Japan in the Middle: The geo-economic conflict between China and the United States (Summary)

Propositions about the global economic order

There are three propositions concerning the future of the global economic order. The first proposition is that an open and cooperative international economic order has played a crucial role in fostering prosperity and peace during the entire postwar period. Japan has been the most remarkable example of that system’s success. In this context, China’s growth may be parallel to Japan’s, but Japan’s average income far surpasses China’s.

The second proposition is that the successful international economic order, though not perfect, has heavily relied on the global economic leadership of the U.S., collaborating with key allies. Political scientists have called the concept “hegemonic stability theory,” which posits that effective leadership from one country is essential for the system to work effectively. While the concept may be debatable, the U.S.’s effective leadership throughout the postwar period has been a critical factor contributing to the overall success of the international economic order.

The third premise is that the U.S. can no longer play its previous role to the same extent due to the rise of China as a significant global player. In the last 100 years, the U.S. held a dominant position as the world’s leading economy without any serious challengers. Japan came closest to challenging the U.S. during its period of rapid growth when its gross domestic product (GDP) reached around 80% of the U.S. GDP.

China’s global economic dominance

Nevertheless, the U.S. never faced a true rival for the top economy until China’s rise. China now provides that challenge as a formidable competitor which in many metrics is bigger that the U.S., in terms of trade and foreign exchange reserves.

Given this scenario, China’s participation is crucial in resolving global economic issues, such as climate change, open trade, financial and macroeconomic crises, and pandemics. Therefore, it is essential to integrate China into the global economic leadership matrix, enabling or encouraging it to take on responsibilities, cooperate with other nations, and work towards shared objectives. Thus, finding ways to incorporate China into this cooperative leadership position is vital for the global economic system, which requires collaboration between the U.S. and its allies, and China.

China has demonstrated its willingness and capability to exercise constructive global economic leadership on certain occasions, such after the global financial crisis of 2008-2009 and efforts to address climate change during events like the Paris Conference and the Glasgow meetings. However, China also undermines and subverts the global economic order with its own policies, including trade and investment protectionism and retaliatory actions against countries whose economic policies it does not favor. China’s systematic approach to such behaviors undermines its capacity to assume a constructive global economic leadership role and also affects other countries’ willingness to accept it as a leader.

Thus, there are significant challenges in reordering the global economic system. The alternative approach involves relying on a group of middle powers, notably including the European Union and Japan, to take up leadership roles that the U.S. can no longer perform adequately and that China is not yet fully willing or able to fulfill. These middle powers have played a critical role in filling the leadership vacuum left when the U.S. withdrew under the Trump administration, which resulted in a systemic crisis.

Japan’s leadership initiatives

However, Japan is commendable for its crucial leadership during the past five years, alongside the EU, in keeping the open and cooperative global economic order. Japanese organizations have played a big role in keeping initiatives like the Trans-Pacific Partnership (TPP) alive, transforming it into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). When the U.S. left the CPTPP, Japan made a valiant effort to get the U.S. back, and when that failed, it engaged in “half-way” free trade agreements with the U.S. Japan’s leadership in these areas, including agreements with the European Union, Asian partners in the Regional Comprehensive Economic Partnership (RCEP), and approach model with Korea, serves as strong examples of Japan’s significant role in the global economic system.

During the late 1960s and early 1970s, Japan stepped up and played an international leadership role commensurate with its expanding economy. In the last 50 years, Japan has carried out its international leadership responsibility well in various fields, including development finance. Japan, the European Union, Canada, Australia, and other middle powers have responsibly performed their role in maintaining the world economy during the uncertain period of conflict and confrontation between the U.S. and China.

The rise of the U.S.

Over the last 30 years since the end of the Cold War, the U.S. has experienced significant growth and technological expansion, outpacing most other advanced or high-income countries, including Japan. Despite some claims of U.S. decline, the facts show considerable advancement and success for the U.S. as a mature, advanced industrial economy. While not growing as fast as emerging markets like China, India, and Indonesia, the U.S. has consistently expanded its lead over other Organisation for Economic Cooperation and Development (OECD) countries during this period.

One implication of this is the combined economic lead of China and the U.S. over the rest of the global economy has significantly increased globally, making their cooperation and exercising responsible global economic leadership even more crucial. Despite the existence of other important economies in a multipolar world, the “big two” have been expanding rapidly compared to their counterparts, highlighting the importance of their collaboration and cooperation to provide the needed systemic leadership.

