White Paper on International Economy and Trade 2020

[Outline]

July 2020

Trade Policy Bureau

Ministry of Economy, Trade and Industry

1

White Paper on International Economy and Trade: 2020

The Great Lockdown recession is the worst since the Great Depression.

Nature of COVID-19 crisis: limit on face-to-face interactions →”supply shock” + ”demand shock →employment/ income shock”

International collective actions are needed to deal with the current global crisis on infection and economy.

Quarterly World GDP (IMF)

Source: IMFBlog 6/24, IMF WEO June 2020, and IMF staff calculations.

The supply chain disruption can be seen in efficient production system (inventory, cross-border production sharing), flexible logistics (land, maritime, air), and human mobility within/across borders.

Geographic concentration of production of vital supplies.

Shortage of medical products and emergency measures.

Limit on face-to-face interactions show the value of digital technology.

Global supply chain disruption

Source: Global Trade Alert, Japan External Trade Organization “Region/Analysis Report”,Cabinet Office “Economy Watcher Survey”, Sixfold、Baldwin ”Supply chain contagion waves: Thinking ahead on manufacturing ‘contagion and reinfection’ from the COVID concussion”

We aim to achieve a resilient economic and social system to deal with crises flexibly and to ensure sustainable development.

We aim to enhance global governance to prevent divisive forces and to bring unifying forces for international cooperation, to make the emergency measures temporary, and to deal with true global challenges.

We aim to have resilient supply chains to prepare for and to deal with the next crisis.

We aim to turn this crisis into an opportunity to promote digitalization and evolution of communication.

3. Globalization Past, Present and Future

2. What Coronavirus Reveals About the Structures of Our World

４．The Way Forward

Globalization has fostered exchange of, goods, people, money, and ideas, developing the world economy.

Globalization lowered the cost of moving goods, moving ideas, and moving people (face-to-face).

Both telepresence and telerobotics allow workers to perform tasks inside another nation without actually being there.

Online communication has spread more rapidly due to COVID-19 crisis.

Virtual immigration

would expand the range of jobs

1. The Coronavirus Pandemic Triggers a Global Economic Crisis

Whole worldReduction in

Passenger flights also led to reduction

in air cargo

USQuarantine measures for immigration prevented a free movement of experts

South East Asia→JapanSupply disruption in parts of automobile and electronics

ChinaDelays in land transportation,Reduction in container ships

from China

China→JapanSupply disruption in

parts of automobile and electronics

ＥＵ→WorldInterrupted movement

of medical products

ＥＵRestrictions for

Immigrants caused labor shortage

ＥＵIt took more time for border crossing

2

ChinaAfter new year holidays, mobility restrictions for migrant workers

brought about labor shortage

The world is facing the worst economic crisis since the Great Depression. COVID-19 has limited our face-to-face interactions, creating new challenges for the global economy and international society.

To overcome this ongoing crisis, we should achieve a resilient economic and social system to flexibly respond to shocks and ensure sustainable development.

1. The Coronavirus Pandemic Triggers a Global Economic Crisis

3

-100 -50 0 50 100 150

Amusement ParkPackage tour

Air fareTrain fare

Business suitTaxi

MealsPants for Ladies

gasolineInternet connection

MicrowaveShochu-based beverage, cocktail

Instant noodleGaming device

PastaConsumables for health use

Assumption: For economies where infections are declining, -persistent social distancing into the second half of 2020-greater scarring from the larger-than-anticipated hit to activity during the lockdown in the first and second quarters -a negative impact on productivity as surviving businesses enhance workplace safety and hygiene standards

For economies still struggling to control infection rates, -the need to continue lockdowns and social distancing will take an additional toll on activity

In the event of a second outbreak, the resulting containment measures lead to a decrease in world output of about 4.9 percent in 2021, whereas in a faster recovery from the lockdown measures implemented in the first half of 2020, global output improves by about one-half percent in 2020, relative to the baseline.

１－１．The Great Lockdown: the worst recession since the Great Depression

Source: Japanese Statistics Bureau ”Family Income and Expenditure Survey”Note: Japanese Consumption of April 2020, Year on Year %

【Suspension of production】

Production halted due to lockdown. (manufacturing industry)

【 Disruption of the supply chain】

The parts plant has been ordered to stop production. As a result, parts were not available and our company was unable to continue our own production. (manufacturing industry)

Business activities and disruption of supply chain

Quarterly World GDP

（YoY ％、real）Covid-19 and consumption

（Japanese household, April 2020)

The world experiences the worst economic crisis in a century (IMF names this crisis as “the great lockdown”).

Supply chain disruption and business shutdown trigger outright supply shocks. There are also adverse aggregate demand shocks to face-to-face service industries and durable goods.

4

Notes: 2019 Q1=100 Source: IMFBlog 6/24, IMF WEO June 2020, and IMF staff calculations.

１ー２．Economic shocks of coronavirus

Demand shock

Employment/ income shock

Unprecedented economic crisis affecting all regions and countries

・Supply chain disruption・F2F service suspension

・Decrease in demand in F2F service・Decrease in demand in durable goods

Decrease in income/Massive unemployment

Supply shock

・E.g. Great East Japan Earthquake

・ E.g. Global Financial Crisis

Types of economic crisis

・Border closure/Lockdown

Type Consequences Demand shock or Supply shock

Key toRecovery

Natural disaster

Destruction of the infrastructure /

production facilities

Supply shock Reconstruction

Financial crisis Destruction of financial system

Demand shock Stabilizing financialsystem

Pandemic Avoiding human interaction

Both supply and demand shocks

Containing the virus

The nature of the coronavirus economic crisis: The coronavirus pandemic has limited face-to-face communication, causing both supply and demand shocks, resulting in employment and income shock.

Traditional economic policy tools could be ineffective in combating the consequences of the coronavirus.

5

１ー３（１）．Current situation of COVID economic crisis

（％）

Source: INEGI, CEIC DatabaseNote: seasonal adjusted, Quarter-over-Quarter annualized rate

Source: NBS,CEIC database Note: Year-over-Year comparison

China GDP Growth Rate(％)

Source: EurostatNote: seasonal adjusted, Quarter-over-Quarter annualized rate

Europe GDP Growth Rate（％）

-4.9

-8

-6

-4

-2

0

2

4

6

8

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2018 2019 2020

-6.8

-10.0

-5.0

0.0

5.0

10.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2018 2019 2020

Net export

Net Capitalformation

Finalconsumption

Emerging countriesGDP Growth Rate

（Mexico）

China's economy shrank 6.8% in the first quarter, the first contraction on record. The European Union's GDP saw its sharpest decline in the last 14 years. In some countries, economies shrank by a record 20%.

Emerging economies face a looming economic crisis from the coronavirus.

COVID-19 economic crisis is expanding as an unprecedented crisis affecting all regions and countries.

