China launched a new phase in its escalating diplomatic crisis with Japan in early January over Japanese Prime Minister Sanae Takaichi’s statements on Taiwan late last year. China’s Ministry of Commerce invoked its Export Control Law to implement a ban on “dual-use” exports for military end-uses and signaled more restrictive licensing for rare earth exports to Japan. The move has put Japanese officials on high alert as they prepare for potential disruptions, which Japanese companies have already begun to report, and as they cautiously anticipate President Donald Trump’s upcoming visit to Beijing in April. This escalation is not an isolated case. It highlights a deeper systemic shift in the economy of Asia over the last five years, a change that is shaped by — and will reverberate back to — the strategic competition between the United States and China.
From Beijing to Jakarta, governments are building formalized legal and bureaucratic architectures, establishing new government offices and instituting expansive authorities. These tools are being applied under three general typologies of economic statecraft: offensive coercion, defensive resilience, and flexible hedging. Taken together, they reinforce a regional arms race in administrative instruments. The result is a fragmented “permissioned” trading system that is defined by government oversight and intervention at every node in the supply chain, rendering U.S. unilateral tools less effective and incentivizing economic conflict.
The Evolution of Modern Economic Statecraft
In the aftermath of 9/11, the United States began to shape the modern architecture of economic statecraft globally, as it expanded and strengthened its own coercive instruments, particularly related to financial sanctions. While initially focused on the counterterrorism effort, Washington soon recognized the utility of this architecture for broader foreign policy ends. Over the following decade, U.S. officials applied the legal and financial mechanisms built to target non-state actors to pressure aspiring nuclear states such as Iran and North Korea.
The first major shift in Asia’s conception of economic statecraft occurred in 2012, when the Obama administration barred the Bank of Kunlun in China from accessing the U.S. financial system for processing Iranian oil payments. While the bank survived as a quarantined payment channel, this weaponization of U.S. financial centrality alerted China and Asia more broadly of their vulnerability to U.S. economic coercive tools. Yet, Asia’s bureaucratic mobilization did not occur until the first Trump administration shifted the focus from China’s rogue banks to its national industrial champions, such as Huawei. In 2019, the U.S. Department of Commerce’s Bureau of Industry and Security placed Huawei on its “Entity List” for violating the U.S. International Emergency Economic Powers Act by exporting sensitive goods to Iran. The Commerce Department action restricted Huawei’s access to U.S. microchips critical to its consumer smartphone business. The threat was now directed at the core of the Chinese economy.
Offensive Statecraft: China’s Coercive Transformation
Observing Washington’s application of these tools at scale, China moved to codify its own offensive framework. Driven by rising trade tensions and vulnerabilities exposed by sanctions on Iran and Russia, China initially built its economic statecraft based on an “active defense” model, borrowing from China’s military strategy lexicon. Through state support and industry consolidation, its primary goal was to maintain and expand China’s position in global supply chains and build resilience against U.S. coercive tools.
But in the last five years, China has paired its “fortress economy” with the development of a suite of offensive capabilities. One innovation that illustrates this evolution is China’s two-pillar sanctions regime, administered primarily through the Ministry of Commerce and Ministry of Foreign Affairs and coordinated through a formalized interagency “Working Mechanism.” While the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) takes advantage of the chokepoint created by the U.S. financial system, the primary objective of China’s offensive sanctions tools is to weaponize the supply chain dependencies it has instilled in the region and globally.
China first created the Unreliable Entity List in 2020, providing an extraterritorial coercive instrument to make the most of China’s economic gravity against foreign entities that it sees as harming “China’s interests.” Administered by the Ministry of Commerce, the list establishes an exclusionary trade tool that allows the ministry to restrict or ban listed companies from trade or investment transactions with Chinese individuals and entities.
Second, China’s Anti-Foreign Sanctions Law adopted in 2021, provides statutory deterrents against complying with U.S. sanctions. The law’s “Countermeasures List” goes even further than the Unreliable Entity List, allowing the relevant ministry to impose a complete transaction ban and asset seizures. However, the law does not serve only as a counter-sanctions authority as the name implies — it has become the statutory basis for offensive designations under its “Countermeasures List,” primarily administered by the Ministry of Foreign Affairs.
