Economic security in a world of China-US hazards

Free trade faces a tough opponent – economic security framed as national security. The Asia-Pacific Economic Cooperation or APEC has seen this trend emerge among members like the United States, China, Japan, South Korea and Australia. 

These economic security policies raise barriers to free trade and investment to protect critical infrastructure and specified industries from foreign influences. They also strengthen industrial competitiveness.

Despite its negative influence on the post-World War II liberal trade order, APEC has been reluctant to engage in debates on economic security, which is loosely defined.

But at its core is the reliable, stable and safe supply of critical goods and investment for people and the national economy. 

It has often been used in relation to resources, such as crude oil or food, or to describe the connection between economic and military technology.

Mutual dependence

The emerging security policy marks a shift from the liberal trade order. It emphasizes national boundaries, tighter controls and restrictions. It also promotes industrial competitiveness through tariffs, foreign investment screenings and subsidies. 

The United States and China are both working to strengthen autonomy in trade and investment policy. Yet most APEC members cannot do this through autarkic strategies. Instead, they have to rely on trade and mutual dependence. 

Excessive trade restrictions and subsidies for specific industries may not only undermine liberal trade rules but also raise concerns about their economic security.

Plus, national security presents intractable problems as a policy guide. As Arnold Wolfers pointed out in the 1950s, it can be over-expanded or underestimated. 

Its contents depend on those who assert it, and it carries a normative weight that is difficult to challenge. When economic security is framed as national security, it inherits these tendencies, making over-expansion and underestimation hard to control. 

It has a wide range of policy objectives, from protecting military-related facilities to diversifying supply chains and competing for technological and economic supremacy. 

Yet its focus on semiconductors, rare earths, steel and aluminum – while excluding food or crude oil – suggests that its targets are narrow and politically selected.

On the other hand, national security has a legitimate rationale for conditioning free trade. This is evident in Article XXI of the 1994 General Agreement on Tariffs and Trade, which stipulates security exceptions as the right of each member. 

Even Adam Smith, in Book IV of The Wealth of Nations, refers to the danger of relying on neighbors for the supply of manufactures related to the defense of society.

Although free trade brings advantages to states, it is not a supreme or untouchable principle that overrides their sovereignty.

National security

While both economic security and free trade have their own merits, the key question is how to find a balance between them and investment policy. But solutions are difficult to find within the framework of national security. 

As Barry Buzan suggested, national security problems tend to create a negative spiral of uncertainties and fears. The only way to address competition driven by national security concerns is through shared norms and rules among countries. 

Raising tariffs for national security reasons would only provoke distrust from partners if the policy lacks transparency. What is needed is a consensus on which areas of trade and investment should be subject to scrutiny and how to apply it.

The role of APEC is relevant here, but the bloc’s reluctance to engage in the economic security debate may be justifiable to some extent. 

Since it was founded, the group has been a collection of fora over economic issues. It has largely avoided references to sensitive security matters, and its exclusive focus on economic agendas may have been key to its survival during the past 35 years.

But the international environment surrounding APEC has changed. As some WTO panel reports show – such as the 2022 Hong Kong, China-US case – free trade and national security are in conflict, highlighting the need for international consensus. 

Sharpening US-China trade confrontation and President Donald Trump’s use of tariffs in bilateral deals further undermine the liberal trade order, underscoring the necessity of multilateral solutions.

APEC should allow individual members to pursue trade liberalization without binding others – to the emerging issue of economic security.

A good example can be found in efforts to stabilize supply chains for critical products. In 2020, Singapore and New Zealand announced bilateral cooperation on essential goods in response to Covid-19. 

This bilateral policy was soon shared by other APEC members. At the 2020 Trade Ministers’ Meeting in Malaysia, the ‘Declaration on Facilitating the Movement of Essential Goods’ was announced.

Free trade

It presented a multilateral consensus to ensure the stable flow of crucial goods during the pandemic.

The Covid-19 case may not apply directly to broader economic security issues, but the initiative could be the first step. Non-binding principles have been considered ineffective for advancing liberalization, but they hold potential for new debates. 

As an incubator of ideas, APEC should reconsider its role in finding ways to bridge the gap between economic security and free trade.

Toshiya Takahashi is a Professor of International Relations at Shoin University and a member of APEC Study Centre of Japan.

This edited article is republished from East Asia Forum under a Creative Commons license. Read the original article here.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.