China's "Economic Security" Growth Model, Implications for the US-China Security Dilemma and Lesson for Other Major Players

China’s “economic security” growth model: three components

Traditional analytical frameworks such as export-led or domestic-investment-led growth no longer adequately describe China’s economic model. A decisive shift has occurred in the guiding political logic, captured in the official slogan to “coordinate between development and security,” which effectively elevates national security to the same level as economic development. From this overarching imperative flow three major policy components that together constitute the new model.

Dual circulation, the first component, aims to reduce reliance on external markets, particularly the United States, and to reorient the Chinese economy around domestic demand as its primary engine of growth. While China has long managed tensions between external and internal demand, what is qualitatively new is the nature of the perceived threat. Whereas earlier adjustments were driven by concern about the unpredictability of global markets, the current shift is driven by concern about deliberate actions by foreign governments, giving the strategy a more pronounced security logic than previous iterations of domestic rebalancing. In practice, results have been mixed. Direct trade between the United States and China has declined, but this decline masks the continuing importance of indirect trade routed through third-country connector economies. Meanwhile, chronically weak consumer confidence, the wealth destruction caused by the property-sector collapse, prolonged producer-price deflation lasting almost 44 months, and mounting excess capacity have made domestic-demand-led growth extremely difficult to achieve. The resulting export surge has been the main bright spot of the Chinese economy in recent years, but it has also generated trade friction and investigations from a wide range of partners including Turkey, Brazil, and India, well beyond the United States.

A qualitative shift has also occurred in how China approaches self-reliant innovation, the second component of the model. China has long made technological advancement a national priority, but since 2018 technology has been formally incorporated into the comprehensive national security concept, marking a step change in political emphasis. Analysis of published articles in the People’s Daily shows a clear inflection point after 2018, when the new formulation of the national security concept, explicitly including technology, began to displace the older version. Institutional restructuring has reinforced this shift, most notably through the establishment of a Central Committee Science and Technology Commission in 2023, signaling an intention to consolidate political guidance over what had previously been a fragmented innovation landscape. Textual analysis of nearly 488,000 Chinese newspaper articles confirms a broader discursive turn: language supportive of international cooperation plateaued and then declined, while language concerned with decoupling and self-reliance spiked sharply from 2021 onwards, crossing above cooperation-oriented discourse for the first time. These shifts are backed by sustained increases in central-government expenditure on science and technology, which have consistently outpaced growth in other major budget categories including defense and education. The education system is being reoriented in parallel: by 2024, science and engineering fields accounted for nearly three-quarters of newly approved university majors, compared with approximately half in 2020.

Rounding out the model as the third component is a legal and regulatory toolkit for economic counter-coercion. While China has historically used trade as a political instrument, typically through import restrictions on goods such as Norwegian salmon, Australian wine, or French Bordeaux, what is new is the legal architecture now being built on the export side, framed explicitly in terms of “struggle.” Party theory journals and five-year plan guidance documents call for the use of legal means in “international struggles” against foreign sanctions, interference, and “long-arm jurisdiction.” The recently revised foreign trade law explicitly discusses enriching the “legal toolbox for foreign struggles,” and the fourth plenum recommendations for the 15th Five-Year Plan reiterate the same language. Crucially, this toolkit is designed not merely as a reactive instrument but as a means of raising the anticipated costs of coercive action by foreign governments before it occurs. In practical terms, it encompasses a suite of new or revised laws and supporting State Council regulations covering foreign relations, foreign trade, export controls, tariffs, and sanctions, all promulgated or substantially revised within the past five years, with new regulations on industrial and supply chain security added in 2026.

Distortions arising from the economic security growth model

When security logic becomes the primary driver of economic policy, distinctive distortions emerge that go beyond those already documented in the existing literature on China’s domestic political economy. Three new distortions deserve particular attention.

A regulatory imbalance between the capacity to threaten and the capacity to reassure is perhaps the most structurally significant distortion. The counter-coercion legal toolkit is heavily weighted toward demonstrating a credible threat, encapsulated in the Ministry of Foreign Affairs formulation that “China does not want to fight, but China is not afraid to fight.” The legal infrastructure for issuing credible assurances to foreign partners, by contrast, remains far less developed. This asymmetry matters because effective economic statecraft requires both: the ability to impose costs on an adversary and the ability to credibly signal restraint to partners and investors. Even during the Liberation Day tariff confrontation in 2025, the Ministry of Commerce attempted to reassure foreign investors that China remained open for business, but these statements struggled to achieve credibility against the simultaneous deployment of counter-tariffs, unreliable entity listings, and export control measures. The continuing decline in foreign direct investment inflows suggests that reassurances of this kind carry limited weight when the threat-signaling architecture is so much more developed than the reassurance-signaling architecture.

