【Shaping the Pragmatic and Effective Strategy Toward China Project：Working Paper Vol.10】
China and the New Role for Economic Security in the US-Japan Alliance

Publication of working papers for the SPF project “Shaping the Pragmatic and Effective Strategy Toward China”

　IINA (International Information Network Analysis) will upload the working papers written by U.S. and Japanese project members focusing on shaping a pragmatic and effective strategy toward China. We hope that this series will help IINA readers understand how experts from the U.S. and Japan see China and the U.S.-Japan joint efforts, which have the potential to determine the future world order.

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Introduction

The US-Japan alliance sits at a crucial historical juncture as globalization recedes and China’s international stature grows, with technological and geoeconomic competition at the core. The world is shifting from a technoglobalist-oriented economic and innovation framework premised on reducing barriers to trade, investment, and supply chain development amid harmonized multilateral standards. The technonationalist framework taking its place is prompting countries to intervene more frequently in trade and technological affairs to give their own high-tech industry leaders an advantage over those of other countries. The coronavirus pandemic and subsequent acceleration of nations adopting digital commerce and communications has raised the stakes for this transition. So has a new economic sanctions regime designed to isolate and punish Russia for its brutal invasion of Ukraine.

In some cases, this economic security dynamic is prompting policy makers to impose new rules or subsidize domestic firms in pursuit of “technological sovereignty.” In other cases, efforts to compete with China and maximize access to global research talent and innovation are driving states to form voluntary networks of scientific and industrial collaboration, as well as coordinating on tech trade policy issues and supply chain diversification. Thus, there is a delicate balance emerging between a growing affinity for technonationalism in a traditional sense and an alternative form of techno-minilateralism or a “technology alliance” approach to managing this competition with China. Leveraging the latter for national gain will be difficult, but it is worth the effort.

The United States and China are the main protagonists in this technology-driven rivalry, but Japan remains an indispensable player. Among individual countries, Japan is the third-largest investor globally in research and development behind the United States and China, and Japanese companies fund more R&D in the United States than any other country’s firms. Japan is also the third most prolific patent filer in the world, behind China and the United States. Both Japan and the United States recognize that pooling resources, data, and talent would benefit each other when it comes to technological innovation and reconfiguring supply chains, but it is an inherently complex endeavor with often competing domestic stakeholders.

The allies are working to coordinate their strategies vis-à-vis China in these areas for the sake of better effectiveness and minimal collateral damage from some protectionist policies, and they are launching a new bilateral forum to aid them. Still, this effort would benefit from greater mutual understanding of each other’s diagnoses, priorities, and debates surrounding these policy choices. This paper starts the process with a focus on the US side of the equation.

Technology competition with China is evolving in ways reminiscent of the twentieth-century Cold War between the Soviet bloc and the West but with the added complications of greater economic and supply chain entanglement and significantly more overlap within each other’s spheres of influence (for example, South and Southeast Asia). Tokyo and Washington are taking steps to protect themselves from Chinese pressure and maintain a technology advantage for the future, but they must do so in the context of their slightly different economic and geopolitical relationships with China.

Objectives for this policy paper include:

• Provide policy makers and interested citizens with an up-to-date review/analysis of US diagnoses of the China trade and technology “problem.”
• Compare the allies’ efforts to succeed in technology competition with China and assess their methods of policy coordination.
• Recommend policy adjustments that can improve the implementation of a common strategy in the near term, with a particular focus on how the alliance can coordinate economic security policy under the new “Economic Policy Consultative Committee” (or economic 2+2) framework.

Washington’s Latest China Debate

The United States engaged in a number of pivotal China policy and geopolitical strategy debates during the twentieth century. These included the effort to support Chiang Kai-shek and the Chinese Nationalist movement in the 1940s, President Nixon’s decision to switch US recognition of China from the Republic of China to the People’s Republic of China in the 1970s, and the pursuit of what some called “deep integration” with China via normalized trade relations and China’s entry into the World Trade Organization (WTO) at the end of the 1990s.

