[US-China Economic War Series] ⑦ Economic Security Policies of the US and EU in the Context of US-China Technological Hegemony Competition

I. US Economic Security Policies and Measures

The various economic security-related policies promoted by the Biden administration can be broadly categorized into supply chain reorganization policies, industrial subsidy policies, and export control policies. Previously, policy tools of a unilateral nature were primarily utilized, such as import regulation measures to resolve the US trade deficit with China, and export control and foreign investment restriction measures to prevent technological leakage to specific Chinese telecommunications equipment companies. Furthermore, the US has adopted very explicit protectionist measures, domestically and internationally proclaiming the objective of safeguarding American manufacturing jobs. In contrast, under the Biden administration, the US is pursuing more fundamental problem-solving approaches to counter competitors that threaten its hegemonic position in global trade, commerce, and military security. To address immediate issues such as the high US import dependency on China, the structural vulnerabilities of global supply chains, and China's economic influence in advanced technology and strategic industries, it has become fundamentally necessary to restore and enhance US global competitiveness in core national industries, thereby strengthening economic security.

In fact, a comparison of US manufacturing import dependency on major countries reveals that the US has the highest import dependency on China (see Figure 1 below). In particular, the COVID-19 pandemic highlighted supply chain dependency on China as a problem, especially in terms of the stable supply of essential medicines and equipment for health security. In the case of the global semiconductor supply chain, there is a structural vulnerability in supply due to the diversity of materials and components used throughout the semiconductor manufacturing process. Moreover, due to the concentrated dependency on the Asian region for semiconductor production and material supply, it is vulnerable to supply chain crises caused not only by natural disasters but also by artificial restrictions due to geopolitical factors.

Figure 1. US Manufacturing Supply Chain Dependency on China (Unit: %)

Source: Korea International Trade Association, 2020

1. Supply Chain Reorganization Policy for Materials

The US supply chain reorganization policy officially began to be pursued with the signing of Executive Order 14107, 'Executive Order on Ensuring Secure and Resilient Supply Chains,' on February 24, 2021, shortly after President Biden took office. The order mandated a review of supply chain status, identification of supply chain risks, and the presentation of response measures and policy recommendations for four key items: semiconductor manufacturing and packaging, high-performance batteries (secondary batteries), strategic mineral resources, and pharmaceuticals and pharmaceutical ingredients. Notably, a major risk factor identified in the semiconductor supply chain was the high dependency on China in both semiconductor supply and consumption. Due to the diversity of materials and components used throughout the semiconductor manufacturing process, there was a vulnerability in semiconductor supply in the event of supply chain disruptions. Furthermore, the concentrated dependency on the Asian region, including South Korea, Taiwan, and Japan, exposed vulnerabilities in semiconductor production. US semiconductor manufacturing equipment and EDA (Electronic Design Automation) suppliers found it difficult to detach from the semiconductor production ecosystem already established in China, the largest semiconductor consumption market. Consequently, US companies were in a situation where they could be negatively impacted by Chinese measures due to US government restrictions. Additionally, it is assessed that technological transfer to China has occurred through joint ventures with Chinese companies, significantly aiding the development of China's semiconductor industry. Furthermore, in the case of older semiconductors used in military weapons and defense systems, the lack of profitability for private companies has led to a suspension of investment, resulting in supply shortages. Investment decisions for advanced semiconductor production are also made based on private companies' profitability assessments, leading to a diagnosis of insufficient domestic supply and a lack of production capacity in the US.

As a response measure to strengthen semiconductor supply chain stability, the US Department of Commerce recommends enhancing the capacity of the US semiconductor manufacturing industry through increased government subsidies and the promotion of private investment by domestic and foreign companies. Specifically, it calls for securing financial support for the implementation of the 'CHIPS and Science Act' to expand production facilities by establishing the entire semiconductor production process within the US, supporting R&D for new processes and equipment, and stimulating semiconductor demand and private investment through investments in key semiconductor-consuming industries. It also proposes supply chain cooperation, including support for semiconductor-related startups and small and medium-sized enterprises, support for high-skilled technical training to secure semiconductor industry workforce, and attracting investment from allied and friendly nations in US foundry and material production facilities. Furthermore, to prevent the leakage of advanced semiconductor technology, it suggests enhancing the effectiveness of export control measures against countries of concern and imposing multilateral export control measures for this purpose. It also mandates the continued adoption of foreign investment review regulations to strengthen the security of national security-related supply chains.