6

France-19.7

Spain-19.4

EU-13.6

Italy-19.6

UK-8.5

Germany-8.6

-25

-20

-15

-10

-5

0

5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2018 2019 2020

１ー３（２）．Supply shock and its spillovers

Source: Ministry of FinanceTrade Statistics of Japan

-60%

-40%

-20%

0%

20%

40%

60%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Japanese imports from China

Feb. 2020 -47%

（YoY）

US industrial production

(2012=100）

Feb 109.3

Apr 92.6

90

95

100

105

110

115

Apr MoM-11.2%

Source: FRB, CEIC Database

Automobile -72％Airplane -24%

0

20

40

60

80

100

120

140

2019/7

2019/8

2019/9

2019/1

0

2019/1

1

2019/1

2

2020/1

2020/2

2020/3

Golf

Gym-48.1％

Amusement and Theme park-93.6％

Entertainment

Japanese industrial activities (entertainment)

Source:Indices of Tertiary Industry Activity

Mar 104.3

(2015=100)

As the global economy has become more integrated across transnational borders, global supply chains have formed. Japan's imports from China fell sharply, as the coronavirus ground factory production in China to a halt, resulting in production disruption in Japan. The spread of COVID-19 has disrupted supply chains globally.

Lockdowns bar operations from doing businesses apart from those delivering essential services, and voluntary restraint leads to voluntary suspension of nonessential services (e.g. entertainment industry).

7

１ー３（３）． Demand shock and its spillovers

To confine the infection, travel restrictions and other measures are introduced. Demand for face-to-face services (e.g. tourism industry) has sharply declined.

Demand for durable goods is also disappearing. As a result, exports and production have fallen sharply. Weak demand creates weak supply, and vice versa.

Source: Mr. Zurab Pololikashvili, Secretary-General of United Nations World Tourism Organization

-80%

-60%

-40%

-20%

0%

20%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

September 11 attacks(2001)

SARS(2003)

Global Financial Crisis(2008)

70% decrease

（YoY）

International tourist arrivals

-60

-40

-20

0

20

2018/1

2018/4

2018/7

2018/1

0

2019/1

2019/4

2019/7

2019/1

0

2020/1

2020/4

Apr. 2020

Source: Ministry of Finance, Trade Statistics of Japan

Japanese auto exports

(YoY, ％）

8

１ー３（４）．Employment/ income shock

US unemployment rate（％）

Source: FRED Economic Data, National Bureau of Economic Research Source: European Commission

Eurozone household savings rate

（％）Great Depression

(1930s）

25.6

Global Financial Crisis

(2008）

10.0

Apr. 2020

14.7

May, 2020

13.3

0

5

10

15

20

25

30

10

12

14

16

18

20

2016 2017 2018 2019 2020 2021

Autumn 2019 outlook

Spring 2020 outlook

Face-to-face service industry has been hit hard by COVID-19. The US has suffered job losses unprecedented since the Great Depression.

Households and corporations accumulate precautionary savings due to uncertainties, unemployment, and sluggish income. Such excess savings further depress consumption and investment leading to a vicious cycle of demand and supply shocks.

9

Nikkei225

Doe Jones

Euro Stoxx 50

MSCI

Emerging

markets

Shanghai

60

70

80

90

100

110

2020/1/1 2020/2/1 2020/3/1 2020/4/1 2020/5/1

（ Jan 1, 2020 = 100 ）

-60

-40

-20

0

20

40

60

80

（dollars / barrel）

１ー３（５）．Commodity and financial market turmoil

Crude oil prices

(資料) Refinitivより作成。

Stock prices

WTIfutures

North Sea Brent futures

2020/1 2020/2 2020/3 2020/4 2020/5 2020/6 (Year and month)

2020/1 2020/2 2020/3 2020/4 2020/5 2020/6 (Year and month)

Oil prices have plunged into negative territory due to the glut created by the COVID-19 global economic shutdown. Since May, oil prices have shown signs of recovery with the economic reopening, and its market stability is crucial to ensure energy security for both oil-producing and oil-consuming nations.

Stock markets plunge on coronavirus fears. As the disease has been somewhat confined, economies have started to reopen and the governments and central banks implement stimulus on an unprecedented scale, financial market stabilize.

Source : RefinitivSource : Refinitiv

10

１ー４．The need for international cooperation

Three tracks to a coronavirus vaccine（Ian Bremmer）

China（Mountain）The harshest possible lockdown made a quick control of infection. The economic activities quickly restarted.

Source : Centers for Disease Control and Prevention (https://www.cdc.gov/flu/pandemic-resources/1918-commemoration/three-waves.htm)

The second wave（around fall of 1918）

Three different waves during Spanish influenza in the U.S.

Source : Ian Bremmer, Eurasia group

The first wave（around March of 1918）

The third wave（around January

of 1919）

US/Europe (Tsunami)The lockdowns aren't close to as complete or effective. It will take a longer time before the economycan restart.

Developing world (missile)there will be a much broaderpath of trajectories, owning to・disparity in access to medical

institutions・economic stagnation by

lockdowns

The past pandemics did have a deadly second wave and a third wave. COVID-19 threatens to have devastating consequences in developing nations. If those nations fail to contain the virus, the world cannot overcome the coronavirus. The economic crisis will also last longer.

This global nature of the pandemic means the coronavirus crisis cannot end without international cooperation.

11

2. What Coronavirus Reveals About the Structures of Our World

12

２－１．Supply chain disruption

ＥＵEntry restrictions

for seasonal workers

Source : Global Trade Alert, JETRO “Regional information and analysis”, Cabinet Office “Economy watchers survey”, Sixfold, Baldwin ”Supply chain contagion waves: Thinking ahead on manufacturing ‘contagion and reinfection’ from the COVID concussion”.

The disruption of supply chain

ＥＵExport restrictions on

medical products

ＥＵDelays at

border crossings

China to JapanAuto parts and

electronics parts shortage.

South East Asia to JapanAuto parts and electronics parts shortage.

U.S.Travel restrictions on engineers, business persons, and experts.

ChinaLabor shortages

as migrant workers remaintheir hometowns after

the Lunar New Year holiday

ChinaLockdown causes delays in

road transports. Decreases in shipments

GlobalAir cargo capacity

declines as number of flights decrease

The supply chain disruption can be seen in efficient production system (inventory, cross-border production sharing), flexible logistics (land, maritime, air), and human mobility within/across borders.

13

２－２．Industry characteristics and COVID crisis

Automotive ＩＴ Products Medical supplies Food

FactoriesMany parts. Modular manufacturing isadopted in Electric vehicles.

Many processes from assembly to processing. Easy to be modularized.

Few Parts,Few manufacturing processes

Many operations cannot be mechanized.

LogisticsMainly by maritime transportation

Mainly by air transportation

Air transportation (high value-added), maritime transportation (general purpose), Land transportation (general)）

Air transportation (high value-added), maritime transportation (general-purpose products), and land transportation (general)

Inventory Low inventory Low-Much inventory Low-Much inventory Much inventory

Supply chainbefore corona crisis

Diversification through Local Production and Local ConsumptionLabor intensive parts tend to be geographically concentrated.

