“Everybody has a plan until they get punched in the face," boxer Mike Tyson famously explained. Australia and Japan had their plans for the open international rules-based economic order punched in the face by both China and the United States.
China’s attempted economic coercion against Australia and other countries, including purportedly against Japan earlier on, has shaken confidence in having high trade shares with China and international trade exposure.
US tariffs on steel and aluminium and the threat of tariffs on Japanese cars led to voluntary export restraints on Australian steel exports and pressured Japan into a trade deal with the United States in 2019. That seemed the politically and economically expedient choice then for Canberra and Tokyo.
A more inward-looking United States that is focused on domestic challenges is going to continue to be a source of uncertainty for the international economic rules-based order.
Australia, Japan and other middle powers need a new plan to protect their economic security beyond the measures they now have put in place.
As two leading middle powers that are both security allies of the United States and have China as their largest trading partner, the important geopolitical, economic and security fault lines in the world run through Australia's and Japan's own backyard. So, together with their partners in Southeast Asia, they must work to shape regional and global outcomes.
So far Australia’s and Japan’s economic security policies have focused on the immediate risks from the rise of China. Both Australia’s Economic Resilience and Security Stream in its National Interest Framework and Japan’s Economic Security Promotion Act are mainly designed to protect against Chinese economic coercion. The aim of those policies is to reduce high dependence on China in particular sectors and in the supply chains of critical minerals and rare earths. They all but name China.
Their economic security policies, supported by large subsidies to industry, are about managing risks and securing a ‘high fence’ around a ‘small yard’. The point of the ‘small yard, high fence’ idea is to protect a small number of industries and technologies but to be very liberal outside of that fence. But the ‘small yard’ is growing in the United States. It risks growing for other countries too with national security interest mission creep mixed with naked protectionism.
Australia and Japan need to focus on keeping the yard outside of that fence open and making sure it does not shrink.
Multilateral system defence
The multilateral trading system is the biggest source of economic security for open trading nations like Australia and Japan. That’s where the strategic focus needs to be; otherwise, we risk a much smaller, poorer and less secure world.
The economic coercion that China deployed against Australia in 2020 was blunted terminally by the multilateral trading system, which, despite its weaknesses, allowed Australian exporters to find alternative markets and provide an exit ramp from the problem, with the last of Chinese trade restrictions lifted in October 2024. The open global trading system crucially ensures that there are alternative buyers and sellers.
Japan embracing the multilateral trading system in the postwar period allowed for its peaceful rise, confidently procuring raw materials at lowest cost on the international market and helping it take over market share from established industrial powers without spilling over into conflict. More recently China’s rare earth export restrictions against Japan in 2010 were settled peacefully in the WTO with China accepting the ruling against it.
The WTO is no longer fit for purpose, but it still plays a critical role as a reference point against protectionism and the platform for plurilateral initiatives that help to modernise multilateral rules. Plurilateral arrangements like the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) are acting as a workaround to enforce rules and resolve disputes despite the United States’ blockade of the WTO’s dispute settlement mechanism. The WTO may be under threat but it’s far from dead. It provided the exit ramp for Australia and China from their episodes of coercion. And China willingly participates in MPIA.
With the transition to a more multipolar world where power is further dispersed — the BRICS group of emerging markets is now larger than the Group of 7 advanced economies in purchasing power — a more robust system of multilateral rules and norms will be needed to manage interactions between countries. Middle powers must now fill the void left by the United States in the WTO and the multilateral trading system.
Trade coercion measures would inflict significant economic damage in a world of closing markets with fewer alternative buyers or sellers. That was the world of the beggar-thy-neighbour protectionism of the 1930s where trade restrictions fed aggression, insecurity and ultimately war. A primary policy objective for small and middle powers should be to preserve open global markets. Contestable markets raise the costs of intervening in them, dilute economic leverage and thwart the exercise of market and political power.
The multilateral trading system with non-discrimination and a level playing field is the basis of international economic rule-of-law that protects small and middle powers from a world of rule by power. A world ruled by unconstrained Great Powers is one that will be much poorer and less secure.
Efforts to promote multilateral economic governance are complicated by a United States that is locked into zero-sum competition with China where Chinese growth is seen as a threat to US interests. The choices that the Great Powers are forcing on other countries under threat of economic coercion will likely get sharper. The incremental choices of middle powers to do deals with the United States — managed trade deals and voluntary export restraints, for example — may be diplomatically expedient but they weaken the established multilateral trade rules and are against their core long term interests. They also reinforce the trajectory of the global economy heading towards an epic fail equilibrium and a catastrophe of the kind it suffered in the 1930s. Purposeful action by the global community can alter that trajectory by a deliberate policy choice that defends multilateralism.
