Research Group on Economy-Security Linkages #14
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Chinese conception of "economic security" under the Xi Jinping administration
"Economic security" has been gathering attention in recent years. The main reasons for this are (1) neo-globalization, (2) the achievement of objectives by major powers using the "economic statecraft"1 approach, and (3) the development of "game-changing" and other emerging technologies. In particular, there has been a heightened sense of international concern about China's attempts to coerce, demand obedience, or persuade other countries by acquiring/securing technologies (resorting to economic espionage if necessary) and human resources and by leveraging its economic power.
In the first place, the essence of security lies in deterring and responding to possible threats. "Economic security" is a comprehensive concept that includes reacting to threats that may impede a state's economic stability and development, deterring such threats, or engaging in outreach, including coercive measures, against the threatening entity.
"Responding" more specifically means reacting to economic encroachments by strengthening the regulation and management of economic factors, stockpiling, instituting protectionist measures, ramping up domestic production, or engaging in substitution. "Deterring" means building up international economic competitiveness and deterring economic encroachments. To achieve its purpose, the "economic statecraft" approach includes the use of economic power to coerce, demand obedience from, or persuade other countries.
In China, at the 1st meeting of the Central National Security Commission of the Communist Party of China (CPC) held on April 15, 2014, the Xi Jinping administration presented its first "Overall National Security Outlook."2 This Overall National Security Outlook (ONSO) is a comprehensive and uniquely Chinese concept of including 11 areas, including politics, economy, culture, and society, as well as external threats, in the realm of national security3.
Xi Jinping, General Secretary of the CPC's Central Committee, President of the People's Republic of China (PRC), and Chairman of the Central Military Commission, urged firm adherence to the ONSO with regard to China's national security activities and said that "the security of the people is the purpose, the security of politics is the bedrock, and the security of the economy is the cornerstone." This statement suggests that the ONSO is based on political security, namely the maintenance of the ruling system by the CPC, and that the legitimacy of the government is to be ensured by guaranteeing economic security.
Focus of China's economic security
Based on this ONSO, the "National Security Law of the PRC" was approved and enacted at the 15th session of the Standing Committee of the PRC National People's Congress on July 1, 20154.
Regarding economic security, the Law stipulates that "the state shall maintain its basic economic system and the order of the socialist market economy, improve the rules and mechanisms to prevent and resolve economic security risks, and ensure the security of important industries and crucial fields related to the lifeline of the national economy, key sectors, major infrastructure, major construction projects, and other major economic interests" (Article 19).
Prior to this law, the CPC and the State Council in May 2015 called for (1) improving the national security examination mechanism for foreign investment, (2) establishing systems for preventing and managing risk from globalization, (3) establishing security systems for the economy and trade and (4) improving financial risk prevention and management systems, to protect China's "core interests" and to establish an economic security system in an open economy while at the same time opening the economy to the outside5.
From this, it can be seen that China places importance on the security aspects of its economy, such as assessing investment in China by foreign companies in areas that affect national security, maintaining stability by strengthening market management and supervision, securing international channels for the stable supply of resources, establishing an export control system, and implementing measures against systemic risks. All of these focus on protecting the national economy by strengthening domestic economic stability and supervision.
China's concept of "economic security" has changed somewhat since 2018 in response to the Trump administration's emphasis on economic security. For example, the context in which Chinese leaders use the term "economic security" has changed since 2018 to emphasize core technologies and related intellectual property rights as well as data, industrial protection, and supply chain security.
In 2020, amid the global spread of the novel coronavirus outbreak originating in Wuhan, Hubei Province, China, and the deepening confrontation between the United States and China, China advocated "self-reliance" and "dual circulation" in its economy; expanded tax cuts, loans, and subsidies to its companies; and launched economic policies such as infrastructure investment, industrial chain transfer, as well as expansion of consumption and exports. On the other hand, China has been developing domestic laws to strengthen the security aspects of its economy.
Enactment of the Export Control Law
The "Export Control Law of the PRC" enacted on October 17, 2020, and put into force on December 1, has attracted international attention. The Export Control Law is China's first special law governing export control. It consists of five chapters with 49 articles covering control policies, control lists and control measures, supervision and management requirements, legal responsibilities, and supplementary provisions6. The Law stipulates the establishment of a list of regulated products, the introduction of an entity list for prohibiting the export of specific items, the introduction of restrictions on deemed exports and re-exports, the principle of extra-territorial application, and the retaliatory measures.
The Law had been amended before its enactment, with the first draft made available for public comment on June 16, 2017, and presented to the NPC Standing Committee on December 28, 2019, and the second draft submitted to the NPC Standing Committee on July 3, 2020. While the draft version of the Export Control Law made available for public comment was released before the US-China rivalry escalated, after President Trump took office and seen by many as a response to the United States' growing restrictions on China's high-tech startups.
