Sheila Smith discusses the importance of the U.S.-Japan alliance in today's global political environment, including insight into shifts in Japanese defense capability since the security pact was signed, as well as changes in Japan’s position as a regional and global power.
O'NEIL: Welcome, everyone. Good afternoon, and welcome to the Master Class Series. I'm Shannon O'Neil, and I will be presiding this afternoon. Today's subject is the long-standing alliance between the United States and Japan. And we have no one better to talk about it than our own Sheila Smith. Sheila has been a senior fellow for Japanese studies here at CFR for many years. Before she joined us, she spent a lot of time in Japan as a visiting scholar and visiting researcher looking at lots of different issues. She's a very sought-after advisor and has been a participant on many formal U.S.-Japan commissions. And if you didn't read it last year, she has a great book. She has many books, but her latest one came out just last year, and it's titled Japan Rearmed: The Politics of Military Power. I am going to turn it over to her in just a minute. I'm going to let her set the stage for the first ten minutes, give us an overview of U.S.-Japan relations and the alliance, and then we'll open it up to a broader discussion with everyone. So please, Sheila, go ahead.
SMITH: Thank you, Shannon. I'm delighted to be here. It's kind of fun this idea of a Master Class. So I'm going to just lay out a few basic ways in which we can understand the very broad and complex U.S.-Japan partnership. And hopefully, we'll get into a deeper discussion during the Q&A session. As you know, our relationship with Japan goes back to World War II. We signed our first security treaty with Japan alongside the San Francisco Peace Treaty in 1951. That bilateral security pact was revised at the request of the Japanese in the late 1950s, and then it was ratified in 1960. So this year is the sixtieth anniversary of the Bilateral Security Treaty. The United States maintains today about fifty thousand men and women in uniform on Japanese bases. It is also home to the only U.S. aircraft carrier that's homeported abroad. And so it is a very important stationing ground for U.S. forces in the region. And it allows not only U.S. air and naval forces but also our Marine Corps to operate across the Indo-Pacific, from what we think of as East Asia all the way through to the Indian Ocean. But it also is a very important part of the United Nations command support in case of a contingency on the Korean peninsula. So Japanese bases are not just for U.S.-Japan security cooperation but are also integral to the UN response in case of a conflict on the Korean peninsula. So that's the military dimension.
Of course, our partnership goes far beyond military cooperation. In fact, in that renewed Security Treaty of 1960, Article II focuses on our mutual prosperity and the ambition of building economic ties, working together on a host of economic issues. We work closely today with Japan across the region on a variety of issues in global fora as well. For example, the United States and Japan work with the countries of ASEAN in maritime capacity-building, as we do with Australia. We are working with our Japanese partners on developing new digital standards for the protection of new information technologies and also are defending our privacy rights in our democracies. And that's in the G7 as well as in the G20 performance fora. And of course, we work very closely with Japan even though it is not a UN Security Council member. They have long been a supporting member of the UN effort to ensure nuclear non-proliferation and specifically to support and enhance the efforts of the United Nations to contain and sanction North Korea for its proliferation of nuclear weapons. So we have a varied partnership; it runs the gamut of almost everything we can think of in terms of American global interests. And we are usually aligned in values with our Japanese partners, but we don't always agree on everything. And it's important to understand that our allies don't agree with us 100 percent of the time, but we have a very strong working partnership. It's not just about our bilateral relationship but also about the region and the globe.
And then finally, these days, as we watch the transition from Prime Minister Abe to Prime Minister Suga, I get a lot of questions about what is that going to mean for Japan-U.S. cooperation in the region? Is that going to change? And I think it has been very clear since Prime Minister Suga made his first visit abroad to Vietnam and Indonesia, and the theme of those conversations was, of course, the free and open Indo-Pacific. So the United States and Japan have a lot of common interests in making sure that we sustain a rules-based order in and across the Indo-Pacific. And Japan now works very closely alongside us with Australia and India, not only in the economic and the diplomatic realm but also increasingly in the military realm, which is a new piece of Japan's instruments that it brings to its statecraft in the region. And it is welcomed across the region. I think that what we think of the U.S.-Japan partnership, where the United States leads and Japan comes along, that old model of thinking about our relationship, particularly in the region, has really given way to a much more well-articulated Japanese vision for the Indo-Pacific. Again, we emphasize, at times, different pieces of that vision. But there's no doubt in my mind that Japan today is an active player in making sure that the region has a sustainable economy, has open sea lanes, and has strong partnerships, not only with those bigger powers like India, Australia, and us but also with the Pacific Islands States, and with the many countries of ASEAN that Japan has long-standing ties with.