Assembly is labor-intensive.High value-added components are concentrated in locations where there are many highly skilled workers.

General purpose products aremainly made in areas with low labor costs.

Food is produced in good climate and in good soil.

The effects of corona crisis

If the supply of some parts is disrupted, the entire production process will stagnate.Also, operations were suspended due to sluggish demand

Although the spread of the infection has made it difficult to procure parts and assembly work for a period of time, many companies have continued to operate.

Demand for medical supplies surged in many countries. Export restrictions were imposed in many countries, leading to global supply shortages.

Some countries have implemented export restrictions.There are delays in cross-border logistics, and in some areas there is a shortage of workers for agricultural work.

The COVID-19 crisis have brought uneven shocks to each industry.

Coronavirus outbreak disrupted the supply of components. Vehicle production was suspended as automobiles have many parts and its industry relies on a complex production system. Modularity has enabled the IT industry to continue production.

As demand for medical supplies exploded, many countries imposed export restrictions on medical supplies.

14

２－３．Production system: cross-border linkage

Share of wire harness exportsAuto Parts Trade with China

0

1

2

3

4

5billion US dollar

Korea→China

China→Korea

0

2

4

6

8

102001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

billion US dollar

Japan→China

China→Japan

0

5

10

15

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

billion US dollar

Germany→China

China→Germany

0

0.5

1

1.5

2

2.5

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

billion US dollar

Mexico→China

China→Mexico

Source：International Trade CentreNote：Auto Parts is listed as HS code 8708.

0

5

10

15

20

25

30

35

40

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

%

Source：International Trade CentreNote：Wire harness is listed as HS code 854430.

Mexico

VietnamChina

Romania

Philippines

US

Germany

Japanese, South Korean and European automakers have suspended production amid an increase in parts imports from China.

Although the amount of parts imports is not large, automobile industry has complex production system and supply is concentrated, vehicle production was suspended.

15

２－４. Logistics and human mobility

Responses on Human Shortages in Ports around the World(Shortage of personnel in port management is reported in about 20% of ports)

Source：IAPH,WPSPNote: W16,2020. It covers 90 ports around the world.

The number of seasonal farmers needed in major EU countries,EU employees commuting across borders

Source：Eurostat

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dock workers Technical-nautical services

harbar masterservices

Port Authority

Normal presence moderate shortages shortages

0 100 200 300 400

Germany

Italy

France

Spain

(thousand)

Number of seasonal farmers needed in major EU countries

0 50 100 150

Poland→Germany

France→Luxembu

rg

Germany→Luxem

burg

Slovakia→Austria

France→Belgium

(Thousand)

Number of workers commuting across borders

Tighter entry rules (e.g. quarantine, border closure) have raised international trade costs and have reduced trade activity.

Restrictions on human mobility have negatively impacted global shipping. Global logistics were disrupted by a decline in air cargo capacity as the number of flights decrease. Also, there have been shortages of customs officials and border control personnel.

Restrictions on human mobility also affected production. In Europe, where free movement across borders is allowed generally, cross-border commuters face border closure.

16

２－５．Concentrating production of vital supplies

0%

5%

10%

15%

20%

25%

30%

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

JapanKoreaUnited States

World

Germany

China’s share of each country’s imports

0

500

1,000

1,500

2,000

2,500

3,000

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

JapanKoreaUnited StatesTaiwan

China

Germany

Vietnam

World

Import concentration index(HHI Index of importing countries)

Electric Machineries, Electronic parts Auto parts

0

1,000

2,000

3,000

4,000

5,000

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

ThailandUnited StatesSpainKoreaWorld

Germany

Japan

China

Note:HHI index is used to measure concentration of suppliers to import. Higher index shows higher concentration. If CountryA imports from Country B that accounts for 50％of total import of Country A, from Country C(30%),Country D(20%), HHI index of Country A is calculated as follows:502+302+202=3,800. If Country A imports from only one country, the index is 1002=10,000 as the maximum. If country A is near from a major production country, HHI index of the country may be large.

Source: International Trade Centre

As the international division of labor progresses, some supplies show geographical concentration of production.

Many countries increase imports from China. Production concentration in Electric Machineries, Electronic parts has intensified, while auto parts show a diverse production base.

17

70

80

90

100

0

200

400

600

2008 2017 2008 2017Suppliers of intermediate goods (A)

Final assemblers (B)

Ratio (A)/(A+B) (right axis)

89.3%

83.4%

２ー６．Japanese manufacturing affiliates in China

Source : METI, “Basic Survey on Overseas Business Activities”.Note : The scale of circle reflects the sales value of Japanese affiliates in China.

Source : : METI, “Basic Survey on Overseas Business ActivitiesNote : The question is whether your main products is intermediate goods or final ones. This question started for performance of 2008.

The ratio of Japanese suppliers of intermediate goods in China

Transportation equipment

Automobile is “integral products”, which requires coordination of various related companies for qualitycontrol such as strict safety control. Parts-suppliers are likely to locate near the assembly plant, partly because of transportation cost of heavy components.

The local procurement ratio is high. Japanese affiliates, located in Chins, procure over 75% from suppliers in China.

Information and communication electronics equipment

The ratio of international procurement is higher, because it has different industrial features; characterized as “modular products”, low transportation cost due to lightness of theircomponents.

Japanese affiliates in China procure over one third of total amount from their parent companies in Japan. Another just under 15% comes from the third countries. The local procurement stays around 40%. Japanese companies, in upstream position, are easy to be influenced, when production activities are disrupted in China.

0

10

20

30

40

50

0 10 20 30 40 50 60

Overseas production ratio (%)

Chin

a’s

share

in o

vers

eas

pro

duction (

%)

Transportation equipment

Information and communication electronics equipment

Average

The overseas production ratio and China’s share

Transportation equipment

Information and communication electronics equipment

（companies） （%）

Chemicals

Food

Electrical machinery

General machinery

The ratios of overseas production in transportation equipment and information technology industries are high among manufacturing. Their revenues from China are also huge. The number of Japanese intermediate suppliers in China is increasing and they deepen Japanese-Chinese production linkage.

The ratio of local procurement is high for transportation equipment sector. The ratio of procurement from Japanese parent company is high for sector of information and communication electronics equipment.

18

２ー７． Regional integration

Source: Created from International Trade Centre, World Input-Output Table.Note: USMCA, a new trade agreement replacing NAFTA, went into effect in July 2020.

Share of intra/inter-regional trade (total)

Share of intra/inter-regional trade (Electrical machinery and electronic parts)

Share of intra/inter-regional trade (Auto parts)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2019 2005 2019 2005 2019

EU NAFTA Asia

EU NAFTA China Asia(except China) Others

within ＥＵ50％

within ＮＡＦＴＡ23％

within Asia87%

(excluding China 54％）

within ＮＡＦＴＡ30％

withinＥＵ55％

within Asia78%

(excluding China 57％）

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2019 2005 2019 2005 2019

EU NAFTA Asia

EU NAFTA China Asia(except China) Others

within ＥＵ59％

withinＮＡＦＴＡ33％

within Asia64%

(excluding China 45％）

within ＮＡＦＴＡ35％

within ＥＵ62％

within Asia60%

(excludingChina 47％）

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2019 2005 2019 2005 2019

EU NAFTA Asia

EU NAFTA China Asia(except China) Others

within ＥＵ84％

withinＮＡＦＴＡ58％

within Asia59%

(excluding China 46％）

within ＮＡＦＴＡ62％within

ＥＵ88％

within Asia61%

(excluding China 57％）

Regional integration helps establish regional production networks. The shares of intra-regional trade has been steady across the globe.

