Economic Security Policy as Growth Strategy and Recent Developments in Trade Rules

The Government of Japan expands on its view of economic security policy as a growth strategy and its holistic approach to protect critical technology in response to rapid changes in technological innovation and shifting geopolitics. Japan's Ministry of Economy, Trade and Industry is engaged in a review of its export control policy and shares recent developments in trade rules and the use of anti-dumping and countervailing duties measures, and challenges and opportunities therein.

The basis of national security is rapidly expanding into the economic and technological fields due to technological innovation and geopolitical changes. Vulnerabilities in supply chains are becoming clear due to COVID-19 and other disruptive challenges. In this respect, the Japanese government recently stated its growth strategy to strengthen and promote economic security policy. Japan intends to secure autonomy and gain superiority, as well as deepen cooperation with likeminded countries and international order based on fundamental values and rules. Japan will strengthen its effort to know, protect and promote critical technologies via a holistic, whole-of-government approach.

While the economic security policy is a new focus, free and fair trade remains an essential part of government policy. In fact, the most recent government-wide documents emphasize that the Japanese government will expand free and fair economic order and further strengthen the rules-based multilateral trading system to build a resilient supply chain and to actively develop the global economy in light of challenges such as climate change and the digital economy. In addition to rulemaking in such challenging areas, enforcement is also important in tackling unfair trade practices, including those which may lead to overcapacity in certain sectors in the global economy.

Japan has adopted a holistic approach to protect critical technology, namely "know, protect and promote." "Know" means to identify chokepoints in global supply chains with multiple suppliers. "Protect" means to prevent diversified technology acquisition activities. "Promote" is R&D promotion in the field of critical technology, as highlighted in the Integrated Innovation Strategy of 2020, through which the government made intensive efforts to materialize and define government policy in more granular detail.

Economic security is characterized as a key policy in three government wide strategies, namely the growth strategy, the Basic Policy on Economic and Fiscal Management and Reform of 2021, and the Integrated Innovation Strategy of 2021. These three documents decide the allocation of human and other resources in the Japanese government through which Japan will accelerate its economic security policy, including export controls.

Within the Japanese government's growth strategy, I would like to highlight Chapter 6: The Assurance of Economic Security and Intensive Investment. It places critical importance on the assurance of technological supremacy. To achieve this, the strategy highlights the need to develop critical technologies in sectors such as aerospace, quantum, artificial intelligence, high performance computing, semiconductors, nuclear, advanced materials, biotechnology, and marine technologies.

Furthermore, it mentions protecting critical technologies, such as through a novel export control framework and export controls. It also focuses on investment control enforcement, immigration screening policy of foreign students and researchers, research integrity, and a secret patent system. Thus, it promotes both a policy of protection and a policy of promotion. Moreover, the government strategy highlights building resilient supply chains for critical technologies and materials in 4 critical sectors: semiconductors, pharmaceutical products, batteries, and critical minerals.

In addition, the Government of Japan intends to newly establish a funding mechanism for economic security, promote advanced semiconductor and battery technologies and attract manufacturing facilities of critical industries to Japan, in order to strengthen its supply chain resilience.

These factors are identical to those mentioned in the United States' Hundred Day Supply Chain Resilience Report, the European Union's "Open Strategic Autonomy," and China's emphasis on the importance of supply chain resilience in order to reduce its dependency on other countries while simultaneously increasing the dependency on China by other countries in critical sectors. As such it is evident that major economies are promoting these protection policies and promotion policies emphasizing supply chain resilience.

More specifically the Ministry of Economy, Trade and Industry's outlook covers the economy and the environment, the Green Growth Strategy, economy and national security, economy and inclusion, the digital economy, and global economic strategy.

METI places economic security clearly in the center of its policy framework, within which supply chain resilience in critical technologies, infrastructure and industries are a vital component of the strategy in the essential sectors of semiconductors, data, biotechnology, etc.

There are two important areas of export control to consider. The first is the challenges of existing export control regimes and possible solutions. Japan's export controls are in accordance with international regimes, such as the Wassenaar Arrangement and the Nuclear Suppliers Group, but limitations exist. Under such frameworks as the Wassenaar Arrangement, the immediate needs to address emerging technologies are undermined by a deficiency in consensus process among the 42 member countries. Export control requires quick consensus, but that is often difficult.

Additionally, unilateral measures are problematic. During the recent trade conflict, the U.S. issued a number of unilateral measures, namely, the foreign direct product rules on semiconductors or some additions to the entity list, which had a number of impacts on industries. In response, China also introduced a number of measures including the newly entered into force Export Control Laws, anti-extraterritorial application law and the anti-sanction laws. This sort of escalation of unilateral measures by two major economies is detrimental to business predictability.

