Roundtable on White Paper on International Economy & Trade 2025 (on Aug. 4, 2025)

By Japan SPOTLIGHT

Participants
Prof. Ryo Sahashi of the University of Tokyo's Institute for Advanced Studies on Asia

Prof. Mariko Watanabe of Gakushuin University

Prof. Nobuhiro Aizawa of the National Graduate Institute for Policy Studies (GRIPS) and managing director of the Economic Research Institute for ASEAN and East Asia (ERIA)

Dr. Kazunari Morii, director of the Office for Trade Remedy Investigations, at the Trade and Economic Security Bureau, Ministry of Economy, Trade and Industry (METI)

Moderator: Masakazu Toyoda, chairman & CEO, Japan Economic Foundation (JEF)

Summary of Discussion

Reading this year's White Paper on International Economy & Trade 2025 makes it clear that we stand at a major historical turning point. The United States, which led the global economy with free trade rules, has shifted to an "America First" stance, while the economic power of the Global South is rapidly growing. Will a power-based international order dominate the coming era? That would be a nightmare for business. A rules-based international order is what can reduce uncertainty in these times, bringing security and peace of mind to citizens. This is precisely in Japan's national interest, and simultaneously in the national interest of many countries that are not superpowers. Japan should lead efforts to create rules in various international cooperative forums, working in concert with these like-minded nations. We must not forget that many countries have benefited from globalization through rules-based free trade and the international order. Reversing globalization is impossible given the current realities of the world economy, and we should not abandon it. The future of the world still hinges on how effectively we harness its benefits. Historical turning points are created by striving for a better form of globalization.

Introduction

Toyoda On June 27, the "White Paper on International Economy and Trade 2025" was published and distributed among Cabinet members. The White Paper on International Economy and Trade aims to analyze trends in the international economy and trade to contribute to the formulation of trade policy. I understand this marks its 77th edition. This year, based on analysis of the international situation, Japan's trade strategy has been compiled as the "Trade Policy Strategy 2025" following discussions by the Trade and Commerce Subcommittee of the Industrial Structure Council to METI. Key points of this strategy are also outlined in the White Paper as the "Direction of the Trade Policy Strategy".

Today we have gathered four experts to discuss the current state and challenges of the international economy and trade and how Japan should respond to them. First is Prof. Ryo Sahashi of the University of Tokyo's Institute for Advanced Studies on Asia, who specializes in US economics and politics. Second is Prof. Mariko Watanabe of Gakushuin University, who possesses deep knowledge of China and is also well-versed in trade rules such as those of the WTO. Third is Prof. Nobuhiro Aizawa of the National Graduate Institute for Policy Studies (GRIPS), who analyzes Southeast Asian economics and politics and currently serves as managing director of ERIA. Finally, we have the former director of the Policy Planning and Research Office at the Trade Policy Bureau at METI, Dr. Kazunari Morii, who compiled this White Paper 2025. He currently serves as director of the Office for Trade Remedy Investigations at the Trade and Economic Security Bureau.

For today's discussion, we will first address "Current Status and Issues in International Economic Trends" based on the White Paper. Following that, keeping "Direction of Trade Policy Strategy" in mind, we will discuss countermeasures for Japan.

Structural Changes Facing the International Economic Order

Toyoda First, could Dr. Morii, author of the White Paper, briefly summarize the current situation and issues outlined in it from two perspectives - the structural changes facing the international economic order, and then the tariff shocks by the US administration of President Donald Trump?

Morii The White Paper summarizes the changes facing the international economic order after three decades of globalization. These three decades have seen multi-layered structural changes. First, after the Cold War, countries of varying economic scale, stages of development, political-economic systems, and policy directions - including China - joined the free trade system. During this period, the international balance of power has gradually shifted, and in recent years the presence of emerging and developing countries - often referred to as Global South countries - has grown. While global income levels have risen and absolute poverty has decreased during this period, it has also been noted that economic disparities have widened both between nations and within individual countries.

In addition, heightened geopolitical tensions have increased awareness of economic security among countries, leading to its reflection in their foreign economic policies. While partially overlapping with this phenomenon, the issues of international overcapacity and overdependence have also come to be pointed out as problems with different origins.

Furthermore, in the real economy, the advance of digitalization and policy efforts toward a green transition are transforming economic fundamentals. However, countries are responding with diverse approaches. Some countries, for example, introduced new digital-related regulations such as data transfer restrictions or new environmental regulations symbolized by the European Union's Carbon Border Adjustment Mechanism (CBAM). These developments have also contributed to heightened uncertainty.

Against this backdrop, I understand that protectionist tendencies and trade frictions had already begun to emerge gradually from around the mid-2010s. This April saw what has been termed the US tariff shock. While the Trump administration's specific policy approaches have their unique characteristics, I believe the broader background stems from the structural changes I've been discussing. Particularly in the US, research on the "China Shock" has flourished, with studies arguing that the rapid increase in imports from China caused harm to certain regions and workers. I understand that such findings underlie public perceptions and discontent, forming the basis for public opinion supporting protectionism.

