Japan Is Investing in Supply Chain Resliency, but Expert Concerned Excessive Subsidies Could Follow
A Japanese trade official said Japan's subsidies to diversify and reshore supply chains have already spurred plans for domestic factories for semiconductors, battery components for electric vehicles, aircraft engine parts, household disinfectants, medicines, protective gowns and chemicals.
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But Jingo Kikukawa, who heads the Ministry of Economy, Trade and Industry's policy planning and coordination division, told a Hudson Institute webinar “the work is sometimes tricky,” as policymakers need to balance the desire for greater resilience with the cost-effectiveness of manufacturing in lower-cost countries. “Diversification is OK, but 100% reshoring is not realistic,” he said at the March 30 event.
He said Japan has been wrestling with supply chain resilience for years, citing as the impetus the impact of the tsunami and Thai flooding on the auto industry 10 years ago, as well as Chinese efforts to restrict the export of rare earth minerals to Japan nine years ago. “Although it took two years, the [World Trade Organization] appellate body supported Japanese government claims,” Kikukawa said.
Japan in response also invested in research to learn how to make products with smaller amounts of rare earth minerals.
Kikukawa said that although some auto industry players manage the entire supply chain, most companies do not have insight past their direct suppliers. “Global supply chains have been left vulnerable or fragile due to high concentration of the production base,” he said. Manufacturers or distributors should heed “the old wisdom of: 'Don't put all your eggs in one basket.'”
At a Hudson panel following Kikukawa's presentation, Shihoko Goto, a senior associate for Northeast Asia at the Wilson Center, said the COVID-19 pandemic has led companies and policymakers to reconsider what is, as she said, instrumental to Japan's global success -- its specialization in production and its lean manufacturing. During the pandemic, Japan's strength in valuing cost-effectiveness became a weakness, she said.
Goto said adding suppliers outside China began a decade ago over price issues, but it's also happening as countries recognize the risk of China using trade to coerce countries to comply with its foreign policy demands.
“It's all too clear what's going on in Australia,” she said, referring to antidumping cases in China against Australian barley and wine, and a ban on Australian coal.
Hudson Institute Senior Fellow Thomas Duesterberg said he's worried that the political forces in Japan, the U.S. and the European Union to reshore high-tech manufacturing, such as fabricating computer chips, could lead to competitive spending among the three polities.
“The most important thing we need to do to reform the World Trade Organization is to get a better handle on disciplining subsidization China has used so effectively to undermine industry in Japan, the United States, Asia and Europe,” he said. “If we go too far … it’s going to make it difficult to make the argument at the WTO that China is the outlier.”
He said it is critical that the EU, Japan and the U.S. continue their trilateral dialogue on what changes on subsidies they would like to see at the WTO.