The nature of industrial trade patterns influences intra/inter regional trade patterns. In the electrical industry, the share of Chinese imports has increased globally. Regional integration maintains more intra-regional auto production networks.

19

２ー８． Role of logistics in supply chain

Maritime transportation Land transportationAir transportation

Blockade of some roads and railway tracks

Decline in the number of operation of passenger aircraft

Blockade of some ports

Influence of measures to prevent the spread of new

coronavirus infection

In terms of trade volume, sea transportation accounts for 99.7% of Japan's international trade

In terms of trade amount of money, air transportation accounts for 40% of Japan's international trade.

Suitable for transporting lightweight, high value-added products. The just-in-time production system has been upgraded by the short transport time.

In domestic logistics, truck transportation, which is responsible for the "last mile," accounts for more than 90% of the total by weight.

Land transportation and warehouses account for nearly 80% of Japan's overall logistics

costs

Suitable for the mass transportation of heavy goods such as mineral fuels, iron ore, and foodstuffs.

For heavy goods and mass transportation, it is difficult to replace sea transportation with air transportation.

In the case of transportation between long distances, maritime transportation with a lengthy transit time is not suitable as an emergency alternative means of transportation.

Impact of each logistics route

It is essential to connect before and after sea and air transportation. In international trade, it is impossible to replace sea and air transportation with land transport.

Characteristics of each logistics route

Limitation of substitutability of each logistics route

Source: Created from the Ministry of Land,

Infrastructure and Transport. Source: ICAOSource: Created from the World Input-Output table.

Maritime

transportation

99.7 %

Air transportation

0.3 %

Air transportation

40% Maritime transportation

60%

Land

transportation

63.7 %Water transportation

15.2 %

Air

transportation

3.4 %

Warehouses

14.9 %Postal mail

2.9 %

Overseas trade (weight basis, 2017) Overseas trade (money basis, 2017)Transportation costs for agriculture, forestry, industry and manufacturing (2014)

Design of resilient supply chains requires stable logistics and alternative logistics options

Maritime, air, and land transportations play different roles, and they complement each other. It’s important to use effective transportations based on the type of goods.

20

0102030405060708090

100110

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

U.S. ↔ Canada U.S. ↔ China U.S. ↔ Germany

World average = 100

２－９． Cross-border movement of people, trade and investment

International travelers, trade (left panel) andforeign direct investment (right panel)

Source: IMF WEO, UNWTO, World Bank Source: World Bank, UNCTAD

Trade costs

Source: ESCAP-World Bank Trade Cost Database 。

Between 1995 and 2015, trade costs between the U.S. and China fell significantly by about 30 percent above the global average.

-1

0

1

2

3

4

3/3 3/6 3/10 3/13 3/17 3/20 3/24 3/27

delay time (hours)

Border crossing delays for truck

Source: Created by Sixfold, Baldwin

Transportation time increased due to checkpoints, etc.

0%

5%

10%

15%

20%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

World foreign direct investment outward

stock/ World GDP (LHS）International tourism number of

arrivals/World population（RHS）

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0%

10%

20%

30%

40%

50%

60%

70%

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

World trade/World GDP(LHS）

International tourism number of

arrivals/World population（RHS）

The movement of people across borders stimulates trade and investment. This relationship is particularly strong for emerging and developing economies.

COVID-19 decreases human mobility, and trade costs have increased. As a result, trade and investment have stagnated significantly.

21

２－１０．Human concentration and the spread of virus

World population

0

20

40

60

80

100

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

都市部

地方部

Source: UN

(100 million people)

New Coronavirus Infection Rates and Population Density by State in the U.S.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

0 200 400 600 800 1000 1200 1400

Population density (state population per square mile)

Massachusetts

New JerseyNew York

Rhode Island

Connecticut

California

Infection rate (confirmed cases as of April 20th

/state population,%)

Source: 1keydata, github

Urban area

Rural area

The movement of people across borders concentrates people to cities. The exchange of diverse knowledge has led to an increase in innovation and increase in productivity.

Service industry, which requires F2F interactions, increases dominance in urban areas. The new coronavirus infections has spread in urban areas with high population density. Face-to-face communication costs are rising since the crisis.

22

２ー１１． Emergency measures

Source: WTO https://www.wto.org/english/tratop_e/covid19_e/export_prohibitions_report_e.pdf

Note: As of 22 April, 2020

Exporters of personal protective equipment

Source: WTO https://www.wto.org/english/news_e/news20_e/rese_03apr20_e.pdf

Note: Average from 2017 to 2019

China, Germany and USaccount for about half of

the total export

The Number of countries and separate customs territory introducing export prohibitions and restrictions as a

result of COVID-19, by categories of products

Demand for personal protective equipment has exploded, and shortages of medical supplies have become serious in various regions. As a result, many authorities have adopted emergency measures.

To ensure stable supply, it is important to prepare for crises and cooperate with other countries in emergencies. Export restrictions may put themselves at risk as complicated supply chains have been established (“paradox of export restriction”).

23

２−１２．Digitalization and COVID-19 crisis

Daily Active Users of Facebook (QoQ)

0

1

2

3

4

5

1,300

1,400

1,500

1,600

1,700

1,800DAUｓ（左軸）

前期比（右軸）

（million people） （％）

Source: Facebook

North

America

Europe

Asia Pacific

Others

-50

0

50

100

150

200

250

1/5 2/5 3/5 4/5 5/5

（％）

Online retail sales growth(YoY)

Source: Emarsys initiative, GoodDataNote: Online sales of brands that primarily sell in stores through apps, etc.

DAU (left)

% compared to the previous term (right)

During the COVID-19 Crisis, the digitization of the economy and society accelerated rapidly, with the spread of e-commerce and online communications.

Social distancing and the rise of online communication remind us of the importance of digitalization.

24

２−１３．The growing presence of mega IT firms

Data traffic expands beyond economic scale(Internet Traffic/Global GDP)

0

0.5

1

1.5(Monthly Traffic Volume [EB]/World GDP [trillions of dollars])

Others

Europe

North America

Asia Pacific

Source: Cicso, IMF

0%

5%

10%

15%

20%

時価総額

売上

純利益

Market capitalization, sales and net income share of the U.S. mega IT firms

Source: RefinitivNote: Amazon, Alphabet, Facebook, Apple, MicrosoftMarket capitalization, revenue and net income shares of the five Microsoft companies in the S&P500 as a whole

Market capitalization

Sales

Net income

The rapid spread of digital technologies is transforming many economic and social activities (e.g. the expansion of digital trade, cross-border e-commerce, internet of things). The amount of global data traffic is growing faster than the size of the economy.

