Rising Sun, Shifting Tides: Kazuto Suzuki on Japan’s Economic Strategy in a Divided World

Richard Gray

Welcome to today's episode of Pacific Polarity. Today we're speaking with Dr. Kazuto Suzuki, who is director of the Institute of Geoeconomics at the International House of Japan and professor at the Graduate School of Public Policy at the University of Tokyo. Dr. Suzuki also serves as president of the Japan Association of International Security and Trade, and an advisor of the Japanese government on National Space Policy Committee of the Cabinet Office. Dr. Suzuki, pleasure to be speaking with you.

Kazuto Suzuki

Pleasure is all mine. Thank you.

Richard Gray

Recently in Japan Times, you argued that we were witnessing a transition from a defensive economic security to an approach of geoeconomics, which combines both offensive and defensive tools of economic statecraft. Can you describe this transition and Japan's role within Japan?

Kazuto Suzuki

Well, initially Japan has been interested in the concept of economic security, largely because we have been under pressure from China with regard to the export of rare earth minerals, various critical minerals, and also because Japan has been involved in a lot of supply chain network with China.

But because of the intensive confrontation between the United States and China, especially after the first Trump administration, I think the economic relationship, especially in China using the economy as a weapon, and imposing various mechanisms such as export control on critical minerals and also controlling much harder in the Chinese domestic market.

So in that regard, Japan had to take certain actions to improve the resilience of the Japanese industry and Japanese economic relationship with China. And therefore, we launched the concept of economic security. In 2022, Japan has established a law called the Economic Security Promotion Act, or ESPA, which targeted mainly improvement of the resilience of the supply chain, and also protecting the critical infrastructure, including the 5G network. After the establishment of ESPA, Japan, of course, took various measures to improve its economic resilience.

But we gradually understand that the world is getting much complicated, including the tariff policy by the second Trump administration. So, we are now thinking of using the Japanese economic capabilities, especially focusing on the indispensability of the Japanese products in the global market, especially in terms of material, machine tools, or the manufacturing equipment. So these are the strengths of Japanese industry and Japan is indispensable in the upper stage of the production cycle. And we think that having this sort of strength in economic statecraft or economic indispensability in the global market we would be able to take advantage of this as the tools to express ourselves in the global supply chain.

But unlike China, Japan has much less or little leverage against the global market. And we do need to maintain the free trade and free exchange of goods, in order to survive, because obviously Japan is a resource poor country. We depend heavily on the international trade. So we think that it is important to use this economic statecraft or economic indispensability in the global supply chain as the tools to build up the much stronger international frameworks such as CPTPP.

Perhaps some of you may not know, maybe Australian audience understands very well about the CPTPP. This was a free trade agreement after the Trump administration left the TPP negotiation. The TPP was originally started with the 12 countries, but when the first Trump administration came into power, Mr. Trump decided to leave the TPP, and the TPP was on the verge of collapse. But Mr. Abe, Prime Minister then, he took initiative to restore the TPP negotiation and reframed the TPP to the CPTPP. So that was one of the examples that Japan took leadership in maintaining the free flow of global trading goods and to make sure that we will be engaged in the free trade.

I think this is getting more and more important under the second Trump administration, where the tendency of protectionism is much stronger. And I think Mr. Trump's economic policy against US allies is now being very severe, and really hit on the capabilities of the economic activities of both Japan and Australia. I think it is in a sense the reason why Japan is using the economic statecraft not in an aggressive way, but for the cooperative way, is probably the reflection of the change of the international economic system.

Jersey Lee

Yeah, so we will get to the longer-term challenge posed by China later on. Right now, as you mentioned, Japan has this current conflict in the economic realm and the trade realm with the US. Many had thought that Japan might be the first country to sign a trade deal with the US, including many in the current US administration. So first of all, why do you think that did not materialize? And given that China's had a preliminary deal with the US, that also came as quite a surprise to the world in terms of how much tariff reduction China received, particularly as it came on the heels of a notably less significant deal with the UK. So how do you think this was received in Japan? And do you think that all of this makes a deal with the US more or less likely?

Kazuto Suzuki

Well first of all, I think being a first does not necessarily mean a good thing. I think the reason why the UK was the first to make a deal is because the UK does not have the trade surpluses against the United States. In other words, from a US point of view, it's not a trade deficit country. So it's easier to use the tariff as a leverage to negotiate with the UK; and even when there is no trade deficit, the US still imposed a baseline 10% tariff against UK. The 10% of tariff is still a very large scale tariff and UK will face a very difficult moment for exporting its goods to the United States.

