[NATO-IP4 Forum] ③ Supply Chains as Strategic Assets: Possibilities and Limitations of NATO-IP4 Cooperation in the Era of Economic Security | Hyoyeong Lee, Professor at the Korea National Diplomatic Academy

YouTube Link: https://www.youtube.com/watch?v=ogyjWMVKYTQ&si=akDV7Qk6ToJSYHiC

Video Script

Good afternoon. This is Hyoyeong Lee from the East Asia Institute (EAI). I was asked to present today on supply chains as strategic assets and supply chain issues as a topic for NATO IP4 cooperation. As may have been mentioned in the previous session, this is a topic I am encountering for the first time, so I prepared it with a mindset of learning. I ask for your understanding regarding any shortcomings and will now begin. The reason I was asked to give this presentation is likely because not many people study NATO in Europe, and even fewer deal with supply chain issues. My major was in economics and international trade, and after studying U.S. international trade policy last year, I began examining the European Union's (EU) international trade policy.

Background of Supply Chain Issues and NATO IP4 Cooperation

While observing the changes in trade policies based on the EU's economic security strategy, particularly changes in data-related policies and issues, I examined how supply chain restructuring policies differ between the United States and the EU. This is likely why this topic was assigned to me. As research in this area is limited, I ask for your understanding regarding its deficiencies. The first thought that came to my mind while preparing this topic was that supply chain issues have not been addressed from a military security perspective.

I understand NATO to be a military security consultative body, so I was surprised to learn that it addresses supply chain issues. Upon investigation, it appears that the Russia-Ukraine war exposed significant instability in the supply chains of military goods such as ammunition and weapons, thus highlighting the importance of supply chain stability for their secure provision. Consequently, when discussing NATO IP4 supply chain cooperation, terms like defense supply chain cooperation and defense supply chains have been frequently used. However, it seems that not much progress has been made, and as it is an ongoing issue, I had difficulty finding relevant materials.

NATO's New Strategic Concept and the Importance of the Indo-Pacific Region

There were many. It began with stabilizing the supply chains for ammunition and military supplies, but it is now evolving to encompass the stability of supply chains for advanced technologies and the defense industry. Examining the background of promoting cooperation among NATO IP4 countries reveals a significant shift in security perceptions within NATO itself. The NATO Strategic Concept, published in 2010, was followed by a drastically changed security environment over 12 years, leading to the publication of the new NATO Strategic Concept in 2022.

The intensification of U.S.-China strategic competition and the decline of globalization have led to the near collapse of the existing multilateral trade-centered system. Bilateral, unilateral trade policies centered on great powers have significantly altered the trade environment. Furthermore, countries with technological superiority have gained an advantage in security, and new security issues have emerged due to technological advancements. Moreover, the COVID-19 pandemic exposed how the supply instability of critical goods significantly impacts national stability itself. In response to these challenges, NATO published its new Strategic Concept, recognizing that the security environment has fundamentally changed.

The document states that the European region is no longer in a state of peace. It emphasizes resilience and technological superiority, particularly in the context of the evolving relationship with Russia and China, suggesting a recognition that without technological superiority, military superiority is also at risk. The perception that technological superiority is essential for maintaining adequate defense posture has begun to be emphasized. Additionally, the necessity of establishing a cooperative framework with China has been highlighted. China, which was not mentioned previously, was officially mentioned for the first time in the 2022 NATO Strategic Concept.

The Indo-Pacific region was also mentioned for the first time in the new Strategic Concept. This document is significant in its official acknowledgment of the importance of the Indo-Pacific region, with the recognition that the Indo-Pacific region ultimately has a direct impact on the security of the Euro-Atlantic region. In particular, there has been a perceived shift in understanding that the stability of maritime logistics and routes is interconnected with the security of both regions. Positions on the Indo-Pacific region appear to vary slightly among NATO member states.

From the U.S. perspective, it emphasizes increasing interoperability between NATO and U.S. allies in the Indo-Pacific region to enable the deployment of military forces in case of emergency. Its objectives include raising and converging awareness among allies regarding the threat posed by China and recognizing the Indo-Pacific region as a supportive area for securing backing for the Russia-Ukraine war. Conversely, Western European countries such as the UK, France, and Germany do not seem as proactive as the U.S. Cooperation itself is approached at the level of strategic dialogue, and given that the U.S. and the EU have differing stances on pressuring China, they appear to view it as an opportunity for indirect leverage. Furthermore, they seem to believe it is useful as a political alliance due to shared values and systems.

Conversely, they also appear to be pursuing the interest of leveraging NATO-led cooperative initiatives to further develop individual cooperation between European member states and Indo-Pacific countries. Meanwhile, some European countries, such as those in Central Europe and Germany, seem to support NATO's engagement in the Indo-Pacific region from the perspective that the U.S. is the security provider for Europe, and if the U.S. wishes to cooperate with the Indo-Pacific region, they agree with NATO's involvement. Additionally, they support it because increasing interoperability allows for direct or indirect support from Indo-Pacific countries in the event of a security crisis, suggesting a different approach to cooperation with the Indo-Pacific region.

