Editor’s Note: This is part two of a four-part series on Indo-Pacific Supply Chain.
Supply chain resilience is the key factor for today’s economy. The free trade system installed after the World War II allowed the global division of labor, comparative advantages for low-cost manufacturing in developing countries, and emergence of China as the centre of global manufacturing after its accession to the WTO in 2001. Such integration of global economy created a situation where every country depends on each other, even though countries are facing increasing geopolitical friction and the richochete effects of the U.S.-China strateghic competition.
In this regard, the situation in the Indo-Pacific is attracting morer and more 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 higher than ever. This means that there is always a risk that the one side will use its economic advantage – or chokepoint – to put pressure on the other if the geopolitical tension arises. This was witnessed when China halted the export of rare earth minerals, much needed material for Japanese automakers, during a dispute around the Senkaku Islands in 2010. The United States also used its export control regulation to put pressure on China for the purpose of criticizing China’s human rights situation in Xinjiang Province.
In addition to the geopolitical strategic competition, there is always a risk of shortages of supply. The recent shortage of semiconductors was caused by the increase of demand for smartphones and games, by the confusion of logistics, labor shortages due to the COVID infections, and lack of investment by foundries. The shortage of urea water for diesel engines was due to the Chinese policy for complying the environmental regulations for reducing the use of coal, rather than geopolitical ambitions, which eventually impacted local transportation and global logistics.
That is why President Biden has issued the Executive Order 14017 for reviewing supply chains and the White House issued a report on the 100-days review on four domains, semiconductor, critical minerals, large scale batteries and medical resources. The Japanese government is preparing to submit a bill for promoting economic security to improve resilience of supply chain and gaining strategic autonomy. In these initiatives, there are calls for improving strategic stockpiles and investment in new technologies that does not rely on foreign technologies and materials.
However, the most important element of improving resilience of supply chain is to build an economic coalition with friends and allies. The concept which was presented by the US Trade Representative, Katherine Tai, when she visited Japan in November last year highlights a “new framework” of trade agreement with partners in Indo-Pacific region. Such ideas suggest that the United States aims to reshape the international trade order 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 for launching Supply Chain Resilience Initiative (SCRI) for COVID-19 vaccines and other medical supplies in April 2021 and the Quad agreement on the common initiative for supply chain resilience for semiconductor, vaccines, batteries, and rare earth minerals.
One of the key questions for these new plurilateral frameworks is whether they are enough to provide secure and sustainable supply chain. Although the combined size of population, technological level and reserves of energy and minerals are comparable to China, the Quad countries still need to depend on the supplies from China. Particularly, China is dominant player in the production and refining of rare earth minerals. Furthermore, many companies of the Quad countries are operating in China because of the proximity to the large market and quality of labor. China is the largest trade partner of Japan, the US and Australia, and the largest import for India. It is almost impossible to decouple China from their economic structure. Thus, it is important for the supply chain resilience for the Quad countries to define what are the strategic items that need to be decoupled from China, while maintaining the normal trade in other items.
The other key question is whether they are compatible with the principle of free trade. Reshaping supply chain requires government intervention in the free trade with subsidies and regulations in the name of security. However, the WTO rules allows only very specific cases as security exemptions (GATT Article XXI). According to this article, the government can only exempt itself in case of procurement of arms and munitions, in case of conflict and in case of UN sanctions. If the improvement of resilience of supply chain is regarded as state aid or trade manipulation, the Quad countries may face legal challenges in front of WTO dispute settlement procedures.
It requires a reshaping of the international trade order which is deeply integrated regardless of political and ideological differences. The geopolitical confrontation may have an impact on the supply chain, but so as the case of unintentional causes. 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.
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 Ph.D. 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.