The problems within the US stem not only from the China Shock, but from various causes such as the advance of innovation and mechanization, or even prior to that, the inadequacy of the social safety net compared to other countries. However, public discontent tends to be directed toward foreign relations and immigration. Due to this deeply rooted background, it seems difficult to foresee the situation in the US changing significantly in the short term.

Given this, I think there is a growing awareness that the existing international economic order has not been adequately updated to address these structural changes. In particular, issues such as opaque market-distorting measures and the weaponization of economic dependencies are contributing to trade frictions.

That said, it is absolutely not acceptable for Japan to lose a rules-based international economic order; it would not serve Japan's interests. Japan has consistently maintained that it is to be rules-oriented, not results-oriented, and that disputes should be resolved based on rules, not force. Rules have also enhanced predictability and created a business-friendly economic environment across borders. Grounded in this philosophy, we believe it is necessary to find ways to address these structural changes, including through cooperation with like-minded countries.

Toyoda Based on Dr. Morii's explanation, I would like to hear from the three professors about issues in the US. First, I'd like to ask Prof. Sahashi. Looking at the current state of the global economy, many people say the US is the sole superpower. Yet the US is said to be deeply divided, with a stark wealth gap. As a result, it is pursuing high tariff negotiations under the MAGA banner. Many international economic institutions predict that, as a consequence, the US will see the sharpest decline in growth rates. Why has this contradictory situation arisen?

Sahashi Your question is right on target and a highly significant one. The US economy remains exceptionally strong. However, this strength hasn't led to high-paying jobs or improved living standards as is expected. I think this view has become deeply ingrained among American citizens over the past decade or so.

Prof. David Autor of MIT has discussed the China Shock theory, which was also mentioned in the White Paper. But even before his paper was published in 2016, propaganda highlighting the economic reversal between the US and China began airing as early as the 2010 midterm elections. This indicates that the sense of being victims of globalization had gradually been growing in the US.

However, this is a deeply ironic situation. In reality, American corporations themselves have skillfully exploited the global economic landscape. The concentration of wealth is largely attributable to their reluctance to allocate significant funds to wages, while simultaneously advancing monopolistic and oligopolistic practices. I think it is largely incorrect to pin all problems solely on China, but this narrative has become almost accepted as commonplace over the past decade or so. Consequently, negative perceptions of the global economy and the international economic order have significantly intensified.

Needless to say, the first Trump administration from 2017 - so-called Trump 1.0 - was also an era strongly reflecting such growing passion for a negative view on global economy. But this administration's defining characteristic is its even greater weaponization of tariffs compared to the previous one. While the previous administration also imposed tariffs on allies by sector, such as steel and aluminum, this time the momentum is far stronger, as it has escalated to imposing reciprocal tariffs.

This background, needless to say, involves not only the goal of gaining leverage in economic negotiations, but also the industrial policy aspect of encouraging industries to relocate to the US - a point often noted. More recently, it has also taken on the aspect of a political tool, as seen in the high tariff measures against BRICS nations, in particular Brazil. However, what cannot be overlooked is that the goal of securing tax revenue has likely become more significant than initially stated. Once tariffs are imposed, the sweet taste of tax revenue is hard to give up. I believe it will be extremely difficult to abandon tariffs and similar measures as a source of funding going forward.

What will become of US policy going forward? It remains difficult to predict at this point whether the US economic growth rate will decline, or just how much real benefit Trump's economic policies and tariffs truly hold for America. Industrial relocation, for instance, takes considerable time. Another key factor not to overlook is that this administration includes not only economic populists who emphasize this China Shock and advocate for the revival of manufacturing, but also many so-called libertarians. Their influence seems reflected in the so-called OBBBA (One Big Beautiful Budget Act). Considering this, I believe adjustments will ultimately be made to achieve economic growth. However, it is important to note that tariff policies are highly troublesome and sticky.

Toyoda I'd like to ask Prof. Watanabe about the US-China tariff negotiations. The most intense negotiations are said to be between the US and China, which at one point escalated to imposing additional tariffs exceeding 100% on each other's goods. However, in May, both sides significantly reduced these tariffs and extended the early August deadline for suspending them. How does China view its tariffs with the US?

Watanabe This issue combines short-term political negotiations with the long-term challenges of addressing structural problems, which was effectively outlined in the White Paper. At present, I will focus on the short-term negotiations, and the discussion on the Chinese side is proceeding as follows. First, domestic discourse emphasizes that China has not been defeated by the US, that it has been threatened but has not yielded. However, objectively speaking, the situation can be summarized in three points.

First, while it has "not lost", it is recognized that it must ultimately yield and accept the demand for a certain level of tariff increases from Trump this time, just as Japan and other countries have done.

