Recent US Trends in Economic Security

Introduction

In fall 2021, Sasakawa USA launched the NEXT Alliance Initiative to support bilateral dialogue addressing emerging challenges for the Alliance. Each year, we organize one project in foreign and security policy, focusing this year on modernization of U.S.-Japan command and control relationships, as Japan develops a new joint operational command for the self-defense forces, and introduces counter-strike capabilities. We convened dialogues to update U.S. command relationships with forces in Japan. We also organized one project in the technology and innovation realm concentrating on economic security, tracking the core partnership of the Japan-U.S. Commercial and Industrial Partnership (JUSIP), and the Japan-U.S. Economic Policy Consultative Committee (EPCC). Interestingly, the term economic security was not mentioned once in the first joint statement made in 2021. Now, the term is everywhere and covers a wide range of topics, almost all of which concern China. Due to the focus on China in U.S. economic security measures, I will begin by briefly outlining the evolution and current perspectives of U.S. policy and strategy toward China.

Evolution of U.S. policy towards China and economic security

We tried to make China a responsible stakeholder in the world, but it did not work. Throughout the 20th century, the U.S. has had several pivotal China geopolitical strategy debates, such as support for Chiang Kai-shek's nationalist movement in the 1940s, President Nixon's switch to the recognition of the People's Republic of China in the 1970s, and the pursuit of deep integration with China via trade normalization and entry into the World Trade Organization in the late 1990s. Interestingly, the Clinton administration that pushed for deep integration with China and the North American Free Trade Agreement (NAFTA), also proposed the formation of an economic security council which later became the National Economic Council (NEC), aimed at bolstering U.S. competitiveness.

In the 1990s, economic security entailed strengthening U.S. competitiveness, so getting closer economically with China and strengthening economic security were not mutually exclusive in that era. Today, it is very different, with a closer connection to national security or even national survival. The ongoing debate in Washington is between de-risking our economic relationship with China, and strategic decoupling, which some are advocating for.

The concept of deep integration only took about a decade to begin falling apart. The first problem was political, with studies estimating nearly one million manufacturing job losses in the U.S. from 1999 to 2001 due to new trade and investment patterns with China. Advances in automation and the Great Recession exacerbated these effects, leading to significant job losses in states like Ohio. While the national economy overall was not negatively affected, the effect was severe in these states and communities, and politicians took notice.

Subsequently, scrutiny of Chinese trade practices intensified, coinciding with growing criticism among the U.S. private sector regarding persistent market barriers and intellectual property theft. Vocal support for deep integration began to dry up in 2015, when Beijing launched Made in China 2025, and its civil-military fusion initiatives, which now represented both economic and security problems, both of which were becoming more prominent. More recently, the emergence of digital authoritarianism and China's Digital Silk Road initiative have added one last ideological layer and prompted fears of China leveraging combinations of technology, finance, and infrastructure support for countries around the world in ways that will undermine democratic norms and human rights.

Due to these varying issues, there are differences in what U.S. policymakers focus on in term of economic security concerning China. Those with a national security priority, largely Republicans, but some Democrats too, want U.S. companies to succeed and to help maintain a military advantage over China. But liberal Democrats are opposed to what they see as corporate welfare, instead prioritizing the domestic condition. Education, healthcare, support for the middle class becomes their economic security agenda. These different layers of issues complicate strategy formulation, policy response, and allied coordination, and as a result, U.S. economic security policy is fragmented, despite a deliberate effort by the Biden administration to centralize economic security and China policy coordination by leveraging the National Security Council (NSC).

The current approach to managing economic security

There are three main points I would like to make regarding recent trends in the U.S. on economic security. The first is that there is a growing recognition that the current approach to managing economic security is insufficient. Various reports, including those from the China Select Committee (CSC), call for the creation of a coordinating office responsible for assessing and developing an economic security strategy, and devising a plan for how to respond to China's economic coercion. The model they point to is in the recently introduced bill H.R. 5703, known as the SHIELD Act, and it has a plan for an Office of Economic Security Preparedness and Resilience with jurisdiction over a supply chain mapping unit. Another proposal, the Global Technology Leadership Act, supports the creation of an Office of Technology Net Assessment.

Mapping and assessing threats on the economic security front is seen as a crucial area to focus on, but there is still debate regarding who will do the work and how. I think that this is an area that the U.S. and Japan can collaborate on quite significantly. Scholars in Foreign Affairs Magazine recently wrote that nothing less than a transformation of the U.S. government is required to deal with economic security issues, and Japan is mentioned as an example of a "considerably reformed economic security state" because of the legislation and steps that have been taken.

