AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies
NPIRIPS

Nakasone Yasuhiro
Peace Institute

The Japan Institute ofInternational Affairs(Secretariat)

Research Institute for
Peace and Security

No. 302
20 June 2023

ECONOMIC STATECRAFT:
THE USE OF ECONOMIC POWER BY A
NATION TO PURSUE ITS STRATEGICPOLICY GOALS FOR NATIONAL SECURITY
Makio Miyagawa

・ Amid rapidly rising tensions in East Asia,
Japan has put in place measures tostrengthen its economic statecraft one after
another.
・ Policy measures for economic statecraft vary.
The scope of economic statecraft covers awide-range of government economic policy.
・ Conventional Keynesian economic policies
and economic statecraft policies are two
separate sets of economic policies based on
different values and in pursuit of distinctive
policy objectives. They are, however, notconflicting with each other, but rather mutuallyreinforcing.
The views expressed in this piece are the author’s own and should not be
attributed to The Association of Japanese Institutes of Strategic Studies.

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The Association of Japanese Institutes of Strategic Studies

Never in the post-war years has the need for mobilising “economic statecraft”to harness economic power for national security purposes been so acutely recognised
in Japan as today.
Of late, dangers have been perceived in our neighbourhood, where the flexingof military muscles threatens the peace and security of a number of nations in thisregion. If our government and public had more assiduously sharpened their swords toprepare for future dangers while our economy still remained robust, our nation would
not have had to rush to deal with this issue now. Nonetheless, it is not too late to act.
While Japan is now keenly aware of the need to seriously strengthen its
defence capabilities, the recent focus on economic statecraft appears to assume thatJapan, still under somewhat restraints on bolstering its military power, should first
explore all other non-military measures available, even while facing a real national
security crisis looming over the Far East.
“Economic statecraft” is not a policy to protect the interests of the business
community by preventing infringements by foreign governments, but is a policy toguarantee the security of a sovereign state by making full use of its economic power
against any political and military threats from other countries. Over the years, Japan andthe West have taken various countermeasures against illegal trade restrictions by China,
which has profited from the free markets of the West, buying up real estate and sending
their engineers and students to steal technology in the West, while it has closed its own
market, forced foreign companies to disclose advanced technologies, and prohibited
real estate purchases.
Most egregious in the export restrictions and impositions of excessive export
taxes China repeated on its rare earths, tungsten and molybdenum since 2006 wastheir total export ban to Japan after a Chinese fishing boat operating illegally inJapanese territorial waters off the Senkaku Islands in September 2011 rammed a Japan
Coast Guard vessel, which then captured the fishing boat. Japan, together with the US
and the EU, claiming illegality of China’s export control measures (imposition of export
taxes, restrictions on export volumes, and restrictions on trade rights) on rare earths,
tungsten, and molybdenum, filed the case with the WTO dispute settlement mechanism,
which in 2012 dismissed China's assertion that its ban was for the protection andconservation of resources, and ruled that its export prohibition would arbitrarily favour
China’s domestic industries.
In Parallel with the filing of a WTO lawsuit, Japan, the US and EU strengthened
policy co-operation for the diversification of supply origins, the development of

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alternative materials, and the promotion of their recycling for the stable procurement ofrare earths. They also conducted research and development on their reuse,reinvigorating the domestic production networks. Although the action of the Chinese
fishing boat in disguise appeared intended to undermine the national security andsovereignty of Japan, the countermeasures taken by Japan and the West wereoriginally distinctive from the subject of economic statecraft, and had not been
comprehended to fall under the category of economic statecraft measures.
While the aforementioned countermeasures was taken intended at the time oftaking to prevent business interests of companies of the West from damages incurred
upon them by a foreign government’s trade measures, economic statecraft measures
are to protect the national security of a sovereign state from any threats or infringement
imposed upon it by an act of a foreign government. The recent export restrictions on
advanced semiconductors currently in place in Japan, along with some Westerncountries, for instance, are, however, now categorised as an exercise of economic
statecraft, as they are contemplated to frustrate importing countries intending to use
such equipment to build up their military power and become a national security threat tothe exporting countries.
Out of dire need to prepare against the deterioration in East Asia’s security
environment, our Parliament enacted a law in May of last year to advance strategic
policies in the four areas, empowering the government to take swift actions, which it has
in fact been putting in place one after another. First, the government is strengthening
supply chains to ensure a stable supply of those strategically critical goods and raw
materials that have a significant impact on people’s livelihoods and industrial activities.
Second, it is establishing a framework to provide financial assistance for thedevelopment of cutting-edge strategic technologies by reinvigorating their research anddevelopment.
Third, the government is intervening in the maintenance and management of
key critical infrastructure so that external disruptions do not impede the functioning ofsuch infrastructure. Fourth, it is newly introducing a non-disclosure patent system towithhold disclosure of security-sensitive technologies at the time when each of theirapplications is filed. These four policy measures represent just the first few steps
forward in reinforcing economic statecraft in Japan, and many more approaches ought
to be presented in future to confront the emerging imminent security challenges
surrounding Japan.