Interestingly, the same Clinton administration that effectively pushed deep integration with China across the finish line was also the first to propose an “Economic Security Council” in the White House (eventually becoming the National Economic Council) to help bolster US competitiveness. So, getting closer economically with China and strengthening “economic security” (in that era at least) were not considered running at cross purposes.

US scholars and policy makers have also spent a lot of time revisiting these previous decisions in order to assess—and often lament—their outcomes. A little over a decade into the twenty-first century and following a global financial crisis emanating from the United States, US policy makers began debating China policy anew and with a more intense focus on considerations of economic security. They began to have second thoughts.

The demise of deep integration

The US-China economic relationship has become more integrated and complex since 2000 and the start of the deep integration experiment. As trade patterns shifted, the share occupied by China of all US imports and exports roughly doubled over the next two decades. US trade ties with China arguably peaked in 2017, with the share of US goods exports going to China reaching 8.6 percent of total US exports to the world and the China share of all US imports reaching 21.6 percent. America’s most valuable exports to China are travel (that is, Chinese visiting and spending money in the United States), machinery and transport equipment, crude materials (such as wood, gravel, metal ores, and cotton), agricultural products (mostly soybeans and pork), and chemicals. Top imports from China include electrical machinery, machinery, furniture and bedding, toys and sports equipment, and plastics.

Of course, these simple trade categories belie the complexity of modern supply chains, growing direct investment in each other’s country, and large-scale financial flows. A lot of trade in critical components involving China and the United States takes place indirectly and does not show up in bilateral trade statistics. This has sparked multiple security of supply concerns in Washington on such items as rare earth metals, electric vehicle batteries, pharmaceutical ingredients, and semiconductors. The Trump administration also highlighted other indirect aspects of US-China economic relations by limiting who can sell high-end semiconductors to China (even if produced abroad) if those chips are made with US technology. So, the US pushback against deep integration has been evident on various fronts.

On the financial side, China is the second largest holder of US Treasury securities (at over $1 trillion in 2020), and US investors hold an estimated $1.1 trillion in Chinese equities. Moreover, there is a sizable amount of venture capital (VC) investment in each other’s country, with about $20 billion flowing into China from US-based funds in 2018 and about $3 billion of Chinese VC investment to the United States. Frostier bilateral economic relations since the Trump administration, however, combined with a global economic downturn amid the COVID-19 pandemic cut the outbound US figure down to just $2.5 billion in 2020.

In various ways, the new reality of US-China relations—framed by both the Trump and Biden administrations as one of a long-term strategic competition and with antecedents in Obama’s “Rebalance to Asia”—began as a domestic political concern over the loss of manufacturing jobs during the early 2000s. Although difficult to quantify, one frequently cited study of the 2000s estimated that new trade and investment patterns with China resulted in nearly 1 million manufacturing job losses in the United States between 1999 and 2011. Advances in automation and the Great Recession added to the China factor, to the point where just one state like Ohio lost about 400,000 manufacturing jobs in the first decade of the new century.

The political concern over such job losses (regularly attributed to China) led to greater scrutiny of China’s economic and foreign policy behavior, precisely at a time when the US business community was becoming more pessimistic about its opportunities in China due to cases of intellectual property theft, technology transfer requirements, and differential governmental treatment in China that favored Chinese businesses over foreign-affiliated companies. For example, a 2014 US-China Business Council survey of US firms about China’s business environment noted “a steady 30 percentage point shift over the past four years in how companies view prospects in China’s market, from ‘optimistic’ to ‘somewhat optimistic,’” and US attitudes continued to decline from there.

Beijing’s “Made in China 2025” initiative from 2015 prompted the US Chamber of Commerce to conclude that China “aims to leverage the power of the state to alter competitive dynamics in global markets in industries core to economic competitiveness.” In addition, 2015 marked the first full year of China’s “Military-Civil Fusion” initiative as a national strategy, and together these two initiatives helped elevate Washington’s concerns about Chinese economic behavior from just an economic and political threat to one of national security (and for some this threat was viewed in existential terms).

