Economic statecraft in an age of strategic competition ft. JBIC's Tadashi Maeda

Thank you. Uh, Mike, good afternoon. Distinguished participants in this very important workshop, I'd like to express my sincere gratitude to the United States Studies Center for hosting this event. As Dr. Michael Green very kindly introduced me, he and I have been close friends for more than three decades since I was in Washington, D.C. twice, back in the early 90s and early 2000s. Dr. Green, as you know, was at the time Senior Director of the NSC at the Bush 43 Administration, and I frequently had contact with him during that time. By the way, this morning everyone saw the news that President of Russia Vladimir Putin paid a visit to Pyongyang and was very warmly received by North Korean leader Kim Jong-un. I'd like to remind you all of the fact that North Korea is still under sanctions, and since 2006 the UN Security Council has adopted 11 resolutions to condemn the North Korean regime and force them to destroy and abandon their nuclear programs and weapons of mass destruction. Those sanctions were imposed by the international community, and these 11 resolutions were adopted unanimously, including by Russia. But what we see right now is totally opposite to the spirit of the UN Security Council resolution, and that's the reality we face right now. Earlier this month, I also participated in the Shangri-La Dialogue in Singapore together with many of the participants at this conference. I served as a member of the Council of the World Economic Forum for four years between 2013 and 2017, and I served as advisor to former Prime Minister Abe and currently Prime Minister Kishida. Former Prime Minister Abe requested me to be a player backchannel to Russia, and upon request I created the Russia-Japan Investment Fund, a $1 billion fund. Because of this activity, I had a chance to meet with President Putin bilaterally nine times. So I was so depressed by the most recent aggression by Russia to Ukraine. I also saw the Chinese Defense Minister together with the Secretary of Defense of the United States and others at Shangri-La. On day two, the Chinese Defense Minister delivered a speech at the first plenary session and reiterated that China's policy toward Taiwan is its own, ignoring any intervention. The moderator repeatedly reiterated that Taiwan is its own, and also condemned the US and its naval forces for upholding freedom of navigation in the East China Sea and South China Sea. On day two, during the last plenary session, President Zelenskyy of Ukraine appeared, and I saw that all Chinese audience left during that time. That's the reality. Two weeks later, the Swiss government hosted the global peace summit, obviously Russia and China were not there, and only 98 countries (92 countries attended) and they undermined the effort by the Swiss government and other international community. Therefore, this is the reality that reminds me of the old book 'The Twenty Years' Crisis' from 1945 by British historian Edward H. Carr. It described a kind of competition between utopianism and realism. Now we may have to remind ourselves of that fact. Carr also wrote in that book that both military power and soft power and economic power have to exist together. That's a very important message from the historian Edward H. Carr. So we are now facing this reality. The Japanese government is now working on three important powerful issues: economic statecraft, together with coordination among like-minded countries. On April 7th, Japan, the United States, Australia, and the Philippines made a joint exercise by maritime and air forces to uphold the right to freedom of navigation and the rule of law. At the Shangri-La Dialogue, the President of the Philippines, Ferdinand Marcos Jr., delivered his speech and strongly advocated for the rule of law, and he clearly said that cooperation among like-minded countries to support this rule of law is very important. Our country, Japan, is also changing course. Prime Minister Kishida already committed to increase defense budget from 1% to 2% of GDP, and he followed the course of former Prime Minister Abe for national security policy. In April, Prime Minister Kishida was invited by President Biden as a state guest and delivered a speech at a joint session of the US Congress, and this is a very strong commitment by the Government of Japan. JBIC, as Dr. Green referred to, is a very strong instrument of the Government of Japan for economic statecraft. Today, I'd like to show basically three areas: one is energy transition towards carbon neutrality to make new frontiers; two is strengthening connectivity; three is making the supply chain of critical sectors, including