Japan-China relations: Establish a legal framework for "economic statecraft"!

Hirokazu Kobayashi

CEO, Green Insight Japan, Inc.

Professor Emeritus and Visiting Professor, University of Shizuoka

Following the friendly atmosphere fostered by the two leaders at the October 31 Japan-China summit, China took issue with the "Takaichi remarks" on November 7, and reports of deteriorating Japan-China relations dominate the Japanese media. Regarding the “existential crisis” judgment under the 2015 Peace and Security Legislation, Representative Katsuya Okada posed a leading question, bringing up the phrase “Japan's use of force” and suggesting that it should not be taken lightly. In response, Prime Minister Takaichi merely read the relevant section of the legislation regarding the use of force "when attacked." Therefore, her remarks cannot be interpreted as deviating from the “exclusively defensive defense” stance outlined in Article 9 of the Constitution. Therefore, it is concluded that Prime Minister Takaichi did not commit a gaffe.

Some political parties, media outlets, and commentators argue that avoiding attacks from external forces requires not provoking the opposing country. They also argue that a military buildup should be avoided. However, this theory has not held true historically. For example, the Nationalist Government of China in the 1930s lacked modern military capabilities and a unified command structure. Japan concluded that it could win a quick victory, which escalated into a full-scale war. In other words, weakness does not deter aggression; rather, it heightens the aggressor's appetite for attack. At the Munich Conference of 1938, Britain and France acquiesced to Germany's annexation of the Sudetenland in Czechoslovakia to avoid provoking Germany. Consequently, Hitler concluded that further concessions were possible and invaded Poland the following year, triggering World War II. Similarly, Kuwait was extremely vulnerable militarily, yet Iraq judged that neighboring countries would not intervene when it invaded in 1990, leading to the Gulf War. These historical examples demonstrate that a policy of non-provocation does not suppress the aggressor's desire to invade. Errors in the non-provocation theory include: (1) equating everyday ethics with state behavior, (2) assuming that expressing intentions determines the other party's actions, and (3) confusing non-provocation with deterrence.

Are unarmed nations immune to attack? Switzerland is a permanently neutral state but fulfills its neutrality obligations through "active armed neutrality," which allows it to maintain military forces and a conscription system. Furthermore, its terrain makes it a natural mountain fortress. It is said that the Hitler regime judged that attacking Switzerland would result in too significant a loss relative to the gains. Costa Rica abolished its army in 1948, and Iceland has no standing army; however, Costa Rica is under US protection, and Iceland is under NATO protection. The Vatican enjoys special protection due to its religious and symbolic value. Bhutan relies on India. Conditions for establishing a disarmed state include: (1) having little to gain from invasion, (2) having no threatening nations nearby, and (3) not being a buffer zone between major powers. Japan fails to meet any of these criteria. Japan possesses: (1) advanced science and technology, (2) a hardworking national character, (3) a sophisticated culture, (4) a pivotal role in the First Island Chain in the Pacific, (5) a potential flashpoint for US-China conflict, (6) a vital maritime transport hub, and (7) the world's sixth-largest maritime territory with significant seabed resources. Some strategic analyses and commentaries position the "Japanese archipelago line" as the key to accessing the Western Pacific.

Is it possible to confront China militarily? The Stockholm International Peace Research Institute (SIPRI) reported that China's official 2024 military expenditure was at least US$314 billion (48.7 trillion yen), noting that official figures may exclude certain expenditures, and the actual amount could be significantly higher. Meanwhile, Japan's military spending is approximately 8.37 trillion yen (US$54 billion). That is, the gap is nearly six times. Simple monetary comparisons cannot determine military strength. However, short-term reversals are complex. They cannot be reversed in the short term. AI projections suggest that even over a decade, Japan is unlikely to achieve equivalent military capabilities. Does this mean that the solution lies in military capabilities? The 2022 National Security Strategy and Defense Capability Development Plan outlines a form of denial deterrence to prevent an adversary from intending to attack. This strategy includes stand-off defense (long-range missiles), integrated air and missile defense, unmanned assets (drones, etc.), cross-domain capabilities (space and cyber), C2 (command and control), ISR (intelligence, surveillance, and reconnaissance), mobility, civil protection, and sustainability/resilience (maintaining and restoring societal functions). These do not necessarily imply nuclear armament.

