A Japanese solution to the EU’s economic security struggle

German Chancellor Olaf Scholz visited Japan rather than top trading partner China during his first official trip to the region last week. This was, by some, assessed as signal that Germany and the EU are seeking closer ties with countries that share similar values. No matter if that’s true or if it was the rigid Covid regulations that kept Scholz from visiting China first: When it comes to business involvement, the EU can learn a lot from Japan’s approach to economic security, say Aya Adachi and Francesca Ghiretti.

At the recent EU-China virtual summit, EU Commission President Ursula von der Leyen warned Beijing that European businesses were eying whether China would undermine international sanctions against Russia. “Reputational risks” were driving the exodus of EU companies from Russia and she did not want a similar fate to befall China, she said, noting that EU-China trade flows are six times bigger than those between China and Russia. But what was meant as a show of strength could also be taken as a sign of weakness, given the high degree of economic interdependence: were Beijing ever to invade Taiwan, would Europe really be prepared to unwind its business ties with China as it sacrificed those with Russia?

Europe’s reluctance to apply sanctions on oil and gas from Russia is telling of the EU’s turmoil when its core dependencies are at stake. Without wanting to put war and economic coercion on the same level, the EU was similarly paralyzed after Beijing embargoed EU goods carrying Lithuanian parts after the opening of a Taiwanese Representative Office in Vilnius late last year.  The EU has shown how much harder a united response would be if it ever had to go head-to-head with Beijing. Japan offers a could example of how to better manage an increasingly challenging interdependence with China.

Japan has known for decades that doing business with China can be volatile and costly

Japan woke up to the economic-security risk posed by China over a decade ago. The two countries are not only more economically interdependent, their political relationship is also more fraught than that of China and the EU. The conflict over who owns the Senkaku or Diaoyu Islands led to two waves of economic coercion by Beijing: in 2010, when China restricted rare-earths exports to Japan, and in 2012, when it fanned anti-Japanese protests, forcing Japanese companies to temporarily shutter facilities in China. Such coercive behavior – in the region in general and towards Japan specifically – was eye opening for Japan: China offered many economic opportunities but doing business with it could also be very volatile and costly.

Japan as a result aimed to reduce its economic vulnerabilities, while simultaneously maintaining economic ties with China. Policymakers crafted a safety net by, among other things, increasing oversight over economic vulnerabilities, tightening export and investment control, reducing Japan’s dependence on critical raw materials from China, and establishing an Economic Security Minister and a department within the National Security Secretariat. Companies, forced to reassess their risk exposure, started to diversify their investments beyond China to balance short-term profits with long-term competitiveness. Having pioneered “just-in-time" supply chains, Japan flanked them with “just-in-case" security measures.

The EU’s economic security agenda remains scattered

Unlike Japan, the EU has come late to developing an effective response to the challenges China poses to its economic security. However, in the past five years, the EU has slowly woken up to the same problem with China and has worked on a set of economic security tools. Active since 2021, the EU’s screening mechanism for foreign direct investments is the first EU instrument to explicitly address an issue of economic security triggered by China. The anti-coercion instrument is currently the most important economic security instrument in the EU pipeline. But the bloc’s economic security agenda remains scattered, and the interests of the private sector focused on short-term profits. 

EU action remains dispersed over a set of economic security-related policies, of which different European actors are in charge. This leaves the EU without an organic economic security agenda, and without the structure to respond promptly in case of need. The EU could follow Japan’s example and formalize an inter-institutional group tasked with economic security matters. For example, that group could decide on measures to be adopted under the anti-coercion instrument, with member states allowed to raise concerns if they disagree with the group’s proposals. That would make the process more efficient without ignoring member states. 

Japanese companies have learned to mitigate their risk exposure to China

At the same time, European companies should become as active as Japanese companies were in coming up with ways of mitigating their risk exposure and supporting the EU’s economic security. So far, the European private sector’s response has been underwhelming, with companies lobbying for a change of policy on Lithuania and triggering mistrust in the EU’s ability to effectively use the tools at its disposal. Also, it threatens the EU’s supply-chain diversification strategy – EU plans to publish one, but if the private sector does not follow its lead, diversification will become arduous if not impossible. 

Japan’s example should inspire Europe to adopt bold measures to mitigate the effects of economic-security risks stemming from China and beyond. But Japan’s example also shows that economic-security concerns can only be addressed when government and companies tackle the problem together. If companies are not on board, any strategy to better protect the EU’s economic security will be weak. While the EU has already begun to do some long-term planning, turning a set of polices into an organic agenda and involving the private sector remain two pressing challenges.