Securing Japan from Chinese ‘Predatory Economics’

One of the key questions in Japan’s present national security debate is how to manage China’s “predatory” geoeconomics.

Where does Tokyo stand in crafting an effective economic security strategy? 

Beijing has systematically integrated economic and financial instruments into its foreign policy with the objective of advancing its grand strategic ambitions. From the Belt and Road Initiative (BRI) to Made in China 2025, Beijing shrewdly incorporated geoeconomic tools of statecraft into its grand strategic thinking. China’s coercive economic maneuvering employs trade, investments, technology, internationalizing of currency, and even weaponization of resource supply chains toward geopolitical ends. 

Thus, reorienting Japan’s economic security strategy constitutes a top priority for Prime Minister Shinzo Abe. The objective is primarily to secure cutting edge technologies including next-generation 5G networks; strengthening foreign investment regulations in “core industries” in 12 strategic sectors; blocking COVID-19 bargain hunters grabbing key businesses; protecting intellectual property and averting forced technology transfers; fortifying self-sufficiency in strategic metals and mineral resource supply; managing China’s plans for a digital yuan; and better strategizing developmental aid in the Indo-Pacific. From instituting an economic unit at the National Security Secretariat (NSS), conceiving a U.S.-Japan economic security dialogue, and joining forces with other democracies in a D-10 (the G-7 plus India, Australia, and South Korea) framework for 5G and the Global Partnership on Artificial Intelligence – Japan’s strategic thinking on economic security is manifesting. 

Pre-pandemic, Abe’s priority was how to secure Japan’s economic interests amid worrying trends of de-globalization, receding trade liberalization, and increasing protectionism. Japan, as the world’s third largest economy, has led in building the multilateral trading system, particularly with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) following the U.S. exit from the Trans-Pacific Partnership; the Economic Partnership Agreement (EPA) with the EU following Brexit; and the Regional Comprehensive Economic Partnership (RCEP) process. At the Osaka G-20, Japan pushed for building rules for data governance and constructing a new regime underpinned by “data free flow with trust” (DFFT). 

Navigating Sino-U.S. targeted decoupling, techno-nationalism, and building a “Society 5.0” by leveraging the innovations of the fourth industrial revolution present colossal challenges. Post-pandemic complexities have only exacerbated the economic security concerns for Japan. With severe global economic contraction underway, Japan is weighing tough economic choices.

For Japan, COVID-led global supply chain disruptions brought forth the old debate on decoupling versus re-shoring and risk management. Japan has earmarked $2.2 billion to facilitate the shift of production out of China and back to Japan for high-value added products (boosting Japanese small, medium, and micro enterprises and regional economic development) and the rest to other Southeast Asian economies. But a complete disentanglement of the deeply embedded supply chains advancing niche manufacturing and intense trade and investment networks built over decades is highly unlikely in the immediate term. Securing critical supply chains with a “China plus One” model constitutes only one part of a much more complex debate on reducing Japanese economic reliance on China.

National security concerns led to revision of the Foreign Exchange and Foreign Trade Act in order to protect information and technology from overseas state interference. Japan listed 518 companies under the category of “core” industries, which will be subject to rigorous rules. This has raised some concerns about the inadvertent consequences of adversely affecting incoming foreign investment. But Japan’s move is essentially to align with U.S. rules. Washington has taken steps to restrict the flow of information through Chinese acquisition of companies with advanced technology or intellectual property. The U.S. Treasury Department whitelist of countries whose investments enjoy preferential treatment did not feature Japan. Thus Japan has to double down on its efforts to align with U.S. standards.

Securing vital communications networks and 5G technology remains a priority for the United States and its allies. To this end, the U.S.-Japan economic security dialogue involving Japan’s Cabinet Secretariat, the U.S. National Security Council, and the U.S. Commerce Department are likely to have a meeting by the end 2020. Japan has barred Huawei Technologies and ZTE Corp. from getting involved in public procurement contracts. Japanese companies are gearing up for the 5G race, which is now dominated by Huawei, Ericsson, Nokia, and others. To support the development of secured networks, a 15 percent tax credit or a 30 percent special depreciation for fixed capital investments is given. Meanwhile, Nippon Telegraph and Telephone (NTT) is collaborating with NEC Corp. is advancing a “made-in-Japan” alliance in 5G network infrastructure, equipment, as well as base stations. 

Resource security is also a key concern to sustain Japan’s economic foundation. Japan is well acquainted with Beijing’s weaponization of rare earth elements in 2010 in relation to escalating tensions in the East China Sea. Subsequently, to ease dependence on China and bolster critical mineral security, Japan has stepped up cooperation along with the U.S. and Australia and investing in processing non-Chinese rare earth metals. Smelting facilities in Texas, to be operated by Australian firm Lynas, may see Japanese investments. Diversifying sources for rare earth elements and cobalt remains a priority for the Ministry of International Trade and Industry (METI). As China dominates the rare earth supply chain from mining to processing and magnet production, Japan aims to ease its reliance for Chinese rare earth elements to 50 percent or less by 2025 and increase its self-sufficiency ratio through equity investments.

Securing Japanese business interests in Hong Kong following the new national security law will be a concern. U.S. President Donald Trump has ended Hong Kong’s special status and Washington will sanction Chinese officials and entities that helped Beijing in diluting Hong Kong’s autonomy. Financial institutions are anxious regarding the impact of the sanctions. The global financial hub accounted for 2.5 percent of Japan’s total trade in 2019. As turmoil in Hong Kong damages its status as one of the key global financial centers after New York and London, Tokyo is weighing if it can position itself as an alternative Asian financial hub. Japan’s Financial Services Agency (FSA) has appointed Ryozo Himino, vice minister for international affairs at the FSA, as commissioner to lure business. However, higher tax loads, language hurdles, and bureaucracy may divert business to Singapore and Taiwan instead of Tokyo. 

Japan has been leading promoter of the rules-based economic order and invests in rule-making to strengthen free and open global economic system and governance. To this end, Japan is aiming to increase its footprint in international organizations by positioning senior personnel who can align Tokyo’s standards into international standards as part of an effective economic strategy. Japan’s personnel strategy for international organizations is now under the scope of the NSS economic team. The economic team, in discussion with the cabinet bureau of personnel affairs and the foreign ministry, is aiming to place Japanese personnel in specialized agencies.

Economic security has become a key anchor in the Japanese national security debate. Battling Beijing’s “predatory” economic tactics would not be easy given the complex interdependence nurtured over decades in China-Japan economic relations. Japanese aid and investments over the decades played a crucial role in Chinese economic modernization. China has been a beneficiary of open global economic rules and institutions. However, with its rise in comprehensive national power, China has pursued alternative ideas, norms, and institutions that resonate with China’s values, interests, and status as a rule-maker rather than a rule-taker. 

In the middle of a global pandemic, Tokyo has colossal challenges with projected GDP contraction of 4.7 percent in fiscal 2020. Managing economic interests amid a fierce Sino-U.S. trade war is a tightrope walk. Japan and China, as the largest economies in Asia, have developed robust trade and investment networks over decades. China’s share of Japan’s trade is 24 percent. Moving forward, engaging in a zero-sum game with China, the second largest economy in the world, is not an option. As Japan taps into the opportunities that the Chinese economy has to offer, managing risks and fortifying national security are critical while doing business with China.