China-Japan Dispute Threatens Asia Supply Chains

China-Japan Dispute Threatens Asia Supply Chains

SINGAPORE — The escalating dispute between Japan and China over an East China Sea island chain could have long-term ramifications for trade and supply chain planning, industry analysts say.

The dispute over the Senkakus islets, which Japan nationalized on Sept. 11, sparked protests and boycotts of Japanese products in China, which claims the islands and calls them Diaoyu.

China’s imports from Japan plunged 9.6 percent in September, and total trade between the two countries, the world’s second- and third-largest economies, dropped 4.5 percent, according to Chinese customs data.

Container shipping volumes from Japan also have fallen, according to a shipping line executive, although the impact has been minor compared to the destitute Asia-Europe trade. “In terms of impact, weaker Japan-China volume will hit (Chinese shipping company) SITC the most as North Asia is their key area,” said the official, who requested anonymity. “Others are less affected as they are more long-haul focus.”

In the near term, the dispute will hit automotive parts and completed vehicle traffic the most, according to Janet Lewis, head of industrial and transportation research in Asia at Macquarie Capital Securities.

Japanese automakers’ sales in China plummeted 49 percent in September compared to a year earlier, and several of the manufacturers have cut production.

“There could be significant negative consequences for the global economy and the Asia-Pacific region if this disruption to bilateral trade and investment continues for any length of time,” said Rajiv Biswas, chief economist for the Asia-Pacific at IHS Global Insight.

Multinational companies with production facilities in China may have to re-evaluate the vulnerability of their supply chains to future bouts of Chinese civil unrest targeting particular nations, while some Japanese companies could accelerate plans to diversify production capacity out of the Pearl River Delta and Yangtze River Delta where costs are rising.

“It seems inevitable that Japanese multinationals, in particular, will be reconsidering their global expansion plans,” Biswas said. Toyo Tire and Rubber, a Japanese company with a production facility in Qingdao, already has said it is reconsidering expansion plans for China after the unrest, and may look to other companies, such as Malaysia, for new investment plans, he said.

Lewis said Japanese automakers can’t afford to back away from the world’s biggest market, but recent events could prompt them to rethink their strategies. “I believe this is just one of a string of events like the Japan earthquake and the Thai flooding … that serves as a reminder to multinationals that geographic diversification is important,” she said. “The China market in and of itself is too big for any MNC (multinational company) to ignore. It’s not like other locations don’t have their own risks.”

The dispute also could impact Asia’s trade liberalization efforts. “China and Japan have been a fundamental part of the new regional economic and trade architecture that has been gradually constructed in East Asia,” Biswas said. He noted the official negotiations China, Japan and South Korea launched in May aimed at establishing a free trade agreement in Northeast Asia that would cover some 20 percent of global GDP. “While Asia’s two largest economies are at loggerheads, such regional cooperation initiatives are unlikely to make much progress, Biswas said. “The escalation in tensions between China and Japan risks derailing not only the bilateral economic relationship between the two nations, but also creating wider negative transmission effects throughout the Asia-Pacific region if it undermines regional economic and trade cooperation initiatives.”

Contact Mike King at michael@borderline.eu.com