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Three quarters of 100 Japanese firms that are critical to the nation’s economic security see uncertainty in U.S.-China relations as the most pressing concern regarding economic security, a survey conducted by the Asia Pacific Initiative showed.

A questionnaire was sent between mid-November and mid-December to 100 firms and research institutions seen as both critical and susceptible to economic security challenges, asking about their business risks in regards to economic security, as well as what kind of government support they need.

According to the survey, 60.8% of the respondents said tensions between Washington and Beijing actually affected their businesses, and 12.5% responded that they feel caught in a dilemma regarding the two countries.

Under such circumstances, many firms have great expectations for the minister in charge of economic security, a new post created for Prime Minister Fumio Kishida’s Cabinet.

On the question of what they want from the government, 47.4% said they wanted the government to show a clear policy direction, followed by 18.6% who asked for policymaking taking corporate profits into account.

The results indicate that companies have hopes that the government will conduct diplomacy that balances between the U.S. and China, and stabilizes Japan’s relationship with both countries as much as possible.

They also hope that the government will implement national security and industrial policies that strike a good balance between economic security and free economic activities.

This means the government must find a good policy balance between the U.S. and China, as well as between national security and economic activities.

The survey showed that 98% of respondents said they were aware of the significance of economic security while 86.9% said they were already making efforts to address the issue. Specifically, 64.4% had strengthened information management, 50.6% had changed or diversified suppliers and 23% had set up a section focused on economic security.

More than 84% of the firms said the issue of economic security was regularly discussed, sometimes or often at board meetings or executive meetings where they talked over management policies.

The results also highlighted the fact that companies view economic security as a medium- to long-term challenge.

Asked about their biggest concern if the government imposes stricter regulations related to economic security, 72.4% of those surveyed said they were worried about the policy’s impact on their medium- to long-term business plans, while nearly 10% each said they were worried about how they might affect their sales, profits or expenses.

On the question of what they believe is the biggest challenge to tackling economic security, allowing multiple answers, 75% said uncertainties in the U.S.-China relationship, followed by 65% who said securing adequate information, 62% who said risk assessment and 57% who responded that collecting information on international situations was the biggest challenge.

The results clearly showed how heavily U.S.-China confrontations are weighing on Japanese firms.

According to the survey, 60.8% said the tensions were already affecting their business in some form.

Specifically, nearly 60% said their costs had risen due to the U.S.’ stricter regulations including tariffs, followed by 36.5% who said they had changed suppliers, 33.8% who said their expenses had increased due to China’s stricter regulations including levies and 29.7% who said their sales had dropped.

Asked whether they had ever been caught in the tensions between the U.S. and China, 12.5% said they had.

Business risks

As for concerns regarding doing business in China, the following responses were recorded:

  • There are risks of not being able to continue business in China due to the Chinese government’s policy changes: 76.1%
  • Geopolitical risks: 63.6%
  • Leakage of information including on technologies: 65.9%
  • Growth of Chinese competitors: 62.5%
  • Cyberattacks: 52.3%
  • Beijing’s strengthening of foreign investment regulations: 52.3%

And regarding doing business in the U.S. the responses were as follows:

  • Concerns over the uncertainty of the U.S.’ medium- to long-term China policy: 45.5%
  • Washington’s intensifying moves to exclude Chinese companies: 46.6%
  • The confusions of supply chains: 47.7%
  • Geopolitical risks: 38.6%
  • Increasing costs due to reorganization of supply chains and relocation of production facilities: 28.4%

Because of such risks, firms are burdened with rising costs for economic security measures, with 58.2% saying their overall costs rose by less than 5% along with stricter economic security regulations, largely exceeding 36.3% who said their costs have not increased at all.

Currently, more firms see the U.S.’ stricter regulations as a factor for increased cost burden, with 59.5% saying their costs expanded to cope with Washington’s rules, compared with 33.8% who said their costs rose to cope with Beijing’s rules.

Japanese firms are active across numerous industries in China and the United States, giving rise to worries as tensions between the two powers rise. | KYODO
Japanese firms are active across numerous industries in China and the United States, giving rise to worries as tensions between the two powers rise. | KYODO

Both the U.S. and Chinese markets are important for Japanese firms, with 33.3% of respondents saying they set a target to raise the share of the Chinese market in their sales, while 41.9% said they have such plans for the U.S. market.

This is why the companies are having difficulty balancing between the two nations.

Asked what they want the new economic security minister to work on, one logistics firm said he should cooperate closely with the U.S. on diplomacy and defense, but at the same time maintain a balance so as to avoid deterioration in Japan’s economic relations with China.

A transportation firm said the minister should implement policies to prevent a situation in which companies are forced to choose between the U.S. and China, as well as to minimize risks of decoupling.

One electric appliance company said the minister should collaborate with the U.S. and China so that Japanese companies will not suffer losses by being caught in the middle.

On the issue of what they expect from the government, 47.4% of those surveyed asked the government to show a clear policy direction, 18.6% asked for policy decisions that take into account the need of companies to secure profits, 9.3% asked for subsidies to support reshoring of factories and 5.2% for subsidies to support relocation of production from China to other regions such as Southeast Asia.

The results indicate that companies believe Japan’s response to stricter regulations from the U.S. and China, and the scope of its own regulations, are unclear.

A shipbuilding company said a clear policy should be presented on how to respond to the U.S. and China’s regulations, while a machinery maker called for policymaking that enables companies to continue business in both countries and clarification of rules regarding security.

These answers represent companies’ frustration with the government for being unable to present a clear rule as to what extent sensitive information should be protected for national security reasons in supply chains.

Other companies expressed hope that the government will work on raising the nation’s competitiveness and play a leadership role in the global community to promote the free trade system.

Balancing security and business

Strengthening economic security and expanding corporate profits can be contradictory at times.

It is necessary to make sure that the government’s economic security measures will not excessively restrict companies nor discourage their free activities.

It is also true that nearly 15% of companies doing business in China are asking for government support to relocate their factories in China to Japan or countries in places like Southeast Asia.

Takayuki Kobayashi, Japan's minister in charge of economic security | KYODO
Takayuki Kobayashi, Japan’s minister in charge of economic security | KYODO

Japan should diversify imports of raw materials, components, products, data and services vital to achieve economic security, as well as diversifying investments, production facilities and supply chains.

At the same time, instead of taking a “Made in Japan,” self-reliance approach, the government must pursue a muscular economic security strategy by maintaining and boosting international rules-based order through policy coordination with allies and like-minded countries.

Companies believe they have to deal with economic security issues — including China’s military-civil fusion, its expansion of its sphere of influence, the U.S.-China tensions, collapse of international order, rise of economic nationalism — as medium- and long-term challenges.

They are asking for the government to ensure effective economic security policies.

The government needs to aim for two balancing acts — constructing a stable relationship with both the U.S. and China despite their confrontations, and come up with innovations and an industrial policy to balance economic security and corporate activities.

Companies should be prepared to accept trade and investment regulations that are essential to Japan’s economic security as a way to protect themselves. But such regulations should not be imposed unilaterally by the government.

Companies are concerned over the fact that the government has still not presented a clear rule on regulating corporate activities for national security purposes.

Unlike national security, the main players of economic security are companies. It is indispensable for the government and companies to hold serious discussions and cooperate more closely on the issue.

Mariko Togashi is a Matsumoto-Samata fellow at API. API Geoeconomic Briefing is a series that looks into geopolitical and economic trends, with a particular focus on technology and innovation, global supply chains, international rule-making and climate change.

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