Ultimately, the US policy to strengthen supply chain stability is linked to industrial subsidy policies aimed at enhancing the manufacturing capabilities and competitiveness of key strategic industries. In addition to direct subsidies, various financial support policies such as tax exemptions, loan support, and guarantees are being pursued to improve the competitiveness of the domestic semiconductor industry. Furthermore, by inducing foreign companies to invest locally in the US and simultaneously strengthening linkages with US manufacturing industries, the 'Buy America' requirement is being actively utilized to enhance the competitiveness of the domestic semiconductor industry.

2. Industrial Subsidy Policies

The Biden administration's flagship industrial subsidy policies, the 'CHIPS and Science Act' and the 'Inflation Reduction Act (IRA),' are legislative measures to foster the semiconductor and electric vehicle industries, which are key advanced technology and strategic sectors. The CHIPS and Science Act, enacted and implemented in August 2022, plans to invest a total of $280 billion to enhance the competitiveness of key future technology industries in the US, with $52.7 billion allocated for strengthening semiconductor manufacturing capabilities and supporting research and development (R&D). The Inflation Reduction Act, which took effect immediately upon its enactment in August 2022, plans to invest a total of $773 billion to facilitate the transition to a green economy and reduce inflation, with $433 billion allocated for fostering the green energy industry, supporting the clean fuel vehicle industry, and addressing climate change.

Meanwhile, these industrial subsidies are accompanied by various regulatory measures to prevent the leakage of US key technologies and the transfer of subsidy benefits to countries of concern. The CHIPS and Science Act includes 'guardrail' provisions that restrict investment in China, imposing limits on significant transactions by subsidy recipients for the expansion of semiconductor manufacturing in China. Violations can result in the recovery of subsidies. Specifically, the expansion of new facilities for advanced semiconductor manufacturing in China is limited to no more than 5% of existing production capacity, with investments exceeding $100,000 over 10 years prohibited. Furthermore, for the production of traditional (legacy) semiconductors using existing production facilities, capacity expansion is limited to no more than 10%, and joint R&D and technology licensing with Chinese companies are prohibited. The Inflation Reduction Act (IRA) provides tax credits to consumers purchasing new electric vehicles, with a $7,500 subsidy conditional upon meeting three requirements. First, if the mining and processing of key minerals required for the production of electric vehicles and their batteries are carried out to a certain extent in countries of concern (foreign entities of concern), the subsidy will not be provided. Second, even if these conditions are met, subsidies cannot be received if battery materials produced and assembled in countries of concern are used to a certain extent. Third, even if the first two conditions are met, subsidies are only provided if the final assembled electric vehicle is assembled in North America (US, Canada, Mexico). These strict eligibility requirements accompanying the subsidy provisions are evaluated as highly discriminatory measures, as they disadvantage foreign companies. Furthermore, the 'domestic material purchase requirement' applied as a condition for electric vehicle subsidies is considered to have the nature of an import substitution subsidy, potentially becoming a point of contention under international trade law.

3. Export Control Policies

To prevent the leakage of US advanced technologies to countries of concern, the US government implemented strengthened export control measures on semiconductor equipment to China by revising the 'Export Administration Regulation (EAR)' in October 2022. Specifically, the list of export control targets for China was revised to include high-performance computer chips and related computers, electronic assemblies and components, software and technology, certain items related to semiconductor manufacturing, and associated software and technology. Furthermore, the existing 'Entity List Foreign Direct Product Rule (FDPR)' was expanded by establishing 'High-Performance Computing FDPR' and 'Supercomputer FDPR,' imposing export license acquisition requirements for these items to fundamentally block circumvention exports to China. In addition, controls were established on the end-use of integrated circuits (ICs) developed and produced in semiconductor manufacturing facilities located in China. During company site inspections, if cooperation from foreign governments is insufficient to confirm end-use in a timely manner, companies are listed on the 'Entity List' to strengthen management of parties of concern.

