POLICY
Economic Security in the Indo-Pacific: Implications for US-Japan Relations
May 10, 2024
Despite the attention given to US-China strategic competition and the importance of economic security in the US media and in policymaker speeches, the impact so far on trade has been relatively mild and narrowly focused. There are signs, however, that this dynamic is changing, and if Donald Trump is re-elected US president in November, the change will accelerate. For the sake of preserving a stable rules-based economic order in the Indo-Pacific, the United States and Japan should work to harmonize their economic security policies with other nations at the minimum necessary level to protect national security with maximum multilateral support.
However, the US push to “de-risk” its economic ties with China in pursuit of national security related to supply chains, investment, and protecting technological innovation is having an impact, and China is taking similar steps. Like a river being diverted by new obstacles in its path, emerging economic security policies will alter the global trade and investment landscape over time. For example, China’s total share of US exports and imports is dropping, and has reached its lowest level in at least a decade. US private equity investment in China has also retreated to where it stood in 2019, and global foreign direct investment in China has dropped precipitously to less than 10 percent of its peak in 2021. Meanwhile, China’s stockpile of US government debt hit its lowest level in 14 years during 2023, with the pace of decline accelerating.
These are just a few of many symptoms of change stimulated by various economic security policies related to export controls, investment restrictions, subsidies for reshoring and supply chain diversification, technology research funding and research security initiatives, workforce development initiatives, and other areas. These policies are more pronounced in the United States compared to other countries, despite the Biden administration’s effort to build a “high fence” around only a “small yard” of economic activity, but Japan and European nations are implementing some of them as well. The US government, however, is poised to widen the definition of economic security and the scale of its interventions in ways that could be more disruptive to global trade and investment flows and possibly drive allies apart.
Increasingly, the US Congress and former Trump administration officials are pushing for more significant institutional changes to economic security policymaking by the US government and to cover a wider range of economic activity. The China Select Committee in the House of Representatives, for example, has called China’s entire economic system a threat to US economic security, recommended that China be moved to an entirely different tariff column for the US, and urged the creation of a coordinating office responsible for assessing and developing a more robust economic security strategy. The model they pointed to is described in HR 5703, SHIELD Act, and its Office of Economic and Security Preparedness and Resilience (and its supply chain mapping unit).
There are other proposals in Congress (and announced by Treasury) to further strengthen the powers of the Committee on Foreign Investment in the United States (CFIUS) or build upon the Export Control Reform Act of 2018 with a wider range of target goods and technologies. This more restrictive atmosphere is already evident in CFIUS behavior, setting records in 2022 for the highest number of “withdrawal-refiles” and “mitigation agreements,” despite a drop in Chinese transactions. Closer to home for the US-Japan alliance, this helps explain why Nippon Steel’s planned acquisition of US Steel is in danger of being blocked on dubious economic security grounds. Indeed, the definition of economic security in the United States seems to be expanding to include artificial intelligence, data governance, agriculture, and other areas, manifesting in such actions as House passage of a bill to ban the video app TikTok, unless its Chinese owner sells its stake in the United States, and President Biden’s executive order to prevent access to Americans’ bulk sensitive personal data by “countries of concern” (primarily China).
The United States uses a variety of mechanisms to help coordinate economic security policies with like-minded countries, including the Economic Policy Consultative Committee (EPCC) with Japan (a “2+2” with State/Commerce-MOFA/METI), the US-EU Trade and Technology Council (a “3+3” including trade officials), and NSC-led forums with India and South Korea (i.e., the US-India initiative on Critical and Emerging Technology and US-ROK Next Generation Critical and Emerging Technologies Dialogue. However, a “hub-and-spoke” bilateral approach is not feasible if Washington keeps expanding the scope and intensity (and nationalist flavor) of economic security measures.
Mini- and multilateral forums address some aspects of these issues, such as the G7, the QUAD, US-Japan-South Korea initiatives, and the Chip4 Alliance concept, and might help mitigate the worst excesses of future US economic security policy. The goal would not be to weaken economic security but rather prioritize only the most important vulnerabilities in concert with other nations. The strategy could be two-fold: first to develop more effective policies buoyed by wider international support, and then leverage the argument of effectiveness to help keep US policy makers satisfied with a less disruptive (non-unilateral) approach. The US-Japan alliance is common factor in all these forums, and can and should be a starting point for harmonizing economic security policies with as many countries in the Indo-Pacific as possible.
These are just a few of many symptoms of change stimulated by various economic security policies related to export controls, investment restrictions, subsidies for reshoring and supply chain diversification, technology research funding and research security initiatives, workforce development initiatives, and other areas. These policies are more pronounced in the United States compared to other countries, despite the Biden administration’s effort to build a “high fence” around only a “small yard” of economic activity, but Japan and European nations are implementing some of them as well. The US government, however, is poised to widen the definition of economic security and the scale of its interventions in ways that could be more disruptive to global trade and investment flows and possibly drive allies apart.
Increasingly, the US Congress and former Trump administration officials are pushing for more significant institutional changes to economic security policymaking by the US government and to cover a wider range of economic activity. The China Select Committee in the House of Representatives, for example, has called China’s entire economic system a threat to US economic security, recommended that China be moved to an entirely different tariff column for the US, and urged the creation of a coordinating office responsible for assessing and developing a more robust economic security strategy. The model they pointed to is described in HR 5703, SHIELD Act, and its Office of Economic and Security Preparedness and Resilience (and its supply chain mapping unit).
There are other proposals in Congress (and announced by Treasury) to further strengthen the powers of the Committee on Foreign Investment in the United States (CFIUS) or build upon the Export Control Reform Act of 2018 with a wider range of target goods and technologies. This more restrictive atmosphere is already evident in CFIUS behavior, setting records in 2022 for the highest number of “withdrawal-refiles” and “mitigation agreements,” despite a drop in Chinese transactions. Closer to home for the US-Japan alliance, this helps explain why Nippon Steel’s planned acquisition of US Steel is in danger of being blocked on dubious economic security grounds. Indeed, the definition of economic security in the United States seems to be expanding to include artificial intelligence, data governance, agriculture, and other areas, manifesting in such actions as House passage of a bill to ban the video app TikTok, unless its Chinese owner sells its stake in the United States, and President Biden’s executive order to prevent access to Americans’ bulk sensitive personal data by “countries of concern” (primarily China).
The United States uses a variety of mechanisms to help coordinate economic security policies with like-minded countries, including the Economic Policy Consultative Committee (EPCC) with Japan (a “2+2” with State/Commerce-MOFA/METI), the US-EU Trade and Technology Council (a “3+3” including trade officials), and NSC-led forums with India and South Korea (i.e., the US-India initiative on Critical and Emerging Technology and US-ROK Next Generation Critical and Emerging Technologies Dialogue. However, a “hub-and-spoke” bilateral approach is not feasible if Washington keeps expanding the scope and intensity (and nationalist flavor) of economic security measures.
Mini- and multilateral forums address some aspects of these issues, such as the G7, the QUAD, US-Japan-South Korea initiatives, and the Chip4 Alliance concept, and might help mitigate the worst excesses of future US economic security policy. The goal would not be to weaken economic security but rather prioritize only the most important vulnerabilities in concert with other nations. The strategy could be two-fold: first to develop more effective policies buoyed by wider international support, and then leverage the argument of effectiveness to help keep US policy makers satisfied with a less disruptive (non-unilateral) approach. The US-Japan alliance is common factor in all these forums, and can and should be a starting point for harmonizing economic security policies with as many countries in the Indo-Pacific as possible.
