Image credit: Official White House Photo by Adam Schultz

POLICY PERSPECTIVE

by Kazuto Suzuki
February 2022

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Table of Contents

• Investing in Supply Chain Resilience in the Indo-Pacific
• End Notes
• About the Author
• Canadian Global Affairs Institute

Investing in Supply Chain Resilience in the Indo-Pacific

Supply chain resilience is critical for today’s globalized economy. The free trade system established after the Second World War encouraged the global division of labour, comparative advantages for low-cost manufacturing in developing countries and the emergence of China as the centre of global manufacturing after its accession to the World Trade Organization (WTO) in 2001. This integration of the global economy created a situation in which every country depends on every other, even though countries may be involved in geopolitical confrontations. 

The situation in the Indo-Pacific has garnered increasing attention. On the one hand, there is a severe ideological, political and military strategic competition between the United States and its allies against China, while on the other hand, the economic interdependence between them is greater than ever. This means that there is always a risk that one side will use its economic advantage – or cut off the chokepoint items – to put pressure on the other if geopolitical tensions rise. This was the case when China halted the export of rare earth minerals, a necessary material for Japanese automakers, during the dispute over the Senkaku Islands in 2010.1 It is also true that the United States used its export control regulation to put pressure on China and express its criticism of China’s human rights situation in Xinjiang Province.2

In addition to the geopolitical strategic competition, there is always a risk of a supply shortage. The shortage of semiconductors was brought on by increased demand for smartphones and games, by the conglomeration of logistics, labour shortages due to COVID-19 and a lack of investment by foundries. The shortage of urea water for diesel engines arose not from geopolitical ambitions, but because China was complying with environmental regulations for reducing the use of coal, and it eventually impacted local transportation and global logistics.3

Supply chains are always threatened by both intentional and unintentional disruptions. That is why President Joe Biden issued Executive Order 14017,4 which focused on supply chains. The White House issued a report on the 100-days’ review in four domains: semiconductors, critical minerals, large-scale batteries and medical resources.5 The Japanese government is preparing to submit a bill to promote economic security to improve supply chain resilience and gain strategic autonomy, based on a proposal by the ruling Liberal Democratic Party.6 With these initiatives, policy-makers have been looking at ways to reduce Japan’s dependence on China, by diversifying our supply sources for key materials and products and augmenting our stockpiles of strategic supplies.  It remains to be seen how the cabinet’s economic security legislation will tackle these challenges. The first step will be a thorough review of the nation’s supply chains to assess our degree of dependence on Chinese suppliers.

The Japanese government has already taken some concrete steps to address supply chain issues with respect to semiconductors. Essential to a wide range of electronic products and systems, semiconductors are highly strategic products; yet Japanese manufacturers today are almost entirely dependent on overseas makers for advanced logic chips.  Hoping to boost domestic chip production quickly, the Japanese government has persuaded Taiwan Semiconductor Manufacturing Co. (TSMC) to build its first chip plant in Japan by offering subsidies covering half the construction costs. When it comes to economically strategic goods such as semiconductors, maintaining a stable supply, even at the cost of hefty subsidies, is a political as well as a security priority.

However, the most important element of improving supply chain resilience is to build an economic coalition with allies. The concept, which was presented by US Trade Representative Katherine Tai when she visited Japan in November last year, highlights a “new framework” for trade agreements with partners in the Indo-Pacific region.7 These ideas suggest that the United States aims to reshape the international trade order and to set up a new plurilateral framework to allow free trade within a small group. This can also be seen in the trilateral agreement between Japan, Australia and India in launching the Supply Chain Resilience Initiative (SCRI) for COVID-19 vaccines and other medical supplies in April 20218 and the Quad agreement on the common initiative for supply chain resilience for semiconductors, vaccines, batteries and rare earth minerals.9

A key question for these new plurilateral frameworks is whether they are sufficient to provide secure and sustainable supply chains. Although their combined populations, technological levels and reserves of energy and minerals are comparable to China’s, the Quad countries still need to depend on supplies from China. China is an especially dominant player in the production and refining of rare earth minerals (China: 57.57 per cent; United States: 15.63 per cent; Myanmar: 12.34 per cent; Australia: 6.99 per cent; Madagascar: 3.29 per cent; and India: 1.23 per cent).10 Furthermore, many companies in the Quad countries operate in China because of its proximity to a large market and the quality of labour. China is the largest trading partner of Japan and Australia, and the largest importer for India and the United States (see Table 1). It is almost impossible to decouple China from those countries’ economic structures. Thus, it is important for supply chain resilience for the Quad countries to define the strategic items that need to be decoupled from China, while maintaining normal trade in other items.

Table 1. Top 5 Trading Partners of Quad Countries for Imports and Exports in 2019

Source: World Bank

The other key question is whether they are compatible with the principle of free trade.  Reshaping supply chains requires government intervention in free trade with subsidies and regulations in the name of security. However, the WTO rules allow only very specific cases to be security exemptions. According to GATT Article XXI, the government can only exempt itself in the case of procurement of arms and munitions, in case of conflict and in case of UN sanctions.[11] There are so-called security exemption clauses in the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which are not as stringent as the WTO rules. Applying these exemptions, however, to supply chain security would allow states to take protectionist measures in the name of security. If improving supply chain resilience is seen as state aid or trade manipulation, the Quad countries may face legal challenges with WTO dispute settlement procedures. 

Improving supply chain resilience is a key strategic act of today’s geo-economy. It requires a reshaping of the international trade order, which is deeply integrated regardless of political and ideological differences. The geopolitical strategic competition may have an impact on supply chains, but it does so unintentionally. While it is important to build up more resilient supply chains with allies, it is also important to consider accepting some of the risks and preparing for contingencies. There must be a good balance between ensuring safe and stable supply chains without interference from adversarial states and safeguarding the principle of free trade and avoiding protectionism.

