“API Geoeconomic Briefing” is a weekly analysis of significant geopolitical and geoeconomic developments that precede the post-pandemic world. The briefing is written by experts at Asia Pacific Initiative (API) and includes an assessment of burgeoning trends in international politics and economics and the possible impact on Japan’s national interests and strategic response. (Editor-in-chief: Dr. HOSOYA Yuichi, Research Director, API; Professor, Faculty of Law, Keio University; Visiting Fellow, Downing College, University of Cambridge)

This article was posted to the Japan Times on December 3, 2021:

https://www.japantimes.co.jp/opinion/2021/12/03/commentary/japan-commentary/japan-economic-security/

API Geoeconomic Briefing

December 3, 2021

What Japan needs to do to boost its economic security

SUZUKI Kazuto
Senior Research Fellow, Asia Pacific Initaitive (API);
Professor, Graduate School of Public Policy, The University of Tokyo

 

 

 

 

A significant feature of Prime Minister Fumio Kishida’s administration is the creation of a new ministerial post for economic security and the appointment of Takayuki Kobayashi, a young Lower House lawmaker, to the post.

Boosting economic security has been one of the top items advocated by the ruling Liberal Democratic Party, with its Strategic Headquarters on the Creation of a New International Order — chaired by Akira Amari, one of the most powerful politicians at that time — hammering out proposals on the issue in December 2020 and in May of this year.

Amari, who had been actively pushing the need to improve the country’s economic security, resigned as the LDP’s secretary-general — only a month after being appointed — following a loss in his single-seat constituency in the Oct. 31 general election. But it is highly likely the Kishida administration’s economic security policies will be based on the proposals made by the strategic headquarters.

There are a number of issues that need to be addressed in discussing economic security.

 

Defending national interests

The LDP’s proposals define economic security as “ensuring the nation’s independence, survival and prosperity in economic terms,” and put forward two concepts to achieve it.

One is “securing strategic autonomy” by strengthening foundations indispensable to maintain Japan’s social and economic activities and making sure the nation is not excessively dependent on other countries. The second concept is “maintaining, boosting and obtaining strategic indispensability” by expanding areas in which Japan is considered essential to the global community.

In order to realize these objectives, the proposals call for the need to grasp and analyze the vulnerabilities of strategic infrastructure industries and take necessary measures.

Five sectors — energy, telecommunications, transportation, medicine and finance — are listed as strategic infrastructure industries in the proposals, and analysis is given on risks and ways to cope with vulnerabilities in each sector.

The discussions in the LDP’s reports are extremely detailed and useful.

However, they are focused on how Japan should prepare for situations that threaten its independence, survival and prosperity. They do not discuss measures to prevent such situations from happening in the first place, except mentioning the need for strategic indispensability.

In other words, the proposals are intended to make use of strategic indispensability as a deterrent against threats from other countries.

Will strategic indispensability work effectively enough as a deterrent? If a country that produces certain items such as crude oil does not depend on Japanese technology, will it be possible for Japan to reduce threats only through strategic indispensability?

In the case of North Korea — a country that poses national security threats — Japan has been gradually expanding its scope of punitive measures to cooperate towards full implementation of U.N. sanctions.

But such moves have failed to stop North Korea from developing missiles or nuclear weapons.

Economic security will function only when it is incorporated into the country’s national security strategy, but more discussions are necessary on how to do it.

 

Strategic autonomy

Having vulnerable strategic infrastructure industries means a country will not only risk becoming subject to intentional attacks on supply chains by other countries, but may also be greatly affected by natural disasters and supply-demand fluctuations in the global market.

An effective way to cope with the problem is to reduce vulnerabilities and strengthen autonomy by lowering dependence on other countries as much as possible.

But it would be impossible to realize that in all industrial sectors.

It is necessary to carefully consider how much should be spent on which sectors to reduce vulnerabilities and to what extent risks can be taken in other sectors.

While the LDP lists five sectors under the banner of strategic infrastructure, each of those is made up of a variety of industries — ranging from nuclear power to renewables in the case of the energy sector, for instance — and it is difficult to decide on priorities.

To reduce the vulnerabilities, it is also important to think of how to cooperate with allies and partner countries to establish supply chains based on trust.

 

Collaboration with industries

Kobayashi, the economic security minister, is tasked with taking the lead in putting together an economic security strategy.

In doing so, it is important that he works closely with industrial circles.

To secure strategic autonomy, the government will have to take measures to maintain and strengthen strategic infrastructure through subsidies and regulations. But this means the government will use its authority and rules to make industries shift from procuring cheaper items produced overseas to buying domestically made products.

The move could result in reducing some industries’ competitiveness.

The government and the private sector should work together to achieve economic security, with the government making companies get involved in policy implementation by promoting their business activities and controlling them at the same time.

 

Rules-based international order
Production networks and supply chains have expanded globally under the principle of free trade, but as a result they are extended to include countries which can pose strategic threats.

Economic security policies are aimed at reducing dependence on such supply chains.

This indicates the possibility that in order to achieve strategic autonomy, Japan might take measures that go against the principle of free trade.

The World Trade Organization has a national security exception clause under Article 21 of the General Agreement on Tariffs and Trade (GATT) that allows member states to breach their WTO obligations for purposes of protecting essential security interests.

Such security exceptions are also included in the Regional Comprehensive Economic Partnership (RCEP), a regional trade agreement which has Japan, China and South Korea as its members, as well as in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) led by Japan.

However, the security exception stated in the GATT rules is very narrowly defined and it is hard to interpret it as including economic security.

While security exceptions in RCEP and CPTPP allow broader interpretations, it doesn’t mean countries can adopt subsidies without limits, or ban foreign companies’ entries for the sake of achieving strategic autonomy.

We should also note that countries have different interpretations of security exceptions.

China does not strictly differentiate between security and national security, and Beijing is highly likely to attempt to apply security exceptions to such issues as data localization — efforts to restrict flow of data across borders.

Rules-based international order and economic security have many contradictory features.

Japan should take part in international rule-making so that it can achieve its own economic security while setting rules to limit interpretations of security exceptions so as to prevent the exception clause from being misused by countries like China.

 

Economic security as national security
Economic security measures lead to changes in the way of doing business for industries and companies that have been benefiting from globalization.

It means modifying and restricting, from national security perspectives, the production networks and supply chains that have been optimized by free trade principles and free capital transfers.

It also means companies will be forced to make decisions that differ from economic rationality.

While economic security policies share the same goals with national security policies, their tools differ.

Taking economic security measures is like constantly dealing with so-called gray-zone situations. While being vigilant against unilateral trade-restricting acts or sanctions by other countries, it is necessary to create a foundation to conduct stable economic activities in cooperation with allies and partner countries.

What is important is to not only strengthen strategic autonomy but also stabilize the global community so that rules-based trade and investments are maintained.

Japan should achieve strategic indispensability so it can be used not only as deterrence against other countries but also as a tool to take the leadership role in international rule-making and in realizing stable international order.

Japan succeeded in putting together the Trans-Pacific Partnership free trade agreement after the United States’ withdrawal from the framework, restarting it as the CPTPP.

Having the power to establish such rules-based order is the most effective way to realize economic security.

 

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