O'NEIL: Alright, let me take you to this last point that you just sort of ended on, and this idea that it's no longer Japan following the United States, but Japan has this bigger role. And maybe talk a little bit about the evolution, if you would, of Japanese capacity to project in the kinds of things that they do? Is it mostly hard security? Is it economic? Or how do they balance? What are the various tools that they use in the region? And how has that evolved over time, either on its own or in conjunction with the United States? A little bit of how did they do this? And how has that role changed over the last several years?
SMITH: Okay, sure. We're looking at a sixty-year swath of time, so I'll do big broad brushstrokes. But of course, as we're coming out of World War II, Japan had to recover much as the European countries had to recover. And it is not until the 1960s that we see Japan with an economy that has some stability and is growing in a way that the Japanese people can feel and experience in terms of their own wages. Japan had to negotiate peace treaties outside of that San Francisco framework. And you saw throughout the 1960s, overtures to its neighbors in Southeast Asia, and to South Korea in the mid-60s. And again, to China in the 1970s. The economic ties were a big part of its relationship with the region, and the United States supported that. But of course, that was a negotiation between Japan and its neighbors to try to overcome some of the ill feelings and the legacies that were still part of the Asian response to Japan after World War II. By the time we get to the 1980s, as we all know, Japan had emerged as a dynamo; it was the economic superpower. That was the new language. It was a trading nation; it had succeeded without hard power. And there are a lot of IR theorists who thought that was an interesting model. In other words, it's not all about hard power in terms of how you achieve your interests across the globe. And so Japan was kind of a different model in lots of ways of a major power.
And it's sustained its position as the second-largest economy in the world until 2011, when China overtook it in the absolute size of its economy. But Japan is still the third-largest economy. As for the relationship with us, we can jump forward to the 1980s, to our trade disputes and our fights in the Congress, smashing Toshibas on the steps, all that drama, and some very tough trade negotiations to open the Japanese market, to get the Japanese to liberalize, especially in sectors like agriculture where they were very resistant. Our former co-chair, Carla Hills, was a very effective agent at prying open the Japanese market. But you have today a U.S.-Japan relationship that's really quite astounding, given all the differences we had in the past.
So today, Japan is the third-largest economy in the world. But it's the fourth-largest trading partner for the United States, it's the fourth-largest investment partner for the United States, and it's the largest holder of U.S. government debt. And I think a lot of people erroneously think that we should be worried about China. Well, in fact, we should say thank you to Japan. The Japanese considered investing in us in ways that were unprecedented and are sustaining investment in us in ways that are unprecedented. Our exports to Japan were probably about $120 billion last year. The bulk of that $75 billion is in goods, and $45 billion is in services. So you see the composition of our trade is beginning to shift in the direction of services as well. We are still the largest trading partner for Japan. About 20 percent of their trade is with us, and North America is also home to a number of Japanese major multinational manufacturers in particular. So we are a market that the Japanese corporate world finds secure and finds worth investing in. We have a very close economic partnership. Both our economy and Japan's economy rely on this partnership for their growth and stability. I think what's been interesting, though, is to watch how we are now trying to cooperate abroad together.
And a little footnote on the trade side. I was, of course, a supporter of the Trans-Pacific Partnership (TPP), now the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which I know you are very familiar with. And you know, I would have been very happy to see us join in that effort. And I think what was interesting about the negotiations over the Trans-Pacific Partnership that it wasn't just the United States and Japan at loggerheads. If you talked to lots of our trade negotiators here in D.C., they thought that Japan would be very hard. But in fact, Prime Minister Abe and President Obama really said, alright, this is where we need to create rules. We need to move the agenda of trade liberalization forward not only for its economic benefits but also for its strategic benefits would have. So until we exited at the beginning of the Trump administration, we also saw Japan as a really constructive partner in moving trade liberalization forward across the Pacific.
