ASEAN is No “Plan B” for US-China Trade War Disruption of Japanese MNC GVCs

Mr. Naoyuki Haraoka's picture

A quarter of Japanese manufacturing is done overseas with the subsidiaries of Japanese multinational corporations (MNCs) venturing overseas to extend global value chains (GVCs) that begin in Japan. Under the resulting structure, the majority of Japanese manufacturing exports head towards overseas subsidiaries with capital ties to headquarters in Japan.

Indeed, more than 20 percent of these subsidiaries’ basic components are imported from Japan! In terms of value-added statistics, the most important destination for Japanese MNCs’ exports is the United States (US). Given that the share of the intermediary goods made in China in Japanese MNC exports is increasing, Japanese MNEs will be seriously affected by the US-China trade war in terms of value-added of exports and imports. In the background, Japanese MNCs are now shifting their Association of Southeast Asian Nations (ASEAN) business activities from exporting manufactured goods to drawing dividends from subsidiaries or garnering royalties by selling patents or professional services, which means their presence as a manufacturer is declining. The decline is intensified by the expansion of ASEAN countries’ nominal GDP, the progress of regional integration, and increasing foreign direct investment (FDI). Moreover, the weight of professional services is still small in the case of the Japanese MNCs. What all of this means is Japanese MNCs cannot supplement loss flowing from the US-China trade war with their economic returns from ASEAN. The sale of Japanese MNC sales from Asia versus other regions is still excessively high, namely 70 percent of the total sales of the Japanese MNEs. This excessive dependency on Asia will only increase their vulnerability. Thus, Japanese MNCs should try to enhance the weight of professional services or explore other markets such as Africa or Latin America in order to prepare themselves for a continuation of the US-China trade war and to reduce other aforementioned vulnerabilities.