COVER STORY • 4

International Order on
Economic Security

By Masahiko Hosokawa

Introduction
In order to discuss economic security, it is necessary to clarify the“threat” that is the premise of the discussion. When the government
talks about economic security, it states that it “does not have a
specific country in mind” but this is only due to diplomaticconsiderations; in light of the National Security Strategy compiled in
December 2022, China is clearly the focus of today’s threats facing
Japan’s economy.
First, I will identify specific threat movements in China that are a
prerequisite for Japan’s economic security and discuss Japan’s
preparedness for them. Second, regarding semiconductors, the main
battlefield of the US-China confrontation which has become thefocus of economic security, I will clarify the intensifying tug-of-war
between the United States and China and Japan’s position in it.
Third, I will look at how the international order is undergoing a majortransformation centered on economic security, from the perspectiveof the unity of Japan, the US, and Europe (G7) and the inclusion of
emerging and developing countries (Global South).

“Threats” to Be Addressed for Economic Security
There are three key phrases in President Xi Jinping’s
administration in China that are indispensable when discussing
economic security. They are “military-civilian fusion”, “dual cycle”,
and “self-improvement”.
The “military-civilian fusion” is an attempt to promote theupgrading and strengthening of military power and industrial powerin an integrated manner. The “dual cycle” refers to both domestic
and international cycles. In the domestic cycle, strategic industries
such as semiconductors are to be domestically produced fromupstream to downstream in the supply chain (supply network) andcirculated domestically. In other words, the goal is to achieve selfsufficiency within China. This means an economic system that does
not depend on the US and other Western nations, and is inextricably
linked to “self-reliance and self-sufficiency”.
International cycles seem desirable because they strengthen
economic interdependence, but they are not: in a speech in April
2020 to a domestic audience, Xi said, “Enhance our ability tocounterattack and strike by making the rest of the world more
dependent on China.” I will address this later as “weaponization of
the economy” and “economic coercion”, and focus here on the
32 Japan SPOTLIGHT • July / August 2024

AuthorMasahiko Hosokawa

domestication strategy.
Domestic production by China is now increasingly accelerating(Chart 1). In 2015, China announced its “China Manufacturing 2025”
policy and set a goal of increasing self-sufficiency in semiconductors
and other strategic industries. For example, as seen in the “Plan toStrengthen the Electronic Components Industry” issued in 2021,
plans are being elaborated for each industry. Furthermore, in view ofthe economic sanctions imposed on Russia by Western countries
after its invasion of Ukraine, China has become even more eager todomesticate strategic industries, with a Taiwan contingency in mind.
The report lists specific technologies that are bottlenecks to thedomestication of strategic industries. Then, after listing the Japaneseand other foreign companies that possess these technologies, China
attempts to attract these foreign companies by providing them withaccess to the Chinese market. When it does so, it demands that theforeign firms enter the Chinese market as a joint venture with
Chinese firms. Once the foreign firms have been lured and Chinese
firms have access to the technology, they will boldly invest with thesupport of massive subsidies to gain an advantage in costcompetitiveness. Then China shifts from “attraction mode” to“exclusion mode” with respect to foreign firms. This pattern has
been repeated time and time again in various industries.
For example, a Japanese company that once had an overwhelming
technological advantage in high-performance magnets used inelectric vehicle (EV) motors was lured and entered a joint venture
CHART 1

Domestic production in strategic
industries ⇒ use against foreigncompanies(weak) ⇒⇒⇒ Competitiveness of Chinese Companies ⇒⇒⇒ (Competitive)“attraction mode”(bottleneck technology)
・Semiconductors (equipment,materials)
・Electronic components(smartphones, 5G corecomponents)
・LCD panel materials, OLED
materials
・Machine tools, robots
・High-performance medical devices“exclusion mode”
・lithium-ion batteries
・High-performance magnets
・Solar panels
・Wind power generators(turbines)
・Automotive (EV), parts

