An Overview of Economic Security (3): From an academic perspective (U.S. version)

The Biden Administration’s Worldview

The U.S. National Security Advisor, Jake Sullivan, gave a speech at the Brookings Institution in April 2023 regarding international economic policy. Mr. Sullivan laid out a “New Washington Consensus” on international economic policy, highlighting that the old economic order built by the United States after World War II had come under strain and was crumbling.

Mr. Sullivan emphasized the need for a new order based on new assumptions and questioned existing institutions such as the World Trade Organization. He raised issues with trade policy and stated that the Biden administration would attempt a new approach, focusing on domestic challenges such as the underperforming economy and under-investment in sectors like infrastructure and manufacturing. Internationally, China and Russia are undermining the existing order in various ways. Mr. Sullivan went on to identify several risks and threats to the global economy, the U.S., and to partners like Japan. He emphasized the need for protection again those risks, making supply chains more resilient, and the promotion of new manufacturing capabilities and technologies.

U.S. Economic Security Policy Assessment

The term “economic security” in the U.S. is used in a broad sense as an imperative to ensure that Americans are safe, prosperous, and benefitting from the gains of economic growth in an inclusive and sustainable way. Sustainable growth is a clear emphasis of the Biden administration, in its emphasis on addressing climate change, and persistent issues like that are also treated as part of economic security. In Japan, “economic security” is used more actively than in the U.S. as Japan also has a law with “economic security” in the title, and it connotes a different meaning that is much more specific that deals mainly with issues related to technology theft or cybersecurity, including the other issues with supply chains etc. mentioned above.

The Biden administration is pursuing both defensive and offensive approaches to economic security. Defensively, they have used economic statecraft tools designed to protect against various risks. For example, export controls on sensitive or critical technologies such as advanced semiconductors, or investment screening policies of inbound and outbound investments. There are also cybersecurity and cyber-protection policies being pursued. This very specific approach of protecting key technologies such as semiconductors, quantum computing, and biotechnology is called a “narrow targeted” approach, beyond which other technologies will be allowed to be developed and traded freely.

Offensively, the U.S. government is investing heavily in domestic manufacturing capabilities through the CHIPS Act. It includes subsidies of 52 billion dollars to the semiconductor industry, and other means of supporting advanced technology manufacturing capabilities. Another major industrial policy investment amounting to 369 billion dollars is in clean energy solutions, particularly electric vehicles, and other forms of sustainable products.

Internationally, the U.S. government is promoting joint research and development initiatives with allies including Japan to develop new technological capabilities. Another example of the U.S. taking a broader approach than Japan is the positioning of certain initiatives like the Partnership on Global Infrastructure (PGII) as an economic security measure by the U.S. Promoting such approaches to infrastructure investment sends a clear signal to partner countries in the rest of Asia, Africa, and Latin America, that the U.S. has a better offering than China. In trade policy, the U.S. believes that the Indo-Pacific Economic Framework (IPEF) and America’s Partnership for Economic Prosperity (APEP) are part of an economic security strategy in the sense of trying to promote its preferred standards and norms. This includes supply chain resilience, clean energy investment, and better governance, including anti-corruption.

Policy Gaps and Inconsistencies

While these policies are generally comprehensive and cohesive, there are some inconsistencies, tensions, as well as some gaps in the approach. For example, investing in domestic manufacturing of clean energy solutions is at odds with the commitment to working together in the same area with allies and partners in Japan, Korea, and Europe. Some allies and partners feel that there are discriminatory or protectionist policies that favor American manufacturing. There is also tension and inconsistency between the effort to invest in clean energy solutions on the one hand, and our tough relationship with China on the other. China is a major producer of both raw materials for clean energy technology and final products like solar panels. If we restrict trade with China, there will be an economic cost and an environmental cost, and the U.S. will not be able to address climate change as robustly as the Biden administration wants to.

The biggest gap in U.S. “economic security” policy is the weakness of our affirmative offering of a trade policy to the Indo-Pacific and the rest of the world. The Biden administration is not interested in pursuing formal trade agreements. Trade agreements play an important role in advancing U.S. interests and help create an alternative set of rules and norms to the ones being offered by China and others. We recently witnessed the failure of IPEF to deliver a final or partial agreement because the U.S. decided to pull back its offerings on the first (trade) pillar. Overall, this is a significant gap in policy. If the U.S. wants to be secure against Chinese domination in certain industries, they must put forward an affirmative agenda on trade, as it is currently a weakness in their economic security strategy.

