When the Japanese government announced a subsidy program to encourage Japanese firms to shift production operations out of China, it might have been easy to mistake it as an attempt to decouple from China, amid broader talk of U.S.-China economic decoupling. But, on closer inspection, Japan’s efforts to bring production home or to southeast Asia isn’t new and with Japan’s economy firmly interconnected with China the move is rooted in building resilient supply chains as opposed to decoupling from China.
After coronavirus severely disrupted trade and supply chains globally, Japan’s coronavirus stimulus package allocated 250 billion yen ($2.2 billion) in subsidies for firms to diversify supply chains. The main bulk of funds aims to relocate manufacturing of high value-added products into Japan, with 25 billion for those who move operations into Southeast Asia. This would have been a productive step regardless of the context, but the fact that it’s happening amid a pandemic and increasing tensions between the United States and China raises questions about how this plan fits into those larger trends.
But concerns about Japan’s over reliance on supply chains in China are nothing new. China is an attractive manufacturing hub known for its unique ability to handle many components along a supply chain from design to distribution and everything in between without the hassle of crossing borders. Yet the global coronavirus pandemic and supply chain disruptions have underscored concerns of an excessive dependence on a single country. Rather than deliberately decoupling, government subsidies seek to minimize the exposure to future trade disruptions by facilitating the diversification of supply chains. Other countries, such as Taiwan have openly discussed the issue along with the possibility of similar measures but Japan is the first to concretely offer subsidies.
Government subsidies seek to minimize exposure to future trade disruptions by facilitating the diversification of supply chains
In July, the Japanese government revealed that 57 companies will receive subsidies to invest in local production lines, while 30 firms will receive funds to invest in operations in Vietnam, Myanmar, Thailand, and elsewhere in Southeast Asia. Many Southeast Asian economies are “scaling up” in terms of what they can offer to manufacturing supply chains by providing additional value-added contributions, while increasing economic connectivity in the region makes it more affordable and easier to place production points across several countries. While further improving regional connectivity remains a major hurdle at this stage, the move overall is a step in a transition that was already underway.
Although Japan has recognized the risks of overdependence on one single manufacturing source, China remains an indispensable economic partner both as a market and as a manufacturing base. China is Japan’s biggest trading partner home to a massive consumer market for Japanese products. It’s resource-rich, well educated, and has a diverse labor market which has clear appeal for firms looking to base manufacturing operations, not to mention that inbound tourism from mainland China was booming prior to the global coronavirus outbreak. China’s economic value for Japan means the Japanese government is reluctant to drastically shake up economic ties. While there is a risk the move could get entangled with other contentious issues in the relationship, such as Japanese concerns on the status of Hong Kong or the disputed Senkaku Islands, it’s doubtful that China would push Japan too far on this issue since China’s economy has also taken a hit during the pandemic and they’ll continue to rely on their economic relationship with Japan as they try to recover.
Despite the risks, China remains an indispensable economic partner both as a market and manufacturing base
Politically, Japan is trying to walk a fine line in the tensions between China and the United States. Abe has prioritized improving relations with China following the confrontation over the Senkaku Islands in 2012 and Japan provided aid to China (with affectionate poetry about the two countries’ relationship on the packaging) which was warmly received by the Chinese government. But since then, Japan has raised concerns over the new security law for Hong Kong, so much so that there are growing calls to cancel Xi Jinping’s visit to Japan even from within the ruling party, as well as increasing concern about China’s increasing provocations towards the Senkaku Islands and Taiwan. There’s a chance that this move could aggravate other issues, but it won’t be because of any intention from the Japanese side.
Rather than repatriating supply chains, as the Trump administration is hoping for, Japan’s subsidy program is about supply chain resilience rather than repatriating supply chains. The geopolitical context of Japan’s decision is going to beg questions about decoupling, but that’s not the goal for Japan, nor is it a realistic option. That’s not to say that there aren’t concerns in Japan about China’s trajectory under Xi, but economically Japan wants to improve supply chain security while also trying to maintain its economic relationship with China.