Economic Security Challenges and Cyber Security

Jun Osawa


In Japan, the deliberation of an economic security promotion bill is now reaching its final stage. The expert panel on economic security legislation in the Cabinet Secretariat, which started to work on November 26, 2021, held four plenary meetings and eight subcommittee meetings (two meetings each for four subcommittees), and on February 1, 2022, released recommendations on economic security legislation. Based on the awareness that science, technology, and innovation constitute the centerpiece of the interstate struggle for supremacy amid rising geopolitical tensions, the recommendations outline a framework of policy responses and legislative measures in the following four areas: (1) supply chain resilience, (2) the safety and credibility of critical infrastructure functions, (3) public-private technological cooperation, and (4) non-disclosure of patent applications.

This paper discusses the international political background of a growing focus on "economic security" since 2018 (Section 1), economic security challenges in cyberspace (Section 2), and the evolution of debates on economic security legislation also covering measures to ensure cyber security, and relevant challenges (Section 3).

1. The Narrative of Economic Security

Behind the rapid progress of the debates on economic security in Japan since 2019, there have been major structural changes in international politics; it is necessary to understand the narrative of economic security in this context. In post-WWII international politics, the Cold War between the United States and the Soviet Union continued for about 40 years from 1946 to 1989 (sometimes referred to as 1991, the year of the collapse of the Soviet Union). The Cold War featured the so-called "inter-regime competition" for survival between the socialist camp centered on the Soviet Union and that of democracy and free economy led by the United States; the logic of security took precedence over that of the economy. The perceptions in the West of the "inter-regime competition" were symbolically represented by the "Iron Curtain Speech" by British Prime Minister Winston Churchill in March 1946 (delivered after he left office) and the "Long Telegram" by George Kennan, the then American charge d'affaires in Moscow. The "Long Telegram" was later published in Foreign Affairs under the pseudonym "X" (the X Article).

The 30 years from the end of the Cold War in 1989 to around 2019 fall into two phases: one is the emergence of the US unipolar system following the collapse of the Soviet Union; the other is the era of multipolarity that began with the Lehman Shock in 2008. Those three decades featured globalization --- major international political tensions subdued; economic logic took precedence over security logic, and people, goods, and money moved more actively than ever across national borders.

This era of globalization, however, is coming to an end with the rise of China. Debates are evolving over the so-called "economic security" issues such as economic statecraft and stricter trade controls around the world; this is because the rise of China has helped forge a narrative that international politics is once again moving toward "inter-regime competition." Vice President Pence's Hudson Institute speech on US China strategy (October 2018) marked a tipping point for changing the world outlook to one that regards China as a competitor and expects the return of Cold War-like "inter-regime competition." In that speech, Pence suggested that the United States should be prepared to fight a protracted war with China and reset its economic and strategic relationship with China, alleging that China was using political, economic, and military means and propaganda to increase its influence and interference in the United States, while suppressing human rights and religious freedom. The media assessed that Pence's speech implied the start of a new Cold War between the United States and China.

In 2021, a paper seemingly intended as a contemporary version of Kennan's "Long Telegram" appeared on the website of a US think tank Atlantic Council. The article, titled "The Longer Telegram: Toward a new American China strategy," was written anonymously by a former US government official, presumably with Kennan's "Long Telegram" in mind. It called for the United States to work with its allies to implement a new China strategy to counter China's long-term strategy for gaining supremacy over the United States.

The "New Cold War," an "inter-regime competition" with China, is unlikely to end soon. The Chinese economy is estimated to surpass the US economy in around 2030 and to continue developing as the world's largest economy until around 2050 when the US economy is predicted to once again overtake the Chinese economy due to the latter's downturn due to population decline. For at least the next 30 years, the Chinese authoritarian regime, featuring a peculiar style of socialism and mass digital surveillance, and the liberal democratic camp led by the United States will engage in an "inter-regime competition." Considering that the Cold War lasted 40 years, it is not worth surprising that the current competition will continue until around 2060. In the "New Cold War," as in the Cold War, the logic of security will take precedence over that of the economy. It is necessary to think about economic security from the standpoint of such a narrative.