There are proposals in Congress and announced by the Treasury Department to strengthen and add resources to the Committee on Foreign Investment in the United States (CFIUS), or to build upon the Export Control Reform Act of 2018. Policymakers have noticed that CFIUS experienced a record number of withdrawal refiles in 2022, due to assessments taking too long to complete in the 90-day timeframe. The review process in general is trending towards becoming more stringent and demanding, despite an overall drop in Chinese transactions.

Economic security proliferation

The second trend in U.S. economic security is the expanding definition and proliferation of the concept itself. Alongside traditional concerns such as countering economic coercion and improving supply chain diversification, newer dimensions like cybersecurity, artificial intelligence (AI) security, countering disinformation, and data governance are gaining prominence. Concerns are even being raised on minor aspects like the de minimis rule for import exemptions, typically allowing $800 daily with minimal paperwork, with Congressmen and bureaucrats beginning to see Amazon packages from China valued at less than $800 as potentially an economic security threat because they do not know what is in there and the requirements are different.

Then there are the efforts in economic security to promote research and development for emerging tech, which is going to complicate efforts in Washington to rework the structure for managing cyber security. I would like to highlight AI, data, and cyber security in particular as being a focus of economic security, as I see a potential gap emerging between the U.S. and Japan in terms of framing future regulatory approaches despite harmonization efforts at G7 and OECD levels.

Potential approaches include supply chain management for data, leveraging existing mechanisms like the Commerce Department's Office of Information and Communications Technology and Services (OICTS) and the Federal Acquisition Security Council (FASC), to enforce higher standards or exclusions for Chinese components in IT or telecom products. I think we will see rules that significantly hinder businesses like TikTok in the U.S., and in the AI space, protections against poisoning of AI model development, cloud certifications and accountability rules, and other AI standards that go beyond what is currently being discussed between institutions like the National Institute of Standards and Technology (NIST) and the Ministry of Economy, Trade, and Industry’s (METI) Information Technology Promotion Agency (IPA).

The widening gap in opinions on the threat of economic security

The third trend to watch relates to the widening gap in the United States regarding how serious the economic security threat is, and what should be done about it. Everybody thinks it is serious, but a gap is developing, and many are speculating what will occur depending on the outcome of the next election.

Many think that a Trump presidency could significantly change the current stance on China yet again. Former Trump administration USTR Lighthizer advocates for strategic decoupling with China, with recommendations including withdrawing China's permanent normal trading relations status, and creating a new tariff regime for China. He cited the previously unheard-of level of mercantilist policies employed by China as their reasons for the need to decouple, while former Secretary of State Pompeo said that Chinese Communist Party has been at war with the U.S. economy for 20 years, pushing for greater sanctions and other economic action. On the other hand, I have heard concerns that a Trump administration might try to cut a deal with China to limit U.S. pushback in East Asia in exchange for various trade and economic security concessions with China, but I think this is highly unlikely due to the sense among some likely Trump administration officials that the CCP is already engaged in an economic war with the U.S. economy.

On the other hand, the Biden administration see itself as clear-eyed to the Chinese economic security threat, but believes it can reassure China that the bulk of economic engagement can continue, even if some high-end technology trade and investment is interrupted. Both sides mention the importance of coordination with partners and allies, but this is easier said than done, depending on which strategy you are approaching. The main challenge in this situation is how to compete effectively, without harming yourself or your friends or undermining the open, stable system we all benefit from.

Both the Trump and Biden administrations are evaluating potential implications and responses to potential economic conflicts. For the Trump faction, one could imagine this starting with reciprocal sanctions, stemming from a U.S. initiation of strategic decoupling. However, the Biden team thinks that by limiting security measures to the most necessary technologies and supply chains, this kind of economic confrontation can be avoided during peacetime. However, a conflict involving Taiwan could prompt Democrats to apply economic pressure on China akin to the Russia-Ukraine situation.

Assessing risks and threats remains critical to understanding how this could unfold, particularly regarding scenarios like an economic blockade of Taiwan. Economic simulations explore resupply efforts amid embargoes or blockades, potentially involving trans-shipment points to mitigate risks. Recent events, such as Houthi rebels' missile strikes in the Red Sea, exemplify escalating war risks, impacting insurance rates and subsequently the shipping routes themselves.