But in terms of the automobile tariff, which is 27.5%, UK has the quota for the low tariff, which is 10%, for 100,000 vehicles per year. But UK is exporting almost 100,000 vehicles, which is okay for UK. The problem is that Japan is exporting 10 times more than the UK. So the conditions are quite different. And tariff negotiation with the United States and Japan is more complicated than the UK.

The tariff agreement with China was basically, it is just an adjustment of the excessive escalation. So it was an escalation control mechanism rather than the negotiation. Basically, there's no deal with China. It is just simply bringing down these very excessive tariff level, like 145% to the 30%. If there is no agreement in the 90 days, then it will come back to the 54% (note: initial rate after “Liberation Day”). These are basically the beginning of the trade negotiation. It's not the conclusion of any tariff negotiation. Apart from that, there's no agreement.

Fiji is another one, but Fiji is a very small economy and it's easy to deal. So I think Japan needs to take more time to negotiate with the United States because we are still far apart of our demand and the U.S. demand. And there's no reason that we accelerate the negotiation, because time is on our side. Even if it passed the July 9th, which is the end of the 90 days postponement of the so-called reciprocal tariff, even after the July 9th, probably it is the United States which face the more difficult situation. So I think the United States will have more incentives to conclude the negotiation. So in that regard, I think we can make the deal in a stronger position. So I think taking more time for negotiation is not a bad thing.

And after all, the negotiation is to make an agreement which is acceptable for both countries. We cannot accept such high tariff on automobile, which is the bread and butter of Japanese economy. And there is no reason that we need to haste for the negotiation.

Richard Gray

And so to transition on from this, while it's important to coordinate on economic security and geoeconomic challenges between allies, it's also somewhat important for there to be a positive agenda of having reliable and continual investment relationships. And so this is where it's sort of the continual derailing of the Nippon steel acquisition of US Steel is in many ways very confusing. So on one end, Japan is an ally of the United States, but the Biden administration commented that the purchase was a national security concern. On more of the logistical and corporate specific challenges, Nippon Steel had cutting edge technology that would boost US steel manufacturing. And what's more, the union's preferred purchaser, Cleveland Cliffs, had recently laid off 950 workers in Illinois and Pennsylvania. And so there was going to be some downsizing in staffing regardless of who the purchaser would be.

So with all of this in mind, a question of the US as a reliable place to invest in and to receive investment from, I think there's some level of ambiguity, which is not helpful to U.S.-Japan relations at large. And at this moment, President Trump has indicated his support of the acquisition, and it looks like it will go through. But there are many questions that still remain, including but not limited to his claim that the acquisition will lead to 70,000 new jobs. I don't know if Nippon Steel knows where that number exactly came from. In your view, what are some of the lessons that the Japanese government and Japanese companies have drawn from this saga?

Kazuto Suzuki

Well, the first lesson is don't propose the acquisition of the national interest of the country during the election time. The second is that steel and Aluminium has been a major U.S. interest for many, many years, ever since 1970s. And I think this is the hardest sector to penetrate into, and it is understandable that the United States is trying to restore the manufacturing jobs and manufacturing capabilities. Of course, the competitiveness of the US steel industry is much, much less, and I don't think it is economically reasonable, but I think when it comes to a question of maintaining the stable supply chain within the country, the U.S. steel or the Cleveland Cliffs are the major supplier for the steel, for any defense equipment.

I think the situation in Ukraine has changed the landscape quite dramatically, because most of the US support of the arms and ammunitions were coming from the U.S. industry, so maintaining the U.S. productivity within United States soil is probably national interest for a certain extent. It's not about the question of alliance, I don't think United States is concerned about the Japanese commitment to the alliance, I think it is about the security of supply within the United States and that's what Mr Biden has mentioned about the matter of national security.

So the second lesson that we learned is don't touch the steel and aluminum. We learned that steel and aluminum are the major national interest for the security of supply.

Probably, I think what Mr. Trump has decided to go ahead with a partnership, so-called partnership between the Nippon Steel and the US Steel, I don't think… he mentioned that the acquisition plan, 100% subsidiary of the Nippon Steel is not going to be accepted, but the ownership of the US Steel will remain in the hands of US investors. So I don't think there's any change from the previous position of Mr. Trump. And I think the Nippon Steel is still struggling to find out what is the end game or end state of this acquisition processes. But anyway, there will be a lifting of the CFIUS denial, after the revision of the order by Mr. Trump. So I think that's the good news. But still, we are not exactly sure what will be the end state.

