[EAI Issue Brief] The New Government's Economic Security Strategy: Five Tasks for Responding to 'Economic Coercion'

I. Why Economic Security?

Economic security is emerging as a major foreign policy issue that the next government must address. Russia's invasion of Ukraine has caused an emergency in the supply of raw materials, and last fall, the urea solution crisis caused significant disruption to the public's economic activities, causing widespread concern. In the early stages of the COVID-19 outbreak in 2020, the domestic automobile production was temporarily halted due to difficulties in procuring auto parts following the lockdown of Wuhan, China. Six months prior to that, in July 2019, the Korean economy was hit by export restrictions on three key semiconductor materials imposed by the Japanese government, and in 2016, South Korea experienced economic retaliation from the Chinese government due to the deployment of THAAD.

As economic threats have continued, public opinion has also shown an interesting trend. According to a public perception survey on foreign affairs conducted jointly by the East Asia Institute and Korea Research in November 2021, strengthening economic diplomacy was identified as the top priority for the next government in foreign and security affairs (35.9%), as shown in <Figure 1>. The public demonstrates sensitivity to economic issues, comparable to military security issues such as strengthening the ROK-US alliance (30.9%) or denuclearizing North Korea (19.6%).

The essence of the economic security challenges facing South Korea lies in the fact that vulnerabilities arising from deepening economic interdependence can lead to security risks. Countries like South Korea, which have benefited from openness and globalization, are severely impacted when other nations intentionally disrupt the network of interdependence, as seen in the THAAD or semiconductor retaliations. They are vulnerable to economic coercion through the so-called 'weaponization of interdependence'.

Caught in the fierce strategic competition between the US and China in trade and advanced technology, South Korea faces the risk of further economic coercion from China and Japan. Additionally, if the Republican party under Trump's influence comes to power, South Korea could become a victim of economic security measures like Section 232 of the Trade Expansion Act, and it could be forced into economic decoupling with Russia. However, South Korea's current response remains at a declarative and rudimentary level, focusing on organizational adjustments for economic security and emphasizing supply chain stability and diversification. The next government must develop an economic statecraft that strikes an appropriate balance between security risks, economic costs, and economic benefits amidst the growing threat of economic coercion from great powers. This can be pursued through economic deterrence strategies and strategic engagement strategies.

<Figure 1> Top Foreign Policy Priorities for the Next Government

II. Background of the Rise of Economic Security

Economic security can be defined as securing the lives and property of citizens, social order, and territorial integrity by utilizing available means against external 'economic threats.' Economic threats refer to situations where shocks or detrimental factors to a nation's economy pose a substantial risk to its defense industry, key industries, legal order, or political stability. Traditionally, disasters and calamities fall into this category. Events such as the Great East Japan Earthquake of March 11, the COVID-19 pandemic, the Middle East Wars, and the war in Ukraine can be considered economic security threats that caused difficulties in the supply of raw materials and disruptions to supply chains. Another source of economic threats is financial crises. Events like the 1997 Asian financial crisis and the 2008 Lehman Brothers collapse, driven by the convergence of transnational financial capital, advanced technology, and neoliberal ideology, led to the collapse of financial systems and brought about security crises of 'state bankruptcy'.

Meanwhile, the new source invoking economic security today is the state itself. Certain countries frequently resort to imposing economic threats on other nations to coerce policy changes for their political, economic, or strategic interests. This phenomenon is occurring within the context of two global trends.

First, there are the side effects of neoliberal globalization. Through the flow of capital, goods, services, information, and human resources across borders, supply chains have continuously expanded and deepened globally, integrating nations into networks of economic interdependence. While this interdependence has brought benefits to the involved actors, it has also created asymmetries in dependence. As the flow of interdependence becomes more crucial to a nation's economy, the damage from any disruption to these flows increases, making actors sensitive to the benefits of others and aware of their own vulnerabilities. Consequently, the connectivity of these flows has become a politically and strategically sensitive issue. The risks associated with economic interdependence have been amplified, especially after the COVID-19 pandemic disrupted global supply chains that operated across borders.

