The Importance of Public-Private Partnerships in Economic Security and Japan’s Role

U.S.-China relations appear to be changing dramatically. A decade ago, U.S. policy toward China was premised on the assumption that continued engagement would lead China to act responsibly as a member of the international economic framework. In fact, the United States had such expectations since supporting China’s accession to the World Trade Organization in 2001. But U.S. policy has shifted in favor of policy measures to protect sensitive technologies under the rubric of economic security.

Changes in U.S. China Policy

In May 2022, Secretary of State Antony Blinken described China as “the only country with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military, and technological power to do it.” Blinken said that this decade would be decisive and defined three pillars for U.S. policy toward China: (1) investing in the foundations of U.S. strength, including competitiveness, innovation, and democracy (investment); (2) aligning with allies and partners to advance a shared vision for the future (alignment); and (3) outcompeting China in key areas (competition). The rationale for this approach seems to have been based on the following assumptions:

• The earlier approach based on more optimistic assumptions about China’s trajectory sometimes prioritized avoiding friction over pursuing U.S. national interests.
• In the name of oversimplified market efficiency, entire supply chains of strategic goods moved overseas, and the United States’ industrial base was hollowed out.
• Economic integration with China created economic interdependence and weakened supply chains instead of increasing China’s sense of responsibility and cooperation.
• The lack of reciprocity from China is unacceptable, and it is unsustainable. China is seeking to make China less dependent on the world and the world more dependent on China.
• S. foreign policy is at an inflection point, and how it responds to the new challenge of “competition in an age of interdependence” and whether it can sustain its core advantages in geopolitical competition are critical.

Regarding the first pillar, “investment,” U.S. policy is steadily advancing under three laws (the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act), which will result in an estimated $3.5 trillion in public and private investment over the next decade. With regard to the third pillar, “competition,” one policy that has received significant attention is the October 7, 2022 export controls on advanced computing and semiconductor manufacturing items. While the policy was updated in October 2023 to close loopholes, Commerce Secretary Gina Raimondo said, “technology changes, China changes and we have to keep up with it.” Raimondo also said that the policy could be updated in the future to reflect changing conditions.

Collaborating with Partners

With regard to the second pillar of the policy toward China, “alignment,” National Security Advisor Jake Sullivan explained that “ultimately, our goal is a strong, resilient, and leading-edge techno-industrial base that the United States and its like-minded partners, established and emerging economies alike, can invest in and rely upon together.” Supply chain resilience has received significant attention due to the excessive dependence on China and logistical challenges that surfaced during the pandemic. Coordination with partners is especially important to support supply chain resilience and for U.S. export controls to become more effective. One of the strengths of the United States is its many partners. The Biden administration has made a clear commitment not to leave partners behind, but has also called for further efforts to enhance the power of the U.S.-led network of partnerships in the international community.

Japan’s Situation

Japan, as an important partner of the United States and with consideration of changes in the U.S. government’s policy toward China, the growing need to foster and manage critical emerging technologies, and the need for supply chain resilience, has introduced timely and steady policies related to economic security, including the Economic Security Promotion Act in May 2022. In October 2023, Japan’s Ministry of Economy, Trade and Industry announced the “Action Plan to Strengthen the Supply Chain and Technological Basis for Economic Security.” The plan lists immediate threats and risks such as the severe confrontation between the United States and China, Russia’s invasion of Ukraine, and the impact of the acceleration of disruptive technological innovation and competition for technology acquisition on the rules-based international order. The three pillars of the action plan are the following: (1) industrial support measures, including strengthening supply chains to ensure technological superiority (promotion); (2) industrial defense measures, including preventing the outflow of security-critical technologies (protection); and (3) the establishment of an international framework for cooperation on economic security, including responses to economic coercion (partnership). The government has also decided to deepen discussions with industry and the governments of other countries.

The Importance of Dialogue with Industry

Japan’s action plan is a living document that will be revised in response to changes in the international economic situation and the progress of public and private sector initiatives. It is essential for the government to engage in extensive dialogue with industry in order to effectively address issues such as supply chain resilience and export control challenges facing Japan and the world in the following ways.

First, while the government develops policies and regulations, it is the private sector that must implement them on the ground, and each has a role to play. It is necessary for the government to understand as accurately as possible the current situation, including the evolving state of technology, through communication with the private sector, and to consider feasible policies while avoiding unforeseeable consequences as much as possible. It is important to encourage companies to understand the content and necessity of the policies and regulations and to take action on their own.

Second, there are issues that can be addressed independently by private companies and issues that cannot. In particular, when it comes to issues such as economic coercion and export controls, it is difficult for a single company to deal with these issues because they involve foreign governments. By sharing information and responses in advance, rather than consulting with the government after the issue arises, companies will be able to respond quickly and minimize the impact of economic security measures.

