proposal

How to Read China’s Entity List Targeting Japanese Firms: The “New Type of Militarism Japan” Framing and
Aggressive Extraterritorial Application Measures

This article argues that China’s inclusion of Japanese companies on its Entity List be recognized not merely as a sanction against individual firms, but as a substantial transition in China’s foreign economic behavior from “economic coercion”—which clearly violates trade rules—to “extraterritorial application of laws under the national security exceptions” recognized by those rules. Historically, China appears to have pursued a strategy of deliberate ambiguity: imposing its will on Japan through economic coercion that clearly violates the most-favored-nation treatment required by the WTO, while at the same time carefully avoiding an explicit framing of its security relationship with Japan as adversarial and instead seeking to profit from taking an ambiguous attitude. The Entity List move breaks that pattern.

1. Economic Coercion

While it was aware that coercive economic actions could risk violating trade rules, China could have considered them worthwhile risks or necessary costs for pursuing strategic ambiguity. The costs were real. When China restricted rare earthy export to Japan in 2012, the Japanese government filed a complaint with the WTO; Japan’s claims were upheld, and won. China was required to rectify the export restrictions. Japanese companies accelerated diversification of the rare earth supply sources. China’s rare earth export restrictions temporarily lost their effectiveness as a means of intimidation.

Despite these costs, China has employed economic coercive actions, alongside various political issues, to pressure Japan: import restrictions on seafood due to the discharge of ALPS-treated water; sundry restrictions on Japan-bound tourism from China and Chinese students’ stay in Japan, Japan-bound flights from China, and Japan-originated entertainment in the wake of Prime Minister Takaichi’s statement regarding a Taiwan contingency (2025); and the implementation of export controls on rare earth elements from January 2026. In February 2026, the Chinese government added 20 Japanese companies and universities to its Entity List and another 20 to its Watch List.

When the United States officially announced the deployment of THAAD in South Korea to counter the missile threat from North Korea, China reacted strongly and resorted to economic coercion. The Chinese government restricted Chinese citizens’ group tours to South Korea; in response to Lotte Shopping Co., Ltd.’s providing land for the THAAD deployment, it ordered the suspension of operations at Lotte Mart stores in many of China on the grounds of fire and safety inspections; it also imposed restrictions on South Korean contents and tightened related inspection and licensing requirements. The Chinese government’s restrictions on the import and export of such services violate the most-favored-nation treatment principle, which prohibits discrimination against other countries, and the imposition of stricter inspection and licensing requirements on companies from specific countries constitutes a violation of the SPSS Agreement. Nonetheless, South Korea did not file a complaint with the WTO.

Australia faced similar treatment after its government called for an international investigation into COVID-19’s origin, suspected it flowed out from a Chinese laboratory. High tariffs on barley and wine imports under anti-dumping and countervailing duties; informal import bans on and delaying customs clearance for timber, coal, cotton, and lobster imports are the answer from China. Australia filed a complaint with the WTO alleging that China’s import restrictions on barley (dispute number: DS598) and wine (DS602) were in violation of WTO rules. In 2023, with the aim of improving relations with Australia and accession to the CPTPP, China lifted the restrictions, and Australia withdrew its complaint Lithuania, which in 2021 approved the establishment of a Taiwanese representative office in the capital, Vilnius, dubbed “Taiwan Representative Office.” China deliberately delayed customs clearance of Lithuanian products and banned imports of alcohol, beef, dairy products, timber, and peat from Lithuania. The EU point out those Chinese actions led to an 80% drop in Lithuania’s trade with China in 2022. The European Commission filed a complaint with the WTO regarding these actions (DS610).

China continues to leverage its market dominance—as a supplier and importer—by linking it to political issues. At present, China rarely exerts economic coercion on the United States, a superpower and an apparent military opponent; its targets include middle powers such as the EU, Japan, Australia, South Korea, ASEAN, and neighboring countries. This clearly violates the WTO principle that all member states must be granted most-favored-nation treatment on an equal footing, unless an exception is granted on security grounds. In cases where a final ruling has been issued following a complaint filed with the WTO, the complainant’s claims have generally been upheld.

