Comment on “Economic Security and New Industrial Policy”

Armstrong et al. (2025) provide a comprehensive review of the evolution of Japan's economic security policies, which have accelerated since the late 2010s, along with the private sector's responses to economic security risks. Additionally, using the semiconductor industry as a case study, they examine the legitimacy of Japan's “new industrial policy” aimed at addressing economic security challenges, as well as the potential issues it may pose. Given the limited number of studies that offer a thorough evaluation and assessment of Japan's economic security policies, Armstrong et al. (2025) makes a valuable contribution to the existing body of research. As noted by Armstrong et al., Japan's economic security policies establish two primary goals: achieving “strategic autonomy” and “strategic indispensability.” The former aims to strengthen the resilience of supply chains for critical products—such as semiconductors and critical minerals—against external shocks, as well as enhance the protection of essential infrastructure—such as power plants and financial networks—against cyber threats. The latter seeks to promote research and development in critical technologies while safeguarding them from acquisition by countries of concern through both legal and illegal means. To achieve these goals, policymakers enacted the Economic Security Promotion Act (ESPA) in 2022 to provide a legal foundation for their implementation. One of the main contributions of Armstrong et al. lies in their discussion of the new semiconductor industrial policies in Japan. As they point out, when assessing the legitimacy of industrial policies in the context of economic security, it is necessary to consider not only Marshallian externalities arising from industrial agglomeration but also security externalities. Just as energy security is vital, ensuring a stable semiconductor supply is equally crucial, as disruptions caused by events such as a Taiwan contingency or a new pandemic could impose significant economic costs on Japan. While the private sector has also begun preparing for potential shortages, relying solely on market mechanisms may still lead to insufficient investment to prevent such supply chain disruptions. Therefore, government intervention may be justified to enhance supply stability through measures such as attracting Taiwan's TSMC to establish manufacturing facilities in Japan for legacy semiconductors and, in turn, to ensure strategic autonomy in semiconductor procurement. On the other hand, Armstrong et al. make an important argument that it remains uncertain whether Japan can secure a globally indispensable position in advanced semiconductor technologies through new industrial policies. This issue is particularly relevant to the support provided to Rapidus, a company established by eight leading Japanese firms and that is expected to develop and manufacture cutting-edge semiconductors. They attribute this uncertainty to a fundamental shift in Japan's position. That is, when industrial policies were implemented in Japan in the 1970s and 1980s, the primary objective was to catch up to the technological frontier by absorbing, emulating, and adapting imported technologies. However, Japan has now reached the frontier and faces a more daunting challenge: it must pioneer technologies that have never existed before. Finally, it is worth addressing the issue of subsidy competition, which is not extensively discussed in Armstrong et al., along with its side effects. Amid rising geopolitical risks, neither the United States and its allies nor China can afford to over-rely on foreign sources for the procurement of strategic products such as semiconductors, which are critical to military capabilities. At the same time, economies of scale play a significant role in the semiconductor industry. If a foreign government provides substantial subsidies to expand production, whereas the domestic government does not, the foreign share of the global market may increase at the expense of the domestic share (Brander and Spencer 1985). Consequently, both the United States and Chinese camps have strong incentives to expand subsidies. However, the intensification of subsidy competition—for example, in sectors such as legacy semiconductors—could lead to a costly war of attrition, characterized by excessive fiscal burdens, redundant investments, global overproduction, and a series of retaliatory measures, such as anti-dumping and countervailing duties. To escape this prisoner's dilemma, an effective international regulatory framework to govern subsidy competition is essential. However, the current World Trade Organization (WTO) rules remain incomplete in curbing disorderly subsidy races, and momentum for revising subsidy rules through new multilateral negotiations has not sufficiently developed. As a result, strong incentives persist for some countries to act in their self-interest. Japan, which has historically benefited from a rules-based open trading system, has generally refrained from adopting protectionist measures such as imposing additional tariffs, including even those consistent with WTO rules. However, if subsidy competition in the semiconductor sector intensifies in the future, leading to global overproduction and a decline in semiconductor prices, Japan will face a difficult decision: whether to nonetheless maintain its open trade policy or adopt a more proactive stance in implementing protectionist measures for economic security.