Trump’s State Department called China’s Military-Civil Fusion strategy an “aggressive, national strategy of the Chinese Communist Party . . . in order to achieve military dominance” that “threatens the trust, transparency, reciprocity, and shared values that underpin international science and technology collaboration and fair global business practices.” In 2019, the chairman of the Joint Chiefs of Staff (General Joseph Dunford) told Congress that work by companies like Google in China provided “a direct benefit to the Chinese military.”

Layered on top of US worries that China’s science and technology advancements represent a political, economic, and military threat to the country (via such measures as “Made in China 2025” and “Military-Civil Fusion”), there is an additional ideological component that could have a diplomatic impact with important strategic consequences. This relates to so-called digital authoritarianism or digital Leninism, in which China tries to leverage its technology to export a one-party, state-led political and economic model to other countries. Many policy makers in Washington fear that China’s “Digital Silk Road” and related activities could provide decisive support for authoritarian regimes, stymie democratic progress, and enhance Beijing’s influence and coercive power over many countries around the world. In these different ways (politically, economically, militarily, and ideologically), technology and economic security have become the core of strategic competition between the United States and China, at least in the eyes of most policy makers in Washington.

The politics of strategic competition

Still, although US policy makers appear to be more aligned than ever before on China policy (that is, taking a hard line against China and carrying out aggressive policies to protect America and its allies from these perceived threats), there are subtle differences in the Biden era that will frustrate the US government’s ability to implement a coherent strategy. As a result, we see sometimes paralyzing arguments about how to act on Biden’s 100-day review of US supply chain vulnerabilities, for example, or how to finalize ambitious legislation (named the Innovation and Competition Act) that aims to strengthen US high-tech industries[1]. These two initiatives alone promise billions of dollars of new funding for domestic research, education, and manufacturing in such areas as semiconductors, telecommunications, and biotechnology, and they enjoy relatively broad bipartisan support. However, the motivation behind these two initiatives on diversifying supply chains and bolstering competitiveness have distinctly different political roots.

The group that gets the most attention is an outward-looking collection of both Republicans and Democrats (including some within the Biden administration) who emphasize national security interests vis-à-vis China. For them, the primary goal is to strengthen US companies that compete in critical technology areas and reduce strategic vulnerabilities to China’s economic power and its behavior toward Taiwan. A major concern is the area of semiconductors, in which Taiwan-based TSMC manufactures over 90 percent of the world’s most sophisticated chips and is the largest logic chip producer overall. China’s ability to intimidate and perhaps someday exert greater influence over Taiwan has US policy makers on edge in this regard.

The US policy makers in this group are pushing to subsidize new research and manufacturing capacity, but they are relatively flexible about where that investment takes place and how to cooperate with allies. The important thing, in their minds, is US corporate competitiveness. They advocate a similar approach to other technology areas, such as large capacity batteries, satellites, and telecommunications. This group also advocates for US reengagement with the Trans-Pacific Partnership (TPP) trade agreement signed by the Obama administration but rejected by Trump. The national security group thinks that TPP would either help isolate China or force it to adopt more acceptable international standards of economic behavior.

Another group in Washington, made up mostly of Democrats and others within the Biden administration, prioritizes the domestic economy and repairing what it views as damage caused by China’s abuse of the global trading system. Many members of this group also think that other countries and companies are taking advantage of past trade liberalization agreements that contribute to economic inequality in the United States, so this group is less concerned about relative gains vis-à-vis China than it is about domestic outcomes overall. For example, Democratic Senator Bernie Sanders voted against the competition bill because he thinks it would amount to corporate welfare without requirements to invest domestically and support American workforce development. Sanders and many others in this group see the TPP and agreements like it as part of the problem, not the solution.

Additionally, the Democratic-led House of Representatives spurned the Senate competition bill and drafted its own version called the “America COMPETES Act” that it passed in February 2022. Although the COMPETES Act shares some provisions with its Senate counterpart, there is a much bigger focus in the COMPETES Act on domestic initiatives, de-emphasizing multi-lateral strategies to bolster American power, and an emphasis on climate change mitigation. Republicans have derided the COMPETES Act for relying too much on federal initiatives and not enough on direct competition with China. Representative Jim Banks of Indiana complained that the House bill mentions coral reefs more often than China. If and how these bills can be reconciled this year remains an open question, and if the Democratic Party loses control of the Senate or House (or both) as a result of the mid-term elections in November 2022, the current tension in Congress on economic security issues vis-à-vis China could lead to deeper gridlock.

