Research Group on 'Economy-Security Linkages' FY2022－# 1

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On May 11, 2022, the Diet passed the Economic Security Promotion Law. This paper summarizes the background of this law, evaluates its significance, and examines future issues.

Background to the growing interest in economic security

Interest in economic security has risen in Japan since around 2020 due to the following factors:

1. The US-China competition for technological hegemony: In the 2000s, China emerged as an economic power and improved its technological capabilities, while the United States became increasingly concerned about China. China's national strategies of strengthening the competitiveness of its manufacturing industry and integrating its military and civilian sectors have led to the view, firmly established in the US, that losing out to China in the competition over emerging dual-use technologies such as AI, quantum computing and robotics will have a huge impact on US national security. The result has been an intensification of the struggle for technological supremacy between the United States and China from which economic and security barriers have been removed.

2. COVID-19: The first case of COVID-19 was confirmed in China at the end of 2019, and the virus spread across Japan in 2020 and prompted countermeasures. In this context, a shortage of medical supplies such as masks became apparent. In addition, Japan had to rely on overseas production for vaccines, which had become the trump card for preventing infection. These problems became recognized as issues of economic security.

3. Semiconductor shortage: A shortage of semiconductors became apparent in 2021. This was caused by a combination of factors, including increased demand for electronic devices due to widespread adoption of remote work, higher demand for gaming devices and home appliances due to increased time spent at home, and the impact of competition between the United States and China for technological supremacy. The shortage of semiconductors forced the automobile and consumer electronics industries to cut production, and this became recognized as an economic security issue.

4. Russia's invasion of Ukraine: When Russia invaded Ukraine in February 2022, the Japanese government got on board with the economic sanctions imposed by the United States and Europe, and many Japanese companies were forced to suspend their economic activities in Russia. This issue has also been discussed in relation to economic security.

Provisions and Evaluation of the Economic Security Promotion Law

The economic security issue originated in the US-China competition for technological hegemony, but COVID-19 and the shortage of semiconductors, which occurred at the same time, also affected the economic security debate in Japan. Against this backdrop, a bill to promote economic security was submitted to the Diet. The bill comprises four pillars: (1) securing a stable supply of specified important goods; (2) ensuring a reliable supply of basic infrastructure services; (3) supporting the development of key advanced technologies; and (4) establishing a system to keep confidentiality of the content of patent applications. Among these provisions of the bill, (1) reflects the COVID-19 and the semiconductor problem, (2) is related to infrastructure cyber security, (3) is about the strengthening of Japan's technological capabilities amid the US-China competition for technological hegemony, and (4) is for the prevention of technology leaks, an area in which Japan has lagged behind other developed countries.

In this way, the economic security promotion bill contained four elements that have little relations with each other, but the media and Diet deliberations seemed to imply as if these four elements were the entirety of Japan's economic security policy. As a result, the four components of the bill were discussed in detail, but an overall picture of Japan's economic security policy did not emerge, and there was also confusion about the concept of economic security itself.

In this sense, it is important to place this bill in the overall picture of Japan's economic security policy. The following three aspects are considered key in this process:

1. Policy institutionalization: There have been cases of promoting policies in the area of economic security, but these have taken the form of increased budgets within the existing framework. For example, in the aftermath of the 9/11 terrorist attacks, Japan also promoted the development of counterterrorism equipment using the Ministry of Education, Culture, Sports, Science and Technology's science and technology promotion budget. This time, economic security policy has been institutionalized through legislation, and the relevant ministries and agencies are now able to work together over the medium to long term.

2. Establishment of an "economic security box": As stated in the purpose of the law itself - "promotion of security assurance through integrated economic measures" - the main purpose of this law is to enable economic means to be used to ensure Japan's national security. Therefore, the four constituent elements of the law are individual elements for achieving this objective and further economic measures can be included here if they are required in the future. The significance of this bill can be seen in the creation of this kind of "economic security box."

3. Path to a National Security Strategy: The National Security Council Establishment Act was amended in conjunction with this law, and economic policies were added to the existing foreign and defense policies. This paves the way for economic policy to be incorporated into the National Security Strategy, which is due to be revised in 2022, so as to integrate economic security.

By placing the significance of this law in this way, we can see the overall picture of Japan's economic security policies, which comprise three categories: (1) policies related to the prevention of leakage of technology, which have traditionally been addressed by policy measures such as export controls and foreign investment restrictions under the Foreign Exchange and Foreign Trade Law; (2) the "economic security box" newly established by this law, which covers four areas that are included in this law as well as those that cannot be covered by existing laws but will be included as needed in the future; and (3) economic security policies in the National Security Strategy, which will be included in 2022. Japan's economic security policies are currently under development, and it is necessary to further enhance category (2) and incorporate economic security into the national security strategy per category (3).

Issues of the Economic Security Promotion Law

This section examines those economic security issues concerning the construction of supply chains for important goods and measures to foster important technologies via industry-government cooperation, which are my areas of expertise.

1. Securing of a stable supply of specified important goods (supply chain problems): The issue of strengthening supply chains needs to be addressed as part of corporate management even without government intervention. In fact, the recent multiple earthquakes and the coronavirus crisis have prompted companies to respond by creating business continuity plans (BCPs). Therefore, for the government to embark on efforts to strengthen supply chains, it is necessary to logically clarify why and in what areas government intervention is necessary. Failure to do so could lead to excessive government intervention and hamper free business activities. In addition, strengthening supply chains cannot be achieved by Japan alone, and economic efficiency may be undermined if Japan does not cooperate with its allies and other willing partners. Japan will need to establish a framework for dealing with this kind of issue with its allies and other willing countries and negotiate in a way that is beneficial to both Japan's security and its economy.

2. Support for the development of critical advanced technologies: It is foreseen that the government will support the development of key technologies by establishing a public-private partnership council and a think tank with a research function. Ahead of such a development framework, however, a Program for Developing Key Technologies for Economic Security has already been established and budgetary appropriations have been made starting from FY2022. The order in which development assistance should be provided is (1) identification of key technologies by the think tank, (2) matching of the government's technology needs with industry's technology seeds in the partnership council and preparation of development plans, (3) budgetary appropriation through the Program for Developing Key Technologies for Economic Security, and (4) implementation of developed technologies. However, budgetary measures have been going ahead, while the establishment of the council and the think tank is lagging behind. It will take time to organize an effective think tank, but it should be established and made functional with special emphasis on speed, so that it can serve as a starting point for development. In addition, the development process requires institutional design that combines the enhancement of technologies for the government with the improvement of international competitiveness in the civilian sector. Failure to formulate such a design could result in a development program that is no different from existing government-sponsored programs. Development programs that embody economic security can only be achieved by enhancing both economic and security (government) technologies.

In addition to improving the effectiveness of policies incorporated in the Economic Security Promotion Law, the government must tackle the larger issue of integrating economic security into its National Security Strategy. By comprehensively implementing these measures, the level of Japan's economic security policy can be raised.

(This is an English translation of a Japanese paper originally published on May 13, 2022.)