The COVID-19 pandemic has disrupted global flows of people, dealing a serious blow to social and economic activities. The fall in international air passenger traffic is far more drastic than at the times of the simultaneous terrorist attacks in the United States in 2001 and the SARS (severe acute respiratory syndrome) epidemic in 2003 (See the figure below).
The prospect for a complete end to the COVID-19 pandemic is uncertain, with fears of a second wave of infection persisting. Social and economic activities premised on the "new normal" of life, including restrictions on human-to-human contact, are expected to be maintained for an extended period of time. If psychological factors are also taken into account, it is likely to take long before the movement of people returns to the pre-COVID-19 level. At a time when globalization is stalling and when it is difficult to map out the path to a V-shaped recovery, it is necessary to consider a new approach to industrial policy with an eye on the post-COVID-19 era.
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The policies to foster heavy industries in the postwar reconstruction period and the computer industry later that have been cited as examples of successful industrial policy in Japan. Those policies aimed to develop particular industries by intensively allocating resources to them and by leveraging exports. However, that policy approach started to recede significantly around the 1980s. Instead, the approach to liberalize government regulations and promoting market competition became a global trend as methods to achieving economic growth.
International organizations, such as the World Trade Organization (WTO) and the International Monetary Fund (IMF), have actively taken initiatives to promote market liberalization by invigorating international trade and investment.
However, since the inauguration of the President Trump Administration in the U.S., the push for global free and fair competition has started to lose momentum. The United States announced its withdrawal from the Trans-Pacific Partnership (TPP) on the ground that it can exact more favorable terms through bilateral negotiations. In particular, the United States has recently developed significant concerns about China, which accounts for around half of the U.S. trade deficit, and has criticized the "Made in China 2025" industrial policy. In 2018, the United States imposed punitive tariffs against China in retaliation for infringement of intellectual property rights, among other reasons.
At the same time, the advance of Chinese information and communication technologies into international markets has been recognized in the United States as a serious security threat, developing into a U.S.-China technology conflict. The U.S. administration has decided to ban government contracts and transactions with companies using parts made by five Chinese companies, including Huawei and ZTE, starting in August 2020. This may have no small impact on Japanese companies, depending on future developments.
With the COVID-19 pandemic, national particularism is spreading beyond the United States and China, rather than weakening. As many as 80 countries are imposing restrictions on exports of medical masks and protective gowns. The United States is moving to purchase exclusive rights to a vaccine for the COVID-19 from a German pharmaceutical company, while the European Union (EU) is strengthening restrictions on acquisitions of companies within the EU region by non-EU companies which were spurred by recent sluggish stock performance.
There have been many articles and much commentary comparing the present state of the world, with the disruptions to global supply chains and the escalating tendencies to put one's own country first and pursue national self-sufficiency, to the situation that triggered World War II. Governments around the world should never pursue a shift to a bloc economy, as they took beggar-thy policies pre WWII, which put one's own country first at the expense of others, because such a policy will force their own people to suffer not only economically but also socially and culturally.
One difference between now, when the world is facing the COVID-19 pandemic, and the 1930s, is that the remarkable development of information and communication technology (ICT) has significantly brought down the cost of real-time communication. The practice of working from home using ICT has become popular, and remote education and online medical care programs have started. An industrial policy in a post-COVID-19 era will need to fully take these recent developments into consideration. Two important perspectives are worth the mention on how we should proceed.
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One of the important perspectives is to promote digitization in every aspect of social and economic activities. In order to prevent economic activity from becoming stagnant amid persistent fears over the pandemic, it is necessary to change administrative procedures and obstinate analog practices held by private-sector, including the preferences for face-to-face communication and paper documents and the practice in Japan of using seals for authorizations. Unreasonable, Inefficient, and analogue practices are particularly difficult for individual companies to change, so the government should take some steps to digitalize social and economic activities.
Now that we have entered the era of digitalization, it is essential to shift from the current trend of mere deregulation to a new trend of "co-regulation," where the government the private sector work together to reform governance structure and regulatory frameworks that rule social and economic activities.
Promoting digitalization leads to the accumulation of detailed personal information by online platform companies. Using such personal information in ways that contribute to public interests makes it easier to improve social and economic welfare. On the other hand, due consideration should be given to the risks posed by the use of personal information, such as infringements of privacy and information leakage. Another problem is the oligopoly formed by giant techs collecting data. The challenge facing us is how to promote use of data while preventing inappropriate handling of privacy issues.
The other essential issue is how to protect technologies that are critical to national interests. The experience of the supply shortage of medical masks in the midst of the COVID-19 crisis has made it clear that the development of supply chains depending on companies alone is not sufficient to protect the populace in emergencies.
This problem must be addressed in two stages. First, from the medium- to long-term viewpoint, it is important to restrain the "my country first" principle through international cooperation and make continuous efforts to maintain free and open global economic environment. However, in the current circumstances where the WTO has lost much of its influence, resulting in the absence of international rules that constrain governmental restrictions on the free movement of capital and information, defense against protectionist moves by other countries is essential.
For the moment, in order to ensure the stable supply of technologies and products that are critical to public safety and economic stability, it is important to consider developing a certain degree of self-sufficiency in Japan for the sake of public interest. Governments may start evaluating domestic activities based on the ability to maintain stable supply. This system is already instituted in a limited range of sectors, such as energy and agriculture, must be extended to all economic activities.
As a result of the entry-into-force of the amended Foreign Exchange and Foreign Trade Act (FEFTA) in Japan, the restriction on foreign capital investment in Japanese companies relevant to national security will be strengthened. The challenge will be to restrain the impulse to expand the interpretation of "relevance to national security" in order to avoid giving other countries the wrong impression that Japan has slipped into protectionism. It is also necessary to consider introducing some kind of governance arrangement for Japanese companies that are subject to restrictions on foreign capital investment so that the problem of moral hazard can be avoided.
Some people point out that while the advance of globalization and shift to a market economy in the 2010s have delivered economic growth, they have also aggravated inequalities throughout society. This negative consequence has increased in severity because of the COVID-19 pandemic. At a time when the unemployment rate is expected to rise, the Japanese government should improve the liquidity of the labor market and enhance recurrent education as social safety net measures in order to maintain the Japanese economy's industrial infrastructure.
In the postwar period of high growth, Japan's industrial policy was described as a government-led policy approach. Later, Japan's industrial policy focused on promoting a shift to a market economy led by the private sector through deregulation and privatization. As for an industrial policy in a post-COVID-19 era, Japan should aim to develop a new policy approach under which the public and private sectors work together—rather than one or the other being left to take the leadership alone—in order to renovate social and economic systems.