U.S.-Japan Economic Security

The United States and Japan recently held the “2+2” economic dialogue and produced a four-page joint statement on cooperation between the two nations. The statement includes an affirmation of several points in the G7 declaration about economic security covering nonmarket policies, economic coercion, resilient supply chains, and promoting critical technologies, export controls, and critical minerals. It is very significant that the U.S. and Japan have once again made a clear statement of this shared agenda in the broadly defined economic security area.

U.S.-China Economic Security

In 2024, there will be presidential elections in the U.S. The result will likely be very close and have a strong impact on the future of both countries’ economic security. Notwithstanding any new stabilization of U.S.-China relations, the fundamental tensions, competition, and differences in the U.S.-China relationship will continue. The U.S. political debate about China will continue to be very noisy and confrontational. There will still be a robust set of defensive policies on export controls, investment screening, and resilient supply chains in 2024.

On the other hand, developments on the offensive side of the policies are going to be very limited in 2024. Domestic industrial policy will be highly constrained because the Biden administration will struggle to add new investments or spending. The Biden administration will also be very reluctant to move forward any positive agenda on trade. Whatever happens in the election, there will be a continued strong stance on China-related risks, with forceful policies. There may be different policies depending on who wins the election. If Donald Trump wins, there will be more focus on trade and tariffs. If Biden or anybody else wins, there will be more focus on technology issues. The result is still very speculative and difficult to predict now.

Comments and Q&A

HIRAI Hirohide:
How would you describe the focus on economic security in American society outside of the political realm?

Mathew GOODMAN:
The American private sector understands that risks in the world have increased. The combination of COVID restrictions, the tightening of controls on information, and their treatment of foreign businesses has created a new sense of risk about China. There has been a longstanding concern about technology and trade secret theft. However, the private sector also sees China as a huge market and wants to have access to it. The industry most in the crosshairs is the semi-conductor industry. They understand that certain very highly advanced semi-conductors can’t be sold there, but they want to be able to sell everything else that is less advanced than that. There are a lot of mixed feelings in that industry.

In the broader business community, there is a relief that the Biden administration has said it will not decouple from China, and that the leaders of both countries met recently and seem to have stabilized the relationship. There is still ample concern regarding specific policies to de-risk our relationship with China, and at the same time protect U.S. business interests there.

In broader society, there is relatively little awareness of these risks and issues. There is concern about China, but a lot of that is due to political noise. There is not a strong understanding of the costs and benefits of our engagement with them. In people’s daily lives, they do not experience a strong anti-China feeling, so they are not as tuned into the economic security risks or concerns as policy makers are.

Overall, in academia, there is also not a strong focus on this set of issues.

HIRAI Hirohide:
Can you highlight the differences between economic security for the U.S. and Japan?

Mathew GOODMAN:
In the U.S., actually the core part of the economic security debate is focused more on China than it is in Japan. The pandemic supply chain disruption were related to China because many basic products like ventilators, pharmaceuticals, and masks were produced and assembled in China. The concern in terms of advanced technology such as quantum computing and semi-conductors is directly related to China, and its position as a competitor in those areas.

When the Biden administration looks at technology-related risks, they are directly linking those concerns to national security and the use of these advanced chips in AI applications that could be used in military technologies, for example. In the U.S. we think of it as national security first and foremost. In this case, it just happens to be the economy that is delivering these technologies. That is the lens through which they look at the issue.

In Japan there is more relative focus on the risk to its economic competitiveness, continuity of economic activity, and the risk from cyber-attacks.

Overall, the policies in both Japan and the U.S. are similar, but the term “economic security” invokes a broader definition in America that includes the security of individuals, their livelihood, and our manufacturing capabilities.

HIRAI Hirohide:
Regarding historical differences, you mentioned comparisons in trade frictions between the U.S. and Japan in the 1980s and 1990s. What is the difference with economic security now, compared to the past? What is the difference between Japan and China as an economic and security risk for the U.S.?

Mathew GOODMAN:
In the 1980s and early 1990s, there was a concern about Japan as a threat to our economic competitiveness. The broad concept of economic security was a concern back then, although the exact term was not regularly used. We were not worried about military threats because Japan was a loyal ally. It emphasizes the point that the difference then was that it was more about economic competitiveness, and today it is more about national security. The China risks are a national security threat, which has an economic dimension to it, but it is not the core focus.