Some potential tools that the U.S. are looking at to discourage or de-escalate conflicts include primary financial sanctions, secondary sanctions on entities dealing with designated Chinese firms, preventing profit repatriation and SWIFT banking-related measures. Tariff measures justified on national security or trade practice grounds, along with non-tariff measures like quotas and inspections, are also considered along with expansion of the Foreign Direct Product rule.

I think policymakers need to be very careful. The U.S. and China account for approximately 40% of global GDP. The U.S. is China's primary trading partner, and China is America's second largest partner, with U.S imports from the PRC reaching $563 billion in 2022. This economic interdependence extends to the PRC's holdings of $860 billion of U.S. debt, making it one of their largest creditors. This de-coupling rhetoric is dangerous, in my opinion, and a tailored de-risking strategy is more appropriate and more manageable in terms of ensuring cooperation with allies.

The EPCC

In terms of working together with allies, in peacetime or in the event of some kind of kinetic decoupling, emphasis is often placed on development of joint plans, and coordination with partners. We are using various mechanisms to harmonize everything, like export control policy, supply chain resiliency, and quantum computing innovation. The U.S.-EU Trade and Technology Council (TTC) is a three-plus-three approach with the United States Trade Representative (USTR) involved. India and South Korea are NSC-led, as are Israel, however with a much larger role for the State Department.

With Japan, we have the EPCC, which despite being a big improvement on what came before, is not quite reaching its full potential. The two-plus-two framework is currently viewed as a way to co-ordinate the policies of the two departments and two ministries, where it should be a mechanism to coordinate our two governments' approach to economic security overall. For example, with outbound investment restrictions, it was very hard for the foreign ministry to have insight into what the Treasury was doing, because it was not coordinated within the EPCC, even though any restrictions the U.S. applies to China would have very important diplomatic consequences in a U.S.-Japan context, as well as Europe. It is hard for my Japanese embassy friends in Washington to understand how the U.S. government will reconcile these different interested parties, and I would like to see the EPCC develop a way to manage that.

I have yet to mention the technology promotion side of economic security, which adds further complexity. For instance, the National Science Foundation's (NSF) Regional Innovation Engines Program, funded under the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, looks to invest in and develop innovation hubs across the U.S. It involves so many departments and agencies that I think it is impossible to manage this kind of coordination in a U.S.-Japan alliance context from the capitals themselves. The embassies need to get more involved because they have the chance to network with all these different players. The EPCC is a promising candidate as a forum for U.S.-Japan coordination on these important issues.

Q&A:

Q:
In order for Japan and the U.S. to work more closely on national security issues, we need to consider information sharing between the two countries. How do you evaluate current Japanese security clearance efforts? How important is it? And how does it affect the U.S.-Japan economic security alliance?

Jim SCHOFF:
I think it is incredibly important. This has been an area in the traditional defense arena. Japan has made important advances on information security protection, and the Specially Designated Secrets Act was evaluated highly on the U.S. side. But there have been missing pieces to the Japanese system. One key piece is how it applies to the private sector in a broader security context.

Cybersecurity is the most obvious area. In my mind Japan should be considered an equal partner, but there have been examples of Japan not being included in information sharing until late stages, such as the Five Eyes countries assessment of the Volt Typhoon situation in Guam. Japan does not need to be a Five Eyes partner overall, but it should be an equal on economic security and in key areas of innovation, as well as with information regarding sensitive areas of data or technology regarding accessing data which will require clearance levels to truly share.

Another key issue is that there is currently no sole designated authority in Japan, as I understand it. In the U.S. we have the National Disclosure Policy Committee, a multi-department, multi-agency body that has the final say on what is releasable. I think within the Cabinet Office you could create a sole designated authority without changing the day-to-day operation of how ministries are managing it. It is extremely important that coordination between the U.S. and Japan on this is good, as we will not get a second chance to implement it. The new Japanese security clearance approach does not need to be the same as ours, we just need to agree on the direction and ensure they are equivalent in strength and capacity.

Q:
There are concerns regarding the constantly shifting concept of economic security in the U.S., as well as concerns about the protectionist tendencies the U.S. has. People mention that the U.K. is creating a national risk register, and wonder if the U.S. will do the same kind of thing in order to maintain overall long-term strategies. How do you respond to these concerns and questions?

Jim SCHOFF:
I can understand that view. Because the authorities and strategies are spread throughout the government, there is not a unified strategy. Some of these new bills being put forth in Congress are trying to address this. I believe next year, with a new administration, is going to be critical for us, as I do not see any new legislation being passed during an election year.

