As the world’s third largest economy with a deep strategic reliance on a rules-based international economic order to secure almost all its energy and raw materials externally and keep markets open for its technology, goods and capital, Japan cannot afford a deep fracture in the current system. Comfortable in following the US lead in the past, Japan has stepped up to contribute to global rule-making as the United States went from enforcer-in-chief to spoiler-in-chief of the international trade regime.
The highlight of Japanese leadership was saving the Trans-Pacific Partnership (TPP) in the form of the Comprehensive and Progressive Agreement for TPP (CPTPP) when former president Donald Trump pulled the United States out and current President Joe Biden’s administration decided not to rejoin the CPTPP. It has expanded since then. Last year China lodged a bid to join the CPTPP while the UK has just signed a deal to join the CPTPP in March this year. Japan also initiated Data Free Flow with Trust (DFFT) to create a multilateral umbrella for data and digital rules on the sidelines of the 2019 Osaka G20 summit — which China and the United States have signed on to.
The last time Japan hosted the G7 in Ise-jima in 2016, it pushed principles for promoting quality infrastructure investment. Cross-border infrastructure investment was another area where a global governance deficit to set standards and rules was causing geopolitical friction, with the launch of China’s Belt and Road Initiative (BRI). 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 earlier in 2018. China’s second BRI Forum in 2019 also espoused the principles articulated in Ise-jima.
The Hiroshima G7 agenda will test this track record at a time when Japan’s ability to lead coalitions for reform is needed more than ever.
Economic, environmental, energy and food security are central to Japan’s G7 agenda as it aims to be relevant for the ‘Global South’. Global inflation and contractionary monetary policies, uneven recovery from the COVID-19 pandemic, food and energy crises, as well as the fallout from Russia’s invasion of Ukraine, are challenges that are not unique to advanced economies. The BRICS grouping, consisting of major Global South countries, is now larger than the G7 in economic scale and more dynamic, making the G20 more central to global economic governance than the G7.
Great power 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.
The response to these new circumstances in Japan has seen the introduction of economic security laws that aim to protect Japanese intellectual property and critical infrastructure, as well as 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 US-China strategic competition. Both Beijing and Washington are forcing countries to choose sides in a zero-sum competition.
Australia and India have been invited to the G7 summit as guests. Both are members of the strategic Quad grouping with Japan and the United States. 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 is important to helping Japan secure a safer and more prosperous regional and global economy. As Shiro Armstrong explains in this week’s lead article, ‘most [Australian] exporters quickly found other markets as Chinese imports of barley, coal and other commodities did not slow and opened up other demand. Flexible markets in Australia helped but the crucial external source of resilience was an open multilateral trading system’.
Chinese efforts at economic coercion have almost entirely failed and in every case its actions backfired economically and politically. That is because of an open global economy. Retreating to trade with ‘trusted partners’, friend-shoring of production or even an ‘economic NATO’ as the United States is pushing would make the world much smaller economically and reduce options for trade, making economies less, not more, resilient.
Much of the G7 agenda will target China. How the agenda is framed and deployed will determine whether it is ultimately effective at shaping Chinese engagement for the better as Japan’s past efforts have mostly done. If the agenda keeps international markets open and strengthens the multilateral system, it will curb the worst of zero-sum and protectionist instincts coming out of Washington.
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 this means supply chain resilience from China. But, with China’s central role in global value chains only growing, including through the continued growth of Japanese direct investment in China, supply chain resilience will have to be framed with China.
Dealing with non-market practices is aimed at Chinese state-owned subsidies and industrial subsidies, but the United States has emulated Chinese-style industrial subsidies including through the CHIPS and Science Act and the Inflation Reduction Act that the rest of the G7 is now trying to negotiate around.
As the United States 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 and could make a significant contribution to global governance.
The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.