O'NEIL: What do you think the chances are that we might be reengaged with the CPTPP? What are your thoughts on that?
SMITH: I'm not an American politics specialist. I will leave that to you and others, but I would like to see us do it. I'm not sure how the trade agenda stacks up at the moment in terms of both our houses. We have to not only look to the White House, but we have to look to Congress.
O'NEIL: How does Japan look at it, and are the other members welcoming?
SMITH: Come back, please. When we had all those high individuals of President Trump and Prime Minister Abe in that first visit in 2017, when he came, and he went to Mar-a-Lago, and they went to play golf. Abe spent many of his summits with President Trump, really trying to tell him why TPP was not only in Japan's interest or the region's interest but also in America's interest. And what it meant to set the trade standards at a higher level, what it would also mean for geostrategic competition with China. He didn't manage to persuade President Trump on that, as you know, but I do think there is a great appetite for us to come back, but we won't be there setting the rules, setting the stage. And so that will be a wrinkle, so to speak, in our ability to negotiate with not only Japan but Australia, New Zealand, and other countries around that deal.
O'NEIL: Let's take the first member question, please.
STAFF: We will take our first question from Fred Hochberg.
Q: Hi, Shannon. In the last month or so, we read a lot about the Quadrilateral Security Dialogue (the Quad) meeting in Japan and the addition of India. Just how important is that, or was that a little bit of a photo-op before our election? And what about the dispute with China and Japan over the islands in the East China Sea? Do we take that seriously enough? Or do we not as Americans?
SMITH: Excellent questions, and I really love your tomato. I am a gardener, so that's really nice. I love it. Does Japan take the Quad seriously? Absolutely. But you know, what I see is that the Quad is a little bit in the eye of the beholder among those four countries. So the United States' view of the Quad and the utility of the Quad is largely a more hard power formula for trying to think about how to intensify and deepen military cooperation. It doesn't mean we don't have economic ambitions as well, but our hard power objectives are pretty clear. Japan sees this as both hard power and soft power, if you will, or economic power. In a way, it takes this very focused approach that it is time to not only sustain the current open and free Indo-Pacific but to build new networks and new communications with like-minded countries so that it remains a free and open Indo-Pacific. So it's partly Japan's strategy for competing with China for how to define the future of the regional order. India is definitely on board. And my colleague, Alyssa Ayres, can certainly talk to you about that. But they are definitely on board in some of the economic initiatives that would come from the Quad. Japan is deeply engaged in helping India not only with the infrastructure but also on the digital side. And then Australia, of course, has both hard power and more economic power interests in making sure that the four powers that are democratic also bring those values to bear, thinking about the kind of order that is created in the region. So I think depending on whatever moment you're talking about the Quad, just be alert to the fact that there's a slightly different emphasis from each of those four countries.
My own sense of it is that it's a very productive avenue for thinking about where we can and cannot cooperate. And I think India, in particular, is more concerned about the hard power side of it. They would not like to be perceived as there's a formal alliance-building or a containment of China strategy. Nonetheless, I think India has more of an appetite for the Quad than it did several years ago, given its relationship with China at the moment. But I think the Australians have also gotten much more interested in the Quad. And they had very split public opinion about whether or not that would create a world in the Indo-Pacific that was antithetical, that would raise hostilities, rather than create a more stable environment. So evolution is not only between the countries but also in terms of the way the countries are interacting with China these days.
I think the challenge on the Japan-China side is that Japan would still like to see an open, free, transparent, and rule-based order. So they're still engaged in a conversation with Beijing and would like to have Beijing embrace this idea of maybe not the Quad, obviously, but the free and open Indo-Pacific. And they are trying to temper that with beefing up their defenses, making sure the Senkaku Islands, or Diaoyu for the Chinese, are not vulnerable. The Chinese military, the People's Liberation Army (the PLA), both its air and naval forces are increasingly active in and around Japanese maritime and aerospace. And it's not just those islands themselves, but the straits that go through Okinawa, the southernmost islands of Japan. They're increasingly present in the Bashi straits, which are the straits in and around Taiwan. So, if you can close your eyes and imagine a map of southern Japan when you're talking about the East China Sea and into the South China Sea, those are all one and the same increasingly. The Chinese military is increasing, qualitatively as well as quantitatively, its ability to affect maritime traffic and control airspace in that area. So Japan is very worried about that. Australia and India are more distant from that, but Japan is trying to thread the needle, so to speak, with China, on inviting China to play a bigger role. A responsible stakeholder is not a word the Japanese use with China, but I think they would like to see a better, more constructive role with China in the region, but they're very conscious of the territorial issue.