Second, since Trump's approach itself raises questions under WTO rules, China will, as long as it believes it has a valid case, show a clear stance to actively utilize dispute settlement procedures.

Third, the current focus shifted from trade to the secondary sanctions linked to Russia. Trump has declared that if China buys energy from Russia, he'll impose 100% tariffs on all imports from China. How to deal with these secondary tariffs is, I think, the key short-term issue for China.

This goes beyond trade negotiations, involving security, ceasefire talks with Russia, and various global arrangements. After sorting out those issues, the two countries will reach an agreement. So far the US and China have agreed to hold off on their economic confrontation until the situations in Russia-Ukraine and Gaza settle down. Regarding other structural issues, I'd like to discuss them next time.

Toyoda Next, I'd like to ask Prof. Aizawa how countries in the Global South - particularly ASEAN, which was once called the world's economic growth center - or India view tariff negotiations with the US? What distinguishes the countries that reached an agreement from those that did not?

Aizawa Since the question covers 11 or 12 countries, I cannot address them all, but allow me to focus on a few countries. First, overall - and particularly regarding Southeast Asia - there is naturally a compelling urgency. Viewed in a slightly longer-term context, the larger countries in Southeast Asia, especially those considered as emerging, are currently in the midst of overcoming the middle-income trap. There is a sense of crisis that if they do not accelerate growth during this period while there is a demographic bonus, they will "become old before getting rich".

During this crucial period of growth acceleration, the countries in Southeast Asia have been deprived of opportunities for continued high growth due to two external shocks: Covid-19 and the war on Ukraine. Now, the Trump tariffs mark the third major external shock in five years. It was undoubtedly a situation where countries desperately wanted to execute their long-term plans of structural reforms and consistent high growth. However, these external shocks gave serious blows to their long-term growth strategy and ultimately to escape the middle-income trap. That is why governments in Southeast Asia needed to speed up in mitigating and minimizing the negative effects on their economic growth strategy.

The policy shock originating from the US appears to have caused the most concern for Vietnam among Southeast Asian countries. For Vietnam, the US is its largest export destination, accounting for as much as 30% of its GDP. The initial tariff announcement included high rates of up to 46%. Among Southeast Asian nations, all major economies faced tariffs exceeding 30%. Despite all the unfavorable conditions, there was an urgent need to mitigate the tariff shock. This urgency was a key factor driving the negotiations. That is the first point.

Another point is that within that urgent situation, several issues with long-term implications for relations with the US emerged. In Indonesia's case, a crucial point became whether penalties would be imposed for its membership of BRICS. The final agreement for Indonesia settled at 19%, a relatively low rate compared to Brazil, which faced a high tariff of 50%. This represents a strong achievement in Indonesia's negotiations. Within Southeast Asia, Indonesia alone became a full member of BRICS. Therefore, the extent to which the US would penalize a country that declared its participation in BRICS became a major point in the negotiations for Southeast Asia as a whole as there are other countries testing the consequences of joining BRICS.

Ultimately, no punishment was imposed there. Why did the US impose penalties on Brazil but not on Indonesia? That point remains unknown. But I think this became a point of focus precisely because future policy decisions in Southeast Asia, particularly regarding relations with China, are crucial. Regarding negotiations, one final point: from Southeast Asia's perspective, the key challenge in dealing with Trump was managing not only relations with the US but also simultaneously managing economic relationships with China. Precisely because relations with China are close, the weaker in relations with the US, the weaker the bargaining power vis-à-vis China. A crisis with the US would lead to another crisis with China, from the Southeast Asian point of view. Souring relations with the US made Southeast Asia's leverage towards China steadily diminish in every single price negotiation and trade discussion. This situation has been acutely felt over the past three to four months in various areas, such as price negotiations for raw material exports.

So it has become clear in the current negotiations that there was a need for them to reach an agreement quickly to avoid letting negotiations with the US disadvantage negotiations with China as well.

Evaluation of Japan-US Tariff Negotiation Results

Toyoda Following Japan's House of Councillors election, Japan and the US reached an agreement on July 23 for mutual tariffs of 15% and automobile tariffs of 15%. How do you all evaluate such an agreement, which fundamentally conflicts with WTO rules?

Sahashi I think this Japan-US agreement deserves credit for protecting the minimum essential line for the Japanese economy. While I don't consider it the optimal solution, it undoubtedly averted the worst-case scenario. In terms of managing relations with the US and managing the Japanese economy, it is certainly worthy of high praise. The US subsequently reached agreements with the EU and South Korea, and I think this agreement was also significant in influencing those outcomes. It's also a crucial fact that if automobiles were subject to the same 15% tariff rate, not just the 15% mutual tariffs, this would not be unfavorable for Japanese companies' competitive conditions.