Prior to this, the US government significantly strengthened the executive branch's authority over export control policies and expanded and more strictly managed export-controlled technologies and items by enacting the 'Export Control Reform Act (ECRA)' in 2018. The President was permanently delegated all export control-related authorities, thereby strengthening the US executive branch's power over export control policies. Control targets were expanded to include 'emerging and foundational technologies (EFT),' and export licenses were to be operated more strictly.

The US government applies its domestic export control measures not only to its own companies but also to foreign companies by introducing extraterritoriality provisions. Under the 'Foreign Direct Product Rule (FDPR)' specified in the US Export Administration Regulation (EAR), foreign-made products that use US technology, software, equipment, or materials, or are produced using such facilities, require an export license from US authorities. The extraterritorial application of these US export control regulations applies in five cases: ▲ National Security FDPR, ▲ Space and satellite-related items (9x515 FDPR), ▲ Defense weapon-related items (600 series FDPR), ▲ Huawei (Entity List FDPR), and ▲ Russia/Belarus (Russia/Belarus FDPR).

Furthermore, by revising existing export control laws, the US government effectively mandates the multilateral application of newly introduced export control measures. This can be seen as a safeguard to enhance the effectiveness of export controls and prevent commercial damage from export controls from being unilaterally concentrated on US companies. In particular, Article 1758 of the 'Export Control Reform Act (ECRA)' stipulates that if new export control measures introduced by the US are not incorporated into the control lists of the international export control regime within three years, a determination must be made as to whether the unilateral export control measures against US companies align with US national security objectives.

II. EU Economic Security Policies and Measures

In June 2023, the European Commission officially announced the 'European Economic Security Strategy,' which was pursued to respond to the economic security strategies of major countries like the US and to establish a comprehensive management and response system for economic security risks at the EU level. It is also assessed as presenting more concrete policy directions and tools for the EU's approach to China, following the announcement of its 'de-risking' policy stance towards China in March of the same year. The plan is to finalize this through discussions among EU member states before legislative action.

The EU's economic security strategy aligns with the 'Open Strategic Autonomy' strategy previously advocated by the EU, while placing a greater focus on economic security. Its objective is to minimize risks arising from today's geopolitical conflicts and accelerated technological advancements, while simultaneously creating an internal environment that maintains the EU's economic openness and dynamism. Specifically, it aims to strengthen the EU's autonomy by reducing excessive economic dependence on specific countries and to ensure resilience for rapid recovery in times of crisis through cooperation with allied nations. Furthermore, it aims to enhance internal competitiveness by improving technological innovation capabilities and industrial capacity within the EU single market. It also seeks to jointly address common security issues through cooperation with reliable allied nations, pursuing improvements in existing trade agreements, strengthening the function of international norms and institutions, and increasing investment in sustainable development.

The EU's economic security strategy seeks to proactively identify and analyze internal economic security risks and to address them by strategically utilizing existing policy tools as well as introducing new ones. In particular, economic security risks are broadly classified into four types: ▲ risks related to supply chain resilience, such as energy security; ▲ physical and cybersecurity risks to critical infrastructure; ▲ technology security and technology leakage risks; and ▲ risks related to the weaponization of economic dependencies or economic coercion. Furthermore, the EU fundamentally adheres to the principles of 'proportionality' and 'precision,' meaning that policy tools employed to address economic security risks must be proportionate to the objective and limited in scope.

The European Commission emphasizes three priorities for implementing the economic security strategy: ▲ promotion, ▲ protection, and ▲ partnership. First, it aims to promote EU competitiveness through strengthening the EU single market, economic support, technological investment, and fostering industrial bases, with a particular focus on advancing technological research and industrial bases in strategic sectors such as advanced semiconductors, quantum computing, biotechnology, carbon-neutral industries, and critical raw materials. Second, it aims to strengthen EU economic security by responding to the weaponization of economic dependencies and trade threats, regulating external subsidies, screening foreign direct investment, integrating and strengthening EU-level export controls on dual-use items, and considering the introduction of foreign investment regulations. Third, it seeks to enhance EU economic security through cooperation with various partner countries, including pursuing new trade agreements, strengthening diverse global partnerships, and reinforcing the rules-based economic order and multilateral institutions.

