Examine possible impacts of economic decoupling between the US and China and between Japan and South Korea on the world economy and show some prescriptions

1. Global Effects of
US-China, Japan-South Korea
Economic Decoupling
Yasuyuki Todo
Waseda University
February 27, 2020
USJI Week
SAIS, Johns Hopkins University

2. Who am I?
• Affiliation:
Graduate School of Economics, Waseda University
(currently visiting the University of Sydney)
• Degree:
Ph.D. in economics, Stanford University
• Research fields:
international economics, development economics,
economics of networks
• Research topics:
How do social and economic networks affect
economic development and resilience? 2

3. Today's talk
• Possible impacts of economic decoupling
between the US and China and between Japan
and South Korea on the world economy
–Why can they be so substantial, widespread,
and long-lasting?
• How can we stop decoupling?
–Rules
–Psychology
–Diversification
3

4. US's restrictions on exports to Chinese
high-tech companies
April 2018 Restrict exports to ZTE
May 2019 Restrict exports and technology transfer to
Huawei and 68 of its affiliates in 26 countries
October 2019 8 Chinese high-tech companies specializing
in AI, face recognition, and video surveillance
4

5. Japan's restrictions on high-tech exports
January 2019 Strengthen export controls of ICT and
military-related products
• Require an individual approval on each contract,
not multiple contracts, for exports to countries
other than group A ("white-list countries")
July 2019 Strengthen controls on exports of 3 types of
semiconductor material to South Korea
August 2019 Downgrade South Korea to group B
(non-while list countries)
5

6. Exports of hydrogen fluoride from J to SK
6
Volume (ton,
right scale)
Value (100
million yen)

7. Negative effects of export restrictions/controls
may propagate through global supply chains,
leading to a large total effect.
7
Kashiwagi, Todo, Matous (2018), WINPEC DP.
Actual supply chains identified by data from FactSet Revere.

8. 8
2nd-tier supplier
parts, components, material final goods
1st-tier supplier
Huawei
Export
restrictions
US semiconductor
producers
Affected due to
demand reduction
Affected due to
supply reduction
Illustration of global supply chains

9. 1. Order 2. Demand
4. Production3. Inventory renewal
Simulation
9
Propagation of shocks through supply chains
Inoue and Todo (2019), Nature Sustainability.
Economic model Actual supply chain data
Estimate parameter values
to fit production after
Great East Japan earthquake
Experiment with hypothetical networks to examine
what network features affect propagation
Supercomputer Kei

10. Propagation of shocks through supply chains:
The case of the Great East Japan earthquake
80-100%
Reduction in production
60-80%
40-60%
Direct production loss
0.1 trillion
yen
(0.02%
of GDP)
Indirect loss due to
propagation effect
11.4 trillion
yen
(2.3% of
GDP)
Inoue & Todo (2019), Nature Sustainability. 10

11. Cumulative
Density
Number of suppliers
Propagation effect is larger in the presence of
hub firms
11Inoue & Todo (2019), Nature Sustainability.

12. Keiretsu and input specificity
12
Final-good
producer
1st-tier
supplier
2nd- tier
3rd-tier

13. 13
2nd-tier supplier
parts, components, material final goods
1st-tier supplier
Huawei
Export
restrictions
US semiconductor
producers
Affected due to
demand reduction
Affected due to
supply reduction
Illustration of global supply chains

14. Propagation effect is larger in the presence of
specific inputs and complicated loops
14Loops ComplexNone
Input
substitutionCompleteNone
Inoue & Todo (2019),
Nature Sustainability.
Changes in value added for various supply chains

15. Implications to US-China & Japan-ROK trade conflicts
• Chinese and Korean ICT companies are hub firms,
create complicated loops in supply chains, and
utilize specific inputs.
 Propagation effects can be substantial,
widespread, and long-lasting.
• Companies are linked through supply chains
across industries.
 Decoupling IT sectors of China from the US
affects US's other sectors through supply chains.
15

16. The problem is not limited to trade.
• Export controls restrict not only export of products
but also transfer of related technology.
• Inward foreign direct investment (FDI) in most
ICT industries should be registered in advance.
– US since Nov 2018, Japan since Aug 2019.
– This prevents technology spillovers from FDI to
domestic companies
16

17. Foreign Exchange and Foreign Trade Act of Japan
Screen FDI inflows from the perspectives of
(1) national security
(2) maintenance of public order
(3) preservation of public safety
(4) smooth operation of the Japanese economy
17
MOF (2019), https://www.mof.go.jp/about_mof/councils/customs_foreign_exchange/sub-foreign_exchange/
proceedings/material/gai20190822/06.pdf
Screen
Implement FDI
Suggest
modification
/termination
Order modification
/termination
modify/terminate
Not Obey
Obey
OK
Comments from
committee

18. Japan
US
South
Korea
China
Germany
France
International knowledge networks will also be
segregated. (Iino, Inoue, Saito, Todo, 2018, RIETI DP)
Research collaboration
networks of firms (2011-13)
Data source: Orbis and PATSTAT
Research collaboration is identified
by co-ownership of patents.
The figure is created using Gephi. 18

19. International knowledge diffusion is a major
source of innovation and economic growth.
Iino, Inoue, Saito, Todo (2018),RIETI DP. 19
International
collaboration
Domestic
collaboration

