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Commentary: Corporate Japan fears economic security bill’s impact on China trade

TETSUSHI TAKAHASHI, Editor, Economic News Group

 

TOKYO — Hitoshi Ito, vice president of Toko Tekko, a drone maker based in Odate, Akita Prefecture, spends his days with a sense of uneasiness.

 

He cannot dispel concerns about an economic security bill Prime Minister Fumio Kishida’s administration is moving ahead with. “I’m afraid the new bill, which focuses on supply chains with China, will have a significant impact on our business,” he said.

 

He is not alone. Across corporate Japan, alarm bells are ringing about the legislation’s potential to excessively restrict business relations with China on security grounds. So far, the parts of the bill that have been leaked are vague, apparently leaving much room for interpretation.

 

Toko Tekko develops, produces and sells agricultural- and industrial-use drones.

 

The company in August announced it would partner with Toshiba Energy Systems & Solutions to begin developing an infrastructure inspection service using drones.

 

Offshore wind power generation facilities and power grids are located out at sea or in mountainous areas that are difficult to access. But drones can inspect them safely and efficiently.

 

Sensing business opportunities at offshore wind farms and anticipating that the government will ease regulations, Toko Tekko began rushing to launch a drone-based infrastructure inspection service sometime in the fiscal year that starts April 2023.

 

But now the new government is preparing to submit the economic security bill to an ordinary session of the Diet, Japan’s parliament, to be convened on Monday.

 

One of the bill’s pillars is “ensuring the safety and reliability of key infrastructure.” The legislation will allow the government to make advance checks for any security problems if the maintenance and management of key infrastructure are outsourced to other business operators.

 

To cut costs, Toko Tekko’s drones use general-purpose parts made in China. This has Ito fearing the possibility of the government prolonging an inspection or not giving the all-clear.

“If even Chinese-made general-purpose parts that don’t seem to be sensitive technologies, including motors, are forbidden,” Ito said, “we will not be able to make any price-competitive products.”

 

Ito is gathering as much information on the legislation as possible but still cannot gain absolute certainty on anything.

 

Whenever I meet with business people who deal with China, they speak with one voice on the issue. “We want what’s not OK and what’s OK to be shown in an easy-to-understand manner,” they say.

 

Having said that, drawing a clear line now between what is and is not permissible might be impossible.

 

Japan has been taking economic security more seriously since the confrontation between former U.S. President Donald Trump’s administration and Chinese President Xi Jinping’s leadership team over state-of-the-art technologies.

 

The U.S. has urged its allies to exclude products made by Huawei Technologies and other Chinese tech companies, and Japan has come under pressure to respond.

 

It is inevitable that future developments in the U.S.-China confrontation and U.S. policies will subject certain projects and technologies to regulations.

 

The administration of President Joe Biden shows no sign of softening the U.S.’s tough stance on China. To counter the Xi administration’s move to challenge the U.S.-led international order, the U.S. will continue expanding the coverage of sanctions, especially on the economic front.

 

It is crucial for Japan to strengthen its systems in partnership with the U.S. so that technologies and information that can threaten its security do not fall into China’s hands.

 

It is also important that the Japanese government does not adopt the practice of excluding everything suspicious in the name of ensuring economic security.

 

Meanwhile, Japanese companies also need to examine whether there are any problems with how they deal with China from the viewpoint of their own economic security.

 

“Predictability is important,” Japanese trade minister Koichi Hagiuda told Nikkei when asked about the economic security legislation. “It will not be such a mechanism that one day suddenly makes doing business impossible.”

 

Above all, what kind of China relationship does Prime Minister Fumio Kishida seek to build?

 

The legislation will mark a new stage in Japan’s business relations with China, but as long as Kishida cannot clearly answer the question, unpredictability will remain.

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