The G7 Hiroshima Summit: Unpacking Economic Security Concerns about China
This week, leaders of the G7 will meet in Hiroshima, Japan, to discuss a range of geopolitical, economic, and security issues. Top of mind will undoubtedly be the U.S. debt ceiling and the ongoing war in Ukraine but so will the growing tensions with China and how the most advanced economies in the world should look to de-risk strategic industries and diversify global supply chains. Together the leaders of the United States, Britain, Canada, France, Germany, Italy, and Japan, along with representatives from the European Union, will attend. Notably, Japan, as the host of this year’s summit, also invited the leaders of Australia, Brazil, Comoros (African Union Chair), Cook Islands (Pacific Island Forum Chair), India, Indonesia, South Korea, and Vietnam. The groupings of these countries are significant as they reflect an effort to bring in key countries in the Global South to shore up cooperation among like-minded nations and to balance against China’s growing diplomatic and economic influence in that sphere.
Notably, last year’s G7 commemorated the end of the Second World War in Europe and the liberation from fascism, and the leaders strongly united behind Ukraine’s president Volodymyr Zelensky to defend Ukraine’s sovereignty and territorial integrity from Russia’s unilateral invasion. This year’s summit will likely reaffirm the G7’s pledge of support for Ukraine and commitment to impose costs and pressure over Russia and any other nation’s assistance to Moscow, particularly as Iran, North Korea, and China continue to prop up Russia’s war. At the same time, while China asserts that it is a responsible international player and even peacemaker, Chinese leader Xi Jinping continues to curry favor with Vladimir Putin, and together their actions demonstrate that they seek to create a new international order built on Chinese and Russian interests and dependencies.
This year’s G7 will coincide with a Quad Leaders’ meeting between Australian prime minister Anthony Albanese, Japanese prime minister Fumio Kishida, and Indian prime minister Narendra Modi—originally planned to occur in Sydney, Australia, but is now taking place in Japan on the sidelines of the G7 following President Biden’s decision to shorten his Asia trip. The backdrop of the G7 also follows two days of talks in Vienna between U.S. national security adviser Jake Sullivan and China’s top foreign affairs official Wang Yi after a few months’ freeze.
While some may view (or hope) the recent bilateral U.S.-China meeting is a sign of a diplomatic thaw—and there can be benefits to having open lines of communication—the restart of bilateral engagement should in no way hold back the United States in utilizing these like-minded multilateral leader engagements to drive its own positive economic and security agenda and push back on China and Russia’s efforts to challenge global peace and stability. This includes reaffirming key points agreed to in last month’s G7 Foreign Ministers’ Communiqué on cooperation toward a “free and open Indo-Pacific,” the importance of peace and stability across the Taiwan Strait, vigilance against China expanding its military and economic clout, and enforcement of international sanctions against countries that support Russia’s ongoing invasion of Ukraine. Additionally, G7 leaders should use this meeting to push for greater cooperation against economic coercion by China and to work toward mechanisms and practical tools to both de-risk and diversify strategic sectors in their economies.
China’s use of economic retaliation against nations over policy disputes and other agreements will be front and center, especially following a string of coercive tactics. Recently China has raided U.S. private firms and detained U.S. and foreign staff members, halted imports from Lithuania after the country allowed Taiwan to open a representative office, stopped buying Canadian canola oil after Canadian authorities arrested a Huawei Technologies executive, sanctioned South Korea’s Lotte Corporation after Seoul acquired a U.S. THAAD missile defense system—and the list goes on. According to Treasury Secretary Janet Yellen, many G7 members share a common concern with this kind of activity and are looking to see what they could jointly do to try to counter this kind of behavior.
Members of Congress and experts in a hearing last week discussed how China’s use of economic coercion is pervasive and targeted at both sovereign nations and global corporations as it aims to gain a strategic advantage for itself while undermining leverage held by the United States and partner nations. One expert called for legislation to better assist countries targeted by China, another proposed a practice of collective retaliation or “economic defense framework” that would promise collective retaliation against China should it chooses to act against a member of the collective. Both have merits if executable, and in this G7 forum, the leaders should, at the very least, focus on calling out China’s actions and pledging that their nation’s industries will stay resist such coercion and take concrete steps to start building resiliency, implement its own sticks, and focus on outcompeting China in the sectors it seeks to gain access and an advantage.
