Case Study: Xi’s Economic Coercion Strategy

Background

The current crisis stems from Japanese Prime Minister Sanae Takaichi’s unprecedented statement in late 2025 suggesting Japan could deploy military forces if China attempted to seize Taiwan. This marked a significant departure from Japan’s traditionally cautious diplomatic language on Taiwan.

China’s Multi-Pronged Response

Beijing’s retaliation demonstrates a sophisticated economic warfare playbook:

Phase 1: Broad Export Controls

• Banned all dual-use goods for military purposes (affecting ~40% of Chinese exports to Japan)
• Created intentionally vague language to maximize uncertainty and compliance costs

Phase 2: Strategic Sector Targeting

• Threatened rare earth restrictions affecting Japan’s EV and electronics industries
• Launched anti-dumping probe into chipmaking materials
• Specifically aimed at pillars of Japanese industrial strength

Phase 3: Diplomatic Isolation

• Timing measures during South Korean President Lee’s Beijing visit
• Attempting to fracture the Japan-South Korea-US trilateral partnership
• Exploiting Trump’s desire to maintain his own China détente

Strategic Objectives

China’s campaign serves multiple purposes beyond punishing Japan:

• Testing US commitment to Asian allies under Trump 2.0
• Establishing precedent for economic consequences of Taiwan-related statements
• Demonstrating to other regional powers the costs of alignment with US security positions
• Leveraging economic interdependence as geopolitical weapon

Outlook: Three Potential Scenarios

Scenario 1: Managed De-escalation (40% probability)

Timeline: 3-6 months

Pathway:

• Japan maintains current position without further escalation
• China gradually reduces enforcement of vague export controls
• Back-channel diplomacy through business associations
• Face-saving formula found before APEC Shenzhen (November 2026)

Catalysts:

• Pressure from Chinese exporters losing Japanese market share
• Trump administration private assurances to Beijing
• Japanese economic data showing limited actual impact

Scenario 2: Prolonged Economic Cold War (45% probability)

Timeline: 12-24 months

Pathway:

• Takaichi refuses to back down, bolstered by domestic support
• China implements controls more strictly but stops short of full embargo
• Japan accelerates rare earth diversification (Australia, Vietnam, recycling)
• Tit-for-tat measures avoided but relationship remains frozen until leadership changes

Catalysts:

• Trump’s inconsistent signaling to both sides
• Japanese public opinion supporting firm stance
• China’s domestic political need to demonstrate resolve on Taiwan

Scenario 3: Escalation and Retaliation (15% probability)

Timeline: 1-3 months

Pathway:

• Incident or provocation triggers Japanese counter-measures
• Japan restricts advanced photoresist and semiconductor equipment exports
• China expands controls to broader categories
• Regional supply chains severely disrupted
• US forced to choose sides more explicitly

Catalysts:

• Hardline voices in Beijing gain influence
• Trump makes contradictory public statements
• Military incident in East China Sea or near Taiwan

Most Likely Outcome: Scenario 2 appears most probable given the structural factors at play. Neither side has strong incentives to fully back down, but both want to avoid catastrophic economic damage.

Solutions and Risk Mitigation

For Japan

Immediate Actions:

• Accelerate rare earth supply chain diversification to Australia, India, Vietnam
• Strengthen strategic reserves of critical materials (6-12 month buffer)
• Enhance domestic recycling capabilities for rare earths
• Coordinate closely with US, EU on export control alignment

Medium-term Strategy:

• Develop alternative suppliers for Chinese inputs in EV manufacturing
• Strengthen economic ties with ASEAN, India as hedge
• Use multilateral forums (WTO, G7) to challenge China’s measures
• Build coalition with South Korea, EU facing similar coercion

Diplomatic Options:

• Maintain principled position while offering face-saving off-ramps
• Use business channels for back-channel communication
• Engage at APEC, ASEAN forums to gradually normalize relations
• Leverage Trump’s transactional nature to broker eventual compromise

For China

De-escalation Path:

• Gradually reduce enforcement intensity while maintaining formal measures
• Allow business exemptions that provide practical relief
• Accept informal understanding rather than formal Japanese retraction
• Use APEC summit as forum for leader-level dialogue

For the United States

Balancing Act:

• Provide clear public support for Japan while avoiding inflammatory rhetoric
• Offer private assurances to both sides
• Help Japan accelerate supply chain diversification
• Maintain separate negotiating track with China on broader issues

Strategic Investments:

• Expand US rare earth production capabilities
• Support allied supply chain resilience programs
• Strengthen trilateral Japan-South Korea-US coordination mechanisms

For Regional Partners

Risk Management:

• Avoid taking explicit sides publicly
• Diversify supplier base proactively
• Build strategic reserves of critical inputs
• Strengthen intra-regional supply chain linkages

Impact on Singapore

Direct Economic Impacts

Trade Flows (Moderate Impact) Singapore’s position as regional trading hub means disruptions affect transit and re-export activities:

• Potential 2-5% reduction in China-Japan trade flows through Singapore
• Impact on logistics, warehousing, and trade financing sectors
• Reduced demand for Singapore’s trade facilitation services

Semiconductor Supply Chain (Significant Impact) Singapore is deeply integrated into the semiconductor ecosystem:

• Hosts major chip testing and assembly facilities
• Japanese photoresist and equipment crucial for Singapore’s semiconductor sector
• Chinese rare earths essential for electronics manufacturing
• Any escalation could disrupt Singapore’s $90+ billion electronics exports

Financial Services (Limited Direct Impact)

• Reduced demand for trade finance between China and Japan
• Potential flight to Singapore as safe haven increases deposits
• Opportunity for Singapore banks to finance supply chain diversification

Strategic and Diplomatic Challenges

Neutrality Under Pressure Singapore faces its most significant diplomatic balancing challenge:

China’s Expectations:

• Subtle pressure to avoid supporting “Western containment”
• Expectation of neutrality tilting toward understanding of Chinese position
• Testing of Singapore’s commitment to ASEAN centrality vs. Western alignment

US-Japan Expectations:

• Expectation of solidarity with like-minded democracies
• Pressure to align with any multilateral response
• Implicit test of Singapore’s reliability as security partner

Singapore’s Tightrope:

• Must avoid being forced to choose sides explicitly
• Risk of being perceived as insufficiently supportive by either camp
• Cannot afford to damage relations with either economic giant

Operational Impacts on Singapore

Port and Logistics Sector

• Volume reduction if China-Japan trade decreases
• Opportunity to serve as neutral transshipment point
• Potential increase in regulatory complexity for dual-use cargo

Manufacturing Sector

• Singapore-based Japanese manufacturers may face input shortages
• Electronics sector vulnerable to both rare earth and photoresist disruptions
• Potential catalyst for manufacturers to diversify operations regionally

Aviation and Tourism

• China-Japan travel disruptions could reduce transit passengers through Changi
• Business travel decline affects hotel and MICE industries
• Opportunity to market Singapore as neutral meeting ground

Strategic Opportunities for Singapore

Supply Chain Hub Positioning

• Market Singapore as reliable, neutral alternative for critical material stockpiling
• Develop rare earth processing and recycling capabilities
• Become regional hub for supply chain resilience services

Diplomatic Facilitation

• Offer Singapore as neutral venue for back-channel negotiations
• Leverage ASEAN chairmanship experience for mediation
• Strengthen reputation as trusted honest broker

Economic Diversification Beneficiary

• Attract companies seeking to hedge China-Japan concentration risk
• Position as manufacturing alternative for sensitive components
• Expand role in trade financing for diversified supply chains

Risk Mitigation Strategies for Singapore

Government Level:

• Maintain strict neutrality in public statements
• Privately engage both sides to encourage de-escalation
• Strengthen strategic reserves of critical materials
• Accelerate supply chain mapping and vulnerability assessment
• Use ASEAN platforms to advocate for multilateral trade rules

Business Level:

• Diversify supplier and customer bases proactively
• Build 3-6 month inventory buffers for critical inputs
• Develop contingency plans for logistics disruptions
• Strengthen relationships with alternative suppliers in ASEAN, India

Regional Cooperation:

• Strengthen ASEAN economic integration to reduce dependence on any single economy
• Coordinate with ASEAN partners on collective response to economic coercion
• Support development of ASEAN-wide strategic reserves

Long-term Implications for Singapore

Structural Shifts: The China-Japan tensions accelerate trends already reshaping Singapore’s strategic environment:

1. End of Benign Globalization: Singapore’s model depends on open trade and stable great power relations. Persistent economic warfare undermines both.
2. Weaponization of Interdependence: Economic ties increasingly viewed through security lens, complicating Singapore’s position as neutral hub.
3. Pressure to Choose: The middle ground for small states narrows as great powers demand alignment on critical issues.
4. ASEAN Centrality Tested: Singapore’s traditional strategy of operating through ASEAN faces challenges if regional unity fractures.

Strategic Adjustments Needed:

• Reduce vulnerability to any single economy
• Deepen economic integration with diverse partners (EU, India, Middle East)
• Invest in strategic autonomy (food security, energy, critical materials)
• Strengthen diplomatic capabilities for complex navigation
• Build coalitions of small states facing similar pressures

Bottom Line for Singapore

The China-Japan trade war presents Singapore with significant challenges but also opportunities. The immediate economic impact is manageable, but the strategic implications are profound. Singapore must navigate carefully to:

• Preserve economic relationships with both powers
• Maintain credibility as neutral, reliable partner
• Avoid being forced into binary choices
• Turn supply chain disruption into opportunity
• Strengthen long-term strategic resilience

Success requires combining Singapore’s traditional diplomatic skills with proactive economic diversification and clear-eyed recognition that the era of effortless balancing between great powers has ended. The stakes are high: Singapore’s prosperity and relevance depend on adapting to a more fragmented, contested regional order while preserving the open, rules-based system that enabled its success.