Trade and Security

Geoeconomics: the U.S. Strategy of Technological Protection and Economic Security

By Anthea Roberts, Henrique Choer Moraes, Victor Ferguson
Tuesday, December 11, 2018, 7:00 AM

This is the fourth post in a series. Read the first three parts here, here and here.

 

In three previous posts, we have looked at the emerging Geoeconomic World Order, the increased convergence of economics and security in this new order and some elements of China’s geoeconomic strategy with respect to technological advancement and cyber security. The challenges posed by China’s economic rise have led the United States to dramatically revise its approach to international trade and economic law. In this post, we examine the United States’s use of geoeconomic strategies that seek to foster U.S. technological protection and economic security.

Invoking the mantra that “economic security is national security,” the United States has adopted a wide range of measures to protect its technology and manufacturing sectors. On a substantive level, these measures appear to be part of a longer-term strategy of protecting U.S. technological dominance and “decoupling” key sectors of the U.S. and Chinese economies. On a procedural level, the United States is also seeking to remove international judicial review over its economic decision-making in general and its invocation of national security exemptions in particular.

The formulation “economic security is national security” first appeared in the United States’s December 2017 National Security Strategy, but it has re-appeared many times since. In a Dec. 9 op-ed, Peter Navarro, a close advisor to the president on trade issues, characterizes the maxim as President Trump’s “new organizing principle for strategic policy.” This approach challenges the central assumptions underlying the old International Economic World Order and provides a perfect example of the convergence of economics and security that characterizes this new Geoeconomic World Order.

Redefining Economic Security as National Security

The old International Economic World Order incorporated rules against protectionism and mercantilism—what we refer to as the rule against “economic nationalism.” Thus, for instance, states were discouraged from subsidizing many industries and imposing other trade and investment barriers designed to treat domestic firms more favorably than their competitors abroad. This rule was subject to several exceptions, including national security: that is, measures that a state considers necessary for the protection of its essential security interests.

The rule against economic nationalism can be understood as a rule against economic protectionism, while the exception that permitted essential security measures provided an escape valve designed to permit national protection. The assumption underlying the old International Economic World Order was that the rule (against protectionism) applied broadly and the exception (permitting protection) applied narrowly. The former was seen primarily through an economic mindset and the latter was seen primarily through a security mindset.

Pivotal to ushering in the new Geoeconomic World Order has been the Trump administration’s declaration that “economic security is national security.” The concept of “economic security” bridges—and potentially collapses—the concepts of economic nationalism and national security. In doing so, it carves out space for a much larger pro-protection exception that has the potential to swallow the anti-protectionism rule, particularly if the United States succeeds in its claim that invocations of national security cannot be judicially reviewed.

The declaration that “economic security is national security” in the 2017 National Security Strategy identified China as a revisionist power and “strategic competitor.” The U.S. government elaborated on this idea in the Defense Department’s October 2018 report on Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States. The report stated that: “To provide for our national security, America’s manufacturing and defense industrial base must be secure, robust, resilient, and ready… America’s manufacturing and defense industrial base,” the Defense Department wrote, must support “economic prosperity, be globally competitive, and have the capabilities and capacity to rapidly innovate and arm our military with the lethality and dominance necessary to prevail in any conflict.”

On one level, it is hard to argue with the idea that economic security is national security. A state will not be able to defend itself if it lacks economic prosperity. Even if a state is prosperous, its ability to defend itself will be jeopardized if it is reliant on foreign states, including potential adversaries, for key defense supplies. Foreign states might be unable or unwilling to provide such supplies, or supplies might be tampered with in production or shipping. On another level, however, the assertion that national security requires a state to be economically prosperous, globally competitive and capable of being militarily self-sufficient, including at surge capacity during wartime, can be used to justify protectionist measures across an enormous range of industries—right down to footwear and materials for making tents.

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This raises the question: If economic security is national security, how can one draw the line between protection and protectionism? Measures justified under economic security thus have a hologram-like quality to them: What may look like permissible protection from the perspective of a security mindset may look like impermissible protectionism from an economic mindset. Indeed, many states and commentators have denounced some of President Trump’s actions, like the steel and aluminum tariffs, as purely protectionist. If the “economic security is national security” defense is accepted in theory, it has the ability to eat the heart out of the old International Economic World Order in practice. It moves the norm from economically oriented efficiency and interdependence to security-oriented self-reliance and self-sufficiency.

