Kristin Vekasi on Japan Trade Relations with US and China

Kristin Vekasi is an Associate Professor in the Department of Political Science and School of Policy and International Affairs at the University of Maine. Her research interests focus on international political economy, and the dynamics of political conflict, foreign direct investment, and nationalism. She specializes in Northeast Asia, and has spent years conducting research in both China and Japan. Her book Risk Management Strategies of Japanese Companies in China: Political Crisis and Multinational Firms (Routledge 2019) analyzes the political risk mitigation strategies of Japanese multinational corporations in China. Professor Vekasi received her PhD in political science from the University of Wisconsin, Madison in 2014. Prior to joining the faculty at University of Maine, she taught at New College of Florida, was a visiting Research Fellow at the University of Tokyo and a Fulbright Fellow at Tohoku University.
Qingyang (Grace) Wang CMC '21 interviewed Dr. Kristin Vekasi on October 9, 2020.
Photograph and biography courtesy of Dr. Kristin Vekasi.

How has the U.S.-China trade and tech decoupling affected the Japanese economy?  How are Japanese companies responding to the prospect of the dismantling of a globalized supply chain with a significant portion centered in China? Have we seen an exodus of Japanese companies from Japan?

Over the last three decades, Japan has increasingly been more economically dependent on China, in particular as an export destination, but also with high import flows as well. With time, as Japan grew more economically dependent on China for trade, China became dependent on Japan for trade as well. We started seeing this increasingly lopsided relationship. Now, as the United States and China have, or rather is more driven by the United States, moved towards this idea of decoupling, it has presented some challenges for Japanese businesses, because Japan is also involved in the supply chain networks where Japanese products are manufactured in China and then exported to the United States. If there were trade frictions between the United States and China, it can affect the point of sale exports for Japanese businesses. The Japanese are concerned about it disrupting the flow of trade. If the final point of manufacture is in China and then that is affected by trade frictions, in the more extreme case of decoupling, that could mean rejection of these products, which can be very disturbing. However, Japan has fairly diversified supply chains, and this is not the first time that Japanese companies have been threatened by political risk in China. So Japanese companies do have responses in their playbook already about how they might respond. And when we say Japanese global supply chains, that's not just a Japan, China, United States relationship, so there are a lot of spaces for Japanese companies to try to diversify their supply chain.

As a response both to the US China trade frictions, and also to COVID specifically, there has been a move from Japanese companies and also from the Japanese government to support those companies to try and exit from the China market. Early this year, there was a new policy put forward that will be implemented through the Ministry of Economy, Trade and Industry (METI) that will encourage re-shoring of Japanese companies. That involves not only bringing Japanese manufacturing back to Japan, but also diversification of manufacturing processes out of China and into different countries. What that means is that Japanese companies will relocate to Southeast Asian countries, such as Thailand, Philippines, Indonesia, Bangladesh. This is to both have a more diversified supply chain, but also to reduce overall Japanese dependence on China. How dramatic divestment from China will be is hard to tell at the moment. This is what we've seen in previous times when China was a politically risky destination for Japanese firms, like after the SARS crisis as well as in 2012 with the series of territorial dispute issues.

What are the biggest fears for Japan amidst this decoupling as Japan has extensive economic relations with both China and the US?

Particularly after the election of President Trump, it became more clear to Japan that there would be a finer line to balance between the United States and China. And prior to that, Japan had started building a network of regional institutions and regional supply chains that favored the American approach to trade without excluding China explicitly. So that balancing act for Japan was working with both countries extensively. But if a choice had to be made, Japan was leaning towards the United States which isn't surprising as the United States is the largest security ally and a long-term partner in economic and political realms. But after the election of President Trump and particularly in the last year or two, there is more of a fear that Japan companies will have to choose to either do business in China or the US. I've looked at the sectoral analysis of how Japanese companies manage risk in China and have found that the companies that aren't going to exit China are the ones that are trying to sell to Chinese consumers. That's a pattern we should continue to see. If Japanese companies have to move the manufacturing process elsewhere in order to export to the United States, they'll do that, particularly home electronics and household products. There will certainly be products like automobiles that will be manufactured in China and sold in China, but those same products that are sold to an American market or Southeast Asian market will just be manufactured elsewhere to have a diverse, diversified manufacturing chain.