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End Notes

1 Keith Bradsher, “Amid Tension, China Blocks Vital Exports to Japan,” New York Times, September 22, 2010, https://www.nytimes.com/2010/09/23/business/global/23rare.html.

2 Staff, “Treasury Sanctions Chinese Government Officials in Connection with Serious Human Rights Abuse in Xinjiang,” Press Release, U.S. Department of the Treasury, March 22, 2021, https://home.treasury.gov/news/press-releases/jy0070.

3 Jiyoung Sohn and Vibhuti Agarwal, “China’s Coal Shortage Threatens Farmers in India and Truckers in South Korea,” Wall Street Journal, November 11, 2021, https://www.wsj.com/articles/chinas-coal-shortage-threatens-farmers-in-india-and-truckers-in-south-korea-11636635601.

4 President Joe Biden, “Executive Order on America’s Supply Chains,” Executive Order 14017, The White House, February 24, 2021, https://www.whitehouse.gov/briefing-room/presidential-actions/2021/02/24/executive-order-on-americas-supply-chains/.

5 Staff, “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-based Growth: 100-Day Reviews under Executive Order 14017,” A Report by the White House, June 2021, http://www.whitehouse.gov/wp-content/uploads/2021/06/100-day-supply-chain-review-report.pdf.

6 Kazuto Suzuki, “Modern Economic Security: Definition and Arguments,” Discuss Japan: Japan Foreign Policy Forum, Sept. 27, 2021, https://www.japanpolicyforum.jp/diplomacy/pt2021092718421511597.html.

7 Matthew P. Goodman and William Reinsch, “Filling in the Indo-Pacific Economic Framework,” Center for Strategic & International Studies, January 2022, https://www.csis.org/analysis/filling-indo-pacific-economic-framework.

8 Staff, “Joint Statement on the Supply Chain Resilience Initiative by Australian, Indian and Japanese Trade Ministers,” Japan’s Ministry of Economy, Trade and Industry, April 27, 2021, https://www.meti.go.jp/press/2021/04/20210427004/20210427004-1.pdf.

9 Staff, “Joint Statement from Quad Leaders,” The White House, September 24, 2021, https://www.whitehouse.gov/briefing-room/statements-releases/2021/09/24/joint-statement-from-quad-leaders/.

10 Statista, “Distribution of Rare Earths Production Worldwide as of 2020, by Country,” 2022, https://www.statista.com/statistics/270277/mining-of-rare-earths-by-country/.

11 Vinod K. Aggarwal and Andrew W. Reddie, “Economic Statecraft and Global Trade in the 21st Century,” World Trade Review, vol. 20, Special Issue 2, May 2021: 137–151.

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About the Author

Kazuto Suzuki is a professor of science and technology policy at the Graduate School of Public Policy at the University of Tokyo, Japan. He graduated from the Department of International Relations, Ritsumeikan University, and received his PhD from Sussex European Institute, University of Sussex, England. He has worked for the Fondation pour la recherche stratégique in Paris, France as an assistant researcher, as an associate professor at the University of Tsukuba from 2000 to 2008 and served as professor of international politics at Hokkaido University until 2020. He also spent one year at the School of Public and International Affairs at Princeton University from 2012 to 2013 as a visiting researcher. He served as an expert in the Panel of Experts for Iranian Sanction Committee under the United Nations Security Council from 2013 to July 2015. He has been the president of the Japan Association of International Security and Trade. His research focuses on the intersection of science/technology and international relations and on subjects including space policy, non-proliferation, export control and sanctions. His recent work includes Space and International Politics (in Japanese, awarded the Suntory Prize for Social Sciences and Humanities), Policy Logics and Institutions of European Space Collaboration and many others.

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Canadian Global Affairs Institute

The Canadian Global Affairs Institute focuses on the entire range of Canada’s international relations in all its forms including (in partnership with the University of Calgary’s School of Public Policy), trade investment and international capacity building. Successor to the Canadian Defence and Foreign Affairs Institute (CDFAI, which was established in 2001), the Institute works to inform Canadians about the importance of having a respected and influential voice in those parts of the globe where Canada has significant interests due to trade and investment, origins of Canada’s population, geographic security (and especially security of North America in conjunction with the United States), social development, or the peace and freedom of allied nations. The Institute aims to demonstrate to Canadians the importance of comprehensive foreign, defence and trade policies which both express our values and represent our interests.

The Institute was created to bridge the gap between what Canadians need to know about Canadian international activities and what they do know. Historically Canadians have tended to look abroad out of a search for markets because Canada depends heavily on foreign trade. In the modern post-Cold War world, however, global security and stability have become the bedrocks of global commerce and the free movement of people, goods and ideas across international boundaries. Canada has striven to open the world since the 1930s and was a driving factor behind the adoption of the main structures which underpin globalization such as the International Monetary Fund, the World Bank, the World Trade Organization and emerging free trade networks connecting dozens of international economies. The Canadian Global Affairs Institute recognizes Canada’s contribution to a globalized world and aims to inform Canadians about Canada’s role in that process and the connection between globalization and security.

In all its activities the Institute is a charitable, non-partisan, non-advocacy organization that provides a platform for a variety of viewpoints. It is supported financially by the contributions of individuals, foundations, and corporations. Conclusions or opinions expressed in Institute publications and programs are those of the author(s) and do not necessarily reflect the views of Institute staff, fellows, directors, advisors or any individuals or organizations that provide financial support to, or collaborate with, the Institute.

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