The US-China Rivalry and Economic Security

Yuzo Murayama

1. Introduction: What is Economic Security?

Economic security is an area where, conceptually, the economy and security overlap (See Figure 1). The shaded part in the diagram illustrates the area of economic security. It is an area where one can explore the security-related role of the economy in today's context of the economy and security. If defined narrowly, civilian technology applicable to military use or dual-use technology is covered by economic security.

Fig. 1 Conceptual Diagram of Economic Security
Source: the author

For example, semiconductors for civilian use are employed in automobiles, home appliances, game consoles, etc. However, since semiconductors are essential for the development of military technology, there is a necessity from a security perspective to monitor the technological development and supply chains of civilian-use semiconductors. If defined broadly, economic security can encompass the issues of how to secure energy essential for the economy (energy security) and how to secure food necessary for livelihood (food security).

Thus, economic security is an inherently ambiguous concept because it is open to a broad range of interpretations. Additionally, the meaning of economic security changes depending on the international environment. This fact adds to the complexities surrounding economic security. As will be explained later, economic security policies vary in an international environment where globalization progresses and where US-China rivalry is intensifying. Consequently, discussion on and analyses of economic security must be preceded by a clarification of the context in which economic security is discussed. I intend this paper to focus on the relationship between the economy and security on the question of technology in the context of the US-China confrontation.

2. Background Leading up to the US-China Confrontation

(1) Emergence of the concept of economic security and response to China

In the 1980s marked by Japan's growing technological competitiveness, the idea of economic security emerged in the United States, concurrently with the increasing use of Japanese high-tech products, particularly semiconductors, in US-made weapons. The prevalent logic was that the United States should avoid dependence on foreign suppliers for civilian-use components and products convertible to military use and should establish a technological basis for those products at home because dependence on foreign-made components would lead to the country's security vulnerability. With the background of such changes in perception, US-Japan frictions erupted involving the economy and security, which were conducive to the blocking of acquisitions of US companies by Japanese semiconductor manufacturers and the controversial joint development of the FSX fighter.

However, the sense of threat from Japan rapidly subsided as the Japanese economy lost momentum in the late 1990s. China replaced Japan as the rising economic power in Asia. From this period, the United States began to be wary of China. In 1998, the US Congress launched the Select Committee on US National Security and Military/Commercial Concerns with the People's Republic of China (the Cox Committee) to conduct a detailed investigation into the outflow of military technology to China. The Cox Committee report points out that in the 1980's China stole classified information on nuclear warheads, missile guidance and propulsion systems, and neutron bombs. The United States became increasingly wary of China on the issue of technology toward the late 1990s. In 2000, the US Congress established the US-China Economic and Security Review Commission to begin monitoring and investigating the impact on US security of expanding economic interdependence with China. The Bush administration continued this policy from the Clinton administration, tightening export controls in 2007 to strengthen measures for preventing the outflow of dual-use technology that would help improve China's military capabilities. In the same year, the US Congress also passed the Foreign Investment and National Security Act (FINSA) to tighten restrictions on foreign investment.

(2) The Trump administration and the changed perception of economic interdependence

Unlike the preceding administrations, the Obama administration took no particular action to prevent the further outflow of technology to China. Aiming to build a "strategic trust relationship" with China, the Obama administration refrained from taking hardline measures to safeguard US technology. It entertained expectations that by integrating the country into the accelerating economic globalization, China would be transformed into a country that abides by international rules and acts as a responsible member of the international community. However, China showed no signs of changing in this direction; on the contrary, it became active in propagating its authoritarian policies abroad. Nonetheless, the Obama administration resorted to no strong technology safeguard measures against China, and as a result, the United States and China spent a "quiet eight years."

With the advent of the Trump administration came significant changes, as heralded by the National Security Strategy of 2017 and Vice President Pence's 2018 Hudson Institute speech. The Trump administration positioned China as a nation that seeks to create a world that opposes US values and interests. It also harshly criticized China for such behaviors as intellectual property infringement, technology theft, rapid military buildup, efforts to expand influence, mass surveillance, and religious oppression. The Trump administration's policies mirrored those changes in political stance. On the technology policy front, the administration strengthened research and development of key technologies; in 2018, it enacted the National Defense Authorization Act 2019, thereby instituting measures to strengthen export controls and foreign investment restrictions to prevent the outflow of technology to China. Among other measures implemented by the Trump administration were the placing of Huawei and ZTE on the export control entity list to restrict transactions with these Chinese telecom companies and the widening of the scope of the restriction to include companies involved in Chinese state projects and those responsible for human rights abuses.

Changes in the basic US stance toward China under the Trump administration should be understood from the perspective of economic security. In the globalized international environment in the pre-Trump era, it was argued that deepening economic interdependence would reduce the likelihood of war. The mainstream view was that the cross-border movement of people, goods, money, and information would allow for cross-border storage of these economic resources and that if these resources were destroyed in war, non-belligerent countries also would suffer enormous damage. In other words, economic interdependence was considered to make war costly.