semiconductors and critical minerals, more resilient. We cannot achieve this only by ourselves; we need cooperation among like-minded countries. The world of like-minded countries is very important. Like-minded means sharing key principles and freedom and rule of law. We have to remind ourselves that leaders like President Putin are also elected by vote, so they have some support by the public and some legitimacy, but it's very skillful to manipulate those views from the general public. Therefore, he still has very strong overwhelming support from the general public. We have to remind ourselves that this is not so easy to let him change his course. Other partners like North Korea, China, etc. The world seems to be very divided, so we need to always pay attention to what's going on in different camps. On the first issue, energy transition: Prime Minister Kishida announced his new initiative, Asia Zero Emission Community (AZEC). Australia is a member of this AZEC along with nine ASEAN countries, Japan, and Australia. This has some resemblance to JETP (Just Energy Transition Partnership) of the G7. The difference between JETP and AZEC is that AZEC is more practical and based on realism. JETP is more cookie-cutter; JETP does not address any use of natural gas as a transitional source of fuel power, but AZEC does. We are going to engage country by country because each country's situation is different. We don't want a one-size-fits-all solution. In Vietnam in July 2023, myself and the Minister of Planning and Investment agreed to have a joint AZEC and GX Promotion Working Team. In Indonesia two months later, myself and Airlangga Hartarto, Coordinating Minister of Economic Affairs, also agreed to set up this framework. I am co-head of this Joint Task Force. In the Philippines in April this year, I agreed with Secretary of Energy Lotilla to create a very similar framework, co-headed with me. The situation of the Philippines is totally different from Vietnam or Indonesia because the power generation sector has been privatized more than 20 years ago; there are no state-owned players in the Philippine power generation sector. Therefore, I ordered my staff to sign MOUs with three private players: Aboitiz Power, Metro Pacific Investment Corporation, and San Miguel. These three players play a pivotal role in power generation in the Philippines. I also had a meeting with leaders of American hyper-tech companies including OpenAI and others. They are now working on making their GPUs and using a massive volume of power, especially from clean energy, renewable energy. Also, GPUs need a lot of semiconductors. The supply chain not only of the chip itself but also processing and other downstream is very important. One thing not to be underestimated is the too much concentration on Taiwan of TSMC and others being very pivotal. Even in a peaceful reunification scenario with China, there is also the risk that China's monopoly will gain more power in this sector. Therefore, we need to be prepared for two different scenarios: one of military aggression and the other of peaceful reunification. On power, for the time being, more than 10 gigawatts of additional power is required for GX and DX. This is a reality, not an illusion. The cost of power from renewable energy in Japan is 14 to 15 cents per kilowatt-hour, too high. In China it's 4 cents, India 4 cents. Countries like Malaysia, Laos, compared with the size of economy and market, excessive capacity is there. Therefore, a 10 cent gap is very huge. If it's made up by subsidy annually, the government is required to supply those subsidies, which is very problematic fiscally. Australia and Japan are very natural partners because Australia is resource-rich, we are not. But the problem is that Australia has a weak platform of manufacturing sectors. Therefore, we both supplement each other. Japan, Australia, and the United States, and by adding India to be a Quad. But India is more delicate and sensitive because India has ties with Russia for many years. However, my friend Dr. Jaishankar, Minister of External Affairs of India, privately said to me that India is very gradually shifting towards the West, but it's not so easy to cut off ties with Russia in terms of military cooperation. He understands the reality, so very gradually slowly shifting to the West. Therefore, we need to encourage that direction. That's why I am now a global advisory board member of the Indian think tank Observer Research Foundation (ORF). I participate every year in the Raisina Dialogue, and this year for the first time Japan hosted a side event round table in Tokyo. I hosted this event together with Keidanren, the business federation. We