1. Supply Chain Reorganization Policy

Key legislative initiatives constituting the EU's economic security strategy can be categorized into supply chain reorganization policies, industrial subsidy policies, and export control/investment regulation policies. Firstly, a representative legislative measure in supply chain reorganization policy is the 'Critical Raw Materials Act (CRMA),' a bill announced by the European Commission in March 2023 to ensure secure and sustainable access to critical raw materials for the EU. This initiative is driven by the increasing need to strengthen the security of critical raw material supply within the EU, amidst deepening supply chain crises caused by the energy crisis following the Russia-Ukraine war, the intensification of protectionism due to US-China strategic competition and the proliferation of export control measures, and the rise of resource nationalism.

The Critical Raw Materials Act (CRMA) designates critical and strategic raw materials and aims to enhance resilience at each stage of the raw material value chain by 2030, thereby increasing the EU's capacity to secure raw materials domestically. In particular, it seeks to improve the EU's domestic capacity for the extraction, refining, processing, and recycling of critical raw materials by strengthening supply chain management and expanding administrative and financial support for 'strategic projects.' 'Strategic projects' are designated to receive priority administrative and financial support. EU member states are obligated to enhance administrative support, such as providing information on administrative procedures and financing, for the swift and effective implementation of 'strategic projects.' To be designated as a 'strategic project,' projects must meet criteria such as contributing to the EU's supply security of strategic raw materials, being technically feasible and having predictable production volumes within a reasonable timeframe, and minimizing environmental impact and complying with social obligations.

Furthermore, the EU aims to resolve the issue of import concentration from specific countries and manage supply risks by establishing strategic partnerships with third countries regarding the supply of critical raw materials. Specifically, it seeks to expand investment across stages of the critical raw material supply chain and strengthen cooperation with third countries through strategic partnerships. It is also forming a 'Critical Raw Materials Club' with like-minded countries to improve sustainability in the critical raw material supply chain cooperation process and to jointly promote human rights, conflict resolution, and regional stability in supply cooperation regions.

In addition, the draft 'Directive on Corporate Sustainability Due Diligence,' a representative supply chain reorganization policy of the EU, was published in February 2022 and is scheduled to be fully implemented from 2024 onwards. Under this directive, targeted companies will be obligated to conduct due diligence related to human rights and the environment when participating in EU supply chains. The due diligence directive, scheduled for full implementation from 2024, applies to both large and small and medium-sized enterprises, domestic and foreign, operating within the EU that meet employment and revenue thresholds. Consequently, it will apply to most foreign companies engaged in trade and investment activities related to EU supply chains. Accordingly, due diligence obligations will be imposed on all companies that have established 'established business relationships' within the value chain of the targeted company, including its subsidiaries. Furthermore, targeted companies must identify, prevent, mitigate, or respond to adverse impacts on human rights and the environment arising from all activities of the company and its subsidiaries, and must develop and implement action plans to prevent, mitigate, and remediate the impacts caused by their activities and those of their subsidiaries.

2. Industrial Subsidy Policies

In March 2023, the European Commission adopted the 'Temporary Crisis and Transition Framework (TCTF)' by amending the existing 'Temporary Crisis Framework (TCF),' thereby introducing measures to further ease state aid regulations for green industries within the EU. Originally scheduled to expire at the end of December 2023, the TCF was extended to the end of December 2025 to respond to the US Inflation Reduction Act (IRA) and to achieve the goals of the EU's 'Green Deal Industrial Plan,' allowing for the temporary provision of subsidies necessary for the transition to carbon-neutral industries.

