Global value chains have become integral for manufacturing and trade in the 21st century but their efficiency has been undermined by shocks emanating from the US–China trade war, the COVID-19 pandemic, the war in Europe and rising geopolitical tensions. In the post-pandemic era, a focus on strengthening the resilience of supply chains and protecting national security has been driving the reconfiguration of global value chains.
As early as 2005, the Japanese government proposed the China Plus One strategy to Japanese multinational companies to hedge against the risks of chilling bilateral relations between China and Japan. At the time, the response of Japanese companies to the proposal was lukewarm. This time is different. Shocked by the contagious effects of the COVID-19 lockdowns in China, the administration of former Japanese prime minister Shinzo Abe budgeted 245.6 billion yen (US$1.56 billion) to help Japanese firms relocate production on shore or to Southeast Asia.
By 2022 Japanese foreign direct investment in China had reached US$127.6 billion, the largest among Asian countries. Many Japanese multinational enterprises used the country as an export platform for the US market. The 25 per cent punitive tariffs imposed by the United States on Chinese exports and the possibility of escalation in the trade war raised the costs and uncertainty of operating in global value chains where China is the manufacturing and assembly base and the United States is the destination market. The ongoing US–China trade war has further motivated Japanese firms to diversify their supply chains.
In Japan the Ministry of Economy, Trade and Industry (METI) assists Japanese companies to reshore supply chains while the Japan External Trade Organization (JETRO) supports Japanese firms to shift their supply chains to ASEAN, India and Bangladesh. Between May 2020 and March 2022, METI subsidised 439 onshoring projects covering a range of sectors including medical equipment, auto parts, electronics and semiconductors. During the same period, JETRO approved 104 near-shoring projects and provided up to 5 billion yen (US$32 million) to each project. It has also coordinated with ASEAN to implement the near-shoring strategy to strengthen the supply chain resilience of Japanese companies.
In 2023, China accounted for 17.6 per cent of Japanese exports. It is also one of the largest hosts of Japanese foreign direct investment. Supply chain diversification aims to reduce Japan’s economic dependence on China and mitigate the risks of unstable political relations between the two nations.
The COVID-19 pandemic disrupted semiconductor supply chains and caused a severe shortage of semiconductor chips for the automobile industry, a pillar of Japan’s industrial economy. In 2021, the Japanese government published its ‘Strategy for Semiconductors and the Digital Industry’ which aims to rebuild the semiconductor industry with government subsidies. In 2022 the Japanese Diet passed the Economic Security Promotion Act, mandating the government to secure the supply chains of critical materials and maintain the stability of key infrastructure and national security.
The United States has designated China as a competitor and is attempting to reorganise global supply chains in semiconductors, electric vehicles and other high-tech industries with partners and like-minded nations. The dominance of global value chains in the world economy makes it unlikely for one country to build a sophisticated industry completely independent of foreign suppliers. Friend-shoring is more realistic than on-shoring.
Given its geopolitical significance and technological capacity, Japan is regarded as the United States’ most capable and reliable partner to jointly reconstruct global supply chains in strategic industries. In March 2023 the United States and Japan signed the Critical Minerals Agreement to strengthen cooperation in critical material supply chains and ensure that EV battery materials processed in Japan are not discriminated by the United Sates’ Inflation Reduction Act. In May 2023, US Secretary of Commerce Gina Raimondo and Japanese Minister of Economy, Trade and Industry Yasutoshi Nishimura issued a joint statement advocating cooperation in creating a more resilient semiconductor ecosystem and developing the next generation of semiconductors. Japan has joined the United States’ semiconductor alliance and has adopted export controls on 23 semiconductor technologies.
The Japanese government is seizing on the momentum of supply chain reorganisation and US–China rivalry to revitalise its domestic semiconductor industry. Building resilient supply chains for national security also justified the Japanese government’s promotion of strategic industries through lavish subsidies.
The Japanese government has allocated 4 trillion yen (US$25.4 billion) to subsidise investment in the semiconductor industry—the largest among OECD countries in terms of GDP. Both Japanese and foreign semiconductor firms are eligible for subsidies. Taiwan’s TSMC received 1.2 trillion yen (US$7.6 billion) for its first two factories in Kumamoto enabling the production of more advanced twenty-eight to six nanometre chips.
Even the South Korean company Samsung, the arch-rival of Japan’s Sony, received a subsidy of 20 billion yen (US$127 million) to build a semiconductor research centre in Yokohama. With a subsidy of 920 billion yen (US$5.8 billion), Rapidus, a new chip venture founded by seven Japanese companies including Toyota and Softbank, aims to manufacture two nanometre chips in collaboration with the US company IBM in 2027.
The friend-shoring strategy has strengthened coordination in industrial policies between Japan and the United States and elevated Japan’s role in global supply chain reorganisation, providing fresh impetus for Japan to re-industrialise and regain growth momentum. Japan can take advantage of its involvement in multilateral free trade initiatives, including the United States’ Indo-Pacific Economic Framework for Prosperity and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, to strengthen its regional leadership in building sustainable and resilient global supply chains.
Yuqing Xing is Professor of Economics at the National Graduate Institute for Policy Studies, Tokyo.
This article originally appeared in the most recent edition of East Asia Forum Quarterly, ‘Remaking supply chains’, Vol. 16, No. 2.
