Japan seeks to ship more manufacturing capacity from China to Southeast Asia. Image: AFP

TOKYO – Of all the things Asian leaders anticipated for 2020, Vietnam envy probably wasn’t among them.

Even as Covid-19 ravages growth, Southeast Asia’s sixth-biggest economy continues to punch far above its weight in scoring business fleeing China.

The US-China trade war was as abrupt a wakeup-call as multinational companies had in generations. It’s driven many CEOs to the nation with the most in common, on paper, with Asia’s biggest economy.

Vietnam’s communist system, smokestack economy, sizable population, competitive wages and rapid growth make it the region’s “mini-China.”

But other countries in ASEAN are also looking to Japan for investment, as intra-Asian trade grabs an ever-greater share of the global economic pie.

Japan has two reasons to act. It is keen to help Southeast Asia raise its game; and it is, itself, diversifying away from China.

Shinzo Abe’s Japan was plenty antagonistic toward Xi Jinping’s China long before Donald Trump started a tariff arms race. Relations have darkened markedly since then — and since Covid-19 upended the global order.

The US president’s assault on China Inc. began in early 2018 and has been intensifying since – so much so that Trump’s White House is now even targeting Chinese mobile phone apps popular with American teens.

The American offensive puts Japan’s troubled economy directly in the crossfire.

Japanese Prime Minister Shinzo Abe attends an upper house plenary session at parliament in Tokyo on March 11, a day after announcing a second emergency package to tackle economic woes stemming from the coronavirus outbreak. Photo: AFP / Kazuhiro Nogi

Before Trump’s taxes on steel, aluminum and more than $500 billion of Chinese goods savaged Asia’s supply chains, Japan was enjoying its longest expansion in decades. Not a roaring one that boosted incomes broadly, but Tokyo’s best run yet at ending the deflation and malaise of the 1990s once and for all.

The trade war threw Japan Inc. off course. And now, Trump’s attack-China re-election gambit, and Xi’s own retaliatory moves, has Tokyo mulling ways to decouple from the mainland.

Last month, Abe’s government got things rolling with a relatively  modest US$542 million worth of subsidies to reduce Japan’s dependence on Chinese manufacturing.

So far, nearly 60 companies – from Sharp Corp. to facemask-maker Ohyama Inc. — signed on. Another 30, at least, are lining up for the next round of support to shift production to Indonesia, Myanmar, the Philippines, Thailand, Vietnam and beyond.

To be sure, Japan has long been a major economic force in the region.

It started in the 1970s with official development assistance, or ODA, that has since invested tens of billions of dollars in Southeast Asia. More recently, over the last decade, Tokyo’s investments in Indonesia, Malaysia, the Philippines, Thailand and Vietnam rose at nearly double the pace of those in China.

All in, the total is close to $140 billion, largely focused on infrastructure.

Breaking with China

The private sector, though, has been more China-centric to harness mainland’s plentiful and cheap labor and squishy adherence to global environmental norms. Yet rising mainland wages and trade war chaos has CEOs eyeing stabler pastures.

Abe’s government is eyeing ways to accelerate the shift; the question is when Tokyo will get serious.

Abe will have to add a zero or two to the funds he’s currently offering to decoupling-curious CEOs. When planning an industrial divorce between China’s $14 trillion economy and Japan’s $5 trillion one, the amount he is offering is piddling.

More financial firepower will almost certainly materialize. Though there’s an organic dynamic to Japan Inc. exiting China, government policies are largely in the driver’s seat.

In his first stint as premier from 2006 to 2007, Abe and fellow nationalists tried their hand at weaning Japan off China. Now Abe is trying anew — and at this moment of maximum hostility between Beijing and Washington, Japanese CEOs are more amenable than previously.

Workers at a car assembly line at a Honda plant in Ayuthaya, north of Bangkok, Thailand in a file photo. Photo: AFP/Christophe Archambault

Here, the Trump effect can’t be ruled out. No world leader has done more to ingratiate his nation with Trump’s America than Abe. In November 2016, nine days after Trump’s shock election win, Abe was the first world leader to seek an audience at New York’s Trump Tower.

Abe even nominated Trump for a Nobel Peace Prize for his bizarre “love” diplomacy with North Korea’s Kim Jong Un. It’s entirely possible Abe’s decoupling gambit is a kabuki performance aimed at placating Trump.

Yet Abe, for all his nationalist bluster, is mindful of his neighbor’s economic might. Tokyo, in other words, gets the impossible position it’s in as Beijing and Washington trade blows.

The game now is more about limiting fallout than Japan turning its back on its main customer.

“Rather than deliberately decoupling, government subsidies seek to minimize the exposure to future trade disruptions by facilitating the diversification of supply chains,” says Paul Nadeau, a researcher at Center for Strategic and International Studies and founder of the Tokyo Review news portal.

