US-China rift looms over Japanese companies

Last week, Yuko Kishida, the wife of Japan’s prime minister, made a rare solo trip to the White House to plant a cherry tree with Jill Biden, celebrating a friendship between the two countries that will last “for ever and ever.” , first in the US words from mrs. It was a nice symbol of the close alignment between the two nations.

The costs of those ties have been a source of concern for some Japanese executives as tensions rise between the US and China. But at the Shanghai auto show, which was also held last week, there were more pressing concerns about Japanese car manufacturers: how to survive in the world’s largest car market.

Japanese automakers are already suffering biggest drop in sales this year among foreign brands in China. Companies like Toyota and Honda face big risks if they fail to keep up with rapid advances in electric vehicles and self-driving technology by their Chinese rivals. Both companies pledged at the Shanghai fair to increase local production so they can deliver electric vehicles to Chinese consumers faster.

“I feel an underlying sense of crisis that we need to accelerate our efforts to do business in this market,” Koji Sato, Toyota’s new chief executive, said in a group interview.

That could be more difficult if the decoupling between the US and China accelerates. Sato carefully avoided directly addressing whether a China-only supply chain was needed to guard against further escalation of tensions. But the practical difficulty of decoupling has been widely pointed out. And a growing number of Japanese CEOs have privately raised concerns about the extent to which Tokyo should play along with Washington to distance itself from China, even as threats to economic and national security appear to bring the United States and Japan closer together.

On the surface, the economic strain is barely noticeable. Japan recently Announced heavy restrictions on exports of semiconductor manufacturing equipment, fulfilling its part of a trilateral agreement with the US and the Netherlands aimed at reducing China’s ability to produce high-end chips for military use.

Japan was also the first to sign a trade agreement with the US covering critical minerals needed for electric car batteries, giving their companies access to at least some of the Biden administration’s green subsidies.

Still, there are some in Japan who question the economic benefits the US is offering to offset the huge risks of trade tensions with China. Joe Biden launched a trade initiative with 12 Indo-Pacific countries in May as part of efforts to counter a more assertive China.

But the Indo-Pacific Economic Framework has already come under much criticism, as it does not include any new access to the US market from Asian countries. There is also no prospect of the US joining an 11-member Asia-Pacific trading bloc known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (soon 12 nations including the UK). That block is the successor to the Trans-Pacific Agreement that was signed in 2016 but from which Donald Trump removed the United States the following year.

And while Tokyo revealed export controls on semiconductor equipment that will affect a larger number of Japanese companies than previously expected, the US has signaled it will seek even tougher measures and it’s unclear if Japan will play along.

Inside Japan’s Commerce Ministry, people with knowledge of the matter say there is a deep division between a camp that is concerned about the economic consequences of such measures and another camp that seeks more aggressive steps to further align Tokyo with Washington.

For Japanese chief executives, political uncertainty in the US is a further factor in their reluctance to put all their bets on the country’s alliance with Washington.

In an interview earlier this year, Keiji Kojima, Hitachi’s chief executive, openly questioned the concept of “friendship,” which involves shifting production toward friendly geopolitical partners. “With various changes in the geopolitical balance of power, how do you know that our friend today will always be our friend?” he asked him.

Because these concerns are not shared publicly, it can sometimes be difficult to spot the subtle tensions that are brewing underneath. But it will be dangerous to assume that Japanese companies are on board on the basis of strong national security cooperation between Washington and Tokyo. Tensions are likely to erupt eventually if the US does not address the gap in its trade strategy.

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