Geoeconomic Briefing is a series featuring researchers at the IOG focused on Japan’s challenges in that field. It will also provide analyses of the state of the world and trade risks as well as technological and industrial structures. (Editor-in-chief: Dr. SUZUKI Kazuto, Director, Institute of Geoeconomics (IOG); Professor, The University of Tokyo)

This article was posted to the Japan Times on May 25, 2023:

https://www.japantimes.co.jp/opinion/2023/05/25/commentary/world-commentary/g7-economic-security/

API Geoeconomic Briefing

Photo:Website of Prime Minister’s Office of Japan

May 25, 2023

Why the G7 has significance as a collective economic defense mechanism

SUZUKI Kazuto
Director & Group Head, Economic Security, Institute of Geoeconomics
Professor, Graduate School of Public Policy, The University of Tokyo

 

 

 

 

With Russia’s invasion of Ukraine still continuing after more than a year, confrontation between the United States and China intensifying and the so-called Global South coming to the forefront, the Group of Seven summit in Hiroshima attracted much more attention than previous G7 summits held in Japan.

The world apparently cannot help but focus on how the role of G7, which has shaped the international order until now, will change going forward.
 

Chairing the G7

The G7 is not an international organization and its decisions are not legally binding.

However, it is aimed at major industrialized countries getting together to form a stable order in the international community and jointly implementing policies that meet their own national interests and the public interest of the global society at the same time.

While many countries are invited to G7 meetings as guests — representatives from eight nations, including India, South Korea and Australia, plus international organizations such as the United Nations were invited to the Hiroshima summit — a summit’s final communique is adopted only by G7 leaders and the representative of the European Union.

Issues to be discussed at a G7 summit are negotiated on a working level for around a year. Chief negotiators, dubbed “sherpas,” sort out agendas and work to find common ground among the member countries.

Prior to the summit meeting, different ministerial meetings such as a meeting of foreign ministers and a meeting of health ministers are held according to policy areas.

Most of the issues were cleared before the G7 leaders met in Hiroshima, leaving them free to discuss the agenda that ultimately needed to be hashed out.

The country that chairs a meeting is responsible for proposing a possible agenda, starting with negotiations on the sherpas’ level and coming up with a draft for the final communique.

The chair is tasked with the role of steering the direction of the discussions.

Because the G7 has been based on personal relationships of mutual trust among individual leaders from the time of the organization’s launch, the chair country also sets the tone and mood for the agenda.

One of the key agenda items Japan took up in the summit was economic security.

The issue was also the main topic of the meeting between Prime Minister Fumio Kishida and German Chancellor Olaf Scholz in mid-March.

In a bid to deal with the issue, Germany showed willingness to learn from Japan, which enacted a law to promote economic security in May last year and has been putting together policies ahead of European countries.

The fact that Japan, along with the U.S., has been making efforts in the area of economic security a step ahead of other G7 countries would seem impressive to other members, putting the G7 chair in a position to lead the discussion.

With Russia’s invasion of Ukraine, European countries, which have deepened economic interdependence with Russia despite security concerns, are now strongly aware that strengthening economic ties with countries that have geopolitical risks brings a lot of stress to their own economy.

Now they recognize the risks in maintaining economic relations not only with Russia but also with China, which could become an adversary in the future.
 

Export controls on semiconductors

The U.S. is also increasingly aware that economic interdependence with China is an issue directly related to its own national security.

Strengthened controls on chip exports to China, announced by Washington in October, are based on concerns that China’s rapidly developing semiconductor industry will help upgrade the country’s military capabilities, especially in the field of artificial intelligence, which uses advanced chips, making its military operations more efficient and sophisticated.

The U.S. saw the need to stop transfers of its products and technologies that contribute to China’s semiconductor manufacturing capability.

The export controls can restrict not only U.S. firms but also companies in third countries that ship to China products and software made using U.S. technologies. But Japanese and Dutch companies that export products not based on U.S. technologies are not subject to the restrictions.

Washington has, therefore, urged Japan and the Netherlands to introduce similar restrictions and, though unofficially, the three governments agreed to cooperate in stepping up export control of semiconductor manufacturing equipment.

Due to such circumstances, there has been increasing interest in economic security among G7 members — the EU is an official member too — but it is difficult for one country to achieve economic security by itself, considering that the international division of labor has matured in manufacturing processes and supply chains.

