Comment on “Supply Chain Decoupling: Geopolitical Debates and Economic Dynamism in East Asia”

Abstract

Ando et al. (2024) examine how the tightening of export control regulations by the USA in recent years has affected the exports of three East Asian countries – Japan, South Korea, and Taiwan – to China. Given that China is the most important trading partner for these three countries, Ando et al.'s paper focuses on a very important issue for the region.

Ando et al. closely examine the impact of the US Foreign Direct Product Rule (FDPR) on Japan's exports. Many interesting results are presented, but I would like to highlight two in particular. First, Ando et al. find that the strengthening of the US FDPR significantly reduced Japan's exports of related products to China. Interestingly, their estimation results (Ando et al.'s table 2) imply that it is the more semiconductor-intensive, that is, more high-tech, products that are negatively affected, while exports of less high-tech products may have increased. Since the US FDPR specifically targets high-tech products, the finding suggests that the measure is having the intended effect.

Second, in terms of the size of the impact, Ando et al. estimate that the reduction of Japanese exports to China due to the FDPR amounted to 3.3% of the total value of Japanese exports to China in 2019. Accurately measuring the impact of export controls is very difficult, and the 3.3% estimate may be a slight overestimate. However, compared to the increase in exports from Japan to China (in Japanese yen terms) from 2014 to 2019 of about 10% over the 5-year period, this 3.3% impact is too large to ignore.

While Ando et al.'s attempt to quantitatively examine the impact of export controls is an important first step, there are still a large range of issues that have not yet been addressed. I would like to highlight key issues that warrant attention in the future. First, it is very difficult to identify the scope of export controls and quantitatively measure the impact of export controls. For example, Hayakawa et al. (2023) also show the negative impact of the tightening of the US FDPR, but their estimate of the size of the impact (0.2%) was considerably smaller than Ando et al.'s (3.3%). Although the two results cannot be compared directly because of the different empirical methods and time periods, this difference in the results may partly reflect the difficulty of quantifying the impact of export controls. Nevertheless, it is worth trying to investigate the impact, and accumulating empirical results will help us get closer to the true picture.

Second, I would like to highlight the importance of micro-level studies. Export controls may severely affect specific firms that heavily rely on exports of the products subject to the regulations. For example, it has been reported that some Japanese firms that had heavily relied on exports of hydrogen fluoride to Korea experienced a large decline in exports and profits due to the tightening of Japan's controls of exports of chemical products to Korea which took effect on 4 July 2019. This experience suggests that policy makers should keep an eye on such micro-level impacts.

Third, Korea and Taiwan are likely to be much more severely affected by the tightening of the US FDPR and various restrictions on semiconductor-related products in the future, since, according to trade statistics, Korea and Taiwan appear to be more dependent on exports of integrated circuit products to China than Japan. While Ando et al. focus on the impact of the US FDPR on Japan's exports, the quantitative impact of the tightening of US regulations on Korea and Taiwan should be carefully monitored.

Last but not least, I would like to consider the balance between regulation and economic benefit. As Ando et al. mention in their conclusion, large compliance costs associated with trade controls will dampen economic activities, and the burden of such costs likely is greater for small and medium-sized firms. I strongly agree with Ando et al. that the governments of East Asian countries “need to communicate well with the US government and help their private sectors avoid the huge compliance costs.”

Moreover, we should be aware of the possibility that a tightening of regulations may have a negative impact not only on the target country, but also on the country doing the tightening, as shown by studies on the US–China trade war and sanctions by Western countries against Russia. There is also anecdotal evidence that regulations did not always produce the intended results. For example, it was the semiconductor industries of Korea and Taiwan rather than that of the US that grew as a result of the Japan–US Semiconductor Agreement concluded in the 1980s. Moreover, surveys by the U.S. Department of Commerce (2014) report that the export controls on space-related products and services adversely impacted on the US space industry's health and competitiveness. Therefore, US export controls and other policies for a technological decoupling from China may end up hurting the US as well as China (and third parties).

National security is important, even if it requires some economic sacrifices. However, it is also important not to impose export controls blindly, without regard for their consequences. It is therefore essential to continue to gather empirical evidence through careful quantitative and qualitative analyses to highlight the costs of regulation and the importance of the rules-based trading system.