G7 Rushes to De-Risk to Protect Sensitive Tech

This year has already become an epoch-making one globally in terms of revving up economic security. Country after country has prioritized de-risking in industrial and financial policies.

De-risking is an approach to reducing dependency on certain countries feared to pose security concerns and preparing for economic coercion from these nations. It also aims to restrict economic activities prone to be utilized by countries of concern to upgrade their military capabilities.

A structural change in economic globalization has hitherto accelerated economic ties even with countries concerned about better cost performance and efficiency.

The United States, for its part, has been tightening risk-mitigating measures for countries of concern.

On Aug. 9, U.S. President Joe Biden signed an executive order to regulate investment in Chinese companies active in high-technology sectors such as semiconductors and microelectronics, quantum information technologies, and artificial intelligence. U.S. venture capital investments and the like in Chinese companies working on technologies converted to military use will be banned in principle. In contrast, investors in Chinese companies handling even technologies less likely to be applied to military purposes must notify the U.S. government of their investment plans in advance. Corporate entities and individuals who breach the executive order will be fined. The order will regulate investment by Japanese companies domiciled in the United States and investment in Chinese companies operating in Japan. The new U.S. regulatory regime is expected to come into effect in 2024.

Biden’s order targets Beijing

Biden’s executive order is aimed at preventing funds of corporations and individuals in the United States from being used by China to advance its military capabilities. In the executive order, he wrote about countries that “eliminate barriers between civilian and commercial sectors and military and defense industrial sectors … to achieve military dominance.” China has been revving the so-called Military-Civil Fusion development strategy to strengthen its military. The U.S. president referred to the investment risk even in Chinese private enterprises leveraging the Chinese military’s advancements.

Until now, regulations on investment in sensitive technologies have been primarily purported to ward off technology outflows by controlling inward direct investment in domestic companies. Therefore, an approach to regulate outward direct investment is quite rare. In other words, the United States is extremely wary of China’s military expansion. For his part, Biden, seeking reelection in 2024, cannot but help consider the hardening of U.S. public sentiment toward China.

Such a sense of danger is not limited to the United States.

When the leaders of the G7 held a summit in Hiroshima in May this year, they issued a standalone statement focusing on economic security for the first time.

The G7 leaders, in their Statement on Economic Resilience and Economic Security, wrote, “We recognize that appropriate measures designed to address risks from outbound investment could be important … to protect our sensitive technologies from being used in ways that threaten international peace and security.” What was undoubtedly behind their recognition of the risks caused by outward investment was the ongoing structural change to the global economy, as mentioned at the outset of this article.

No more dependence on Russia

The European Union, like the United States, is aware of outbound investment as a potential risk to regional security. As such, it has been looking into how to regulate outward investment.

In June, the EU unveiled a comprehensive economic security strategy, heralding that it would “examine … what security risks can result from outbound investments and propose an initiative by the end of the year.” It included quantum, advanced semiconductor, and AI technologies in critical military-civil or dual-use technology areas. It warned that technology leakage concerning those areas could increase the military capabilities of countries of concern.

The starting point for approaching economic security, the EU noted, is to precisely identify risks and acknowledge a relationship of tension between benefiting from an open economy and ensuring economic security. The bloc cited risk mitigation as the keyword for economic security.

In March, European Commission President Ursula von der Leyen said that Brussels’ basic policy toward China was to reduce European risks without naming any countries that might be subject to the EU’s possible economic security-related regulations. Her statement indicates that the EU considers China when refining its economic security initiative. Given that the bloc acutely felt the danger of depending on Russian energy supplies when Moscow launched an invasion of Ukraine in February 2022, the EU is presumed to be aiming to curtail risks presented by Russia as well.

The EU now has a policy of developing security-critical technologies independently instead of depending on countries of concern. It has been working on a series of relevant laws to that end. For instance, the Critical Raw Materials Act envisions promoting extraction, smelting, processing, and recycling within the bloc. The European Chips Act proposes a more stable supply chain. At the same time, the Net-Zero Industry Act envisages increased output of solar photovoltaic and solar thermal power and batteries for energy storage.

The EU’s approach to economic security had been considered lukewarm compared with those of the United States and Japan. But that landscape changed drastically on the heels of the outbreak of the war in Ukraine. In March 2022, only two weeks after the beginning of the war, EU member states adopted the Versailles Declaration, addressing three key dimensions: bolstering their defense capabilities, reducing their energy dependencies, and building a more robust economic basis. In the declaration, their leaders said they “agreed to phase out our dependency on Russian gas, oil, and coal imports as soon as possible.” The fact that they were appalled by the danger of depending on Russia for energy supplies was the primary driving force in issuing the declaration hurriedly.

Now that the United States and the EU have moved to regulate outward investment, the Japanese government must consider following suit. In his Aug. 9 executive order, defined as countries of concern that handle national security-sensitive technologies and products and pose severe threats to other nations, Biden said the United States would engage “with allies and partners regarding the national security risks posed by countries of concern.”

China tightens anti-spy law

For its part, China has been constricting measures to safeguard its technologies. It revised its anti-espionage law in July this year, adding “data” to which authorities conducting investigations into suspected espionage cases are now allowed access. As a result, the anti-espionage law’s provisions are likely to be applied to research outcomes adaptable to military and civil use in such areas as AI and quantum technologies and biotechnology, on top of those items that are covered by the export control law and the export prohibition law or on negative lists that specify items subject to outbound shipment restrictions.

Beijing’s move demonstrates its decision to prioritize national security over inward investment. Though the revision of China’s anti-espionage law is purported to protect national security, no explanations have been given about what activities contravene the law. There are concerns that the law can be utilized arbitrarily.

The enactment of the revised anti-espionage law has made it more probable that there would be permanent eavesdropping on communications between Japanese and other foreign companies in China and their head offices. Other concerns are that Chinese authorities will intensify crackdowns on information and communication technology, AI, and semiconductor companies and that trade secrets and intellectual properties of foreign companies operating in China may be precarious because of an increase in searching and confiscating operations justified by the revised anti-espionage law. Moreover, Japanese companies may risk facing a situation where their commercial practice of requesting business information from their Chinese counterparts would be regarded as an “act of espionage.”

Shigeru Kitamura

Kitamura joined the National Police Agency in 1980 after graduating from the University of Tokyo. He became director of Cabinet Intelligence in 2011 and served as secretary general of the National Security Secretariat from 2019 to 2021.

The original article in Japanese appeared in the Nov. 19 issue of The Yomiuri Shimbun.