In a particular legal regime, the outer limits of the national security exception may be circumscribed. For instance, Article XXI of the General Agreement on Tariffs and Trade (GATT) provides that essential security interests must come within enumerated grounds, including traffic in any goods and materials carried on directly or indirectly for the purpose of supplying the military or measures taken in time of war or other emergency in international relations. But these limitations are broad and relatively untested. For instance, what are the outer limits of the notion of “other emergency in international relations”? Would the United States’s new characterization of China as a revisionist power that seeks to threaten the international system and U.S. values count? Does war need to be imminent or is a threat to strategic capabilities sufficient?

Protecting the Crown Jewels

No trend better exemplifies the “economic security is national security” maxim in practice than recent U.S. initiatives in the technology sector. The United States considers maintaining its dominant position in science, technology and innovation as essential to its economic and military competitiveness. China’s large research and development expenditure coupled with its “Made in China 2025” industrial policy, which seeks to move the country up the value chain to become a leader in emerging high-tech markets, such as artificial intelligence, robots, energy-saving vehicles and aerospace technology, have piqued U.S. concerns. The United States is now taking a variety of measures to protect its “crown jewels.” As U.S. Trade Representative Robert Lighthizer has declared: “If we can’t protect our innovation, we lose our edge.

The United States laid the groundwork for this move in the Office of the U.S. Trade Representative’s March 2018 report on China’s Acts, Policies, and Practices related to Technology Transfer, Intellectual Property, and Innovation—known as a Section 301 report, after the provision of the Trade Act of 1974 under which it is issued—and the White House Office of Trade and Manufacturing Policy’s June 2018 report on Chinese “Economic Aggression.” In these reports, the government identified a series of Chinese activities that it deemed unfair, discriminatory or otherwise nefarious, including forced technology transfers, discriminatory licensing restrictions, high levels of state support for “national champions,” overseas investment or direct acquisitions of foreign companies to capture key technologies and theft of intellectual property and commercial information. To deter this mix of “making, transacting and taking,” the United States introduced a variety of measures designed to limit the scope for technology transfer.

In terms of inbound investment, in August 2018, Congress passed the Foreign Investment Risk Review Modernization Act (FIRRMA) as part of the 2019 National Defense Authorization Act (NDAA), which significantly expanded the activities of the Committee on Foreign Investment in the United States (CFIUS). Whereas previously, CFIUS only had jurisdiction to review transactions that could result in foreign control of a U.S. business, covered transactions now include all non-passive foreign investments in any company that deals with “critical technology” (including “emerging and foundational technologies”) or “critical infrastructure,” among other things. CFIUS is additionally required to consider whether a transaction “involves a country of special concern that has a demonstrated or declared strategic goal of acquiring a type of critical technology or critical infrastructure that would affect United States leadership in areas related to national security”—presumably a passage written with China in mind. In the past year, the president has already intervened in two transactions on the basis of CFIUS advice—first to block the sale of Lattice Semiconductor Corp. to a Chinese-backed investor in September 2017, and subsequently to prevent Singapore-based Broadcom’s takeover of Qualcomm in March. With CFIUS now enjoying greater resources and a broader ambit of review, it is likely that such recommendations will become more frequent.

In terms of outbound exports, the 2019 NDAA also facilitated the passage of the Export Control Reform Act, which includes new controls on the export of “emerging and foundational technologies”—a category that will be determined by a new interagency group that will coordinate its activities with CFIUS. This new category is designed to cover technologies that are deemed “essential to the national security of the United States” but not currently captured by legislation addressing “critical technologies” (such as the U.S. Munitions List). This definition has the potential to go beyond traditional military and dual-use technologies to capture next-generation technologies that are inherently dual-use, such as quantum computing, robotics and artificial intelligence. However, identifying the technologies that will be regulated presents real trade-offs: Imposing controls that are too broad risks “undercutting the ecosystems of data and capital (both financial and human) that enable those technologies and their successors to be developed” in the first place.

In terms of trade tariffs, the United States has imposed a series of tariffs of between ten and 25 percent in response to the concerns raised in the § 301 report. These tariffs now cover approximately 50 percent of total Chinese imports, to the value of U.S. $250 billion. While the primary rationale cited for the § 301 tariff retaliation is achieving “more fair and reciprocal trade,” the administration almost always characterizes the practices it seeks to deter as harming U.S. “economic and national security.” The § 301 tariffs are in addition to duties on steel (25 percent) and aluminum (ten percent) imported from China and other nations, which the U.S. has implemented through the national security remedy contained in § 232 of the Trade Expansion Act of 1962. Although many states and commentators decry these as purely protectionist moves, the White House seeks to justify them, at least in part, as a reaction to “unfair transfers of American technology and intellectual property to China.”