On the United States policy, President Obama was the first president to say that Article V protections of the U.S.-Japan Bilateral Security Treaty do apply to the Senkaku Islands. He said it out loud and at the highest level of our government. President Trump said it as well in February 2017 when Prime Minister Abe came to visit, so I expect a future President Biden will also make the same affirmation that the United States sees the Senkaku Islands as territory administered by Japan. And should there be a threat to that territory, the United States will see it as invoking Article V protections.
O'NEIL: Let's take the next question.
STAFF: We'll take our next question from Ellen Frost.
Q: Ellen Frost, East-West Center. Great comments, Sheila. I would add to your list the partnership for quality infrastructure, emphasis on quality, and in general economic statecraft in the region, which is implicitly a challenge to China, but it's a positive sort of win-win; they've also helped us with defining standards for this kind of investment. The weak spot I would say is that the Japanese companies aren't necessarily enthusiastic about these investments. My question, though, is different and very short. The current tensions with Korea and Japan, how and in what ways do they affect the functioning of the U.S.-Japan alliance? And do you see any kind of breakthrough in the future?
SMITH: Thank you. And thank you also for bringing up the infrastructure piece, which I think is increasingly important for the U.S. and Japan in the region. So the Japan-ROK relationship could be a whole master class by itself. I'll try to be as succinct as I can; let me put it that way. We are at a very difficult time in the Japan-ROK relationship. And last year was worse than this year as things seem to have quieted down, but we do have several factors here that continue to affect the possibility of Japan-ROK getting their relationship on the better and more constructive ground. There are a lot of Asian experts on this call, so forgive me for the abbreviated comments I'm going to give you. As you know, the Japanese government believes that issues of compensation for forced labor, for POW treatment, and for many of the egregious behaviors that occurred under Japanese colonization of South Korea were resolved in the 1965 basic agreement, which was a treaty, a normalization of relations. This is a different ball of wax legally, in a sense, because it was not only about the war and wartime damages but also about the colonial experience of the South Koreans. That 1965 Korea, as many of you are aware, is a very different South Korea than we have today. Today, Korea is a democracy, not an authoritarian state. And so the terms of that peace treaty are respected by the Korean government, but there are some aspects of it that raise questions; one has to do with the so-called comfort women, the women who were forced to work in Japanese military brothels during the war. And now this question of forced laborers who were asked to work in Japanese companies. Not asked, they were forced to labor in Japanese companies. These are court cases that had been tried in Japanese court and then are now present in the South Korean court. And the Supreme Court of Korea has identified several Japanese companies that owe indemnities to these laborers.
Legal experts will give you a much more sophisticated answer. I'm going to leave it at that for now. The assets of several companies have been expropriated in keeping with the South Korean verdict. The Japanese government does not accept this and says that the two governments negotiated in 1965, and the Japanese government paid money specifically for these kinds of issues. But clearly, in the public's eyes in South Korea, the diplomatic conclusion in 1965 was insufficient. I think there's a lot of very deep sentiment in both countries of antagonism over the continued war legacy, the sort of incompleteness of the war legacy resolutions, and they are multiples; they're not just one. I think it's also difficult at the moment because both Prime Minister Abe and President Moon tried to do the right things, but I think domestic politics in both countries made it very hard for the two of them. They come from very different political backgrounds and political ambitions.
I think the third thing I'd say, Ellen, and this is the part where I have increasingly wondered aloud on the CFR blog, is the long- term strategic outlook in Seoul and Tokyo, the way they look at the future of the region. In fact, the way they look at China is very different, as well as the options they think they have. And I think that's a challenge for the U.S. policymakers because increasingly they just don't see the same world or the same region, I should say. And our trilateral cooperation U.S.-Japan-South Korea was very focused on the North Korean threat. Japan is very vulnerable, of course, to North Korean missiles and potentially for the decoupling that might come from a nuclear North Korea. South Korea is also worried about these factors, but it feels less of the vulnerability. I think that Japan's vulnerability is new. The South Koreans have to live with the threat from the North for a long time, so they see different avenues, such as negotiation and a peace treaty, perhaps. So I think you were starting to see a region where their sense of threat and challenge is becoming less overlapping than it had for much of the Cold War. And I think that's also a factor to realize.
