G-7 to Focus on Supply Chain Resilience in Face of China's Influence

(Prime Minister Fumio Kishida) Tom Bateman

The Lede: The upcoming the Group of Seven (G-7) meeting in Hiroshima is set to forge a new path as economic security, with a focus on supply chains, takes center stage for the first time in the group’s history.

What we know:

Japan’s Prime Minister Fumio Kishida has made economic security a top priority for the upcoming G-7 summit in Hiroshima, where he will serve as the chairperson. This marks the first time that economic security will be a standalone theme at a G-7 summit, underscoring the critical importance of ensuring the stability of the global economy.
At the upcoming summit, the G-7 major economies will issue a joint document calling for the establishment of groupwide supply chains for critical goods, including microchips, rare earths, and other increasingly important commodities, Nikkei Asia reported. The proposal is to broaden the scope of international supply chain agreements that are currently established independently by different countries, such as Japan and the U.S., and the U.S. and Europe, to encompass the entire G-7.
Earlier in April G-7 finance leaders vowed to ensure the stability of the global financial system amid recent banking disruptions pledging to increase the participation of low- and middle-income countries in the diversification of supply chains to enhance their resilience and allow them to play bigger roles in the system. To translate this guidance into specific actions, the G7 will explore the development of a mutually beneficial partnership with these countries in collaboration with Multilateral Development Banks and relevant international organizations.

The background: Economic security has been a longstanding issue, but it has become an increasingly important topic in recent years with rising geopolitical tensions, technological advances, and the COVID-19 pandemic. Due to the pandemic-related disruptions and the high concentration of production bases in China, Japan has been implementing measures to enhance its supply chain resilience since 2020. Now Japan’s ascension to G-7 leadership presents an opportunity for the country to address the issue on the international stage and strengthen cooperation with the U.S. and other members of the group – Canada, Germany, France, Italy, the United Kingdom, and the European Union.

Minister of Economy, Trade and Industry of Japan Nishimura Yasutoshi outlined three areas of focus for G-7 for building up economic security in his speech in Washington DC earlier this year: reducing dependence on other countries for emerging technologies, implementing export controls, and increasing supply chain resilience. He also emphasized the need for cooperation among like-minded countries, referring to the U.S. and other allies. Japan’s approach aligns with the efforts of industrial democracies, including the U.S., to reduce their dependence on China for strategic goods, such as semiconductors and battery minerals, through "friend-shoring" initiatives that promote collaboration among like-minded countries.

Likely outcomes/Takeaway:

In the upcoming G-7 summit, each nation has its own agenda that would likely play into any decision that comes out of the meeting. Japan’s objectives include increasing economic security, promoting the protection and development of critical and emerging technologies, and reducing dependence on China. Japan also aims to strengthen its cooperation with the U.S. and other allies and to take a prominent role on the international stage regarding issues such as support for Taiwan and supply chain resilience. On top of that, Japan might want to bring Germany closer to the U.S. and other allies to prevent the flow of goods and technology to China through Europe, particularly because Germany has close economic ties with Beijing.
As for Germany, Chancellor Olaf Scholz sees Beijing as a competitor in certain aspects; however, he disagrees with the idea of severing ties with China, as it is Germany's most crucial trade ally and an important market for German goods, particularly in the field of electric vehicles. It’s hard to say if Germany would agree to the formation of a groupwide supply chain among the G-7 nations. But, given Scholz's pursuit of a trade agreement between the EU and Indonesia to reduce reliance on China for raw materials, it is possible that after all Germany may be open to exploring alternative supply chain arrangements with its G-7 counterparts.
Canada has been increasing its efforts to position itself as an alternative supplier of critical raw materials that are vital to produce a range of goods, including electric vehicles, smartphones, and solar panels – the move aimed at European governments that are seeking to decrease their dependence on China for these materials. Therefore, Canada would likely be in favor of expanding supply chain arrangements to the entire G-7.
France, on the other hand, might have a different stance. Earlier in April French President Emmanuel Macron met with Chinese President Xi Jinping and made controversial comments on Taiwan after the trip. He said that being an ally doesn't mean being subordinate and that European countries shouldn't become embroiled in issues that aren't directly related to them or become “just America’s followers.”
In 2019, Italy joined China’s Belt and Road Initiative (BRI) but froze the agreement two years later. Now it stands in the middle of supporting Taiwan and deepening investment links with Beijing. The country still has until the end of 2023 to inform China if it wants to be involved with BRI. Italy’s middle stance makes it difficult to say if the nation is likely to agree on the creation of groupwide supply chains to move away from China.
China’s invasion of Taiwan – the world's leading chip manufacturer – would represent a significant setback to the supply chain in the UK, impacting a wide range of products, including medicines and smartphones. It’s likely that the UK would be seeking alternative supply chain arrangements at the G-7 summit.
It is expected that the U.S. would have a strong interest in reducing dependence on China for critical raw materials and emerging technologies, given its ongoing trade tensions with Beijing and concerns about national security risks associated with Chinese supply chains.
The president of the European Commission Ursula von der Leyen recently gave a speech about the need for the EU to implement a consistent policy on security, economy, and trade with China. She emphasized that Xi Jinping aims to reduce China's reliance on the rest of the world while increasing the world's reliance on China. Meanwhile, 19 member states of the European Union are advocating for actions to lessen the bloc's reliance on the import of pharmaceutical ingredients from China. Both actions and rhetoric from the EU indicate that the bloc might be seeking alternative supply chain arrangements.

Quotables:

“Whether we are discussing responses to economic coercion, boosting supply chain resilience, or ensuring energy security, the point held in common by all is that it is impossible to reach our goal when a single country acts alone.” – Yasutoshi Nishimura, Japanese Minister of Economy, Trade and Industry
“We commit to jointly empowering low- and middle-income countries to play bigger roles in supply chains through mutually beneficial cooperation by combining finance, knowledge, and partnership, which will help contribute to sustainable development and enhance supply chain resilience globally." – G-7 finance ministers and central bank governors in the statement
“As far as the production of green hydrogen is concerned, or artificial intelligence or semiconductor chips, or electric batteries, or other strategic goods, we need to be more independent.” – Bruno Le Maire, the Minister of the Economy, and Finance of France
“We can expect to see a clear path and push to make China less dependent on the world and the world more dependent on China. Or as President Xi put it bluntly a few years ago: ‘China must tighten international production chains' dependence on China to form a powerful countermeasure and deterrent capability." – president of the European Commission Ursula von der Leyen

Good Reads:

G7 finance heads vow financial stability, supply chain diversity (Al-Jazeera)

G7 to seek quality investment for economic security (The Japan Times)

Europe’s Dangerous Dependence on China (Carnegie Europe)