There is no simple solution to this tension because both sides make valid arguments. From the national security perspective, US and allied security will indeed require targeted investments to support strategic technologies and supply chain resilience. Moreover, precious financial resources will likely be wasted if policy makers ignore market forces and try to control corporate decision making from Washington for the sake of enhancing economic equality or other political objectives. Inflation, reduced market share, or declining competitiveness could result. Moreover, a heavy “America First” or protectionist approach to these measures might spark an unproductive subsidy competition among allies and inhibit multilateral cooperation at a time when allies share similar goals vis-à-vis China.

However, from a government-led, “domestic condition” perspective, it is true that the private sector, on its own, cannot be counted on to make decisions based on the nation’s best interest or to support struggling communities. Additionally, a “hands off” approach that bolsters strategic US industries without strings attached is unlikely to address the economic imbalances that are currently undermining the stability of democracies around the world. Any deepening of “America First” sentiment in the United States stoked by economic dissatisfaction will undermine future policy making toward China. So, Washington policy makers and bureaucrats will have important roles to play in terms of crafting economic security policies, and corporations should be accountable to the taxpayers in some way. Moreover, it would be better and more effective for all if allied responses are well-coordinated, but this cannot be managed by the private sector alone. It requires national government direction and centralized decision making.

This tension suggests that implementation of additional economic and trade reform measures in the United States will be contentious and uneven. Because policy coordination involves so many stakeholders and different government agencies, the process will take several months and perhaps even years, and the results are likely to be watered down.

The reemergence of economic security awareness

For all the shortcomings during the Trump era implementing economic security measures, including poor internal and allied coordination, as well as occasionally working at cross purposes, the administration did not suffer from self-doubt. With the support of Congress, it took on the China challenge head on with a series of aggressive defensive moves, on the one hand, such as new export controls (including entity list designations), investment restrictions, and limiting Chinese access to US basic science research, and, on the other hand, such offensive measures as new subsidies for research and development and several high-profile public-private commissions and strategy papers. It also pressed other countries to follow the US lead and build a global “clean network” that excluded Chinese systems and applications in telecommunications, cloud computing, undersea cables, and other parts of the digital economy.

Overall, however, even Trump administration officials would admit that they moved more slowly on the offensive side, with a lot of ideas and intentions rather than actual programs in place for keeping US companies at the forefront of innovation. Then head of the Pentagon’s Defense Innovation Unit told a public forum in 2020 that “we’re focused too much on the defensive side, and that’s the wrong balance[2].” It then fell to the Biden administration to decide how much of Trump’s aggressive defensive measures to keep in place, what kinds of offensive measures it can get Congress and the private sector to agree on, and how to coordinate all of this with allies. So far, the Trump-to-Biden transition has been marked more by continuity than change.

The Biden administration has sustained many of the Trump era defensive measures involving export controls and investment restrictions vis-à-vis China, for example by implementing last-minute regulations put forth on Trump’s last work day regarding US companies purchasing information and communications technology and services (ICTS) from China and building upon Trump plans for enhanced science research security. Biden also added seven Chinese supercomputing firms to its Entity List in April 2021 and did the same for over thirty other Chinese tech firms in December 2021.

Although the Biden team is unlikely to continue the “Clean Network Initiative” in name (in part because of the pejorative nature of that term), it will promote measures that help produce more trusted communications and computer networks that allow for greater transparency and accountability. Biden has already promoted this idea within the Quad (Japan, United States, India, and Australia) through its Emerging Technology Working Group and is supportive of the Track 2 Quad Tech Network that is encouraging the adoption of trusted technologies in the Indo-Pacific.

