Japan Seeks to Ease US-China Tensions as G7 Chief

Visiting Fellow, RIETI

At the G7 summit next month, Japan must strike a balance between pushing back against China’s coercion and stabilising the rules-based order.

As host of the G7 leaders’ summit next month, Japanese Prime Minister Fumio Kishida aims to contribute to global rule-making.

He ultimately hopes to shape Chinese behaviour, keep a distracted United States locked into a productive role in the international economy, and engage emerging market economies.

But the world’s third-largest economy relies heavily on the rules-based international economic order to secure almost all of its energy and raw materials. Japan, therefore, cannot afford a deep fracture in the current system, since its also needs open markets for its technology, goods and capital.

Japan has stepped up to contribute to global rule-making since the United States went from enforcer-in-chief to spoiler-in-chief of the international trade regime.

It saved the Trans-Pacific Partnership, after Donald Trump withdrew the United States, by leading the formation of the Comprehensive and Progressive Agreement for TPP. Sensing its importance, China last year lodged a bid to join.

Japan also initiated Data Free Flow with Trust, a multilateral umbrella for data and digital rules, on the sidelines of the Osaka G20 summit. Both China and the US signed up. The last time Japan hosted the G7, in 2016, it pushed principles for promoting quality infrastructure investment, given the geopolitical frictions over China’s Belt and Road Initiative.

That agenda was carried through to the G20 Osaka summit, where China signed on to the G20 Principles for Quality Infrastructure Investment, alongside joint infrastructure projects between China and Japan announced in 2018.

Testing Japan’s track record

The G7 summit agenda in Hiroshima on May 19-21 will test this track record at a time when Japan’s ability to lead coalitions for reform is needed more than ever.

Economic, environmental and food security are central to Japan’s G7 agenda. Japan aims to be relevant to the Global South as inflation, uneven recovery from the pandemic and food and energy crises hit those economies hard.

The BRICS grouping is now larger than the G7 in economic scale and more dynamic, making the G20 more central to global economic governance.

Strategic competition between China and the United States, and the rise of an assertive China, has elevated the issue of economic coercion on the G7 agenda. China has tried to use its economic power to extract political concessions from Japan and other countries, including South Korea, the Philippines and most recently Australia.

Japan’s response has seen the introduction of economic security laws that aim to protect Japanese intellectual property and critical infrastructure, and make supply chains more resilient.

Much of this is sound economic policy, but there is also an element of protection from Chinese practices and an attempt to avoid collateral damage from the US-China strategic competition. Both Beijing and Washington are forcing countries to choose sides in a competition where each sees the gain of the other as a loss to them.

Australia and India have been invited as guests to the G7 summit. Both are members of the strategic Quad grouping with Japan and the US, while India holds the G20 presidency this year and is an important leader of the Global South.

Australia has much to share from its experience in withstanding Chinese economic coercion since 2020. Australia’s experience can help Japan secure a safer and more prosperous regional and global economy. It was the open multilateral trading system that allowed Australian exporters to pivot, and this was key to Australia’s resilience to coercion.

Retreating to trade with “trusted partners”, friend-shoring of production or even an “economic NATO” would make the world much smaller economically and reduce options for trade, making economies less, not more resilient.

Targeting China

Much of the G7 agenda will target China. How the agenda is framed and deployed will determine if it effectively shapes Chinese engagement for the better, as Japan’s past efforts have mostly done. If the agenda keeps markets open and strengthens the multilateral system, it will curb Washington’s worst instincts.

In addition to responding to economic coercion, Japan will look to balance the agenda on supply chain resilience and dealing with non-market practices.

Some G7 leaders may think that means supply chain resilience from China, but with China’s still central role in global value chains only growing, including through growth of Japanese direct investment in China, supply chain resilience must be framed with China.

Dealing with non-market practices targets Chinese state-owned subsidies and industrial subsidies, but the US has emulated Chinese-style industrial subsidies that the rest of the G7 is now trying to negotiate around.

As the US becomes more like China, with economic intervention and draconian restrictions on the free flow of information as it deals with TikTok, getting the principles right for economic rules of engagement will be crucial for Japan. It could make a significant contribution to global governance.

April 17, 2023 Financial Review

October 25, 2023

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