China’s escalating restrictions on Japanese defence-linked companies have largely been framed as a bilateral clash between Asia’s two largest economies. Yet the consequences extend far beyond Tokyo and Beijing. Across Southeast Asia, where supply chains for rare earths, electronics, automotive components and defence technologies are deeply interconnected with both powers, governments and businesses face a sobering reality: the room to manoeuvre between the United States and China is shrinking.
On February 24, China’s Ministry of Commerce placed 20 Japanese organizations on a restricted list under the country’s 2020 Export Control Law. The targets included subsidiaries of major defense contractors Mitsubishi Heavy Industries and IHI Corporation, the national space agency Japan Aerospace Exploration Agency, and the National Defense Academy of Japan. Entities on the list are banned from receiving dual-use items — goods with both civilian and military applications — from China.
A further 20 organizations, including carmaker Subaru and Sumitomo Heavy Industries, were placed on a watch list requiring case-by-case approval for access to Chinese dual-use exports.
The move followed a broader January measure banning dual-use exports to Japan for any end use that could strengthen its military. The two-step escalation — from a sweeping restriction to a calibrated targeting of specific companies — suggests a deliberate, strategic approach rather than a reactive protest.
The proximate trigger was Japanese Prime Minister Sanae Takaichi’s November statement that Japan could help defend Taiwan in the event of a Chinese invasion. For Beijing, Taiwan remains a core sovereignty issue and an explicit red line. Takaichi’s remarks were interpreted as crossing into direct involvement in a potential cross-strait contingency.
China’s response has been multi-layered. Beyond export controls, Beijing has imposed tourism restrictions, tightened seafood import inspections, and canceled cultural exchanges. But it is the supply-chain measures aimed at Japan’s defense-industrial base that represent the most consequential step.
By invoking its Export Control Law and framing the measures as nonproliferation safeguards, Beijing has grounded its actions in domestic legislation that is harder to challenge under international trade law. Unlike earlier quota-based restrictions on rare earths that were struck down by the World Trade Organization in 2014, the current system is couched in national security language that many countries, including the United States, also employ.
If such controls can be applied effectively against a G7 economy like Japan, smaller economies across Southeast Asia have reason to pay attention.
For members of the Association of Southeast Asian Nations (ASEAN), the dispute underscores the fragility of strategic neutrality. Most ASEAN governments have avoided taking positions on Taiwan’s status. Yet several have deepened security cooperation with Washington or Tokyo in recent years.
The Philippines, for instance, has expanded defense ties with both Japan and the United States, including granting greater access to American forces under the Enhanced Defense Cooperation Agreement and exploring new maritime security arrangements with Tokyo. Even modest rhetorical shifts in support of a “free and open Indo-Pacific” could now risk triggering graduated economic pressure.
The message from Beijing appears clear: statements about Taiwan that imply military involvement carry tangible economic costs.
For Southeast Asian policymakers, the challenge is acute. Their economies depend heavily on trade with China, yet many seek to diversify security partnerships amid concerns about maritime assertiveness in the South China Sea. As economic and security domains become more tightly linked, hedging strategies grow more complicated.
At the heart of the dispute lies the rare earth supply chain — an area where China retains overwhelming dominance. China accounts for roughly 70 percent of global rare earth mining and, according to the International Energy Agency, about 94 percent of the world’s sintered permanent magnets. These high-performance magnets are essential components in electric vehicle motors, wind turbines, advanced electronics and precision-guided munitions.
Japan has spent more than 15 years attempting to reduce its reliance on Chinese rare earth supplies, especially after a 2010 incident in which Beijing curtailed exports during a diplomatic standoff. Much of that diversification strategy runs through Southeast Asia.
Vietnam occupies a central position in these efforts. Japanese chemical giant Shin-Etsu Chemical operates rare earth refining and magnet manufacturing facilities in Hai Phong province with a combined capacity of around 2,200 tonnes per year — one of its only sintering facilities outside Japan.
Yet capacity at the site has not expanded since completion in 2018, and it still relies on feedstock that traces back to Chinese-dominated supply chains. Efforts to secure alternative upstream sources have been halting.
Japan’s earlier attempt to develop Vietnam’s Dong Pao rare earth deposit in Lai Chau province — one of the world’s largest — illustrates the fragility of such ventures. Japanese investors withdrew after China drove down global rare earth prices, undermining commercial viability. A 2023 restart effort faltered when the chairman of a local partner company was arrested. As of early 2026, the planned auction of mining concessions had yet to occur.
