Economic Security in the Free Trade Regime

Kazuto Suzuki

The Liberal Democratic Party's Recommendations on Economic Security

The idea of economic security that the Kishida administration highlights is based arguably on the LDP's recommendations released in December 2020 and May 2021. 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 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 they look somewhat abstract.

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?

In association with "strategic indispensability," concerns are shared that even if, for example, some corporation succeeds in becoming a unique enterprise in world business, it might be left at the mercy of some political ulterior motives. In 2019 the Japanese government imposed restrictions on exports to South Korea of three chemicals (hydrogen fluoride, polyimide fluoride, and photoresist) indispensable for semiconductor manufacture. That measure, however, only angered South Korea; the restrictions did not lead to the solution of the war-time forced labor issue that was at the root cause of the controversial export control measure. Governmental meddling in private business from political motives is questionable in its ethical validity. Also, it is uncertain whether the export control in question has global leverage because it would not work against countries that do not produce semiconductors.

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 to comply with economic security promotion laws.

The Three Meanings of Economic Security

Economic security has three meanings; many confuse them and discuss economic security without making a distinction between them, which leads to conceptual confusion. One of those three meanings is "security of supply," that is, the security of supply chains. In a situation where a particular product is dependent on a particular country (especially China), the particular country may use that economic dependence as leverage to exert pressure. In order to deal with such a situation, it is imperative to review supply chains in normal times and clarify the degree of dependence on other countries. President Biden issued Executive Order 14017 immediately after taking office and ordered a review of supply chains; in June 2021, a report was released on semiconductors, pharmaceuticals, storage batteries, and rare earth minerals. The Biden administration is acutely aware of the risk of dependence on other countries for the supply of goods mentioned above.

The second meaning is "security through non-proliferation of technology." It falls into the category of traditional "security trade control" to avoid a situation where the lives and property of citizens are jeopardized by an adversary country's military capabilities enhanced by the proliferation of technologies through trade and other means. Among the G20 countries, Japan and Mexico are the only two that have yet to institute a patent closure system; they had little awareness of the possible outflow of technology. In Japan, on the premise that academic research should be free, research and development are in principle open to the public. In 2017, the climate of public opinion changed; the disclosure of a Japanese patent on electromagnetic uranium enrichment using plasma was deemed to be problematic.

In addition, there is concern that the outflow of technology is reducing Japan's international competitiveness. One aspect of the US-China confrontation is a competition for "technological hegemony" over emerging technologies. Japan possesses a certain level of technological strength and R&D capability in the field of emerging technologies. Meanwhile, China is busy not merely in strengthening its military buildup with cutting-edge and sensitive technologies it has stolen from Japan through cyber-attacks and industrial espionage. It is also raising the competitiveness of its industry by utilizing those technologies for civilian use under the name of "military-civil fusion." Just think how unreasonable it would be if, as a result, Japanese industries lose in international competition. In order to avoid such absurdities, we must consider preventing the outflow of technologies and surviving the competition for "technological hegemony."

The third meaning is "security against hostile foreign regulations." Using human rights as leverage, the United States is imposing aggressive trade regulations on China under the Global Magnitsky Act; these US regulations also influence Japanese corporations. China has responded with countermeasures based on the "Anti-foreign Sanctions Law," and Japanese corporations following the US regulations cannot do business in China. Thus, the United States and China are tightening regulations through their domestic legislation. Such legal moves are beyond the reach of Japan; Japanese companies are obliged to incur increased costs to deal with changes in regulations of those superpowers. In this situation, in order to protect the activities of Japanese corporations and Japanese industry, Japan should improve its economic intelligence to analyze potential risks and review supply chains to avoid entanglement with human rights issues. The enhancement of economic intelligence should be considered as part of economic security.

Distinction between Economic Security and Economic Statecraft

Alongside economic security with the three meanings mentioned above, there is another concept called "economic statecraft" (from here cited as "ES"). Although economic security and ES are often confused, they should be distinguished from each other.

ES 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. The condition for implementing ES 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 above-mentioned "Global Magnitsky Act" and economic sanctions against Iran and North Korea's nuclear development are a form of ES.

In some cases, ES may be categorized as an "offensive" form of economic security. But fundamentally it should be considered to be different from economic security. An "offensive" economic security is a means with which a country strengthens its international competitiveness and gains economic advantage. To that end, it is essential for the country not only to develop "indispensable" technologies but also to materialize them, through social implementation, into products and services viable in the global market. Thus the country aims to increase other countries' dependence on it by allowing them access to those "indispensable" technologies. As part of its "offensive" economic security efforts, the country should establish international rules and secure global standards to make such socially-implemented technologies "indispensable" to others.

On the other hand, a country uses ES to enforce upon a target country its political will and values by leveraging its economic superiority. The user of ES 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 ES, trade with the target country will cease, resulting in economic losses. Other countries, fearing the possibility of future ES against them, will enhance their autonomy and reduce economic dependence or make their markets less open. This will damage the ES 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 older generation products with line widths of 20 nanometers or more can be traded to China as general-purpose products.

