An added problem for European companies is that Europe is only now starting to look at the supply-chain problem. The Japanese government, on the other hand, in 2002 began to strike trade agreements with most of its neighbors to promote economic diversification, maintain existing economic activities and better manage the unavoidable economic pull of the Chinese market. Initial pandemic-induced supply-chain issues of 2020 quickly subsided and required little further adjustment. But the Japan External Trade Organization and the Ministry of Economy, Trade and Industry still assessed this new vulnerability through various studies and published recommendations on how to deal with supply shortages.
The government also set up a 2.2 billion Yen (223 million USD) diversification fund in 2020 and an additional 2.1 billion Yen in 2021 to assist Japanese businesses in moving from China to Southeast Asia. For sure, as lockdowns returned to wide parts of China in 2022, prolonged shipping delays once again reminded Japan and the rest of the world of their continued reliance products made in China. But Japan is in a better position than most of them, also thanks to its recent Economic Security Law, which includes monitoring of and financial support for the supply of a range of critical items like semiconductors, batteries, certain minerals, machine tools, advanced materials, software, fertilizer and pharmaceuticals.
But diversification does not mean full-scale decoupling from China. Many Japanese companies will maintain their operations in China as long as they generate profits in local sales. Furthermore, cross-border production is vital for the region’s economies – and will likely strengthen after the recent conclusion of the Regional Comprehensive Economic Partnership, a fifteen-member free trade agreement between the ASEAN, Australia, China, Japan, New Zealand South Korea. Corporate diversification as well as government-led economic security measures show that Japan is aiming for a balanced, pragmatic, and geopolitically sustainable approach to managing its economic interdependence with China.
European companies are latecomers to a game in which Japan, China, and the US compete for ASEAN’s bestowal of lucrative trade and investment opportunities. While European companies might benefit from newly established local supply networks initiated by foreign rivals, they will also face difficulties in replacing Chinese intermediary products. Japan’s experience shows diversifying risks away from China is easier said than done. It is a long and gradual process that raises costs. But shifting assembly processes is a necessary step that must be followed by diversification of component sourcing. Difficult as it will be, European companies must assess their vulnerabilities and reduce their concentration of risk in China.