China’s economic coercion: The case of Japan and the lesson for Europe

The US-China trade war has helped normalize sanctions as a tool of statecraft. In the latest dispute between China and Japan over Prime Minister Sanae Takaichi’s comments on Taiwan, the risks of Beijing’s growing use of economic pressure are back in focus. This article traces the evolution of China’s economic coercion, examines Japan’s diversification strategy, and explains what Europe can learn.

Key takeaways:

Soon after the relative calm brought by more predictable US tariff rates, geopolitics has once again taken center stage. Tensions between China and Japan have flared after Japanese Prime Minister Sanae Takaichi’s comment on a “Taiwan contingency”, which Beijing interpreted as political interference. At the same time, China has moved to strengthen the legal and policy foundations for its economic-security agenda and counter-sanctions tools through a revised Foreign Trade Law. There is nothing radically new in practical terms, but the changes formalize retaliation options and place greater emphasis on national security, tighter control over dual-use goods, and the protection of China’s “development interests”.

These changes come alongside military signaling with implications for supply chains. In late December 2025, large-scale drills focusing on five key ports around Taiwan sent a strong signal about China’s ambition to blockade the island, a global semiconductor powerhouse. While the US has secured a deal with China to export rare earths essential for military use, China has tightened controls on dual-use exports to Japan as a follow-up. This compounds earlier pressure from restrictions on outbound tourism and seafood imports. Recent developments in China-Japan relations have once again brought Beijing’s use of economic coercion in pursuit of geopolitical goals into sharp focus, an issue relevant not only to Japan but also to other economies, including the EU.

The evolution of China’s economic coercion

China’s economic coercion typically involves trade, investment, regulatory, and market-access restrictions used to punish countries whose policies conflict with Beijing’s political or strategic interests. The core objective is to send a warning signal to China at minimal cost while inflicting selective, sector-specific damage on the target. Tactics have also evolved in response to domestic and geopolitical conditions, with a stronger emphasis on national security and inward-facing propaganda.

Compared with the past, China has increasingly relied on formalized sanctions tools. Its counter-sanctions toolbox has expanded through the Unreliable Entity List (September 2020), the Anti-Foreign Sanctions Law (June 2021), regulations on export controls for dual-use items (October 2024), and the revised Foreign Trade Law (December 2025). Most formal measures target the US as retaliation for tariffs and export controls. However, there has also been growing use of such tools in Taiwan-related disputes, as Beijing seeks additional leverage and responds to recurring US arms sales and, more recently, Takaichi’s statement.

Based on China Sanctions Monitor, the most frequently used channel is restricting access to the Chinese market, including import controls, outbound tourism curbs, restrictions on foreign business operations, and state-led boycotts. These are often accompanied by administrative measures such as delays in customs clearance and additional checks. Beyond market access, export controls—which leverage China’s manufacturing capacity and market share to create global supply-chain bottlenecks—have become increasingly prominent. China learned about its advantage in global supply chains during the first phase of the trade war, when US President Donald Trump introduced import tariffs in 2018. By restricting exports of critical inputs, China can raise costs and uncertainty for downstream industries in target countries, including the defense sector. Lastly, China has increasingly sanctioned individuals and firms (not just governments) through measures such as entry bans and asset freezes, aiming to shape behavior over time through longer-term deterrence.

The US has faced the most measures from China, reflecting the ongoing tariff war, export controls, and arms sales. Taiwan is also a recurring target as Beijing attempts to apply economic pressure and influence domestic politics. Beyond these, China has a long history of coercive economic measures and shifts targets based on bilateral relations. In 2016 and 2017, South Korea faced pressure over the THAAD deployment. In 2020, Australia was targeted after calling for efforts to identify the origin of COVID-19. In Europe, different countries have faced China’s coercion over issues including Taiwan, human rights, and countermeasures related to tariffs on electric vehicles.

Sectorally, agriculture and food and beverage remain the most common targets, given China’s large market and population and the ease of switching import sources. Still, there is growing emphasis on aerospace, defense, drones, and maritime industries, which are areas where China holds key components that much of the world has underproduced amid decades of globalization. Measures affecting raw materials are less frequent, but their impact can be significant given China’s dominance in upstream refining. Echoing China’s use of market share and cost advantages, there is a clear shift toward export controls in aerospace, defense, drones, maritime electronics, and raw materials. In more consumer-oriented sectors, China has more often opted for direct import controls and restrictions than for stoking boycotts.

