Assessing Geopolitical Trade Risks: How China's Pressure on Japan Impacts U.S.-Allied Economic Stability

The global economic landscape in 2025 is defined by a fragile equilibrium, where geopolitical tensions between major powers increasingly shape supply chain dynamics. China's strategic use of economic coercion against Japan-rooted in disputes over Taiwan and broader regional security concerns-has exposed vulnerabilities in U.S.-allied supply chains. For investors, understanding these risks and the countermeasures being deployed by governments and corporations is critical to navigating a rapidly shifting geopolitical and economic environment.

China's Informal Coercion and Its Economic Impact

China's approach to Japan has shifted from formal sanctions to a subtler, more ambiguous form of economic pressure. Following Japanese Prime Minister Sanae Takaichi's comments suggesting potential Self Defense Forces deployment in a Taiwan contingency, Beijing reimposed a ban on Japanese seafood imports, delayed the release of Japanese films, and issued travel advisories discouraging Chinese tourists and students from visiting Japan. These measures, while lacking clear legal justification, leverage China's economic weight to signal displeasure without overtly violating international norms.

The consequences for Japan are tangible. Chinese tourists and students account for 20% and 35% of Japan's international visitors and students, respectively. The seafood ban, which had been relaxed in August 2023, threatens a sector where China is Japan's largest export market. The Chinese Commerce Ministry has explicitly warned that further "unspecified retaliatory measures" could follow if Japan continues its "provocative" stance. This pattern mirrors historical tactics, such as the 2023 seafood ban after Japan's Fukushima nuclear water release, underscoring Beijing's preference for indirect, politically motivated economic tools.

Rare Earth Export Controls and Supply Chain Vulnerabilities

Beyond informal coercion, China has weaponized its dominance in critical minerals. In October 2025, Beijing expanded export controls to include five rare earth elements-holmium, erbium, thulium, europium, and ytterbium-and introduced extraterritorial provisions requiring export licenses for products made outside China if they contain Chinese-origin materials or technologies. These controls, part of a broader strategy to assert strategic control over critical materials, have disrupted industries reliant on high-temperature magnets and specialized alloys, such as electric vehicles and wind turbines.

The extraterritorial nature of these rules complicates global manufacturing. Companies must now trace supply chains more rigorously, secure export licenses, and navigate end-use monitoring-a costly and time-consuming process. For Japan, which has long depended on Chinese rare earth processing, the impact is acute. The ban on rare earth exports to Japan, triggered by Takaichi's Taiwan comments, has forced Japanese firms to accelerate domestic production and seek alternative suppliers.

U.S. and Allied Diversification Strategies

The U.S. and its allies have responded to these risks with a dual strategy: diversifying supply chains and deepening strategic partnerships. The U.S. has spearheaded an eight-nation alliance to secure semiconductors, critical minerals, and AI infrastructure. This coalition leverages each nation's strengths: Japan and South Korea's semiconductor expertise, the Netherlands' lithography capabilities, and the UAE's energy infrastructure. The initiative aims to reduce reliance on China's 90% dominance in rare-earth processing, a vulnerability highlighted by recent export controls.

Japan, meanwhile, has adopted a "China Plus One" strategy, diversifying manufacturing to countries like Vietnam and India while bolstering domestic production. The U.S.-Japan Technology Prosperity Deal, signed in October 2025, underscores this alignment. The agreement focuses on joint R&D in AI, quantum computing, and biotechnology, alongside a Critical Minerals Framework to secure supply chains for advanced technologies. Japan's $550 billion investment in U.S. energy infrastructure and manufacturing further cements this partnership.

The European Union has also recalibrated its approach. Over 70% of EU firms in China have reviewed their supply chains, with initiatives like ReSourceEU-a €3 billion program to de-risk supply chains and restrict scrap aluminum exports-reflecting a shift toward economic security. The EU and Japan are collaborating on joint mineral stockpiling and critical technology procurement, mirroring Japan's proactive response to China's rare-earth restrictions.