In addition, unilateral measures are not effective measures as they cannot deter the exports of equivalent items from other countries due to loopholes. Therefore, the Government of Japan seeks a solution in the promotion of the likeminded-countries approach, seeking to form a novel export control group complementary to existing international regimes, in order to achieve more effective export control and also avoid any escalation of unilateral measures.

The second important area of export control is the review of deemed export controls. The approach firstly addresses appropriate controls on intangible technology transfer which is foundational for both national security and innovation in companies, universities and institutions. This includes such intangible technologies such as design program software or algorithms.

The Government of Japan is also to review and expand the scope of control into residents that are influenced by foreign countries. Under current rules, Japanese nationals and foreigners staying in Japan for more than six months are exempted from the intangible technology transfer controls. Therefore, the Government of Japan seeks to protect critical technologies at an early stage in these transactions and a cabinet-backed proposal to do so is now under the public comment process. The new approach requires intangible technology transfer controls, or an export license on critical technologies, between residents within the country when the receiving party is significantly influenced by a foreign power, either through certain contracts, economic benefits, direct government instructions, or similar.

METI's policy includes global economic strategy, and it intends to integrate internal policy and external policy. It seeks to do this by building trustable value chains focusing on resilience, Green, climate change and human rights protection and Digital. Furthermore, METI's policy supports a free and open trading system built for sustainability and fairness, and its improvement, as well as creating norms that ensure a level playing field at WTO, within EPAs and other fora. Japan is at the center of a mega FTA presently and in response to market distorting measures, METI deems both rulemaking and enforcement to be important.

Since 1995, Japan has only imposed anti-dumping measures in nine cases, and only a single instance of countervailing duty measures. There was only one such case in 2006. Anti-dumping measures are widely used around the world with 113 such measures in 2020. In particular, after COVID-19, instances are growing, notably in the metal and chemical sectors.

In addition, between 1995 and 2020, there have been 344 countervailing duty measures implemented around the world. Eight countries have implemented over 10 countervailing duty measures each, including the U.S., the EU, Canada, Australia, Mexico, India, Brazil and China. However Japanese cases are very limited.

But what are the challenges here? Trade structure has become more complex with the development of global supply chains. Thus, countervailing duty measures can be seen to be an option to lead to less market-distorting measures including industrial subsidies.

METI has conducted studies through the Subcommittee on Trade Remedies of the Industrial Structure Council, and the key findings reveal that there is difficulty in gaining information on subsidies, or in particular, the benefits of a subsidy under the definitions of WTO agreement and domestic regulation. The second issue is concerns about retaliation from other countries. Once a countervailing duty measure is issued, it may prompt a countermeasure from another party.

Third, there is a lack of awareness of countervailing duty measures in Japan considering that the only use of CVD measures was in 2006. Given the current economic situation and importance of supply chains, it is curious why Japan has not considered the use of countervailing duty measures. The next step is for Japan to promote international cooperation and engage with the EU and the U.S. to compare best practices in the use of such trade remedies.

WATANABE Tetsuya:
That was a wonderful and holistic explanation on Japanese government economic security policy and recent development of trade defense measures in Japanese trade policy.

KAWASE Tsuyoshi:
The use of trade remedy measures has been increasing for the past couple of years. This is explainable by the current economic downtrend all over the world caused by the COVID-19 pandemic. We have experienced a similar increase in the use of trade remedies during the 1997 Asian financial crisis and the 2008 global financial crisis, for example.

The trade remedies, in particular anti-dumping and countervailing duty measures, are often described as a tool to tackle unfair trade practices. However, there is a great variety of economic systems which have acceded to the WTO. Even among two similar western-style market economies there would be many differences in regulatory conditions and government policies, and thus differences cost structures, even within the same industry.

According to the WTO founding father, Professor John Jackson, trade remedies play a buffering role in order for the members in the various economic systems to coexist in the single WTO system.

Regardless of the usefulness, so far Japan has seldom employed trade remedies. This is partly because of Japan's experiences under the General Agreement on Tariffs and Trade, when Japan was the target of anti-dumping and countervailing duty measures imposed mainly by the U.S. and the European Economic Community at that time. For that reason, in Japan, trade remedies have been regarded as the policy tool of the protectionist, and additionally, domestic competitiveness in manufacturing meant that there was little need for the measures. Therefore, Japan was eager to reimpose discipline on trade remedies during the Euro Round and the early stage of the Doha Round.