O'NEIL: Great. Let's take another question.
STAFF: We will take the next question from Jonathan Masters.
Q: Hi, Sheila. Hi, Shannon. Good to see you both. It's been a while. I have a question actually on energy security. Because, believe it or not, I think that next March is the tenth anniversary of the Fukushima disaster. And, Sheila, if you could just talk about the legacy of that and how energy security will factor into Japan's foreign policy. And particularly, I think that the Prime Minister just announced that Japan is going to be carbon neutral by mid-century, and sort of how all that comports together. Thank you.
SMITH: Thank you, Jonathan. I would say nice to see you, but I can't see you. So nice to hear you. I am not a specialist in Japanese energy policy. So I'll just put that out there because there are others in this group, actually, who are more informed on the more recent decision by the Suga cabinet than I am. But the long term trajectory here is, of course, that Japan for some time, for decades now, has seen self-sufficiency and energy as being available through increased investment in nuclear energy. And, of course, the Great East Japan Earthquake and the tsunami that affected the Fukushima Daiichi reactor changed that. The Democratic Party of Japan (the DPJ) was in power in 2011. They had in their energy policy moving Japan up to 40 percent of nuclear power by mid-century. And that was a pretty ambitious renewal project for nuclear power in Japan. That, of course, cannot happen. Japan at the time of the Great East Japan Earthquake had fifty-four operating reactors, some of which were quite elderly, and they all were turned off. I don't have the actual number today of how many have been able to go back into operation, but local governments around Japan have been very hesitant to buy into the government's new security regulations that were created in the wake of that disastrous accident. So you find lots of localities that house these nuclear reactors, of course, depend on them for government revenue, but the citizens who are in the next municipality and sometimes the prefecture don't feel as comfortable as the municipalities.
But I think it's a question of nuclear safety. It's a question of how the government regulatory framework after 2011 was rebuilt. I still think there's a lot of skepticism about the ability to have safe nuclear power in Japan. All that being said, though, Japan, as you know, imports up to 90 something percent of its fossil fuels. Its LNG comes from Russia and other places, and we are now also exporters or about to be exporters of natural gas to Japan. So Japan is trying to diversify its sources of energy, but that still raises the current account surplus there. It's not a good trade balance for Japan, those numbers over the long haul, and also it ameliorates or it mitigates the opportunity for self-sufficiency. So I see in Suga's decision making not a walk away from nuclear power, but a reckoning that Japan is going to have to move to a carbon-neutral footing if it is going to not have to bear the costs of being so dependent on external sources of energy. So I'm kind of curious to see how this is going to unfold. And I am not sure if I answered the question fully, but I think you're seeing Japan, especially the conservatives, the Liberal Democratic Party of Japan (LDP), come to the realization that they have to invest differently going forward. They also have to be much more out-front in terms of transforming the sources of Japanese energy supply.
O'NEIL: The next question, please.
STAFF: We will take our next question from Jonathan Wheeler.
Q: Hi, Sheila, how are you?
SMITH: Hi, John. Good, how are you?
Q: Good. I'd be interested in your take if there are any changes you expect in the relationship with the new Biden administration in January. Prime Minister Abe, of course, was one of the best in the world at handling President Trump, if that's the right word. And luckily for Prime Minister Suga, he won't have too long to try to duplicate that act. But, you know, there are many in Europe and elsewhere that feel that even post-Trump, the reliability, the trust, the predictability of the United States has been compromised for the long term and that they may have to go it more alone. And I just wonder how you see Japanese attitudes both from the official standpoint and among the people?