As noted earlier, there is a lot of political support for technology strategies that support research and innovation, diversify critical supply chains, subsidize cybersecurity investments, promote technology literacy in the workforce, and other types of offensive technonationalism measures. The hard part will be balancing the interests of various stakeholders, including business leaders, labor, investors, government agencies, the military, and allies and partners, around the world. On the international side, some policy makers might be tempted to work through multilateral organizations like the OECD or minilateral groupings like the Quad, but the foundation for effective collective action will be easiest to work out bilaterally among a few key partnerships and then expand from there. For the United States and Japan, there should be many opportunities to better align their economic security policies, but it requires sufficient leadership attention and substantial interagency coordination to succeed.

Managing Future Economic Security Policy Coordination in the Alliance

Coordinating modern economic security policy approaches within the US-Japan alliance presents unique challenges for policy makers. The traditional “2+2” framework (leadership meetings among the State and Defense Departments on the US side, and the Foreign and Defense Ministries from Japan) has developed into something of a well-oiled machine. The allies convene regular 2+2 meetings from the Secretary/Minister level on down to Deputy Assistant Secretary/Deputy Director General, and each country’s NSC secretariats utilize the 2+2 process to help pursue policy goals identified in leadership summit meetings.

It is worth highlighting that the current (foreign-security policy) 2+2 framework has not always been as authoritative or as comprehensive as it is today. The original 2+2, formally known as the Security Consultative Committee, dates back to 1960, when the allies signed their Treaty of Mutual Cooperation and Security. For decades, the Security Consultative Committee focused primarily on political and logistical issues related to US military bases in Japan, and the US side was usually represented by its Ambassador in Tokyo and the US Forces Japan Commander. However, when the allies expanded their “Common Agenda” after the Cold War ended, they elevated its stature and used the Committee to coordinate broader foreign policy strategy toward new challenges, such as with North Korea or in the Middle East. Today, it is vital for coordinating policies to help Ukraine fend off Russia’s invasion.

The process of sharing leadership on these policy issues between the foreign policy and defense policy bureaucracies was not always smooth, particularly on the Japan side where the Foreign Ministry had dominated this policy space for decades. When the original 2+2 began expanding its portfolio thirty years ago, and later when Japan’s Defense Agency gained greater status as a ministry in 2007, many Foreign Ministry officials did not want to share their leadership on alliance matters. This reluctance faded, however, as they realized that together they all had more access, resources, and authority to develop and implement strategies that benefited all parties concerned.

Some Japanese policy makers suggested in 2021 that the 2+2 process could be leveraged to address “economic statecraft” and help the allies coordinate on economic security, but the 2+2 agenda is crowded as it is, and this would also put key economic stakeholders in a subordinate position. The expertise and authority of many different agencies and ministries is required to sort through agreed protocols for cyber security, data governance, export controls, investment restrictions, and supply chain resiliency. The 2+2 framework might be helpful to establish broad goals and a harmonized strategy at a macro level, but the “devil”—as they say—is in the details.

As a result, the allies discussed creating a new framework akin to the 2+2 to focus specifically on economic security issues involving relevant ministries and agencies, even though this could be unwieldy if they tried to institute a truly representative leadership group of involved stakeholders. On the low end the allies could end up with a “3+3” approach involving the Departments of State, Commerce, and probably Homeland Security or Energy, to coordinate with Japan’s Ministries of Foreign Affairs, Economy Trade and Industry (METI), and Internal Affairs and Communications (MIC). And if they wanted to add some bilateral or regional trade issues to the mix, which they probably do, then the Office of the US Trade Representative (USTR) would argue for a leading role. Scheduling bilateral 2+2 meetings is hard enough, so a 3+3 configuration (or more) would be especially difficult. And this would not even include other important stakeholders, such as the US Departments of Energy, Justice, Defense, or Treasury, or Japan’s Ministries of Finance, Education Sports Science and Technology, Defense, or Justice. A compromise was necessary.

US and Japanese government officials eventually settled on a new bilateral policy coordination forum dubbed the Economic Policy Consultative Committee, also known as the “economic 2+2,” which they unveiled at a virtual summit meeting between President Biden and Prime Minister Kishida in January 2022. Modern times demand this new approach, and expectations are high in both countries that the economic 2+2 can better align their trade and economic security policies with positive effects. But success requires an unprecedented amount of collective effort among government offices not accustomed to sharing leadership, and close coordination with the private sector is also necessary. Making this alliance management rewiring work on the US side might be the biggest challenge.