Source: Compiled by the author

https://www.jef.or.jp/journal/

factory in 2016. After a few years, the technology was transferred toa Chinese partner company. Since then, this Chinese company has
been growing rapidly.
Japan is not alone in having such bitter experiences. The same istrue for medical devices and wind power generation in Europe andthe US. Europe is finally realizing these Chinese strategies, and theEuropean Union (EU) Chamber of Commerce and Industry in Beijing
has issued a report sounding the alarm.
Currently, China is actively trying to attract Japanese companies
with a focus on semiconductor equipment and materials, andadvanced electronic components such as laminated ceramic
capacitors with a technological edge. These Japanese companies
need to be very careful.
In this strategy of enhancing domestic production, in addition to
attracting companies, acquisitions are also a means of acquiring
technology. In many cases, the target is not necessarily a large
company, but a small to medium-sized company that is a supplier ofcore components to a large company. Thus, China is trying toacquire bottleneck technologies through two means: attraction andacquisition.

Moving to Deal with the Situation
This threat of from China’s domestication strategy is also serious
for South Korea and Taiwan. They are dealing with it with heightened
vigilance. In August 2022, South Korea enacted the National
Advanced Strategic Industry Act, which requires export approval for
17 advanced technologies in four fields: semiconductors, displays,
batteries, and biotechnology. Taiwan also amended its National
Security Act to prevent the outflow of advanced technologies anddesignated 22 items in five fields, including advanced
semiconductors, as the first phase of “national core technologies” inDecember 2023.
Japan is not well prepared for this. Recognizing the need for Japanto act, the government is moving to strengthen its economic security
measures. Of particular concern are semiconductor manufacturing
equipment and materials and electronic components, where
Japanese firms have an advantage. The problem is that “essential
technologies” in these strategic industries are not regulated by theForeign Exchange and Foreign Trade Law, and concerns about
outflows cannot be ignored. The reality is that Japan is unable torespond to China’s current moves to acquire technology in strategic
industries.
Although companies should be able to make their own judgments
on how to draw the line between security sensitive technology andothers, they tend to be lax because of this lack of regulations.
Therefore, Japan needs to consider the establishment of a legal
system as well.
There is also a problem with the regulations under the law withregard to acquisitions. There is a system in place that exempts

private Chinese firms from prior notification of acquisitions of private
Japanese firms. Japan should face the reality that China is tightening
its control over private companies, even those that are not statefunded or state-owned enterprises, and close these “loopholes”.

Tug-of-War over Main Battlefield & Semiconductors
The greatest focus of economic security is semiconductors, which
are China’s Achilles heel. The fierce battle over semiconductors
between the US and China is becoming increasingly intense. China
has been promoting domestic production of semiconductors sincearound 2015 by creating a 10 trillion yen fund with the aim ofincreasing its self-sufficiency. In addition to attracting
semiconductor manufacturers such as South Korea’s Samsung
Electronics and Taiwan’s TSMC, it is also providing huge subsidies
to Chinese manufacturers to foster them, and huge investments arebeing made.
The US administration of President Joe Biden passed the CHIPS
Act in August 2022 that allocated approximately $52.7 billion fordomestic semiconductor manufacturing. This was a move to protect
the semiconductor industry domestically in anticipation of long-termcompetition with China. Japanese equipment and component makers
are also seeing a surge in transactions, pulled by the trend ofincreased investment in semiconductor manufacturing in both the
US and China. This will be discussed later in this article.
Furthermore, in response to China’s strategy of increasing
domestic production, the US issued regulations on semiconductors
to China in October 2022, which were further strengthened thefollowing year. Japan also tightened export controls on
manufacturing equipment for advanced semiconductors in July
2023. The Netherlands did the same, effective September 2023. The
Biden administration is seeking dialogue with China, but the US
Congress, which has a hardline stance on China, continues topressure the administration for stricter semiconductor regulations.
Biden has no domestic political latitude to loosen the restrictions on
semiconductors from China, even if he can tighten them.
Against these US measures, China responded withcountermeasures. In May 2023, China banned procurement ofsemiconductors from US semiconductor giant Micron Technology,
and in August of the same year it made gallium and germanium,
which are also semiconductor materials, subject to export approval.
These moves are aimed at checking the US and other countries, but
we should be wary of them based on an understanding of the facts.
First, China’s measures will subject gallium and germanium toexport controls, which China says are “to protect national security
and interests”. This is an excuse to avoid being considered inviolation of the World Trade Organization (WTO). However, gallium isused in a wide range of electronic devices, including light-emitting
diodes (LEDs), and it is unreasonable to restrict exports as an
exception to WTO rules on the grounds of security.
Japan SPOTLIGHT • July / August 202433