The author’s interpretation is that this is because China has sought to avoid creating clear lines of conflict in the realm of security by taking risks in the realm of trade rules. However, China’s inclusion of Japanese companies on its Entity List clearly shows that it is giving its security concerns a shape of institutionalized legal measures. This move could change the very nature of Japan-China relations.

2. Extraterritorial Application of Laws: Legalization of External Sanctions

This shift did not emerge accidentally. Since around 2021, Chinese government quietly made preparation of a legal toolkit for the “extraterritorial application of laws”, although it appeared as China’s response to the Japanese government’s statement on contingencies in Taiwan and its moves to lift the ban on arms exports.

The extraterritorial sanction regimes, which applies a country’s legal system outside its territory when another country takes actions that threaten its national security, long operated by the United States and Europe.

Such regimes are, in principle, in line with current WTO rules. The WTO permits security exceptions; what I prohibits is discriminatory treatment of trading partners without a recognized security justification.. Building a domestic legal architecture that formally designates security threats and attaches trade consequences to them is a different matter from ad hoc coercive measures applied informally. There may be room for debate as to whether the extraterritorial application of laws enacted by each country is compatible with WTO rules, but this point has not been contested until now.

China put this extraterritorial application of laws on the agenda of the 14th Five-Year Plan. In 2021, the inaugural year of this five-year plan, China applied to join the CPTPP. At the same time, it began building a legal toolbox to counter foreign sanctions, interference, and the extraterritorial application of foreign laws. Economic coercion often collides with the WTO’s most-favored-nation principle, but the extraterritorial application of laws under the national security exceptions is structured as a less contestable legal framework modeled on US and European extraterritorial enforcement regimes.

The legal toolkit consists of multiple instruments: 1) the Export Control Law, which formed the basis for the recent inclusion of Japanese firms on the Entity List; 2) the Unreliable Entity List Regulations; 3) the Rules on Blocking the Unjustified Extraterritorial Application of Foreign Legislation and Measures; 4) the Anti-Foreign Sanctions Law; 5) the Regulations on Export Control of Dual-Use Items, and 6) the Regulations on Countering Foreign States’ Unlawful Extraterritorial Jurisdiction.

These instruments enable the Chinese government to add specific importers and end-users on the export control list on the grounds of threats to national security and interests. In addition, Japanese the Watch List.

The consequence of this toolkit and growing legalization of China’s external behavior are already visible in 2025. A Swiss company became subject to US sanctions against China then terminated the transaction with a Chinese company. Despite the contract specifying a settlement process, China issued a judicial ruling that affects the contractual arbitration clause, citing its Anti-Foreign Sanctions Law. China issued an anti-suit injunction, demanding that priority be given to the ruling of the Chinese court where the lawsuit was first filed. The EU challenged this action by filing a lawsuit, and the EU’s argument was ultimately upheld.

In May 2026, China invoked the Regulations on Countering Foreign States’ Unlawful Extraterritorial Jurisdiction to declare it “unlawful extraterritorial jurisdiction.” This is a response against EU’s Foreign Subsidies Regulation. The aim is to rectify the unfair competitive advantage accorded to enterprises receiving subsidies in China in terms of corporate acquisitions and public procurement within EU member states.

This shows that economic friction has moved beyond traditional tariff and non-tariff measures, shifting toward an exchange of retaliatory measures through the extraterritorial application of domestic laws. Given this series of trends, China’s listing Japanese companies on the Entity List in February 2026 should not be viewed as a temporary political reaction but as part of China’s efforts to embed its concept of national security into trade relations.