Launching the economic 2+2 successfully will be difficult because the number of relevant policy offices and stakeholders is far greater than a simple 2+2 equation. As noted above, the USTR believes that it should have a leading role in any new bilateral framework addressing regional trade issues. The Departments of Energy, Treasury, and Homeland Security also have interests in the economic 2+2 agenda. They will of course be asked to contribute to future bilateral meetings, but will Commerce and State make them true partners in the process or instead view them as subordinates? Some officials in Commerce itself are reluctant to share the leadership role with State, as they prefer to address issues directly with METI alone[3]. Commerce also has relatively few specialists on Japan and could feel disadvantaged vis-à-vis State in this regard[4].

What working-level Commerce officials might not understand yet is the longer-term potential for the economic 2+2 and how it can enhance their ability to accomplish bilateral, regional, and perhaps even some global objectives. Just as the original 2+2 gained in stature and authority since its elevation in rank from 1994, the economic 2+2 could become the leading bilateral policy coordination tool for economic security and related policy issues. A diverse group of officials could then leverage the influence of the world’s first and third largest economies to support broader coordination with other Quad countries and the European Union, in addition to addressing bilateral issues.

The economic 2+2 agenda will likely focus on some mainstream economic security issues, such as supply chain resiliency for critical technologies, aligning policies and implementation for export controls and investment restrictions, and collaborating where possible on fostering competitiveness in emerging technologies (including support for basic science and applied research and development). Whether or not the allies can extend this cooperation to dual-use technologies and the pursuit of defense innovation remains to be seen, as legal and political differences in how the two governments approach dual-use research and defense funding for technology start-ups will complicate matters.

Energy security has become a more important agenda item given current market volatility and export restrictions imposed on Russia (affecting the allies and Europe), and other priorities include secure and reliable telecommunications deployment (notably, 5G and Open RAN technology) and cyber security strategies. These latter two issues could end up connecting to what used to be the “Clean Network Initiative” internationally or what the Biden White House has been considering as a possible “Alliance for the Future of the Internet.” Some of these issues could be relevant to connect to the Biden administration’s Indo-Pacific Economic Framework (IPEF), so strategies for IPEF formation and implementation might also end up on the bilateral agenda.

Of course, any bureaucratic process must always accommodate prevailing political realities, and this is means that the US political divide over China and economic security policy mentioned earlier will frustrate attempts at purely technocratic solutions. For example, any attempt by Japan to try to knit together components of IPEF with the existing Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will likely meet US resistance. Instead, less binding agreements might be more feasible, in the way that US policy is consistent with the UN Convention on the Law of the Sea or the Nuclear Test-Ban Treaty, even though neither has been ratified by the US Senate. In addition, some supply chain resiliency initiatives might have to accommodate certain “Buy Domestic” provisions or the relative political clout of one industry or another.

Most important, policy makers in both countries should recognize the valuable opportunity before them to establish a well-functioning interagency alliance coordination mechanism to address some of the most consequential national security issues we face in the twenty-first century. Even though the 2+2 is nominally led by only two secretaries and two ministers, it should in fact be a collective effort throughout the bureaucracy with a shared sense of purpose that also continuously involves politicians and private sector leaders. Toward this end, the Economic Policy Consultative Committee could engage key business groups on a regular basis, such as the US Chamber of Commerce, American Chamber of Commerce in Japan, Keidanren, and Keizai Doyukai. These groups can coordinate their support for the economic 2+2 within their existing bilateral engagements.

Today’s US-Japan alliance needs a strong and cohesive Economic Policy Consultative Committee to address emerging issues in the twenty-first century. Economic security, semiconductors, pandemic preparation, and other issues all require new policy partnerships and public-private cooperation. When bureaucrats begin to see the economic 2+2 as a preeminent forum to help them address their own priorities collectively, then the new committee will have realized its potential.

(2022/04/27)