A further problem is the opaqueness of the operation. By making
the criteria for approval unclear, it makes it impossible for otherparties to foresee the situation. The purpose of this is to have acheck-and-balance effect; China is effectively saying, “We will turnoff the tap at any time depending on future moves by Japan, the US,
and Europe toward restrictions on China. If any problems arise, theWTO complaint should be filed by China.”

Caution over Legacy (non-advanced)
Semiconductors
The US restrictions on China’s semiconductor industry have dealt
a major blow to the factory operations of Chinese memory
semiconductor giant Yangtze Memory Technologies Corp. (YMTC)and semiconductor foundry Semiconductor Manufacturing
International Corp. (SMIC). Most observers believe that China will lag
far behind in the production of advanced semiconductors, at least for
the time being.
However, while all eyes are focused on cutting-edge
semiconductors, they are not the only ones to be wary of. There arelegacy (non-advanced) semiconductors such as power
semiconductors. Logic semiconductors with circuit line widths of 20
nm to 40 nm, which are legacy (non-advanced) semiconductors, areused in large quantities in the automotive and consumer electronics
industries. China is accelerating large-scale investment in legacy(non-advanced) semiconductors despite restrictions on advanced
semiconductors. The country as a whole is making large-scale
investments through subsidies to expand production capacity, bringit into overproduction, and sell the semiconductors overseas at low
prices. As a result, the semiconductor industry in other countries
may be devastated. The strategy is thus to make them dependent on
China. This is a pattern that China has repeated in a variety ofindustries, including steel, solar panels, and electric vehicles.
It should be noted that Japanese materials and equipment
technology is being targeted as part of the aforementioned strategy
of domestic production. This is in order to complete the supply
chain, including the upstream of semiconductors, domestically.
Today, this trend is accelerating, and Japanese companies are being
shaken up. Japanese companies with technology are being strongly
urged by major Chinese semiconductor manufacturers such as
YMTC and SMIC, who are their major customers, to enter factories
as joint ventures. The goal, of course, is to acquire technology. Just
as there is a serious outflow of engineers from South Korea andTaiwan, there is also a growing exodus of Japanese engineers.
Exporting to China is not the same as entering the Chinese market,
and there is a huge difference in the risk of technological outflow.
Even if a company does decide to enter the Chinese market, it shouldcarefully assess what level of technology it should maintain. The
government is also reviewing the nature of regulations, rather thanleaving it up to the companies.
34 Japan SPOTLIGHT • July / August 2024

Toward an International Order Based on Economic
Security
The international order is undergoing a major transformation
based on “economic security” against the backdrop of the US-China
confrontation. The economic sanctions against Russia by theWestern powers in 2022 brought to light the essence of the current
international order. The first is the unity of the Western nations, andthe second is their divergence from emerging and developing
nations.

1. Can Japan, the US and Europe “Unite” Against China?
Economic security is also an important pillar of the Leaders’
Declaration at the 2023 G7 Summit. It was agreed that the basic
policy toward China is not “decoupling” but rather “de-risking”. Thisis meant to clearly counteract China’s deliberate external propaganda
that the US is trying to decouple.
Economic security is a major topic of discussion at the G7, with afocus on advanced technology, including export controls, investment
screening, and cooperation in semiconductors and emerging
technologies. The “unity” in the Japan-US-Europe triangle is not
limited to the G7. An economic version of the 2-plus-2 between the
US and Japan, the Trade and Technology Council (TTC) between the
US and the EU, and the High-Level Consultations between Japan andEurope, each of which is facilitated by ministerial-level consultations,
are in place.
In this context, let us take up two specific themes whereinternational cooperation is indispensable.
(i) Major Reforms in Export Controls

The international export control framework reflects theinternational order of the time (Chart 2). In the past, during the Cold
War period of US-Soviet conflict, there was the COCOM

CHART 2

Transition of international export
control regimes
Cold-War era

COCOM(1949-1994)(17 countries)
vs. Communist
countries

Post-Cold War

US-China Conflict

Wassenaar
Arrangement

Wassenaar A+
Framework fortechnology-owningcountries(1996~)(Japan, US and Europe)(42 countries)

With China in mind

Non-proliferation

All regions arecoveredNote 1: International framework related to conventional weapons
Note 2: A stands for arrangement.

