Trade Partner Diversification and Changes in Asymmetric Trade Dependence

Abstract

Trade partner diversification is often treated as evidence that economic dependence has declined. In global supply chains, however, a change in direct suppliers may leave important parts of the original relationship intact. Hirschman's analysis of foreign trade and national power explains why limited alternatives can place one country in a weaker position when a trade relationship is disrupted, while Farrell and Newman's network approach helps explain why dependence can remain in important upstream positions even after bilateral trade changes. Japan's rare-earth diversification after 2010 illustrates both problems. Japan expanded its sources through overseas projects, long-term supply agreements, recycling, technologies that reduced rare-earth use, and especially the Australia-Malaysia supply chain developed around Lynas. These measures gave Japanese firms more ways to respond to disruption, although their effects differed across projects and stages of production. China remained much harder to replace in refining, heavy rare earths, and permanent-magnet production. The Japanese experience shows that diversification reduces asymmetric dependence most clearly when new relationships create enough production capacity to replace the parts of the original supply chain that had been difficult to replace.