Why has Japan mooted the Supply Chain Resilience Initiative?

Introduction:

• Japan has mooted the Supply Chain Resilience Initiative (SCRI) with the COVID-19 and trade tensions between Chins and US threatening supply chains and causing bottlenecks.
• This SCRI is a trilateral approach to trade, with India and Australia as the other two partners.

Supply Chain Resilience Initiative (SCRI):

• The initiative aims to reduce the dependency on a single nation (at present China).
• SCRI is a direct response to individual companies and economies concerned about Chinese political behaviour and the disruption that could lead to the supply chain.
• The initiative, first proposed by Japan with India and Australia as partners, potentially see other Asian and Pacific Rim nations later.

About supply chain resilience:

• In the context of international trade, supply chain resilience is an approach that helps a country to ensure that it has diversified its supply risk across a clutch of supplying nations instead of being dependent on just one or a few.
• Unanticipated events whether natural, such as volcanic eruptions, tsunamis, earthquakes or even a pandemic; or manmade, such as an armed conflict in a region that disrupt supplies from a particular country or even intentional halts to trade, could adversely impact economic activity in the destination country.

Japan’s initiative:

• It is significant that Japan has taken the initiative to include India and Australia, and potentially other Asian and Pacific Rim nations later, in a strategic dialogue, despite India having pulled out of the Regional Comprehensive Economic Partnership that Japan helped stitch together.
• What has changed now is that the COVID-19 pandemic has brought into sharp focus what was already known that when assembly lines are heavily dependent on supplies from one country, the impact on importing nations could be crippling if that source stops production for involuntary reasons, or even as a conscious measure of economic coercion.
• While Japan exported $135 billion worth of goods to China in 2019, it also imported $169 billion worth from the world’s second-largest economy, accounting for 24% of its total imports, according to data from tradingeconomics.com.
• Electrical and electronic gear, and machinery, nuclear reactors and boilers were sectors that clocked up significant imports into Japan.
• So, any halt to supplies could potentially impair economic activity in Japan.
• A Bloomberg report said that Japan’s imports from China fell by half in February, a period when the latter was battling the peak of the virus impact.
• If the world’s two largest economies do not resolve their differences, it could threaten globalisation as a whole and have a major impact on Japan, which is heavily reliant on international trade both for markets for its exports and for supplies of a range of primary goods from oil to iron ore.
• As part of the country’s economic stimulus package, the Japanese government recently earmarked $2.2 billion to incentivise its companies to move their manufacturing out of China.
• This was not a protectionist move the manufacturing could, but did not have to, return to Japan.
• This was a nudge to diversification of risk where those manufacturing lines could be relocated out of China to other third countries.

Importance of India for Japan:

• Japan is the fourth-largest investor in India with cumulative foreign direct investments touching $33.5 billion in the 2000-2020 period accounting for 2% of inflows in that period, according to quasi government agency India Invest.
• Imports from Japan into India more than doubled over 12 years to $12.8 billion in FY19.
• Exports from India to the world’s third-largest economy stood at $4.9 billion that year.
• Also, India is carrying forward the sentiments of self-reliance focussing on less dependence on China which is one of the reasons behind SCRI.
• Japan has included India under the SCRI initiative despite India having pulled out of the Regional Comprehensive Economic Partnership.
• Further, India and Japan are a part of QUAD and malabar exercise.

Role of Australia:

• Australia, Japan and India are already part of another informal grouping, the Quad.
• Media reports indicate that China has been Australia’s largest trading partner and that it counts for 6% of Australia’s exports, with iron ore, coal and gas dominating the products shipped to Asia’s largest economy.
• But relations including trade ties between the two have been deteriorating for a while now. China banned beef imports from four Australian firms in May, and levied import tariffs on Australian barley.
• China’s education Ministry warned its students aspiring to study or already studying in Australia, of ‘rising racism’ in that country, urging them to re-assess their aspirations.
• Prior to that, China’s Ministry of Culture and Tourism had said its citizens should by ‘no means travel to Australia’ on account of rising ‘racist incidents’.
• Australia’s push for an enquiry into the origins of the SARS-CoV-2 virus.

Significance for India:

• Following the border tensions between the two highly populous Asian neighbours, partners such as Japan have sensed that India may be ready for dialogue on alternative supply chains. Earlier, India would have done little to overtly antagonise China.
• But an internal push to suddenly cut links with China would be impractical.
• China’s share of imports into India in stood at 5%, according to an impact analysis by the Confederation of Indian Industry in February 2020.
• In areas such as Active Pharmaceutical Ingredients for medicines such as paracetamol, India is fully dependent on China. In electronics, China accounts for 45% of India’s imports, the analysis showed.
• Chinese supplies dominate segments of the Indian economy. Sectors that have been impacted by supply chain issues arising out of the pandemic include pharmaceuticals, automotive parts, electronics, shipping, chemicals and textiles.

Way forward:

• Over time, if India enhances self-reliance or works with exporting nations other than China, it could build resilience into the economy’s supply networks.
• While India appears an attractive option for potential investors both as a market and as a manufacturing base, trade experts point to the need for India to accelerate progress in ease of doing business and in skill building.