The Liberal Democratic Party’s Recommendations on Economic Security

The idea of economic security that the Kishida administration highlights is based arguably on the Liberal Democratic Party’s (LDP’s) recommendations released in December 2020Footnote 1 and May 2021.Footnote 2 Those recommendations define economic security as ensuring “Japan’s national interests … with economic measures.” They propose to enhance Japan’s “strategic autonomy” necessary for the country to protect its key industries and infrastructure from other countries’ export bans, or supply chain disruptions, and to reinforce Japan’s “strategic indispensability” to make the country integral to the global chain, thereby neutralizing efforts to disrupt trade with Japan. It is undeniable, however, that these recommendations look somewhat abstract.Footnote 3

How much cost is the Kishida administration ready to incur to achieve “strategic autonomy” and to what extent will it make Japan’s “strategic autonomy” compatible with free trade principles? Under the pretext of security, the Trump administration neglected free trade principles, imposing additional tariffs on steel and aluminum imports. The Biden administration follows suit. Yet, should Japan also downplay free trade principles?

The LDP recommendations focus principally on “defensive” measures, neglecting “offensive” ones. The enhancement of supply chain resilience and the reinforcement of critical infrastructures are proposed not only to protect the people’s livelihoods and the national economy from economic pressures from foreign countries but also to avoid coming under economic pressures from other countries, thereby maintaining political independence as a nation. Undoubtedly, such “defensive” measures are significant, but these alone would be an economic “self-defense” and would not lead to a strategy of utilizing Japan’s economic strength as power.

Japan's economic security promotion bill now in preparation also features this “defensive” stance. But there is another problem associated with such a stance: the government's increasing tendency to regulate corporate activities with penalties for technology leakage or the violation of relevant laws and regulations. Economic security means that the government has the authority to intervene in free business activities in the market. To this end, the government institutes penalties. Corporations, sensitive to such penalties, do not want to have their activities restrained due to increased compliance costs in order to comply with economic security promotion laws.

Supply Chain Imperatives

Among the measures in the economic security bill, high on the agenda are measures to boost the resilience of the supply chain. This is an issue that has received much attention of late, not only in Japan but around the world. U.S. President Joe Biden ordered a review of America’s supply chains in February 2021,Footnote 4 and the European Parliament is deliberating measures to strengthen Europe’s supply chain resilience.Footnote 5 A key factor driving these efforts is China’s pivotal place in the global supply chains that have sprung up as a result of trade liberalization and market integration. The United States and China have become deeply interdependent economically, even as tensions have mounted over such flashpoints as China’s authoritarian one-party rule, human rights violations, and military expansion. In the event that such tensions escalated into a serious clash, the United States and Japan would both be vulnerable to Chinese economic coercion in the form of sanctions and embargoes. Beijing has already demonstrated its willingness to use trade as a weapon against countries that provoke its ire, as seen in its ban on Taiwanese pineapple imports and its imposition of a wide range of punitive sanctions against Australia (including a ban on coal imports) after Prime Minister Scott Morrison called for a full-scale international investigation into the origins of the COVID-19 pandemic.Footnote 6

With such security considerations in mind, policymakers have been looking at ways to reduce Japan’s dependence on China, by, for example, diversifying our supply sources for key materials and products and augmenting our stockpiles of strategic supplies. It remains to be seen how the cabinet’s economic security legislation will tackle these challenges, but the first step will doubtless be a thorough review of the nation’s supply chains to assess our degree of dependence on Chinese suppliers.

Distinction Between Economic Security and Economic Statecraft

Alongside economic security with the three meanings mentioned above, there is another concept called “economic statecraft.” Although economic security and economic statecraft are often confused, they should be distinguished from each other.

Economic statecraft means that a certain country “enforces upon other countries its own political will and values employing economic measures”—it overlaps with “economic coercion” in many ways with no distinct difference.Footnote 7 The condition for implementing economic statecraft is that a state has a “strategic indispensability” that gives it an advantage over other states. The state in question uses that advantage as leverage to enforce its political will and values on others. The “Global Magnitsky Act,” which enforces standards of protecting human rights onto other countries, and economic sanctions against Iran and North Korea’s nuclear development are both forms of economic statecraft.

In some cases, economic statecraft may be categorized as an “offensive” form of economic security. But fundamentally it should be considered to be different from economic security. A country uses economic statecraft to enforce upon a target country its political will and values by leveraging its economic superiority. The user of economic statecraft sets political objectives such as “improving the human rights situation in other countries” and uses its competitive industries and products as a means to achieve these goals. Once the country resorts to economic statecraft, trade with the target country will cease, resulting in economic losses. Other countries, fearing the possibility of future economic statecraft against them, will enhance their autonomy and reduce economic dependence or make their markets less open. This will damage the economic statecraft enforcer’s international competitiveness and deprive it of business opportunities.

