Japan is facing economic and diplomatic retaliation from China after Japan's new prime minister, Sanae Takaichi, suggested her country could respond militarily if China attacked Taiwan. China's government told its citizens not to travel to Japan, Japanese movies have been pulled from theaters, and Japanese media reported China was preparing to ban Japanese seafood.

Only a few weeks ago, Japan and China had been warming up to each other, when Takaichi and Chinese President Xi Jinping met at a forum and agreed to cooperate more.

Mary Lovely, senior fellow at the Peterson Institute for International Economics, recently joined “Marketplace Morning Report” host Sabri Ben-Achour to help unpack what this might mean for Japan and the U.S.  

Sabri Ben-Achour: So, Japan said it could get involved militarily over Taiwan and followed up to say that this is just a continuation of old policy. China's response has been furious. There's been travel warnings. Japanese films have been pulled out of theaters, and, of course, this possible seafood ban. How much economic leverage does China have over Japan?

Mary Lovely: It's a very important partner, let's put it that way. There's a lot of trade that goes back and forth. I think it's hitting on things that are more warning shots, on the films, on tourism. There are other ways that they could hurt the Japanese economy more severely. So I think this is a very vocal protest. It will have some economic ramifications, but it's not clear how long any of this will last and how intense the response by Chinese citizens will be to these

Ben-Achour: The U.S. has not hesitated to use its economic power to achieve its various goals. Is China using its economic powers of coercion more in recent years in response?

Lovely: China has definitely, I think, taken a page from the U.S. book. I think this particularly changed this year in Chinese and U.S. negotiations over the Liberation Day tariffs, where the Chinese clearly wanted export controls on the table as one of the bargaining items. The U.S. said, “No, those are national security. They're off the table." But, as we all know now, they went back on the table when China decided to strengthen export controls on its rare earth exports.

Ben-Achour: You mentioned, or it seems to be implying that China could be responding economically in a much harsher fashion. As furious as it is, it's a little bit restrained. What could China do that would be more serious?

Lovely: Well, it can withhold critical exports to Japan. It could crack down on Japanese firms operating in Japan. It could refuse to buy Japanese exports. So I think there's a lot of things here that might have a that would have a higher price tag in terms of the damage that they would cause to the Japanese economy.

Ben-Achour: Does this episode change anything about the U.S.-China relationship?

Lovely: So I don't think that this particular episode is anything that's sort of not within the behavior that we've seen in the past. We've seen a much more defiant China in its relationship with the United States, and, of course, that has a chilling effect on other countries who see that China is now willing to stand up to the United States. You know, what would they do to my small country?