Source: Compiled by the author

(Coordinating Committee for Multilateral Strategic Export Controls)by Western countries. The purpose of this was to ensure a“technology gap” with the Communist bloc, which would also lead tomilitary power. With the end of the Cold War, the COCOM wasabolished, and in 1996 the Wassenaar Arrangement (WA) wasestablished as a post-Cold War international framework to replace it.
This was a reform of export controls aimed at non-proliferation ofarms to countries of concern.
Such non-proliferation export controls have required companies todistinguish between military and civilian end uses for generalpurpose controlled items. However, China’s current policy of“military-civilian fusion” has made this distinction meaningless.
Rather, export controls that prevent the outflow of technology above
a certain level, such as advanced semiconductors, are needed, withthe goal of ensuring a “technology gap” in high-technology that
leads to improved military capabilities. This is analogous to the“technology gap” in the former COCOM.
However, unlike the Communist bloc during the Cold War,economic globalization has led to widespread economic
interdependence with China. In addition, China is rapidly improving
its technology in many key industries. Therefore, the areas oftechnological disparity are naturally limited. The US and Europe
focus on advanced semiconductors, quantum, artificial intelligence,and biotechnology.
The US is aiming for a “high fence in a small yard”, so to speak, inwhich a small number of technology-holding countries, such as
Japan, the US and European nations strictly control exports in theselimited fields. A pioneering example of this is the export control ofadvanced semiconductor manufacturing equipment, which wasrecently introduced in a coordinated effort by Japan, the US, and theNetherlands. In line with the US, the export of equipment above acertain technological level is in principle not permitted, regardless of
its intended use, on the grounds that it will lead to the enhancementof military capabilities.
In addition to export controls for semiconductors and otherproducts, Japan, the US, and Europe will probably be oriented
toward a new framework on how to strengthen export controls for
emerging technologies such as quantum and biotechnology in the
future. We have come to a new phase of export control in the few
countries that have the technology.
(ii) Reliable Economic Zones by Sector

In recent years, China has been using its huge market and supply
capacity to intimidate other countries and coerce them to change
their policies, a form of “weaponization of the economy”. In 2020, in
response to Australia’s request for an independent investigation todetermine the cause of the new Corona virus, China imposed
additional tariffs on imports of Australian barley and wine. In 2023,
China imposed an embargo on seafood products from Japan in
response to the release of treated water from TEPCO’s Fukushima

Daiichi nuclear power plant into the ocean. This was not based on
scientific evidence, and should be seen as another example ofeconomic coercion with a political agenda. The foreign policy of theXi administration suggests that such economic coercion willcontinue in the future.
Fundamentally, in response to this, it is necessary to urgently
build a supply chain that is not dependent on China. Focusing on therisk of supply disruptions by China, it will be extremely important tocreate an economic zone with “reliability” as a requirement without
such risks. For example, cooperative agreements have beenconcluded with the US and other like-minded countries on supply
networks for critical minerals, storage batteries, and other items. In
the area of semiconductors, a framework for cooperation among thefour “CHIP4” countries (Japan, the US, South Korea, Taiwan), plus
Europe, is also conceivable. In this way, the “block stacking” methodshould be pursued, in which cooperation in each strategic industry isbuilt up by field.
However, that is not enough. The G7 is also trying to take “joint
action” against such economic coercion by China. There are two
concrete actions. The first is to support the targeted countries andthe second is to take countermeasures against economic pressure
on their own countries. The G7 has decided to establish a“coordination platform” to work together. The question is what
specific actions will be included in this platform. Japan’s response isbeing questioned in this regard.
As for countermeasures, Japan is the only G7 country that does
not have the means. It is even reluctant to develop institutions thathave the means to do so. Without the means to effectively respondto such coercion, Japan will be seen as an easy rival to deal with,and economic coercion may be repeated in the future. A mechanism
to deter such coercion is necessary. Japan needs to have such a tool
to collectively deal with the situation.