Japan’s most ambitious alternative — deep-sea mining of rare-earth-rich sediment from the Pacific seabed — remains years from commercial feasibility. A February test retrieved material from depths of 6,000 meters, but scaling up extraction and processing poses enormous technical and environmental hurdles.
The vulnerability of supply chains became starkly visible in April 2025, when China imposed export controls on seven heavy rare earth elements in response to U.S. tariffs. Though the restrictions were global rather than Japan-specific, Japanese automakers felt the impact quickly.
Nissan and Suzuki reported supply disruptions, and Suzuki temporarily suspended production of its Swift model. European prices for certain rare earth products surged to as much as six times domestic Chinese prices, underscoring the asymmetry of leverage.
In October, Beijing introduced extraterritorial provisions requiring Chinese export licenses for foreign-made products containing more than 0.1 percent Chinese-origin rare earths by value. Though these measures were suspended for a year as part of a diplomatic understanding reached in Busan, they were delayed rather than withdrawn. The underlying licensing architecture remains in place.
For Southeast Asian firms, this is a warning. Even if they are not direct parties to the China–Japan dispute, they may find themselves ensnared by rules governing the origin and content of inputs in their products.
Vietnam has sought to position itself as a beneficiary of supply chain realignment. A ban on exports of unprocessed rare earths, effective January 1, 2026, signals Hanoi’s ambition to capture more value domestically by encouraging local refining and magnet production.
Yet this strategy carries risks. China remains deeply embedded in earlier stages of processing and provides key inputs and technical expertise. A Council on Foreign Relations report notes that after mid-2025, China’s exports of finished permanent magnets returned to near-normal levels, while exports of rare earth metals and compounds — the upstream materials Southeast Asian processors need — stayed below historical baselines.
The implication is clear: Beijing is selectively easing pressure downstream while retaining control over raw materials that confer the greatest leverage.
If Vietnam and its neighbors expand processing capacity without securing diversified upstream inputs, they risk becoming dependent intermediaries in a supply chain still anchored in China.
The February measures against Japanese entities also contain extraterritorial clauses. Overseas companies and individuals are explicitly prohibited from transferring Chinese-origin dual-use goods to the 20 blacklisted organizations. Violations could expose third parties to criminal liability under Chinese law.
This creates a chilling effect. A Vietnamese rare earth processor supplying a Mitsubishi subsidiary, or a Thai electronics firm integrated into IHI’s supply chain, may decide that the regulatory risk outweighs the commercial benefit. Such decisions could effectively extend Beijing’s reach into ASEAN economies without direct diplomatic confrontation.
The United States, for its part, has accelerated efforts to build alternative critical minerals networks. Since mid-2025, Washington has signed critical minerals agreements or frameworks with more than 20 countries, including Malaysia, Thailand, Indonesia and Japan.
Participation offers Southeast Asian states economic opportunity and potential investment. But it also increases exposure to geopolitical contestation. Should Beijing reactivate its extraterritorial controls after November 2026, firms embedded in U.S.-aligned supply chains may face renewed scrutiny.
The China–Japan export control dispute shows little sign of easing. With Prime Minister Takaichi’s White House visit scheduled for mid-March, further alignment between Tokyo and Washington on Taiwan contingencies could prompt additional measures.
For ASEAN governments, the central question is whether their economic strategies adequately account for the weaponization of supply chains. Control over critical minerals — once a niche industrial concern — has become a frontline instrument of statecraft.
Diversification, long touted as the solution, is proving more complex than anticipated. Building processing capacity outside China does not automatically eliminate dependence if feedstock, specialized equipment or intellectual property still originate there. Nor does participation in Western-led frameworks guarantee insulation from pressure.
Southeast Asia’s growth model has thrived on openness and integration. Yet as geopolitical rivalry intensifies, integration itself becomes a vulnerability.
The present dispute between Beijing and Tokyo is not merely about bilateral grievances. It is a test case for how far China is willing to use economic tools in response to perceived security threats — and how resilient regional supply chains truly are.
For policymakers from Hanoi to Jakarta to Manila, the lesson may be sobering. In an era where dual-use goods and rare earth elements are instruments of geopolitical leverage, neutrality is harder to maintain, and economic decisions are inseparable from strategic alignment.