Then how will the United States fight the "New Cold War" with China? US military personnel and those who study security are educated to work on national interest strategies by using the combination of the four elements of "DIME." DIME is an acronym combining D for Diplomacy, I for Information/ Intelligence, M for Military, and E for Economy. The inter-regime competition for survival is a life-death duel in which all the elements of DIME must be mobilized. In Japan, "economic security" has become a watchword. However, it is necessary to acknowledge that we are discussing only the E (economy) of DIME. The Biden administration is now busy formulating a new national defense strategy, which envisages the implementation of security strategies by employing, under the keywords of "integrated deterrence," the whole-of-government approach mobilizing all the elements of DIME. To understand the narrative of "economic security," it is necessary to understand the current situation in the United States where a shift is taking place from traditional security leaning heavily on diplomacy and the military to one that will utilize every possible means available.

2. Cyber Theft as a Challenge of Economic Security

The previously mentioned 2018 Pence speech warned, "Now, through the ‘Made in China 2025' plan, the Communist Party has set its sights on controlling 90% of the world's most advanced industries, including robotics, biotechnology, and artificial intelligence. ... Beijing has directed its bureaucrats and businesses to obtain American intellectual property ... by any means necessary." The focal point of the US-China confrontation that has become prominent in cyberspace is China's theft of intellectual property --- the foundation of US technological and economic power --- through cyber attacks.

"Made in China 2025" is a medium- to long-term industrial development policy announced by the Chinese government in May 2015. It aims to transform China into a "manufacturing powerhouse" in the following ten priority industries: (1) next-generation information technology, (2) new energy vehicles, (3) aerospace, (4) marine engineering (high-tech ships), (5) advanced railroads, (6) robots and machine tools, (7) electric power equipment, (8) new materials, (9) biomedicine and medical equipment, and (10) agricultural machinery. In cyberspace, numerous China-originated cyber theft are taking place. Chinese cyber attackers' targets are identical with some of the key industries listed in "Made in China 2025": (1) next-generation information technology, (2) new energy vehicles, (3) aerospace, (4) marine engineering, (5) new materials, and (6) electric power equipment.

These China-originated cyber attacks contribute to an unfair coerced transfer of technological assets owned by developed countries and threaten their technological superiority. They are not only a security problem but also a significant threat to the free trade system. Some Chinese companies have been identified as manufacturing and exporting products for developing countries using technologies acquired by such unfair means. Confidence in the free trade system based on free and fair rules is in jeopardy.

One example of China-originated cyber theft is a cyber-attack operation by the Chinese People's Liberation Army (PLA) uncovered in January 2013. According to a report by US security firm Mandiant, which analyzed the attack, the group named "APT1" that carried out the cyber attack was Unit 61398 under the then Second Bureau of the PLA General Staff Department Third Department. For more than seven years from 2006, this attack group conducted cyber attacks targeting a broad range of industries including the US media. Their targets included information, transportation, high-tech, finance, law firms, engineering, media, food and agriculture, space, satellite communications, chemical, energy, medical, and many others.

A similar Chinese cyber attack group targeting technologies in developed countries is known as APT10. APT10 has been identified by UK and US judicial authorities as an attack group closely affiliated with China's Ministry of National Security. APT10 has repeatedly unleashed cyber theft against government agencies and a wide range of industries in developed countries, including pharmaceuticals, mining, energy, metals, engineering, industrial production, technology, and retail.

Cyber security experts have so far identified dozens of Chinese cyber-attack groups such as APT1 and APT10 that target advanced industries in developed countries. They have become a vital means for the Chinese government to steal business secrets and intellectual property and to seize technologies of foreign corporations, alongside coercion of technology transfer from foreign companies through, among other things, investment restrictions, as well as the acquisition of foreign companies possessing advanced technologies.