SMITH: Thank you, John. It's a great question. Let me start off with what I think was going on during the Abe cabinet because I think it was interesting to watch. So we all, as you just mentioned, admired Abe's ability to manage our unpredictable president. That doesn't mean that Japan got everything it wanted. Obviously, it didn't get TPP, which is where we started. It also couldn't protect itself from the tariffs on steel and aluminum, and it didn't get protection on some of the core interests that Japan had. Nonetheless, it did invest heavily in military weapon systems from the United States. They have rolled back some of that, honestly, because it's too expensive. So Prime Minister Abe's ability to have a personal relationship with President Trump allowed the U.S.-Japan alliance to avoid the kind of threatening language over Article V protections that you saw early on in NATO. It also allowed avoiding the kind of really draconian demand for renegotiating trade and sharing costs that you saw with South Korea. Some of that was serendipity.
Japan's burden-sharing agreement doesn't come up for renegotiation until next year, so Japan managed to sidestep that a little bit. But what I thought was also interesting, John, was not just what Abe managed with the United States in this difficult or unpredictable time. But what he managed to negotiate around President Trump and the CPTPP would be one prime example. The other is the Japan-EU trade agreement. Okay, at a point where the United States is pulling back from multilateralism and trade, Japan went full throttle. And I think that was an interesting accomplishment. It was an interesting focal point for me to watch how Abe was trying to deal with the more unpredictable United States. I think it'll take some time for us to know what Japanese calculations are about the reliability or the credibility of the United States going forward; I would hate to hazard a guess. I'm sure lots of Americans are also thinking about that question just because the election is behind us. Clearly, our politics are more contentious.
I think Americans are asking fundamental questions about our engagement, especially about the perception that we are footing the bill for our allies. A perception, I think, is wrong, by the way. But I do think it is going to be something the Japanese will watch carefully to try to read the new administration and how they're going to approach it. There are two areas I expect to be in the headlines, at least in Tokyo, if not in Washington. One is the Biden administration's approach to China. And, as you know, the pressure of China on its neighbors is growing and growing. Japan is no exception, despite what I noted earlier. And they're looking for a pretty tough American approach. They don't want what they see as engagement. They don't want to step back from the tough line that they thought the Trump administration was putting forward. I can't read the Biden administration's China policy, but if you look at the people who are engaged in the Biden administration, foreign policy advisors, I don't think you're going to see people stepping back. I think you're going to see people who would want to engage China in certain ways, where we can, on issues where without the two of us working together, the world or the region will be in trouble. And personally, I hope, we see that, but I think there'll be a really cautious look at where the Biden administration is going to put its emphasis on the China piece.
The second is, you know, the Biden administration has advocated allies first as well as an appreciation of the need to build coalitions. I think that the coalition building approach is very much welcomed in Tokyo for all the reasons I outlined earlier when I was talking about the Indo-Pacific. Be it about Chinese cyber activity, be it about sea lanes and open maritime activity, be it about technology transfer, technology theft, and all kinds of issues where we see foreign intervention in democracies, I think the coalition approach will be welcomed in Tokyo.
I think they'll wonder whether the United States can sustain that over time. And so there will be some questions about it, but I think the approach will be welcome. And the last piece, John, is the host nation support. We are due to negotiate burden-sharing costs with Japan. And so they'll be looking to see whether a Biden administration continues along the line that President Trump outlined, or whether they're going to come at this in a more strategic way. In other words, it's not just going to be about dollars and cents but also about the ways in which the U.S. and Japan, the two militaries, and the two sets of diplomats, will be able to carve a strategic future for the region that will be reassuring for both.
O'NEIL: Sheila, let me just ask you to expand a little bit on Japan's relationship with China and how they see this hard approach from the Trump administration. I share your sense that a Biden administration is not going to fully back down because there does seem to be a bipartisan consensus in Washington of having a bit of a heavier hand vis-à-vis China. I'd be interested to hear about the aspects of this stronger policy towards China. What does Japan like, and which parts don't they like? Is it decoupling, is it the technology part that they like? What are the things that they like? And then also, I heard you when you were talking about the Japan-ROK relationship, saying that they diverged in their views on China. I'd love for you to just expand on that a little bit more. Where does Japan sit vis-à-vis China? And is there a lot of light between its view and the view of its neighbors, whether Korea or some of the ASEAN neighbors? Is there a consensus there? Is Japan an outlier in some way, the way they see China?