Globally, sanctions have become a more common response to political disputes, especially since the first phase of the US-China trade war. The relatively limited, often lower-than-expected macroeconomic impact on China has also increased Beijing’s confidence in confronting Washington. That confidence was reinforced after COVID-19, alongside claims of the superiority of China’s economic and political model. Beijing appears willing to trade short-term economic gains for long-term national security, with a focus on technology and manufacturing capabilities. Over time, this has led China to adopt more extraterritorial-style approaches, including export controls and tighter oversight of outbound technology transfers, such as regulatory scrutiny of TikTok and Meta’s acquisition of Manus AI. This makes it increasingly important to understand how to navigate a reality in which other countries may face dilemmas similar to Japan’s.

The case of Japan: Minimal macro impact due to diversification

Following Takaichi’s statement on Taiwan, China responded with harsh rhetoric, viewing it as the first time a Japanese leader in power publicly endorsed such a narrative. To raise economic pressure, Beijing targeted outbound tourism and seafood imports from Japan. Since 2023, Japan’s international tourism sector has rebounded sharply following the post-COVID reopening of borders. It has surpassed semiconductors as the second-largest export category, trailing only motor vehicles. Travel receipts rose by 89%, from €28 billion in 2019 to €53 billion in the 12 months to September 2025, equivalent to an increase from roughly 0.9% to 1.5% of GDP.

Japan’s tourism sector has also diversified over time, helping to buffer the impact of China’s outbound tourism restrictions, including state-led flight cancellations and boycotts. Tourists from Taiwan, South Korea, the US, and Hong Kong have increased significantly, supported by the weak yen, targeted marketing campaigns, and Japan’s competitiveness as a destination.

By contrast, the share of Chinese tourists fell from 27% in 2016-2019 to 22% in the 12 months to September 2025. The share of spending also declined from 37% to 23%. Even so, because Japan is now more exposed to tourism overall, spending by Chinese tourists still amounts to around 0.33% of GDP, similar to 2016-2019 levels. However, the broader mix of visitors should make the sector more resilient, especially given higher per-capita spending in many other markets.

At the same time, China reimposed its ban on Japanese seafood, which began in 2023 after the release of treated Fukushima wastewater and ended in May 2025. Within Japan’s exports to China, foodstuffs account for only 0.7% of total exports. Beyond the small scale and limited macro relevance, the impact is again moderated by diversification, though it can still matter politically under a democratic system, particularly for affected constituencies.

In just two years, Japan has materially reduced its reliance on China in this sector. As of September 2025, Japan’s seafood exports totaled €1.88 billion, close to €1.92 billion in June 2023, before China imposed the ban. China (including Hong Kong) once accounted for 43% of Japan’s seafood exports in June 2023, but that share had fallen to 14% by September 2025. The pressure was largely offset by growth in other markets, especially the ASEAN-6, the US, Taiwan, and South Korea. The ASEAN-6 is now Japan’s largest seafood export market.

While Japan’s experience shows how diversification can mitigate coercion, it is also important to note that the targeted sectors have been relatively limited, and China has not fully played its strongest card in export controls. Beyond the long-discussed issue of rare earths, China’s recent restrictions on exports of dual-use goods for military use suggest it is prepared to escalate. The economic consequences would be far larger if coverage expanded to commercial use. That remains unlikely for now, but it is possible in the event of miscalculation, especially if hawkish voices in China gain greater influence in policymaking and seek further escalation.

Japan accelerated diversification after China first restricted rare earth exports amid territorial disputes in 2010. The Japan Organization for Metals and Energy Security has played a key role through equity stakes, guarantees and financing, and long-term agreements. As a result, Japan’s reliance on China for rare earths fell from 90% in 2010 to 63% in 2024. Exposure remains substantial, and dependence can still be highly concentrated in specific materials, especially heavy rare earths. Investing in refining, recycling, stockpiling, non-rare-earth alternatives, and  collaboration with partners such as the US, Australia, Europe, and Malaysia is increasingly urgent. Projects such as the recent mission to explore undersea mud containing rare-earth elements under the Japanese government’s Cross-ministerial Strategic Innovation Promotion Program should be accelerated further.

The side effects of economic coercion

Although China now has a broader menu of carrots and sticks, coercion can produce unintended consequences. It signals to foreign governments and firms that economic engagement carries geopolitical risk. This can deter foreign investment, though China may care less about it today, given its reduced reliance on external capital and its push to develop indigenous technologies and supply chains.