I have two concerns regarding the Japan-US agreement. One, as is often said, is that mutual understanding and alignment regarding investment have likely not been achieved. Furthermore, if this is incorporated into a larger US plan - such as the creation of a $350 billion package for South Korea, or the establishment of something akin to a US Sovereign Wealth Fund (SWF) - I have concerns about how much control we can maintain and whether Japan's interests will be safeguarded. Nevertheless, without this investment package, the negotiations would not have been concluded, and I think that should be respected as a political judgment.

Another concern is that negotiations between the Trump administration, which brandishes tariffs, and other countries simply do not align with the purpose of the free trade system. Ultimately, while these matters are important from a management perspective, they do nothing to save the WTO system or the entire free trade framework. They offer no salvation whatsoever. So how can we maintain the free trade system? How can we rebuild it? This requires an entirely different strategy, and I understand this remains a major challenge.

Toyoda How do you evaluate it, Prof. Watanabe?

Watanabe The current WTO rules contain systemic flaws that should have been addressed in the 1990s. These flaws now contribute to current major imbalances. As this year's White Paper highlights, WTO rules lack provisions to prevent a single country from monopolizing the profits from economies of scale, and more importantly from abusing the power that scale confers. China has expanded its scale to the point where it can do both, and creating a significant international imbalance.

The US, no longer willing to tolerate the situation, is exercising its negotiating power by invoking the WTO's national security exception. In this context, I think Japan's initial response, prioritizing investment over tariffs, was exceptionally well-handled. This method allows for sharing the profits from economies of scale between Japan - a country with industrial policy advantages - and the US, making it a more effective way to correct current structural imbalances. It also revives the philosophy adopted during the Japan-US friction of the 1980s.

More broadly, agreements between the US and countries with significant industrial bases are increasingly settling on investment rather than tariffs. The balance between the US demand and what partners can accept seems to lie here. Japan's leadership in this area has been valuable. However, this only completes the initial phase of the response. In the next phase Japan should move quickly to address US concerns by working to upgrade WTO rules.

For example, Vietnam and Mexico were requested as early as April to accept high tariff rates because, within the global value chain - including the larger one involving China - these countries serves as the direct points of contact with the US. Understandably, these countries are dissatisfied, as it is not entirely of their making.

If Trump's tariffs are economically permissible, it highlights the urgent need to correct the imbalances caused by the economies of scale, with China at the center. Since no effective rules currently exist, comprehensive regulatory measures must be introduced. These measures are necessary not only for the US and China, but also for Europe, Japan and other Asian nations to prevent unfair burdens from falling on the surrounding nations. We are, I think, at a stage where taking the next step forward is essential.

Toyoda Prof. Aizawa, how do you evaluate it?

Aizawa To be honest, this is an area I haven't fully assessed yet, and it's quite challenging. But as Prof. Watanabe just mentioned, while it may not be a completely new rule, I think it ultimately comes down to establishing the legitimacy of Japan's practices as something that can be shared going forward. Japan's investment capacity enabled it to successfully negotiate with the US, but since this approach is not adoptable by other Southeast Asian nations, I think there are certain reservations about whether the Japanese model can serve as a standard for negotiations. In other words, whether Japan's approach is legitimate and replicable by other countries, and whether we can translate this deal as such will determine whether Japan's negotiations in this instance become a model for all of Asia or not.

Trade and investment, finance and security - I think this flow is unavoidable, where negotiations begin by bundling the rationality and benefits of different systems. However, what can be linked and where the limits lie will still vary considerably depending on each country's political, economic, or geopolitical circumstances. The options available to wealthy nations and poor nations differ greatly. The outcome is not yet fully determined, so we cannot be certain, but I believe the battle going forward will be one to be fixed by its correctness and legitimacy.

China's Industrial Development Shakes Up Trade & Investment

Toyoda I'd like to move on to the next issue. I'd appreciate hearing each of your opinions, but first, could Dr. Morii briefly outline the current situation and key issues concerning "Trade and Investment Shaken by China's Industrial Development"?

Morii One focus of this year's White Paper is China. I believe China has had the greatest impact on global trade and investment over the past 30 years. Data clearly shows China has expanded manufacturing value-added across a wide range of industries at unprecedented speed and scale. By 2020, China's manufacturing value-added had grown 18.5 times over what it was in 1995. The two provinces of Guangdong and Jiangsu alone generate industrial value-added comparable to that of Japan. Prof. Richard Baldwin of IMD states that China has become the world's sole manufacturing superpower.

While the White Paper did not conduct empirical research on the causes of this phenomenon, discussions among experts point to several drivers of China's industrial development: large-scale industrial policies and fiscal spending under a political-economic model often termed state capitalism; competition among local governments to develop industries; and the functioning of economies of scale as a market-level characteristic. Economies of scale fundamentally refer to the decreasing production costs that accompany increased production scale, though their manifestations vary. Simply put, there are classic cases where large initial investments are made in equipment-intensive industries, and as production increases after investment, unit fixed costs decrease. There are also cases where technology and skills accumulate through repeated production, and cases where efficient supply chains are formed within industrial clusters, leading to increased productivity.