SMITH: Well, I wrote a book about this not that long ago. In 2015, I wrote a book called Intimate Rivals, where I looked at China's increased influence and how that affected domestic politics in Japan. The rise of China and the government reaction and how it was really influencing Japanese people at different parts of their national debate. The thing I find interesting is the reaction around the region. What I heard from others, be it in ASEAN or even in Seoul, was if China can do that to the Japanese, they'll do that to anybody in the region. Because Japan is an advanced industrialized economy, it is not necessarily easy to push around. I think it was an eye-opener. And I heard it from my friends in the Philippines, I heard it throughout ASEAN, I heard it from my South Korean colleagues quietly, that China is flexing its muscle. And this was specifically to the rare earth's issue, and also just to the confrontation itself over the islands, that China was ready to be a much more assertive player in the region, and that even Japan wasn't going to be immune from this. So I think you don't necessarily see Japan as an outlier on China. I think what Japan can bring to the table is probably the kind of leadership on the Indo-Pacific strategy or vision, the kind of diplomatic activism, the coalition building that smaller countries actually cannot, and that Australia would be hard placed to do all by itself.
Japan and Australia can do it together. A group of Japan, Australia, and India is even better, and then put us in the mix. And of course, that's a great effort. But I think Japan has more range in the diplomatic arena in the region that it can bring to bear. Even more, I would say, add to the mix the Republic of Korea, which has been not opposed to the Indo-Pacific vision, but South Korean security is very focused on the peninsula. And, while there have been some little bits of maritime cooperation here and there, they're not necessarily ready to jump on board on the Indo-Pacific, especially if they perceive Japan as leading the game. So there is a little bit of tension on that as well.
But I think, on the decoupling piece, so the supply chain piece that you're writing your new book about, Japan has had different phases of diversification. And in the late 1990s, Japan began to diversify some of its supply chain activity from China, largely because of wages going up in China. So it was largely because of economic decision making in China, not because of the strategic piece.
You are now, in the wake of the pandemic, looking at the Japanese government offering financial support to companies that want to relocate out of China. Those companies tend to be small and medium-sized companies; those are not the Toyotas; they are not the big, long term investors in the Chinese economy. Those are largely consumer goods manufacturers, and they want to have access to the Chinese consumer. That's why they're there. But for smaller Japanese companies that really find the difficulty of doing business and the uncertainty problematic, the Abe cabinet put forward some money in their pandemic response to help with relocation. So diversification supply chain will come from a lot of different places. You gave a talk at CFR the other day, where we talked about the disasters and floods of Thailand. So the Japanese have had to adjust as they go depending on what the cause of the instability is.
I think the one piece on the Japan-ROK relationship, just to close out your three big questions, is the tension that we typically see between Japan and ROK has largely been about war legacy. It was about strategic cooperation and information sharing, something the United States government really wanted across the three allies in the region. So it was less enthusiastic, but in the end, it did it. But what was new last year was the export control issue. And, of course, the Japanese basically announced this, unbeknownst to many of us here in the United States, that they were going to get South Korea off of their preferred trading partner list because they weren't quite sure that Korean companies were taking enough steps to make sure that these technologies weren't ending up in in the North. Big blow, as you know, to Samsung and other companies that were really deeply integrated with some niche technologies in Japan for the production of some semiconductors and chips. That was a mind-blowing kind of decision by the Japanese, largely because it came out of the blue. Everybody was surprised. It seemed counterintuitive given Japanese exposure and supply chains. But it was one of those pieces of the puzzle where you wonder if that was a strategic decision. Was it just a demonstration that Japan could make certain parts of the Korean economy hurt if it wanted to? Still, to this day, I can't tell you. Was it a mistake? I don't know. But you see that the Japan-ROK relationship difficulties have now bled over into the economic realm in a way that's not terribly healthy, not only for the bilateral relationship but also for the broader regional economic supply chain, that whole network of economic ties across the region.
O'NEIL: Thanks, Sheila. Let's take the next question.
STAFF: We will take our next question from Laetitia Garriott de Cayeux.