However, with the inauguration of the Trump administration, this argument shifted to one where economic dependence on other countries, hostile countries, in particular, would make the security of a country vulnerable. The technological implications of this "question of dependence" are: 1) dependence on foreign countries for critical emergency goods will risk disruptions in supply in an emergency, 2) increasing dependence on other countries for research and development will lead to a loss of future technological superiority, and 3) dependence on other countries for data will lead to problems related to, among others, human rights. It is necessary to recognize that such a major shift has occurred in US technology policy toward China.

(3) China's technology-based economic security policy

The core of China's technology-related economic security policy is the military-civil fusion strategy, whose roots are traceable to the 1950s. For example, the idea of military-civilian dual-use technology developed in the "Long-term Plan for the Development of Science and Technology for 1956-1967," which positioned jet propulsion, computers, nuclear development, and electronics as technologies essential for both the national economy and national defense. The military-civil fusion strategy was put to practical test during the period of military-civilian conversion from the late 1970s to the early 1980s when accumulated military technology was called upon to develop and produce civilian products. The Chinese-style military-civilian conversion encouraged not only the production of civilian products by converting military technology but also the transplanting of developed civilian technology to the military field. In other words, it was China's military-civilian conversion to lower barriers between the military and civilian sectors and to allow technology to move freely in between.

During the late 1990s, China's military-civil fusion started in full swing. In the lead-up to the decision, the country studied the military-civilian integration that evolved in the 1990s United States. China introduced it in a copy and paste manner. For example, as measures for restoring the military industry, the Chinese government encouraged utilizing civilian technologies for military purposes, alongside selective concentration of investment in critical fields and importing advanced technologies from overseas.

In the 2000s, this trend accelerated; under the policy of "civilian participation in the defense industries," China introduced the four military industry permits and began to actively transfer technologies owned by companies and universities to the military field. In addition, in 2008, the Chinese government launched the "Thousand Talent Plan" to recruit talented R&D personnel from overseas. Furthermore, in 2016, the "Military-Civil Fusion Development Strategy" was officially adopted as a national strategy.

(4) US-China technological hegemony competition

The United States became seriously alarmed by China's "Military-Civil Fusion Development Strategy." Americans feared that the combination of this policy with "Made in China 2025," which aims to strengthen China's competitiveness in such fields as next-generation information and communications technology, robotics, new materials, and biomedicine to take the lead in the world, would enable China to gain the world's top-level competitiveness in military technology.

Many estimate that emerging technologies such as AI, quantum technology, robotics, and drones will redraw the global technological map in the future. They will drive the fourth industrial revolution. Since they are applicable for military and civilian uses, it is unacceptable for the United States to lose in the competition with China over these technologies. Against this background, a fierce US-China competition for technological supremacy has begun in a way that removes barriers separating the economy and security.

3. Characteristics of the US-China Technological Rivalry

This section will examine the characteristics of the US-China technological rivalry by comparing it with the technology friction between Japan and the United States that arose in the 1980s. Those characteristics can be summarized under the following four heads.

(1) Collapse of barriers separating the economy and security

In the latter half of the 1980s, there was harsh technology friction between Japan and the United States over semiconductors and other advanced technologies. Nonetheless, they were disputes between two allies. Some on the US side argued that the economy and security issues should be addressed together. But such an argument did not dominate the bilateral negotiations, which separated the economy and security issues. The US side considered that bracketing issues of different natures together --- competitive economic issues and cooperative security issues --- would hurt the bilateral alliance. The Japanese side was under the impression that the United States was treating together economic and security issues. Basically, the US government separated them in negotiations with Japan.

In the US-China confrontation, on the other hand, due to the US policy of military-civilian integration and China's military-civil fusion strategy, barriers separating the economy and security are much lower compared to the case of US-Japan friction. As a result, economic competition between the United States and China frequently turns into a security issue. In the current situation that the two superpowers are competing for supremacy, a restraining mechanism is missing that is comparable to the US-Japan alliance.

(2) Increasing dual-use technologies

In the case of the US-Japan technology friction, as mentioned earlier, the parties concerned attempted to distinguish economic issues from security issues as much as possible. Friction over highly dual-use technologies, such as semiconductors, became more complicated than, for example, automobile friction, because those technologies are related to economic security. Nonetheless, highly dual-use technologies were used in a limited number of sectors.

The US-China technology friction differs from that between the United States and Japan in that the number of highly dual-use technological fields is sharply increasing. This is because rapidly developing emerging technologies such as AI, quantum technology, and robotics have become the main battlegrounds for technological hegemony between the United States and China. As mentioned earlier, these emerging technologies are unexceptionally highly dual-use technologies, and undoubtedly, security technology capabilities depend more on the results of economic competition. Under the situation that the United States and China lower barriers separating the economy from security, competition has begun over emerging highly dual-use technologies that will determine the fate of the next generation. This competition between the two superpowers over technology-based economic security is incomparably more intense than the 1980s US-Japan competition and is different from the latter in the sense that the US-China competition is bound to have profound impacts on international relations.

