China and Japan's chauvinism threatens global logistics

Once again the global supply chain geared to JIT (just-in-time) deliveries shows just how Asia is a high risk trade partner without a robust recovery plan to sidestep disruption to supplies for western importers. This blog has repeatedly warned of the folly from placing too many eggs in one supply chain basket. The Japanese tsunami in 2011 and the Thailand floods showed just how nature alone can cripple global supply chains. As if that were not enough we now have the political risks surrounding the disputed, uninhabited islands known as Senkaku to the Japanese and Diaoyu to the Chinese in the East China Sea. Readers should not be surprised that Asian politics is threatening the global supply chains. In my blog of April 25, 2011, headed: "Japan's earthquake must force JIT supply changes," I warned: "Nature, it should be said, is not the only threat to the supply chain. There are also significant political risks."

Japanese factories produce about 40% of the world's electronic components, and in some cases is the only source of supply for items like parts for jet engines. China's Guangdong province provides 80% of the world's basic electronic components and is the largest source of rare earths, so essential for electronic devices. This shows how vulnerable the world is to any political upheaval in this region.

Japan and China, the second and third largest economies with an estimated £218 billion trade relationship, have been a 21st century success story but that success could be seriously set back by the current dispute over typhoon-lashed, uninhabited islands.

Inflamed feelings in both China and Japan, whipped up by a jingoistic media with Government connivance, has already caused considerable economic damage. Japanese businesses in China have been ransacked and closed down. Japanese car makers in China have ceased production following calls for a Chinese boycott of their cars, leading to estimated losses of £154 million so far. The Organisation for Economic Cooperation and Development is so worried by the flare up that they believe it is making the world economy more fragile than at any time since the 2008 financial crisis.

It is difficult to discern what is really behind the flare up over five small islands. Historically, China has the stronger claim that stretches back to imperial times, long before Japan forcibly annexed the islands in 1895. Geographically, the islands are also much nearer China (about 150 miles) compared with over 600 miles to mainland Japan. There are believed to be valuable natural resources like gas but if this is the motive for militaristic passions then is should not be difficult for both governments to reach agreement on development of the islands' surrounding resources by mutual consent and share the revenues equally.

America could help here by hinting to Japan that it will not honour the US-Japan security treaty if Japan is attacked by China around the disputed islands and only come to its aid if mainland Japan is threatened. America right now needs a Pacific war entanglement like a dose of the plague. Its economy is in an unholy mess built on an appetite for unsustainable debt, fanned by rampant banking greed and military spending supporting world-wide bases and numerous military entanglements.

As always, trade is the hand-maiden of prosperity and the surest guarantor of peace. Both Asia and the world have too much tied up in trade interdependence for that to be jeopardised over a few barren rocks. And Japan, in particular, should recall the words of General MacArthur at the dawn of the Atomic Age when taking the Japanese surrender in Tokyo Bay: "It must be of the spirit if the flesh is to survive."