3. From Ambiguous and Asymmetrical Japan-China Economic Friction to Distinct Security Exceptions

The asymmetry of prior Japan-China trade frictions is instructive. Japan has initiated three WTO cases against China — on rare earth export restrictions (DS433), anti-dumping duties on high-performance stainless steel pipes (DS454), and anti-dumping duties on stainless steel products (DS601). China, by contrast, has filed no formal WTO complaint against Japan. Beijing preferred the fog of informal pressure to the clarity of legal adjudication.

In contrast, there are no cases in which China formally filed a complaint against Japan at the WTO. In short, the pattern of bilateral disputes to date has been that Japan challenged China’s measures under WTO rules, while China, rather than filing a complaint with the WTO, resorted to economic pressure—a tactic that intentionally left room for ambiguity. To date, there have been several cases of most-favored-nation treatment violations by China, such as import restrictions on Japanese fishery products and restrictions on Japanese contents. But Japan has maintained a passive stance or failed to address all of them.

The recent changes on the Chinese side suggest that China’s approach is shifting its center of gravity away from economic coercion―committing a deliberate violation of rules to maintain security ambiguity―to extraterritorial application measures under the national security exceptions recognized by the WTO framework. If China continues to engage in economic coercion, Japan will retain the option to challenge this as a violation of WTO rules and may also lodge a complaint regarding a breach of most-favored-nation treatment. However, if China were to take security measures such as adding Japanese companies to its Entity List, it would be far more difficult for Japan to file a complaint with the WTO. The WTO’s security exceptions are not unlimited; yet, the Regional Comprehensive Economic Partnership (RCEP), among other regional agreements, allows a broader scope for self-interpretation of security exceptions. It will matter which rule framework to contend with.

4. Japan’s Options

Japan now faces a more complex environment, and one that may paradoxically offer new legal openings alongside new constraints.

Where China continues to apply economic coercion — the kind of MFN-violating informal pressure that dominated the relationship until recently — Japan’s legal position is actually stronger now. China’s public designation of certain Japanese actors as security threats clarifies the line between targeted security measures and discriminatory economic pressure applied to everyone else. That clarity makes coercive measures legally more vulnerable, and Japan has stronger grounds to bring WTO cases challenging them.

The Entity List itself presents a different challenge. Measures framed as security exceptions are much harder to contest at the WTO. Here, a coordinated response combining trade law, economic security policy, and diplomacy is likely necessary. Japan will also need to watch whether China expands, maintains, or eventually narrows the scope of Entity List designations — the latter being a potential tool for diplomatic signaling in both directions.

Remaining passive, as Japan has often done in the past when facing Chinese economic pressure, carries its own risks. Failing to invoke available legal mechanisms against outright coercion forfeits norm-setting leverage and may signal to Beijing that extraterritorial application of laws can work for her.

This article has argued that China’s placement of Japanese firms on its Entity List must be understood not as a discrete act of retaliation, but as part of a structural transformation in Chinese economic statecraft. China is simultaneously securitizing its foreign economic policy and legalizing it — embedding security rationales into formal domestic law in ways that, while harder to challenge under existing international trade rules, are also more legible and more predictable than the opaque coercion that preceded them.

For Japan, the essential analytical task is to distinguish between economic coercion (challengeable under trade rules) and security-exception-based extraterritorial measures (requiring a different toolkit). Meeting that challenge will require not only the active use of WTO and FTA dispute mechanisms, but deliberate engagement with like-minded partners in redesigning international trade rules for the era of economic security.

References

Mariko Watanabe, Tomoki Kamo, Fujio Kawashima, and Takeshi Kawase (2021), “An Analysis of the Background to China’s Expression of Intent to Join the CPTPP,” RIETI Policy Discussion Paper Series 21-P-016.

Mariko Watanabe (2026), “The ‘Legalization’ of China’s Economic Sanctions Against Japan,” Gaiko (Diplomacy), Vol. 97.

(Mariko Watanabe, Professor, Gakushuin University)

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