(3) Globalization of supply chains

Between the late 1980s and today, the globalization of the economy has made significant progress. The supply chain of a single product involves many manufacturers of different nationalities; the nationality of the product becomes more and more ambiguous. In the US-Japan friction, the parties concerned had only to negotiate about a particular product. Meanwhile, the US-China friction is structurally bound to affect many other countries.

As for the Huawei case, for example, the United States imposed sanctions on Huawei by adding the company to its export control entity list. The US government noted that if the United States alone banned transactions with Huawei, sanctions would not be effective if other countries continued to supply Huawei with technology and components. Therefore, in order to urge companies in Huawei's supply chain to follow suit, the US government used a combination of entity listing and reexport regulations (regulations enjoin exporters to obtain permission from US export control authorities when they export to third countries products and components that contain US-made parts) to make its sanctions effective. Thus, due to the globalization of supply chains, US-China bilateral issues have come to affect other countries, and the bilateral technology friction has become increasingly intricate.

(4) Different polities and economic systems

When considering the US-China confrontation, we should keep in mind that the United States and China have historically different origins. The United States was founded by immigrants who left the European continent in quest of freedom, and its founding philosophy emphasizes "individual freedom." This is manifest in the US Constitution, which states in its preamble, "We the People of the United States, in Order to ... secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America." Based on this constitution, various laws are instituted and economic activities are conducted in accordance with these legal frameworks.

On the other hand, Communist China was born through a socialist revolution. The Constitution of the People's Republic of China states, "The leadership of the Communist Party of China is the defining feature of socialism with Chinese characteristics." The Chinese economy operates based on legal frameworks instituted under the leadership of the CPC. A conspicuous difference between the US and Chinese economic systems can be found in the field of data utilization. In the United States, where individual freedom is emphasized, the privacy of data possessed by individuals is considered important, whereas, in China, where the leadership of the Communist Party is supreme, it is taken for granted that the government may confiscate data possessed by individuals.

During the era of the US-Japan friction, Americans developed the theory of Japan as a heterogeneous nation, focusing on Japan's national traits that are different from theirs. It is an argument that Japan shares capitalist values with the United States but is otherwise alien. The case is poles apart from the current US-China confrontation based on completely different ideological systems.

The above analyses of US-China relations illustrate that the root causes of the US-China rivalry are more profound than those of the US-Japan friction; that it faces many issues hard to resolve. For this reason, Japan must consider its economic security policy on the assumption that the current US-China confrontation will be prolonged, and that, in some cases, tensions will considerably increase.

4. Conclusion: Implications for Japan's Economic Security Policy

Economic security is currently attracting a great deal of attention in Japan. This year's ordinary Diet session will debate new legislation on economic security: 1) the strengthening of supply chains; 2) preliminary review of critical infrastructure needs; 3) public-private cooperation in advanced technologies, and 4) non-disclosure of patents. Among the reasons why these four measures have become the focus of the legislation include the shortage of medical products amid the COVID-19 outbreak and production cutbacks in the automobile and home appliance industries caused by semiconductor supply problems, in addition to the US-China confrontation. Consequently, the individual bills to be debated will deal with topics that are not necessarily related directly to military security, though they make up the economic security legislation package.

As mentioned at the outset, economic security is an ambiguous concept that allows a broad range of interpretations. For example, the LDP's "Recommendations Toward Developing Japan's 'Economic Security Strategy'" (2020) defines economic security as ensuring "Japan's independence, survival, and prosperity from an economic perspective." Yet, it is economic and industrial policies, not economic security policies, that ensure prosperity from an economic perspective. Thus, there is a tendency to extend economic security policies to include economic and industrial policies. Business circles tend to understand economic security as "the overall risks posed by non-economic factors to Japanese companies." If the debate evolves in this direction, the concept of economic security will become more equivocal, and its essence unintelligible.

Prime Minister Kishida has announced that he will revise the current National Security Strategy within a year and incorporate economic security in the new Strategy. To that end, the Kishida administration should focus clearly on the fields where Japan's military security and the economy overlap. One of these is the area of dual-use technologies discussed above ("2. Background Leading up to the US-China Confrontation"), which is the main battleground of the US-China confrontation. Japan should earnestly consider how to deal with dual-use technologies. Amid the US-China confrontation, Japan should contemplate how to utilize its competitive technologies for security and how to enhance its international status and presence.

* This paper includes part of the content written by the author in the "Analysis" section of "Japan's Course in the Era of High-Tech Hegemony: Securing ‘Strategic Indispensability' and Becoming a Free and Open First-Class Nation" published by the PHP Geo-Technology Strategy Study Group.

(Professor, Doshisya University)

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