This sentiment changed due to the rise of China and as other emerging economies became more salient in the early 2000s. For Japan, the turning point was the imposition of the provisional safeguard measures on certain agricultural imports, mainly from China in 2001, which was followed by anti-dumping duties on the Korean polyester staple fiber the following year.

As Mr. Kazeki showed, Japan has been invoking trade remedies constantly ever since then. Therefore, even though the number is still small, there has been a remarkable increase in the past 20 years. Alongside this, there has also been a continuing improvement of the investigation procedures in Japan.

Japanese industry used to seldom initiate trade remedy investigations. That is partly due to the mentality of competitiveness but also due to the restrictiveness of the prerequisites for petition. For example, Japan's domestic regulation on anti-dumping duties and countervailing duty measures used to require more support from domestic industry to initiate an investigation than those under the WTO agreement. The 2011 and 2016 amendments to the anti-dumping duties and countervailing duty measures guidelines relaxed the excessive requirements to conform with the WTO agreement, with further amendments in 2017.

Another impediment for the prospective petitioner is the anti-monopoly law. Sometimes the producers concerned inevitably need to discuss their collective application for an investigation, and because such talks sometimes touch upon the information about pricing, it could be deemed as a violation of the anti-monopoly law. To remedy such legal uncertainties, METI published a hypothetical case of corrective application, which gives the prospective petitioners a hint of the dos and don'ts in preparing a collective application.

Furthermore, METI has intensified outreach for domestic industry recently as only a limited number of Japanese manufacturers were aware of the usefulness of trade remedies in their business strategy at top management level. METI repeatedly holds seminars to publicize trade remedy systems, has established a desk for consultation, and is providing data regarding supply demand, the trends of various products, and useful information on its website.

For further promotion of trade remedies, the Subcommittee on the Trade Remedies of the Industrial Structure Council, METI's advisory body of experts, published a proposal for more active use of countervailing duties.

In addition to the domestic effort, Japan also attempts to combat unfair trade practices through international cooperation. In 2017, it set up the Trilateral Trade Minister Meeting which agreed to amendments to the current WTO subsidy agreement, including expansion of the list of prohibited to subsidies, introduction of a list of situations where out-of-country benchmarks can be used regarding the governmental provision of goods and services, and redefinition of a public body whose subsidies are subject to WTO rules.

While these elements, if successfully incorporated into the WTO subsidy agreement, will contribute to the better use of countervailing duty measures, the Trilateral Meeting should pay more attention to the procedural aspect of countervailing duty measures. Currently the appellate body is defunct and unfortunately this status quo will continue for the foreseeable future. Accordingly, in the absence of dispute settlement measures, countervailing duty measures imposed by individual WTO members are more effective to combat industrial subsidies and ensure a level playing field. Therefore, I would urge the Trilateral Meeting to discuss the cooperation between their investigating authorities, including exchange of information regarding the third country subsidies and concerted action in the countervailing duty measures investigations.

In conclusion, the active use of trade remedies is necessary for levelling the playing field, especially among the WTO members with a great variety of different economic systems. Having said that, my comments developed here by no means encourage protectionism. All measures and investigations must be WTO consistent as a matter of course. WTO agreement regarding the trade remedies has been already sufficiently clarified by a number of panel and appellate body reports. So finally, I recommended the Japanese investigating authorities observe the relevant WTO jurisprudence.

WATANABE Tetsuya:
It is very interesting that Professor Kawase mentioned that because the WTO appellate body is defunct, direct applications of the anti-dumping duties and countervailing duty measures will be more important.

SUZUKI Kazuto:
The economic security of Japan is a very urgent issue in the context of the rivalry between the United States and China, and for many years Japan has taken a position to separate the economic activities and the political influence, and that economic activities should not be influenced by the political willingness or political strategy. Nevertheless, in the recent geostrategic and geopolitical situation, the economy is now being used as leverage to impose the will of the state on others, and it is a certainty that more countries are actively using these economic measures to impose strategic positions. As such, Japan needs to take appropriate actions.

Mr. Kazeki discussed economic security, but the word "economic security" is relatively new and its definition is not yet clear. Basically, in relation to technological innovation and geopolitical change, economic security means to reestablish the resilience of supply chains to reduce vulnerability in supply chain activities. Indeed, it is extremely difficult to separate the global market into smaller businesses based within national economies, and a global supply chain is unavoidable if we want to reap the benefits of productivity and just-in-time production. As such, all countries are vulnerable to political influence upon the supply chain. In order to increase the resilience in supply chains, METI's policy is to highlight strategic autonomy and gain the superiority in the supply chain. Then the question remains, to what extent Japan should be autonomous and at what cost? What type of items of trade are more or less important in terms of strategic autonomy? Here, the definition of the terms will be critical.

