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.

Multilateral Export Control

Both Japan and the United States have increasingly been turning to economic measures to manage their security ties with China. All US presidents since Barack Obama, for instance, have sought to curb the transfer to China of sensitive products and technologies that could shift the balance of power in Beijing’s favor. In the following, I will explore how Japan and United States can more effectively coordinate their export control systems in the face of ongoing changes in US policy.

Consensus on three points is a prerequisite for multilateral cooperation in security trade management. This can be gleaned from the post–Cold War nonproliferation regime covering weapons of mass destruction, certain conventional weapons, and dual-use technologies, as well as from the measures adopted to prevent terrorist organizations from obtaining weapons of mass destruction in the wake of the 9/11 terrorist attacks.

The first point is the sharing of goals, which is necessitated by the kind of policy instruments employed. Export controls are effective only for those products and technologies in which domestic firms enjoy a comparative advantage, with their denial being used as political leverage. Because this deprives domestic companies of sales opportunities, though, those businesses will have little incentive to abide by the controls unless they are convinced the regulations will make substantial contributions to national and international security. There may well be cases where differences of opinion emerge on the aims of export control, both domestically and internationally.

The second point of consensus concerns the procedures for implementing export control. UN Security Council Resolution 1540, which called for the strengthening of control regimes against nonstate actors, and the committee established to monitor its implementation, note that the factors required for effective control include a legal system, a licensing system, penalties, and a list of controlled goods. Unless these measures to enforce export control are reliably upheld among nations, concerns about free-riders and loopholes will persist.

The third point covers the content of the controlled items. Products and technologies used by the military include those that are specifically designed for military applications and dual-use technologies that can be utilized in the civilian sector as well. Additionally, exports of innovative new technologies and those deemed critical for national security have also been controlled since the Trump administration. These technologies have the potential to create enormous value in the commercial market, and countries possessing them must coordinate their control regimes to prevent the country with the least restrictive controls from reaping the biggest economic benefits. This is the reason lists of controlled items were of great importance for Cold War–era export control regimes and subsequent nonproliferation regimes.

Consensus on these three points regarding security-related trade with China is still in the midst of being built. I will next examine where Japan and the United States stand on this issue and consider the policies that will be needed to achieve closer coordination.

Prospects for Shared Goals and Policies in Addressing Security Threats

Institutional changes are being made to US export controls out of security concerns about China. Particularly since 2016, the annual reports prepared by the US-China Economic and Security Review Commission have highlighted concerns about the acquisition of technology in the United States by companies that either receive funds from or are under the influence of the People’s Liberation Army. The reports point to a variety of ways in which technology is acquired, not just through trade but also through the establishment of joint ventures with US companies, mergers and acquisitions, technical cooperation agreements, and networks of Chinese students conducting research at US universities. These concerns led to the establishment of the Export Control Reform Act (ECRA) of 2018.

In Japan, too, concerns have been raised about technology outflows resulting from the acquisition of high-tech firms by foreign investors. The United States revised its rules pertaining to foreign direct investment in 2018, and Europe followed suit in 2019. Japan, meanwhile, amended its Foreign Exchange and Foreign Trade Act in 2020 to widen the scope of direct investments requiring prior notification, lowering the requirement threshold from 10% to 1% for investments in publicly traded companies (on a par with the right to propose an agenda item at a general shareholders’ meeting under the Companies Act) and introducing prior notification requirements for board director appointments and the transfer or suspension of businesses in designated industries.

Japan, the United States, and Europe have now aligned their foreign direct investment rules covering notification systems and ex-post guidance. Although such changes were spurred by China’s acquisition of domestic companies, which carry technology transfer implications, they were by no means hostile by nature. Japan, in particular, has been shoring up its economic security in areas that could potentially lead to the outflow of domestic technology, and the amendments apply to foreign direct investment in general, not just from China.

The grounds for justifying Japan’s export control are stated in Article 1 of the Foreign Exchange and Foreign Trade Law as “to enable proper expansion of foreign transactions and the maintenance of peace and security in Japan and in the international community,” but specifics are not provided. The substance of Japan’s concern in its export control policy regarding China is revealed through the designation of foreign entities subject to catch-all control in the End User List.