Outbound Investment Screening
A practical area of focus at the G7, therefore, will be to secure ally and partner cooperation to implement targeted controls aimed at screening and potentially prohibiting investments in China in strategically important sectors. The Biden administration is already considering such an outbound investment mechanism, though the degree to which U.S. investments in China would be regulated is still under interagency review, and it appears that it will be narrowly focused on increasing investment transparency in semiconductors, quantum computing, and artificial intelligence (AI). This means that U.S. firms may be expected to notify federal authorities when investing in China in industries like quantum computing and AI but likely will not be prohibited in sales and investment yet, although follow-on measures could do so. While this is a step in the right direction, it should go further in both broadening strategic sectors, such as advanced computing, biotechnologies, and space technologies and systems, and prohibiting certain investment outright. The European Union is also considering outbound strategic investment controls, but the effort is still in very early stages.
This week, the G7 should both discuss and set forth a framework for how the world’s largest economies can take steps to prevent certain strategic industries from directly contributing to China’s rapid military buildup and its increasingly provocative behavior. The Biden administration should also publicly release its long-awaited plan shortly after the G7 to both start laying the parameters for U.S. industry and nudge allies and partners to work toward their own outbound investment regimes by the end of the year.
Supply Chain Resilience
The G7 will also be coming together to discuss efforts to diversify the supply chain in strategically important and critical sectors, like renewable energy resources and rare earth minerals. Already G7 finance leaders have started discussing the launch of a partnership proposal to diversify supply chains, which could require countries to have minimum standards on human rights and environmental policies to join. Additionally, the European Commission in March adopted a European critical raw materials act to secure the supply of these key materials. This is particularly relevant as there are recurring fears that Beijing could limit access to strategic minerals, which has bolstered calls for secure, resilient supply chains as well as the standards and regulations that govern them. Minerals like lithium and cobalt can be found in products from computers to household appliances to clean energies like batteries, electric vehicles, wind turbines, and solar panels.
China already dominates in many of these products and has more than half of the world’s production of battery metals, including lithium, cobalt, and manganese, and as much as 100 percent of rare earths. Losing access to these materials could have significant consequences across industrial and manufacturing sectors—i.e., if China were to choke off global supplies. In 2010, China cut off rare earth exports to Japan in the midst of a territorial dispute, which led the Japanese government and private sectors to aggressively lessen their dependence on China through industrial policy, diplomatic efforts, and through private enterprise. China has shown it will go to extreme measures either for retribution or for its pursuit of national interests. This G7 summit should agree on a plan to collectively become more resilient in strategic minerals and rare earths.
Finally, a key area to address is how the G7 forum can continue to bolster the rules-based international order, its democratic values and norms, and how to drive technical standard-setting for emerging technologies. China aspires (and in some cases is already leading) in writing international rules for emerging technologies for its benefit. Beijing has drafted strategies and plans for 5G, AI, and smart cities, to name a few. Since 2019, China has submitted hundreds of technical documents to the International Telecommunication Union to serve as a basis for deliberation on generative AI regulation and is racing to lead in this space.
Notably, Kishida recently said Japan will seek to lead international efforts in establishing rules of the use of AI as the chair of this year’s G7 meetings. At a government panel to discuss the country’s AI strategy on May 11, Kishida said “it is necessary for Japan, as the G-7 chair, to exercise leadership in promoting common understanding and establishing rules.” This is a positive step to see, and in line with this effort, there are further opportunities for the G7 to lead and partner on how to establish and coordinate on global standards and supply chains. U.S. allies and partners should show their commitment to compete and advance core national security interests.
As representatives of the world’s most advanced economies, G7 leaders should take every opportunity to lead and take greater ownership in safeguarding against the very serious challenges that China presents. The Biden administration should encourage G7 nations attending to develop their own mechanisms for outbound investment screening into China, as well as inbound investment screening for countries that do not yet have screening processes and take a close look at their supply chains and the strategic sectors that China could leverage to serve Beijing’s national interest. Together, Washington and its allies and partners should agree to coordinate and collaborate in this forum and demonstrate their resolve to lead international standards and norms as a clear signal that the G7 will continue to meaningfully tackle today’s most challenging issues. This will involve concrete actions, a good deal of patience and strength to take the economic hit at times, and the use of both punitive measures and proactive strategies to play back and win the long game that China is contesting. The sooner leaders can agree and execute this, the better off everyone will be.
Kimberly Lehn is a senior associate (non-resident) with the Asia Program at the Center for Strategic and International Studies in Washington, D.C.