An Asian Agenda for Economic Security and Prosperity (Summary)

Opening Remarks

FUKAO Kyoji (Chairman, RIETI / University Professor, IER, Hitotsubashi University)

East Asia has become the engine of growth for the global economy, but at the same time, it is the region that would be hit hardest by the collapse of the free trade system. Strategic competition between great powers, a retreat into protectionism, and weaponization of trade and economic policies have led many countries to pursue economic security policies.

Will East Asia be able to continue to enjoy the benefits of the international division of labor and economies of scale gained through globalization? What can be done to reduce the vulnerability in supply chains and overseas subsidiary networks in preparation for natural disasters, international conflicts, and economic pressure by major powers? What kind of international order could we build that will allow us to balance economic security with maintaining and expanding the prosperity that comes from free international trade?

The purpose of today's symposium is to discuss these important themes with stakeholders from Japan, Australia and the Association of Southeast Asian Nations (ASEAN) countries and to indicate the most appropriate policy directions.

Keynote Speech

MATANO Motosada (Cabinet Councillor and Senior Director, National Security Secretariat)

Assessment of the International Environment and the Need for Economic Security

In the mid-2010s, free trade was actively being promoted, and negotiations for free trade agreements were seen everywhere in the world. Today, the global security environment is far more complex, and in an era of geopolitical competition, free trade is much less valued, and the scope of national security has now expanded into the field of the economy. We talk about economic coercion, supply chain disruptions, technology leakage, civil-military fusion, and the need to take action to cope with the situation is imminent.

The concept of economic security lacks a clear definition, and the question we face is “What needs to be changed as we transition from a free trade era to an economic security era?”. In order to address this question, the concept of “small yard, high fence” has become a key phrase, describing the idea of implementing only necessary regulations or controls and only in critical areas necessary for national security. Japan has a goal to promote its economic security, aiming for self-reliance and technological superiority and indispensability. However, there are various “trade-offs” to economic security. While we focus on geopolitical competition among states, there are competitions among private companies both in and out of a country that has supported the economic growth. Also, without a robust economy, a state will not be strong, and Japan’s economy and technological power have been fueled by free trade and global supply chains. It would defeat the purpose if we act in the name of economic security and in the end, erode the very technology and economy we intend to protect. What goes into or should be inside the “small yard” or “how small, or big, the yard should be” is something that is easier said than done, and there is no easy answer to this question.

Continuous Progress of Japan’s Economic Security Policy

Economic security is an extremely complex policy agenda, and to this end, Japan has enacted the Economic Security Promotion Act, which systematically legislates measures that need to be taken on an urgent basis to address economic security challenges. There are four pillars to this act; ensuring the stable supply of critical products like semiconductors and antimicrobials; securing stable provision of essential infrastructure services; development of designated critical technologies including in space and cyber; and establishing a system for non-disclosure of sensitive patent applications with national security applications. These measures have been widely praised. Japan will also introduce a security clearance system to align with international standards and facilitate cooperation with allies and partners. This will expand opportunities for Japanese firms in foreign government procurement tenders and international research collaboration. Foreign investment screening is also being addressed in terms of economic security concerns related to supply chains, technology leakage and defense use.

Another focus is research security. While an open research environment is vital for innovation, we must manage risks like technology leakage. Managing such risks opens new frontiers for international research collaboration, so we are formulating guidelines for research institutions to promote research security measures.

Economic Security and Prosperity in Asia: Efforts for Regional Resiliency and Self-Reliance

As I mentioned, there is no established definition for economic security, and there is no one-size-fits-all economic security policy. As the region forms a supply chain network connected to the global economy, Japan emphasizes supply chain resilience and supporting the self-reliance of like-minded countries within the region.