It should also be noted that ES is often described as "weaponization of interdependence," "weaponization of trade," or "war without weapons." But its effects are different from those of military statecraft. As is manifest from sanctions against North Korea's nuclear and missile development, if ES fails to be effective on the target country --- North Korea still pursues its nuclear development despite sanctions without changing its behavior ---, the enforcers of ES will lose much by the very act of launching ES. In preparation for the possible use of ES by others, any country must ask itself its political readiness to allow how much risk or damage stemming from ES.

Economic Security in the Free Trade Regime

Economic security has a marked "defensive" inclination and looks, therefore, as 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 WTO regime, are specified in GATT Article 21, but such exceptions are applicable only in limited cases:

GATT Article XXI Security Exceptions
Nothing in this Agreement shall be construed
(a) to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or
(b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests
(i) relating to fissionable materials or the materials from which they are derived;
(ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;
(iii) taken in time of war or other emergency in international relations; or
(c) to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security

It is true that "security exceptions" stipulated by the RCEP and 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 senior members are not appointed due to US 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 for the first time to the fore in the free trade block. (In the past, Russia and Ukraine in one case and Saudi Arabia and Qatar 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.)

Economic Security in the United States

"Economic security" is not frequently referred to in the United States, but the US government adopts other policies with equivalent effects. A watchword in circulation is "Put China Down, Speed Us Up." It is important to note that Americans are keenly aware of China's "capabilities," not its "deeds." US economic security policies focus for example on measures to prevent Huawei from acquiring capabilities rather than what Huawei will do. In other words, it seems that the United States feels threatened by China's increasing its capabilities to challenge it.

Four concepts help to think about US economic security: resilience, innovation, divestment, and decoupling.

First comes resilience. Comparison with Japan reveals that the US government is intensely aware of the necessity to address supply chain disruptions in general, regardless of whether they are caused by accident or design, or by natural disasters or changes in the supply-demand balance. Japan experienced the trauma of having its rare earth imports halted in 2010, but the United States has no similar experience. For the country, supply chain disruptions due for example to labor shortages are a substantial problem; discussion centers on the need to enhance resilience against them.

In the second area, innovation, the United States does not have much experience with state-led industrial development. There is a growing concern about the capabilities that the country lacks. The US government feels the necessity of restoring US industrial competitiveness lost due to the promotion of free trade. The formulation of new industrial policies has been put on the government's political agenda. Traditionally, US industrial policies have focused on R&D promoted by the Defense Advanced Research Projects Agency (DARPA) and industrial development through defense procurement. Today, the distinction between military and civilian technologies and products blurs, and dual-use technologies, such as semiconductors, are considered critical for security. The resulting trend is to regard the economy and security as interlocked and to formulate industrial policies compatible with that trend. However, in the open US economy, the nationality of corporations is not emphasized, and foreign companies are without exception required to increase production in the United States. As a result, the priority is to urge TSMC (Taiwan) and Samsung (South Korea) to build their factories in the United States, which is inviting complaints from the domestic semiconductor industry.

The third concept of divestment is a noteworthy one. The US government's message in this connection is that US corporations should withdraw from China. But Tesla, Inc. and J.P. Morgan Chase & Co., for example, cannot do business, isolated from the Chinese market. The US government and corporations are at odds over China. Yet, the US government does not intend to control all of these businesses in China and maintains that it will regulate the transfer of sensitive technologies for security reasons and the outflow of technologies and products that may undermine US superiority. As far as other general-purpose products, the US government in principle allows US corporations free business activities.

Regarding decoupling, Americans are becoming aware that the full-scale decoupling envisioned under the Trump administration, such as eliminating economic dependence on and the trade deficit with China, is virtually impossible. However, Congress is calling for hardline measures against China; ideological confrontation is prevailing over the wishes of US industry. On the other hand, the US government believes that there are limits to restricting business activities, and that unrealistic decoupling would seriously damage the US economy. The US industry consistently sees great potential in doing business with China; in this sense, Congress, the government, and industry are not on the same page.

A problem associated with US economic security is a drift toward protectionism. From the perspective that economic security is necessary but should not be used to justify protectionism, the US government admits that economic security issues should be addressed in cooperation with allies and like-minded countries. At the end of last year, USTR Representative Katherine Tai and Secretary of Commerce Gina Raimondo visited Japan and proposed an "Indo-Pacific Economic Framework." The purpose of the initiative is to maintain the framework of free trade through cooperation on the so-called minilateral and plurilateral frameworks, urging the United States not to turn its back to free trade and choose protectionism.

It has yet to see whether this framework could replace the free trade system. Its stance of excluding China is not necessarily appropriate in the light of maintaining a liberal international order. However, given that the free trade system evolved after World War II within various frameworks created by the West, the ideas of minilateral or plurilateral approach seem to suggest a regression to the early Cold War years.


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 TPP after the US 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." Therefore, Japan should adopt a well-balanced strategy to prevent the collapse of the rules-based international order while promoting economic security to maintain its economic and social order.

(Professor, the University of Tokyo)

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