Japan is Paying Companies to Leave China: Will They Move to Southeast Asia?

As a response to China’s temporary halt on its production chain due to COVID-19 outbreak, the flow of export from China to Japan has fallen by 50% on February 2020.

This presents Japan with a shock, given that China is Japan’s biggest trading partner. This shock also presents Japan with a realization that its economy is very dependent on China.

Waking up from its lack of awareness, Japan took a swift and bold action. The country decided to release US$ 2.2 billion economic stimulus package, which is intended to allow Japanese companies to move out from China.

The Japanese government wants Japanese companies that manufacture high-value products in China to return to Japan, while expecting the rest of China-based Japanese companies that produce other products to move somewhere else.

Now that those companies are looking for new destinations, Southeast Asia emerges as one of the strongest candidates.

In the fourth quarter of 2019, a similar situation happened — it is when a number of China-based companies decided to move their production out of China to escape the tariffs imposed by the United States amidst the heightened US-China trade war tension.

Thirty-three companies announced that they would move out of China to find a new place to call home. Out of 33 companies, 23 decided that Vietnam will be their next home. The rest chose to head to Thailand, Cambodia, Malaysia, India, Mexico, and Serbia. This means around 80% of the companies moved to Southeast Asia.

First of all, proximity. China and Southeast Asian countries are not a located a world apart. Moving production from China to Southeast Asia will not harm the cost of production and shipping so much — especially for Japan. India, Mexico, and Serbia are not as close to Japan or China as how Southeast Asia is.

Secondly, international sea lane. The South China Sea is located in the heart of Southeast Asia — and thousands of ships are passing through the sea every day. About 42% of Japan’s maritime trade has already passed through the sea according to a data in 2016. The fact that Southeast Asia has the advantage of being located in a “hugging” position to the South China Sea helps companies to make their decision that Southeast Asia is indeed the strategic location that they want.

Thirdly, costs. Either it is cheap labor, cheap land, or low tax rate, cheap costs is definitely another attractive feature that Southeast Asia has.

The event that took place on November 2019 happened even without economic stimulus package. Now that the Japanese government provided an economic stimulus package, we could expect the same “migration” will take place, once more.

The United States under President Trump has been trying to do the so-called the “Great Decoupling” from China — meaning that the administration will resort to any means possible to disengage from China. And this might not only be the case for the United States.

Drawing from previous examples, the United States has always tried to persuade friends and allies to join its cause — as exemplified by its campaign against the establishment of China-backed Asian Infrastructure and Investment Bank and China’s Belt and Road Initiative. In this context of US-China trade war, the United States has also asked European countries and other allies to antagonize a Chinese tech company — with alleged ties with the Chinese Communist Party, that solely govern the People’s Republic of China — named Huawei and to not use its products.

Bearing all this in mind, Japan’s move to give economic stimulus package to persuade its companies to exit China may sound like music to United States’ ears.

International Relations enthusiast