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Exit China: Subsidies for Japanese companies to shift base to India

Japan has announced a $221 million China exit subsidy for Japanese companies to shift their base to India and other regions.

In April, amidst the coronavirus pandemic, outgoing Japanese Prime Minister Shinzo Abe proposed building an economy that is less dependent on one country – China, so that the nation can avoid supply chain disruptions.

In mid-July, Japan’s Ministry of Economy, Trade and Industry unveiled the first group of Japanese companies to subsidise shifting manufacturing out of China to Southeast Asia or Japan in a bid to build a more resilient supply chain. Ahead of the India-Japan summit, the Japanese government has announced it would add India and Bangladesh to a list of ASEAN countries to qualify for subsidies for Japanese manufacturers moving out of China.

The move comes following a recent virtual meeting between the trade ministers of India, Japan and Australia to advance cooperation on building trusted supply chain resilience in the Indo-Pacific to reduce dependence on China, which is a major trade partner with all three countries. The SCRI (Supply Chains Resilience Initiative) is aimed to build an alternative supply chain, away from China.

Commerce Minister of India, Piyush Goyal explained, “diversification of supply chain is critical for managing the risks associated with the supply of inputs, including disciplining price volatility. We could provide the core pathway for linking value chains in the region by creating a network of reliable, long-term supplies and appropriate capacities”.

He further stated that the initiative could not have come at a more opportune time in the post-Covid-19 scenario when there is a likelihood of churning of supply chains in the Indo-Pacific region. He said that in May 2020, PM Modi had stressed that it is the need of the hour that India should play a big role in the supply chains.

The Japanese government's supplementary budget earmarked 23.5 billion yen ($221 million) for businesses that wish to move their production to Southeast Asian nations from China. The country's manufacturers can now receive subsidies for pilot programmes and feasibility studies. The Japanese government's programme aims to ensure a steady supply chain of products like medical supplies and electrical components in case of any emergency. Currently, Japanese companies' supply chain relies heavily on China. The issue came to light during the Covid-19 pandemic when supplies from China were cut off.

In the second round of applications, projects would contribute to the ASEAN-Japan supply chain, assuming that relocation will occur to India and Bangladesh. Feasibility studies on decentralising manufacturing plans were also carried out along with the experimental introduction of facilities.

The first round of subsidies, which was announced in July, granted around 10 billion yen to 30 companies relocating their production sites to Southeast Asia. Another 57 firms are also receiving support for moving manufacturing facilities to Japan.

<strong>Exodus of Manufacturing: Impact on China</strong>

The movement of production capacity from China will increase unemployment in the communist country as jobs move away. The US-China trade tensions have already cost about two million industrial jobs in China. Its border aggression with India has seen the latter severe its trade and business ties giving China a major economic blow. China wants to move up the value chain and produce more high-tech goods as it has repeatedly indicated, for which it needs FDI and more open trade. China is beginning to miss out on these two factors as a result of the US-China trade war, tensions with neighbours on account of aggressive behaviour and suspension of human rights in Hong Kong.

In the medium to long-term, China could see a larger negative effect on productivity. A reduction in productivity growth will hurt China’s potential growth rate, which increasingly relies on technological innovation, rather than, for example, labour force growth. Finally, global value chains from China will be disrupted with countries like India, Bangladesh and the southeast Asian region taking away the giant's business..