Japan values a multilateral trade system that covers the “large yard”. As we engage more in what to put in the small yard, we have come to believe that strengthening rules-based international economic order is increasingly crucial when, for instance, certain countries have started to “weaponize” economic dependencies. We put strong emphasis on international cooperation to fight against economic coercion, such as the Coordination Platform on Economic Coercion launched with other G7 countries. Quad is another line of efforts in promoting the resilience of the regional economy.

Japan also promotes the Asia Zero Emission Community (AZEC), where Asian countries share the principle of decarbonization and work together to promote energy transition. We are also collaborating on resilient supply chains, notably through the Indo-Pacific Economic Framework (IPEF).

Conclusion

The major difference between traditional security and economic security is that, for the latter, the private sector entities are indeed one of the main players. Our efforts will not be truly effective unless they are founded on close communication and collaboration between the government and the private sector. As we move forward, we are bound to face other challenges such as where the boundary of the “small yard” should be, how high the fence should be, and how we should manage the area outside the “small yard” namely, the “large yard”, and accordingly, how free trade can still play a role in this era of economic security.

Session 1: Supply Chain Resilience

Session Chair: TOMIURA Eiichi (President and Chief Research Officer (CRO), Chief EBPM Officer, RIETI / Professor, Otsuma Women's University)

Presentation 1

Jenny GORDON (Honorary Professor, Australian National University)

Mr. Matano outlined the legislative frameworks for economic security, but the challenge lies in ensuring we build a “small yard with high walls” around what truly matters while avoiding walls around incorrect targets. Industrial policy is more prevalent among developed countries that can afford it. What problem do we face? One major concern is China’s growing control over critical supply chains. However, this focus often overlooks broader risks to economic security beyond China’s role in global supply chains, and we must also account for other disruptions, like war and climate change affecting key trade routes such as the Suez and Panama canals respectively. A more comprehensive approach is needed, considering a broader range of risks to ensure supply chain security.

In thinking through policy decisions, we should first ask: what security risks are we attempting to address? Policies should not only focus on deterrence but also on building resilience, whether through self-sufficiency, diversification of supply sources, or securing insurance mechanisms like contingent contracts. Japan and Australia are in very different places regarding economic resilience and self-sufficiency, but we apply the same tools to tackle these issues.

However, we must also consider unintended consequences of our policies. Policymakers need to ask if their actions are negatively impacting productivity, social stability, or international influence. This is particularly important for countries like Australia, where we really need strong relationships with Southeast Asian neighbors, and not just with the U.S.

Do de-risking supply chains make countries more secure? Policies to improve economic resilience have to either make you self-sufficient, diversify supply sources and domestic production, or offer insurance against disruptions. You have to deliver on one of those three, or elements of all those three, if you are actually improving resilience. Many policies claim to boost resilience but fail to deliver when seen through this lens. Identifying which products are at risk of disruption (vulnerable), impose high costs on the local population when not available (essential), and necessary for local production (critical), is extremely beneficial in determining policy targets. Also asking which policies increase the availability of substitutes is valuable.

In conclusion, there is a really big research agenda, because there are many questions that need to be answered. We need to be looking at what is really at risk. We need to think about what trade rules might increase the availability of substitutes, we need to think about the broader costs and benefits of policies, and what the effect is on other countries.

Presentation 2

TODO Yasuyuki (Faculty Fellow, Program Director, RIETI / Professor, Faculty of Political Science and Economics, Waseda University)

My presentation today focuses on the significant economic effects of supply chain disruptions, particularly highlighted by a study I conducted using rich firm-level data from one million Japanese firms. In a simulation where imports from China were disrupted by 80% for two months, the value-added production level loss would be 40% of the gross domestic product (GDP) of Japan. This is a substantial effect, because disruptions can propagate through domestic supply chains and be substantially magnified. We also found that upstream product disruptions cause larger impacts than downstream ones because of this propagation of effects.

