The Impact of Trade Disruption with China on the Japanese Economy

Recent events of the Russian invasion of Ukraine and the US-China decoupling have shown that key trade policies today are shaped by geopolitical risks and economic security concerns. In Japan, economic security in increasingly complex global supply chains is also being discussed as an important policy theme, though quantitative evidence remains scarce. This paper aims to quantify the impact of trade disruptions with China on the Japanese economy. To do so, I develop a general equilibrium model of production networks with international trade, which incorporates non-unitary elasticity of substitution across intermediate inputs. The model is calibrated using large-scale firm-level network data from Japan. The aggregate impact of trade disruption is substantial in the short run but becomes milder in the long run. If both exports and imports with China decline by 90%, real GDP is projected to drop by 7% within a year. Additionally, import disruptions cause more severe damage than export disruptions. There is significant sectoral heterogeneity in the negative impact of trade disruptions, depending on sectoral exposure to trade, the share of intermediate inputs, and position within production networks.