Can the United States, South Korea, and Japan boost resilience to economic coercion?

As part of a project on trilateral U.S.-South Korea-Japan cooperation on economic security, the Center for East Asia Policy Studies at Brookings hosted a workshop with experts from these three countries on June 14, 2023. The session focused on trilateral cooperation in building resilience against economic coercion and sustaining the rules-based international economic order. Andrew Yeo, senior fellow and SK-Korea Foundation Chair at Brookings, followed up with a written conversation with Kristin Vekasi, associate professor of political science at the University of Maine’s School of Policy & International Affairs.

Andrew Yeo: Kristin, your research covers political risk management of supply chains in the Indo-Pacific. An early, but significant episode of economic coercion took place in 2010 when China blocked exports of rare earth minerals to Japan. How did Tokyo respond, and did the Japanese government draw lessons from that incident?

Kristin Vekasi: In 2010, Japanese companies reported that they were denied permission to load Chinese rare earths for export. At the time, Japan depended on China for around 90% of their rare earths, an ingredient in a variety of high-tech products important to the Japanese economy, such as smart phones, digital cameras, and light bulbs. The Chinese government denied they were purposefully limiting exports to gain leverage, but Japanese companies and officials nevertheless interpreted Chinese actions as coercive.

Japan’s response was broad and swift. The Ministry of Economy, Trade, and Industry funded projects to reduce the amount of rare earths used in industry, develop substitutes, recycle the existing supply, and diversify the supply chain. Over the following decade, Japanese companies, with public funding at some critical junctures, managed to build a non-Chinese supply chain  largely with partners in Australia and Malaysia. Japanese public-private cooperation showed results: dependence on China was reduced to 60% by 2016, although it has recently inched back up.

Tokyo has expanded that model more formally with the recently passed Economic Security Promotion Act (ESPA). The experience with rare earths spurred Japan to systematically identify raw materials and components with supply chain chokepoints and proactively diversify their sourcing.

Andrew Yeo: When did policymakers in the United States, South Korea, and Japan realize Chinese economic coercion had become a serious problem that required working together?

Kristin Vekasi: When I first started working on these issues in 2009, I encountered skepticism from people in government and industry. Economic coercion and geopolitical risks more generally were not perceived as key business priorities. A few people even kindly advised me to move on from the topic. After the 2010 rare earth incident, there was less scoffing, but still limited attention. Today, that is far from the case.

Japanese and South Korean attention to economic coercion arose from direct experiences. Although Japan’s first major wakeup was 2010, it was the start of the U.S.-China trade war during the Trump administration that initiated serious examination in Tokyo of what is now called “economic security,” and the holistic reconsideration of how integrated supply chains might clash with geopolitical concerns.

South Korean perspectives shifted when its private sector faced a harsh economic backlash from China in an attempt to make Seoul abandon the adoption of a U.S.-made missile defense system (THAAD) in 2016. In 2019, when Japan took administrative measures that potentially threatened South Korea’s supply of a critical material for semiconductor production, Seoul began to systematically examine and monitor vulnerable points in critical supply chains.

In the United States, there were three motivators. First, worsening relations with Beijing, coupled with deep economic dependence on China; second, witnessing economic coercion and the effects of energy dependence during Russia’s invasion of Ukraine; and third, supply chain gridlock during the COVID-19 pandemic. The latter two scenarios made economic security issues highly visible to consumers and voters, not only in the United States but also in Japan and South Korea. This in turn drove a new sense of urgency for leaders to reduce vulnerabilities and increase governments’ and private firms’ capacity to respond deftly to crises.

U.S.-Japan cooperation on semiconductor restrictions to China is one key example of cooperation on economic security. The 2023 G-7 summit in Hiroshima produced a joint statement supporting a collective response to economic coercion, including information sharing, an early warning system, and joint efforts at the World Trade Organization. South Korea was on the sidelines of this meeting, and perhaps should be involved in implementation. Trilateral cooperation is still at an early stage, but Japan and South Korea are both involved in critical mineral supply chain initiatives – potential measures include joint stockpiling or providing temporary relief in the case of economic coercion, in addition to the G-7 approaches.

Andrew Yeo: Washington is attempting to build  a coalition of countries to defend against Chinese economic coercion. What has Japan’s Prime Minister Fumio Kishida’s response been so far? Do you see any key differences between Japan and South Korea?