invited about 100 guests, half from Japan and India, but the rest included the United States, Australia, and ASEAN countries. I invited the Deputy Prime Minister of Fiji, who attended. This is a very small step and small effort, but engagement is very important. Not only energy transition, but we also have to work on the supply chain issue. Japan clearly remembers what China did in 2010 when a fishing boat collision with Japanese coast guard ships occurred, and we arrested the captain. China retaliated by banning exports of rare earth elements to Japan. This is one execution of economic statecraft by China. That's the reality. So we do not have any illusion. What they talk is opposite to what they do in some sense, not 100%, but some sense. That's the reality. So Australia and Japan need to strengthen more cooperation in economic sense. JBIC reopened its representative office in Sydney two years ago. The government of New South Wales, in May 2024, announced its Future Gas Strategy. We also signed MOUs with leading industry players including Woodside and Santos. These are small steps but a really basic platform. JBIC also signed MOUs with the state of Western Australia and the Northern Territory as well, not only with the government in Canberra. We need to have more deepened cooperation on hydrogen and ammonia. This is very important frontier for both of us. I had a meeting with my colleagues from the Republic of Korea, and Prime Minister Kishida and President Yoon agreed to cover the supply chain of hydrogen and ammonia. In the US, massive subsidies are now available for hydrogen and ammonia through the Inflation Reduction Act, but it's not clear yet that these hydrogen and ammonia can be deployed outside the United States. Therefore, covering this supply chain is very important. On connectivity, JBIC, EFA, and US DFC signed an MOU for trilateral cooperation. We created the Trilateral Infrastructure Partnership. The first case was providing funding for a submarine cable to Palau. The second case was an acquisition deal over Diesel Pacific to block acquisition by China. By adding India to the Quad, we share this with India as well. Most recently, when I paid a visit to Washington DC, I had a meeting with Mr. Amos Hochstein, Secretary of Commerce Gina Raimondo, and we discussed cooperation on the Laoag Corridor in the Philippines. Also from USAID, we received a request for support to open land in the Philippines. Last month, the Laoag Economic Corridor Steering Committee held its first meeting in Manila, and we participated. Third issue, the supply chain issue. I already referred to hydrogen and ammonia. Ammonia can be used as fuel for vessels. A German company already manufactured an engine to use ammonia as fuel, and we are going to deploy and materialize this fuel for vessels. Hydrogen ammonia is convertible to hydrogen. Because of low energy intensity, it's very costly right now; the cost of hydrogen is between $400 and $450 per ton. We need to reduce this cost substantially to make hydrogen ammonia more affordable. Not only for electricity, but our industry can underpin this decarbonization of hydrogen especially in steel and cement sectors. JBIC provided funding for Nippon Steel's acquisition of SRI, a bankrupt steel company in India. We provided massive, almost more than $5 billion in equipment funding for them. As a goal of AZEC, we need to make more transparent and science-based global standards based on carbon intensity, not the color. Everyone says green ammonia, green hydrogen, but no clear definition is made. My idea is to share global standards based on carbon intensity, so we can make use of blue hydrogen and blue ammonia as well, using carbon capture and storage technology. We provided some support for this attempt in Australia in the Latrobe Valley, for example hydrogen made from lignite with CCS applied underground in Victoria. These are a couple of examples we are still working on. In 2022, the Japanese and Australian governments signed an agreement on partnership concerning critical minerals. This is not just about critical mineral ore, but also supply chain downstream processing. This is very important. In this regard, not only JBIC, but we are going to encourage all Japanese private sectors and private businesses to engage with partners in Australia, the United States, India, and other like-minded countries. We need to demonstrate and show the path and roadmap towards that goal. This goal must be shared among private sectors as well. That's my message I direct to deliver in front of these distinguished audiences and participants. Thank again to USSC for inviting me, and thank again to my dear friend Dr. Michael Green.

