Economic Security Cooperation

Japan’s Economic Security Policy and Japan-ROK Cooperation

December 19, 2023

► Over the past several years, the Japanese government has been actively addressing economic security issues, such as preventing leakage of critical technologies to foreign countries and strengthening supply chains for critical goods. Notably, in 2022, the Diet passed the Economic Security Promotion Act to comprehensively promote economic security.

► Japan and the ROK, which share fundamental values and have played significant roles in East Asian production networks, have multiple reasons to enhance cooperation in addressing economic security challenges while learning from each other's experiences and institutional frameworks.

► The future of Japan-ROK relations is filled with uncertainty. However, the economic security risks surrounding both countries will not disappear in the near future. That is why the two countries should aspire to construct a resilient bilateral relationship that remains unaffected by changes in government, by establishing a multi-layered framework for dialogue and cooperation between the two countries while the current administrations are still in power.

 

Introduction

Amidst a rapidly evolving geopolitical landscape, the Japanese government has been promoting economic security policies over the past several years to safeguard national interests, including peace and economic prosperity, from an economic standpoint.

 

Two pivotal factors drive this initiative. First, Japan is becoming increasingly concerned about indications that China aims to enhance its military and economic power through a "military-civilian fusion policy" and is pursuing state-led acquisition of critical technologies from foreign countries to achieve this goal.

 

Second, the intensifying strategic competition between the US and China, coupled with the outbreak of a pandemic, has triggered supply chain disruptions for critical goods such as semiconductors and medical supplies in Japan. Consequently, a pervasive sense of anxiety and heightened crisis awareness has rapidly developed regarding the adverse effects of these disruptions.

 

Japan's economic security policy

The genesis of Japan's economic security policy traces back to the latter years of the Abe administration. In October 2019, the government unveiled plans to establish a dedicated section within the National Security Secretariat (NSS) specializing in economic security issues. Consequently, a system led by the Prime Minister's Office was created to prevent technology leaks out of the country through trade, investment, and cyberspace. In November of the same year, the Foreign Exchange and Foreign Trade Act was amended to tighten the criteria for screening inward direct investment in industries critical to national security.

 

After the disruption of critical goods supply chains caused by the 2020 pandemic, the government provided subsidies to Japanese companies overseas to incentivize reshoring and friend-shoring. When Mr. Kishida, long known for his keen interest in economic security issues, became prime minister in October 2021, he created a new ministerial post responsible for economic security and instructed the new minister to prepare a comprehensive bill to promote policies in this area.

 

With minimal political opposition to the idea of fortifying the government's authority to enhance the strategic autonomy of Japan's economy and its technological advantages, likely influenced in part by Russia's invasion of Ukraine just weeks before the Diet began deliberating on the bill, the Economic Security Promotion Act (ESPA) was passed with bipartisan support in May 2022.

 

The ESPA consists of four pillars, encompassing provisions to strengthen supply chains for critical goods, enhance measures against possible cyber-attacks from external sources on essential infrastructure facilities such as telecommunications and electricity, and make patent applications for sensitive technologies undisclosed. These are all areas not covered by the existing Foreign Exchange and Foreign Trade Act, which governs export control and investment screening.

 

To bolster the effectiveness of economic security policies, it is imperative to increase the number of companies, including small and medium-sized enterprises (SMEs), that accurately recognize the business and national security risks associated with technology leaks and implement their own countermeasures. To achieve this objective, the National Police Agency (NPA) has been undertaking a systematic nationwide outreach campaign to inform industries about the significance of preparing for the threat of industrial espionage and cyber-attacks.

 

Japan's economic security policy will continue to be upgraded. For instance, the government has initiated discussions on more effective responses to economic coercion and the potential introduction of a security clearance system.

 

Why should Japan and the ROK cooperate?

It is not realistic for any country to prevent technology leaks and build resilient supply chains alone. Therefore, policy coordination and cooperation with trusted like-minded countries are essential. In recent years, the Japanese government has been actively fostering bilateral and plurilateral partnerships in the field of economic security. In this context, Japan and the ROK, which share fundamental values and have played significant roles in East Asian production networks, have multiple reasons to enhance cooperation in addressing economic security challenges while learning from each other's experiences and institutional frameworks.

