North-east Asia in focus: anti-espionage laws

• In a new quarterly round-up focusing on economic, political and geopolitical topics in North-east Asia, EIU sees a growing focus on countering industrial espionage as an emerging policy theme for the region.

• While China’s anti-espionage law stands out for its extensive scope and vagueness of definition, Japan is likely to be the next country to strengthen its legal framework regarding commercial espionage, as it seeks to catch up with the regional trend.

• We also highlight our coverage in the past quarter on the global electronics cycle, China’s post-pandemic recovery, Japan’s energy diplomacy, the implications of “de-risking” from China and NATO’s engagement in the Asia-Pacific region.

Hot topics in the region: tightening the anti-espionage net

Industrial competition and trade conflicts in North-east Asia are intensifying. In recent weeks these themes have been underlined by a sequence of headline-making industrial espionage cases in South Korea, as well as revision of the anti-espionage law in China. Against the backdrop of worsening technological and trade rivalry between the US and China, alongside the latter’s uphill battle to achieve self-sufficiency in strategic technologies and products, national economic security will increasingly become a policy priority for North-east Asian governments. A renewed focus on industrial counter-espionage, talent retention and the sourcing of critical material resources points towards a tightening of relevant legal and regulatory frameworks, in ways that may enhance compliance and other legal burdens for companies with exposure to China, Japan, South Korea and Taiwan.

The recent cases in South Korea lay bare the region’s concerns over industrial espionage. In June South Korean authorities indicted Choi Jin‑seok, a senior semiconductor engineer who had previously worked for the country’s two leading chipmakers, Samsung Electronics and SK Hynix, on charges of having stolen trade secrets from Samsung Electronics for the purpose of building a rival memory chip plant in China. This case revealed the extent of Chinese firms’ efforts to acquire trade secrets and to poach talented employees with industrial expertise from foreign companies in strategic industries.

The urgency of such actions has scaled up significantly in recent years, following the Chinese government’s call for greater self-sufficiency in the country’s strategic industries, including semiconductors, clean energy, robotics, aerospace equipment and new materials. Businesses in South Korea, Japan and Taiwan have emerged as major targets, with “brain drain” and related intellectual property theft, in particular, having long been a strategic anxiety for the Taiwanese government). 

These dynamics are not new. Talent attraction schemes are a regular feature of both corporate and government strategy, and were used by Japanese, Taiwanese and South Korean authorities in the 1970s and 1980s to woo back their citizens who had worked or studied in the West. Coupled with generous financial incentives, such programmes allowed these three North-east Asian economies to develop their world-class electronics manufacturing sectors. China’s current strategy is similar, and amplified by the deep financial resources offered by the Chinese state.

However, worsening geopolitical concerns, including the West’s growing efforts to “de‑risk” its supply chains from China and attempts by the US to force global alignment with its trade restrictions on China, have made the issue of talent flows more sensitive. The US’s export restrictions on China, for example, already include prohibitions on US citizens working in certain advanced technology sectors in China, placing talent flows explicitly at the heart of these geopolitical fissures. We sense a risk that these prohibitions may be replicated by other governments in North-east Asia, particularly as geopolitical concerns related to China build in the coming years.    

Unpacking China’s anti-espionage law

China’s anti-espionage law also highlights the disparity between legal and regulatory frameworks across North-east Asian states. The law stands out for the extensive scope of its coverage, as well as the vagueness of its definition of “espionage activities”. It defines acts of espionage as activities that endanger national security and interests. It does not, however, specify what constitutes “national security and interests”, despite also stipulating that stealing, purchasing and disseminating any intelligence, documents, data, materials or items related to “national security” could be deemed as criminal behaviour.

Other provisions within the law highlight the obligations of Chinese citizens to preserve the nation’s “security, honour and interests”. In combination, these purposefully vague provisions set a wide and amorphous boundary for activities and materials that could be classified as “espionage”, raising concern over arbitrary enforcement, particularly following China’s investigation of several multinational information service firms earlier in 2023. 

The vagueness of China’s anti-espionage law also extends to stipulated penalties for prohibited activities. The law states that for “acts of espionage that do not constitute a crime”, the state security organs can enforce up to 15 days of administrative detention and a fine of up to Rmb50,000 (US$7,000). For explicitly “criminal” espionage activities, the law does not stipulate what penalties could follow. By contrast, the Act on Prevention of Divulgence and Protection of Industrial Technology in South Korea and the Unfair Competition Prevention Act in Japan both stipulate an upper limit on the length of imprisonment and fines that can be imposed for various criminal activities.

Japan may be the next market to watch for legislation in the areas of espionage and related trade secret protection. While China, South Korea and Taiwan have all updated and upgraded their relevant laws in recent years, Japan currently has no legislation dedicated to commercial and industrial espionage. Its Unfair Competition Prevention Act has provisions on trade secrets, but it has not been amended to accommodate the latest trends, and has very limited scope.

In its national security strategy review in late 2022, the Japanese government emphasised the importance of economic security, including by guarding industrial and commercial intelligence. Follow-up work on legislation in related areas has been slow.  We expect it to be only a matter of time, however, before Japanese authorities align themselves with the wider regional trend for tighter counter-espionage scrutiny. 

EIU coverage highlights from the last quarter

Electronics trade cycle and Asian economies. Leading indicators of semiconductor and electronics devices production and inventory in South Korea and Taiwan indicate that global electronics trade is unlikely to bottom out before the last quarter of this year. The recovery to trend will be a slow, drawn-out process that will not be complete until at least mid-2024. This means that the anticipated boost for North-east Asia’s economies from a rebound in electronics exports will not materialise fully this year.

China’s underwhelming economic recovery. China’s economy underperformed in the second quarter of this year, extending an underwhelming post-pandemic economic recovery in the country. Property remains the biggest drag on a sectoral basis, and its weakness exacerbated consumers’ reluctance to spend. We expect stronger intervention by the central government later this year in order to avoid a hard landing in the property sector.

Japan’s pursuit of energy security. Japan will remain dependent on imports to meet its energy demand, even if it succeeds in transitioning from fossil fuels to clean energy sources. Energy security will continue to be the main pillar of Japan’s foreign policy, leading to enduring ties with Middle Eastern countries and Australia. Read more.

Implications of “de-risking” from China. De-risking the supply of critical materials from China will be difficult, owing to that country’s dominance in processing and production stages, as well as a high risk of retaliatory measures. 

NATO in the Asia-Pacific region. NATO and Asian countries such as Japan and South Korea are bound by a shared desire to preserve the global security status quo. However, the expansion of NATO’s involvement in security affairs in the Asia‑Pacific will be gradual, to avoid unsettling other regional powers.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.