I think if certain agreements between the United States government and the Nippon Steel are made, then there'll be an investment coming into the U.S. Steel and there'll be probably additional investment on the productivity of certain companies, smelters and certain sites of the U.S. steel. It remains that the competitiveness of the steel and aluminum in the United States is very low, but I think the new investment and the shift of the focuses of the production of steel, especially for the specialized steel for the automobile industry and defense equipment, will recover or regain the productivity of the U.S. steel. So probably it is for the best for both Japan and the United States to maintain this deal, to make this deal happen.

And we do not have certain concerns over the investment in the United States in general. I think this is a very particular case of the steel industry. I think this has a very different position in the industry in the United States. It is different from the automobile or any other industry. So I think the other lessons that we learn is that the US is still the largest market in the world. And because of the tariff, I think investment in the United States is necessary to make sure that we can maintain the holding the share in the U.S. market. And I think overemphasizing the CFIUS process and everything about the instability of the U.S. market as a destination of investment shall be refrained. I think we don't need to overemphasize this instability or the complexity of the CFIUS process.

Jersey Lee

Moving on to relations with China, which you had mentioned in the first response. Japan's relations with China had taken a dive after the release of the Fukushima nuclear wastewater in 2023. Relations seems to have improved a lot since then, with China unilaterally providing visa-free travel for Japanese citizens, and there were discussions earlier this year, around the time of Trump's “Liberation Day”, about a potential great leap forward in trade relations, although Japan has pushed back against some of these suggestions. However, there are doubts over how sustainable this recovery in relations might be, because over the past few decades, we've seen bilateral relations fluctuate significantly between good and bad and then back to good. Do you see any possibility for a more stable and sustainable bilateral relations framework?

Kazuto Suzuki

Well, over thousands of years, Japan and China have been neighbors. And there were always the cycle of good and bad and good and bad. So why do you expect that there is a stability in bilateral relationships? The fluctuation of the relationship, the mood of the relationship is the normal. So basically, we are not expecting that the bilateral relationship stabilize in a certain position or a certain level, and it goes on forever. Whether it's longer term or shorter term, there's always fluctuation and this is what the relationship with neighborhood is. We are expecting the relationship to fluctuate; sometimes it's good, then we try to promote whatever we can. If it's bad, then we'll try to fix it as much as we can.

That's probably the historical wisdom that we acquired in the relationship with China. Both countries, which have been always the largest country in East Asia, there are a lot of mutual interests as well as mutual concerns; sometimes these concerns are probably highlighted because of the domestic political situations and we need to be careful, we need to be very much aware that anything is possible, even if the relationship is good, we shall not expect that this goes on forever. We always pay very close attention to the bilateral relationship and the mood in domestic political situations and try to see the best way out for the bilateral relationship in the given circumstances.

So, basically, I think expecting the long-term, stable relationship is not the name of the game in the bilateral relationship with China. It's a relationship which is very delicate and very... So we need to make sure that it's like a gardening; you have to pay attention to make sure that everything is all set and at least appears good while you are taking good care of each plant and each issues.

Jersey Lee

This week, the ASEAN-China Free Trade Area received its third upgrade, which symbolically contrasts with the ongoing U.S. tariff war against basically every country. Since World War II, Japan has been a major investor in ASEAN, in Southeast Asia, offshoring manufacturing to countries like Vietnam, Singapore, Thailand, Malaysia. But with rising Chinese influence, particularly evident in Japan losing a bid for Indonesia's high-speed rail to China, how might Japan adjust its strategy? And generally, how does Japan view Southeast Asia?

Kazuto Suzuki

Southeast Asia is strategically important. Japan has a long-term relationship with Southeast Asian countries. As you said, Japan has been the largest investor in these countries, but it's their choice whether to accept the Chinese investment or not, or whether to have the Chinese goods in the market. Of course, the Chinese goods are competitive; and I think in some of the area or some of the sectors, Chinese industry is much more competitive than the Japanese one. So it is understandable. This is a free market as long as you make the free trade.

I think the US tariff policy has pushed the Southeast Asian country to strengthen the economic relationship with China, because China is the second largest market. the Southeast Asian countries need the country or market to export. So it's fully understandable that China and Southeast Asian countries' relationship is improving.