The progress of digitalization changes the industrial structure from “value chain model” to “layer model.” Along with this business model change, the network effect contributes to the growing presence of mega IT firms.

25

0

200

400

600

800

1,000

1,200

1,400

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

（100 million dollars）India

Source: IMF Global Financial Stability ReportNote: Cumulative basis. Non-resident securities investment.

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

0.10

t

t +

30

t +

60

t +

90

Global financial crisis(2008)

Taper tantrum(2013)

COVID-19 Crisis(2020)

China’s Devaluation(2015)

（%）

Ratio of output to value addedin the emerging markets

0

100

200

300

400

500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Malaysia

Source: BIS

0 2 4 6

マレーシアベトナム

中国南アフリカブラジル

インドタイ

ロシアトルコ

フィリピンブルネイ

アルゼンチンカンボジア

Source OECDThe larger this value is, the greater the production activity used for intermediate inputs, and the wider the supply chain.

Dollar credit in the emerging Asian countries

Declining in Emerging markets(2018)

（100 million dollars）

MalaysiaVietnamChinaSouth AfricaBrazilIndiaThailandRussiaTurkeyPhilippinesBruneiArgentinaCambodia

Cumulative nonresident portfolio flows to emerging markets(percent of GDP, based on

daily observations)

Capital outflows from emerging and developing economies, which rely on commodity, tourism industry, and dollar funding. This is one symptom of the dollar-concentration risk.

Emerging Asian economies are expanding their dollar credit. As the supply chain is a payment chain in reverse, if this payment risk materializes, supply chain disruption might happen.

２−１４．Capital outflow and supply chain

26

3. Globalization:Past, Present and Future

27

３ー１．Globalization and world development

World GDP after 1800s

（year）

Foreign Direct Investment(stock)

The number of immigrants (stock)

Source: UN Source: UNCTAD

0

20

40

60

80

100

120

1800 1900 2000

（trilliondollars）

Source: Our World in DataNote: The units are international dollars

as of 2011.

0

5

10

15

20

25

30

35

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

その他

アジア（中国を除く）

中国

欧州

米国

世界

（trilliondollars）

0

0.5

1

1.5

2

2.5

3

1990 1995 2000 2005 2010 2015 2019

高所得国

中所得国

低所得国

（100 million people）

High-income countries

Middle-income countries

Low-income countries

Others

Asia(expect China)

China

Europe

U.S.

World

Globalization promotes and increases interactions between different regions and populations around the globe, fostering exchange of goods, people, money, and ideas, making it a major driving force for the development of the world economy.

Furthermore, due to the ICT revolution in recent years, factories were crossing borders, bringing the knowhow of advanced economies’ firms to emerging economies, accelerating global growth.

28

３ー２（１）．Globalization’s first unbundling

Globalization can be thought of as a progressive reversal of the forcible bundling. Three costs of distance mattered: the cost of moving goods, moving ideas, and moving people.

In the first unbundling (from 1820 to 1990), the Industrial Revolution fostered and was fostered by transportation technology, lowering the cost of moving goods and separating of production and consumption.

Source: Richard Baldwin and Fukunari Kimura.

The first unbundling(Separation of production and

consumption)

Country A

Country A Country B

（1820～）

Features The first unbundling was all about

allowing nations to better exploit their comparative advantages.

Raw materials and final products were traded between countries.

While shipping got cheaper, the costs of moving ideas and people fell much less.

This unbalanced reduction of separation costs triggered a chain of causes and effects that eventually produced enormous income differences between today’s developed and developing nations.

Roles of nations

Promoting free trade and achieving a welfare state, building global governance.

(e.g.)GATT system

Transportation costsin the U.S.

Source: Fred, Federal Reserve Bank of St. LouisNote: This data is derived from revenue per ton-mile railroad in the United State

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1865

1873

1881

1889

1897

1905

1913

1921

1929

1937

1945

1953

（Cent）

29

３ー２（２）．Globalization’s second unbundling

In the second unbundling (from 1990 to 2015), the information and communication technology (ICT) revolution lowered the cost of moving ideas. ICT made offshoring feasible, which promoted the development of the global supply chain.

50

60

70

80

90

100

110

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

The second unbundling(International separation

of factories)（1990＝100）

Communications Costsin the U.S

Source: Fred, Federal Reserve Bank of St. LouisNote: This data is derived from the US PCE price index of communication

HQ in Country A

Factory in Country B

（parts）

Factory in Country C（assembly）

Factory in Country D（painting）

Features Rich-nation firms sent their marketing,

managerial, and technical know-how along with the production stages that had been moved offshore.

As a result, the wage gap between today’s developed and developing nations has shrunk.

The international trade of intermediate goods developed, which promoted the expansion of the global supply chain.

Roles of nations

Facilitating trade and investment environments, including rule-making in bilateral and regional frameworks (e.g. )EPAs

Source: Richard Baldwin and Fukunari Kimura.

30

３ー２（３）． Globalization’s third unbundling

In the third unbundling (from 2015), face-to-face cost is plunging thanks to both telepresence and telerobotics. They allow workers from one nation to perform tasks inside another nation without actually being there. Such virtual immigration would expand the range of jobs that are directly subject to international competition.

The world experiences COVID-19 crisis during the transition to the third unbundling. Online communication has been accelerating and accelerated by the new globalization.

The third unbundling(Likely to allow labor services to be

physically unbundled from laborers.)

Features Many menial and professional tasks in

developed nations could be performed remotely by workers and professionals sitting in developing nations. It would also allow developed-nation professionals to apply their talents on a much wider basis.

For example, Japanese engineers could repair Japanese-made capital equipment in South Africa by controlling sophisticated robots from Tokyo.

Roles of nations

Strengthening human capital, Securing person, and developing infrastructures and rules required to promote digitalization.

Online communication tool(Teams and Zoom)

0

50

100

150

200

250

300

350

0

10

20

30

40

50

2018/4

2018/6

2018/8

2018/1

0

2018/1

2

2019/2

2019/4

2019/6

2019/8

2019/1

0

2019/1

2

2020/2

2020/4

(million people ）（million people ）

Microsoft Teams（Daily active users, left）

Zoom（Daily meeting

participants, right）

Source: Microsoft, Zoom video communicationsSource: Richard Baldwin and Fukunari Kimura.

31

３ー３．Globalization for Japan

GVC participation rate in Japan Breakdown of Japan's current account

Source: OECD TIVANote: The GVC participation rate indicates the percentage of exports in the global value chain on a value added basis, and the higher the ratio, the more it contributes to the formation of the global value chain.