A big test for the economic rules-based order with the WTO at its core will be whether it can survive further US withdrawal. The rest of the world is now much bigger than it used to be relative to the United States and will have to act collectively to prevent the system from collapsing, and to keep it open to US re-entry and leadership when it is ready.
As US allies, Australia and Japan should turn their political and diplomatic energy toward convincing the United States that its prosperity and influence are enduringly embedded in functional multilateral institutions and a global economy in which small and middle powers friendly to it, like Australia, Japan and others in Asia, can freely pursue prosperity and security through economic exchange with both China and the West.
China’s stake
China has a substantial stake in the established system of trade rules and, despite its trade sanctions against Australia and some other countries, has a demonstrated preference for enforceable rules including through its membership of MPIA. China’s track record in the WTO and its acceptance of rulings — in black and white on the WTO website — is better than that of either the US or Europe. China is getting better at navigating and gaming the system, just like the other members, and many of the problems originate in domains where WTO rules are outdated and China’s actions have been able to create large spillovers to the rest of the world.
China’s circumstances, as the world’s largest trading nation and a nation without any major formal allies, mean that it is deeply dependent on the system that helps to manage its trade exposure for its own economic and political security. Australia, Japan and the region’s economic and security interests lie in sustaining Chinese dependence on that system and the maintenance of its multilateralist posture.
A Chinese economy and society that is less integrated into the global economy is one that brings more international political risks, not less. China’s integration into complex global supply chains that reach deep into the Chinese domestic market is a constraint on China’s economic and political action. Australia is indispensable to China’s economic security — China has no substitute for Australian iron ore in quality or quantity as it supplies over half its entire steel industry and will continue to do so for decades yet. China and Japan have a huge interdependence that, if unwound, would do huge damage to both countries, both economically and politically.
There are arrangements through which small and middle powers can shape Chinese behaviour. China has sought membership of both the Digital Economy Partnership Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The New Zealand, Chile and Singapore digital agreement will help build rules in the digital economy where multilateral rules and norms are missing. The hurdles for membership of CPTPP are high for China, with all twelve current members having veto power over new members.
To have any chance of joining CPTPP, China will have to make significant reforms and rebuild trust with CPTPP members that have been at the receiving end of its economic coercion. It took 15 years for China to join the WTO and that process involved unilateral reforms and commitments in the lead up to its accession in 2001. It may take just as long for China to join CPTPP, (if it ever becomes possible), but the process could be beneficial for China and CPTPP members if China can use the external leverage for reform and liberalisation, in a way that transforms its economy and rebuilds trust.
The most promising instruments for coalition building are in ASEAN-centred agreements like the Regional Comprehensive Economic Partnership (RCEP) that includes China. RCEP has an economic cooperation agenda with a Ministers’ process and infrastructure that Australia and Japan can help activate. ASEAN is highly trade exposed and that is a source of prosperity and security. Working with ASEAN to strengthen principles of equal treatment and peaceful resolution of disputes with inclusive cooperation can help it mitigate economic security risks.
False economy of economic security policies
The limits of the economic security policies and their rationale are yet to be delineated. Without clearer frameworks and a purposeful strategy to shape productive engagement with China in the multilateral system, current economic security policies will simply “securitise” economics.
Retreat from interdependence and high trade share because of the threat of weaponisation will make countries poorer but also less secure. It will also make it more expensive and harder to deal with the bigger security threat of accelerating climate change. There is a pitfall in both Australia’s and Japan’s economic security policies, with both countries having ambitious decarbonisation efforts that require green technologies, for many of which China is at the frontier. Further industrial subsidies will not resolve this tension.
Economic openness and integration are sources of security. Unwinding economic ties based simply on political alliances or from fear of coercion will heighten insecurity. Meanwhile, trade and economic interdependence, by design, have been a cause of peace in East Asia, Australia included, while retreat from this position has been a cause of conflict.
A priority for Australia and Japan is to advance a strategy that sees prosperity and security as complements to the achievement of both. They should not be seen as either-or-substitutes where economic efficiency has to be sacrificed for national security, as some of the new economic security policies appear to do now.
It’s not enough that Australia and Japan’s economic security policies assume open markets and support for the rules-based system. They don’t. A strategy to defend and modernise the rules-based economic system is what’s needed in Tokyo and Canberra.