I believe the way Chinese government's industrial policies and economies of scale have combined to foster growth differs by industry. Furthermore, in terms of output, this has sometimes led to increased productivity, while other times it has merely expanded production scale without productivity gains. Consequently, the international implications also differ. In any case, the fact remains that it has consistently generated new export items.

Looking at export categories, while light industries like textiles were originally dominant, it has successively created new major items: personal computers, mobile phones, semiconductors, automobiles, and batteries. The problem lies in the lack of transparency in its industrial policies during this process. Combined with issues like providing extensive industrial subsidies compared to other countries and the non-market behaviors of state-owned enterprises, this is assumed to be generating negative externalities internationally. Also, as a result of the rapid expansion of industrial scale, the Chinese economy in recent years revealed its underlying underconsumption structure during the post-Covid economic downturn. It has led to an accelerated situation of so-called deflationary exports: imports fail to increase, export unit prices decline, yet export volumes continue to rise.

Furthermore, surrounding countries are experiencing deepening asymmetric dependencies, and risks of excessive reliance on China for certain strategic materials have also been pointed out. Moreover, as the latest phenomenon, trade diversion effects are occurring due to US-China trade friction and new trade measures by other countries, and recent data clearly shows that international markets are in turmoil. Looking within China itself, excessive competition known as "nei juan" (involution) and preferential policies for domestic products have worsened the business environment for Japanese and other foreign companies.

Amidst all this, China's direct investment in ASEAN and "Belt and Road" countries has expanded, with manufacturing in particular showing a marked trend toward shifting production overseas. But investment in the US and EU has not necessarily increased. This has two sides: it's not only due to the reasons on the Chinese side, but also because the US and EU are not necessarily actively welcoming investment from a security perspective. In any case, it is difficult to foresee at this point that direct investment will lead to the distribution of economies of scale across the board and generate a trend toward greater liberalization of international trade and investment.

Toyoda Prof. Watanabe, you already pointed out the issue of China's economy of scale. This concerns the problem of international negative externalities. Could you elaborate a bit more on this and also discuss what we can do about it?

Watanabe To be precise, the concept of international negative externalities is still not fully developed within economists, but let me begin with a technical explanation. An externality arises when the people who benefit from an action and the people who bear its costs are different. In today's context, the negative externality refers to a country's policy - such as, unilaterally changing tariff rates or implementing strong industrial policies. The country implementing such measures naturally reaps benefits, like stronger domestic industries or increased exports, while other countries are left to bear the costs. In effect one nations' gains come at the expense of another's losses, intensifying conflicts of interest. This is called "externalities of production relocation".

This debate is not new; it goes to the very function of the WTO. The costs created by such externalities underpin core WTO principles: the most-favored-nation treatment, and the requirement to adjust tariff rates simultaneously when changes are made. This recognition itself has existed for over 20 years, which is why unilateral tariff rate changes are regulated under the WTO and related FTAs.

However, as I noted earlier, the WTO has no clear provisions for cases where a country monopolizes a supply chain through unilateral industrial policies. While the potential for friction was long recognized, the rules have remained silent for two decades. This is one reason why, even today, the logic of economic friction is not widely acknowledged among economists.

For example, Prof. Autor's group at MIT - well known for their "China Shock" research - has recently been advancing arguments very close to those of the MAGA movement, calling for stronger US industrial policies to revive American employment and the middle class. However, this approach lacks the recognition of negative externalities that Japanese economists had highlighted years ago. This divergence in understanding still remains. Of course, the extent of harm caused by industrial monopolization is highly nuanced, and research is still in its early stages.

Still, the theoretical implications are very clear. To put it bluntly: if we were now under a world government with no national conflicts, concentrating production in the most efficient locations would be unproblematic. But that is not the reality. In a world of competing states, if one country monopolizes an industry and abuses that power, institutional design needs some form of regulation.

As for remedies, short-term political feasibility may be quite difficult, but several points can be made. Ultimately, through FTAs and the global value chains, economies of scale should be shared internationally. As the experience of the past 20 years has shown, this corrects the "externalities of production relocation". The real challenge is refining this process institutionally.

Furthermore, in terms of global security, clearer and stronger rules against the political abuse of scale are needed. How best to implement these principles through concrete mechanisms remains open to debate. But conceptually, two directions are essential: sharing the benefits of scale and disciplining its abuses. I believe the world we must build is one that combines both.

Toyoda Next, we'll hear from Prof. Aizawa. Recently, China's investment in ASEAN has been rapidly expanding, and I understand its influence in ASEAN is now greater than Japan's. How do you assess this? There's also talk that ASEAN trusts Japan the most. What should Japan do?