The EU has historically imposed strict regulations on state aid provided by member states to prevent indiscriminate subsidy support and ensure a 'level playing field.' However, the EU's temporary easing of subsidy regulations (TCTF) involves relaxing subsidy rules for different support categories, expanding the scope of eligible recipients, and increasing subsidy limits. Specifically, the scope of subsidy support has been expanded to include manufacturers of batteries, solar panels, wind turbines, heat pumps, electrolyzers, and carbon capture, utilization, and storage (CCUS) related equipment, as well as all renewable energy-related industries. Furthermore, along with the introduction of the TCTF, the European Commission has amended the 'General Block Exemption Regulation (GBER)' to simplify the procedures for providing subsidies for green industries. In particular, the scope of exemption has been expanded to include green sectors (such as renewable energy, decarbonization projects, green mobility, biodiversity enhancement, renewable hydrogen development, and energy efficiency improvements), allowing for more flexible provision of subsidies to key industries necessary for the transition to a carbon-neutral economy by EU member states.

Most importantly, to secure the security and competitiveness of carbon-neutral technologies, the EU announced the 'Green Deal Industrial Plan' in February 2023. As part of the implementation of this plan, the European Commission unveiled the 'Net-Zero Industry Act (NZIA)' in March 2023 to expand the manufacturing capacity of carbon-neutral technologies within the EU. The NZIA aims to increase the EU's domestic manufacturing capacity for 'strategic net-zero technologies' to over 40% of domestic demand by 2030. Its core components include streamlining regulations, accelerating procedures, and strengthening financial support for workforce and R&D. To this end, it has identified 'eight strategic net-zero technologies' and designated key projects utilizing these eight technologies as 'climate-neutral strategic projects.' These projects will receive benefits such as simplified administrative and licensing procedures, shortened administrative processing times, regulatory sandboxes, and subsidies, aiming for focused development.

3. Export Control and Investment Regulation Policies

Through its economic security strategy, the EU aims to curb the military application of dual-use technologies by preventing their transfer to specific countries. As part of this effort, the EU intends to more actively utilize existing trade remedy (import regulation) measures and emphasize the creation of a fair competitive environment within the EU single market through the 'Foreign Subsidies Regulation.' Furthermore, it aims to introduce an 'Anti-Coercion Instrument' to counter actions by other countries that coerce changes in EU policy through trade and investment restrictions, and to seek joint responses through cooperation with allied nations.

To strengthen export control measures on emerging technologies with high sensitivity among dual-use items that can be used for military purposes, the EU aims to enhance its export control system as an integrated and coordinated EU-level regime through the 'EU Regulation on dual-use export controls,' revised in 2021. To this end, based on risk assessments by member states for each technology sector, an EU-level export control proposal is planned to be prepared by the end of 2023.

Furthermore, through foreign direct investment (FDI) screening regulations, the EU reviews national security threats from foreign investment transactions and prevents entities from third countries or entities controlled by third countries from participating in technological development and innovation activities within the EU. Specifically, it requires the exclusion of high-risk suppliers during the implementation of 5G communication network construction projects by EU member states and is also drafting the 'Cyber Resilience Act' to strengthen the cybersecurity of communication and energy infrastructure. Conversely, to address security risks related to outbound investment, an expert group at the EU level has been established, and a proposal is expected to be prepared by the European Commission by the end of 2023.

The EU has also introduced the 'Foreign Subsidies Regulation' to regulate 'external subsidies' granted by foreign governments to their companies, under the pretext of creating a 'fair competition' environment. Proposed in May 2021 by the European Commission to strengthen regulations on foreign subsidies distorting the EU internal market, this regulation has been in effect since July 2023. Specifically, it argues that foreign subsidies distort the EU internal market, infringing upon the 'level playing field,' and that foreign companies benefiting from third-country subsidy policies gain a competitive advantage over EU companies in mergers and acquisitions and public procurement bids. Accordingly, the Foreign Subsidies Regulation aims to prevent 'distortions on the internal market,' which applies when the competitive position of a subsidized company is enhanced, potentially or actually adversely affecting the competitive environment in the internal market. The European Commission can utilize trade remedies to rectify distortions in the internal market, requiring subsidized companies to repay the amount of the subsidy, including principal and appropriate interest, to the granting authority to rectify the market distortion.