The concepts of "know, protect and promote" are, to some extent, understandable, but if you look carefully there are different categories or different contexts in those activities. "To know" is to understand the vulnerability of the supply chain and to understand the current structure of international trade. "Protect" means how to protect Japanese industry and technology and how to prevent technology from transferring to other parties. "To promote" is a more basic, traditional industrial policy. These three have different contexts. What does economic security as national security exactly mean? In the study of international relations, national security means to prevent intentional harm by others. As it pertains to economic security, it, by extension, takes on the concept of trying to avoid intentional harm to the supply chain. And furthermore, protect means the intentional harm done by stealing technology. Then the question remains, what does "promote" do for national security? Yes, building up the industrial base is important, but how does it contribute to national security? Whether the promotion of industrial policy relates to national security is another question that we need to explore in the future.

Regarding the proposed, much smaller, agile export control group with the likeminded countries with certain technological capabilities; this is very understandable, and I encourage METI to move forward with this idea. The question still remains if it is going to be a new export control regime or a group within a certain regime, particularly in the Wassenaar Arrangement? I think the international regime is basically the coalition of willings. It's not legally binding, but it still needs to clarify how to relate to the other international regimes. This new export control group may have some conflict with the other existing but still influential members. So how do we justify the idea of this new framework of the export control group?

WATANABE Tetsuya:
Professor Suzuki provided us with very comprehensive comments and a very suitable overall view from the perspective of political economy and what is happening in the real world in terms of supply chains and geopolitical tensions. Mr. Kazeki, could you respond first to Professor Suzuki's comments on the economic security perspective, and then respond to Professor Kawase's comments on trade defense measures.

KAZEKI Jun:
First of all, to Professor Suzuki, the first question you raised on whether the Japanese government or industry should pursue the economic security policy at all costs is a relevant question because of the number of products and number of technologies in question: some technologies are critical, and others are not. The question is how can we distinguish between the two? Which one is strategically important?

During METI's consultations with industry, we propose that compliance and transparency are important, but for companies to shrink too much is not ideal. Therefore, we do our best to clarify the critical technologies in our list. And at the same time, companies need to make a comprehensive assessment regarding the risk, the nature of the technologies and the regulations present in the U.S., China and the EU. They need to look at the supply chains as a whole, not only for export control, but also regarding their R&D office, strategy office and various other offices. Now we are recommending companies to establish such kind of a holistic strategic office to cope with such matters.

Regarding the second question on how economic security policy and national security are treated and what kind of definitions exist. There is no clear, concrete, legal text definition of the economic security policy. It is a new subject, so we are pursuing how to define its scope. One approach is to focus on critical technologies, but as Professor Suzuki rightly said, there are a number of broader perspectives and a number of definitions in the world. Therefore, I believe that government officials, industries and academia need to contribute to this debate on the definition. The ultimate objective is to give transparency or guidance to all stakeholders.

Regarding the third question on the novel export control regime, Wassenaar is still the basis for control of exports and we are considering its future. The question is whether we would create such a mechanism within Wassenaar or outside it. In short, there is a need for certain discussions with Japan's trading partners, but we also need to protect or regulate critical technologies rapidly. Here, the point is that likeminded countries should be countries which actually possess such critical technologies in the supply chains.

In response to Professor Kawase's remarks, I find the use of the word "interface" by Professor Jackson to be quite impressive. I agree with this concept of interface because from my experience, anti-dumping and countervailing duty measures are a kind of linkage to the trade policy itself. The number of dispute cases and political implications of these measures are outstanding in the trade policy context.

Also, regarding Professor Kawase's comment that the use of countervailing duty measures is effective in terms of the WTO impasse right now, of course, METI's basic view is that we need WTO reform, but in the meantime, CVD use will be necessary, otherwise our industry or stakeholders will lose their level playing field in the world. We need to promote this idea right now and proceed with international cooperation with the U.S. and the EU, and we plan to have an international seminar in this regard.

SUZUKI Kazuto:
I fully agree that Japan needs to adopt a holistic approach, and I think there are a lot of issues that remain to be discussed with various stakeholders.

WATANABE Tetsuya:
The point mentioned by Professor Suzuki is very important that this is a very rapidly changing geopolitical environment, so we need to collect the knowledge and wisdom from academia and from government and from experts.

KAZEKI Jun:
I am appreciative of RIETI's leadership and insights into the new economic policy and international policies. As a government, we will proceed as needed to implement our Cabinet's decisions. But at the same time, from a longer-term perspective, we need help from academia and all stakeholders for further developments in government policies.