 

The first reason is the relationship with China. Due to China's enormous market size and geographical proximity to both countries, Japan and the ROK inevitably become highly dependent on China as a production base, supplier, and sales market. As a result, Tokyo and Seoul have been facing a common dilemma: on one hand, they must maintain pragmatic economic relations with China, which offers an “irresistibly attractive market” for Japanese and Korean industries, and on the other hand, they must prevent the leakage of critical technologies in the process of maintaining and expanding economic ties with China.

 

The second reason is the relationship with the US. The US is aiming for a "small yard, high fence" type of regulation in the area of economic security. While this is a reasonable approach in general terms, the interests of the U.S. and those of Japan and the ROK may not necessarily coincide when it comes to how regulations should be designed and implemented in individual industries. There may be room for both countries to coordinate and engage in dialogue with the U.S. in areas where Japan and the ROK agree on the optimal fence height and yard size.

 

The third reason is the complementary nature of the two countries' industries. It is often mistakenly believed that due to their similar industrial structures, Japanese and Korean companies are always rivals. However, there are many industries, such as semiconductors, in which Japanese and Korean companies have different strengths and depend on each other. In such industries, both countries can be considered to be in the same boat, as a supply chain disruption in one country could adversely affect the other.

 

The final reason is energy vulnerability. While both countries excel in energy-intensive industries like steel and chemicals, they heavily rely on imports of fossil fuels. Therefore, achieving stable energy procurement and developing supply chains for decarbonized fuels are high priorities for both nations.

 

Toward a resilient Japan-ROK relationship

Bilateral relations between Japan and the ROK have improved rapidly since the Yoon administration took office. In 2023 alone, the two countries have held summit meetings seven times and launched a mechanism for consultation on economic security issues. At the summit meeting in November, the two leaders announced the establishment of a framework for cooperation between the two countries in the development of supply chains for decarbonized fuels, such as hydrogen and ammonia.

 

In addition to the bilateral summit meetings, two summit meetings were held between the leaders of Japan, the US, and the ROK. At the Camp David meeting in August, a Joint Leaders’ Statement was released, stating that the three countries would collaborate in areas such as strengthening supply chains, responding to economic coercion, preventing technology leaks, and fostering scientific and technological innovation.

 

Furthermore, Japan and the ROK participated in the negotiations for the Indo-Pacific Economic Framework (IPEF) and demonstrated leadership by jointly working toward the conclusion of the world's first plurilateral supply chain agreement. Even if Mr. Trump wins the next U.S. presidential election and the U.S. withdraws from the IPEF, Japan and the ROK should continue to cooperate and utilize the IPEF to build a resilient supply chain in the region.

 

The challenging aspect is that the current approval ratings of the two leaders in their home countries are not high. Particularly in the ROK, there is a certain amount of criticism that President Yoon's administration may be unilaterally making concessions to Japan. Next year, there will be a legislative election in the ROK in April and a presidential election in the US in November. Depending on the outcomes of these elections, it is not difficult to imagine that Japan-ROK and Japan-US-ROK relations could be adversely affected.

 

As in the past, the future of Japan-ROK relations is filled with uncertainty. However, the economic security risks surrounding both countries will not disappear in the near future. That is why the two countries should aspire to construct a resilient bilateral relationship that remains unaffected by changes in government, by establishing a multi-layered framework for dialogue and cooperation between the two countries while the current administrations are still in power.

 

Author(s)

Dr. KUNO is a Professor of International Economics at Asia University in Tokyo, Japan. He is also a visiting researcher at the Institute for International Trade and Investment (ITI). Before joining the university, he worked as a visiting researcher at the Ministry of Economy, Trade and Industry (METI). Additionally, at Mitsubishi UFJ Research & Consulting, he served as a Senior Economist, conducting research on Japan's trade policy. While his earlier research focused on Japan's trade policy and East Asian economic integration, his recent interests extend to the relationship between globalization and economic security. His recent publications include: “Building Resilient Supply Chains through IPEF: The Possibilities and Challenges” (The Japan Institute of International Affairs, 2022) and “The Effectiveness of Economic Sanctions against Russia: Preliminary Evaluation and Prospects (in Japanese)” (Toua (East Asia), 2022). He was a member of the Japanese delegation in the “Korea-Japan Economic and Security Dialogue” held in February 2023, hosted by the Korea Institute for International Economic Policy (KIEP). He received his Ph.D. in Economics from Keio University.