The Japan Model

Today, when it comes to economic security, the United States and the European Union are razor-focused on a single challenge: China. The West strives to face down Beijing’s economic coercion and lower dependencies on China for critical minerals, batteries, and other strategic goods.

In an article for The Wire China, DIIS senior researcher, Luke Patey, finds that in pursuit of their economic security agendas western capitals should examine a range of lessons offered by Japan. Tokyo’s prioritization and institutionalization of economic security stands out. Indeed, many Western executives and consultants are only now catching on to the best practice of “China plus one” to hedge sales and production activities in China by engaging Asia’s emerging economies in India and Southeast Asia. But Japanese manufacturers first coined the term some twenty years ago.

As an island nation with a history of outside containment causing bouts of economic harm, Japan has expanded the modern frontiers of economic security by both advancing new regional trade deals and enforcing new trade and investment protections over its economy. The Japanese parliament even passed the Economic Security and Promotion Act, which focuses on strengthening supply chains, maintaining indispensability in advanced technologies, protecting critical infrastructure and preventing disclosure of sensitive patents. The legislation signaled that Japanese decision-makers not only recognized the new, dangerous geopolitical environment, but that they were ready to act on it as well.

But the dawn of the economic security era does not negate China’s importance to global business. Even for Japan, the economic security pioneer, the deep interests of Japanese companies in China may make it

difficult to keep the ball rolling. In 2022, China accounted for 13 and 10 percent of American and German trade respectively. For Japan, however, China made up a whopping one-fifth of total trade. Japanese companies also hold the largest foreign investment stock in China.

Indeed, rather than a one-off, diversification from China is a complex process in which investment often first shifts final assembly production and then component sourcing. Diversifying away from Chinese suppliers is possible, but it is neither quick nor easy. Nonetheless, over the years, Tokyo has managed to maintain closer economic ties to China than its allies while still advancing protections over strategic resources, knowhow, and technologies across complex supply chains.

With the U.S. and EU just starting down the economic security path — and influential corporations in their business communities still stridently against any restrictive measures —allies might very well find strength in numbers through coordinating economic security efforts that rework select supply chains away from critical dependencies on China without overly upsetting the broader flows of global trade and investment they have all benefited from.