. General Assembly meeting in New York in late September. Moreover, signing the deal with Japan holds a huge importance for Trump’s election campaign in 2020. 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.

ETFs in Focus

Against this backdrop, let’s look at some ETFs which can gain and lose if the trade deal is signed between Japan and the United States.

Winning ETFs

US Agricultural/Livestock ETFs

The agricultural sector in the United States will definitely reap benefits if a trade deal is signed between Japan and United States. Thus, investors can keep an eye on some ETFs like the Teucrium Wheat Fund WEAT, MLCX Grains ETN GRU, 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).

Japan ETFs

Japan ETFs that can gain from the move like the iShares MSCI Japan ETF EWJ, JPMorgan BetaBuilders Japan ETF BBJP, iShares Edge MSCI Intl Value Factor ETF IVLU, Franklin FTSE Japan ETF FLJP and WisdomTree Japan SmallCap Dividend Fund DFJ can also be considered.

Losing ETFs

US Automobile ETFs

Already, the U.S. automobile manufacturers are lobbying for the inclusion of a provision prohibiting both the countries from engaging in currency manipulation in the trade pact. Japan is unwilling to add this clause as if there is any rise in yen, the Japanese exports will be adversely affected. Therefore, in the current scenario, it is prudent to remain on the sidelines and watch how the ETFs with considerable exposure to auto makers behave if the deal is signed. First Trust NASDAQ Global Auto Index Fund CARZ is one such ETF that can be observed.

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ELEMENTS Linked to the ICE BofAML Grains Index - Total Return (GRU): ETF Research Reports
 
First Trust NASDAQ Global Auto Index Fund (CARZ): ETF Research Reports
 
iPath Series B Bloomberg Grains Subindex Total Return ETN (JJG): ETF Research Reports
 
WisdomTree Japan SmallCap Dividend Fund (DFJ): ETF Research Reports
 
iShares MSCI Japan ETF (EWJ): ETF Research Reports
 
Teucrium Wheat Fund (WEAT): ETF Research Reports
 
Franklin FTSE Japan ETF (FLJP): ETF Research Reports
 
JPMorgan BetaBuilders Japan ETF (BBJP): ETF Research Reports
 
iShares Edge MSCI Intl Value Factor ETF (IVLU): ETF Research Reports
 
iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW): ETF Research Reports
 
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