What Japan can do is just maintain its competitiveness in different ways. Chinese competitiveness is basically price competitiveness, and of course the quality of the Chinese product is improving. But Japan can offer different kinds of high value-added services, including not just exporting the railway system as such, but also we are providing the various services associated with those train services, such as the train operation systems, as well as the services to the passengers, all the ticketing systems, et cetera. So there are a number of things that Japan can do to add values to these investments. To put it simply, I think it's quality versus price. I think Japan probably cannot compete in the pricing, so what we can do is to make sure that we provide quality.

The problem for China is that Chinese Belt and Road Initiative has given too much bad loans and bad investment in infrastructure in many countries, not only the Southeast Asian countries, but in regions like Africa, Latin America, etc. I think China will face the significant debt service problems. So I think the forces of the Chinese expansion of its export of infrastructure and many things may come to a difficult position, because of these debt service problems. So I think the game has not ended. I think we are still in the game and we are still trying to compete against Chinese in Southeast Asia market. And I think as long as we maintain our position to provide services and to provide more added values, I think we still have a chance to stay in the game and to be profitable from the investment in Southeast Asia.

Richard Gray

As you had discussed earlier in this conversation, Japan is a net importer of independent on a wide variety of goods, including most importantly, critical minerals and energy. For both of these different goods, geopolitics are at the center of both, with non-adversarial relationship with China being in some ways very important for continual import of sustained critical minerals, and then also a dependency on either a stable Middle East or a non-aggressive Russia for the import of energy. What do you think about these dependencies and what are some of the ways Japan can weather through some of these vulnerabilities? To an extent, some of this is just a question of geography and what resources your country does and doesn't have, but there are relational strategic components where the needle can be moved in certain ways. For one, this could lead to greater cooperation with Australia, as Australia rare earth firm Lynas recently started the first non-Chinese rare earth processing plant in Malaysia.

Kazuto Suzuki

Distribution of the natural resources is very unfair and unequal. Japan has to face with the lack of natural resources. From the beginning, I think we cannot change that. No matter how deep you dig the Japanese soil, we don't have any oils or gas coming out, nor the critical mineral. So we depend on the foreign countries, that's for sure.

The first and the easiest response to that is to build a stockpile. We need to create more buffer to adjust for the change of market and trying to balance out if there is some sort of an economic statecraft exercised by other countries. But it's going to cost a lot. Japan having a very limited land mass in China in the industrial area, we cannot have the tanks and everything for storing the oil and gas forever.

I think we need to make sure that first we create a buffer to adjust the change of market and the change of the international relations. The second is that we need to build the more trustworthy, reliable supply chain network. Middle East, yes, it's unstable, but so far it's not too unstable. We can maintain supplies from outside.

Australia is the greatest trustworthy partner from a Japanese point of view; Australia is the largest provider of the natural gas for Japan. We have a strategic relationship with Lynas to build the supply chain network on the rare earth minerals, and of course, coal and other energy sources such as hydrogen coming from Australia. Basically, Japan has relied on Australia for very large scale. But still, supply from Australia is not enough, and we need to diversify the sources of the suppliers in the different countries.

Especially when it comes to the minerals, China dominates in the market. Not only Japan, everyone relies on the critical mineral for China, be it cobalt, nickel, magnesium and so on and so forth. So there is no escape from dependency on China. And that's why we need to maintain a good relationship with China and to prevent China from exercising its economic statecraft. Nickel, for example, one of the producers of the nickel is the Indonesia. So we are supporting the Indonesian government investment in the processing factory within Indonesia, so that we reduce the dependency on China on that.

There are a number of efforts that Japan has taken to make sure that we reduce the dependency on China. We cannot shut off the relationship with China because China is still holding a large share in the mineral market. So it's natural that we still need to depend on China, but we do not stop our effort to diversify the supply chain.

Jersey Lee

On the subject of natural gas, during the recent election in Australia, the opposition party, the Coalition, had raised the possibility of reserving a minimum percentage of natural gas for domestic use, due to looming gas shortages in parts of Australia. This has obviously sparked some concern in Japan as a major importer.

On this issue though, some Australians are quite unhappy that a significant percentage of these natural gas exports aren't actually consumed by Japan. Some studies indicate that around half of Australia's natural gas exports to Japan are then re-exported after being refined. So some Australians have called for retaining more of the value add for these natural gas exports domestically, either through raising taxes, royalties on these exports, or through more domestic refining. This perhaps gets to broader themes of friendshoring versus onshoring that's playing out across various countries that are trying to de-risk in the process. So what's your view on this?