However, I do think either administration has the opportunity to reassess and make adjustments on the economic security front next year, and move towards this idea of a national strategy or risk assessment. I think "who does what" and "will they be sufficiently funded" are some of the critical questions. Handling of economic security may need to be divided into smaller areas of expertise with leadership given to those areas. The problem, in my opinion, is that there will be a very different approach depending on the administration. I think a Trump administration will be more dangerous, more disruptive and not as productive. I may be overreacting, but that is a concern that I have.

There is no doubt about the issue of protectionism, however. Some people are approaching economic security from a political point of view, focusing on labor and industries or areas, or from a military point of view. That will continue. Both the U.S. and Japan are incentivizing new industries and capacity building for the sake of supply chain diversification. I think that is OK, especially if there is coordination and agreements are in place to help each other. But the politics are going to be contentious.

Q:
What is your personal view on the buyout of U.S. Steel by Nippon Steel, in the view of the economic security of the U.S.?

Jim SCHOFF:
The buyout of U.S. Steel by Nippon Steel, in my view, is not an economic security concern, although some will portray it that way. The main problem is conflicting interests among key stakeholders in the U.S., namely U.S. Steel, the Steelworkers Union, and Cleveland Cliffs. The problem is that two out of those three are trying to undermine the deal. The Steelworkers Union are trying to get leverage for negotiations with the eventual owner and they are concerned about Japan's reputation as not being supportive of labor unions even though they have treated employees well in the U.S. automotive industry and elsewhere.

Cleveland Cliffs wants to acquire U.S. Steel at a lower cost. In an election year, the Biden administration is paralyzed, unless the Steelworkers change their position. The steelworkers are they key stakeholder to convince. Nippon Steel's visit to Washington was good, and they should work to reassure the Steelworkers union as much as they can.

From an economic security standpoint, the buyout will enhance America's steelmaking capacity and bring new technologies and investments, the same way the U.S. automotive industry benefited from Japanese investment. Unfortunately, the negotiation will take time. If Biden wins, I think this deal gets done just by reassuring the Steelworkers, but we are going to have to wait until the election. If Trump wins, I think it is possible he would end the deal, but it is not an economic security concern in my opinion.

Q:
How would you describe the roles that the National Security Strategy (NSS), NSC could play within the broader version of the EPCC you proposed?

Jim SCHOFF:
Certainly, at least on the U.S. front, the NSC plays a crucial role in providing direction, acting as a control tower for technology-related matters, such as negotiating with Congress for funding and getting authorities to do certain things. But they do it through other departments and agencies because they do not have the manpower or capacity to do it alone, so I would not be surprised if it became more of a council arrangement where you bring the different ministries and our departments and agencies together. The NSC would be the chairperson of that council, but the other stakeholders have to have a very prominent role because they are the ones with the money, technology, and expertise to get things done.

Q:
If you were to name three major economic security risks for Japan in recent years, what would you think they are?

Jim SCHOFF:
That is a good question, I have been thinking about the U.S. mostly. Cyber security is certainly an issue. We have seen reports highlighting vulnerabilities and challenges in this area. I think through the NSS in late 2022 there is more effort applied to the cyber security mission, and I think that is a good direction to move in.

The supply chain would be very high on the list as well. Events like the floods in Thailand, or the earthquake and tsunami on 3/11 have demonstrated what happens to the economy. The question is which industries or supply chains, which leads us back to risk assessment and understanding where the chokepoints are on that front.

Lastly, I think Japan has great technology and innovation capabilities and capacity, but sustaining and advancing that is going to continue to take more investment and attention. So, collaboration here is very important. The talent pool, the workforce in this arena does not have to just be a national resource, it could be an alliance resource as well. Innovation and workforce could be another area to focus on.

Q:
What would your advice be to Japanese companies dealing with economic security issues? For example, how to make a risk assessment, or supply chain analysis.

Jim SCHOFF:
I think I would encourage public-private action, working with the government and other companies. I do not think that one company by itself can do a comprehensive enough risk assessment. Industry associations, or working with the government, or having a group that can collect this information and share the benefits of the assessment with the companies that participated, would be best. My practical advice might be to develop new alliances with government agencies and other companies. For example, U.S. and Japanese companies that are competitors in one realm, but they have shared interests in the context of economic security challenges should collaborate. That type of collaboration in developing risk assessments could be very useful. It would be helpful to have an office in Washington or visit Washington frequently and to do the same in other locations that are relevant and create connections, even virtually. You have to understand these risks and challenges around the world, because it is not just about carrying out your business, but carrying out your business within this dynamic geopolitical environment that we live in.