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The government plans to submit new economic security legislation to the National Parliament in the new year. Specifically, the economic security law aims to bolster supply chains for important commodities, ensure the safety of core infrastructure, nurture high technology and protect patents.

It is only natural that the government should address economic security head-on — if anything, this effort has come too late. The new legislation speaks to the fragility of the Japanese economy and the severity of the international environment surrounding Japan.

Japan’s economic dependence on other countries needs to be reassessed amid lessons learned from pandemic-caused scarcities and other geopolitical factors.  | REUTERS
Japan’s economic dependence on other countries needs to be reassessed amid lessons learned from pandemic-caused scarcities and other geopolitical factors.  | REUTERS

The rules, international order and balance of power that once supported Japan’s prosperity are collapsing. Moreover, the U.S. and China — the two countries with which Japan’s economy is most deeply intertwined — are engaged in a fierce standoff. Given the conflict between the U.S. and China is driven by domestic circumstances on both sides — “divisions” in the U.S. and “dictatorship” in China — the standoff is both structural and likely long-term.

The pandemic has made Japan painfully aware of its reliance on other countries for commodities and raw materials that are indispensable to the lives and health of its people, including vaccines, personal protective equipment and ventilators. The Japanese people have also been reminded of their dependence on foreign countries for not only oil, natural gas and food, but also the solar panels essential to decarbonization, rare earth minerals, the digital platforms that are the foundation of information retrieval, data, networks and narrative sharing.

As the hegemonic powers that once defended the international order and rules retreat, emerging powers have filled the resulting power vacuum, enlarging the balance of power and plunging other countries into a short-term, zero-sum game.

This has accelerated the collapse of the international order, and the rules governing international relations are increasingly disregarded or distorted. Countries with economic power seek to use this power as a diplomatic tool. Economic interdependence is being weaponized. The U.S. and China are not engaged in a total so-called cold war like that between the U.S. and the former Soviet Union. But in geoeconomic terms, there are already smaller geopolitical conflicts unfolding in certain areas.

By 2030, China’s gross domestic product is set to surpass that of the U.S., and it has unleashed upon the world an enormous surge of geoeconomic power. As Chinese President Xi Jinping made clear in an internal speech last year, China’s economic security strategy is to create a “gravitational force” drawing foreign investment and technology to the vast Chinese market and to “tighten international production chains’ dependence on China, forming a powerful countermeasure and deterrent capability.” With the world’s largest economy and an ever more powerful gravitational field, China’s geoeconomic aggression will only intensify.

Moreover, the challenge posed by China has expanded beyond scale (quantity) to technology (quality). A recent report by the U.S. National Security Commission on Artificial Intelligence warned: “For the first time since World War II, America’s technological predominance … is under threat. China possesses the might, talent and ambition to surpass the United States as the world’s leader in AI in the next decade if current trends do not change. Simultaneously, AI is deepening the threat posed by cyberattacks and disinformation campaigns.”

For China, state security, or the maintenance of Communist Party rule, is the most important conception of security. The government assesses economics, politics and culture on the basis of whether or not they pose a threat to this end and uses the economy for political maneuvering. If Japan is to realize a competitive coexistence with China, it must establish economic security policies of its own.

But we must accept one thing up front. Economic security policy is just one part of national security policy. In certain cases, the interests of overall national security may demand limitations — albeit temporary and partial ones — on profits, efficiency and freedom. As Adam Smith wrote in “The Wealth of Nations,” when the interests of national security and wealth collide, national security takes precedence. This is because “defense is of much more importance than opulence.”

Japan must devise strategies for competitiveness globally and against China at three levels: intelligence, security and innovation. The new economic security legislation will serve as both offense and defense. Japan must adopt a mix-and-match approach, identifying some areas where domestic production can respond to demand and areas where the economy should be further opened up to attract companies from like-minded allies to Japan.

The key will be to avoid over-expanding the areas subject to the provisions of “economic security” legislation. Like the phrase “small yard, high fence” suggests, only areas that are vital to security should be protected by a high fence.

Tensions between freedom and regulation, market and state, private enterprise and government lie ahead of us. In business, this may manifest as the tension between “just in time” and “just in case” supply chain management. In government, this will appear as the tension between free trade and industrial policy. The key will be to convert these mutually exclusive demands into the type of “creative tension” that will ultimately benefit Japan’s future.

Yoichi Funabashi is chairman of the Asia Pacific Initiative and a former editor-in-chief of the Asahi Shimbun. This is a translation of his column in the monthly Bungei Shunju.

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