Evidence suggests diversifying supply chain partners across countries can result in resilience. In a study on the impact of a 2012 U.S. hurricane, firms connected to foreign suppliers mitigated disruptions more effectively than those solely reliant on domestic ones. Similarly, firms with suppliers in more than one country during the COVID-19 pandemic in ASEAN and India were more resilient.

Many Asian countries rely heavily on China for their supply chains. Data from 2017 to 2023 shows the U.S. successfully reduced its reliance on China while increasing total imports. Australia, by contrast, strengthened its reliance on China, while Japan showed mixed results. Japan also saw reduced total exports and exports to China, leading to economic losses that other countries like the U.S. and Australia have avoided.

Balancing economic security with economic benefits is critical, and Japan, unlike other nations, has struggled to strike this balance, particularly in its diversification efforts, suffering economic losses. Diversification is not just a tool for resilience, but also a means of avoiding economic coercion, such as China’s 2010 rare earth metals export ban. Following the coercion, Japan successfully diversified its rare earth imports, reducing reliance on China. In fact, when undertaking its economic coercion, China seems to target products with lower substitutability in the target country, meaning that diversification is a defensive strategy.

However, in a recent example of economic coercion, restriction on exports of fishery products from Japan to China last year have resulted in low total exports of fishery products that continue to the present. In contrast, when Australia faced economic coercion on imports of wine, barley and coal from Australia to China, Australia successfully reduced its reliance on China but increased total exports after the coercion. That means that Japan, in comparison to Australia, has failed to diversify export partners, and we should learn from Australia’s example.

In summary, the disruption of essential materials can be substantial, and creating more flexible supply chains through diversification and innovation is critical.

Presentation 3

ZHANG Hongyong (Senior Fellow, Policy Advisor, RIETI)

The impacts of exogenous shocks on global supply chains are heterogeneous. In the case of natural disasters and pandemics, the impacts are relatively short-lived. For example, Japanese companies were significantly impacted by the 2011 Great East Japan Earthquake and the 2020 COVID-19 pandemic, but their business performance recovered within about a year in both cases.

On the other hand, the impacts of policy or institutional changes are long-lived. For example, Brexit in 2016 not only caused short-term reductions in sales and employment, but also had a long-term influence, meaning that the UK’s role as a production base and export platform to the EU weakened. Also, in 2019, Japan strengthened export controls against South Korea on three chemical inputs essential in semiconductor production. The export controls were lifted in 2023, but exports did not revert.

One policy implication is that while policy support for emergencies such as natural disasters is necessary, subsidies for excessive reshoring are not a good idea. In the case of policy or institutional changes, policy coordination efforts or trade negotiations among relevant parties or WTO members are needed. Industrial policy and economic security policy may have long-run impacts on supply chains.

Discussion

TOMIURA:
Let me start with Professor Jenny Gordon. You proposed a framework for policy discussions. In that case, how do you define resilience and on what level should resilience be discussed in terms of granularity? What time frame do you have in mind in discussing resilience?

GORDON:
Time frame depends on criticality. There are certain things where short-term supply chain disruptions are very costly to economic activity or to the health and wellbeing of the population. This is one of these things to look at. Understanding whether you are looking at a short-term disruption or long-term disruption, and then also the level of substitution and how long it takes for those substitutions to actually happen. I think that is a really important way of thinking through it. Also, it is important to determine whether actions taken to diversify are actually effective or simply lengthening the supply chain without developing actual substitutions, as in the case of the U.S. shift to India, which is also actually economically tied to China to a similar degree.

TOMIURA:
Professor Todo, you report your own research result partly based on the micro-firm level data and partly from industrial aggregate level data. The question is, what level should we discuss the resilience of the supply chain?

TODO:
That is a very important point. Firm level supply chain networks are very complex, so the simulation results fluctuate a lot depending on the assumptions and so forth. But sometimes, when using firm level data, the effect of supply chain disruptions can be quite large, much larger than the result from industry or country-level analysis, because of the complexity of supply chain networks. That implies that we really need to utilize firm level data to quantify the effect of supply chain disruptions and also the resilience of supply chains.

