Japan withstanding trade competition with China so far...except with semiconductors

•   The trade relationship between Japan and China has evolved quite substantially during the past few decades. From a very complementary relation, China’s rapid move up the ladder in terms of value added exports has started to have an impact in the two countries’ trade relations.
• Although Japan’s exports have recently expanded on the back of a global cyclical pickup, its competitive edge is being challenged on a more structural basis and, in particular, by China. This finding is based on the narrowing gap of relative comparative advantage (RCA) between China and Japan for Japan’s key export sectors.
•  However, it is important to note that the challenge is still limited, at least when measured by the still positive difference between Japan’s and China’s RCA for all sectors. The more negative case, from Japan’s perspective is semiconductors where Japan’s comparative advantage has significantly been eroded. At the other end, Japan’s relative advantage in automobile parts has expanded more than that of China.
• When moving to the potential reasons for China’s relative catch up, investment in research and development (R&D) seems key. China’s R&D expenditure is rapidly catching up with Japan. Another piece of evidence of the efforts China is making to move up the ladder is the growing number of intellectual property application, which is already coming very close to that of Japan.
• Moving forward, as China reduces the technology gap with Japan, Japan’s competitive advantage could be further challenged not only in China but also in third markets.

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