Initially seen as hurting allies, tough policies could end up helping Washington’s partners
Over the last few months, Japanese companies in the critical and advanced technology sectors have come under severe pressure from shareholders and investors for trailing behind competition and failing to rapidly evolve to a changing global technological marketplace.
Around the same time, CNN’s “Face the Nation” host, Fareed Zakaria, in his Washington Post column titled, “The rest of the world doesn’t see China the same way we do,” claimed that Chinese electric vehicle maker Nio was going to “take the world by storm.”
Zakaria went on to claim that while America’s European partners were supportive of its actions toward Russia, they are worried about Washington’s strategy with China and its new economic policies. Zakaria’s reverence to supposed Chinese ingenuity and his view that China’s dominant role in global value chains is inescapable was a classic case of missing the forest for the trees.
For some time now, there’s been a notion that China’s edge in advanced and critical technologies — including EV, batteries and semiconductors — make any attempts at decoupling with the world’s economic juggernaut not only futile, but counterproductive. The U.S. is alone in its trade tussle with China, they say.
For example, soon after French President Emmanuel Macron’s trip to China, American geopolitical experts such as Ian Bremmer, president of Eurasia Group, and Jeffrey Sachs, a professor at Columbia University, were quick to issue that verdict.
But things aren’t so simple. While America’s recent industrial policies have been initially misunderstood, they have since gained traction among the early naysayers — such as Japan and South Korea. In fact, these countries now have the most to gain from Washington’s China strategy.
While it is true that America’s allies and partners initially expressed concern over domestic legislation such as the CHIPS and Science Act, they were sector-specific and designed to address short- to medium-term concerns over a long-term crisis.
In the last six months, allies such as Australia and Japan have worked out agreements and deals with the U.S. for increased cooperation on vital sectors such as critical minerals and battery supply chains. Washington and Tokyo signed the Critical Minerals Agreement and the U.S. and Australia signed a similar agreement on critical minerals that go into advanced technologies such as batteries for EVs, among other fourth generation technologies.
Moreover, the concerns were largely in the semiconductor sector and companies exporting automobiles to America.
Battery manufacturing is a whole different story — a comparative advantage that China currently enjoys and critics of the “new Washington consensus” have pointed to.
Of note, Japan has the most to gain from America’s industrial policies such as the Inflation Reduction Act (IRA), which offers generous subsidies to onshore battery manufacturing for EVs and storage.
Once a leader in the manufacturing of lead-acid batteries, Japanese manufacturers have steadily lost market share to their Chinese and South Korean peers, particularly in the EV lithium-ion battery market. Over the last decade, South Korea and China have steadily gained market share in a highly competitive industry. In 2022, among the top 10 battery manufacturers, there were over four Chinese companies, two South Korean and just one Japanese battery manufacturer: Panasonic, with less than 6% global market share.
The IRA gives Japan the opportunity to catch up to its competitors, particularly China. Japanese battery manufacturers trailing their competition is not simply a matter of market response, but a combination of market and government intervention. In 2015, China whitelisted Chinese battery manufacturers for generous subsidies, in essence cutting South Korean and Japanese manufacturers out of the competition.
Fast forward to 2023, the U.S. is embarking on a similar industrial policy drive with a major difference in its approach. The Biden administration, from the get-go, has established mechanisms for increased discussion and coordination among allies and partners to maximize the benefits of industrial policies, such as with the IRA, while not isolating any partners in the process. Fruits of such discussions and deliberations are the agreements signed with Australia and Japan.
The Biden administration is patently aware of its limitations to reshore battery manufacturing without the support of partners in East Asia. Recognizing its limitations, it has rightly courted Japanese and South Korean battery manufacturers for its EV reshoring ambitions. While highly restricted initially, the IRA and the Bipartisan Infrastructure Law have since become less restrictive to avail the subsidies.
Nations with a free trade agreement with the U.S. may profit from the benefits offered under the industrial policies. Those include nations such as Canada and Mexico that have the United States–Mexico–Canada Agreement, Chile with the Chile Free Trade Agreement and Australia with the Australia Free Trade Agreement — and of course the limited trade agreement between Japan and the U.S.
As it pertains to the battery and critical mineral sector, the U.S. and Japan have announced a trade deal on minerals used in the manufacture of electric vehicle batteries that will be key to strengthening their supply chains and granting Japanese automakers wider access to the new $7,500 U.S. EV tax credit.
The swiftly negotiated agreement prohibits the two countries from enacting bilateral export restrictions on the minerals most critical for EV batteries.
While Japanese companies lost out to state-supported indigenous competition in China, in the U.S. as a direct result of the Biden administration’s policies toward restricting Chinese businesses in critical sectors, Japanese companies have a pathway clearly laid out for them.
The U.S. is one of the largest automobile and battery markets. Given that Japan and South Korea are two nations that have strong automobile sectors and complementing battery manufacturing sectors, the only major competition for Japanese manufacturers are South Korean.
While Japanese battery manufacturers with less than 6% market share have some catching up to do with their South Korean competition, Tokyo and Washington’s synergies in the foreign policy realm give Japan a significant advantage over South Korea, particularly in foreign markets. By leveraging multilateral groupings such as “the Quad” and the Indo-Pacific Economic Framework, Japan can rapidly advance in critical technology value chains.
In June, Toyota revealed plans to expand into the EV market with new vehicles boasting longer ranges by as early as 2026. Earlier in the year, the world’s largest automaker, under pressure from critics, vowed to catch up to Chinese rivals and Tesla.
U.S. foreign and industrial policies could sway the fate of Japan’s plans to catch up to Chinese competition. After all, Toyota, Panasonic and other Japanese companies investing in the U.S. as a direct result of the IRA is a sign of the U.S. partnering with its allies in its competition with China.
While America’s economic security posture toward China may be too much for some countries to stomach, it is at least helping its closest allies.
JT