Nicholas Crawford
Economic security depends not on domestic capacity but on maintaining a diversity of suppliers and customers across multiple countries, argues Nick Crawford. Should G7 states then seek to redress the growing tendency for economic self-reliance that comes at the expense of multilateralism?
Ahead of the 2021 G7 summit in Cornwall, the United Kingdom has used its presidency of the group to put economic security on the agenda. It has convened a panel to advise on three challenges: the security of supply chains for critical minerals, medical supplies and semiconductors; the international rulebook and economic competition; and technology and innovation around digital services and e-commerce.
The G7 agenda reflects growing concern among its members about their economic dependence on China and about Beijing’s ambition to shape international economic rules and standards in its own national interests. But the real problem the G7 needs to solve is the proliferation of independent, inward-looking initiatives on economic security among G7 governments, particularly in the United States and European Union.
Multilateralism gives way to greater self-reliance
In the approaches of the world’s largest economies to economic security, there are shades of ‘autarkic’ ambition or drives towards greater self-reliance. In the United States, the Biden administration plans to build domestic supply chains in energy technologies, semiconductors, electronics, telecommunications and key raw materials, with initiatives interwoven with the need to create jobs. State governments are also involved, offering tax breaks for companies to re-shore to the US. In the European Union, the European Commission is pulling together industrial alliances of EU-based firms in battery technology, hydrogen power, raw materials, processors and semiconductor technologies and data, edge and the cloud, and has announced ambitions to capture 20% of the global semiconductor market. The EU has embraced ‘open strategic autonomy’ as the watchwords for its trade policy and German Chancellor Angela Merkel has said that the EU must be ‘sovereign’ in the digital sector. In China, plans for dual-circulation in the new Five-Year Plan involve building self-sufficiency in key industries and relying less on exports for economic growth.
Middle powers such as Japan and the UK are also grappling with the challenge of economic security but, by virtue of their smaller economies, are more outward-looking in their approach. For these countries, economic connectedness and the openness of foreign markets are essential to the growth of businesses in highly specialised critical and emerging technologies, because their domestic markets are small. Japan’s Free and Open Indo-Pacific (FOIP) policy, conceived under former prime minister Abe Shinzo, is the cornerstone of its security policy, with economic openness and the free flow of data an important pillar of this. The UK’s recent Integrated Review of Security, Defence, Development and Foreign Policy set out an ‘Own-Collaborate-Access’ strategy for supply-chain security and emerging technologies, which emphasises the need to collaborate with other countries and access foreign suppliers. Both countries stress the importance of multilateralism.
Accelerating fragmentation
Instead of multilateralism, there is, however, a ‘bloc-ification’ of the global economy. With little movement multilaterally on free trade or common standards, plurilateral trade agreements such as the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) are on the rise. These blocs have the potential to act as counterweights to the US and EU in the setting of global economic norms and standards. The EU’s recent Strategy for Cooperation in the Indo-Pacific noted the threat this presents to a level playing field for EU exporters.
But these two trends – towards an autarkic vision of economic security and towards the emergence of rival trade blocs – are accelerating fragmentation in the world economy, which bodes ill not only for middle powers but for continental economies such as the US and EU too. With autonomy and blocs come the multiplication of standards, the expense of protectionist policy, rising business costs, burdens on innovation and, ultimately, slower global growth. Economic security policies that rely on excluding foreign firms, even from like-minded states, erode access to innovation and efficiency elsewhere in the world.
Economic security depends not on domestic capacity but on maintaining a diversity of suppliers and customers across multiple countries and being able to substitute between them at minimal cost. This reduces risks from trade disruption and from coercive economic statecraft by foreign governments. International technical standards have an important role to play as a means of reducing the costs of substituting between suppliers. Moreover, given the size and importance of China’s economy and its growth as a market for G7 countries’ exports, it is both undesirable and unfeasible for Western states to rely on an autarkic approach to security, which ushers the world towards a less interconnected economy.
Economic security versus openness
The G7 claims it is committed to ‘free and fair trade‘, to the ‘rules-based multilateral trade system‘ and to ‘an open, free and secure digital transformation‘. Both the economic security policies of the world’s largest economies and the growing tendency to view standard setting as a matter of zero-sum geo-economic competition test these commitments.
Rather than shutting foreign firms out of national (or EU) initiatives in critical and emerging industries, G7 states need to pursue multinational initiatives that ensure a diversity of suppliers. Rather than setting standards that advantage domestic firms over foreign competition, G7 states should outline common international standards that make it easier to substitute between suppliers and sell into multiple markets. Rather than forcing their own standards on trading partners, their task is to build a legitimate consensus from which they themselves will benefit. As the advocates for multilateralism and for the liberal economic order, G7 governments have an essential role to play in reconciling economic security with economic openness.
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