As Farrell and Newman point out, certain states leverage their position to exploit the vulnerabilities of other nations by 'weaponizing' economic means to influence their foreign policy.[1]They exploit their superior position in highly interconnected global supply chains to target the chokepoints of other nations.

However, the use of export or import restrictions and financial sanctions as weapons of interdependence also imposes limitations on the economic activities of a nation's own businesses and consumers, leading to economic losses for specific groups. When the United States imposes sanctions on China, American companies with significant trade ties to China petition their government for compensation for losses. In response, governments resort to tactics such as emphasizing threats from other nations, invoking nationalism, and highlighting strategic goals to justify the weaponization of interdependence. Various economic restrictive measures are thus legitimized under the guise of economic security.

Second, the intensifying US-China strategic competition is leading to more frequent weaponization of interdependence and invocation of economic security. The United States has designated China as a strategic competitor and is applying pressure through trade and technology. In particular, under the pretext of deepening economic interdependence with China undermining national security, it has labeled 'Made in China 2025' and China's 'semiconductor rise' as economic aggression, thereby tightening control over the supply chains of key industries and companies. For example, the US is implementing stringent control policies against key Chinese companies like Huawei, Tsinghua Unigroup, and Fujian Jinhua, leveraging its overwhelming competitiveness in the design segment of the global semiconductor supply chain.[2]

China is also deploying its economic security strategy in a multi-layered manner. Due to its disadvantageous position in the economic interdependence with the US, China aims to adopt reactive and defensive economic security measures, maintaining a cooperative relationship within the framework of a 'new type of major power relationship' until the asymmetry is corrected.[3]Conversely, against entities where it holds a unilateral advantage, China does not hesitate to take preemptive economic coercion measures under the guise of security. In 2010, it imposed an export ban on rare earths to Japan following the Senkaku (Diaoyu) Islands territorial dispute. In 2016, in response to South Korea's THAAD deployment, it retaliated with measures such as blocking tourism and cultural exchanges and informally boycotting Korean products. In 2020, it retaliated against Australia, which questioned its responsibility for COVID-19, with import bans on beef, coal, and iron ore.

III. The Dangers of Over-Securitization and Abuse

What is noteworthy here is the expansive definition of economic security adopted by the US and China to pursue their strategic objectives. The US National Security Strategy (NSS 2017) defines economic security as 'the ability to maintain economic vitality, prosperity, and growth as an element of national security,' while the Department of Defense defines it as 'the ability to possess the material resources that can protect or advance U.S. economic interests and overcome non-economic challenges.' China, based on its 'holistic national security concept,' defines economic security as 'the condition and capability to maintain the sustained development of the national economy.' Both major powers are expanding the concept of economic security to provide justification for extensive government intervention in international economic transactions and the imposition of economic threats on other nations. Japan is also rapidly moving to strengthen its economic security, with Prime Minister Fumio Kishida making 'economic security' a flagship policy of his cabinet, appointing a minister for economic security, and preparing the 'Economic Security Promotion Act'.[4]

When major powers engage in a competition to secure economic security in this manner, an economic security dilemma arises between them, similar to the security dilemma in military affairs. Indeed, the US and China are competitively strengthening sanctions, accusing each other of abusing economic security and creating threats, while strategically fostering technologies and industries that target the other's weaknesses. The problem lies in the damage caused when major powers over-securitize or abuse the invocation of economic security. Firstly, the global economic order based on openness and free trade can fall into chaos, directly impacting outward-oriented economic systems like South Korea's. Secondly, specific damages arise from bilateral economic coercion, exemplified by the THAAD and semiconductor retaliations that South Korea has painfully experienced.