How have Japanese-Chinese relations changed due to rising tensions between the US and China? Is it becoming harder for Japan to stay on the fence? With Japans newly elected prime minister Yoshihide Suga, how can we expect Japan-US/ Japan- China relations to change? 

As tensions began to rise between the United States and China over the last three or four years, Japan has, in some ways, had an easier political path to work with China. And we have seen this through head of state visits when the Prime Minister was still Abe, Xi Jinping was supposed to come to Japan, but unfortunately, that was postponed, and Abe and Xi will never have their summit. And in Japan, since Abe has resigned, it's been easier for Japan to not be looming large as a geopolitical rival and enemy in China and with rising tensions. And that's not to say that it's pushed Japan and China closer, but it's made it politically easier for Japan and for Chinese and Japanese elites to rebuild relationships after the acrimonies in the two or three years after 2012. In terms of balancing this economic relationship, it is getting a bit harder for Japan to try to walk the line carefully between the United States and China. We should not expect any large changes with Prime Minister Suka. He was one of the top members in Abe's cabinet for eight years, so it is expected that there will be a lot of continuity. It's possible that he could do something foolish or say something foolish as a newly minted prime minister and antagonize Chinese elites. But in terms of overall policy direction, he's going to stay the course. 

The U.S. efforts to contain Chinas technological advancement would require Japanese cooperation. Is Japan already taking measures to limit technology flows into China?  Which sectors are likely to be affected the most? How might Japan respond to Americas requests for more drastic restrictions on technology flows to China in the future?

There are already some measures within Japan that limit technology flows and in particular, certain technologies that could potentially be used in national security-related products, like weapons and surveillance technology.  There's a careful monitoring process before these technologies can be exported to other countries, including China. There are some trade controls in place in order to try and limit technology flows into China in terms of sectors. Certainly those directly related to national security are more controlled than others. But in the future, there could also be sectors such as electronics or green technology. But with that said, most of that's done by the private sector in Japan anyway. So the Japanese private sector, like businesses from other countries, are concerned about technology transfer when they invest in China. Most of the research and development, as well as their most cutting-edge manufacturing processes, companies don't offshore to China because they're concerned about intellectual property rights. In that sense, some of those controls are in place via capitalism already. 

As for drastic restrictions, that's going to depend on the response of the private sector, in particular, groups like the Association of Large Businesses, which is a powerful lobby group. It's possible they could cooperate with that if it fits their overall incentive structure and agenda, but if KEIDANREN, the Japan Business Federation opposes more drastic restrictions, it's unlikely that the Japanese government would enthusiastically comply with the United States' request as China is such an important trading partner.

What measures are Chinese companies taking to protect their business relations with Japan in light of rising geopolitical risks? What can the Chinese government do to preserve its economic ties with Japan?

One of the things that we see happening with Japanese and Chinese companies is that there are a few different dynamics here. One is that Japanese companies, along with their Chinese counterparts, are the businesses that are actually in China and are localizing. The result of that is you have this Japanese branded company with Chinese employees and Chinese managers having positions of responsibility in the company. So just over time, they've been deepening those relationships and localizing Japanese companies in China, which should insulate the Japanese company from political risks as well as provide an incentive to stay. It becomes a Chinese company now with a Japanese brand-- a Chinese company that has a home in the PRC. So this is something that business executives do in order to try and manage these geopolitical risks. Another process that we're seeing is that Japanese and Chinese companies, to a limited extent, are cooperating in overseas ventures. So there are these joint efforts in  third countries in Southeast Asia that bring together the private interests from the different companies.  In terms of what the Chinese government could do to preserve its economic ties, the Chinese government needs to protect its economic ties with all of its major trading partners by strengthening its domestic rule of law. China needs to protect intellectual property rights to a greater extent. And it needs to have more transparency with both of those processes to reassure nervous international investors and business people that their investments in China will be safe.

Qingyang (Grace) Wang CMC '21Student Journalist

Basile Morin, CC BY-SA 4.0 <>, via Wikimedia Commons

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