Aizawa You're absolutely right. Looking at various public opinion polls, there's no doubt that China is recognized as having the greatest influence. And the same surveys strongly indicate that people trust Japan. I don't think it's at all unnatural for influence and trust to be separate matters.

Why China holds such influence is, of course, because its investment is indispensable for Southeast Asian nations. As mentioned earlier, to achieve prosperity before aging, these countries must maintain high economic growth rates. Therefore, securing investors, even for the short term, is crucial. It is only natural that implementing various policy adjustments and support measures to attract investment from those willing to invest now becomes the top priority for each nation seeking to become a high-income country.

However, one crucial point to note is that while there are various types of investment, what is particularly vital for Southeast Asia is industrial policy - specifically, how to grow manufacturing - as this is essential for placing the region on a long-term growth trajectory. But due to the issue of oversupply of goods in China, and its strong competitiveness in manufacturing products made in Southeast Asia, I think this creates additional headwinds for Southeast Asia in escaping the middle-income trap through industrialization. Particularly when nurturing and strengthening the competitiveness of domestic small and medium-sized enterprises, there is undoubtedly a concern that while Chinese investment supports macroeconomic statistics, it creates a liability at the micro level.

Another aspect is technology transfer. Investment is certainly necessary, but to pursue the long-term goals, Southeast Asia would like to see technology transfers from Chinese companies firmly take root in. However, in the case of Chinese investment in Indonesia, unlike Japan or the US, Chinese investment advances by bringing in labor as a package. Consequently, the expected rate of technology transfer inevitably falls short of what was hoped for.

Therefore, while it is inevitable that macro-level investments will advance and their influence will grow, the crucial point is how to govern these investments and channel them toward enhancing domestic workforces, particularly enhancing industrial capabilities. Support for this governance is likely the area where trusted countries like Japan must share.

Particularly within governance, not only regarding trade but also concerning R&D, while Southeast Asia continues to trust Japan, I think it is imperative for Japan to demonstrate trustworthy responses in R&D. Sitting back complacently without explanation and assuming trust will persist without action, risks sending a signal that we ourselves do not trust them. If that happens, the "co-creation" concept Japan proposed with Southeast Asia at the ASEAN Japan summit in December 2023 could end up as a pipe dream. Therefore, we will focus our efforts here on supporting Japan's governance assistance regarding R&D and technology transfer, as well as promoting actual cooperation between companies. That way, Southeast Asia can benefit from both China's macro-level investment and Japan's support in governance. Taken together, this will form a highly beneficial partnership for Southeast Asia with Northeast Asia.

Toyoda: Prof. Sahashi, what is the US planning to do about its relationship with China? The China issue isn't something that can be resolved solely through tariffs, and security concerns surrounding Taiwan are particularly serious. While the current administration includes Secretary of State Marco Rubio, who is seen as a hardliner on China, Trump's position remains unclear. What are your thoughts on this?

Sahashi There is no doubt that the US government places considerable importance on US-China trade negotiations. It is also widely agreed that the ultimate goal is to hold a summit meeting. Trump is often described as the ultimate negotiator, but talks with China will continue for the time being. What's crucial at this point is the purpose of the negotiations. Ultimately, I believe they are strongly focused on market opening and the benefits for the US economy.

However, as long as negotiations remain a priority, there is considerable interest in managing US-China relations. This is precisely why, as has been pointed out, the stance on the Taiwan issue sometimes appears to be regressive. For example, although the Taiwan authorities deny it, reports have surfaced about the refusal of President Lai Ching-te's transit through New York.

However, the Trump administration is politically volatile, and a shift in the tide is entirely possible. And if you peel back the current pro-negotiation facade to look beneath, there is undoubtedly a very strong hardline stance toward China. This stance consists of two factions: economic hawks and security hawks. Both undoubtedly must harbor significant concerns about China's economic and technological advance, as well as its growing influence. Some also strongly voice worries about the influx of fentanyl from China into the US and concerns regarding the Chinese Communist Party's governing system. When such hardline views toward China emerge on the surface, I think they could easily lead to intense decoupling discussions. But I still think negotiations will hold the upper hand for the time being.

If negotiations take center stage, we must closely monitor how economic security unfolds. The hardline stance toward China remains on the basis of the negotiations, and economic security policies have seen numerous rules accumulated since the administration of Joe Biden or the first Trump administration. Therefore, we understand the overall direction of economic security policy is unlikely to change easily. Recently, Trump has also been advancing regulations on land acquisitions by foreigners, particularly targeting purchases of US land by China, as indicated by the secretary of agriculture. Consequently, foreign companies from Japan and other countries must now formulate strategies in accordance with these rules. But it is also true that amid ongoing negotiations between the US and China, export controls on China have been relaxed, most notably for semiconductors. Export restrictions on NVIDIA's H20 chips have been eased. Similarly, exports of parts for the C919 aircraft and Electronic Design Automation (EDA) tools have been unblocked. Export controls have become part of the negotiation leverage, raising questions about how this will unfold.