The End User List issued by the Ministry of Economy, Trade, and Industry (METI) in March 2022 designates 85 Chinese corporations as being among “foreign entities for which concern cannot be eliminated regarding involvement in the development of weapons of mass destruction and other items.” The United States has designated a number of Chinese organizations, including telecommunications giant Huawei, as representing security threats and has limited their access to US technology. Washington also outlines the nature of China’s threat in its Interim National Security Strategic Guidance. Japan has not yet imposed such clear restrictions on Chinese companies, merely expressing concerns in its annual White Paper on Defense and other documents about China’s foreign and military policies and developments in the South China Sea and across the Taiwan Strait. Similarly, while the United States now openly refers to China as a strategic rival, Japan has not yet expressed such a position.

A discrepancy thus exists between Japanese and US export control policy. While Japan and the United States share concerns regarding international peace and stability under the UN Charter and multilateral nonproliferation regimes, Washington has greater flexibility in implementing export controls to meet its foreign policy goals, in addition to being able to control the export, release, and transfer of sensitive technologies under ECRA.

Japan, by contrast, has historically been restrained in the use of export controls to target specific countries like China unless such decisions can be fully justified in the international context. For the most part, managing trade has been positioned as the domestic application of rules agreed to by Japan in the international community, and there has been little room for unilateral action or measures to reflect foreign policy. The only notable exceptions include Article 10 of the Foreign Exchange and Foreign Trade Act, which allows measures to be taken by Cabinet decision. Remnants of the justification previously given for export control, as provided for by the Foreign Exchange and Foreign Trade Act, can be seen in the first paragraph of Article 16, Chapter 3, regarding international payments, which states: “When the competent minister finds it necessary for sincerely fulfilling obligations under the treaties and other international agreements which Japan has signed or when he/she finds it particularly necessary for making Japan’s contribution to international efforts for achieving international peace, or when a cabinet decision set forth in Article 10, paragraph 1 has been made, he/she may impose, pursuant to the provisions of Cabinet Order, on a resident or non-resident who intends to make payment from Japan to a foreign state or a resident who intends to make payment, etc. to a non-resident, the obligation to obtain permission for the payment or payment, etc. . . .”

One can conclude, then, that while Japan applies export control with greater flexibility today, it has not yet developed a legal framework providing a detailed definition of the conditions necessary for such flexibility.

Procedural Issues

Japan’s export control system is ostensibly aligned with that of the United States in terms of legal frameworks, licensing systems, penalties, and control lists. This harmonization is the product of the leading roles both countries have played in international export control regimes during the Cold War era and in the post–Cold War era of nonproliferation. Differences in the two countries’ systems lie in how they are operated, and it is difficult to say which approach is more efficient.

Japan’s security trade control is governed by the Foreign Exchange and Foreign Trade Act and relevant government ordinances. The screening of license applications and issuance of lists of controlled goods and technologies are under the jurisdiction of the Ministry of Economy, Trade, and Industry. Supporting the review of license applications is the Center for Information on Security Trade Control (CISTEC), which mediates between exporters and METI. CISTEC-member companies account for some 70% of Japan’s total exports, so the organization has a key role in facilitating the application process. It acts as an intermediary and provides advice to exporters, familiarizing them with the government’s decisions and ensuring the smooth administration of the export control system.

In the United States, the Department of Commerce has primary responsibility for export control, but there are cases where interagency coordination is required, since defense equipment is under the jurisdiction of the Department of State and nuclear-related products and technologies are handled by the Department of Energy. Reforms launched by the Obama administration has led to the integration of the Commerce Control List (CCL) for basic items, administered by the Department of Commerce, and the US Munitions List (USML), administered by the Department of State, as well as the consolidation of licensing agencies. Progress is also being made on the longstanding issue of shortening and streamlining the license review process.