Three objectives of Japan’s leadership role

There are three key objectives that Japan should pursue in its leadership role between the U.S. and China. Firstly, Japan should exert efforts to encourage the U.S. to maintain or preferably increase its global economic leadership. The U.S.’s decline in leadership began around 20 to 25 years ago but worsened during the Trump administration. Japan, along with its allies, needs to push the U.S. to restore its traditional role in the global economy.

Secondly, Japan should urge cooperative management of the global economy between the U.S. and China. Japan and the U.S. allies should influence the internal debate within the U.S., encouraging a return to its global role. This approach can be effective as is seen in some recent cases. Lastly, Japan should maintain and expand its own leadership in global economic affairs that it has been conducting effectively for the last five years.

Thucydides trap and the U.S. response

The anticipated question is whether the U.S. can be influenced by external forces regarding its policies, or is it inevitably heading towards a cold war with China. Many people in both the U.S. and China would welcome a new cold war between the two economic superpowers. It is a fair question of whether U.S. policy could be steered in a more positive and constructive direction to avoid the risk of inevitable conflict, often referred to as the “Thucydides Trap.” However, there is a relatively optimistic belief that the conflict can be avoided, noting that U.S. policy is already starting to change favorably, although it is not yet entirely clear, especially considering how China might respond.

Internally in the U.S., there is a bipartisan consensus on recognizing the seriousness of the China challenge. However, there is no consensus on how to respond and on the future vision of U.S.-China relations or the policy strategy to adopt, providing an opportunity to influence outcomes.

There have been some U.S. responses to the China challenge, primarily in the form of domestic policy changes, which are crucial for effectively addressing external challenges like China. The U.S. passed three major pieces of legislation last year, including an infrastructure investment bill, a semiconductor bill with increased funding for research and development spending on new innovations, and a bill focused on energy investment and responding to climate change by promoting appropriate investment. These measures amount to almost $1 trillion of new U.S. investment in enhancing American competitiveness. The China challenge played a significant role in promoting the success of these policies and gaining support in Congress.

There are certain aspects of these legislations, such as “Buy American” provisions and new industrial policy with subsidies, which are not favorable, but on balance, such a major U.S. response with domestic measures has been constructive in addressing the China challenge.

However, there is no clear strategy in place regarding China itself. The U.S. and its allies will continue to have significant disagreements with China on security, political, and values issues. Conflict and confrontation are expected to persist on topics like the South China Sea, East China Sea, Taiwan, and human rights concerns. Nevertheless, it is essential to find ways to cooperate with China on economic and global public goods issues despite disagreements as their cooperation on global issues is simply essential.

Focus on functional decoupling

So, the proposal is to focus on “functional decoupling,” which involves separating security issues from economic issues and continuing to disagree on security matters while striving to cooperate on economic matters. But, the recommendation is to avoid complete “national decoupling” between the U.S. and China, as it could lead to increased conflict and risks associated with the “Thucydides Trap.” Instead, the focus should be on de-risking which can make supply chains more resilient and less reliant on a single partner country.

Also, the Biden administration seems to be moving towards functional decoupling. Recent important speeches by top officials, including National Security Advisor Jake Sullivan and Treasury Secretary Janet Yellen, have supported functional decoupling. Both officials have engaged in discussions with their Chinese counterparts and have stressed the need to work together to resolve economic and global issues like climate change, despite disagreements on other matters.

An important question arises about distinguishing between security and economic issues, particularly concerning products with dual-use applications. The Chinese have the dual-circulation concept where there’s an overlap between civilian economic goods and military goods. The Chinese view with suspicion Jake Sullivan’s idea of controlling exports of high technologies like semiconductors to China but limiting it to a narrow part of the economy, seeing it as a containment or suppression strategy. Hence, making critical distinctions between security and economic issues is essential for functional decoupling.

The Biden administration’s construct of China policy involves confrontation, competition, and cooperation. Treasury Secretary Yellen and National Security Advisor Sullivan aim to accelerate the cooperative aspect of the approach, and my suggestion is that cooperation should include almost the entire range of economic relationships between the U.S. and China, due to their necessity in carrying out global economic leadership despite disagreements in other areas.

