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Weaponised interdependence and the Japanese private sector

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A banner campaigning for boycott of Japanese products is seen at a market in Seoul, South Korea. The banner reads 'We don't sell Japanese products'. 12 July 2019 (Photo: Reuters/Daewoung Kim).

In Brief

Author: Kristin Vekasi, University of Maine

From trade barriers to financial sanctions, it’s increasingly common to see economic interdependence deployed for political goals. The United States uses its control of global financial networks to implement its economic sanctions policy and has used trade restrictions to obstruct Chinese competitors’ access to US-based technology. China is said to have used this strategy against Japanese firms with the rare earth issue in 2010 and against high visibility, consumer-facing industries following Japan’s nationalisation of disputed maritime territories in 2012.

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South Korea experienced similar treatment from China following deployment of the Terminal High Altitude Area Defense missile systems, with retaliation against the tourism industry. Japan is currently said to be using similarly coercive tactics against South Korea, with new export restrictions on high-tech sectors central to the South Korean economy. This is an escalation of a historic dispute reignited in 2018 when the South Korean High Court ruled that two Japanese companies were responsible for wartime forced labour reparations.

This type of economic coercion, dubbed ‘weaponised interdependence’, affects multinational firms first and foremost — entities that are often removed from the geopolitical issues that starts such coercion. These companies become potential targets of the state.

Toyota was not the driving force behind the Japanese government nationalising the disputed Senkaku/Diaoyu island chain. Yet their production and trade with China was severely damaged[. Japanese-branded vehicles were smashed in the streets and production fell in Japan’s joint ventures. While South Korean companies were not directly responsible for the 2018 court decision, the export restrictions curtail their ability to manufacture.

Japanese companies have managed country-of-origin risks well before the current era of so-called weaponised interdependence, albeit with mixed success. The cold welcome received by Japanese nationals in Southeast Asia in the 1960s and 1970s and nationalist ‘Japan bashing’ in the United States in the 1980s and 1990s resemble contemporary conflicts. Management strategies include diversifying throughout the Asia Pacific, engaging with the host society through public diplomacy or simply waiting out the crisis while minimising damage.

Diversification is a potent risk-management tool. The ‘China-plus-one’ strategy involves maintaining a subsidiary in China while opening a new subsidiary in a third country either to minimise production disruptions or take advantage of changing market conditions. Japanese firms state that protests and business restrictions push them to fast-track their plans to diversify.

Many firms need to stay on the mainland to keep market access. Yet, with the increasing costs of doing business in China, shifting manufacturing production to a less-expensive country in Southeast Asia is an attractive option.

Following the nationalisation of the Senkaku/Diaoyu islands in 2012, China-plus-one style diversification became more prevalent, particularly for the sectors targeted by boycotts, protest and state sanctions. In 2012, Japanese creation of subsidiaries in the combined ‘plus one’ countries overtook subsidiary creation in China for the first time in decades. Controlling for wages, exchange rates and other fundamental macroeconomic indicators, China lost new assets and employees from Japanese companies to Southeast Asia following the 2012 crisis.

Exiting the market — even partially — is not always an option for firms. Costs of exit may be too high or direct access to Chinese consumers may be the raison d’etre of the company’s Chinese subsidiary. These firms need to manage the risks they face locally with an eye for future consumer relations and market access. Companies do so by relying on professional organisations to keep employees out of harm’s way, nurturing ties to local officials and business partners and maintaining a low profile. But this quiet approach is sometimes not enough.

Japanese firms also actively engage with the society of the host country with the aim of improving person-to-person relations in the long run. Many of these engagement activities take the form of corporate social responsibility, such as a Hayao Miyazaki exhibition in China and donations to the Japanese Chamber of Commerce and Industry to bring Chinese college students on study tours to Japan.

In China, Japanese firms work with local and national officials and security forces to protect their interests. When there is no direct danger to either product or supply chain, firms will typically choose to wait out incidences of geopolitical risk.

These tactics have been effective for Japanese companies historically. Following the 1974 Malari Incident in Indonesia, a combination of economic engagement and ‘heart-to-heart’ diplomacy through the Fukuda Doctrine improved the business environment for Japanese multinationals. Southeast Asia is no longer seen as a place to manage risks from anti-Japanese sentiment but rather a place to go to flee it. Anti-Japanese sentiment in the United States has also been soothed by Japanese investment, job opportunities and cultural engagement.

The strategies of Japanese firms are more likely to be successful when the Japanese government is not using weaponised interdependence against its trade partners. With the Abe government’s escalation against South Korea, business actors have been drawn straight into the crosshairs of historical disputes — an area previously insulated.

Unlike relations with China, where consumer behaviour and trade and tourism policy are more frequently used as tools of economic coercion, Japan–South Korea relations had a clearer separation between politics and economics. This separation seems to have ended and both Japanese and South Korean companies must now pursue the same risk-management tactics. Yet the foundation of cooperation between Japanese and South Korean business communities is strong and should provide more opportunities for private sector leadership in resolving geopolitical conflict.

Kristin Vekasi is Assistant Professor in the Department of Political Science and School of Policy and International Affairs at the University of Maine. She is the author of Risk Management Strategies of Japanese Firms in China: Political Crisis and Multinational Firms (Routledge 2019).

This article appears in the most recent edition of East Asia Forum Quarterly, ‘Economics and security’, Vol. 11 No. 4.


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One response to “Weaponised interdependence and the Japanese private sector”

  1. Thanks for an informative analysis. The historical context was helpful. Not noted, however, was the fact that some Japanese carmakers, Toyota and Honda in particular, agreed to build assembly plants in the USA in response to the 1980’s anti Japanese sentiment. after a few years this seemed to mollify American interests to a great degree.

    Also not noted in this piece is the fact that many S Koreans are boycotting Japanese products during this current time of tensions. And tourist visits of S Koreans to Japan are significantly less in recent months. Having just been to Japan myself I can verify that many hotels and retail businesses are hurting from the boycott.

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