In July 2019, the Abe administration imposed export controls on three key semiconductor materials (hydrogen fluoride, photoresist, and polyimide) to South Korea, citing three 'economic security' reasons: vulnerabilities in South Korea's strategic materials export control system, the absence of a 'catch-all' regulation for conventional weapons, and a lack of dialogue between the two countries on export controls. Even after the South Korean government implemented strengthened measures to meet Japan's demands, Japan has not withdrawn the controls because it has used the logic of economic security as a means to pressure South Korea to change its policy regarding the 2018 Supreme Court ruling on forced labor compensation. This demonstrates that Japan itself has used export controls, a coercive measure, for political reasons related to the forced labor issue.

IV. Tasks for the New Government

The new government must prepare a systematic economic strategy to respond to supply chain disruptions occurring on multiple fronts. Among these, the core economic strategy that should be prioritized from a foreign policy and security perspective is the task of preventing the abuse of economic security measures by major powers and responding to economic coercion. This can be divided into ① economic deterrence strategy and ② strategic engagement strategy.

1. Economic Deterrence Strategy

Strategic Autonomy[5]First, it is crucial to secure strategic autonomy against external pressure. Disruptions in trade and investment in strategic key industries such as telecommunications, finance, and energy can cause significant shocks to the public's livelihood and the nation's economic operations. This is why the Biden administration in the US, upon taking office, developed a strategy to strengthen supply chains in four key areas—semiconductors and rare earths—and pursued supply chain cooperation with South Korea and Japan. Since strategic key industries being exposed to the economic security policies of other countries would increase South Korea's strategic vulnerability, the next government must implement safeguards, such as diversifying supply sources and reducing external dependence (= partial de-synchronization), with a focus on ensuring the safety of supply chains in these sectors.

Strategic IndispensabilitySecond, it is essential to occupy a strategically indispensable position (node) within the global supply chain. This implies securing a form of positional power within the network, such as a network hub or a crucial bridging role. If China were to impose economic sanctions on South Korea, it would be difficult to implement if China were significantly dependent on South Korea in certain areas. In the case of the semiconductor supply chain, possessing competitiveness in the upstream segment or fostering indispensable materials, components, and equipment sectors within the network would provide deterrence against the coercion of other nations. The task of making South Korean companies essential and indispensable in the global supply chain fundamentally depends on the vitality and efforts of the private sector. Therefore, the role of the next government is to provide policies that effectively support private sector vitality and create a favorable environment.

Political ExecutabilityThird, to secure strategic autonomy and indispensability in the global supply chain, a close cooperative system must be established among the government, domestic market actors, and civil society, ensuring that market actors respond cooperatively to government signals. Economic security measures, in particular, often involve market regulations, inevitably creating winners and losers, and requiring the acceptance of political backlash from the losers. The next government must demonstrate political leadership by building close policy networks with society and establishing systems for relief and compensation for losers, thereby enhancing the effectiveness of policies.

2. Strategic Engagement Strategy

Deterrence strategies like these are difficult for countries with smaller market sizes, financial resources, and technological capabilities compared to neighboring great powers to secure immediately. Furthermore, given South Korea's economic structure, which heavily relies on external trade and investment, its vulnerability in terms of asymmetric interdependence necessitates the pursuit of diplomatic alliances and engagement strategies alongside the independent acquisition of deterrence capabilities.

As a recent example, Australia has demonstrated success in deterrence by responding to China's economic coercion. Despite a higher trade dependency on China than South Korea, Australia has shown resolve in deterrence and has also led efforts to garner warnings from the US and responses from the EU regarding China's coercive measures.[6]This holds significant implications for the new government.

In the long term, the counterproductive effects of economic coercion have been observed in past incidents involving rare earths, semiconductors, and THAAD retaliation. It is pointed out that coercive measures often exceed the resilience of the market, negatively impact the international reputation of the coercing country, and severely worsen public opinion in the coerced country, thereby increasing diplomatic burdens. This indicates that there is room for South Korea to engage in more proactive and preemptive diplomatic efforts, moving beyond a victim mentality and deference to great powers.[7]This means that there is an opportunity for South Korea to engage in more proactive and preemptive diplomatic efforts, moving beyond a sense of victimhood and deference to great powers.