“That’s not to say that there aren’t concerns in Japan about China’s trajectory under Xi, but economically, Japan wants to improve supply chain security while also trying to maintain its economic relationship with China.”

The move, as Francesco Alberti writes in a report for The ASEAN Post, “is aimed at reducing future risks of supply chain disruption in case of another black swan.”

ASEAN-Japan love affair

Japan’s desire to recalibrate risks is Southeast Asia’s gain.

A survey conducted earlier this year by the Singapore-based ISEAS-Yusof Ishak Institute found Japan is the most trusted world power in Southeast Asia.

When it comes to “who will the region turn to in America’s absence,” says Tang Siew Mun, senior fellow at the institute, Japan “garners the highest number of supporters.”

That might come as a disappointment to President Xi’s Communist Party. In recent years, its “Belt and Road” and Asian Infrastructure Investment Bank initiatives were aimed at buttressing China’s soft power in Southeast Asia and beyond.

Instead, the network of strings attached, including high debts and demands for loyalty to Beijing, had the opposite effect. Moreover, Xi’s land grabs in the South China Sea, military assertiveness and crackdown on Hong Kong have created openings for Japan.

Vietnam has been the clear winner. With labor costs that are one-tenth of Japan’s, a stable and business-oriented government, a sizable young population and enviable geographical placement in one of the world’s most dynamic regions, Vietnam is winning the race for Japanese investment.

A motorcycle assembly plant in Vietnam. Image: Facebook

Half of the 30 Japanese companies seeking government cash specifically to strengthen supply chains are putting it in Vietnam. As Tokyo puts more money behind its pivot to Southeast Asia, it’s sure to have a catalyzing effect.

Indonesia, the Philippines and Thailand are working to increase their share of the global manufacturing business. In Jakarta, President Joko Widodo is investing big in infrastructure, working to reduce red tape and improve the quality of human capital in the globe’s fourth most populous nation.

Efforts to get Tokyo’s attention are paying off. In June, Jakarta announced that three of seven companies moving production from China to Indonesia were Japanese, adding about $850 million to Southeast Asia’s biggest economy. They include electronics giant Panasonic and Denso Corp, a major auto parts maker.

Philippine President Rodrigo Duterte is keen to cut ribbons on new factories, too. His $180 billion “Build, Build, Build” campaign is aimed at scoring, among other things, some of the Japanese auto businesses that officials in Bangkok take for granted.

Picking off some Toyota or Mitsubishi factories from Bangkok’s “Detroit of Asia” would create thousands of good-paying jobs as the Philippines slides into recession.

In Thailand, the junta-turned-politicians running the nation have been skilled at maintaining order, until now, but less so at the microeconomic upgrades needed to boost competitiveness and spark innovation.

Might vying for Japan’s next outward wave of investment encourage ASEAN nations to raise their competitive game? Even better if China ramps up investment plans, too, enabling the region to play one Asian economic superpower off another.

Geostrategically, Abe has sought to curb China’s influence by staying in the Trans-Pacific Partnership.

Trump’s 2017 move to walk away from the 12-nation trade pact was a “disastrous act of foreign policy vandalism,” said John Hulsman, president of the London-based global political risk consulting firm that bears his name. As a result, he says, the “Abe government stepped into the void, shepherding a revised TPP to fruition.”

Japan’s Prime Minister Shinzo Abe, center, shakes hands with ministers from 11 countries during the first meeting of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership in Tokyo on January 19, 2019. Photo: AFP/ Yomiuri Shimbun

Abe has had to tread carefully so as not to provoke Trump’s ire. For Abe’s Liberal Democratic Party, though, pivoting to Southeast Asia has been a priority since the 1950s, when it first took power.

Japan is very careful not to resurrect the concept of the “The Greater East Asia Co-Prosperity Sphere” – the ambition that led Imperial Japan into war in Southeast Asia in 1941. August 15 marks the 75th anniversary of the end of the Pacific War.

And yet, Abe’s LDP is sensitive to concerns about China’s own hegemonic ambitions. “Lately, even the Chinese ‘Belt and Road Initiative’ and its ‘community of common destiny’ is seen as the ‘Greater East Asia Co-Prosperity Sphere 2.0,’” says Jeremy Yellen, author of a 2019 book on the topic who teaches at the Chinese University of Hong Kong. “The idea of the ‘co-prosperity sphere’ thus lives on in the politics of the present.”

As Tokyo’s ambitions grow, and it adds a zero or two to the subsidies it’s offering, the region could see a timely influx of post-Covid-19 investment and add incentives for ASEAN governments to get their economic houses in order to win their fair share of the spoils.