In that sense, America's economic security policy appears inconsistent, and the portion serving as a bargaining chip is likely to grow significantly. Concerns persist that this trend will continue to intensify, and Japan must keep a close watch on these developments. Allies may still be required to maintain high-level economic security as before, but America's own economic security policy will change with unfettered flexibility. I think this heightened flexibility is an issue that warrants attention.

Direction of Trade Policy

Toyoda I'd like to move on to the final question. It concerns the "Direction of Trade Policy Strategy". I'd like to ask Dr. Morii to briefly outline the key points of the three directions outlined in the White Paper.

Morii The International Trade and Economic Strategy 2025 positioned within the White Paper this time sets its primary goal as exploring overseas markets through exports and investments and maximizing Japan's added-value, even as competition intensifies around Global South countries and DX and GX advance. This strategy responds to demands for autonomy and indispensability amid rising protectionism and the need to address the fluctuations in the international economic order, all while taking into account shifts in the international environment.

It outlines three directions for trade policy.

First, as a response to the fluctuations in the international economic order, we should pursue multi-layered economic diplomacy. This involves demonstrating our commitment to remaining a reliable partner in the international community while building win-win relationships with various countries and working to strengthen the international economic order.

Second, regardless of the state of the international economic order, we must maximize added-value by addressing global challenges such as DX and GX, and harness overseas market vitality. Building on domestic investment promoted by domestic industrial policy, we will secure and diversify export markets. Through co-creation with Global South and like-minded countries via outward investment, we will support the high-value-added activities of Japanese companies.

Third, even amid rising protectionism and the emergence of threats from overcapacity and overdependence, it is essential to enhance supply chain resilience, strengthen autonomy such as a stable resource supply, and secure indispensability regarding technologies and businesses. To ensure economic security, we will promote integrated efforts both domestically and internationally including policy coordination with like-minded countries, domestic institutional development, and overseas business expansion.

Toyoda Regarding the above three points, I would like to hear your perspectives on how Japan should proceed. First, Prof. Sahashi. On "Responding to the Shifting International Economic Order Amid the Rise of Protectionism", specifically, what kind of cooperation should we pursue with the US, which has become the foremost proponent of protectionism? While energy and defense are obvious areas, should we give up on building a rules-based order altogether?

Sahashi I believe it is crucial for Japan's stance to neither abandon globalization nor abandon rules. From the perspective of Japan as a trading nation, I cannot overemphasize that rules are what we must rely on. Furthermore, two things will be crucial going forward. First, I think Japan has no choice but to expand the areas where it takes the lead in shaping rules or championing international cooperation in response to the rise of global protectionism and the destabilization of the international order.

Various cooperative bodies are rapidly emerging in today's world. If this trend continues, we may see an increase in fragmented efforts - with people trying to take initiatives in pursuing various forms of cooperation, attempting to establish rules in different parts of the world and across regions. However, what we truly need is the creation of an international system that incorporates values as a unifying thread, building a multi-layered structure. If these bodies simply exist in isolation, that is not real multi-layeredness. Therefore, I think it is crucial to adopt a concept that properly threads them together vertically.

Within that framework, I think it's acceptable to have both highly sophisticated international coordination mechanisms and simpler ones. I also think it's appropriate to have arrangements tailored to each country's needs and stage of development. Japan should promote such approaches. From this perspective, I've been thinking lately that initiatives like the Asia Zero Emissions Community are actually quite promising. On the other hand, we must also consider how to strategically leverage high-level frameworks like the CPTPP.

Finally, one more point: what to do about the US. I don't think we should be overly optimistic that it will easily return to international cooperation any time soon. However, we must also preserve a place for the US to return to. And we must carefully consider how to engage with those within the US who understand the implications of international cooperation, the international economic order, and free trade. These are areas that require careful thought.

Because the US is reluctant to participate in any cooperation scheme, we should not hastily establish systems that exclude it. Instead, we should ensure the US can return to such multilateral systems. While it may not be necessary to leave things exactly as they are now, I think it is unacceptable to officially reduce the G7 to a G6. The G7 must remain the G7, and it is crucial that the US retains the option to rejoin. We should pursue an approach where we advance cooperation with other members while preserving the framework and space for the US to return.

And within the US, we must reach out to individuals who recognize the importance of these matters. We must unite those who understand liberalization and free trade. I increasingly believe that, in the long term, this is essential for building a rules-based order.

Toyoda Next, I would like to hear from Prof. Aizawa on the topic of "Co-creation and Export Promotion with the Global South and Like-Minded Nations". Is it truly possible for Japanese companies to achieve high-added-value through co-creation? What about the content industry? Is it possible to cooperate with these nations in building a rules-based trade order?