TOMIURA:
I have a question for Dr. Zhang. You characterized natural disaster effects, as in the pandemic case, as short-lived, while with policy changes, the impact is persistent. But some may ask whether the difference may come from the perceived persistence of the change. What is your assessment of this difference?

ZHANG:
In the case of a pandemic and earthquake, I think the response of intra-firm trade is very quick, compared to inter-firm trade. But in the case of Brexit or U.S.-China trade war, after the exogenous shock, policy change or institutional change, multinational firms have to reorganize their supply chains, both in terms of inter-firm trade and intra-firm. They may relocate their production from China to the ASEAN countries or reshore the production back to Japan. That is quite different.

TOMIURA:
What kind of policy recommendation do you have on trade policy?

ZHANG:
Unilateral export controls are not very effective in attaining broader objectives. Countries should have trade talks with their target country and coordinate industrial policies among these countries. For example, China’s industrial policy, Made in China 2025, from China’s perspective, is justified because the Chinese government wants to promote innovation in key products, but the U.S. government criticized the policy. I think the two countries need to coordinate this.

TOMIURA:
Professor Todo, could you explain your views on unintended consequences of active industrial policy justified in the name of economic security?

TODO:
One obvious disadvantage of industrial policies is their reduction of efficiency in the market economy. However, let me evaluate current Japanese industrial policies for economic security to answer this question. Recently, the Japanese government has provided large subsidies to attract Taiwan Semiconductor Manufacturing Company (TSMC) to Kyushu in Japan and established the domestic company Rapidus. While these subsidies might lower efficiency, they appear to have been effective to this point. TSMC’s presence has attracted other companies, creating industrial agglomeration in Kyushu, creating regional supply chains.

Additionally, these policies can promote knowledge spillovers, which is another type of increasing returns to scale. The Japanese government also attracted TSMC’s R&D center to Tsukuba, and it is collaborating with Japanese firms and universities, promoting international knowledge spillover. Still, we must carefully manage efficiency losses and ensure future policies enhance these spillover effects.

TOMIURA:
Professor Gordon, in the presentation by Professor Todo, he referred to the case of economic coercion between China and Australia. Could you elaborate on the Australian perspective?

GORDON:
Australia actually did very well in adjusting, and the government played a pretty significant role in that. During this period, agencies like the Australian Trade and Investment Commission (Austrade) worked really hard to help exporters find alternative markets and to facilitate contracts. Information gaps in the market during disruptions are the costliest issues, as new roads have to be trodden in every aspect of the businesses in question. Government efforts involved everything from ensuring sanitary and certification standards to organizing distribution networks. The wine industry suffered the most, having spent decades building the Chinese market. But it is a product tailored to a market, which makes the products most difficult to immediately find another market for.

One way to manage economic coercion is for other trade partners to support the affected country by not supplying the market, but of course, what actually happened was the U.S., Argentina, Chile, and South Africa supplied the market in Australia’s stead. This shows you the challenge of forming reliable coalitions to resist economic coercion.

Despite these pressures, Australia managed to adjust well, thanks to government efforts and that most of the products were commodities. Ultimately, the goals of China’s trade actions were not clearly understood, but it can only be assumed that they did not achieve their intended results, as Australia did not cave to the demands. If China was trying to instill fear in the market for other players, it is important not to fall prey such coercion. The relationship has since improved with a change in government. The real question remains: what did China gain from this strategy?

TOMIURA:
Are there any specific indicators that can be used to measure the resilience of Australia?

GORDON:
Measuring resilience is really important, but I am not quite sure if it can be easily measured. While it is possible to measure certain things like water usage, controlling them effectively is a different matter. I think it comes down to starting to actually measure the elasticity of substitution, how easily companies can find alternatives when an input is disrupted. Using longitudinal firm-level data, we can analyze how quickly firms adapt to disruptions and what strategies they employ. This allows us to measure not just the problem’s magnitude but also the effectiveness of policies designed to promote diversification and resilience within firms.