Source: Bank of Japan, "balance of payments"; Policy Research Institute, Ministry of Finance, "Financial Statistics Monthly“Note: The primary income balance shows interest and dividends arising from external financial claims and debts.Thesecondary income balance shows the balance of the provision of assets without compensation between migrants and non-migrants.In the 1980s, there was a change in the current account balance. Before that, the balance was divided into the trade balance, the non-trade balance, and the current transfer balance. The non-trade balance corresponds to the current service balance, the primary income balance, and the current transfer balance corresponds to the current secondary income balance.

-20

-10

0

10

20

30

40

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

primary income balance

trade balance

service balance

secondary income balance

current account balance

current transfer balance

invisible trade balance

（trillion yen）

0%

10%

20%

30%

40%

50%

60%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Backward Participation(importing foreign inputs to produce the goods and services they

export)

Forward Participation(exporting domestically produced inputs to partners in charge of

downstream production stages)

Japan has played an important role in the development of the second unbundling in East Asia. Japanese companies have extended international production networks and forming industrial agglomerations. Japanese GVC participation has shifted from forward to backward where companies provide high-value-added products with high technological capabilities in Japan.

Japan achieved rapid economic growth as a “trade nation” after the war. While it becomes the world largest creditor along with building supply chain network, Japan has transformed itself from “trade nation” to “investment nation.” Its current account balance is now determined by investment income rather than trade surplus.

32

３ー４．Third unbundling in the world

Three areas of China's new infrastructure construction

Source: April 20, 2020: National Development and Reform CommissionWritten based on Wu Hao, Chief of Innovative Digital Department

１．Information infrastructure

(e.g.)5G, IoT, satellite Internet, AI, cloud computing, blockchain.

３．Innovation infrastructure

(e.g.) Critical science and technology infrastructure, science and education infrastructure, industrial technology innovation infrastructure, etc.

２．Unified infrastructure

(e.g.) Intelligent transport system infrastructure,

smart energy infrastructure, etc.

Examples of global AI strategies

U.S.：Revised “National Strategic Plan for Research and Development of Artificial Intelligence” (June 2019)・Prioritizing long-term investments in AI research to maintain U.S. leadership.・Developing an effective method to realize collaboration between humans and AI.・Ensuring system safety and security.・Expanding public-private partnerships in AI.

China：“Next Generation Artificial Intelligence Development Project" (July 2017)・By 2030, China will be the world's best in theory, technology and application.・The size of the core AI industry and related industries was expanded to 1 trillion yuan and 10 trillion yuan, respectively.・Key development areas include AI, software, hardware, intelligent robots, autonomous driving, virtual reality (VR), augmented reality (AR), smart devices, and IoT core components.

European Commission: “AI White Paper” (February 2020)・Europe should become a global leader in AI systems that can be used and applied safely.・Achieving "reliability" and "superiority" for safe AI development that respects the values and rights of citizens.

Source: JETRO, The Foundation for MultiMedia Communications

The third unbundling is driving a new industrial revolution. Infrastructure such as 5G and AI, is important for this transformation. In the world, nations take measures to develop the environment, and to establish digital related rules, such as the GDPR of Europe.

In the wake of the COVID-19 pandemic, the Chinese government announced that it would accelerate the construction of new infrastructure.

33

３ー５．Japan's challenges toward the third unbundling

Data free flowData security

and safety

Data Free Flow with Trust（DFFT）

E-commerce rule-making at the WTO ・Negotiations are under way among 84 member countries at the Joint Statement Initiative on electronic commerce at the WTO.

Multilateral regulatory cooperation・The framework for mutual transfer of personal data between Japan and the EU has come into force, in January 2019.・Promotion of CBPR (APEC)

Investments on tangible and intangible assets (ratio to GDP)

Source: based on INTAN-Invest, SPINTAN, JIP Database 2015, Penn World Table 9.1, etc., with reference to the Japan Center for Economic Research.

0

10

20

30

40

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

(%)有形資産投資

無形資産投資

0

10

20

30

40

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

(%) 有形資産投資

無形資産投資

Concept of Data Free Flow with Trust（DFFT)

U.S. Japan

investment in tangible assets

investment in intangible assets

investment in tangible assets

investment in intangible assets

Nevertheless companies in Japan have a high level of ICT utilization capabilities in general, investments on and utilization of intangible assets, including digital ones are insufficient.

Recognizing the importance of improving the regulatory environment, Japan leads international rule-making on digital economy in order to materialize “Data-Free Flow with Trust (DFFT)” and efforts toward realizing “Governance Innovation” that promotes innovation and achieves social value.

It is important to turn the COVID crisis into an opportunity to promote digitalization

34

３ー６．Combating the coronavirus with innovative tech and social implementation

Tracking and management

of the infected

Unmanned operation

Remote communication

Use digital data such as location and

payment to identify contact with infected

persons. China and South Korea are trying

to track close contacts, and UK and

Singapore are also use tracking technology.

Automated diagnosis using AI, health

check, serving in contaminated areas

using robots and drones, monitoring and

disinfection, etc. now widely used in

China for safe and efficient control of

infectious diseases.

The South Korean government published apps to monitor the behavior of infected people. Anonymized attributes and travel histories are disclosed.

China's Megvii has developed an AI system that can identify people with hyperthermia from a crowd of 15 people per second within 5m.

Unmanned transporters deliver medicine and food to quarantined patients and drones go on patrol, measure body temperature, and disinfect rooms in China

PingAn GoodDoctor, a medical app, conducted 1.1 billion remote treatments during COVID. Insurance covers. They also have a 24 hour service.

Source: wall street journal

Source: Toyo keizai

Source：ＮＨＫ

Taiwan government manages sales of masks by utilizing ID numbers of health insurance cards.

New innovations (examples) Examples of initiatives in each country

Telemedicine, education, telework, etc.

Some hospitals are introducing 5G and

VR.

Alibaba provides comprehensive telework support software to 10 million companies free of charge. The number of users has reached 200 million members. Baidu and others follow.

35

The coronavirus outbreak has forced the society to adopt innovative technology such as contact tracing apps and online meetings to continue business activities while keeping social distance.

As governments and companies introduce the apps in response to the Coronavirus, the balance between public health and privacy has become an issue around the world.

4. The Way Forward

36

0

20

40

60

80

100

120

140

(2015=100)

0

50

100

150

200

250

300

350

400

450

500(2015=100)

４ー１．Globalization trend

Source:Cisco, 2019, IMF, WTO, UNCTAD Note:In the IMF projections of GDP, “Baseline scenario” assumes that the spread of the infection is stamped out in the second quarter of 2020 (first quarter in China). “Longer outbreak in 2020 plus new outbreak in 2021”assumes that the continuation of the spread of the infection during 2020 as well as a second wave of spread in 2021.

Trade, investment, human mobility

Original forecast

Source:UNCTAD, UN, WTO, IMF

Recent trends and projections

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

FDI(stock)

FDI(flow)

Data traffic

-32％ Pessimisticscenario

Trade

Migrant stock

Trade volume

GDP

-13％ Optimistic scenario

Longer outbreak in 2020 plus new

outbreak in 2021

-3%

Baseline scenario

-6％

GDP

Acceleration?

