proposal

From Economic Security to Geoeconomics

Kazuto Suzuki

Background on the Need for Economic Security

Why is economic security being discussed and sought today? In the post-World War II world, the international economy is underpinned by the free trade system, which evolved as a partial international order built by "Western" countries during the Cold War. The free trade system was an economic regime based on values and norms shared by "Western" countries. It separated politics from the economy, making political protection and intervention difficult.

However, in the post-Cold War world, "non-Western" nations, such as China and Russia, were incorporated into this free trade system. Economic interdependence increased among nations around the world, including "Western" and "non-Western" countries, and as a result, they fell into the "traps of interdependence.

The first "trap of interdependence" refers to a situation in which the inclusion of China and Russia in the free trade system raised expectations that the economy would grow, a prosperous middle class would emerge, and ideas such as democracy and the rule of law would spread, leading to many investments and joint development projects. In the background were expectations of China's high production capacity and Russia's abundant natural resources, which, however, meant increasing economic dependence on China and Russia.

The second "trap of interdependence" refers to the rise of "state capitalism" after the Lehman shock. This made the political systems of countries like China and Russia appear superior, making it hard to share values and norms with Western countries. Furthermore, more countries in the global South opted for authoritarianism in response to global crises, leading to a decline in democracy. However, free trade with countries with different values and norms continued and expanded under the principle of "separation of politics and economics.

The third "trap of interdependence" refers to the "weaponization" of the existing state of interdependence. As interdependence deepens, some countries have begun to use excessive dependence on specific goods as leverage to achieve political goals. Examples of this ‘weaponization of interdependence' include China's embargo on rare earth exports and the tariff policies introduced by the second Trump administration. With the end of the times of separation of politics from the economy and the beginning of an era of political-economic fusion, economic interdependence has turned into a security threat.

What is Economic Security?

There are various definitions of economic security, but here, we define it as "building the capability to resist pressure or oppression from other countries by economic means."

The concepts that make up the idea of economic security are "strategic autonomy" and "strategic indispensability." "Strategic autonomy" is ensured by avoiding excessive dependence on other countries and building a supply chain on its own or with like-minded countries. However, it is hard to be autonomous in securing all goods and materials. Consequently, the overriding issue is to what extent a country should depend on other countries and, if so, on "whom." In addition, increasing strategic autonomy may contradict the free trade principle, which provides for the principle of non-discrimination; therefore, the question is how to reconcile it with free trade. Free trade promotes the international division of labor. For instance, regarding semiconductors, the supply chain designates the United States for development, Taiwan for manufacturing, and Japan for equipment production. Such a designation enables the Western camp to secure an advantage in semiconductor manufacturing technology. Therefore, in October 2022, the United States was able to implement semiconductor export restrictions against China, which effectively meant excluding the Chinese market, obviously contradicting the free trade system. However, this case may be viewed as an exception to the free trade system, prioritizing "security purposes."

"Strategic indispensability" signifies that a country can retaliate by becoming an indispensable link in the supply chain, even if another country exerts economic intimidation. In other words, it refers to having a deterrent force in economic security. In the case of Japan, what makes the country an indispensable link in the supply chain is the manufacture of high-performance carbon fiber, without which it would be hard to manufacture aircraft, rockets, missiles, and centrifuges for uranium enrichment. It is the efforts of Japanese enterprises that create this "strategic indispensability." Even if a company achieves a unique position in the world through its R&D efforts and production innovation, there is a risk that its status could be undermined by political factors. This will discourage the company from pursuing R&D efforts. Thus, economic security signifies possessing the ability to "safeguard" by avoiding economic intimidation and to "nurture" security capabilities through efforts to become indispensable without relying on other countries. Should a country become less dependent on foreign countries and be able to exert pressure on them by improving its economic security capabilities, it would become a geoeconomic power.

The Age of Geoeconomics

Geoeconomics (Geopolitics + Economy) is a framework for analyzing geographically defined inter-state relations from an economic perspective. In the context of "geopolitics," discussions have so far often focused only on political elements such as military power and diplomacy. Yet, as economic security attracts broad attention, discussions on political elements alone do not suffice to understand inter-state power relations; it is necessary to understand the power of states, including economic factors. In other words, while economic security focuses on the "capabilities" of a state, such as autonomy and indispensability, geoeconomics focuses on how a state uses autonomy and indispensability as "power" to gain influence in the international community. For instance, in geoeconomics, it matters what country has what technology.