Objectives and Challenges of NATO IP4 Supply Chain Cooperation

Examining the background and objectives of promoting supply chain cooperation between NATO and the four Indo-Pacific countries (IP4) reveals that security, previously viewed solely from a national military security perspective, has now expanded to economic security. At its core are advanced technologies and the defense industry, indicating a trend of expansion towards supply chains in these sectors. The prolonged Russia-Ukraine war has exposed issues of insufficient military supplies, slowed production, and depleted inventories among NATO member states, leading to the realization that they cannot resolve military supply chain problems independently. Consequently, the necessity of utilizing the industrial base of Indo-Pacific countries for military supplies has emerged.

In the context of expanding military cooperation between North Korea and Russia or China's military influence, cooperation in defense supply chains with Indo-Pacific nations can serve as a means to simultaneously protect the security of both regions. At the 2024 Washington NATO Summit, the expansion of defense industry investment, multilateral public procurement, and strengthening supply chain complementarity were adopted as key agenda items, and cooperation with IP4 countries was defined as a crucial axis in the implementation process. The most important objective of NATO IP4 supply chain cooperation is to enhance the resilience of the defense industry supply chain. Even in the event of a crisis, if production bases or procurement sources are secured through cooperation with IP4 countries, military supplies can be stably provided.

For ammunition, military parts, and materials to be practically usable, interoperability must be ensured and substitutability guaranteed through the use of common standards, thus interoperability is also an objective. In the long term, the goal is joint development or joint production. As strategic dependence on countries with high geopolitical risk, such as China, can lead to weaponization risks, there is also the objective of diversifying supply sources by reorganizing supply chains with allies who share values such as democracy and the rule of law. Furthermore, as related technologies are dual-use technologies, essential technologies in advanced semiconductors, AI, cyber, space, and unmanned systems that can be militarily utilized are involved; therefore, protective policies to prevent these technologies from being leaked to adversarial nations are also important.

The objective also includes enabling member states to maintain technological superiority through joint research and development, and further, joint investment. Additionally, it can be seen that there are objectives to enhance the defense capabilities and operational sustainment capabilities of both regions and to pursue interconnected capabilities that allow for mutual support in the event of a crisis. I looked for information on supply chain cooperation that has taken place within NATO IP, but there was not much. It appears that concrete efforts were made as this direction was codified and formalized through the 2024 Washington NATO Summit.

NATO and NATO IP4 Supply Chain Cooperation Efforts

In June 2024, a roadmap for defense industry core supply chain security was adopted. Ultimately, this is a roadmap to reduce strategic raw material supply dependence on non-aligned countries, particularly China, and includes identifying and stockpiling key strategic materials, strengthening joint responses among member states, and seeking recycling and alternatives. In December of that year, 12 core defense industry raw materials were selected to create a framework for research on stockpiling, recycling, and seeking alternatives to stabilize the supply chain. In February of last year, the Defense Production Action Plan (DPAP) was updated to agree on consolidating defense industry demands from NATO allies, joint procurement, expanding production capacity, and enhancing the interoperability of weapons and ammunition. It appears that action plans were created and approved to guide countries in restructuring to expand defense industry production investment and increase production.

I looked for supply chain cooperation efforts at the NATO IP4 level, but it is still in its early stages. At the NATO Summit in June last year, a joint statement was issued, formalizing the promotion of defense industry cooperation. Supply chain security for the stable procurement of raw materials and key components was specified as a core area of cooperation, and a commitment was expressed to evolve this into a practical defense industry and technology cooperation system. It is understood that there are no official, concrete cooperation projects yet. Off-Critical refers to the Minerals Security Partnership (MSP) launched in June 2022 under US leadership to stabilize the supply chain of critical minerals; recently, the US launched Pose (Critical Minerals Forum) to replace MSP. South Korea served as the chair of MSP in 2024 and is expected to hold the chairmanship until June. These efforts can be understood as part of the supply chain cooperation efforts at the NATO IP4 level.

Status of Cooperation by Sector and Key Partners

Ultimately, the objective is to map the defense industry production ecosystem among nations to identify which countries have a comparative advantage, where core capabilities lie, and where there are gaps, and to determine how to respond in the event of a crisis. The ultimate goal is to jointly respond to problems through diversification. I intended to examine how cooperation has proceeded by sector, but it seems that specific cooperation projects have not yet been announced. At the NATO IP4 level, existing US-led efforts to stabilize critical mineral supply appear to be included.

A roadmap for the core defense supply chain is announced to diversify and stockpile raw materials and promote research into alternatives. Diversification is pursued through friend-shoring or near-shoring, and Australia and South Korea are viewed as key partners in critical minerals among the IP4 countries. Australia possesses abundant critical mineral reserves, and South Korea is recognized as an important partner with its processing technological capabilities. Since semiconductors are also a critical material for defense, there is significant interest in supply chain cooperation, but specific cooperation examples within the NATO IP4 framework have not yet been identified. It appears to be in the stage of exploring cooperation, with South Korea and Japan expected to be key partners.