(2000=100%)

37

Globalization promotes cross-border human mobility, capital flow, trade and data flow, which is the engine of economic growth and development.

The COVID crisis happens amid the third unbundling and digitalization. This COVID crisis encourages remote communications, and rethink of global supply chain. With/after this crisis, cross-border data flow will be accelerated.

４−２．The way forward: lessons from the COVID crisis

We should achieve a resilient economic and social system to deal with crises flexibly and to ensure sustainable development

１．Upgrade globalization３． Evolution of human

communication

３．Infection and Economy２．Efficiency and Risk１．Global challenges and divisive forces

・ Pandemic cannot be contained without international cooperation.

・ Emergency measures and distrust of global agreements and institutions

・ Limit on face-to-face interactions

・ Acceleration of digitalization

・Geographical concentration of production

・Risk of supply disruption

Lessons learned from the COVID crisis

2. Supply chain resilience

The way forward

38

Based on the lessons of the COVID crisis, we should identify the risks of the global system and how the system will evolve with/after the COVID-19.

We have to achieve an ideal global economic and social system while overcoming the current crisis.

Unifying forces

The Ministers agree that emergency measures designated to tackle COVID-19, if deemed necessary,

① must be targeted, proportionate, transparent, and temporary,

② do not create unnecessary barriers to trade or disruption to global supply chains,

③ are consistent with WTO rules.

The Ministers emphasize ④our commitment to notify the WTO of any trade related measures taken.

◎ Ministerial Statement G20 Trade and Investment (3/30)

◎ Japan-ASEAN Economic Ministers’ Joint Statement onInitiatives on Economic Resilience(4/22)

① We stress that trade restrictive emergency measures aimed at protecting health, if deemed necessary, shall be targeted, proportionate, transparent and temporary, not create unnecessary barriers to trade or disruption to global supplychains, and be consistent with WTO rules.

② We support the full resumption of all WTO activities as soon as feasible.

③ We will also support continued efforts to reform the WTO so that it is

as effective as possible.

Divisive forces

■ Increasing trade restrictions

・ US-China trade friction.

・ Unilateral measures.

・ Export restrictions on PPE etc.

■ International organizations, regional integration

・ WTO reform (incl. Appellate Body).

・ United States withdrawal from the Paris Agreement, cutting WHO fund.

・ Doubt over European project: BREXIT etc.

■ Risks of market fragmentation

• Increased national security regulations. ASEAN and Japan express their commitment to make utmost efforts to prevent stagnation of economic activities by ensuring the smooth flow of goods and to strengthen cooperation on building resilient supply chains. ASEAN and Japan arepreparing the "ASEAN-Japan Economic Resilience Action Plan".

◎ Statement on COVID-19 and the Multilateral Trading System by Ministers Responsible for the WTO (5/5)

39

Pandemic calls for international cooperation to overcome the current crisis, to make the emergency measures temporary, and to deal with true global challenges.

Divisive forces are rampant, even before the pandemic, undermining cooperation. Global leaders are trying to bring unifying forces.

４ー３．Upgrade globalization

Divisive forcesUnifying forces

４ー４．Toward the sustainable development goals(SDGs)

Source:The Green Bond Issuance Promotion Platform、Climate Bonds InitiativeNote:Green bonds are bonds issued by private companies, international organizations, national and local governments to raise funds for environmental projects, such as combating global warming, pollution prevention and control, biodiversity conservation, and sustainable water resources management, with limited use.

Proportion of sustainable investing relative to total assets

0.8 0.4 0.9 3.9 1.2 3.111

36.6 41.8

87.2

160.8170.9

257.5

0

50

100

150

200

250

300

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

（billion USdollar）

0

10

20

30

40

50

60

70

2014 2016 2018

Europe

United States

Canada

Australia/New Zealand

Japan

Source: 2018 Global Sustainable investment reviewNote:In 2014,data for Japan was combined with the rest of Asia,so this information is not available.ESG investments take into account not only financial information, but also environmental, social and governance initiatives. Given that the SDGs are a universal goal, investors should consider the following in evaluating each company's ESG Efforts to address the SDGs can be a criterion for judgment.

The trend of green bond issuance

40

To deal with current/future global crises and risk, such as pandemics and environmental issues, and to contribute to sustainable development, increasing social investment is urgent.

All actors, including states, companies, NGOs, and individuals, should work together to actively invest to achieve the Sustainable Development Goals (SDGs).

（％）

ChinaGermany

US

Canada

Mexicoル

Ireland

Maldives

Taiwan

Brazil

Japan

Korea

FijiLaos

PakistanPhilippine

Hong Kong

Mongolia

Russia

Kyrgyzstan

Australia

Vietnam

Indonesia

ル

ル

ル

India

Nepal

Bhutan

Sri Lanka

Thailand

Cambodia

Turkey

ル

ル

UKMalta

Portugal

NetherlandsPoland

Switzerland

Belgium

Sweden

Austria

Denmark

Czech

Cyprus

Hungary

Romania

Luxembourg

Bulgaria

Estonia

Croatia

Greece

Norway

Finland

Lithuania

Latvia

Malaysia

Slovenia

Slovakia

ル

Brunei

Kazakhstan

Bangladesh

France

ItalySpain

Singapore

ChinGermanyUS

Japan

UK

SwitzerlandSweden

Netherlands

AustriaBelgium

Denmark

Poland

Czech

Portugal

Hungary

Romania

Slovenia

Slovakia

Lithuania

Croatia BulgariaTurkey

Greece

Mongolia

Kazakhstan

Bangladesh

Russia

Pakistan

Hong Kong

Nepal

Vietnam

Philippines

SingaporeThailandLaos

Cambodia

Taiwan

Indonesia

Malaysia

Korea

Maldives

Sri Lanka

Brunei Fiji

Ireland

Cyprus

Kyrgyzstan

Bhutan

AustraliaIndia

Canada

Mexico

Brazil

Finland

Estoniaラ

Malta

Luxembourg

Spain

Norway

France

ItalyLatvia

４−５．Resilient supply chain: Comprehend supply chain

ICT goodsAll goods and services

Source: Li et al. (2019）

2000

2017

2000

2017

ChinaGermany US

Japan

Canada

Mexico

Brazil

Ireland

UK

Cyprus

Portugal

Netherlands

Switzerland

Sweden

Austria

Denmark

Belgium

Romania

Finland

Hungary

Luxembourg

Norway

Bulgaria

Latvia

Russia Kazakhstan

Turkey

Mongolia

Lithuania

KyrgyzstanCroatia

Slovakia

Pakistan

Hong Kong

Sri Lanka

Vietnam

Philippines

Maldives

Singapore

Bangladesh

Thailand

LaosCambodia

Taiwan

Indonesia

Malaysia

Kore

Australia

India

Nepal

BhutanFiji

Malta

Estonia

Greece

Poland

Czech

FranceItaly

Spain

Brunei

Germany

Austria

Sweden

Netherlands

Portugal

Spain

CzechUK

Denmark

Romania

Hungary

Finland

Poland

Belgium

Bulgaria

Slovenia

CroatiaGreece

Latvia

Lithuania

Slovakia

Cyprus

RussiaKazakhstan

Vietnam

Australia

Turkey Nepal

Indonesia

India

Japa

Bhutan

Bangladesh

Philippines

Thailand

China US

Singapore

Malaysia

Canada

Mexico

Brunei

Ireland

Luxembourg

Pakistan

Hong

Kong

Laos

Cambodia

Sri Lanka

Kyrgyzstan

Brazil

Mongolia

Maldives

Fiji

Norway

Malta

Taiwan

Korea

France

ItalySwitzerland

41

For resilient supply chains, it is necessary to balance efficiency and risk of supply chain disruption. The first step is to fully comprehend the supply chain and its network.