Deterrence against attacks is not just about military strength. Consider the economic losses. Since Russia invaded Ukraine in 2022, numerous international companies have been forced to withdraw from or reduce their presence in the Russian market. This number exceeds 1,000 companies. These companies' economic losses are estimated to reach US$107 billion (16.6 trillion yen) by 2024. Current semiconductor production in China (US$179.5 billion; 27.8 trillion yen, 2023) relies heavily on Japanese semiconductor manufacturing equipment and materials, including photoresist. Additionally, China uses many Japanese high-precision machine tools. These exports to China are reported to be worth US$4.8 billion (744 billion yen) per year for semiconductor manufacturing equipment, US$1.02 billion (158.1 billion yen) per year for photoresist, and US$1.32 billion (205.3 billion yen) per year for machine tools. The termination of these exports from Japan directly affects the semiconductor industry in China, causing annual losses of US$5-15 billion (0.78-2.32 trillion yen). The cumulative maximum impact over three years is projected to be US$75 billion (11.6 trillion yen), according to AI estimates. However, if Japanese companies were to withdraw from China, the immediate loss would amount to approximately 100 trillion yen, being US$645 billion (calculated by AI), excluding future losses such as the total fixed assets of Japanese companies in China, sales volume, asset impairment due to market withdrawal, and supply chain reconstruction costs. In contrast, China's losses are calculated to be two to five times greater. When these losses are converted into a ratio relative to each country's GDP, the situation appears to be a stalemate for both nations. According to the Ministry of Economy, Trade and Industry's Basic Survey on Overseas Business Activities, Japanese companies employ more than 1 million people locally in China. This figure accounts for approximately 0.2% of the 473 million urban workers reported by China's National Bureau of Statistics. However, the employment of Japanese companies has a significant impact on coastal and industrial areas, where their operations are concentrated. This impact extends to local government employment, tax revenue, social stability, youth employment, and peripheral industries within the supply chain.

The strategy of demonstrating the economic costs of an invasion in advance to render its expected benefits negative has recently been systematized as the concept of "economic statecraft." The international community already has systems in place to absorb corporate losses for national security reasons. For example, the EU has implemented the Anti-Coercion Instrument, and the US has enacted the Defense Production Act and the CHIPS and Science Act. These could also be introduced in Japan. Could the Japanese government enact legislation that guarantees the associated profits and losses when it issues orders to halt imports/exports to a target country and to withdraw Japanese companies based in that country? From the Cold War era to the present, Japan and the U.S. have repeatedly invoked coordinated export controls, yet there has been no mechanism to compensate for corporate losses automatically. Today, with economic security clearly defined as a national strategy, the existing framework cannot serve as an effective deterrent. Economic and political leverage aims to deter denial and to complement military capabilities. However, as the example with China shows, activating such orders leads to a mutually destructive outcome for both nations. Therefore, economic and political leverage, such as military expansion, should serve as a deterrent. Nevertheless, it cannot serve as a deterrent unless it is feasible. A national expenditure of 100 trillion yen (US$645 billion) is comparable to the budget mobilized for countermeasures against COVID-19 and is not unmanageable. Furthermore, calling for cooperation from Japan's allies and quasi-allies would strengthen denial deterrence. Legal frameworks that enable the activation of this type of economic deterrence should be developed. Ultimately, Japan's possession of diverse deterrence measures in both military and economic spheres will contribute to regional stability. Institutionalizing economic deterrence as a policy tool is now a realistic option that requires urgent consideration.