Kristin Vekasi: Japan began multilateral efforts to counter economic coercion shortly after the rare earth crisis, convening the first Conference on Critical Materials and Minerals to share and build technical expertise in 2011 with the United States. This initiative has expanded to Australia, Canada, and the European Union. The Kishida administration has continued this trajectory. The ESPA and Japan’s 2022 National Security Strategy identify economic resilience against coercion as a priority.

South Korea has also been active in international initiatives to address supply chain security and economic resilience, including the South Korea-Australia MOU on Cooperation in Critical Mineral Supply Chains, the American-led Indo-Pacific Economic Framework, and the Mineral Security Partnership supported by ten countries and the EU.

However, barriers to cooperation remain, particularly a territorial dispute over the Takeshima/Dokdo Islands. Japan and South Korea have also clashed on issues related to economic coercion in the last five years. Rebuilding trust, even in the typically more congenial economic realm, will take time. Under the Yoon Suk-Yeol administration, Japan-South Korea relations are at a high point, and they have nominally resolved many points of economic friction, including the restrictions on semiconductor materials. But stormy seas may lie ahead. Japanese and Korean firms are engaged in fierce competition in key technology sectors and underlying bilateral historical tensions remain unresolved.

Andrew Yeo: How will the United States, Japan, and South Korean manage to get private sector companies on board if their corporate interests do not align with the state’s?

Kristin Vekasi: This question will be one of the hardest for governments to solve as it asks businesses to place security concerns over efficiency. My research shows that when business actors already face costs from geopolitical risks, they are more amenable to cooperating with expensive government programs. However, when private sector actors do not feel vulnerable, they often follow the path of minimal compliance.

Critical minerals are the most likely place for domestic public-private and multilateral cooperation, because initial risks are high, failures are common, and companies have already experienced economic coercion. In both Japan and South Korea, there already has been substantial private-public cooperation, which has led to some diversification in critical mineral supply chains.

However, in cases such as semiconductor supply chains or cloud computing, companies are less willing to adjust their business strategies or make costly new investments in risk management. The Kishida administration has in part opted for sticks: If companies do not comply with the ESPA, there are penalties including fines and possible imprisonment. They are also offering carrots, including government support for specified critical technologies and subsidies for companies seeking a diverse and stable supply of critical products. As of 2023, there are eleven critical products identified, including antibiotics, permanent magnets, semiconductors, batteries, cloud service technologies, and critical minerals.

Survey evidence from Japan shows mixed reactions from companies. While a survey of large companies shows broad knowledge and commitment to addressing economic security concerns, a survey of the broader Japanese business community reveals more limited interest and a minimal sense of geopolitical threat. While the Japanese government has indicated that Japanese companies are moving from China to ASEAN in the face of increased geopolitical risk, it is unclear whether that will translate into direct cooperation with business rivals, particularly those based in South Korea.

Andrew Yeo: Is economic coercion effective? What have recent examples of economic coercion and sanctions taught us in an era of “weaponized interdependence?”

Kristin Vekasi: One challenge is agreeing upon what economic coercion policies are supposed to accomplish. Looking at recent Chinese economic coercion, economic sanctions against Russia, or Russia’s near-total dominance of European energy imports, it is difficult to argue that any of these instances of economic statecraft have led to straightforward foreign policy wins. A recent CSIS report on Chinese economic coercion found that results are mixed at best, and are often not strategically or tactically successful. Japan has not recognized China’s territorial claims, Australia has not apologized to China for its comments on the origins of the pandemic, South Korea did not abandon the THAAD missile system, and neither has Russia retreated from Ukraine nor Europe abandoned Kyiv.

However, if economic coercion is to seek more subtle policy goals, such as Russia’s military readiness, the ability of China to pursue advanced semiconductor or artificial intelligence technology, or shoring up domestic nationalist support, then perhaps economic coercion is more successful than initially meets the eye.

There are also risks to using economic coercion as countries adapt and respond. Private businesses find new markets, companies rely on alternative technologies, and/or governments invest in indigenous development. Economic coercion is a tool that must be applied cautiously and at the right moment. Once the arrow of economic coercion flies, there is no turning back.