Necessity, Potential, and Limitations of Cooperation

South Korea possesses technological capabilities in memory and non-memory production, equipment, and materials, and is mentioned as a key pillar for supply chain cooperation along with Japan. While Dr. Yoon Jeong-hyun will provide more details on AI and emerging technologies, supply chain cooperation in AI and emerging technologies is presented as a core pillar for responding to common security challenges, and various projects related to this seem to be under exploration. Finally, although the necessity and potential for cooperation are vast, there are currently many institutional, industrial, and political limitations. The biggest is the difference in opinion among NATO member states regarding intervention in the Indo-Pacific region.

I seem to be repeating myself. A roadmap for the core defense supply chain is announced to diversify and stockpile raw materials and promote research into alternatives. Diversification is pursued through friend-shoring or near-shoring, and among the IP4 countries, Australia and South Korea are considered key partners in critical minerals. Australia can play a role due to its abundant critical mineral reserves, and South Korea is recognized as an important partner with its processing technological capabilities. Since semiconductors are also a critical material for defense, supply chain cooperation is gaining attention, but specific cooperation in the semiconductor supply chain at the IP4 level has not yet been identified.

Cooperation appears to be in the exploratory stage, with South Korea and Japan expected to be key partners among the IP4 countries. South Korea possesses technological capabilities in memory and non-memory production, equipment, and materials, and is mentioned as a key pillar for supply chain cooperation along with Japan. While Dr. Yoon Jeong-hyun will elaborate on AI and emerging technologies, cooperation in AI and emerging technologies is presented as a core pillar for responding to common security challenges, and related projects are being explored. Lastly, while the necessity and potential for cooperation are immense, there are currently many institutional, industrial, and political limitations. The primary issue is the intervention in the Indo-Pacific region among NATO member states.

Institutional, Industrial, and Normative Limitations

There appear to be differences of opinion. Furthermore, the scope of NATO activities is defined by the 1949 treaty, and there are disagreements regarding the expansion of the scope of cooperation, along with institutional constraints. For IP4 partner countries that are not NATO members, an agreement is needed on the extent to which supply chain or industrial policies can be implemented. Additionally, cooperation in defense production and procurement is limited to the 'M' level, necessitating further institutional consideration for the depth of information sharing and enhanced cooperation. Therefore, establishing dedicated consultative bodies and a permanent discussion platform to address these issues seems necessary.

There are also industrial limitations. Each country aims to foster its own defense and core industries while simultaneously pursuing joint production with allied or partner nations. Therefore, a decision is needed on the extent of joint production versus national interest-based development. Moreover, joint procurement or standardization issues at the IP4 level may conflict with the interests of individual companies, regulatory environments, and subsidy policies, requiring careful consideration of policy implementation strategies. Discussions and deliberations between companies and governments are necessary.

There are also issues related to norms or trust. The US International Traffic in Arms Regulations (ITAR), export control policies of various countries, intellectual property issues, and data protection concerns are problems that must be identified and resolved as institutional constraints for joint development and production. Particularly, cooperation in emerging technology fields such as AI involves high security sensitivity, requiring political consensus from each nation. Establishing a permanent dialogue mechanism to discuss these matters is necessary.

There is a lack of substantive cooperation. Currently, efforts are confined to joint statements at the summit or ministerial level and policy research reports, necessitating the creation of concrete achievements. Pilot projects for joint production or joint stockpiling should be implemented to accumulate best practices, and based on these, the scope should be expanded to achieve tangible outcomes for the diversification of defense supply chains among NATO IP countries.

Structural Problems and US-EU Conflict

There are fundamental structural problems. Even within NATO member states, conflicts between the US and the EU could act as a structural constraint on the promotion of NATO IP supply chain cooperation. Despite the direction towards integrating defense industrial bases and joint production, the relationship is strained due to subsidy and regulatory competition between the US and the EU, and conflicts are expected to intensify. How this issue will be resolved during supply chain design is a concern, and the resolution of US-EU conflicts will impact the promotion of NATO IP4 supply chain cooperation.

There is growing strategic political heterogeneity between the US and Europe. The US is pressing Europe for autonomous defense capabilities, and its strategic priorities for NATO and the Indo-Pacific region are shifting, making the direction of cooperation fluid. Within Europe, the need to reduce dependence on the US is deepening; thus, this issue must be resolved before NATO and IP supply chain cooperation can progress. Furthermore, the partnership itself is a loose consultative body dependent on US strategic compensation, so a deterioration in US-EU relations will pose greater constraints on promoting supply chain cooperation. Technological, diplomatic, and industrial obstacles exist.

As it is in the initial stages, institutional efforts are needed to overcome these conflict situations and promote cooperation, but further delays are possible. Currently, it can be stated that there are significant structural constraints and a high degree of uncertainty. This concludes my presentation.

Professor Lee Hyo-young, Korea National Diplomatic Academy.