The Political Economy of Supply Chain Transformation in Asia: From “China Plus One” to De-Sinicization

executive summary: This essay seeks to provide a guidepost for the future of industrial supply chains in East Asia by looking at the “China plus one” model that Japanese multinationals followed in the 2000s and 2010s and assessing the current geoeconomic environment. main argumentIn the 2000s and the 2010s, Japanese firms doing business in China coped with a series of foreign policy crises, including waves of anti-Japanese demonstrations and boycotts of Japanese goods and services in China during diplomatic spats between the two countries. Meanwhile, Japanese direct investments in China continued to be strong. The secret to how Japanese corporations managed to survive these crises lies in what is journalistically called “China plus one”: a diversification strategy to expand their supply chains to neighboring countries in Asia. However, the magnitude of the headwinds against Japanese and other multinationals in China began to qualitatively differ in 2017 during the Trump administration. A series of events led the U.S. during the subsequent Biden administration, as well as other advanced economies, to follow a policy of “de-risking”: a transformation of supply chains to minimize risks and increase economic security. The current trend pitting the U.S. and China against each other, if it persists, may gradually turn China-plus-one strategies into “de-Sinicization.” policy implications• China-plus-one strategies allowed Japanese firms in the 2000s and 2010s to maintain their investments and supply chains in China while also expanding into other markets. • The current economic landscape is more challenging than earlier years of the 21st century in terms of navigating geopolitical tensions and uncertainty, introducing new technologies, and managing China’s economic slowdown. An increasing number of firms will switch from China plus one to de-Sinicization: an outright reduction in their business presence in China. • Chinese corporations are beginning to massively invest in Southeast Asian countries. Hence, the U.S. and Japan must take utmost care to ensure that China will not dominate these Asian countries in the future.