Q: Hi, Sheila. Hi, Shannon. So I have a two-pronged question. First, I was hoping to come back to the China issue. One of the things we know we will likely see under a Biden administration is the U.S. working with democratic allies in the region to offer an alternative to China's digital Belt and Road expansion that is anchored around shared democratic values. So I was hoping you could comment on the role you see Japan playing in this and whether some assets like the Asian Development Bank (ADB) could be better leveraged. And then, the second part of my question is on a completely different topic. You highlighted some areas for U.S.-Japan cooperation, in particular, cooperating abroad. But I was hoping you could also discuss potential tensions in the relationship in the coming four years.
SMITH: Excellent. I'm going to try and be quick because I know we don't have much time. And my answers get to be long-winded. So let me just try to touch very briefly on those two important questions. You know, there are lots of ways in which I think the U.S. and Japan have an opportunity here in the digital sphere of norm-setting, rules- setting, and if you look at their bilateral trade agreement, that was one of the pieces that the U.S. and Japan negotiated. So I think we've got lots of room. Some friends of mine who are more in the political economy realm of the relationship argue that bilateral agreement could be the basis for gathering in the G7 around a core set of rules for digital expansion. So I think Japan's a player. I think Japan wants to be a player. You saw Prime Minister Abe at the G20 meeting put forward his vision of how he would like to move that forward. And I think, particularly in the wake of COVID-19, you're seeing this balancing act between biomedical information sharing and privacy rights, something the Japanese want to work very closely with us and others in the G7 and G20. So I think, yes, Japan will be there. Whether it's the trendsetter or whether it's the country that leads completely on that, I'm not so sure, but I think it definitely wants to be at the table. So that's a very quick and cursory answer to the first question.
And yes, the ADB can play a significant role here. And I think the Japan Bank for International Cooperation (JBIC) has already started down that pathway as well. So it can be bilateral as well as regionally funded and move forward. As for the tensions, I'll come back to China. I could also come back to North Korea, and I could come back to Taiwan. And I'm not saying that because I think all those are going to blow up, I'm just being very quick here. If a considerable amount of dissonance erupts between Washington and Tokyo on the China piece, I think that will be a significant strain on the relationship. I'm not so worried about the islands because our military and our national security folks are very conscious of the East China Sea, and what it means. That whole first island chain all the way through the Philippines is very important for our military. So I see really strong advocacy in our government for close cooperation with Japan there, and I'm not so worried about the islands in that part.
But I am worried about where to compromise and where not. How much allies are consulted on compromises that a Biden administration may or may not see it needs to make. The allies first coalition approach of the Biden administration, I think, is the ticket. Frankly, executing that will be difficult because coalitions are difficult to manage. And you are dealing with considerable power in the region; getting everybody aligned and on board is a heavy lift. And I'm not saying it can't be done, I'm just recognizing the challenge ahead. So I think China would be the biggest place of strategic dialogue between Tokyo and Washington because we want to get it right. On the Taiwan piece, of course, Japan doesn't have the same policy on Taiwan as we do. And Japan has been very hesitant to embrace a formal role in defense of Taiwan's democracy or in defense of Taiwan against mainland China because it doesn't have a Taiwan Relations Act. It doesn't have a military role in the Taiwan straits contingency. And yet Taiwan sits right there, very close to Japan's southwestern islands, but the politics of decision making on Taiwan could be slow. And that may frustrate people here in Washington should we need to make some kinds of decisions about how to react. And then the last is North Korea. You know, the North Koreans now can reach out and touch Japan. It doesn't have to be an intercontinental ballistic missile (ICBM) to get to Japan. Japan doesn't have a ballistic missile capability of its own, so it still relies on ballistic missile defenses, which the Korean arsenal now can really overwhelm if we really think about a conflict. So I still think there's homework, and again, that's back to where the Japan-ROK piece is so critical. And we are all a little bit worried here that the transition to a new administration is always an opportunity for the North Koreans to test our resolve and to test the two alliances in Northeast Asia. So little slippage there could really make Japan nervous about whether or not its defenses are well-considered here in Washington.
O'NEIL: Well, Sheila, let me extend my thanks. And thanks to everyone here for a sweeping take on Japan and the U.S. and its role in the world. We appreciate it. Thank you very much.
SMITH: Thank you, Shannon. It's been a pleasure.
O'NEIL: That's great. Well, all of you, please join us again. We'll be back in two weeks with Adam Segal on November 24 to talk about cybersecurity issues. So, until then, stay well and stay safe. Nice to see everyone.