It is, therefore, important for G7 countries, which play major roles within supply chains and possess technologies not held by China or Russia, to cooperate and act in concert regarding economic security measures to enhance their effectiveness.
 

Dilemma

Nevertheless, there is one big concern regarding the G7 jointly working to achieve economic security: France.

French President Emmanuel Macron visited China along with European Commission President Ursula von der Leyen in early April with a delegation of around 50 French business leaders. It has been reported that the two countries signed business deals totaling $40 billion, including an agreement by Airbus to deliver 160 commercial aircraft.

At a time when the risks of economic dependency on China are being discussed, actively promoting stronger ties with Beijing and increasing reliance on the Chinese market could disturb concerted action among G7 members and could mean sending the wrong signal to China.

At the same time, we must note that any country can be tempted to prioritize the interests of its own industries.

The reason is that if companies refrain from doing business with China due to concerns over the risk of becoming overly dependent on its economy, a blank space will be created in the market, and filling that space will yield significant benefits.

If firms from other countries withdraw from the Chinese market because of political reasons, there will be a chance to enter the market with no rivals.

In other words, the more G7 countries work together to achieve economic security, the more incentives there will be for attempts to gain profits by stealing a march on them.

Even if governments implement stricter export controls, there is a possibility that companies will try to clinch business deals by finding loopholes in regulations and a way around them.

At the same time, such business demands could result in higher dependence on China and higher vulnerability in security. How should we deal with such issues?

When G7 countries jointly implement an economic security strategy, what is important, first of all, is not to completely deny economic dependence on China.

Some experts in the U.S. have called for a complete decoupling from China, but totally cutting economic ties with Beijing is unrealistic.

Even if decoupling can be achieved, companies will look for ways to somehow work around it. Economic security measures will then become invalidated.

Secondly, it is still necessary to reduce dependence on China as much as possible for strategic goods.

As European countries and Japan have been reliant on natural gas supplies from Russia, natural gas had to be exempted from items subject to economic sanctions against Moscow that were implemented in response to Russia’s invasion of Ukraine.

Attempts were made to hamper natural gas exports to cut the Russian government’s source of revenue and prevent Moscow from continuing the war, but the effects of such efforts have been limited.

This indicates that relying on other countries for strategic goods can represent a vulnerability in economic security.

To break China’s hold on G7 countries’ chokepoints — strategic goods of which China holds a large share — it is important for G7 members to work together to diversify sources of supply for such goods and to develop substitutes.

Thirdly, it is also essential to take control of China’s chokepoints. As Western countries are technologically dominant in the field of semiconductors, they strengthened export controls led by the U.S. to put a brake on China’s chip development and manufacturing.

G7 countries maintain an edge over China not only in semiconductors but also in other areas. They need to maintain technological predominance in such areas so that they can take countermeasures in case China deploys coercive economic practices.

In March, the European Union reached a provisional political agreement on the so-called anti-coercion instrument, aimed at deterring economic coercion through such measures as increased customs duties, import or export licenses, or restrictions in the field of services or public procurement.

Such countermeasures should be taken not by the EU alone but jointly by G7 countries to increase the deterrence effect against economic coercion. At the same time, they should also take measures that are not included in the anti-coercion instrument, such as the prevention of technology transfers and the strengthening of export controls.
 

Gaining understanding from industries

Lastly, it must be noted that maintaining superiority and taking hold of chokepoints would mean nothing if they can’t be transformed into pressure against China.

Each of the governments must create a legal framework to prepare themselves to take countermeasures against China’s economic coercion.

Moreover, countering such economic coercion will cause various stresses for industries and the people.

Therefore, G7 governments need to clarify procedures for imposing countermeasures against such actions and share them with industries beforehand in order to gain their understanding of the need to take the steps for the sake of national security, even if it means partly squeezing their profits.

These countermeasures are indeed necessary for G7 members to jointly protect themselves, because in a globalized market, it is impossible for a country to achieve economic security just by itself.

As the G7 chair and as a country taking economic security policy measures ahead of others, Japan is in a position to take a leadership role in constructing a reliable supply chain network with G7 members and partner countries, and, depending on the situation, jointly establishing a collective economic self-defense mechanism to counter economic coercion.
 

Disclaimer: The views expressed in this API Geoeconomic Briefing do not necessarily reflect those of the API, the Institute of Geoeconomics (IOG) or any other organizations to which the author belongs.