Also, in Japan, a cyber attack was uncovered in April 2021, which appears to have aimed at stealing technologies in the aerospace field. The Metropolitan Police Department sent a man, a member of the Chinese Communist Party, to the prosecutor's office on suspicion of unauthorized production and use of private electromagnetic records. The man was renting a server in Japan, which he used for cyber attacks against some 200 defense and aerospace companies and research institutes, including the Japan Aerospace Exploration Agency (JAXA), Mitsubishi Electric Corporation, and IHI Corporation.

Developed countries must stop cyber attacks affiliated with Chinese state agencies to protect their technological and economic power. The United States implements active cyber defenses (ACD) to make cyber attacks more expensive for attackers and to deter their actions. ACD is a defensive method that identifies cyber attackers based on attribution and mobilizes all available policy measures, including diplomatic pressure, judicial prosecution, economic sanctions, and counter cyber attacks to make cyber attacks more burdensome for attackers. ACD is the embodiment of the whole-of-government approach based on the "integrated deterrence" strategy --- approach which mobilizes all the elements of DIME. Japan should also consider active cyber defense operations as part of its economic security policy to prevent cyber theft by China.

3. The Road to Economic Security Legislation

Looking back at the evolution of debates on economic security, as if in coincidence with the establishment of the National Security Secretariat (NSS) in the Cabinet Secretariat in January 2014, various problems began to emerge, such as the acquisition of security-sensitive land by foreigners, technology transfer associated with foreign capital's investment in and acquisition of Japanese companies, and technology outflow from universities and companies with the involvement of foreigners.

The LDP legislators' group for rule-making strategies, chaired by House of Representatives Member Akira Amari, started its activities in 2017 to discuss national security concerns, next-generation technologies, and the formulation of international standard rules. On March 20, 2019, the group released policy recommendations titled "Establishment of a National Economic Council (Japanese version of NEC)." The recommendations are based on the following perceptions: (1) the intensifying US-China competition has developed into a confrontation over technology, resources, and rule-making; (2) high-tech friction and the struggle for data (digital) hegemony are occurring between the United States and China, and their intelligence and espionage operations are becoming active; and (3) economic statecraft (the pursuit of national interests through economic means) is becoming increasingly intense. To counter China's economic statecraft, the recommendations called for establishing a national economic council (the Japanese version of the US National Economic Council). The national economic council will be tasked specifically to formulate strategic foreign and economic policies and to work on strengthening export controls for cutting-edge technologies and foreign investment monitoring, economic sanctions, intellectual property management, and the formation of international standard rules.

As an embodiment of the recommendations, the Economic Unit was created within the NSS on April 1, 2020. Reportedly, it is responsible for (1) technology security (export control, foreign direct investment regulation, technology transfer regulation, supply chain risks, etc.); (2) cyber security (security of the next-generation mobile communication infrastructure (5G), cyber security, information sharing on cyber security, data security, etc.); (3) international cooperation (international coordination for infrastructure development and high-tech technology development); (4) COVID-19 response (regulation of human movement across borders, procurement of medical equipment), etc.

Following a series of debates both inside and outside the government, on the legislative front, in June 2020, the revised Foreign Exchange and Foreign Trade Law came into effect, and all relevant government ordinances and notifications were applied. To address investments that may undermine national security, the amendments to the Foreign Exchange Law include the following measures: (1) the lowering of the threshold for prior notification of the acquisition of listed companies (from 10% to 1%) and (2) the introduction of a system of prior-notification of: the appointment of directors, auditors, and other corporate officers; the transfer or discontinuation of businesses in designated industries crucial from the perspective of security; and access to non-public technology and information. To address another problem of national security concern that foreigners acquire land around defense facilities and on remote border islands, lawmakers enacted in June 2021 an act on the regulation of land transactions vital to national security. The law provides that the prime minister should designate as critical land areas (1) the sites and surrounding areas of facilities vital to national security, such as defense and nuclear facilities and (2) some remote border island areas that may constitute obstacles to national security. Regarding those critical land areas, it stipulates the notification of land transactions, purchases by the government, and expropriation.