20. Negative effects of export restrictions so far
20US Census Bureau, BEA

21. Negative effects of export controls so far
21MOF of Japan

22. The spread of coronavirus is a "simulation" of
the US-China decoupling.
Effects on Japan
• Imports of intermediate goods from China ($99 billion)
– Supply chain disruptions:
Nissan stopped production in Japan.
• Visitors from China in 2019
– 30% of all foreign visitors
– Spent $15 billion (37% of total expenditure)
Effects on Australia
• Expenditure by visitors from China: US$13 billion
• Exports of education: US$24 billion.
24% of students in the University of Sydney are Chinese.
22

23. Negative effects of export restrictions may be
deepened and long-lasting.
23
Exclusivism
Protectionism
Economic
stagnation
Smaller benefit of trade, FDI,
and technology transfer
Blaming to foreign countries
(populism)

24. Madsen (2001), Southern Economic Journal.
Yamazawa (1973), Keizai Kenkyu, Hitotsubashi University.
Tariff
rate
Japan
1930
1930 19401920
1900
24
Vicious cycles b/w exclusivism and stagnation
in history

25. Recent deepening of anti-globalization
Source: Pew Research Center (2018),
“Americans, Like Many in Other Advanced Economies, Not Convinced of Trade’s Benefits.”
25

26. US view of China
26
Pew Research Center (2019), "U.S. Views of China Turn Sharply Negative Amid Trade Tensions."
Unfavorable
Favorable

27. Increasing negative views
of Japanese and South Korean to each other
27
Genron NPO (2019), http://www.genron-npo.net/world/archives/7250.html.
Gallup (2019), https://www.nikkei.com/article/DGXMZO47297470S9A710C1EA2000/
Note: The poll in July, 2019 was conducted by Gallup, while others by Genron NPO
and East Asia Institute. Therefore, the results may not be comparable.
"Japan does not
need to
compromise with
Korea": 69%
Oct 2019 (Nikkei)

28. 28
Exclusivism
Protectionism
Economic
stagnation

29. 29
We need to stop
decoupling.

30. Prescription (1)
Set transparent and clear rules that exceptionally
allow restrictions on trade, FDI, and technology
transfer for national security.
• Security exceptions are defined in WTO agreements
(GATT article 21). (Kawase, Oct. 2019, Voice)
– New FTAs such as CPTPP adopt similar exceptions.
– But the regulations are not very clear.
• Exceptions should be defined more clearly.
– Wassenaar Arrangement defines and regularly updates its list
of goods and technologies that are subject to export controls
for national security.
– But China is not a member.
– Can RCEP and Japan-China-South Korea FTA set up these rules?
30

31. Prescription (2)
31
https://commons.wikimedia.org/wiki/File:Little_world,_Aichi_prefecture_-_Main_exhibition_hall_-_Diorama_-_Living_of_Homo_erectus.jpg
We need psychological/behavioral
economics approaches,
because we may be intrinsically closed.

32. Homophily in network formation
Hoshino, Shimamoto, Todo (2020), Oxford Bulletin of Economics and Statistics
Are we all homophilous (tendency to be linked
with agents with similar characteristics)?
Hanoi
Data
• Survey to about 300 SMEs in
traditional garment clusters in Vietnam
Method
• Random-coefficient logit regression to
examine heterogeneity in the level of
homophily
32
Prob(link b/w i and j)
= β(difference in characteristics b/w i and j) + …
(β < 0: homophilous, β > 0: heterophilous)

33. Results: Distribution of random coefficient
of the difference in selected variables between 2 firms
Composite index of
firm size
Composite index of
female participation
Mostly homophilous Some heterophilous
33
Homophily in network formation
homophilous heterophilous homophilous heterophilous
Hoshino, Shimamoto, Todo (2020), Oxford Bulletin of Economics and Statistics

34. Experiments
Farmers in region A are randomly selected
and trained for eco-friendly practices in either A, B, or C. 34
Creation of long links
Matous and Todo (2015), Ecology and Society.
How can we create geographically long links?

35. 35
Creation of long links
Number of external links with farmers outside the group
for information exchange 1.5 years later
Density
Farmers without training
Farmers trained in C (very far)
Matous and Todo (2015), Ecology and Society.

36. Social interactions can promote pro-globalization.
Yamamura and Tsutsui (2018). Rev Int Econ.
36
Average of those who
played a team sport,
participated in community
activities, and conducted
group works in childhood
Average of
10,000
Japanese
Pro-group works, pro-competition,
reciprocity, trust in others

37. Prescription (2)
Promote social interactions across countries.
• Social interactions can facilitate trust to others and
support for globalization.
– Exchange and collaboration programs among citizens, students,
business persons, bureaucrats, politicians, and researchers
– Cultural interactions through movies, songs, comics, and more
• The recent propagation of coronavirus prevents
social interactions across countries and
promotes anti-Asian sentiment.
37

38. Prescription (3)
• To alleviate negative effects of decoupling of
the US and China, any country should diversify
partners for trade and investment.
–Many countries rely too much on China.
38
UN Comtrade

39. Hurricane Sandy that hit US east coast in Oct. 2012
39
Propagation of shocks through global supply chains
Kashiwagi, Todo, Matous (2018), WINPEC DP.

40. 40
Results: Effects of supply-chain links with a firm
damaged by Hurricane Sandy on sales growth
(based on linear regression)
Propagation of shocks through global supply chains
Kashiwagi, Todo, Matous (2018), WINPEC DP.

41. Summary
Diagnosis
• The decoupling of the US and China may have
extremely large negative effects on the world economy.
– Propagation of shocks through global supply chains
– Vicious cycle between exclusivism and economic stagnation
Prescriptions
• Set clear rules to define national security issues that
can restrict international trade, investment, and
technology transfer.
• Promote social interactions across countries.
• Diversify partner countries for trade and investment
41