IMPACT ON CHINAJAPAN TRADE RELATIONS
The implications of this package will be wide and far-reaching, both in terms of geopolitics as well as economics. Specifically, the resolution to encourage relocation of Japanese companies away from China, its substantial trading partner designate a growing consensus in Japan to move its supply chains back to the country, or to other preferable countries such as India.
REASONS DRIVING COMPANIES OUT OF CHINA
Even though this package has been announced in the backdrop of a global COVID-19 pandemic, however, it is important that this economic budget must not be analyzed solely as a result of the COVID-19 crisis and needs to be put into perspective to grasp the larger picture driving the Sino-Japanese economic relations for a while now.
Enlisted below are some of the major reasons contributing to this economic fallout between the two neighbors:
U.S-China tariff war:
Before the pandemic struck, the trade relations between the countries were already struggling. One of the foremost reasons being the heated trade war happening between the United States and China, both huge trading partners for Japan.
Preference for diversification to other countries like India:
China has been quickly losing its persuasion among Japanese countries for a while now, an example of which can be seen from the fact that more than 159 companies belong from Japan operating in China have shifted to comparable countries like India or other countries. Such diversification and shifting of Japanese firms away from China is estimated to create a USD 700 Bn to 800 Bn economic opportunity for developing geographies like ASEAN and India.
Rising labour costs:
Another reason for China losing its sheen among Japanese firms is the rising labour costs in China, estimated to have gone up by three times in the last four years, standing at USD 6.50 per labour hour currently as compared to a country like India where it is USD 5 per labour hour.
Administrative and legal procedures:
The export-oriented Japanese firms have been facing multiple issues around administrative and legal procedures in China- some face problems with protecting their IPR while others have to deal with a complex tax and legal system as well as other regulatory and enforcement risks.
As the world’s second-most populous country and its largest democracy, India provides the perfect combination of a large, rapidly growing market economy with open and democratic social values. Indo-Japanese cultural and economic ties have roots going back centuries, of which trade was always an important pillar. In the current times, India has been the largest recipient of Japan’s Official Development Assistance (ODA) program which has played a key role in developing India’s infrastructure through affordable loans and grants. In recent decades, India has consistently featured as one of the world’s fastest-growing major economies with average growth rates around 7 per cent while Japan continues to be an economic powerhouse and the third-largest economy in the world.
Indo-Japanese cooperation covers a wide spectrum of activities and has seen consistently upward growth as this strategic partnership deepens. Since the establishment of diplomatic ties between the two countries, Japan has played a key role in promoting economic and industrial development in India through affordable loans, grants, technology sharing and programs like the ODA. Over the decades, the friendly ties between the two countries have manifested in numerous successes for both, be it the Delhi Metro or the setting up of Japanese Industrial Townships (JITs) having special incentive packages for companies to operate in. The economic relationship between India and Japan has always been on a growth spree, with a major revamp taking place since 2014, when ‘Modinomics and Abenomics’ came together to boost Japanese presence in India through greater investments and incentives. The Delhi Metro project, conceived and executed through Japan’s ODA, is a shining example of what this dynamic relationship can achieve with the right synergies in place. It did not come as a surprise, then, that in 2015, the same year that Japanese Prime Minister Shinzo Abe visited India, the country decided to bring the Japanese ‘Bullet Train’ system in India and enhance connectivity in some of India’s biggest cities and accelerate India’s economic growth.
DELHI MUMBAI INDUSTRIAL CORRIDOR DEVELOPMENT CORPORATION (DMICDC)
One of the most prominent pillars of Indo-Japanese cooperation is Japan’s deep involvement in promoting connectivity and mobility in and around India. After the success of the Delhi Metro, both the countries decided to cooperate further to bring Japanese ‘Shinkansen’ trains in India. Pursuant to this, the Delhi-Mumbai Industrial Corridor project was launched after a Memorandum of Understanding (MoU) was signed between the governments of India and Japan in December 2006. According to its website, the DMICDC incorporated in 2008, is the implementing agency for the project. DMICDC has been registered as a company with 49 per cent equity of Government of India, 26 per cent equity of the Japan Bank for International Cooperation (JBIC), and the remaining held by government financial institutions. The Japanese government also announced financial support for the DMIC project to the extent of USD 4.5 billion in the first phase for the project with the Japanese sharing their cutting-edge technology required to operationalize such an efficient high-speed rail system.
The project spans across the north Indian states of Uttar Pradesh, Haryana, Rajasthan, Madhya Pradesh, Gujarat, and Maharashtra along the western Dedicated Freight Corridor (DFC) of the Indian Railways. While for the southern parts of India, the Chennai-Bengaluru Industrial Corridor (CBIC) is another major flagship project largely supported and funded by the Japanese government. Like the DMIC, the CBIC also envisions accelerated growth in the regional industries in South India to facilitate greater private investments and smooth industry access in the region.
Besides assisting and investing in national infrastructure projects like the DMIC and JITs, the Japanese government is also significantly invested in a range of regional and state-specific developmental projects in India. In this regard, it is important to note that Japan has either invested or is planning to invest in a host of projects in North-East India that include a water supply project in Guwahati, enhancing the road network in Assam-Meghalaya, various forest management and agriculture projects in other North-Eastern states, which crucially also serve as a gateway to Southeast Asia. In 2017, the Japan International Cooperation Agency (JICA) signed an agreement with India to provide USD 610 Mn for the Phase I of the North-East Road Network Connectivity Improvement Project, which will focus on projects in Meghalaya and Mizoram.