Among foreign firms operating in China, the dominant response to this environment has been pervasive risk aversion. Once national security considerations enter the calculus, the traditional cost-benefit framework becomes difficult to apply, because national security risks do not fit easily into quantitative models of expected return. Unlike commercial risks, which can be priced and hedged, geopolitical risks tend to be binary and hard to quantify, pushing firms toward the simpler heuristic of minimizing exposure rather than optimizing returns. Survey data from the European Chamber of Commerce in China consistently identify geopolitical risk as a leading concern for member firms. In practical terms, this has translated into a shrinking physical footprint: fewer employees relocated to China offices, thinner flows of information between China-based operations and headquarters, and a correspondingly reduced capacity for both firms and their home governments to accurately assess conditions inside China. The erosion of this information channel is consequential not only for business strategy but for diplomatic intelligence.

National security imperatives also supercharge resource misallocation in innovation-intensive sectors. Because governments rarely impose binding budget constraints on spending justified on national security grounds, investment decisions in strategically designated industries are driven more by political priority than by anticipated market demand. The result is a systematic acceleration of excess capacity in high-technology industries. The National Development and Reform Commission has already signaled concern about low utilization rates in newly built data centers and incipient oversupply in humanoid robotics. This excess capacity, just as in earlier cycles involving steel and electric vehicles, generates pressure to seek export markets, producing trade friction with third countries. With leading-edge technologies in artificial intelligence and advanced manufacturing now at the center of national security strategy, the pattern is likely to repeat itself in high tech innovation sectors.

The U.S.-China security dilemma and the ambiguity of economic signaling

The three distortions described above connect directly to the persistence of a security dilemma between the United States and China. In the classical formulation of international security theory, a security dilemma arises when two states that do not seek conflict find that their defensive actions are nevertheless perceived as offensive by the other side, triggering escalatory responses that increase the probability of precisely the conflict both sought to avoid. The dilemma can operate through misperception of intent or through rational uncertainty about intent, and both channels are at work in the U.S.-China relationship today.

Economic policies are substantially harder to signal accurately than military actions, which are themselves difficult to interpret. Industrial policy intended to build domestic resilience can be perceived as an attempt to dominate global markets. Stockpiling, primarily a defensive measure, can be read as preparation for armed conflict. Investment screening may be interpreted as a deliberate effort to deny a rival access to capital to cause economic harm.

The complexity of economic bureaucracies compounds the signaling problem. Unlike the hierarchical chain of command in military institutions, economic policy involves multiple central ministries, state-owned enterprises, local governments, and private firms, making it genuinely difficult for a foreign partner to determine whether an observed outcome reflects deliberate policy intent, bureaucratic dysfunctional implementation, or profit-maximizing firm behavior. The delays in rare-earth export licensing following the 2025 U.S.-China tariff negotiations illustrate this vividly: outside observers could not determine whether the delays reflected the teething problems of a new bureaucratic regime, a deliberate signal to Washington, or an attempt to impose costs on third-country connector economies. Each of the three distortions identified above amplifies this uncertainty in a specific way: the regulatory imbalance undermines credible assurances; multinational risk aversion erodes the information channels governments rely on to read Chinese conditions; and excess capacity in strategic industries sustains persistent doubt about whether Chinese industrial policy serves domestic stabilization or the strategic reshaping of global markets.

Implications for third countries and options for Japan

The geopolitical landscape confronting third countries is being shaped not only by China’s economic security model but also by heightened unpredictability in U.S. policy. Third countries have responded with a range of strategies: diversification of trade and investment partnerships, bilateral stabilization agreements with each major power, and renewed multilateral diplomacy. The options available vary considerably depending on the depth of a country’s economic ties with the United States versus China and the intensity of its military alliance with Washington, making the situation facing Canada or Japan fundamentally different from that facing Vietnam or Indonesia.

Diversification alone, however, is unlikely to be sufficient. U.S. tariff agreements with third countries increasingly contain clauses on transshipment controls and export-control alignment designed to limit indirect trade with China, creating friction in relationships those same countries are trying to stabilize. China’s new counter-coercion legislation, including the 2026 supply chain security regulations, places firms in third countries at risk of conflicting legal obligations. Because both powers have been deliberately ambiguous about when they will enforce these provisions, uncertainty for third-country firms and governments remains substantial, and the extraterritorial reach of both legal frameworks means that security-dilemma risks can spill over into relationships between third countries themselves.

Targeted economic diplomacy offers a constructive avenue beyond diversification. Third countries have an interest in pressing China toward greater credibility in its assurances, for example through transparency in export licensing decisions, more specific and constrained drafting of counter-coercion legislation, and toward understanding the chilling effect that the current security logic has on foreign firms and overall foreign investment. China should also demonstrate an understanding that benefits to itself are not necessarily gained by imposing economic harm on others. In terms of managed trade, price controls and curbs on involution, China does seem to accept this logic to some extent, but such efforts would require reciprocal signals of restraint from the United States due to the security dilemma.

