Japan: We’re going to spend $2bn moving our companies out of China

What’s interesting about this is that usually when countries spend great wads of cash to stop their companies from manufacturing things overseas, it’s in order to move that production – and the jobs – back to the home country for political benefit. But not in this case. No, Japan doesn’t seem to much care where its companies make their goods, as long as it’s not in China:

Japan has earmarked $2.2 billion of its record economic stimulus package to help its manufacturers shift production out of China as the coronavirus disrupts supply chains between the major trading partners. The extra budget, compiled to try to offset the devastating effects of the pandemic, includes 220 billion yen ($2 billion) for companies shifting production back to Japan and 23.5 billion yen for those seeking to move production to other countries, according to details of the plan posted online.

The move coincides with what should have been a celebration of friendlier ties between the two countries. Chinese President Xi Jinping was supposed to be on a state visit to Japan early this month. But what would have been the first visit of its sort in a decade was postponed a month ago amid the spread of the virus and no new date has been set.

The second really interesting thing about this is that it’s Japan, of all countries. If the Americans did it you’d say it was just Trump rattling the sabre again, but modern Japan isn’t really known for diplomatic histrionics, and more than that, as a close neighbour to China, it does far more of its trade with the red menace than nearly any western country. Provoking Beijing’s ire is a lot riskier, economically, for the Japanese than it is for the rest of us.

So why are they doing it? Well, basically the Coronavirus has highlighted the severe supply risk that countries are taking by depending on the Chinese for so many vital goods. Here’s Forbes on the subject:

“For national security reasons alone, I think there will be some pretty massive onshoring especially for items that are needed in emergencies like the one we are in now,” says Lily Fang, a professor of finance at INSEAD, a global business school outside of Paris, with a campus also in Singapore. Fang is originally from China.

“China will be a loser in that respect,” she says. “I think it will be a good thing for the world economy. But it is bad news for China. They will need more internal demand.”

China is already relying more on internal demand so the “decoupling” of the U.S. economy from China isn’t exactly a death knell.

Millions were laid off in China over the last two months, including blue collar workers at privately owned factories. A lot of that labor is going to Vietnam. In other words, it’s not only the Japanese and the Americans who are leaving the mainland and setting up shop elsewhere. The Chinese business owners are doing it themselves.

In normal person language, that doesn’t use silly conference-call language like “onshoring”, what they’re saying is that we’ve all realised that during a crisis, when most of your critical medical supplies are made in China, that leaves a big portion of the world at the mercy of the good graces of the Chinese Government. And the Chinese Government is not known for its good graces.

We can speak to that in Europe, of course, where reams and reams of vital equipment has been found to be faulty. We’ve had China doing things like accepting medical equipment from Italy, and then apparently sending the exact same equipment back to Rome and charging them for the privilege:

After telling the world that it would donate masks, face guards and testing equipment to Italy, China quietly backtracked and sold the Mediterranean country desperately-needed medical equipment, according to a report.

What’s worse is that the personal protective equipment (PPE) China forced Italy to buy was actually the same PPE Italy donated to China before coronavirus rushed its own shores and killed nearly 16,000 people.

You can be sure, when this is all over, that the buzzword phrase amongst the Harvard Business School types will be about the “need to de-risk supply chains”. That’s going to be the big global lesson of this crisis, and it’s going to drive a fair bit of de-globalisation.

In the EU, which is having an abysmal crisis, steps will have to be taken to make sure the EU is self-sufficient in case of emergency, because it’s not at the moment. And that’s going to mean moving production back from China, or out of China.

China is going to pay for unleashing this plague on the world. It’s just going to pay quietly, with a loss of trust and investment. But pay it will, and it richly deserves to.

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