Session 1 Concluding Remarks

TOMIURA Eiichi (President and Chief Research Officer (CRO), Chief EBPM Officer, RIETI / Professor, Otsuma Women's University)

TOMIURA:
It is clearly beyond my capacity to summarize the discussion in a simplified phrase, but I am quite sure that there are many more things we should discuss on these important issues. We have confirmed that in terms of resilience, a dynamic perspective on the timeframe and level of analysis is important. In terms of policy discussion, we need to discuss advantages and disadvantages, costs and benefits, and especially the hidden costs or unintended consequences of positive industrial policies.

Session 2: The Future of the World Economic Order

Session Chair: Shiro ARMSTRONG (Non-Resident Fellow, RIETI / Professor, Crawford School of Public Policy, Australian National University)

Presentation 1

URATA Shujiro (Chairman Emeritus and Distinguished Senior Fellow (specially appointed), RIETI / Professor Emeritus, Waseda University / Senior Research Fellow, Economic Research Institute for ASEAN and East Asia (ERIA))

In recent years, protectionist policies in world trade have been prevalent, resulting in decreased economic efficiency and stagnant economic growth. While the World Trade Organization (WTO) is expected to play the three roles of trade liberalization, setting of new trade rules, and dispute settlement, it is not performing these expected functions. This dysfunction seems to emerge from the consensus-based decision-making system. Alternative or supplementary approaches would be regional trade agreements (RTAs) and plurilateral trade agreements (PAs) formed by like-minded countries.

An RTA covers comprehensive issues, including not only trade liberalization but also investment liberalization and rulemaking on intellectual property rights, but its membership is limited. A PA basically involves just one issue with a large number of countries participating. I think these frameworks can also be useful in discussions on economic security.

Japan should adopt policies that encourage as many countries as possible to participate in these movements and that deal with many possible issues in a deeper and more comprehensive manner. It is especially important to act in cooperation with like-minded countries such as Australia.

Presentation 2

Jayant MENON (Senior Fellow, ISEAS – Yusof Ishak Institute, Singapore)

ASEAN and Japan have a very strong multifaceted relationship, but a critical aspect of its economic ties links to global supply chains (GSCs). GSCs are dynamic by nature, and even small shifts in cost competitiveness can lead to entry or exit of labor-intensive segments of GSCs. The restructuring of supply chains in ASEAN started before the U.S.-China trade war, however, the trade war has created a new imperative for ASEAN to address. It is a challenge, because it is a major disruptor. ASEAN’s supply chains are likely to remain China-centered, especially in technology- and capital-intensive sectors.

While there are some short-term gains from reshoring, near-shoring, and friend-shoring, if it results in the desired outcome of pushing China out of the supply chain, the longer-term impacts will be larger losses for all involved. Mechanisms like IPEF may drag ASEAN into this conflict in a way that will not serve its interests.

Within the U.S., trade policy is increasingly shaped by the Department of Commerce, as opposed to the Office of the United States Trade Representative (USTR). This shift has led to more protectionist measures. Major U.S. companies, such as NVIDIA, Intel, and Qualcomm, have voiced concerns about these policies, especially U.S. export controls, which threaten their access to China as both a market and a production base.

U.S. policies like the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act and the Inflation Reduction Act (IRA) are also having spillover impacts throughout the ASEAN region. The IRA distortions are affecting the region because few ASEAN nations, apart from Singapore, have Free Trade Agreements (FTAs) with the U.S., or even a limited FTA on critical minerals like Japan has.

In the long term, isolating China from supply chains could be both disruptive and costly for ASEAN. New trade architectures must take into account that China is, and will remain, a critical part of ASEAN interests economically, and any attempts to move China out of supply chains are likely to fail and to be so costly and disruptive that it does not even actually need to be achieved to be a problem for the region. Moving them into the fold is more realistic.