Yeah, thank you. First, before Prime Minister Abe's era, JBIC's role was more conventional, like export credit agencies such as the Export-Import Bank of the United States. They were based on the idea of a level playing field, which is some sort of trust, a cartel in some sense, based on the assumption that OECD member countries were prevailing all over the economy and financial sector. But it's not anymore. Countries like Brazil, Russia, China, India are not OECD members, but they are growing globally more broadly, so the relative share of the OECD is decreasing. The mindset has changed from a reactive, passive action to being a level playing field to now needing to compete with each other, not just a cartel. That's one issue. Second, risk-taking is not so easy because we need to mitigate risk and make projects bankable. We need to engage from day one, early stage, otherwise it's very difficult to finance, especially infrastructure. Infrastructure revenue is not so profitable from day one; later they gain some cash, so cash flow management is very important. Third, not just debt financing, but also equity investment. Through amendment of the statute, we can do equity, but the statute is a public role, so it's not so easy to persuade members of the Diet, like members of Congress in the US. It's very hard because their mindset is mainly for cost cutting, reducing the number of staffers and salaries of civil servants. We need to change that. For example, in Singapore, the average salary of very high-ranking civil servants is almost 10 times as high. We need to have some function like equity investment. Most recently, the Prime Minister announced a program for supporting startups, but he does not know the details about how they could do it. They have confused some private equity guys like Larry Fink of BlackRock. BlackRock is investing mainly in listed companies and securities, and more recently they are embarking on infrastructure, but that's totally different from startups. We need to tell them how difficult it is and create an ecosystem for supporting startups in Japan. So that's a pathway we started from a very passive export credit agency to a more cutting-edge leader spearheading this movement to eventually make an ecosystem for financing startups.

Yeah, on DFC, the issue is a big major difference between JBIC and DFC. DFC has a boundary of recipient in terms of per capita GDP of the country; they are not able to provide funding for high-income countries. But JBIC can do financing even to the United States and Australia. We disregard per capita GDP if it's strategically important. DFC does not know exactly the situation of developing countries. They are very negative on financing to state-owned enterprises, but in many countries state-owned enterprises play some role. I already told this to top senior US government officials including my friend Kurt Campbell and also members of Congress, but I found this is not a legal issue, it's a policy issue. They need to make guidance to change DFC to be more practical.

Well, in my view, we need to mobilize more funding, not just from the private sector, but also from pension funds, for example. Their appetite for risk is different. I discussed with Larry Fink how to materialize this. He already did a structured fund with JBIC, and also institutions like KfW of Germany took a mezzanine piece, and the World Bank Group and ADB are requested to take this first loss. Then the senior can be funded by pension funds. This is very important. I already talked to World Bank President Ajay Banga about this case. Even though Banga is a reformist, he is a little bit reluctant to work on taking first loss. For example, the World Bank Group's IDA is a very conventional provider of grants to the poorest countries. But not only the poorest countries need to take the first loss infrastructure in more competitive and strategically important countries. For example, I discussed with Amos Hochstein financing the Lobito Corridor in Africa, like Zambia, Angola, and the Democratic Republic of Congo. That's very hard because of the risk perception in the DRC. But we need a more flexible approach to bring different funding, both private and public, from different appetites. We need to coordinate this skill set, which is very important.

Yes, I already discussed this very deeply with Mr. Larry Fink and also Mr. Henry Kravis of KKR. Meeting with super funds here in Australia? Not yet, but I'm delighted to do so. The fourth largest pension fund in the world, I'm just saying.

We still work with the China Development Bank and China Export Bank. However, after the lockdown and COVID-19 era, their behavior has changed. They do not make any decision without direct instruction by the top leader of the Chinese Communist Party. Their decision-making is paralyzed because they are very scared of any attack by the Communist Party. For example, before COVID-19, there were daily 500 demonstrations in the street every day, but now zero, very zero. This is very extreme because there is now a surveillance system by monitoring. Many Chinese business leaders are now evacuating. They now live in Japan, playing golf. Jack Ma is playing golf in Japan. That's what happened. We still keep in touch with those people. I have started a direct channel to the top of the Chinese Communist Party's foreign affairs guys.