III. Evaluation and Implications

The economic security policies and measures adopted by major countries such as the US and the EU are collectively assessed as measures to protect and strengthen the resilience of their domestic or regional competitiveness in response to the escalating geopolitical competition crisis, as well as crises in supply chains, health, energy, and technological security. The shift in the US and EU's approach towards China to a 'de-risking' strategy is also considered a policy decision aimed at preventing excessive containment and regulation that could lead to commercial damage and exacerbate the global economic crisis. Consequently, major countries are increasingly adopting industrial subsidy policies and related deregulation measures to escape unfavorable positions in unfair competitive environments, while simultaneously mitigating or intensifying the application of import/export regulations that conflict with the economic activities and commercial interests of their domestic companies.

The EU's economic security strategy aligns with the US economic security strategy in pursuing supply chain resilience and export controls to prevent technology leakage, in preparation for supply disruptions and the 'weaponization' of interdependence resulting from excessive dependence on specific countries. However, there is a fundamental difference in that the EU adopts a more cautious approach than the US. Notably, the EU's 'risk-based approach,' which entails response measures proportionate to internal and external risk factors, differs significantly from the US's adoption of aggressive export control policies. Furthermore, unlike the US economic security strategy, which focuses on industrial subsidy policies, the EU is assessed to place greater emphasis on preventing technology leakage and protecting economic infrastructure rather than on subsidy support.

Conversely, while not explicitly discriminatory towards non-EU companies unlike the US Inflation Reduction Act (IRA), the EU's 'Corporate Sustainability Due Diligence Directive' and other measures adopt strengthened labor and environmental standards as conditions for market entry and supply chain participation within the EU. The EU does not recognize the conformity or equivalence of environmental standards adopted by its trading partners. The 'extraterritorial application' of domestic laws and standards by the EU as entry requirements for foreign companies seeking to enter the EU market can act as protectionist barriers to the market entry of trading partners if applied excessively.

The Foreign Subsidies Regulation, intended to ensure that EU companies can operate competitively in the global market, is expected to impose significant regulatory burdens on non-EU companies operating within the EU. Ultimately, it is projected to have the effect of restricting the subsidy practices of foreign governments. In particular, in the case of mergers and acquisitions, companies that have received foreign government subsidies must notify EU authorities of the transaction. If necessary, they may be subject to multiple review processes based on various legal grounds, including merger control regulations in the EU and individual member states, and national foreign investment laws. Notably, the EU authorities are granted 'ex officio review' authority to determine the existence of foreign subsidies, and the obligation for prior notification and approval for public procurement bids exceeding a certain threshold is expected to impose a significant regulatory burden on non-EU companies.

Historically, the EU has pursued a strategy of maintaining competitiveness within the international trade order by emphasizing the establishment of a 'level playing field' among participants within the framework of the multilateral trading system. The announcement of the EU's economic security strategy, which is the most active proponent of trade liberalization through the multilateral trading system, signals an inevitable shift in the existing international trade order and norms. Similar to the US, the key legislative initiatives constituting the EU's economic security strategy can be categorized into supply chain reorganization, industrial subsidies, and export control and regulation policies. These largely overlap with trade policy areas and are assessed to deviate from the principles and content of existing multilateral trade norms. In particular, the EU appears to be leading the formation of a new international trade order under the policy principle of 'sustainability.'

In conjunction with its trade policy, the EU emphasizes the importance of 'sustainability' issues such as labor and environment. These are areas where normative efforts at bilateral and multilateral levels have not been well-established due to differences in each country's socio-economic system and stage of economic development. However, developing countries, including China, are perceived to have secured an advantageous position in terms of price competitiveness in the international market and attracting foreign investment due to their weaker environmental and labor regulations. As a response, major countries are emphasizing the logic of 'fair competition.' Consequently, the 'fair competition' logic advocated by major countries is interpreted not merely as a trade policy tool to secure comparative advantages in trade relations, but as a strategic policy tool for securing long-term competitiveness. ■

References

Korea International Trade Association. 2020. “Global Supply Chain Stabilization in the Era of Coexisting with COVID-19 – Current Support Status in the US and Japan, and Implications and Policy Recommendations for Korea.” *IIT Trade Focus*, Issue 45.

■ Lee Hyo-youngAssociate Professor, Korea National Diplomatic Academy.

■ Management and Editing: Lee Ju-yeon_EAI 연구원

    문의: 02 2277 1683 (ext. 205) | jylee@eai.or.kr