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Japan has recently launched a trilateral Supply Chain Resilience Initiative (SCRI) with India and Australia. The initiative has been formalised in a virtual meeting that was attended by Simon Birmingham - Minister of Trade, Tourism and Investment, Australia, Piyush Goyal - Minister of Commerce and Industry, India and Kajiyama Hiroshi - Minister of Economy, Trade and Industry, Japan. SCRI will aim at creating a free and transparent trade and investment ecosystem. It will be in effect from the end of 2020.

After the meeting, Piyush Goyal commented, “The cumulative GDP of Australia, India and Japan during 2019 was $9.3 trillion and their cumulative merchandise goods and services trade were $2.7 trillion and $0.9 trillion respectively. With such a strong baseline, it is important that we use this opportunity to work towards enhancing the share of our trade and investment in the region.”

What is SCRI?

SCRI is critical for risk management associated with supply of inputs. It helps to ensure diversified supply sources across significant numbers of countries. This will confine dependency on a single country for supply of various essential or manufacturing goods. SCRI is also expected to ease the supply bottlenecks through regional cooperation.

Tanmoyee Banerjee, Associate Professor, Economics (International Trade), Jadavpur University, told BE, “In the recent past, following the Covid-19 pandemic, the emergence of tension between the US and China can bring supply bottlenecks to countries that are heavily dependent on China. SCRI can reduce import dependency on Chinese products.”

Need of a diversified supply chain

Unanticipated events, natural or manmade - can halt a country’s supply chain management during an emergency. The ongoing pandemic is the biggest example of the same where countries dependent on China or any other single nation for bulk imports are indeed suffering. This is adversely impacting their economic activities. Last year, Japan exported $135 billion worth of goods to China but imported $169 billion worth goods that accounts for 24% of its total imports. So, the pandemic has disturbed their economic activities. On the contrary, Japan is a tsunami and tremor prone country. Countries dependent only on Japan stay under risks. SCRI’s aim to diversify the import-export system is a necessity. 

In a different economic context, if a single country dictates over the global export business in major segments, it can start unfair trade practices. China exports in much lesser price than its domestic market to maintain control over global exports. Other countries interested to enhance exports are failing to offer competitive deals. So SCRI can prevent this dominance by giving chance to other promising countries.

Will it corner China?

China’s global dominance on the export business and hostile political and military conduct with its neighbouring countries possibly fired this move. China accounts for 32.6% of Australia’s exports including iron ore, coal and gas. But the Chinese and the Australian navy had a confrontation in the South China Sea in July. China has also hiked tariffs for Australia.

It is also expected that Japan’s economic growth will be affected if US and China create their own economic zones. Japan recently fixed $2.2 billion as incentive for its companies to move their manufacturing bases out of China. An India Invest data showed that Japan is the fourth-largest investor in India and imports from Japan have more than doubled in the last decade. So, after pulling out from the Regional Comprehensive Economic Partnership (RCEP) that enraged China, India is now planning to strengthen its ties with Japan.

India’s concern

India has imported goods worth $65.1 billion from China and exported goods worth a mere $16.6 billion to them in the 2020 fiscal. Additionally, India is fully dependent on China for Active Pharmaceutical Ingredients (API) and around 45% of its electronics imports. So, a sudden break with China will be unviable. But the recent border clash at Ladakh has made India look at substituting its Chinese imports. Diversifying supply chain does not essentially mean that it will stop importing from China but will encourage other options along with its domestic manufacturing sector.

Commenting on this, Banerjee said, “India must try to make sectors like pharmaceuticals, automotive parts, electronics, shipping, chemicals and textiles self-reliant and globally competitive as these sectors are profoundly dependent on China. Also, this initiative may in turn make India a potential destination of foreign investors. But that requires some proactive action from the government. According to the ‘Ease of Doing Business Index’ India stood at rank 63 among 190 nations and much below other Asian countries like Singapore, Hong Kong Taiwan and Malaysia. To make India a global destination for foreign investment and reap the benefit of its comparative advantage due to its demographic dividend, the government must make the business atmosphere friendlier, along with offering suitable tax incentives and ensure skill formation.”