Presentation 3

KAWASE Tsuyoshi (Faculty Fellow, RIETI / Professor, Faculty of Law, Sophia University)

The Multi-Party Interim Appeal Arbitration Arrangement (MPIA) is an arbitration system that serves as an alternative to the dysfunctional WTO Appellate Body. Currently, 54 WTO members are participating in the Arrangement, agreeing not to appeal any disputes between MPIA members into the void and to deliberate as necessary under arbitration of the MPIA.

Some argue that the WTO Members should use a majority vote to appoint new Appellate Body members though the General Council, but this would definitely lead the US to move away from the WTO dispute settlement procedure. We have to utilize all possible measures to fill the current rule-of-law vacuum while engaging the US in the reform of the dispute settlement procedure. To that end, I think the MPIA is the only realistic alternative.

It would be best if the Appellate Body functioned perfectly, but in the meantime, it is indispensable for us middle powers to restore the rule of law at the WTO through the MPIA as soon as possible. We need to encourage other WTO members such as India, Korea, the United Kingdom and more ASEAN economies to participate in the MPIA, and also need to continue updating and improving rules. Most importantly, it is essential to tenaciously negotiate to improve the dispute settlement procedure and restart the Appellate Body.

Presentation 4

WATANABE Mariko (Professor, Department of Management, Faculty of Economics, Gakushuin University)

China excels in implementing industrial policy. However, using industrial policy for technologies with strong economies of scale can rapidly disrupt the industrial base of other countries, and an international market failure is unavoidable. That is why new rules are needed to mitigate the impact of scale and ensure fair competition.

An ex-ante solution is multilateral cooperation for an industry in the form of foreign direct investment (FDI) or industrial cooperation, through which the benefits of scale can be shared. Indeed, thanks partly to the Information Technology Agreement (ITA), digital industries succeeded in establishing a global value chain and sharing profits among many countries including smaller economies. Free Trade Agreements (FTAs) and Regional Trade Agreements (RTAs) are also important.

Ex-post solutions include existing WTO trade remedies; disciplines and rulemaking to prevent abuse of power; and limited use of national security exceptions. For example, if a country with a high market share of a product abuses the power of scale, additional tariffs might be imposed. My proposal is to use the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as a testing ground for these new rules.

Discussion

ARMSTRONG:
Dr. Urata, if our confidence in the WTO really fractures, are the RTA and plurilaterals going to be enough to keep the global system open, or do we rely on that underlying WTO?

URATA:
RTAs and plurilaterals cannot be a substitute for the WTO. If the trust in WTO collapses, unfortunately that is maybe the end of the world trading system. But at least having RTAs and plurilaterals may help the world trading system not to collapse completely. But again, they cannot be a substitute for the WTO.

ARMSTRONG:
A big test for expanding CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) membership is China’s bid to join. Is it possible for them to actually join, and is it a constructive way forward? Are there any lessons we can learn from China's WTO accession process that took 15 years?

URATA:
I think it is possible, and I think it is constructive too. But of course, China has to accept all the regulations, rules that the CPTPP requires. We have one very good example of negotiation from the UK’s accession to the CPTPP. If I understand it correctly, that was done very strictly, and China has to go through this very strict screening.

ARMSTRONG:
Mr. Menon, regarding China and the CPTPP, what are the design features that we need to understand in creating bottom-up rules like this? Is open accession enough? Additionally, with the rise of minilateralism like the Quad (Australia, U.S., Japan, India), do you see these arrangements as beneficial to global multilateralism, or potentially harmful?

MENON:
Bringing China into agreements like CPTPP is important, not just for ASEAN but for most of the world. China must learn to play by the rules, as should other countries, including the U.S., which has also bent trade rules, particularly through mechanisms like anti-dumping and countervailing duties.

