By Kyoji Fukao, Chairman of the Research Institute of Economy, Trade and Industry, and University Professor at the Institute of Economic Research, Hitotsubashi University, and Ivan Deseatnicov, an assistant professor at the Faculty of World Economy and International Affairs, HSE University. Originally published at The Centre for Economic Policy Research.
The economic confrontation between the US and China has been transforming global trade, foreign direct investment, and global value chains, particularly in technology-intensive industries. This column uses evidence from Japanese micro-level data to examine the effect of US export controls on the exit of multinational enterprises from China. The findings suggest that the increased intensity of US export controls since 2018 likely led to a higher probability of Japanese MNEs exiting China. Furthermore, specific export controls appear to have caused ripple effects throughout global value chains.
Since 2018, the US has tightened export controls, particularly in electronics, telecommunications, and semiconductors. One of the main goals of this tightening was to restrict China’s access to advanced US technology. Nevertheless, trade and FDI activities have continued. For instance, Tesla is building a new battery manufacturing plant in China, which is planned for completion in 2025. Many businesses and policymakers are interested in the effects of trade tensions between the US and China, particularly with regard to the export controls on advanced technologies.
In this column, we examine the impact of tightened US export controls on the exit of Japanese firms from China. We highlight the mechanism of increased production costs due to the greater difficulty in procuring foreign intermediate inputs in China presented in a recent study (Deseatnicov and Fukao 2024).
US Export Controls
Export controls imposed by the US Department of Commerce through the Export Administration Regulations (EAR) restrict the export of designated goods and technologies for security and foreign policy reasons. Under the US Foreign Direct Product Rule, these restrictions also apply to non-US products manufactured using US technology or components. By targeting key technologies such as advanced semiconductors, the US appears to be aiming to stifle China’s technological development without significantly reducing global trade.
Prior studies (e.g. Hayakawa et al. 2023, Deseatnicov et al. 2024) have found no significant reduction in trade in goods subject to export controls. However, this may be due to the limited scope of US export controls, which cover only a narrow range of goods and technologies, meaning that even highly detailed trade statistics (e.g. US HS ten-digit or Japanese HS nine-digit classifications) may be too coarse to accurately capture the impact. If tighter trade controls are making it more difficult for Japanese firms in China to access advanced components and technologies, the effects may be reflected in the exit behaviour of Japanese firms from China rather than in trade statistics.
Why Do Japanese Multinational Enterprises Exit China?
Figure 1 shows the exit shares of affiliates of Japanese multinational enterprises (MNEs) affiliates in the manufacturing sector relative to the total number of Japanese MNEs’ manufacturing affiliates by region from 2010 to 2021.
The exit share in China has been consistently higher than in other regions since the mid-2010s. This trend appears to have accelerated since 2020. Several factors likely have contributed to this phenomenon. One significant factor is the growing competition posed by domestic Chinese firms, which has presented challenges for Japanese affiliates operating in China. Another is the impact of the COVID-19 pandemic, which disrupted supply chains and altered production dynamics globally, including in China.
In addition, tighter US export controls may have played a crucial role in that they may have made production more difficult for Japanese MNEs’ affiliates in China; essentially, US export controls have likely constrained access to critical advanced technologies and components, raising operating costs and reducing the viability of manufacturing in China.
Figure 1 Exit shares: Manufacturing sector, 2010-2021
Measuring the Intensity of US Export Controls
To estimate the impact of tighter US trade controls on production costs in China, we use a ‘variety index’ that quantifies the diversity of imported intermediate goods affected by US export controls at the industry level. This index is constructed by analysing 61 US Federal Register documents. For each export control record reported in these documents, we map the affected item to the US HS ten-digit classification and calculate the cumulative number of cases where restrictions were tightened for each HS ten-digit item. If a record indicates that regulations were relaxed, the cumulative count for the relevant item is reduced by one. The index shows a sharp increase since 2020, particularly in industries such as electronics, telecommunications, and optical equipment.
Building on this, we develop a theoretical model to illustrate how the tightening of US trade controls increases production costs by reducing the diversity of intermediate inputs available to firms. Assuming that firms rely on a wide variety of differentiated goods as intermediate inputs, the reduced availability of these inputs raises production costs.
To further quantify these effects, we estimate the impact of the tightening of US export controls on production costs across countries and industries using the world input-output table and a detailed industry-by-industry input-output table for China. We refer to this comprehensive measure of the impact as the ‘export controls index’.
Impact of US Export Controls on Japanese Multinational Enterprises in China
Figure 2 shows the ‘export controls index’ by industry for China for 2021. The figure indicates that US export controls particularly affect manufacturing industries such as computers and related equipment, communication equipment and related equipment, video and audio equipment, and other electronic equipment. This may have diminished China’s attractiveness as a production base for foreign firms, particularly in industries that are heavily reliant on advanced technologies.
Figure 2 China IO export controls index, 2021
Using this ‘export controls index’, we estimate a probability model to examine the impact of tighter US export controls on the likelihood of Japanese MNEs’ affiliates to exit a country. To specifically capture the effect in China, we included an interaction term in the model, allowing us to examine the impact of these controls in China. In our analysis, we controlled for trends in wage and capital rents and total factor productivity in each industry in each country, as well as the size and productivity of Japanese affiliates there. The results indicate that a one standard deviation increase in the ‘export controls index’ raises the probability of exit of Japanese affiliates by up to 2.52 percentage points. This effect was particularly pronounced in China’s telecommunications and electronics manufacturing industries.
These findings suggest that tighter US export controls may have contributed to the exit of Japanese affiliates from China through higher intermediate input costs. Furthermore, export controls targeting specific items and technologies appear to have caused ripple effects throughout supply chains, impacting not only China but also global value chains. This suggests that the tightening of export controls may have altered global value chains through the decisions and coping strategies of multinationals.
Conclusion
The findings of this study underscore the importance of analysing not only changes in trade but also shifts in FDI when evaluating the impact of tighter US export controls. Moreover, as we document in the case of Japan, the responses of multinational enterprises to these controls play a critical role in reshaping global value chain linkages.
References
Deseatnicov, I and K Fukao (2024), “U.S. Export Controls and the Restructuring of Global Values Chains: An analysis of Japanese Multinationals Exits from China”, RIETI Discussion Paper Series 24-E-082, 2024.
Deseatnicov, I, K Fukao, K Hayakawa, K Ito and K Kucheryavyy (2024), “Technological Decoupling Between the US and China”, Hitotsubashi University, Institute of Economic Research Discussion Paper Series A No.756.
Hayakawa, K, K Ito, K Fukao and I Deseatnicov (2023), “The Impact of the Strengthening of Export Controls on Japanese Exports of Dual-Use Goods”, International Economics 174: 160–179.