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The scope of economic statecraft can be broadly interpreted to cover a wide
range of government economic policy, including constraining inward and outward
investment, restricting export of sensitive goods and technologies, protecting
confidential information and technologies held by engineers, and securing an ample
budget for defence technology development, all of which are already practiced, albeit ina more piecemeal, less strategic and less rigorous fashion.
Defending against foreign domination or influence through investment indomestic companies that handle sensitive technologies or goods, or in real estate,including land in highly strategic locations, such as those near power stations, water
reservoirs, islands or mountains, ought also to be an important part of economic
statecraft policies. So should be addressing concerns about information or technology
leaks through foreign researchers or students in training at companies or university
research institutes.
The COVID 19 crisis alerted us to the serious defects of the current economic
policy of relying heavily and inattentively on global supply chains. Severance fromsupply chain networks, be it man-made or caused by a natural phenomenon, could leadto grave vulnerabilities in national security during times of crisis, especially in defence
industries. The government has now begun subsidising companies that had shifted
significant assets overseas, especially to unfriendly areas, during the past three
decades of post-Cold War globalisation, to repatriate their assets or relocate them tolike-minded countries.
Properly managed, economic statecraft is potentially aligned with economic
growth strategy. Vigorous industrial activity in the private sector expands national wealth,thereby uplifting national security. However, leaving the growth of strategically criticaldual-use industries to the invisible hand of the market alone has proven insufficient toreach the desired level of their development. Hence, budgetary subsidies and otherpolicy supports are essential. Our government has already sharpened its focus on
reinforcing industrial policies that support the development of dual-use and otheradvanced technologies, and on enhancing the production capacity of cutting-edge
industries, including the training of engineers.
In this context, it is worth noting the recent fading of the demarcation between
military and economic powers. In current preparations for “hybrid warfare,” all state
activities—economic, technological, legal, propaganda, and political—are to bemobilised as tools for both offensive and defensive purposes. Economic strength
facilitates science and technology development, and, in the age of dual-use

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technologies, industrial policies promoting them could also enhance military capabilities,
enabling defence industries to manufacture advanced defence equipment andtechnologies. This is yet another major pillar of economic statecraft.
Policy measures for economic statecraft vary. Strengthening the developmentof quantum computing, space and cyberspace technologies, robotics and otheradvanced industrial technologies, ensuring communication channels by safeguarding
satellites, submarine cables and internet lines, replacing the general competitive bidding
system with a negotiated contract system as necessary for defence procurement,
reinforcing defence industries, repatriating supply chain networks, securing storage ofstrategic mineral resources at home, and upgrading the capability of engineers would allserve to promote a nation’s economic strength and consequently enhance its nationalsecurity.
The intention to apply economic and industrial policies, such as thosementioned above with a view to enhancing national security in an environment
perceived to be menacing, will constitute a remarkable deviation from the laissez-faireeconomic policy so highly recommended and broadly accepted in the era ofglobalisation. Hence, it may be necessary to convince the general polity, the business
community and indeed the government as a whole to pursue a swift conversion ofeconomic and industrial policies. It may also require organisational restructuring ofnational institutions.
Conventional Keynesian economic policies, seeking to expand the economic
pie through liberalisation and deregulation, on the one hand, and economic statecraft
policies aimed at strengthening national security by means of economic power, on theother, are two separate sets of economic policies based on different values and in
pursuit of distinctive policy objectives. They are, however, not conflicting with each other,but rather mutually reinforcing. On the one hand, unless economic benefits grow andeconomic foundations are strengthened, national security will suffer and businesses’
pursuit of economic profit will be severely constrained. Conversely, if economic
statecraft results in a policy straitjacket which overly constrains liberal democraticsociety and individual initiative, the benefits of national security will be lost andmisunderstood.
On the other hand, when national security is threatened, business pursuit ofeconomic profit should be severely limited. The business community may reveal
psychological resistance to restrictions on economic liberalisation for national securityreasons. But would the business community hold a view that the national security could

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be compromised even to suffer from invasion, as long as business interests areguaranteed?
Although mutually reinforcing, separate rules apply to these two sets ofeconomic policies. As the policy objectives are different, so ought to be the applicabledisciplines, as stipulated expressly in the rules set out by the World Trade Organization(WTO) and the Organization for Economic Co-operation and Development (OECD).
Such principles are shared by developed and developing countries alike.
Special rules and regulations should further be applied for national security
purposes through amendments, for instance, of the Foreign Exchange Law, whichgoverns imports and exports as well as inward and outward investment, of the Finance
Law, which generally requires competitive open bidding for government procurement, ofthe Antimonopoly Law, which promotes competition, and of the Patent Law, which
enumerates all the patent applications fully disclosed to the public. Many economic laws,including the aforementioned, would need to establish exceptions from a national
security viewpoint. The dire security environment in the region does not allow for any
delay in those tasks.
In addition, it would be appropriate to tailor the application of Corporate
Governance Codes, general instructions for corporations, to defence-related
businesses from the perspective of national security, particularly regarding its guidance
upon corporations to disclose information to shareholders or to cut off the defence
section on the grounds of low profit margins.
Debates on economic statecraft have wider perspectives to include the use ofeconomic measures to “impose” threats, besides those to “defend” from threats. The
issue is whether Japan could effectively impose and implement economic sanctions,such as raising tariffs, suspending imports and exports, halting currency exchanges,
and freezing assets.
In closing my essay on economic statecraft, let me reiterate that military andnon-military activities have merged to a greater extent than before, largely due to theprevalence of information technologies and digitalisation throughout the economy. The
use of military forces was previously conceived as involving the use of lethal devices
causing direct physical harm to people. In recent “hybrid battles”, however, electronic
devices have been widely used for missile guidance, advanced communication,
high-speed computing, complex cryptography and satellite deployment in distant space.
These devices are not direct lethal devices, but without them modern military machines
cannot function properly.

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Economic statecraft is not a panacea. In times of crisis, a number of othermeans, including military forces, should collectively be mobilised to protect the nationalsecurity.

Dr Makio Miyagawa is former Special Advisor on National Security, National Security
Secretariat, Government of Japan.

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