Q&A

Q:
The U.S.-China security dilemma has been caused by misperception and uncertainty, stemming in part from China’s distinctive economic security growth model and an imbalance between credibility of threats and assurances. How does uncertainty originating from the U.S. side contribute to the security dilemma?

Yeling TAN:
Genuine uncertainty surrounding U.S. intent is equally a driver of the dilemma. The Trump administration’s objectives toward China remain unclear, as it is uncertain whether balanced trade or national security considerations are dominant, and the diverging views among China hawks within the administration compound the ambiguity. Even the more communication-oriented Biden administration generated misperception. The “small yard, high fence” approach to export controls was intended to signal restraint by ring-fencing only critical technologies while preserving the broader relationship; however, China interpreted it as a surgical offensive targeting its most strategically vital sectors. The contrast illustrates that misperception is a two-way dynamic, though its severity varies across administrations depending on the willingness to engage in economic diplomacy. Active outreach by figures such as Janet Yellen and Gina Raimondo did measurably reduce unintended escalation on the Chinese side.

Q:
Given that third countries must align with like-minded partners to gain political clout, how can collective action be achieved despite diverging national interests in order to mitigate the fallout from the U.S.-China security dilemma?

Yeling TAN:
Diverging national interests with both the U.S. and China make collective action difficult even among ostensibly like-minded partners. What is needed is leadership among middle powers and sustained analytical work to identify governance mechanisms for a new geoeconomic world. One concrete option would be a small eminent group of senior thinkers drawn from a select group of third countries, tasked with developing dispassionate policy options, towards improving alignment and including strategies to reduce misperception, which essentially increase instability. We are all increasingly aware of economic security vulnerabilities, but it is the individual actions of governments acting alone that are generating a more insecure world. A more structured collective approach is therefore urgently needed to address the new sources of insecurity.

Q:
Is the U.S.-China security dilemma fundamentally a problem of misperception, or is it made irresolvable by a deeper structural conflict between the U.S. drive to maintain its hegemony and China’s desire to revise the existing geopolitical order?

Yeling TAN:
A fundamental structural difference between the U.S. and China is driving the current power-transition dynamic. However, this coexists with the security dilemma, and the reason to emphasize the security dilemma framework nonetheless is the underlying premise that neither great power actually wishes to enter into a costly military conflict. Given that starting point, the danger is precisely that misperception and escalatory action, even when intended defensively, could drive both sides toward a higher probability of the very conflict neither wants. The security dilemma dynamic operates in the foreground of the structural conflict, in effect steering the course, generating unintended escalation. Managing the foreground dynamic remains meaningful even if the background condition cannot be fully resolved in the short term.

Q:
What is the prospect of China achieving industrial hegemony in AI, autonomous driving, and robotics, and how should advanced economies respond?

Yeling TAN:
The outlook differs significantly between advanced economies and the Global South. In developing and emerging economies, China’s proactive trade and investment posture over the past decade, reinforced through Belt and Road Initiatives, has given it a strong positional advantage that the U.S., constrained by domestic political economy dynamics across both administrations, has not been able to match. The U.S. has brought very little to the table in terms of positive trade and investment frameworks, while China has remained an active presence.

Among advanced economies, the picture is more nuanced. Europe retains a robust legal and regulatory framework and has applied its own methodology to tariffs, distinct from the U.S. approach. There may be scope for European governments to construct licensing, intellectual property, and standards regimes that allow access to Chinese technology on their own terms, enabling arrangements that yield mutual benefit to both sides rather than uncritical market dominance. This matters practically: achieving AI ambitions requires solving energy and electricity pricing challenges, and Chinese technology offers relevant options in addressing those challenges. A more balanced market approach, if politically achievable, could reduce the risk of hegemony while addressing a variety of urgent public policy challenges such as climate change.

Q:
What risks does Japan face within China’s new growth model, and what strategic options are available?

Yeling TAN:
The realistic space for maneuver is narrow when pressure originates from a primary military security partner. Japan has nonetheless been notably sophisticated in balancing U.S. security and economic demands against its geographical reality and deep economic ties with China. Its insistence on multilateralism and adherence to existing international law has allowed it to respond to U.S. interests without triggering unnecessary escalation—the kind that would cause the security dilemma dynamic to proliferate beyond the bilateral U.S.-China relationship. Diversification of ties, including strengthening relationships with Canada, Australia, the United Kingdom, Singapore, and others, remains an important complementary strategy. Avoiding unnecessary escalation remains the key strategic discipline for Japan and other third countries navigating the U.S.-China dilemma.