The important thing when discussing geoeconomics is that things are "geographically defined." Traditionally, geopolitical scientists have discussed economic aspects, dealing mainly with geographically immovable things such as underground resources and food production. Meanwhile, geoeconomics focuses on natural resources, technology, human resources, capital, and national policies such as tax systems and regulations. It particularly emphasizes technology, human resources, and capital, which tend to be highly mobile across countries. For a country that does not possess ample underground resources or food production to acquire geoeconomic power, the question is how to develop, maintain, and control technology. Whether or not a country can realize national policies optimized for such geoeconomic resources will depend on the country's position and capabilities.

We are now in an era of geoeconomic power competition. Geoeconomic power is composed of several elements. First, by ensuring strategic autonomy, a country would reduce its dependence on other countries, decrease its national vulnerability, and increase its economic defense capabilities. Second, if a country ensures strategic indispensability, other countries will become dependent on it, and it will have leverage over other countries. What matters as geoeconomic power is the strategic means to effectively "weaponize" such economic resources. The export controls implemented by China and the tariff policies actively pursued by the Trump administration are examples of leveraging geoeconomic advantages: China utilizes the indispensability of its critical minerals, while the United States capitalizes on its indispensable position as the world's largest market. The "weaponization" of economic resources takes various shapes of tariff policies, sanctions, and import and export controls. In the age of geoeconomics, countries with geoeconomic power aspire to a "power-based international order," while countries lacking sufficient geoeconomic power need a "rule-based international order" to compensate for their lack of geoeconomic power through international law and international organizations.

Trump as Product of the Age of Geoeconomics

The Trump administration is a product of the geoeconomic world. The United States possesses the world's largest market, the strongest military, and the international base currency. It is also a provider of critical infrastructure―GPS and cloud services―that sustains global economic activity. As a result of the United States fully utilizing its geoeconomic power, a clash of geoeconomic power is emerging.

In less than two months since its inauguration, the Trump administration has quickly introduced various policies that utilize geoeconomic power. It imposed 25% tariffs on imports from Colombia, which had refused the acceptance of deported refugees, and threatened to raise the tariffs to 50% the following week. As a result, Columbia agreed to accept the refugees. The Trump administration also threatened to impose 25% tariffs on imports from Canada and Mexico, requiring those countries to implement measures to address immigration issues and illegal drugs (Fentanyl). In this way, the Trump administration is using tariff policies as a means of intimidation against other countries. The background to this is the gigantic size of the US market, which is the source of US leverage.

To attract more foreign capital, the Trump administration is trying to attract investment by lowering corporate taxes. At the same time, by imposing tariffs on imports, it aims to encourage foreign companies that can no longer export goods to the United States to invest and produce their products within the country. This strategy is intended to attract foreign investment.

On the digital trade front, where American companies like GAFA dominate, platform holders provide essential services to other countries. The US government will likely use this technological superiority to pressure other countries by imposing some regulations.

In addition, having the dollar as the international base currency enables the United States to implement economic sanctions and to exert a strong influence on foreign countries. Since the dollar is used in the overwhelming majority of international transactions, all government bond transactions, especially transactions with sanctioned companies and individuals, are conducted through US banks; therefore, the United States is in a position to know who is trading with sanctioned parties. With such information, the country can tighten sanctions and prohibit third-country companies that violate sanctions from operating in the US market. Since this is a severe blow to foreign companies, they will have no choice but to abide by US sanctions. As a result, the United States can increase pressure on other countries.

However, the United States' excessive use of geoeconomic power could undermine the source of geoeconomic power. Geoeconomic power exerts its maximum influence when other countries depend on it. Therefore, tariffs on allies dependent on the United States will have an extremely significant effect. However, the current Trump administration's coercive tariff policy against allies will generate a backlash against the United States; nonetheless, because of its superiority, allies have no choice but to follow the United States.

In addition, the Trump administration's arbitrary tariff policy could jeopardize the US domestic supply chain networks, exposing the country to supply chain disruption risks. Its excessive confidence in its geoeconomic power could lead not only to inflationary pressures due to forced tariffs coupled with tax cuts but also to higher production costs.

In conclusion, today's United States is a "risk" and is losing its attractiveness as a market or investment destination. For us, it is vital to recognize the need for intelligence to objectively analyze the unpredictable policy measures emanating from the Trump administration.

(Professor, The University of Tokyo)

(Lecture report made by the SSDP Secretariat)

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