So, support and encouragement from major U.S. allies would be beneficial, especially considering potential changes in U.S. administrations and stressing the importance of locking in closer cooperative relationships with allies.

Hence, Japan should follow up on the idea of exerting external pressure on the U.S. and actively support and engage in the cooperative approach to maintain and strengthen its economic relationships with the U.S.

Future steps for Japan

Japan could take specific steps to achieve the outlined objectives in the current environment. The focus should be on trade issues, particularly the CPTPP, where Japan has demonstrated good work and credibility.

Specifically, Japan, as the de facto leader of the CPTPP, should initiate accession discussions with China as soon as possible. China’s potential accession would motivate the U.S. to rejoin the agreement. During Obama’s administration, the U.S. viewed its participation in the TPP as crucial to prevent China from forming unfavorable trade and investment rules in the Asia-Pacific region for the U.S.

So, if China were to join the CPTPP while the U.S. remained outside, it would be a significant reversal of what was previously advocated. Such a scenario would likely trigger an outcry in the U.S. from the businesses and the political crowd leading to pressure on the country to apply for accession to the CPTPP to avoid being left at a disadvantage.

Hence, Japan, along with its Asian colleagues and other members of the CPTPP should consider a healthy step to initiate accession discussions with China. This might be a high-risk strategy, but the alternative would be for Japan to be pressured by the U.S. to block China’s accession. Japan then would appear as a tool in the hands of the U.S.

Japan should respond to what the rest of the CPTPP members want to see, basically a comprehensive trade agreement among all Asia-Pacific powers. The original idea of the Asia-Pacific Economic Cooperation (APEC) was to form a free trade area of the Asia-Pacific, which China had pushed about 10-15 years ago, and it would be desirable for both China and the U.S. to be part of CPTTP.

Also, if China and the U.S. were both negotiating accession to the CPTPP at the same time, it could potentially provide a better and less politicized way for the two countries to resolve some of their bilateral trade problems.

In such a scenario, the EU might also even express interest in joining the CPTPP if China and the U.S. were pursuing accession, possibly leading to the reinvention of the World Trade Organization (WTO) and a more effective multilateral trade agreement. However, this would be a scenario for the future.

Lastly, any proposals made by Japan to engage with China regarding accession to the CPTPP and to encourage the U.S. to join in order not to be left behind in this potentially constructive path of high trade standards must be conditional, based on strong domestic and international commitments. Both China and the U.S. will have to accept and exercise in good faith the responsibilities as well as take on bigger roles.

Comments & Q&A

URATA Shujiro:
Dr. Bergsten’s recommendation for Japan to propose China’s accession to the CPTPP, which could be a significant step towards encouraging the U.S. to rejoin the CPTPP is very welcome. However, there are some questions regarding China in maintaining the international economic order.

Q:
Many wonder whether China is going to be a responsible player in world economic activities in light of examples of China increasing tariffs on imports from Australia and boycotting Japanese products based on political motivations, which have raised concerns about China’s adherence to international trade norms.

Q:
Since China’s aspiration is to become a world leader by 2049, challenging the U.S.’s leadership, and there are concerns about China’s intentions and the potential implications for democratic countries.

Q:
In terms of Japan negotiating China’s accession to the CPTPP, initial discussions with China on whether they are interested in or will be able to abide by the necessary rules before entering negotiations on accession are necessary and must be very firm in order to ensure China’s commitment to abide by the rules, considering its track record. How do you see this process advancing?

Q:
While the Biden administration seems to be shifting towards a friendlier strategy, the tightening of restrictions on exports of military and national security-related products and limiting U.S. outward foreign direct investment (FDI) somewhat contradicts this idea and would counteract any such strategy.

Q:
The Asian Infrastructure Investment Bank (AIIB) set up by China will be considered a litmus test for Japan and U.S. policy toward China. If Japan participates in the AIIB, what would the potential reaction from the U.S. be towards Japan’s engagement in the institution?

C. Fred BERGSTEN:
Both Japan and the U.S. should join the AIIB together. Japan should push the U.S. to work cooperatively with China on economic issues, including joining the AIIB, as part of a functional decoupling approach. But even if the U.S. doesn’t join the AIIB, Japan should, because when the AIIB was being set up, despite U.S. opposition, many of its allies including the U.K., Australia, and several European countries indeed joined the AIIB and did not face many repercussions from the U.S.