For example, the United States is restricting semiconductor transactions with China, calling on its allies to cooperate on semiconductor sanctions against China. The purpose of this move is to delay China’s military and economic rise by making unavailable to the country semiconductors manufactured with advanced microfabrication technology while protecting technologies in which the United States and Western countries excel. As a result, however, semiconductor manufacturers cannot sell their most advanced semiconductors to the Chinese market, where demand for semiconductors rises. However, out of some consideration for the semiconductor business, semiconductors that are not cutting-edge products or are older generation products with wider line widths can be traded to China as general-purpose products.Footnote 8

It should also be noted that economic statecraft is often described as “weaponization of interdependence,”Footnote 9 “weaponization of trade,”Footnote 10 or “war without weapons.”Footnote 11 But its effects are different from those of military statecraft. As is manifest from sanctions against North Korea’s nuclear and missile development, if economic statecraft fails to be effective on the target country—North Korea still pursues its nuclear development despite sanctions without changing its behavior—the enforcers of economic statecraft will lose much by the very act of launching economic statecraft. In preparation for the possible use of economic statecraft by others, any country must question its political readiness and evaluate the risk and how much damage may stem from economic statecraft.

Economic Security in the Free Trade Regime

Economic security has a marked “defensive” inclination and looks, therefore, like a protectionist measure. Suppose that a certain country excludes products produced in a foreign country to protect its critical infrastructures. This act may infringe “nondiscrimination principles” for free trade. The strengthening of supply chain resilience may also contravene the provision of state aid that bans governments from providing subsidies to reinforce their industry with low competitiveness. It may well happen that a certain country’s supply chains are fragile. But there are reasons why they are so. If it is more efficient to produce necessary products in other countries than at home, it makes economic sense to import those products rather than to procure home products. State aid is allowed in cases of so-called “positive externalities,” i.e., the realization of social values that could materialize if left to the market, such as the research and development of new technologies and environmental protection. In some cases, security is also recognized as a “positive externality.” These are “security exceptions,” which, under the World Trade Organization (WTO) regime, are specified in General Agreement on Tariffs and Trade (GATT) Article 21, but such exceptions are applicable only in limited cases.

It is true that “security exceptions” stipulated by the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) are subject to a broad range of interpretations; there is room for a state to arbitrarily decide what corresponds to security. On the other hand, the WTO security exception rules are extremely limiting; any infringement of their provisions is highly likely to be judged to not be in conformity with those rules by the WTO dispute settlement mechanism.

Meanwhile, the WTO is not fully functioning, partly because its Appellate Body members are not appointed due to U.S. opposition. Therefore, even if, for example, a member country’s economic and security measures violate the WTO rules, no WTO mechanism is functional to identify and punish it. As a result, some countries including the United States consider that there is more legitimacy in strengthening their economic security and developing industrial policies in a way that protects their industry than in respecting the free trade regime and acting according to its rules. Likewise, as far as critical infrastructures are concerned, some member countries have come to consider it rational to exclude products manufactured in a particular country to prioritize their economic and social stability, rather than to emphasize the WTO’s non-discrimination principles—even if such an exclusionist measure is discriminatory.

GATT Article 21 was written shortly after World War II and has rarely been questioned in association with the postwar order. During the Cold War, the free trade system developed mainly in the West due to the extreme scarcity of economic exchanges between the East and West. With the end of the Cold War, China’s reform and opening-up efforts integrated the country into the international economy. In addition, its accession to the WTO in 2001 changed the situation dramatically. During the post-WWII and Cold War eras, there was no conflict between security issues and free trade issues because free trade was promoted by Western nations that shared identical security interests and values. When China joined the WTO, expectations were high that China would share the same interests and values as the Western nations and respect the interests and values of the liberal regime. In reality, however, China enjoyed economic benefits from the free trade system but rejected its values and remained within the free trade system, adhering to different values and ideologies. In addition, China’s economic growth has helped raise its military power, which has emerged as a security concern. With these developments in the background, security issues came to the fore for the first time in the free trade block. (In the past, Russia and UkraineFootnote 12 in one case and Saudi Arabia and QatarFootnote 13 in another case filed a suit with the WTO over the application of security exceptions. But the WTO has so far not awarded a definitive ruling in either case.)

Conclusion

The term “economic security” is employed in various ways in Japan; the United States and Japan are at variance over how to define it. Different meanings given by so many parties could confuse the concept and lead to losing sight of the destination of the policy. To remove conceptual confusion and to promote helpful discussions, we should precisely exhibit our views on economic security when discussing it.

Economic security entails a wide gamut of meanings depending on the context it is used in. Yet, no matter how it is used, the contradiction that the concept harbors with the free trade system is apparent. Japan, which has rebuilt the Trans-Pacific Partnership (TPP) after the U.S. withdrawal and established the RCEP inclusive of China and South Korea, is now the leader of the free trade system and is in a position to lead the “rules-based international order.” The proposed economic security bill pays great attention to the balance between economic security and free trade. It limits the implementation of the law to a much narrower area of industry: supply chain resilience should be limited to “strategically critical goods” and the protection of critical infrastructure should be limited to the “command and control systems.” The rest of goods and services are to remain the subject of free trade. However, the definition of “strategically critical goods” is still arbitrary and opaque. Whether the contradiction between economic security and free trade can be solved or not remains to be seen in the implementation of the law.