Although the contents of these drafts were not initially intended as counter-measures against the United States, they show the Xi administration's hard-line stance toward foreign countries even in the initial draft for public comment, in such clauses as "protecting national security and the development of national interests" (Article 1), "export control is based on an overall national security outlook" (Article 8), and "if any country (region) imposes discriminatory export controls on China, China will take appropriate measures against that country (region)" (Article 9).
In addition, the enacted and enforced provisions stipulated that "this law is established to safeguard national security and interests, perform non-proliferation and other international obligations, and enhance and regulate export control" (Article 1). The wording "national security and interests" is repeated in other articles, but in the second draft, the scope of the Law was defined as circumstances harmful to "national security." In other words, when the Law was enacted, it was made clear that the Law would be applied to cases in which the Chinese government deemed there was a risk of harm to its "interests."
More distinctively, the Law authorizes retaliatory measures: "where any country or region abuses export control measures to endanger the national security and national interests of the PRC, the PRC may, based on the actual situation, take reciprocal measures against that country or region" (Article 48). From these provisions, it can be seen that China aims at countering the United States, which increasingly excludes Chinese companies, and that it regards export control as a means of economic statecraft.
"Strategic ambiguity" of list rules
Article 9, Paragraph 1 of the Export Control Law stipulates that "State Export Control Administrative Departments are to work with relevant departments pursuant to required procedures to establish and adjust the export control lists for Controlled Items and promptly publish such lists in accordance with the provisions of this Law and related laws and administrative regulations as well as export control policies." On December 2, the day after the Law went into effect, the Ministry of Commerce released the "Public Notice of Commercial Cryptographic Import Permit List, Commercial Cryptographic Export Control List, and Related Control Measures" and applied it from January 1, 20217.
The public notice is based on the Export Control Law and the Cryptography Law of the PRC and covers commercial encryption items such as data encryption technology and software. Specifically, IC chips that perform cryptographic operations and specialized encryption equipment for applications such as quantum cryptography, electric power, and finance as well as phones, smartphones, and fax machines equipped with encryption functions, are subject to the regulations. At the same time, imports of goods and technologies related to commercial cryptography are also subject to licensing.
Thus, the first export control list has been released, but the biggest problem is that the policies and scope of applying the Export Control Law have not yet been clarified. However, the United States, which announced the 14 fields covered by the US Export Control Reform Act (ECRA) in 2018, still has not been able to release a specific list of products. Since the scope of application may change due to factors such as the price and supply of strategic materials, the development status of emerging technologies and products, end users and end uses covered by the law, and changes in political relationships with other countries, it may have intentionally withheld a clear policy and scope of application.
China may be seen as attempting to create a situation where rules favorable to itself can be set by leaving "strategic ambiguity" in the application guidelines and scope of its domestic laws. In fact, under the Export Control Law, China "may exercise temporary control over any goods, technologies and services outside the export control lists, and make an announcement of such. A temporary control can be enforced for a term of up to two years" (Article 9, Paragraph 2). Such provisions do not appear in other countries' export control laws, and they require exporters and related companies in China to shoulder additional burdens and respond to measures based on a "wait-and-see" approach.
On September 19, 2020, the provisions of the "Unreliable Entity List" were announced and enforced on the same day8, prohibiting or restricting trade, investment, and other activities in China by listed foreign entities. However, the entity list based on these provisions was not made public at that time, and it is expected that the list will be released and expanded in keeping with changes in the international environment, including the US-China conflict.
Efforts to revise laws to strengthen protection of intellectual property rights
At the same time, there have been moves to revise laws to strengthen the protection of intellectual property rights. The argument that intellectual property protection is necessary for scientific and technological innovation has been discussed in China since around 20009. A notable development in this regard is the statement made by Xi Jinping on November 30, 2020, the effective date of the Export Control Law, at the 25th Group Study Meeting of the CPC Central Committee's Political Bureau, which works to protect intellectual property rights should be thoroughly strengthened.
In this Group Study Meeting, a study session was conducted on protecting intellectual property in China10. At this session, Yi Jiming, Professor of Law at Beijing University, Director of the International Intellectual Property Center, and Director of the National Institute for the Implementation of Intellectual Property Strategy, was invited to share his view that there is a need to comprehensively strengthen the protection of intellectual property, stimulate innovation, and promote new innovation-driven development methods.
While attending the meeting, Xi said, "Innovation is the first driver of development, and protecting intellectual property rights means protecting innovation." He added that "while strictly implementing the relevant provisions of the Civil Code, we should accelerate the improvement of relevant laws and regulations, and coordinate and facilitate amendments to the Patent Act, the Trademark Act, the Copyright Act, the Antimonopoly Act, and the Act on the Advancement of Science and Technology," stressing the need to revise legal systems to protect intellectual property.
