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Tokyo Prods Japanese Firms to Leave China

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Tokyo Prods Japanese Firms to Leave China

Insights from David Arase.

Tokyo Prods Japanese Firms to Leave China
Credit: Flickr/ Ted McGrath

The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into the U.S. Asia policy. This conversation with Dr. David Arase, Resident Professor of International Politics at the Johns Hopkins University Nanjing University Center for Chinese and American Studies, explores Japan’s recent push to move critical production away from China.

Explain the rationale behind Tokyo’s recent $2.2 billion stimulus package to help Japanese companies to move production out of China.

There are two immediate reasons to reduce supply chain dependence on China. One is that many Japanese firms have “bet on China” and depend exclusively on Chinese factories and firms to provide critically important goods. COVID-19 highlighted the risk of making China a single point-of-failure in Japan’s global and regional supply chains. The lesson is that Japanese firms must expect disruption, diversify risk, and design redundancy into supply chains, especially for products critically important to Japan’s stability and security.

The other reason is that actual reshoring of strategically indispensable Japanese production — not just “China +1” supply chain management — is a key aspect of Abe’s plan. This could kill two birds with one stone. It could enhance national security and it could also benefit Japan’s small- and medium-sized firms and boost provincial redevelopment plans in ways that help the LDP’s political prospects.

What is the impact of COVID-19 on Prime Minister Shinzo Abe’s decision?

The COVID-19 experience highlights China’s underlying fragility and it has weakened trust in the quality of China’s governance. And despite the official messaging coming out of China, the COVID-19 experience is not over. Experts believe that a new wave of infection in China may be in the cards. So COVID-19 recovery in China could drag on for another year at least.

Even with counter-cyclical monetary and fiscal stimulus, a lagging recovery by the rest of the world means that Chinese problems of excessive public and private debt; depressed growth; reduced exports; defaults and bankruptcies; and possible societal discontent will create uncertainty and risk. At the same time, Sino-U.S. relations are deteriorating and Chinese assertiveness in Hong Kong, the Taiwan Strait, East China Sea, and South China Sea is rising—something that may not be unrelated to China’s need to manage a parlous domestic political situation.

All this means that new developments emanating from China could further disrupt global and regional supply chains anchored in China. Although Abe had been toying with the idea of affiliating more closely with China’s Belt and Road Initiative (BRI) and nascent “community of common destiny” in Asia, the COVID-19 experience not only forced the cancellation of the Xi Jinping visit; it also left Abe with no choice but to step back from China’s embrace.

Evaluate the prospects and pitfalls of Abe’s move, considering China is Japan’s largest export market.

China appears to be concerned that Japan’s move might negatively affect wider foreign investor sentiment. This concern reflects the fact that China needs access to rich Western economies to regain a stable growth and development path, which is critical to Xi Jinping’s legitimacy. Moreover, what China imports from Japan and other countries tends to be things it cannot make for itself. So, China cannot make a big show of punishing Japan for fear of sinking the recent Sino-Japanese rapprochement and drawing more international attention to Japan’s negative reassessment of China’s reliability as an economic partner.

At the same time, one should not exaggerate the significance of Abe’s move. It does not signal a desire or intention to decouple from the Chinese economy. For the moment it is merely an adjustment to changed risk perceptions. China should do nothing at this point to make it into something worse for it.

If major Japanese companies move their operations out of China, explain geopolitical implications for Japan-China relations.

There are geopolitical and geoeconomic implications but the extent to which they materialize will depend on whether Abe links the move out of China to his Free and Open Indo-Pacific (FOIP) strategy, which involves a modest but effective Japanese version of China’s BRI focusing on the provision of quality infrastructure and maritime security.

Japan’s FOIP idea is to work with other Quad powers [Australia, India, and the United States] and Indo-Pacific developing countries to sustain regional economic development and integration under the familiar norms of the rules-based order. If Japan decides as a matter of public policy to incentivize the relocation of Japanese supply chains from China to FOIP partner countries, it could reinforce the FOIP effort. But any overt linkage could necessitate Chinese retaliation and set off a downward spiral in Sino-Japanese relations. As ever, a deft touch is required to manage this fragile and conflicted relationship successfully.

Assess potential foreign and trade policy ramifications for U.S.-Japan leadership cooperation amid U.S.-China decoupling.

The COVID-19 experience is teaching both the U.S. and Japan similar lessons. China has excelled in attracting and servicing both U.S. and Japanese global value chains first in low value-added assembly operations and now in the production of higher value-added intermediate goods and services. This has made China an indispensable value chain nexus. But COVID-19 has demonstrated how this indispensable Chinese nexus is also a single point-of-failure that, out of the blue, can halt the supply of goods on which the U.S. and Japan are critically dependent. Both nations are now convinced that remedies must be urgently found and implemented.

The U.S. and Japan also strategically partner to advance their respective FOIP initiatives. As indicated above, there is a potential link between diversifying supply chain risk out of China and bringing infrastructure development, investment, and trade to Indo-Pacific developing country partners under the rules-based order. There is obvious scope for U.S.-Japan cooperation if leaders decide to coordinate their supply chain adjustment efforts with Indo-Pacific policy agendas. For example, India is regarded by both the U.S. and Japan as a key strategic and economic Indo-Pacific partner that could benefit from better economic connectivity with the advanced west.

So, the opportunity for win-win bilateral and regional cooperation growing out of the COVID-19 crisis exists. It behooves both countries to think long-term about FOIP strategy, and to task their aid, trade, and finance ministries to consult — with each other and with European allies, the ADB [Asian Development Bank], and the World Bank — to direct aid, investment, and trade relations toward like-minded Indo-Pacific developing countries to help them pick up supply chain roles migrating out of China and reinforce Free and Open Indo-Pacific strategy.