This sanctions framework operates in tandem with China’s increasingly restrictive export-control regime. China’s weaponization of export controls was originally ad-hoc — as demonstrated in 2010 when China banned rare earth exports to Japan during a territorial dispute over the Senkaku Islands. In 2020, it formalized a regime to leverage its position at the center of global supply chains, setting out a unified framework for controls on sensitive items under China’s Export Control Law. The Ministry of Commerce has gradually built offensive capability into that framework, including a “Controlled Party List” that restricts the transaction of relevant dual-use items to listed organizations.
In April and October 2025, responding to U.S. semiconductor export controls and tariffs, the Ministry of Commerce launched a broadside that affected both the United States and its allies in the region. Exploiting its market dominance in critical rare earth minerals and refining, China added a set of those materials to its list of controlled items and expanded extraterritorial measures such as a foreign direct product rule that created new restrictions on re-exports. As a consequence of the April measures, exports of rare earth magnets to both Japan and South Korea fell more than 90 percent between March and May. These tools now act as a dial that the Ministry of Commerce can turn up or down as needed. In its ongoing diplomatic dispute with Japan, China has ratcheted up that dial, imposing restrictions on dual-use exports that threaten to cost Japan billions of dollars worth of lost production if kept in place and strictly enforced.
From sanctions to export controls, China has successfully carried out President Xi Jinping’s call in 2019 for “legal weapons” to be used “in the struggle against foreign powers,” increasing the effectiveness and reach of its economic statecraft.
Defensive Statecraft: U.S. Allies’ Response for Resilience
China’s aggressive measures have catalyzed a major effort by U.S. allies in the region to build their own defensive legal and bureaucratic architectures. Having seen the threat posed to its supply chain by its reliance on China during the 2010 Senkaku Islands dispute, Japan began diversifying its rare earth materials procurement, reducing dependence on Chinese rare earths from 90 percent in 2010 to 60 percent in 2023. But as U.S.-China tensions rose over the subsequent decade, Japan decided to formalize a whole-of-government effort to insulate the economy against external shocks.
In 2020, Japan established an economic bureau in its National Security Secretariat, and in 2021, it created a Minister of State for Economic Security. The primary vehicle for this shift was the Economic Security Promotion Act of 2022. Under the act, the government has made billions of dollars available to support supply chain resilience and designated 210 specific operators across critical sectors (e.g., finance, rail, electricity) subject to mandatory screening for foreign involvement in facilities supporting domestic infrastructure by relevant ministries.
This bureaucracy is increasingly spurring the private sector into taking actions to adjust, and even intruding in a number of ways. A recent survey found that 88.9 percent of responding Japanese companies have taken economic security measures since the act’s establishment, and of those, 15.9 percent have created entire specialized “economic security departments.” And with the rollout of the economic security clearance program in 2025, the government now exercises unprecedented oversight of corporate human resources departments, vetting employees for access to “economic intelligence.”
Japan is not alone in this approach. In January 2024, South Korea’s then-President Yoon Suk Yeol restructured the country’s National Security Office, creating a third deputy director, for economic security, mirroring Japan’s National Security Secretariat. The Framework Act on Supply Chain Stabilization (effective June 2024) created a “Supply Chain Stabilization Committee” chaired by the deputy prime minister.
The act also provided agencies with the authority to designate certain goods and services as “economic security items” and the firms that provision them as “stabilization leading business entities,” subject to extensive reporting requirements to the relevant agency. These entities are eligible for substantial government backing under the act, including almost 50 trillion South Korean won ($35.7 billion) in 2025 alone. Given that the Korean government has committed to reducing single-country reliance on economic security items to 50 percent by 2030, and the list of items continues to expand, government agencies could ratchet up these measures and become even more critical to normal economic functioning.
China is the crucial stimulant for this growth. With its more assertive use of coercive tools in 2025, as demonstrated in the Hanwha Ocean and rare earth material cases, Japan and South Korea have compelling incentives to accelerate this process and even utilize some offensive tools, as they have with export controls in coordination with the United States.
Flexible Statecraft: Hedging Between the U.S. and China
While U.S. allies build defenses, neutral countries in Southeast Asia are creating administrative infrastructure to hedge between the economic powers. Indonesia and Vietnam are forced to balance U.S. trade demands with China’s economic gravity. China is both Indonesia and Vietnam’s largest trading partner, making significant investments in Indonesia’s mining sector and infrastructure and supplying nearly half of the raw materials and equipment used by Vietnamese manufacturers. But both Indonesia and Vietnam also depend on the United States as a significant export market, and they see opportunities to expand this trade as the U.S. attempts to reduce reliance on China. Faced with the threat of U.S. tariffs, Indonesia and Vietnam are taking steps to demonstrate compliance with U.S. regulations while engaging with China to avoid crossing red lines.