Kazuto Suzuki

Well, there are various public opinions in any countries. Some of the exporting countries, including the United States, are demanding for it to serve its own domestic consumers. But I think it depends on the government positions, and probably if the Coalition has won the last election in Australia, then the government position might have changed, and there's not much that we can do. I mean, that's the choice of the people of Australia and that's democracy. So we are not trying to intervene in the Australian democracy by supporting the parties which are encouraging more exports. Basically, the Australian people are the ones to decide either way, how to deal with the gas and to what extent that it should be exported.

I don't think it is true that Japanese are refining and exporting the natural gas to the third country because refining in Japan is extremely expensive and it doesn't make much sense to export from Japan. So basically, Japan will be the last destination. I think the very large portion of the Australian gas will be consumed in Japan, and probably there are some adjustment of the stockpiles. We may export some of the refined natural gas to third country, but that's a very small portion as an adjustment of the demand and supply.

Also, we are now in negotiations with the United States on tariffs, but one of the issues was the importing of more LNG from the United States. So that's part of the diversification, but also it is the negotiation tactics with the United States, we do import LNG from United States as well. And energy is always a question of the demand and supply.

So if Australian people decided not to export LNG to Japan, then we might find otherwise. But I think it is also damaging for the bilateral relationship between Japan and Australia. If Australia decided not to export the gas to Japan, it will create a great stress on the Japanese energy supply. And I don't think it is very reasonable and strategically important for Australia to stop exporting gas to Japan. If you do so, then you are risking this very good relationship between Japan and Australia. There's always a trade-off. If you do take one action, then there'll be a consequence. I think probably the Australian government as well as the Australian people may be aware of the importance of these consequences of what happened by their choices.

Richard Gray

And so to close our conversation, we wanted to focus on sort of the dynamics surrounding the Russia-Ukraine war and contrasting that with what's happening today. At the onset of the war, Prime Minister Kishida came out with comprehensive support of Ukraine, with indirect military aid, financial assistance for Ukraine's reconstruction, and intimate cooperation with United States and NATO allies on sanctioned implementation and enforcement. Looking back at this vision that Kishida put forward, that fundamentally European stability is Asian stability, and that a strong Trans-Pacific requires a strong transatlantic, are you concerned that this connectivity between democracies is growing weary?

Kazuto Suzuki

I think the connectivity is there, and the situation in Ukraine, as Prime Minister Kishida then has mentioned, that today's Ukraine is the tomorrow's East Asia. The situation in Ukraine is quite similar to the situation in Taiwan.

Ukraine was not an ally of the United States, not a member of NATO, but concerned by Russia as the extension of the Western influence. Mr. Putin has understood that extension of the US influence on Ukraine as sort of “intervening forces” against Russia, and there was a certain pressure that he felt that Russia is pushed into a corner.

I think that the same thing can happen in Taiwan. Taiwan is not an ally of any country. United States and Japan do not recognize Taiwan as an independent country, so we do not have any bilateral treaties for mutual defense. So there is always the chance for China to integrate Taiwan as a part of China with force, and that may have a very strong impact on the Japanese security environment. So in order to make sure that we do not accept the change of status quo by force, and to maintain the law-based international order, we have to reestablish some sort of rule-based international order and to respect the status quo.

So I think the supporting Ukraine and supporting the G7 and other allies’ actions to support Ukraine is fundamentally important to prevent and justify maintaining the status quo in East Asia. So I think it is not a geographical connectivity, I think it is the connectivity in the conceptual importance of the rule-based international order, and to make sure that we do not accept the change of status quo by force. That's why we are very much in favor of supporting Ukraine and the government maintaining that position to impose sanctions on Russia and support Ukrainian reconstruction.

Japan still has very limited legal capabilities of supporting directly Ukraine because of Japan's self-imposed restriction on the export on arms. But we have changed or amended these basic principles of the export on arms to be able to export, for example, the Patriot missiles, which is a surface-to-air missile, to United States, which is the origin of the Patriot missile, so that US Patriot missiles can be exported to Ukraine. So this sort of arrangement is made as an indirect support of Ukraine. And I think it is the best we can do at this moment for providing the necessary arms for Ukraine to fight against Russia. I think at the end of the day, this connectivity is basically coming from the basic notion that Japan will maintain the rule-based international order, and the export of the Patriot missile from Japan to U.S., U.S. to Ukraine, is one of the evidence that we are committed to support Ukraine.

Jersey Lee

Well, that's it for this episode of Pacific Polarity. Thank you for joining us, Dr. Suzuki.

Kazuto Suzuki

Thank you very much for having me.

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