The trade tensions between the United States and China have significantly impacted businesses operating in both countries, as well as those with global supply chains interconnected with these two economic powerhouses.
These tensions, characterized by tariffs, trade restrictions, and geopolitical rivalries, have introduced uncertainty and increased costs for businesses, forcing them to adapt their strategies to navigate this challenging global business environment.
One of the countries that is significantly impacted by these tensions is Japan because of the interconnections of these three countries and the characteristic of the supply chain involving goods manufactured and traded in these three geographic entities. Trade policies may shift to help insulate economies from the negative impact.
For example, Japanese companies that cooperate with US sanctions against China may also be subject to sanctions by China as many Japanese companies in the semiconductor industry do business with both China and US, forcing them to choose between the two (Kwan, 2023). For example, a Japanese company operates and manufactures goods in China. The US imports these Japanese products that are built in China, and because they are built in China, the US will impose import tariffs. The same holds true for Japanese companies that operate and manufacture goods and services in the United States. When China imports from Japanese firms operating in the US, they also may impose additional tariffs. The sanctions effectively remove any competitive advantage these Japanese firms may have benefited from before the trade tensions.
In response to the growing China-US tensions, Japan passed the Economic Security Promotion Act in 2022 to help mitigate the effects of the tensions. As a result, Japanese firms are being encourage to relocate production bases from China to ASEAN and even Japan (Kwan, 2023). This is an example of supply chain diversification (if relocating to ASEAN) and localization of production (if relocating back to Japan), which are mitigating strategies.
Furthermore, because of the national security dimensions of the China-US tensions, Japan also revised the Foreign Exchange and Foreign Trade Act to strengthen restrictions on foreign capital investment in key industries, which includes arms, aircraft, space-related, nuclear, power-related, cyber-security-related, electric power, gas, telecommunications, water supply, railroads, and petroleum. The goals is to discourage foreign takeover of these core industries, whether American but more specifically Chinese investors.
Nevertheless, there are economies that are poised to benefit from the US-China trade tensions, such as India. Jeanette mentioned Apple Inc. In 2023, Apple release their official supplier list, demonstrating shifts in their supply chain preferences (Jiang, 2023)—another example of supply chain diversification. Apple added five new suppliers, but cut out eight suppliers from China. They also moved production bases to India, rising to a total of 14 bases from 2021’s 11.
If we follow the sentiment of the Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno, the Philippines has the potential to benefit from US-China trade tensions. This is because the Philippines has a low exposure to products targeted directly by US tariff actions against the Philippines (Villanueva, 2020). It is worth noting that China is the Philippines’ largest supplier of imported goods, while the US is the fourth largest. On the other hand, Hong Kong is our largest export partner, followed by the US, while China is fourth (Philippine Statistics Authority, 2024).
Nevertheless, there is truly no winner in a protectionist approach to trade. To quote Jeffrey Sachs (2019), “he hardline approach – to be pursued through protectionist trade policies and aggressive technology policies — would prove disastrous, weakening the world economy and creating a self-fulfilling grave risk of future conflict.” If we follow classical economic principles, open trade is a positive-sum game, where all trade partners benefit the more we trade with each other. This is a sentiment shared by Adam Smith, the father of economics. The benefits come from leveraging on competitive advantages and the efficient use of resources.
Sources:
Jiang, B. (2023, May 25). China’s Apple loss is India’s gain, as 2022 supplier list shows shift in supply chain preferences. South China Morning Post. https://www.scmp.com/tech/big-tech/article/3221814/chinas-apple-loss-indias-gain-2022-supplier-list-shows-shift-supply-chain-preferences
Kwan, C.H. (2023, August 25). Decoupling proceeding amid lingering U.S.-China tensions—Rising Concerns about the Impact on Japanese Companies. Reiti. https://www.rieti.go.jp/en/china/23051601.html
Philippine Statistics Authority (2024, January 26). Highlights of the Philippine Export and Import Statistics December 2023 (Preliminary). https://psa.gov.ph/statistics/export-import/monthly
Sachs, J. D. (2019). Will America create a cold war with China. China Economic Journal, 12(2), 100-108. https://doi.org/10.1080/17538963.2019.1601811
Villanueva, J. (2020, May 23). PH to benefit from US-China trade tension: Diokno. Philippine News Agency. https://www.pna.gov.ph/articles/1103764
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