Economic security, Latest news, Perspectives

Perspectives: Making sense of economic security

G7 leaders agreed a wide-ranging statement on economic resilience and economic security at their recent summit in Japan. The breadth of issues put under this heading contents is a problem and risks simply becoming a laundry list of concerns about China.  The European Commission, preparing its own communication on the issue, would do the world a great service by giving the concept a better definition.

Japan has had a minister for economic security since 2021 whose particular concern is with protecting supply chains. With the question of ‘economic security’ attracting increasing interest, it was an obvious choice for the G7 focus under Japan’s Ppresidency this year.

To judge by the G7 statement, the concept of economic security covers quite a range of topics.

Resilient supply chains are the first subject covered, with principles listed as “transparency, diversification, security, sustainability, and trustworthiness and reliability”. The statement adds that enhancing resilience should be “especially for critical goods such as critical minerals, semiconductors and batteries”.

The topics covered further include resilient critical infrastructure with a special focus on the security and openness of the information technology ecosystem.

The economic security term also encompasses ‘non-market policies’ in areas such as subsidies, state-owned enterprises and forced technology transfers, including what seems an optimistic statement to “strengthen efforts at the WTO to better address these issues”.

Economic coercion also falls under the term in a statement that announces a G7 coordination platform on this topic to share information, consult, and collaborate when crafting responses.

Three final  topics covered under the economic security heading are technology-related:  harmful practices in the digital sphere such as unjustifiable data localisation, cooperation on international standards setting, and preventing cutting-edge technologies being used to threaten international peace particularly through export controls.

While not explicitly mentioned anywhere, it is easy to read much of the content listed above as specifically related to concerns about China.

In this context it is interesting to note that climate change is not listed as an economic security issue, but is the subject of a separate G7 document.

But just making economic security about China would seem a waste, when the term is already used in a wider sense to think strategically about protecting our fundamental livelihoods.

It has become clear that the term ‘economic security’ is here to stay. It is time to find a better definition of what it involves for trade policy.

Companies and governments must be aligned

Economic security was popularised as a concept as a result of the shortages of personal protective equipment and certain drugs in the early days of the Covid-19 pandemic. At the heart of its definition should therefore be that a country is able to source – and sell – what it needs when it needs it for its economy to function relatively normally.

Supply chains are thus inevitably at the heart of the concept, as is reflected in the G7 statement.

However, it is companies that conduct the vast majority of trade, rather than governments, and who will therefore be primarily responsible for secure supply chains.

In Japan it is envisaged that companies will share information on their supply chains with government. For a range of reasons, starting with commercial confidentiality, such an arrangement seems less likely in Europe or North America.

As to economic coercion, it is important to note that when faced with Chinese coercion in the form of an effective boycott of some of their products, Australian companies largely solved the issue by finding new markets, with some governmental support.

The above shows that governments are likely to work with companies in different ways to protect their economy. While a fully common approach between G7 and or/other countries is unlikely, recognising the importance of government and companies working together would seem fundamental to defining economic security.

Narrowing the scope and avoiding double standards

Given the importance of semiconductors to modern products, it is understandable that these are singled out for special attention with regard to economic security.

It is less clear why market distortive practices of state-owned enterprises can be considered under the same lense.

The reference to harmful subsidies in the G7 statement is even more problematic. Although the assumed target is China, it is hard not to think of the US Inflation Reduction Act, and of the EU’s very own response to it.

Care must also be taken with the concept of ‘coercion’. It is an important concept but needs to be tightly defined.

One can imagine some countries feeling under pressure from the US with regard to their ties with China, or from the EU for example on the impact of regulations such as for products that may be related to deforestation.

The protection of critical infrastructure, including digital facilities, would seem to be significant in terms of protecting against coercion along with protecting the key components that make these work.

Moving beyond these confines should however better be treated with caution.

Open trade as a fundamental part of economic security

For the current administration in Washington, economic security appears to to include ensuring manufacturing jobs in the US. President Macron has expressed a similar view for France or the EU as a whole.

Yet the G7 leaders statement refers to global cooperation, and the importance for example of low and middle-income countries being part of supply chains.

The statement also includes a clear affirmation that “our cooperation to strengthen economic resilience and economic security will be rooted in maintaining and improving a well-functioning international rules-based system”.

The consistency of open trade with economic security involves a tension, but only to a certain degree. Even to some of the most hardened protectionists there is grudging acceptance that not everything will be sourced in one country, that ‘resilience’ does require trade, however balanced with domestic production.

Indeed, many will argue persuasively that dependence on a single country for supply or demand, including your own, is the greater threat to resilience. This could be one lesson from what has happened in Europe with regard to energy from Russia.

A communication from the European Commission on the subject of economic security is likely in June – and it is expected to make the case for international trade being a key part of European economic security.

Recognising trade as a core part of economic security would be welcome. Presenting a tighter definition would also be a service that the EU could provide globally.

 

 David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.

One Comment

  1. Pasi-Heikki Vaaranmaa

    David, you are clearly onto something here. It makes sense to talk about economic security, and at the same time it is important to frame the topic appropriately – and appropriately narrowly, I should add. Trade – international trade to be precise – is increasingly regarded as the scapegoat responsible for all economic/societal insecurity, and to a large extent without much warrant. We risk a great deal if we have sign onto an all-encompassing notion of economic security. It already has a name: beggar-thy-neighbour.

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