WORLD NEWS

Japan to pay firms to relocate production away from China as part of coronavirus stimulus

Published on: 15th April 2020

Report also claims that US companies are looking at alternatives to Chinese manufacturing.

According to an article in the South China Morning Post, Japan has earmarked $2.2b 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, designed to offset the impact of the pandemic, includes 220b yen ($2b) for companies moving production back to Japan and 23.5b yen for those looking to move production to other countries.

Traditionally, China is Japan’s biggest trading partner, but imports from China slumped by almost 50% in February as the outbreak closed factories, starving Japanese manufacturers of necessary components. This in turn has reawakened talk of Japanese firms reducing their reliance on China as a manufacturing base. Last month, the government’s panel on future investment debated the need for manufacturing of high-added value products to be shifted back to Japan, and for production of other goods to be diversified across Southeast Asia.

Meanwhile, new data shows that US companies are also looking to shift production away from China. Global manufacturing consulting firm Kearney released its seventh annual Reshoring Index last week, claiming what it referred to as a “dramatic reversal” of a five-year trend, with domestic US manufacturing commanding a significantly greater share in 2019. The report suggests that last year saw numerous companies actively rethinking their supply chain, either persuading their Chinese partners to relocate to Southeast Asia to avoid tariffs, or by opting out of sourcing from China altogether.

According to the report’s co-author Patrick Van den Bossche: “Three decades ago, US producers began manufacturing and sourcing in China for one reason: costs. The trade war brought a second dimension more fully into the equation – risk – as tariffs and the threat of disrupted China imports prompted companies to weigh surety of supply more fully alongside costs. Covid-19 brings a third dimension into the mix­, and arguably to the fore: resilience – the ability to foresee and adapt to unforeseen systemic shocks.”

The report claims that the main beneficiaries of this trend are the smaller Southeast Asian nations, such as Vietnam, as well as Mexico, thanks to the passing of the US Mexico Canada Agreement.

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