This blog post examines the conditions under which export controls function as a short-term pressure tactic and the risks they pose as a boomerang effect on domestic industries in the long term, using case studies and economic principles. It also considers variables such as technological level, substitutability, and time.

Export Restrictions: Strategy or Self-Destruction?

Since the end of the Cold War in 1991, nations worldwide have pursued economic development by expanding international trade and fostering active exchanges. However, in recent years, as countries increasingly emphasize their own interests, disputes between nations have become more frequent. The Ukraine war that erupted in 2022 has fueled conflicts not only in security but also in trade, with a noticeable increase in attempts to pressure other nations through export controls. In 2019, Japan implemented stricter export controls on three types of advanced industrial materials targeting South Korea. Similarly, on August 26, 2022, the United States imposed an export licensing system on high-performance graphics cards produced by NVIDIA and AMD destined for China. Subsequently, on October 7 of the same year, it announced additional measures, further expanding the scope of regulated items.
The effects and implications of such export control policies vary significantly depending on the characteristics of the regulated goods. Nevertheless, the general operating principle of these policies can be fully explained through economics.

Export Controls as a Weaponized Trade Policy

When goods are traded, sellers earn profits, and buyers can consume those goods or use them productively to produce other goods. Just as voluntary transactions benefit both sellers and buyers, voluntary trade also benefits both exporting and importing countries.
Positions on trade are broadly divided into free trade and protectionism. Implementing free trade can create domestically disadvantaged groups and cause problems in industrial structure. However, economists generally agree that the overall national benefit is substantial. This article will not delve into the debate between free trade and protectionism or its implications. Instead, it proceeds on the premise that free trade benefits both countries.
Reversing this premise implies that halting exports would result in losses for both nations. Therefore, when a country imposes export controls, it is essentially accepting the losses its own exporters will suffer while aiming to inflict greater damage on the other country. Ultimately, for an export control strategy to succeed, the damage inflicted on the other country must be sufficiently greater than the damage the exporting country must endure. Export control methods fall into two broad categories. One involves strategically accepting domestic damage to strengthen national security while inflicting greater harm on the opposing country. The other involves inflicting sustained damage on the opposing country to force a swift capitulation, then lifting the export controls once the desired objective is achieved to minimize damage to domestic exporters.
So how can the damage to the opposing country be predicted? Several factors can help gauge this. First, the importing country must have high demand for the goods. If these goods are essential to the country and cannot be imported, it faces significant difficulties. While high-demand consumer goods fall into this category, recently products related to large-scale manufacturing or high-tech industries have become the primary targets. These industries have highly complex production processes requiring numerous raw materials and intermediate goods. If problems arise in the procurement process, the entire production flow is affected. The very advantage of production based on global value chains turns into a disadvantage.
Just as completing a large jigsaw puzzle or a massive Lego creation requires specific pieces to fit precisely in specific locations, some components occupy critical positions and are often difficult to substitute with others. Modern high-tech industries operate similarly. Situations where a single component can bring an entire industry to a standstill actually occur. If one country imposes export restrictions, the importing nation must either source the item from another country or begin domestic production. Therefore, the higher the import dependency on a good, the greater the initial damage from export restrictions. However, over time, as import contracts are secured with other nations or domestic production technology is developed, the damage gradually diminishes.

What does it take for export controls to succeed?

Considering these points collectively, the core issue with export controls is the significant difference between short-term and long-term impacts. In the short term, if goods become difficult to obtain, avoiding immediate damage is hard unless sufficient stockpiles were secured beforehand. However, as alternative supplies become available from other countries or substitutes are developed, the damage gradually lessens over time. Economics describes this as low elasticity of supply and demand in the short term, but high elasticity in the long term.
Therefore, the time required to procure the goods from other countries or develop domestic substitutes determines the magnitude of damage caused by export controls. Simultaneously, for the country imposing the controls, this timeframe is the most critical factor determining the policy’s sustained effectiveness. Shortening this time significantly reduces the damage. Conversely, the longer this time takes, the more exponentially the damage increases. The country imposing the export restrictions can also gauge to some extent whether the restricted goods can be purchased from other countries. Ultimately, the effectiveness of export restrictions is determined by the technological level of the country being restricted. The importance of this variable is heightened because information about other countries’ technological capabilities is often opaque and uncertain.
Suppose acquiring the goods from other countries is also difficult. If the targeted country possesses a high technological level, it can significantly reduce the damage from export restrictions by developing the goods directly or creating substitutes within a relatively short period. Conversely, if the technological level is low, damage accumulates over time, making it potentially a better choice to accept the other country’s demands.
If the technological level of the country facing export restrictions is higher than anticipated, the country imposing the restrictions risks shooting itself in the foot. First, its own exporting companies suffer losses due to the restrictions. Furthermore, if the restricted country seizes this opportunity to invest heavily in technological development, the technological gap can rapidly narrow. Should it succeed in developing substitutes, the existing export channels could be completely blocked.
However, accurately assessing another country’s technological level is extremely difficult. A nation’s technological capability is a comprehensive outcome combining the accumulated level of basic science and engineering with the advanced technological capabilities possessed by its companies. Even if the short-term damage is significant, if a country possesses sufficient national capacity, it can substantially raise its technological level within a relatively short time. In such cases, the worst-case scenario could unfold for the country that decided on the export restrictions.
Consequently, it is difficult to predict beforehand whether export restrictions will prove a masterstroke or a blunder. When Japan imposed export restrictions on South Korea in 2019, domestic opinion was sharply divided. Some experts argued that immediately accepting Japan’s demands was advisable to prevent the South Korean economy from facing a severe crisis. Conversely, many contended that since the restrictions were within South Korea’s tolerable range, they should be leveraged as an opportunity to reduce Japan’s influence. The stance of the South Korean government and major corporations directly affected by the restrictions at the time leaned more toward the latter view.
Therefore, predicting the future outcome of the U.S. export restrictions targeting China is also challenging. This is because conclusions can only be approached by comprehensively considering China’s technological level and national-level investment efforts. Clearly, the U.S. judged that pressuring China through export controls offered favorable odds, and China will likewise exert its full strength to overcome this crisis. As these U.S. economic measures are designed to exert long-term pressure on China for security interests, their results are also likely to emerge gradually only after a considerable period of time.
To summarize, the most critical factor determining whether export restrictions become a strategic move or a self-defeating act is the technological level of the targeted country. The outcome is often difficult to gauge in the early stages of export restrictions and frequently only becomes apparent after a considerable period has passed. This characteristic is even more pronounced for measures like U.S. export controls, which aim for long-term pressure. However, in cases where export controls seek to achieve desired outcomes as quickly as possible, the initial strategic responses and choices made by both countries can have a decisive impact on subsequent developments.