2. “Inclusion” of the Global SouthThe “inclusion” of the Global South, the emerging and developing
countries, is even more important. In the midst of the confrontation
between the Western powers and China and Russia over sanctions
against Russia, the divergence between emerging and developing
countries has become clear, so strengthening cooperative relations
is indispensable.
In addition, there are many resource-rich countries in the Global
South, and “resource nationalism” is on the rise as they seek toenclose resources within their own borders. Such countries include
Chile, which is rich in lithium, and Indonesia, which has nickel
resources, making the inclusion of the Global South important interms of securing strategic resources.
In particular, the key will be how to retain India, the self-appointed
leader of the Global South, and the fast-growing countries of the
Association of South East Asian Nations (ASEAN). The Quadrilateral
Security Dialogue (Quad) and the Indo-Pacific Economic Framework
Japan SPOTLIGHT • July / August 2024

35

for Prosperity (IPEF) can be positioned as tools for this purpose.
The Quad is important as a mechanism to bring India into the
picture in terms of checks and balances against China, but Japan’scontribution is significant because of India’s strong trust in Japan.
India is cautious about cooperation in the security field, and the gluethat holds it together must be economic security. Japan has
prepared a menu of economic security issues, including a nextgeneration telecommunications network (5G) and a semiconductor
supply chain, which India is interested in, and Japan’s input isessential for the continuation of such cooperation.
The IPEF was initiated by the Biden administration as analternative to the Trans-Pacific Partnership Agreement (TPP).
However, since the US will not open its markets, it is necessary tohave a real alternative to the TPP in order to gain centripetal force.
Therefore, the US government has been promoting its pragmaticadvantage by taking the lead in negotiations in the area of economic
security, such as the “strengthening of supply chains”.
In the area of strengthening supply networks, the parties agreed tocreate an information-sharing network to assist countries facing
supply disruptions in critical minerals, semiconductors, and otherareas. Japan took the lead in developing a concrete concept for this.
The IPEF mechanism builds on a project that Japan had alreadylaunched with other Asian countries. There is an economic reality inwhich Japanese companies are expanding overseas, especially in
Asia. It can be said that Japan has taken advantage of this strength.

3. Serious Concerns about the Future of the US
But even these frameworks have a difficult road ahead. The Biden
administration has been unable to start making rules for digital tradedue to opposition from labor unions in the country, and negotiationsin the trade area have been adrift or at a standstill. In addition, if
Donald Trump wins back power in the upcoming US presidential
election, it can be assumed that the US will withdraw from the IPEF.
There is some concern among G7 nations over the future of the
US in the run-up to the presidential election. The Biden
administration has so far demonstrated its stance against China byputting forward cooperation with allies and comrades, such as
strengthening supply chains with friendly countries (friend-shoring).
At the same time, however, there have been moves toward
protectionism for reasons of economic security, such as theInflation-Reduction Act (IRA), which have caused friction with allies
and comrades, including the EU.
Furthermore, if a Trump administration were to reappear, we can
expect a blatant shift to a policy of putting the US first rather thancooperating with the EU and Japan. Moreover, the administration’s
campaign promises show that it is still oriented toward a rough-andtumble power game of tariffs. In contrast to this old-fashioned“tariff-based economic zone”, Japan should develop a strategy tocreate an “economic zone of reliability” as mentioned above. The key
to this strategy is to “make friends”, including in Europe, where
36 Japan SPOTLIGHT • July / August 2024

China is attempting to encourage a break with the US.
Japan bears a heavy responsibility in the creation of a multilayered
international order centered on economic security, as the future ofboth G7 unity and the inclusion of emerging Asian countries is in
doubt.

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Article translated from the original Japanese by Naoyuki Haraoka
Masahiko Hosokawa serves as a board member and advisor to global
companies, while also currently teaching at Meisei University as a professor at
the School of Business Administration. He also give lectures and appears on TV.