HIRAI Hirohide:
Concerning the concept of offensive and defensive policy measures, I have the impression that the argument in Washington leans more towards focusing on protectionism than promotion. Is that impression correct, and is it because the administration has limited capacity to do something on the promotion side?

Mathew GOODMAN:
Overall, the focus is more on protection than promotion. There are elements of promotion that are very central to the approach, including in domestic investments in advanced semi-conductors and other advanced technologies, such as electric vehicles and green energy solutions. That is where the promotional activity is mostly focused. Where it is less robust is in promoting our preferred rules and norms through trade policies.

Even with allied cooperation, more of the focus is on protection than promotion. The Biden administration has spent more effort on, for example, working with Japan to support and align its export controls on advanced machinery to make semi-conductors, than it has spent on trying to promote joint development of new technologies.

The problem with joint promotion is that even if we are aligned with our concern on these issues and share interest and values, we are competitors in the marketplace. Promotion is therefore inherently harder in that sense, and one reason why protection is easier and more natural to focus on.

HIRAI Hirohide:
The debate on the effectiveness of economic sanctions is interesting. Studies have shown that in many cases they have not generally been effective. What kind of takeaways are there, and what are your expectations for research in this field? How do you believe this will be reflected in actual policy formations?

Mathew GOODMAN:
The conclusion of many studies is largely that historically, sanctions have generally not been effective. Even in the current Russia-Ukraine situation, there have been papers written about the lessons from Russian sanctions. Generally, sanctions are designed to deter, destabilize, and degrade other countries’ capabilities. In the case of Russia, the Western sanctions did not deter Russia from its action. It arguably did not destabilize the Russian economy, but it could over time reduce the capability of Russia to build advanced military capabilities. That is still to be determined. Overall, the conclusion is that the sanctions did not significantly affect Russia’s thinking or actions. Economic research on the topic is actually lacking in many respects.

HIRAI Hirohide:
Is there anything to add regarding the future of economic security? You mentioned various perspectives regarding a confrontational future in U.S.-China relations, and a bleak outlook for trade agreements politically in the U.S.

Mathew GOODMAN:
I am not very optimistic about the short-term prospects for a robust trade policy. I do not believe that the U.S. will be returning CPTPP. To be more optimistic, I do believe that the U.S. will eventually come back to a more updated, but traditional trade policy approach. It will do so because it is in our national interest to be part of these high standard, comprehensive, trade negotiations in the Indo-Pacific region and elsewhere. I am not predicting we will be back within the next year, and if Donald Trump gets reelected, it will not happen during his term. If anybody else gets elected, there is more hope for a reversion to a traditional trade policy.

We are on a clear course to more targeted controls on advanced technologies, and you will see further tightening of the advanced semi-conductor rules, as well as new rules on quantum computing and biotechnology. The U.S. will continue to scrutinize AI-related technologies with policy action until China changes if it ever does. The strategy may change if China reverts to a more reform-oriented country as it was in the past. Otherwise, efforts will continue to tighten control.

HIRAI Hirohide:
Do you have any comments on the future of the U.S.-Japan relationship and involvement as it relates to economic security?

Mathew GOODMAN:
It will remain very strong, and there will be a lot of joint activity. Japan has been highly aware of the security risks associated with China and data breaches for many years. Japan has also been a pioneer in trying to come up with policy responses. In that sense, now that the U.S. has caught up in being concerned about technology-related issues, we will be working even more closely together on the protection side, and to some extent on the early R&D promotion phase.

FUKUOKA Noriyoshi:
What do you think about METI’s role in terms of economic security?

Mathew GOODMAN:
METI has been far ahead of many agencies, and a leader in thinking of these issues related to technology leakage. METI has been bold in talking about economic security policies, that could end up restricting the business of Japanese companies. It is a difficult balancing act, but METI has done a good job to this point.

FUKUOKA Noriyoshi:
Could you conclude by giving an encouraging message to young METI officials?

Mathew GOODMAN:
METI is a great organization, and you are doing such interesting, important work. I always say to young people that they should consider a career in government because working on such issues is incredibly important and rewarding. Even if you are just a small part of a big policy issue, you are making a big contribution to your countries’ prosperity, security, and development.

The Head of the Council on Foreign Relations wants to emphasize four priorities that are really important issues in today’s world. Those priorities are China, technology, climate change, and economic policy issues. Given that those same issues are the focus of METI, I believe the organization is well placed to play an important role going forward.