Furthermore, Xi stressed the need to maintain national security in the area of intellectual property rights. Specifically, he recognized that "we need to strengthen independent R&D, protect key national security-related core technologies and manage the transfer of national security-related intellectual property rights under the law" and that "it is necessary to improve laws, regulations and policy measures related to intellectual property, antitrust and fair competition, and to form legal and strong controls."
While advocating deep participation in global intellectual property governance, Xi also stated that, in addition to these domestic legal developments, "we need to promote the extra-territorial application of China's intellectual property laws and regulations and improve cross-border judicial coordination arrangements" and "it is necessary to establish an efficient international mechanism for early warning and emergency response to intellectual property risks and to establish a system for preventing and managing foreign-related risks to intellectual property."
Regulation on foreign investment and extra-territorial application of laws and regulations
On January 9, 2021, the Ministry of Commerce released the "Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures," which went into effect on the same day11. These Rules are aimed at "counteracting the impact on China caused by the unjustified extra-territorial application of foreign legislation and other measures, safeguarding national sovereignty, security and development interests, and protecting the legitimate rights and interests of citizens, legal persons, and other organizations of China" (Article 1). Specifically, a review body led by the Ministry of Commerce will be established to conduct reviews in accordance with these Rules when Chinese citizens or corporations encounter improper extra-territorial application of foreign legislation/regulation.
Based on the review results, the Commerce Department may decide to approve, enforce, or prohibit foreign laws/regulations and measures (Article 7). In addition, it is stipulated that "where a person complies with the foreign legislation and other measures within the scope of a prohibition order, and thus infringes upon the legitimate rights and interests of a citizen, legal person or other organization of China, the latter may, in accordance with the law, institute legal proceedings in a people's court and present a claim for compensation" (Article 9). Additionally, "in response to the unjustified extra-territorial application of foreign legislation and other measures, the Chinese Government may take necessary counter-measures based on actual circumstances and needs" (Article 12).
However, because the definition and scope of terms such as "foreign legislation and other measures," "person," and "counter-measures" are ambiguous, there is room for the Chinese government to interpret and apply the law arbitrarily. Therefore, any foreign law or measure could be covered if the Chinese government considers it an "unjustified extra-territorial application." Thus, if a Japanese company discontinues transactions with a Chinese company in compliance with relevant laws, regulations, and measures applied extra-territorially by the United States or other countries, there is a possibility that China will seek damages.
From this, it can be assumed that China will take counter-measures by regarding the application of foreign legislation and other measures as "unreasonable extra-territorial application" while at the same time trying to secure China's "security and interests" by applying its intellectual property laws and regulations outside the region in what is clearly a double standard. In other words, domestic laws, legislations, and measures related to China's economic security may be applied as a means of protecting the interests of Chinese companies, imposing economic pressure on other countries, or deterring regulations on China.
Therefore, as indicated in the "Requests with Regards to the Extra-territorial Application of Chinese and United States Regulations" submitted to the Ministry of Economy, Trade, and Industry on November 10, 2020, by major Japanese industry groups, there is concern that Chinese domestic law "may be put into operation to maintain and develop international competitiveness and superiority12." In other words, there are worries that China's economic security measures will not simply guarantee economic security but will also serve as a "stockade" for profits, technologies, and resources.
Background to China's efforts to strengthen its economic security
The first reason behind China's bolstering of its economic security is that the CPC leadership recognizes that ensuring economic security under the Overall National Security Outlook is the basis of national security. Therefore, to achieve the goal of guaranteeing economic security, China is willing to try coercing, demanding obedience, or persuading other countries using "economic statecraft."
Second, in the face of growing concern from developed countries about the US-China conflict and China's acquisition, development, and enclosure of technology, China has come to recognize the need to secure strategic goods and supply chains. Therefore, as a measure to ensure economic security in a global and open environment, it is believed that the CPC intends to develop relevant domestic laws and establish international rules that are advantageous to China.
Third, as demonstrated by its largest number of patent applications worldwide, China is now in a position to protect its technologies and intellectual property as well as essential data supporting emerging technologies. This is behind its strengthening of economic security. For this reason, China's legal system is designed with the infringement of intellectual property rights by other countries in mind. While other countries have come to regard infringement by China as a problem, it is a significant change that China has come to attach importance to intellectual property, including emerging technologies.
Therefore, Japan and other concerned countries need to prepare for the "economic statecraft" approach by, for instance, diversifying strategic material sources and supply chains. It is also vital that the international community urge China to explain and improve its unilateral and opaque domestic laws and regulations. In addition, it will be important to ensure fairness and effectiveness in the protection of intellectual property, information, and data within the framework of international trade management, including the World Trade Organization (WTO) and economic partnership agreements (EPAs).