As China leverages its market size and industrial capacity to advance geopolitical goals, other countries are likely to accelerate diversification in export destinations and sourcing locations to reduce overreliance on China for corporate revenue and critical inputs. Combined with China’s weaker import demand under supply-side policies and its “dual circulation” strategy, this could reduce China’s leverage over time on the revenue side. China’s domestic substitution may also lower demand for foreign goods. Still, global dependence on China can continue to provide leverage on the supply side, unless alternatives emerge for critical materials and specialized components that are difficult to replace due to technical constraints and cost.

A more uneasy stance toward China can also spur higher defense spending in neighboring markets. While Russia’s invasion of Ukraine and Trump’s push for higher defense budgets matter, perceived threats from China are another driver. China’s own defense spending has increased in absolute terms and in its share of global totals, but its defense burden has remained broadly stable at 1.7% of GDP and 5.1% of total government expenditure in 2024. What alarms neighbors is China’s growing economic base and the increased tempo of activities such as military parades, salami-slicing tactics, drills in the Taiwan Strait, and ships circling Australia.

Looking at the rise in defense spending as a share of GDP, countries closer to China or more concerned about its intentions—South Korea, Taiwan, the Philippines, Japan, and Vietnam, for instance—tend to show larger increases. For China, the downside is that such concerns can fuel greater reliance on and closer cooperation with the US for security. Examples include AUKUS, deeper US ties with Vietnam, and expanded US access to Philippine bases under the Enhanced Defense Cooperation Agreement.

A more assertive China can also affect public sentiment and, by extension, elections. Taiwan is the most obvious case, where China’s threats are frequently debated and can shape identity politics over time, with mixed electoral effects. In many cases, coercive tactics can strengthen bipartisan support for a tougher stance toward China. The aggressive remarks by Xue Jian, the consul general in Osaka, regarding Takaichi appear to have influenced perceptions in Japan. Despite Beijing’s economic pressure, public opinion has generally supported the Takaichi Cabinet’s stance toward China, especially among younger and middle-aged voters. This is based on a survey by Yomiuri Shimbun published on 24 November 2025. Even in polling by the more liberal Asahi Shimbun, the Takaichi Cabinet’s approval stood at 68% as of 22 December 2025.

How should others, especially Europe, respond?

First, diversification among like-minded countries is essential to reduce vulnerability to China’s economic coercion. China is a large and important market, but it accounts for less than one-fifth of global GDP. The rest of the world can provide alternative markets and supplier bases.

For sectors and components with higher spillover risk from coercion, market forces alone often do not attract enough investment to compete with China, which has the most complete supply chains globally. Governments, therefore, need to coordinate and intervene to reduce risk for businesses in critical materials and components through co-investment, funding guarantees, and state-level collaboration. Priority-access arrangements could also be considered for participants who contribute financing, helping to crowd in investment.

Rare earth elements are a well-known example, given their importance for electronics and defense production. The market is often too small (and environmentally costly) for private firms to compete with China, especially when rare earths are by-products of other heavy industries and much processing has been outsourced to China. Rare earths are only one case; at a minimum, governments should ensure adequate supply for defense production in the short run.

Second, technology is a core source of bargaining power with China and can create genuinely irreplaceable advantages. While China’s competitiveness is partly subsidy-driven, it has also sustained a strong focus on R&D, whether funded publicly or privately. China has already overtaken Europe in R&D spending in absolute terms and as a share of GDP, and the gap may be wider on a purchasing-power basis, given lower costs in China. Like-minded economies, therefore, need to restart a cycle of reinvesting revenues into R&D to rebuild competitiveness.

Third, Europe should move faster. EU decision-making remains slower than that of both the US and China, regardless of political systems. Options such as Qualified Majority Voting (QMV) and common EU bonds, issued at the member-state level or via policy banks, should be considered to mobilize resources more quickly.

Conclusion

With a larger economy and greater confidence in its geopolitical power, China will likely use more measures, including formal and informal sanctions, to achieve its policy goals. While many actions are tied to retaliation against the US, China’s use of economic coercion to advance its strategic interests is widening, not only through restrictions on market access but also increasingly through export controls. Japan’s experience shows that diversification is essential for mitigating demand-side risks. Yet diversification may not be sufficient if China escalates on the supply side, an even more complex challenge than finding new markets.

More frequent coercion can also accelerate decoupling and fuel higher defense spending in Asia. In China’s policymaking, concerns about security and industrial capability increasingly override other metrics. For Europe, it is urgent to diversify with like-minded partners, deploy stronger government incentives where markets underinvest, refocus on technology and innovation to build irreplaceable advantages, and speed up decision-making.