Production network has been evolving based on comparative advantages and the type of goods. While the presence of China is growing in general, Japan plays an important role in an ICT goods production network.

Lean production can operate with less inventory. Each industry has a different inventory level.

Diversification of procurement sources and optimization of inventory are effective strategies. “GLOCAL growth strategy” is also effective.

Past crises reminded Japanese firms of the importance of diversification and optimization, but the COVID crisis showed this lesson again. Further digitalization and other measures are needed.

４－６． Resilient supply chain: procurement, inventory

US manufacturing（December 2019)

Japan manufacturing(2019）

Source: US Department of Commerce.Note: Inventory month is inventory outstanding divided by monthly sales.

Source: MOF “Corporate Statistics”Note: Inventory month is inventory outstanding divided by monthly sales.

Kumamoto earthquake（2016）• The operation of the main factory of the image sensor of a Japanese

electronics manufacturer was stopped, damaging production of digital camera.

• From this lesson, semiconductor segment of a Japanese electronics manufacturer made an extensive BCP plan with supply chain not interrupted by similar natural disasters, including measures that production activities will continue with inventory even if it takes two months to restore the factory.

Examples of diversification procurement, proper securing of inventory

Great East Japan Earthquake（2011）• Automobile manufacturers were faced with shortage of various parts

such as microcomputer for engine control, which is largely importedfrom one factory of the specific company although it is indispensable for automobile production.

• Reflecting on their mistakes, the manufacturers engaged in production of microcomputer for engine control, which had been struck by the earthquake, put their factories on various regions and tried to procure materials from factories of other companies six months after thedisaster.

• Japanese automakers have built a system that allows them to keep track of the inventory and operating status of the third and fourth subcontractors. And with diversification of suppliers in progress.

Note: GLOCAL means local company provides goods to global market to capture its growth.

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0.5 0.6

1.1 1.2 1.3 1.4 1.4 1.4 1.5 1.6

1.8 2.0 2.1

2.3 2.4

0 1 2 3

Printing

Auto and parts

Food

PulpInform＆Comm

Electric machinery

Metal products

Manufacturing

Wood

Ceramics

General machinery

Chemical

Non-ferrous metal

Textile

Steel

0.6 0.8

1.0 1.3 1.3 1.4 1.6 1.6 1.6 1.6 1.7 1.8 1.9 2.0 2.2

0.0 1.0 2.0 3.0

Auto and parts

Printing

Pulp

Wood

Chemical

Manufacturing

Non-ferrous metal

TextileInform＆Comm

Metal products

Electric machinery

Ceramics

Steel

Food

General machinery

Inventory month（Inventory/Monthly sales) Inventory month（Inventory/Monthly sales)

４－７．Supply chain and the types of goods

Need to rebuild resilient supply chain to prepare for and to deal with another crisis.

A path toward building resilient supply chain should be based on the types of goods as each type of goods has different bottlenecks in the crisis.

Emergency goods

• Mask, protective clothing, vaccines, ventilators, tents, blankets, etc.

• Important industries supporting Japan with cross-border supply chains（auto, electronic machinery and parts, materials, etc.)

• Review of supply chain from a security perspective is needed (sensible technology, emerging technology)

・ Improving Economic Security by strengthening domestic systems and cooperating with many countries.

【Challenge】 Demand increases explosively during a crisis. It is not feasible to have and maintain full capacity for such emergency demand in peacetime.

【Challenge】 Supply shortage occur in case of crisis. We should maintain balance between efficiency and stable supply in competitive area while the world is peace.

・ To construct stable supply system in case of emergency, which is not affected by international affairs.

• Strategic supplies with physical constraints in domestic production （food, energy, important minerals）

・ Constructing a system hard to break by comprehending the choke points precisely and procuring materials from many countries.

・Enhancing the security of food and energy(supply chain diversification)

Measures based on the types of goods

Other goods

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４−８．Digitalization and evolution of communication

The COVID crisis and the third unbundling will transform the industrial structure.

Face-to-face interactions themselves might transform, but the value of human interactions will remain. We should relaunch the essential travels with preventive measures.

SMEs in local areas can seize the opportunities to expand their business overseas with “GLOCAL growth strategy” as cross-border e-commerce will level the playing field for everyone.

Pre-Corona crisis Post-Corona crisis

CommunicationCommunicatingmainly Face-to-Face

Choosing online or offline

BusinessExchange

Communicatingmainly Face-to-Face

・Development of remote communications technology ・Telework become the norm

Food services Eating outTake-out and delivery service, as popular options

The irreversible changes in social lifeand responding to them

Source: Avdiu,Besart; Nayyar,Gaurav.2020.When Face-to-Face Interactions Become an Occupational Hazard : Jobs in the Time of COVID-19 (English). Policy Research working paper;no. WPS 9240;COVID-19 (Coronavirus). Washington, D.C. : World Bank Group.

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４－９．Co-creation with emerging countries in accelerating digitalization of the world

Investment in ASEAN digital companies

Source:cento”Southeast Asia Tech Investment in 2019

Asia Digital Transformation

・Deep Tech, Real Tech（AI/IoT, Robotics etc.）

・Finance・Service

・Ultra low interest fund

Creation New industryRealization of Society 5.0

Investment

＜Provided by Japan＞

Fund, Technology,

Know-how, Network, Credit

＜Provided by Asia＞・Problem, Need, Market

・Business Model, experience

Innovation circulation

Building New business modelRealization of SDGs

Source:METI

$1,236 $1,882 $3,511 $5,458 $11,959 $7,781

213

417

360395

366

616

0

100

200

300

400

500

600

700

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2014 2015 2016 2017 2018 2019

Amount Number(right）

The main reason for the decrease in the amount is that the investments in unicorns decreased and there were many relatively small investment projects in early stage companies.

（Millon $） （Number）

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Faced with the coronavirus pandemic, emerging countries such as ASEAN have accelerated their “leapfrog digitalization” to solve their social problems. The rapid deployment of contact tracing apps in collaboration with private companies is symbolic.

It is vital for Japan to promote “Asia Digital Transformation”, by connecting Japanese funds, technologies, know-how and business networks with Asia’s emerging digital innovation, in reforming Japan itself and in contributing to sustainable development of the world.