Supply Chain Resilience Initiative

1st September – Supply Chain Resilience Initiative

Supply Chain Resilience Initiative

With COVID-19 and trade tensions between China and the United States threatening supply chains or actually causing bottlenecks, Japan has mooted the Supply Chain Resilience Initiative (SCRI) as a trilateral approach to trade, with India and Australia as the other two partners. The initiative is at the strategy stage and has some way to go before participants can realise trade benefits.

What does supply chain resilience mean?

  • In the context of international trade, supply chain resilience is an approach that helps a country to ensure that it has diversified its supply risk across a clutch of supplying nations instead of being dependent on just one or a few.
  • Unanticipated events — whether natural, such as volcanic eruptions, tsunamis, earthquakes or even a pandemic; or manmade, such as an armed conflict in a region — that disrupt supplies from a particular country or even intentional halts to trade, could adversely impact economic activity in the destination country.

What is Japan proposing?

  • COVID-19 has brought to the focus the idea that when assembly lines are heavily dependent on supplies from one country, the impact on importing nations could be crippling if that source stops production for involuntary reasons, or even as a conscious measure of economic coercion.
  • While Japan exported $135 billion worth of goods to China in 2019, it also imported $169 billion worth from the world’s second-largest economy, accounting for 24% of its total imports.
  • Electrical and electronic gear, and machinery, nuclear reactors and boilers were sectors that clocked up significant imports into Japan. So, any halt to supplies could potentially impair economic activity in Japan. A Bloomberg report said that Japan’s imports from China fell by half in February, a period when China was battling the peak of the virus impact.
  • In addition, the U.S.-China trade tensions have caused alarm in Japanese trade circles for a while now. If the world’s two largest economies do not resolve their differences, it could threaten globalisation as a whole.
  • A Reuters poll of 32 economists published in August showed a majority 80% expect Japan’s growth and Japanese companies’ productivity growth to be affected if Washington and Beijing move towards creating their own economic zones.
  • As part of the country’s economic stimulus package, the Japanese government recently earmarked $2.2 billion to incentivise its companies to move their manufacturing out of China. This was not a protectionist move — the manufacturing could, but did not have to, return to Japan. This was a nudge to diversification of risk — where those manufacturing lines could be relocated out of China to other third countries.

Why Japan wants India as a partner in SCRI?

  • Japan is the fourth-largest investor in India with cumulative foreign direct investments touching $33.5 billion in the 2000-2020 period accounting for 7.2% of inflows in that period.
  • Imports from Japan into India more than doubled over 12 years to $12.8 billion in FY19. Exports from India to the world’s third-largest economy stood at $4.9 billion that year.
  • Almost 1,400 Japanese companies operating in India is a clear reflection that the two countries have a long-standing and deepening trade relationship.

Where does Australia stand?

  • Media reports indicate that China has been Australia’s largest trading partner and that it accounts for 32.6% of Australia’s exports, with iron ore, coal and gas dominating the products shipped to Asia’s largest economy.
  • But relations including trade ties between the two have been deteriorating for a while now. China banned beef imports from four Australian firms recently, and levied import tariffs on Australian barley.
  • Recently again, China’s education Ministry warned its students aspiring to study or already studying in Australia, of ‘rising racism’ in that country, urging them to re-assess their aspirations.

Impact on India –

  • Following the border tensions between the two highly populous Asian neighbours, partners such as Japan have sensed that India may be ready for dialogue on alternative supply chains.
  • But an internal push to suddenly cut links with China would be impractical. China’s share of imports into India in 2018 (considering the top 20 items supplied by China) stood at 14.5%. In areas such as Active Pharmaceutical Ingredients for medicines such as paracetamol, India is fully dependent on China. In electronics, China accounts for 45% of India’s imports, the analysis showed.
  • Chinese supplies dominating segments of the Indian economy include pharmaceuticals, automotive parts, electronics, shipping, chemicals and textiles. Over time, if India enhances self-reliance or works with exporting nations other than China, it could build resilience into the economy’s supply networks.

Way forward –

While India appears an attractive option for potential investors both as a market and as a manufacturing base, trade experts point to the need for India to accelerate progress in ease of doing business and in skill building. Tax incentives, as the one recently announced to compete with the likes of Vietnam and the Philippines for investments in manufacturing, alone may not suffice.

SourceThe Hindu

QUESTION – What is Japan-led ‘Supply Chain Resilience Initiative’? What does India stand to gain or lose if it joins the chorus?

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