Restructuring of Global Values Chains: An analysis of Japanese multinationals’ exits from China

The global trade landscape has been significantly impacted by escalating tensions between the U.S. and China, particularly in technology-driven industries. Since 2018, the U.S. has imposed stricter export controls to curb China's access to advanced U.S. technologies, especially in electronics, communications, and semiconductors. This study investigates how these measures have affected global value chains (GVCs) and influenced Japanese multinational enterprises (MNEs) in their decisions to reduce or cease operations in the Chinese market.

Export controls, enforced by the U.S. Department of Commerce through its Export Administration Regulations (EAR), aim to regulate the export of specific products and technologies for national security and foreign policy reasons. The Foreign Direct Product Rule extends these regulations to products manufactured outside the U.S. if they incorporate U.S. technology or components. By targeting critical technologies like advanced semiconductors, the U.S. aims to disrupt China's technological progression without significantly disrupting overall trade flows.

Although prior studies (e.g., Hayakawa et al., 2023; Deseatnicov et al., 2024) have not observed a substantial decline in the trade of controlled products, this research identifies potential impacts on production within China. We hypothesize that Japanese MNEs which depend on advanced U.S. technology are encountering challenges due to the restricted availability of critical imported intermediate inputs. Consequently, some of these firms are currently or are planning to relocate or scale back their operations in China, which is reshaping global production networks.

To analyze these effects, we examine data from Japanese manufacturing affiliates in China. Japanese firms have been exiting the Chinese market at a faster rate compared to other regions (Figure 1) since about 2015. Several factors may drive this trend, including rising competition from local Chinese producers, economic disruptions stemming from the COVID-19 pandemic, and, as this study suggests, the heightened costs and complexities introduced by the U.S. export controls.

Note: The figure shows the percentage of Japanese affiliates exiting from the regions shown of the total number of affiliates in a region or country.
Source: Authors’ calculations using the Basic Survey on Overseas Business Activities.

One of the key achievements of our study is the development of a "variety index," which quantifies the diversity of imported intermediate goods impacted by U.S. export controls at the industry level. This index is constructed using detailed U.S. HS 10-digit product-level data and regulatory changes outlined in the U.S. Federal Register. Our analysis shows that export controls have intensified over time, particularly since 2020, with significant effects on industries such as electronics, communications, and optical equipment.

The study also employs a theoretical model to examine how reduced access to intermediate inputs influences production costs in China. By leveraging input-output tables, it evaluates both the direct and indirect effects and derives an “export control index.” The findings indicate that industries that are heavily dependent on advanced technology face substantial cost increases, reducing the attractiveness of China as a production base for foreign firms (Figure 2).

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Figure 2. China IO export controls index, 2021

Notes: The figure shows the China IO export controls index computed using the trade-weighted variety index. High values of this index are associated with higher production cost induced by the U.S. export controls. The top 3 industries are (1702) Manufacture of electronic computers and related equipment, (1701) Manufacture of communication equipment and related equipment, video and audio equipment, and (1603) Manufacture of electronic equipment. The numbers represent the industry classifications used in the Basic Survey on Overseas Business Activities.

Notes: The figure shows the China IO export controls index computed using the trade-weighted variety index. High values of this index are associated with higher production cost induced by the U.S. export controls. The top 3 industries are (1702) Manufacture of electronic computers and related equipment, (1701) Manufacture of communication equipment and related equipment, video and audio equipment, and (1603) Manufacture of electronic equipment. The numbers represent the industry classifications used in the Basic Survey on Overseas Business Activities.

An empirical analysis of Japanese MNE affiliates for 2017-2021 reveals a correlation between stricter U.S. export controls and an increased likelihood of affiliates exiting China. For example, an increase of one standard deviation in the severity of export controls, as measured by the export control index, increases the probability of Japanese affiliates exiting by up to 2.52 percentage points, depending on the model employed. This effect is particularly pronounced in industries such as communication and electronic equipment, which have experienced the most significant tightening of restrictions.

Our findings underscore the critical role of intermediate inputs in shaping firms' decisions and demonstrate how targeted policies can ripple through the global economy. U.S. export controls, by restricting China’s access to advanced technologies, have driven Japanese firms to reconsider their operations, resulting in a restructuring of global value chains.

These insights suggest that when analyzing the impact of tighter U.S. trade controls, attention should be paid not only to changes in trade, but also to changes in foreign direct investment.