The prehistory of the current economic security legislation traces back to a movement in the Liberal Democratic Party. In response to the activities of the LDP legislators' group for rule-making strategies, the "Strategic Headquarters on the Creation of a New International Order" was established on June 4, 2020, under the direct control of the then Policy Research Council Chairman Fumio Kishida, with Akira Amari serving as chairperson. On December 22, 2020, the Strategic Headquarters released a proposal titled "Recommendations Toward Developing Japan's "Economic Security Strategy."

The proposal consists of five chapters: (1) The Need to Develop Japan's "Economic Security Strategy," (2) Fundamental Principles and Definition of Economic Security, (3) Economic Security Environment surrounding Japan, (4) Basic Policy on Economic Security Which Japan Should Adopt, and (5) Priorities and Measures To Be Taken. Chapter 1 (The Need to Develop Japan's "Economic Security Strategy") notes the following: 1) the emergence of countries that use economic means as a "weapon" to pursue their interests; 2) the need for strategic thinking to ensure national independence and survival, the maintenance of universal values, and the coordination of alliances amid advancing digital transformation (DX); and 3) the need to develop an economic security strategy. Chapter 2 (Fundamental Principles and Definition of Economic Security) defines economic security as "ensuring Japan's independence, survival, and prosperity from an economic perspective" and presents "strategic autonomy and strategic indispensability" for the first time as basic concepts for ensuring economic security. Regarding basic policy, Chapter 4 states that Japan should: (1) identify vulnerabilities, improve resilience, and reduce dependence on other countries to maintain and strengthen strategic autonomy; (2) create an environment for the maintenance and development of strategic core industries to gain strategic indispensability; and (3) identify, protect, and cultivate technologies that will support strategic autonomy and strategic indispensability. The proposal adds that the Japanese government should aim to enact a law for promoting all forms of economic security measures during the ordinary Diet session in 2022.

The above proposal calls foremost for the necessity of comprehensive and exhaustive responses in a wide range of areas to realize economic security. It specifically lists the following 16 areas: securing resources and energy, ocean development, reinforcing food security, developing financial infrastructure, developing telecommunications infrastructure, space development, reinforcing cyber security, promoting utilization of real-world data, diversifying and strengthening supply chains, achieving and maintaining Japan's technological excellence, enhancing innovative capability, land transactions, countermeasures to major infectious diseases, infrastructure export, involvement in rule-making via international organizations, and improving economic intelligence capabilities.

In response to the LDP's proposal, the Cabinet Secretariat inaugurated the expert panel on economic security legislation. While the LDP's proposal came up with policy measures in 16 areas, the governmental expert panel has significantly narrowed the scope of priorities to four, as mentioned at the outset of this essay. In addition, the four priority areas proposed by the governmental expert panel are almost identical with the matters under the jurisdiction of the Ministry of Economy, Trade and Industry --- a significant regression from the LDP's proposal. The economic security promotion bill is scheduled to be approved by the Cabinet toward the end of February 2022. We should closely monitor whether the promotion of economic security will stay only in the four areas or whether it will be gradually enlarged into comprehensive economic security legislation as recommended by the LDP's Strategic Headquarters.

The economic security promotion bill mentions, as its second pillar, efforts to ensure safety and credibility related to the maintenance of Japan's critical infrastructure functions with particular emphasis on cyber security. However, the bill does not include any cyber security measures to prevent intellectual property theft, as mentioned in Section 2 of this essay, but just the introduction of a secret patent system in the fourth pillar. It is hoped that during the process of revising the bill, legislative efforts should be made to realize ACD and to prevent cyber theft of information.

(Senior Research Fellow, Nakasone Peace Institute)

(Translation by Tsutomu Inuzuka, SSDP Associate)

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