In the New World Economic Order a Strategic Challenge Awaits Japan and Europe

This article was originally published by the Italian Institute for International Political Studies (ISPI) on 27 November, 2025.

“Today the house of representatives has taken an historic step toward continued prosperity in America, reform in China, and peace in the World…it will open new doors of trade for America and new hope for change in China“. - US President Bill Clinton (2000)  

Today’s shifting of the international economic order can be traced back to China’s accession into the World Trade Organisation in 2001. At the time, the US, Japan and Europe expected to profit from full access to Chinese markets. They hoped that China would adopt the market-based economic principles underpinning the WTO agreement: it was expected to minimize state-intervention in its economy, open markets to foreign investment and trade, and respect the rights of foreign businesses investing in China, including Intellectual Property Rights. Instead, China had its cake and ate it too. Chinese exports to Western markets boomed. China absorbed foreign investment and technology, whilst also curtailing imports, and protecting and subsidizing domestic industries. All with the increasingly explicit ambition to outcompete Western industry in strategic markets around the world.

After the rise of Xi Jinping as chairman of the Chinese Communist Party, the US came to the strategic assessment that the WTO system would never bind China to a rules-based order. Continue supporting China would only benefit China’s rise to great power status and its ability to use economic statecraft for geopolitical gain. Now that US commitment to lead a global rules-based international order fades, what can Japan and Europe do jointly to prevent the further erosion of rules-based trade and to enhance their economic security? I observe three courses of action:

Firstly, Japan and Europe will have to flexibly work with like-minded partners, e.g. in the Indo-Pacific region, that share their commitment to rules-based trade. As middle powers, Japan and Europe share US concerns. At the same time, they continue to have a solid interest in upholding the structure of the rules-based multilateral trading system, with the WTO at its core. Japan and Europe can invigorate the WTO through active use of the alternative dispute settlement system (MPIA).  This was put in place by a European initiative after the US effectively neutered the existing appellate body to keep the global rules-based structure in place. Additionally, Europe and Japan can explore EU alignment with the CPTPP Indo-Pacific trade agreement. Both Japan and New Zealand have hinted at this possibility, and the European Commission led by Ursula von der Leyen has signaled her interest in pursuing that avenue.  It makes strategic sense and would communicate Euro-Asian support for rules-based free-trade. But the (economic) impact should not be overstated as Europe already has regional trade agreements in place with most CPTPP members, including with Japan.

Secondly, Japan and Europe will have to actively protect their markets against (1) China’s economic coercion using rare earth export controls, and (2) Chinese overcapacity in strategic industries. China’s policies are posing an imminent threat to the industrial base in Japan and Europe in key areas such as automotive, steel, semiconductors and defence.  Japan and Europe are responding to this urgent challenge. Japan has started several anti-dumping investigations to counter the Chinese overcapacities issue.  Japan has a solid strategy in place to tackle its dependency on China’s rare earth resources, after China had choked off supply to Japan in 2010. The European Commission has put in place a Steel Safeguard Measure  and introduced tariffs on imported Chinese battery-electric vehicles.  The Commission also launched Resource EU to decrease rare earth dependency on China.  In a sign that it is ready to flex some muscle, the Commission is proposing further measures to protect European steel production from unfair impact of global overcapacity.  But there is more that Europe can do, as the Commission could also employ the Anti-coercion and Trade Defence instruments: newly available industry insights can help shape this approach.  If the Commission takes these or similar steps, it could strengthen its position by working in close coordination with Japan, through G7 and through the joint Working Group on Trade & Economic Security.  By doing so Japan and Europe would send a strong signal that they will protect a rules-based order and open trade against unfair trade practices, whilst making sure that free trade under the wings of the Japan-EU Economic Partnership Agreement can continue unimpeded.

Third, and most ambitiously: Japan and Europe can explore joint projects to revitalize the EU’s Indo-Pacific Strategy.  So far, the EU’s Indo-Pacific Strategy has underdelivered. It needs concrete industrial initiatives and still lacks financial punch, whilst defence and foreign policy initiatives remain fragmented. With Commission leadership and involvement of the European Investment Bank and the private sector , the EU could indicate concrete projects or programs that strengthen economic security for Japan and Europe.  In fact, Japan is already taking such an approach with the US. At the first meeting between US President Trump and new Japanese Prime Minister Takaichi they announced grand projects in energy, digital infrastructure, automotive and rare earths. The ambition is to promote bilateral trade and investment while protecting themselves against China’s coercion through trade dependencies.  On the one hand, this is a way forward that is driven by an idiosyncratic US president. But at the same time this approach is firmly rooted in a strategic vision for a new economic order.

With Russia waging a war in Europe and China driving its security ambitions in the Indo-Pacific, both Japan and Europe need strong partners. Both have key security alliances and economic partnerships with the United States. In that relationship, Japan will seek further strategic alignment with the US, instead of strategic autonomy. That is a lesson that Europe should take to heart when deepening its own strategic engagement with Japan.

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