ROK-US-Japan CooperationSouth Korea must engage in international cooperation efforts to highlight the problems of abusing economic security measures and the injustice of economic coercion, and to reaffirm the rules-based international order. ROK-US-Japan cooperation can be particularly useful here, as it serves the common interest of deterring China's economic coercion while also acting as a mechanism to curb the temptation for the US and Japan to use economic coercion measures.

Engagement Through a Coalition of Like-Minded CountriesSouth Korea can lead a coalition of middle powers with externally dependent economic structures vulnerable to economic coercion and pursue alignment with the European Union (EU), which is jointly developing 'anti-coercion instruments.' In particular, South Korea should actively pursue norm-setting and institutional-building diplomacy to ensure that actions such as export controls or the imposition of trade/investment barriers are based on international norms and legitimacy, thereby exerting long-term efforts to bind and engage major powers like China.

[1]Henry Farrell and Abraham Newman. 2019. “Weaponized Interdependence: How Global Economic Networks Shape State Coercion,”International Security44: 42-79.

[2]These include export controls under the 'Export Control Reform Act' within the 'National Defense Authorization Act (NDAA) 2019,' import restrictions under 'Section 889: Prohibition on Certain Communications and Video Surveillance Services and Equipment,' restrictions on domestic investment under the 'Foreign Investment Risk Review Modernization Act,' and measures to ensure the security of the IT supply chain under the 'International Emergency Economic Powers Act'.

[3]'Regulations on the List of Unreliable Entities' (September 2020), 'Export Control Law' (December 2020), 'Measures for Security Review of Foreign Investment' (January 2021), 'Measures to Counter the Application of Foreign Laws in an Extraterritorial Manner' (January 2021), 'Anti-Foreign Sanctions Law' (June 2021), 'Data Security Law' (September 2021).

[4]Son Yeol. 2021. “Economic Security Emerging as a New Issue in ROK-Japan Relations,” *Kwanjeong Japan Review*, No. 41: 1-4.

[5]The concepts of strategic autonomy and strategic essentiality used below are borrowed from the Japanese government's "Bill on the Promotion of Economic Security." This bill focuses on industrial policy based on 'strategic autonomy' and 'strategic indispensability.' Liberal Democratic Party, Headquarters for the Creation of a New International Order, Interim Report: Recommendations for the "Basic Policy for Economic and Fiscal Management and Reform 2021."https://www.jimin.jp/news/policy/201648.html

[6]European Commission, 2021. "Proposal for a Regulation of the European Parliament and of the Council on the Protection of the Union and its Member States from Economic Coercion by Third Countries"

[7]Son, Yeol, 2021. ibid.

■ Author: Son Yeol_ Director of EAI, Professor at Yonsei University's Graduate School of International Studies. Ph.D. in Political Science from the University of Chicago. He has served as Dean of Yonsei University's Graduate School of International Studies, Head of Underwood International College, Director of the Institute for Sustainable Development, and Director of the Institute for International Studies. He was also a Visiting Professor at the University of Tokyo, and a Visiting Scholar at the University of North Carolina (Chapel Hill) and the University of California (Berkeley). He served as President of the Korean Political Science Association (2019) and President of the Association for Japanese Studies (2012). He has been a Senior Fellow at Fulbright, MacArthur, the Japan Foundation, and Waseda University's Advanced Research Center for Science and Engineering, and has served as an advisor to the Ministry of Foreign Affairs, the Korea National Diplomatic Academy, the Northeast Asian History Foundation, and the Korea Foundation, as well as a specialist member of the Committee for Northeast Asian Affairs. His research areas include Japanese foreign policy, international political economy, East Asian international politics, and public diplomacy. His recent publications include Japan and Asia's Contested Order (2019, with T. J. Pempel), "South Korea under US-China Rivalry: the Dynamics of the Economic-Security Nexus in the Trade Policymaking," The Pacific Review (2019), 32, 6, Choices for Korea After the Crisis (2020), and Middle Power Diplomacy of Korea (2017, co-edited).

■ Managed and Edited by: Baek Jin-kyung_ EAI Director of Research and Senior Researcher

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