Despite the increase in U.S. tariffs on China in 2025, China’s exports continued to rise as it diverted trade. Initial data suggest that most of the redirected exports were absorbed by alternative markets, particularly Europe and Southeast Asia, but a portion was transshipped to the United States through third countries. There were signs that Indonesia was becoming a node in these transshipment networks, and the Trump administration has prioritized disrupting them. A Bloomberg investigation revealed that firms with Chinese ownership accounted for almost 70 percent of Indonesia’s solar exports to the United States, and an American solar industry association filed petitions for retaliatory action to U.S. agencies. To disrupt these networks and protect domestic industry, the Indonesian Ministry of Trade implemented a series of updates to import and export regulations enhancing reporting requirements and clarifying administrative sanctions, building on a previous commitment to tighten control of certificate of origin issuance for exports. For Indonesia, neutrality now requires an active certification operation to prevent the economy from becoming collateral damage in U.S.-China trade disputes.
Vietnam similarly strengthened its own trade monitoring and enforcement toolkit. In October 2025, the government issued a decree on “Strategic Trade Control.” This established Vietnam’s first licensing regime for dual-use items, creating more alignment with Western export control regimes and signaling to Washington that Vietnam intends to be a trusted node in the tech supply chain. Vietnam is also using legal tools to move up the critical minerals value chain. Effective Jan. 1, 2026, Vietnam amended its Geology and Minerals Law to ban the export of unprocessed rare earth minerals and classify them as “strategic national assets,” meaning that the state will have significant control over mining and processing. If companies seek to access Vietnam’s reserves of rare earth minerals, they will now need to invest in Vietnam’s refining capacity.
These cases are representative of a broader trend permeating throughout Southeast Asia. For states trying to remain neutral in the U.S.-China competition, the cost of geopolitical tension is high. To walk the line, they are establishing sophisticated bureaucracies from scratch, creating new layers of state influence in the economy.
Sleepwalking Toward Fragmentation: The Economic Security Dilemma
Economies in Asia, from major powers to emerging markets, are building their own statecraft toolkits — whether offensive, defensive, or flexible in orientation. Once in place, these bureaucracies often seek scale, advocating for greater scope and resources commensurate with their growing mission.
In this permissioned trading system, U.S. policymakers are likely to find their unilateral tools less effective. U.S. extraterritorial sanctions, export controls, and other trade measures are increasingly filtered through Asian government agencies, rather than private compliance departments alone, creating friction in their passthrough to firm behavior. These bureaucracies can also nationalize risk and offset coercive U.S. actions to maintain linkages, as India did in May 2025 when its shipping regulator began approving sanctioned Russian insurance entities to provide maritime coverage for oil cargoes. As unilateral actions falter in this system, U.S. policymakers should increasingly rely on a coordinated approach among allies, where additional administrative capacity can bolster effectiveness, instead of creating resistance to it.
At the regional level, Asia’s economic statecraft structures and mechanisms are increasingly at loggerheads with each other, creating an economic security dilemma in which governments both develop and are encouraged to deploy stockpiles of administrative instruments. The more assertive use of China’s offensive tools prompts a defensive response from U.S. allies and a hedging response from neutral states. Those responses narrow the window of time in which China can effectively deploy its tools before eroding its own leverage, creating a heightened escalatory incentive. China’s recent export restrictions on Japan have only exacerbated this process. In response, Japan has accelerated efforts to diversify its rare earth supply chain. If China perceives a threat to its dominance over that supply chain, it has room to escalate further by expanding the scope of export controls, restricting license issuance, or imposing sanctions on companies that depend on Chinese rare earth materials. (Japan’s Prime Minister Takaichi, fresh off an election victory for her party that gives her a supermajority in parliament, will meet with Trump at the White House in March, before his April meeting with Xi in Beijing.)
A less stable regional order is emerging, one prone to economic brinksmanship and where unilateral tools are less potent. The economic costs will also be significant, as governments launch interventions that disrupt supply chains and expend finite resources to bolster domestic industry. That environment will necessitate U.S. policymakers to adopt a clear-eyed view of the regional structure of economic statecraft and how their application of economic tools feeds Asia’s administrative arms race.