In terms of administrative procedures, Japan benefits from the efficiency made possible by placing METI solely in charge of export control, from license screening to list issuance, while the United States requires interagency policy coordination given the involvement not only of the abovementioned departments but also the Department of Defense and the White House.

On the other hand, the whole-of-government approach of the United States has the advantage of being able to incorporate the full breadth of military-security considerations. And METI’s central management of information in Japan, even while incorporating the catch-all principle of the Wassenaar Arrangement for conventional weapons, can give rise to a lack of transparency regarding the criteria for the ministry’s decisions and the reliability of the information on which such decisions are based.

Any differences between the Japanese and US approaches to export control have rarely been cited as impediments to the two countries’ China policy. But there is still room for greater coordination in the sharing of security information with a view to enhancing effectiveness. The lack of interagency coordination in Japan is sometimes seen as a drawback, and efforts are needed to make greater use of information held by the Ministry of Defense and the Ministry of Foreign Affairs, as well as to bolster the sharing of security intelligence with the United States.

Given the sensitivity of the information involved, such an arrangement should be given serious consideration, even if limited to China-related policy areas or the technology procurement activities of the People’s Liberation Army.

Bilateral Coordination regarding Controlled Items

Post–Cold War export control has been based on efforts to contain the proliferation of weapons of mass destruction, with countries implementing domestic controls for technologies used in nuclear weapons, biological and chemical weapons, and missiles, as well as dual-use technologies, in accordance with international nonproliferation regimes. The items on such lists reflect the interests of individual countries and are not necessarily imposed by the regime itself. The United States has been a driving force in these regimes given its capacity to gather and analyze security information.

In the light of the competitive and confrontational overtones in Japanese and US policy toward China, the list of controlled items under multilateral nonproliferation regimes is not always enough. There are three reasons for this. First, although the Wassenaar Arrangement includes both a basic list (of dual-use goods and technologies) and a munitions list, the pace of revision of these lists has been quite slow. Reaching agreement has also been difficult on newly emerging technologies or in areas such as digital technology where members are in intense development competition. The regime includes states whose strategic interests vis-à-vis China do not coincide with those of Japan and the United States, moreover, so the lists of controlled items do not always reflect the two countries’ concerns.

Second, the lists compiled by the Wassenaar Arrangement and the Missile Technology Control Regime (MTCR) may not accurately reflect today’s technological realities given the rapid advances in China’s development capabilities. In fact, the lists are likely to exclude the latest technologies, which may be available from multiple sources. And third, China is a member of the Nuclear Suppliers Group (NSG) and could conceivably also join the Wassenaar Arrangement, compelling Tokyo and Washington to work with Beijing on nonproliferation issues.

Thus, it is difficult today to effectively apply nonproliferation export controls against China in a manner that was once achieved through the China Committee (CHINCOM) of the Cold War years. And as long as Japanese and US companies possess cutting-edge, critical technologies, tightening transfer controls toward China would, even if legitimate policy reasons exist, mean a loss of economic opportunity for those business and could spark a political backlash.

Given the above, export controls are likely to focus narrowly on concerns regarding security, particularly economic security. A bill to promote economic security is now being considered in Japan, but its main objective is not to be ban the transfer of sensitive technologies but to enhance the safety and resilience of supply chains and protect intellectual property. The direction of export control, in other words, is shifting from compiling lists of controlled items and assessing transfer risks to conducting risk management based on the state of competition between Japan and the United States, on the one hand, and China, on the other.

Export Control in the Era of Risk Management

Under the newly emerging type of export control, closer coordination between Japan and the United States will be required to align the two countries’ security perceptions, systems, and regulations, as well as control methods. Methods of control that have been cited to date include supply chain management for certain critical technologies, enhanced cyber security, and prevention of technology leakage via foreign students and other personal networks.

Additional factors will also need to be considered, such as the development of STEM personnel and the procurement of both funding and human resources for technology development. These are already being discussed by the two countries, and new items will likely emerge in accordance with technology trends. A bilateral framework is thus needed for the exchange of views and policy coordination on evolving control methods.