Although Trump and Chinese President Xi Jinping appear to have struck a 90-day trade war truce following a recent G20 forum in Argentina, Sino-U.S. economic relations seem likely to remain hostile for some time to come. Indeed, on  Dec. 5, the United States arranged for the arrest and extradition from Canada of the chief financial officer of Huawei—a leading Chinese technology company, the activities of which have long been considered a threat to national security by the United States—for alleged violations of U.S. sanctions against Iran. Unsurprisingly, the Chinese response to this move has been decidedly negative: It was widely decried on social media, foreign vice-minister Le Yucheng summoned the Canadian ambassador to lodge a “strong protest” and the editor of state media outlet Global Times has labeled the arrest as tantamount to “a declaration of war.”

Exempting National Security from Judicial Review

In addition to redefining economic security as national security, the United States is also seeking to exempt its invocations of national security from international judicial review. This move comes on top of more general U.S. measures blocking the appointment of members to the World Trade Organization (WTO) Appellate Body, which has been criticized as an attempt to asphyxiate the judicial arm of the WTO.

The United States has long taken the position that the WTO cannot review invocations of national security, even on a good-faith basis. In sticking to that claim now, the United States is seeking to move decision making over national security from the international level to the national one and from a judicial body (on an international level) to wholly within the U.S. executive branch. The U.S. argues that national authorities alone have the non-justiciable discretion to decide when to invoke national security to adopt measures that could otherwise be deemed inconsistent with international trade rules. This move would shift national security from the realm of open and reasoned international judicial review to the less transparent realm of domestic executive discretion.

This push is apparent in the United States’s third party submission in the WTO panel in Russia – Traffic in Transit (DS512). The case concerns alleged transit restrictions that affected Ukrainian trade passing through Russia to states in Central Asia and the Caucuses. Despite supporting Ukraine in the wider conflict with Russia that led to the WTO dispute, the United States has sided with Russia to argue that the WTO has no right to review the legality of Russia’s invocation of national security. According to the United States, once a national security exception in Article XXI of the GATT has been invoked, the matter becomes non-justiciable and a WTO panel cannot make a finding on whether the actions are consistent with the WTO. The United States has taken the same position in a dispute between the United Arab Emirates and Qatar, stating that: “national security issues are political and not appropriate for the WTO dispute system.”

Other actors, including the European Union and Canada, have objected to this U.S. position before the WTO. They claim that national security exceptions must be invoked in good faith, must be accompanied by a reasonable explanation and can be reviewed on this basis—that is, these countries argue for the existence of some judicially reviewable constraints over the ability of states to enact discriminatory trade restrictions under the guise of national security. This disagreement is likely to become stark in claims filed by many states, including the European Union, against U.S. tariffs on steel and aluminum. The stakes are high. The United States has warned that, if the WTO were to find that it could review national security claims, “this would undermine the legitimacy of the WTO’s dispute settlement system and even the viability of the WTO as a whole.” If the United States loses its claim that national security decisions are unreviewable, it may well walk away from the WTO. If it wins, however, states will be given a “‘get out of jail free’ card that can be played just by saying the magic words ‘national security,” as Jennifer Hillman has argued.

Movements to limit or prevent judicial review of national security decisions are also prevalent in the U.S. domestic sphere. For instance, the CFIUS reforms in FIRRMA sought to further centralize investment screening in the Treasury Department and place limitations on judicial review. Decisions made by the president on referral are exempt from judicial review, and appeals of other CFIUS actions can only be made in the U.S. Court of Appeals for the D.C. Circuit.

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The contrast between the U.S. and Chinese strategies is instructive. China sees its future economic security in fostering indigenous innovation, moving up the supply chain, securing its cyber-sphere and localizing data. It resists appeals to free trade in data flows but objects to restraints on free trade being imposed through tariffs and investment screening, even though the United States would argue that it has imposed many barriers on foreign investment in its own domestic market. The United States, on the other hand, sees its future economic security in protecting its technological and manufacturing base. It is now explicitly appealing to national security in order to exempt its tariffs and investment screening from international judicial review, while pushing for multilateral rules that ensure global data flows freely.

China and the United States each seek to propagate multilateral rules by invoking the benefits of free trade when this suits them, and to prevent multilateral rules from being created or applied by invoking national security when it does not. But they each want to create multilateral rules, or exempt themselves from multilateral rules, with respect to different practices depending on what suits their differing interests in economic and/or national security. The United States stands to benefit from the free flow of data and digital information, but China sees strategic advantage in tight national regulation. In a mirror image, China would prefer “clear and consistent criteria and procedures for investment screening at the international level, but the United States privileges national control.