The Biden administration has indeed aimed to restrict export controls but limiting the controls to products, issues, and processes deemed crucial to national security, rather than primarily targeting economic matters. So, while the perception of a tightening policy is true, the administration’s focus is on specific security-related areas.

Next, regarding the process for China’s potential accession to the CPTPP, Japan should follow the same standard procedures used for the UK’s entry into the agreement. If the accession process for China were initiated, even though it might take time, it would serve as a wake-up call for the U.S. to see China working towards membership in the CPTPP. However, if Japan is perceived as blocking China’s entry, it could harm Japan-China relations and the overall effectiveness of the organization.

On the question of whether China can be trusted to be responsible, there are two main factors that contribute to some optimism. First, China is highly dependent on the open international economic system, just like Japan, and they are aware that their economic progress relies on it. Second, while China aspires to be a global superpower, they also understand that they cannot afford to jeopardize the global economic system that has been crucial to its rise. The question is whether China realizes that its own policies, such as subsidies to state-owned enterprises (SOEs), intellectual property theft, forced technology transfer, and retaliatory actions, have triggered a significant backlash against globalization and raised threats to the openness of the global economic system. The trade war initiated by the Trump administration and its continuation under Biden, along with other countries’ reactions, should make it clear to China that their policies are backfiring and having adverse effects on their own interests.

In the 1970s and 1980s, Japan did not fully realize how its policies triggered a backlash against its economic relations with the U.S. and the world. The country’s growing size and influence had a systemic impact that they were not fully aware of at the time. China is now hopefully experiencing a similar realization.

It is noteworthy that China has complied with the rules when it lost cases in the WTO, but there are still concerns about certain objectionable actions that are not effectively covered by existing rules. Thus, there is a need for expanding and updating the rules.

Such negotiations will involve some compromises and changes in rules, but it is crucial to hold China accountable and encourage them to adopt responsible policies. China’s aspirations to become a global superpower or challenge the U.S. can only be achieved through responsible actions and policies. Otherwise, there is a risk of conflict and the Thucydides Trap, which should be avoided at all costs.

SABURI Masataka:
There are a few additional questions from the audience.

Q:
Regarding China’s accession to the CPTPP, what are the risks associated with China joining the CPTPP if the U.S. remains uninvolved? Also, will there be national security tension between Taiwan and China if Japan promotes China’s accession to the agreement?

Q:
What are Japan’s strengths that could positively influence its role as a mediator between the U.S. and China positively and in which areas does Japan need improvement in its diplomatic efforts?

C. Fred BERGSTEN:
Japan’s comparative advantage lies in the economic and trade area, given its historical position as a leading trading power and its extensive trade agreements with major economies including participation in the RCEP and the CPTPP. Japan could play a significant role in encouraging the U.S. and China to end their ongoing trade war, as it has credibility and influence in trade matters. Additionally, Japan’s constructive support for infrastructure investment in Asia through development finance could help address issues related to the Belt and Road Initiative (BRI). If Japan and the U.S. joined the AIIB, Japan would be well-positioned to discuss debt rescheduling and debt relief initiatives including the Paris club, which are critical for many poor countries facing debt burdens largely due to China’s unwillingness to engage in discussions related to debt relief or rescheduling in relation to Belt and Road. China’s recent willingness to cooperate in working out debt rescheduling for Zambia is a positive step forward.

In response to Taiwan’s accession to the CPTPP, Japan could follow a formula similar to the one used when the APEC was created in 1991. At that time, China, Taiwan, and Hong Kong were brought in as three separate independent members of APEC simultaneously through skillful diplomacy by Korea. Japan could promote parallel discussions with Taiwan and China, with the understanding that Taiwan would not be accepted until China was.

Regarding the CPTPP if China joined without the U.S., it would be unfortunate, but it might be a net positive for Japan and the region. Based on China’s behavior in other international organizations like the International Monetary Fund (IMF) and the World Bank, China has been a responsible member of these organizations and has supported IMF programs and implemented World Bank, even when they went against their interests. In terms of the WTO, their track record is mixed, but is not as bad as some claim. China would likely want to be accepted as a big player and, therefore, would be inclined to be a responsible member of the CPTPP. There is importance in engaging China constructively rather than trying to keep them out, as this approach reduces the risk of conflict and confrontation in the future.