CPTPP has shown it can be both stringent and flexible. Countries like Vietnam, Malaysia, and Singapore, which are dominated by state-owned enterprises, have negotiated flexible timelines. So, China could also be integrated in a way that encourages it to comply. Punishing China has not worked, but bringing them in might get them to play by the rules. Additionally, Taiwan and China should join at the same time, because one will veto the other if they are brought in separately.

On open accession, yes, it is important. It should also continue to be outward-looking, dealing with subsidies and export controls and all the other new forms of protectionism. In other words, not allowing anti-dumping duties to be used as a new instrument of protectionism.

The best potential alternative to the WTO likely lies in some combination of CPTPP and the Regional Comprehensive Economic Partnership (RCEP). I think the Quad has too much geopolitics tied to it, and any agreement that involves India will only go as fast as India will allow it to go, which is not a rapid pace.

ARMSTRONG:
Dr. Kawase, it is important to expand the membership of the MPIA. How might we bring a country like Indonesia into MPIA and expand the membership?

KAWASE:
It is always tough to persuade a big emerging economy like Indonesia. But my answer is quite simple, self-interest. One effective way to persuade other WTO members to join MPIA is to take advantage of opportunities when the need for the MPIA arises, and in particular cases. For example, currently, Indonesia actually has three WTO cases against the EU. Once these panel reports come out, Indonesia will inevitably consider joining the MPIA. Even if they win, the EU is likely to appeal into the void if they are not party to the agreement.

In addition, Indonesia, like other Southeast Asian countries, has territorial disputes with China over islands in the South China Sea. Territorial disputes can easily lead to economic coercion with trade restrictions by China. I believe as a policy option to deal with China’s pressure, the MPIA would be a useful option for Indonesia.

ARMSTRONG:
Dr. Watanabe, regarding industrial subsidies and economies of scale, the U.S. has long criticized China for its subsidies, yet it is now deploying even larger ones. How do we respond to countries that do not recognize the rule of law, especially as the U.S. retreats from its former role in enforcing the system? Is the CPTPP going to be enough to address this, or should more be done?

WATANABE:
I have not focused on the U.S. specifically, but regarding U.S.-China friction, subsidies are just one aspect of China’s competitiveness. The size of China’s market itself helps lower costs and provides it with greater ability to exploit that power to harm other countries. This abusive, ex post behavior must be disciplined, as it undermines global welfare.

ARMSTRONG:
Given the situation, should countries that still value the rules, essentially everyone but the U.S. and China, work to create mechanisms that encourage the U.S. to act more consistently?

WATANBE:
For China, the WTO and its rules are actually very important in dealing with the U.S. and the EU. China has never filed a case against Japan, but Japan has filed against China. Instead, China focuses on disputes with the U.S. and the EU. This shows that for China, the rules are an instrument to counter larger entities.

ARMSTRONG:
It seems that it is our collective interest to wrap the Chinese economy in more rules and more markets and this has to be done jointly.

Session 2 Concluding Remarks

Shiro ARMSTRONG (Non-Resident Fellow, RIETI / Professor, Crawford School of Public Policy, Australian National University)

We have discussed many risks to global economic security, and while change and uncertainty are inevitable, three constants stand out. First is the United States. Whoever wins the election in six weeks’ time, we can expect continuity or worse in trade policy, driven by domestic structural factors that are going to take a while to sort out. Second is the rise of China. It is going to continue to challenge us as it disrupts global markets, puts pressure on existing rules and norms. Third is their interaction. There is an effective fight for primacy, and this is going to continue to narrow our policy options and risk our economic security, globally.

We need to counter this by maintaining economic interdependence, not reducing it based on political alliances. Middle powers like Japan and ASEAN are crucial in preserving multilateralism, equal treatment, and peaceful dispute resolution. Collective action, and appeal to multilateral processes and will protect our interests and the rules-based order, especially in the face of economic coercion or trade threats.