Third, regulations are generally disliked by private companies because they can stifle innovation and because compliance introduces considerable costs for private companies. It is therefore important to increase transparency and predictability with regard to addressing the concerns of the private sector through dialogue to encourage private sector cooperation on economic security.

Fourth, changing circumstances mean new business opportunities. The action plan includes policies to support the private sector, and private companies can identify new opportunities by actively participating and incorporating the information that the government has to offer. On the other hand, where China has a policy of incorporating foreign technology and having Chinese companies produce it, private companies need to carefully consider the risk of being excluded from the Chinese market in the future and take appropriate measures.

Fifth, the Japanese government should coordinate with other governments to prevent Japanese companies from being adversely affected by economic security policies. Private companies are very concerned that they alone will be disadvantaged and companies in other countries will benefit as a result of Japanese regulations. It is the role of the government to protect private companies from being disadvantaged in the international market. In addition to actively coordinating with partners such as the United States, the Japanese government has also pursued dialogue channels with China, such as the Japan-China Export Control Dialogue announced in November 2023. Japan’s export controls are not targeted at any particular country. Given the degree of economic interdependence between Japan and China, it is extremely important to establish and maintain such a framework for communication.

Challenges in Strengthening Supply Chains

Supply chain resilience, an important issue for both the U.S. and Japanese governments, is an area that cannot be addressed by a single country, but requires deliberate bilateral and multilateral cooperation with partners, including the United States.

In order to produce high-quality and competitively priced products, private companies have been focusing on how to create efficient supply chains at low cost (which, crucially, should remain trade secrets), in addition to promoting technological innovation. As new variables such as geopolitical competition and pandemics have recently emerged, companies are scrambling to determine whether their existing supply chains are resilient to such risks. Private companies face the difficult challenge of weighing the cost of supply chain resiliency against the risk potential and impact on their businesses to maintain the competitiveness of their products.

The government has a role to play in making private sector supply chains more resilient. Several international frameworks in which the Japanese government played a central role have already been established to discuss supply chains: the 2023 Hiroshima G7 Summit, the first to address economic security, which announced principles on resilient and reliable supply chains; the Quad, a cooperative effort among Japan, the United States, Australia, and India; and the Indo-Pacific Economic Framework or IPEF, the Biden administration’s tool for economic diplomacy in the Indo-Pacific. These international frameworks start with the collection and sharing of information, but it is also possible to go one step further and introduce a certification system for companies in each country that are working on supply chain resilience. A framework could also be created through discussions among countries to give an incentive for companies that are working on supply chain resilience, such as actively purchasing from such certified companies (i.e., trustworthy companies).

In the future, it is conceivable to promote the creation of such a framework in a way that involves more countries, and, as in the case of addressing climate change risks, investors’ funds could be directed to companies that invest in supply chain resilience. Incentives that fit these mechanisms of private sector behavior can be examined based on information from private sector companies in the public-private dialogue.

Conclusion

Some hope that the Chinese government’s policies will change in the face of a shrinking population, declining economic growth, and a sharp drop in foreign investment. However, it is unwise to bet on that expectation. At least, the Biden administration has not put forth any policies that would raise such expectations. In a recent speech at the Center for Strategic and International Studies, Commerce Secretary Gina Raimondo explained that the United States will have 20 percent of the world’s advanced semiconductor manufacturing capacity by the end of the decade, and it is steadily taking steps to achieve this goal. Japan has also made steady efforts to strengthen its domestic manufacturing capacity through support for TSMC, Micron, Rapidus, and other companies, and these efforts should continue. The United States is also in need of a strong partner and should welcome such a move.

U.S.-China economic competition will last for a long time, and companies need to be prepared for this situation. Japan is on a path to strengthen its own resilience, which should encourage other nations to develop a sustainable strategy through public-private dialogue. (Japan is ahead of other countries in the level of public-private dialogue in this field.) Based on a commitment to maintain and improve a free and open international order based on the rule of law, Japan also can engage the Global South as it did during the 2023 G7 Trade Ministers’ Meeting.

Cooperation between the United States and Japan has been deepened more than ever thanks to the efforts of all parties involved. Since it also has bilateral channels with China, Japan, as an important partner of the United States, can lead international discussions on economic security issues, including supply chain resilience.

Takayuki Sato is a visiting fellow with the Japan Chair at the Center for Strategic and International Studies in Washington, D.C., from the Japan Bank for International Cooperation (JBIC).

The views expressed herein are solely those of the author and do not represent the views of the JBIC, nor the government of Japan.