Aizawa I certainly believe it is possible. As stated in the White Paper, I strongly urge the government to seriously commit to pursuing a policy focused not on Japanese outward investment, but on attracting foreign domestic investment into Japan, alongside trade policy. What makes this important is that it leads to higher value-added products for Japanese companies. By leveraging the perspectives of Southeast Asia and other countries, we can redefine where the value of Japanese companies lies and learn from those perspectives to boost exports with higher values. This is the crucial point.

What holds value naturally varies by market and era. The dynamics of each era likely move far more intensely within fellow nations, so even if Japan decides to promote something as valuable within its borders, there's a high chance it could miss the mark. We will steadily build up our own domestic capacity for variation. To achieve this, we will promote domestic investment. Specifically, we will invite people and resources from the region and globally. I think this will become extremely important.

As for which industries, there's no clear-cut answer. The entertainment industry is certainly important, but I think one of Japan's strength lies in the food industry. Regarding food, I think there are various metrics on culinary experiences, and while this area is highly competitive, the Japanese are in a good position.

Moreover, I believe science and technology will be increasingly important in the coming era. How many skilled talents from partner countries can Japan retain to build collaborative relationships? Given the mismatch occurring between talent and industries in each country, the key will be how effectively Japan can create platforms to correct this. Therefore, establishing collaborative relationships with Southeast Asia in Japan's science and technology, particularly in cutting-edge technology development, will be critically important.

One more point. As noted in the White Paper, even if protectionism is gaining ground in the trend toward a protectionist trade regime, I believe it is crucial to send a message that we should pursue liberalization in areas like the labor market. Seeking answers solely in reforming or retaining the ideal liberal trade regime may not be strategically feasible. Another way to think of course is unlike pursuing trade rules and regimes at the global level, we should emphasize social policies and education policies to tailor and respond at the regional level. Within the multi-layered global order, trade systems, such as WTO mechanism, aren't the only backbone. There are social policies, education policies, welfare policies, and various other policies. Japan must consider building orders within these policy frameworks through rulemaking. Crucially, within this framework, we must design systems enabling talents from diverse nations to thrive in Japan.

I think this is a crucial opportunity to take such action. The time of great crisis is also the time to design great policies. So now is the time to implement bold policies.

Toyoda Finally, Prof. Watanabe, I would like to ask you about "Foreign Economic Policy for Strengthening the Supply Chain Resilience". What kind of cooperation with China is important? Is it possible to bring China's economic activities under rules? Or in relation to establishing strategic indispensability, does this mean Japan must sometimes confront China?

Watanabe In conclusion, I believe that the benefits of having rules in place outweigh the drawbacks for China as well. Moreover, China does not think it has the power to set all the rules on its own, and in that sense, there is a possibility that it may agree to updates to the new rules.

The fundamental direction is clear: a stronger predictability in rules. Perpetual pressure from the US is not beneficial for any country. But if the US harbors significant dissatisfaction and believes China will not alter the status quo under current rules, it will have no intention of changing the situation. The continuous monopolization of specific industries is unwelcome not only to the US but also to other countries, many of which want to correct market distortions caused by overproduction and excessive exports.

Revolving these issues will bring significant benefits not just to the US but also to Europe and many Asian economies. Getting China to recognize this should be the starting point of negotiations, and Japan has a role in taking initiatives.

Despite talk of China being America's sole competitor, the current reality is that the US overwhelmingly surpasses China. I don't believe China genuinely thinks it can replace America's position. So in this imbalance of power, even if the US does not fully engage in a rules-based system, Japan and Europe can play the role of constructing US grievances rationally, compelling China to respond, and ultimately upgrading the current rules.

This process itself strengthens supply chain resilience. Global supply chains are essentially mechanisms for sharing economies of scale, serving as a means to resolve the problems currently being generated by China's rise. But repeated abuses of this scale power have exposed their fragility, prompting the emergence of the concept of economic security as a new framework. Incentive structures to deter such abuses remain essential, and ultimately this is the only path to genuine resilience. This requires some form of response, and incentive structures that deter the abuse of scale are still necessary. Ultimately, I believe this is the only way to achieve supply chain resilience.

This year's White Paper highlights that China has grown increasingly powerful in manufacturing across multiple sectors. But it remains dependent on global economic transactions and technologically, and it has not achieved independence or dominating power.

A patent study of the US and China shows that while Chinese patents have surged since this friction began, they remain rooted in the technological framework established by the US. This does not signal reduced dependence.

Given these dynamics, it is entirely possible that China must accept the need to upgrade the current rules. Japan should take the lead in such negotiations. In this sense, it is a very positive step that this year's Trade White Paper begins with the recognition that the current friction stems from significant structural problems, and then builds as trade strategy based upon that recognition.

Toyoda Though brief, we've had a truly substantive discussion. Thank you for taking time out of your busy schedule today. I look forward to our continued cooperation.

Written and translated by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT, with the cooperation of Tape Rewrite Co.