Supply chains are truly being weaponized

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Published: 16 Jul. 2023, 20:07 Updated: 17 Jul. 2023, 14:31

Supply chains are truly being weaponized

Kim Doo-sik

The author is CEO of Tech & Trade Institute and a lawyer.

The U.S.-China hegemony contest has turned into a boundless “security game.” After the United States methodically blocked China from gaining technology supremacy, China sternly responded — both citing “national security” reasons. The heated race between the two superpowers threatens the global economy. As national security outweighs the economy, the multilateral trade system that brought global prosperity over the past decades faces a watershed moment.

‘WTO can’t stop China’s unfair practices’
Defining economic matters from the perspective of national security was in full swing during Donald Trump’s presidency. The U.S. president imposed a 11-25 percent tariff on steel and aluminum imports from the EU, China, India and Canada in 2018 citing their potential security threat to the U.S. based on Article 232 of the Trade Expansion Act of 1962. Undergoing the World Trade Organization (WTO) dispute settlement process, the U.S. claimed that its act of levying the tariff constituted “security measures” specified in Article 21 of the General Agreement on Tariffs and Trade (GATT), adding that security measures were not subject to a WTO judgment. The WTO panel dismissed the U.S. claim, but Washington refused to withdraw its tariff imposition.

Since President Joe Biden took office, national security has been used as the U.S. government’s main logic to keep China in check. The U.S. believes that a victory in the technology war will protect its national security the most. The U.S. characterized the WTO-led free trade system as a failed one in stopping China’s unfair practices such as the heavy reliance on government-led economic management, gargantuan industrial subsidies, and technology theft.

The developments reflect the U.S. government’s determination to check China without being restricted by the multilateralism in international trade. The U.S took steps to pressure China — including prohibiting other advanced countries from exporting their cutting-edge semiconductors and sophisticated chipmaking equipment to China — all for the cause of national security.

China’s retaliation executed in full force
China is also taking a hard line on national security grounds. It enacted the Anti-Foreign Sanctions Law in 2021 to impose sanctions on states or individuals who join the U.S. sanctions. But recently, China promulgated an even-tougher Foreign Relations Law which went into effect on July 1. The new law allows Beijing to take corresponding — and comprehensive — actions to any countries damaging the sovereignty, security and development interests of China — even when they didn’t take actions against China.

Article 6 of the Foreign Relations Law stipulated, “State organs and armed forces, each political party and mass organization, enterprises, public institutions, and other social organizations, as well as citizens, all have the responsibility and obligation to maintain national sovereignty, security, dignity, honor, and interests in diplomatic exchanges and cooperation.” Article 33 of the same law gives the Chinese government the rights to “employ corresponding countermeasures or restrictive measures against acts that violate fundamental principles of international law and international relations and harm the sovereignty, security, and developmental interests of China.” That means national security has evolved from passive defense logic to aggressive offense logic for China.

The reinforced concept of national security is also reflected in the Anti-Espionage Law, which also went into effect from July 1. The law drastically intensified internal control for security reasons. For instance, espionage activities now include acts such as “prying into, purchasing or illegally providing state secrets and other documents, data, materials related to national security.” Even a misdemeanor undeserving of criminal punishment for espionage can be penalized with administrative detention.

The problem is the overly broad scope of the “information” the Anti-Espionage Law refers to with regard to national security or interest. Because of that ambiguity and obscurity, foreigners residing or doing business in China — or their Chinese counterparts — must worry about the possibility of being punished for “spying activities” even for their normal information-gathering activities in the course of doing business.

Such draconian legislation in China forewarns even tougher — and more diversified — economic sanctions or pressures on the U.S. and other countries or companies following what the U.S. has done. As seen in China’s import restrictions over Korea’s deployment of the U.S. Thaad missile defense system — and in Beijing’s suspension of coal import from Australia over its demand for an international investigation into the origin of the Covid-19 — China has often used official means of pressure — such as trade sanctions — along with nonofficial tools such as product boycott or tourism restrictions.

China’s economic retaliation executed
So far, China’s economic pressure has mostly targeted consumer products or retailers — not high-tech enterprises. Not anymore. In April, Beijing conducted an investigation of America’s largest memory chip maker Micron for “serious cybersecurity problems” with its products and ordered Chinese companies to stop buying them. Micron was dealt a critical blow even after building its first overseas factory in Xian in 2007 and hiring more than 3,000 Chinese workers since. That hints at the possibility of China’s economic retaliation expanding to all categories in reaction to the U.S.-led technology blockade.

In March and April, Bain & Company, a global consulting firm, and Mintz Group, a corporate investigations firm, both doing business in China, were raided out of the blue by Chinese security authorities for investigation. The two cases were a pre-warning to foreign companies collecting corporate information in China and providing advice to other companies that their activities will be closely monitored from now. That’s not all. If foreign companies don’t follow the security standards of China’s data-related law or refuse to accept security checks, they could be punished for espionage charges. China regards the migration of data overseas as a national security issue.

GATT accepts “security exceptions,” though in a limited way
The situations show the Sino-U.S. competition moves toward “excess security concerns.” That’s what the GATT had worried about from the start to help maintain the free trade order and global peace since World War II. GATT not only banned its member countries from discriminating against a certain country or foreign company or foreign products, but also disallowed members from unilaterally restricting export and import against other members.

And yet, GATT allowed its members to take trade-restricting measures to protect a certain level of security interests. For instance, Article 21 of the agreement recognizes each member’s rights to take measures it deems necessary to protect its essential security interests over nuclear materials, weapons transportation or logistics support for military bases, or an emergency in international relations. These are the so-called “security exceptions.”

But if such exceptions are abused, the free trade system cannot be sustained. That’s why finding ways to prevent the abuse of security exceptions was often a point of contention in GATT negotiations. Late U.S. State Department official John M. Leddy, who had proposed the security exception clause for the GATT, wanted to strictly confine it to the protection of “essential security interest” instead of abusing it for “commercial purposes.”

Today, the scope of national security is broader than ever, because civilian technology can be used for military purposes and economic issues are directly linked to national security. Among various security measures the U.S. and China have taken, some could be within the boundaries of “security exceptions.” But the steps the two superpowers took to attack and pressure one another certainly has reached the level of denying the multilateral trade system itself.

Repercussions of China’s rare earth export control
After China announced a plan to control its export of gallium and germanium — key materials for chips and electronic products — the U.S.-China standoff has entered a new phase. The threat from Beijing is a signal to use the supply chains dominated by China as a weapon to counter the U.S. control on export and import of cutting-edge chips. That’ same as a declaration of “war without bullets” against the U.S. with the execution of the Anti-Foreign Sanctions Law and the even-tougher Foreign Relations Law. The U.S. relies on China for nearly 100 percent of the gallium and germanium it needs. Korea — the chip powerhouse — is no exception. If the U.S. and China wage such a battle targeting the other’s lifeline with its powerful supply chains, the damages will be inflicted on the rest of the world.

Given their humongous economic and military size, the two countries can hardly beat the other through sanctions. Rather, it could lead to a vicious cycle of sanctions triggering sanctions. In this sense, each country’s effort to join in the rebuilding of supply chains to lessen their risks can be justified.

Nevertheless, the act of directly sanctioning a particular country or company or tightening the leash around the enemy’s neck in the crusade for national security should be restrained unless it critically harms the “essential security interests” stipulated in Article 21 of the GATT. The U.S. and China must not forget that the security exceptions are only allowed when they don’t shake the very foundation of the free trade system the global economy relies on.
Translation by the Korea JoongAng Daily staff.