Finance Minister Nirmala Sitharaman presented a record 8th consecutive Union Budget on Saturday (February 1, 2025), focusing on four engines: Agriculture, MSME, Investment, and Exports, to drive the goal of Viksit Bharat.

Ms. Sitharaman, hours after presenting the Union Budget in the Parliament, addressed a press conference. She said that there would be no reduction in public spending on capital expenditure. She further said that there would be two amendments made – to the Atomic Energy Act and to Civil Liability for Nuclear Damage Act – aimed at achieving energy security.

Also read: Union Budget 2025 political reactions LIVE

In a relief to taxpayers, Ms. Sitharaman announced that individuals earning up to ₹12 lakh annually will not have to pay any income tax under the new tax regime. Meanwhile, Bihar remained in focus in the presentation of the Union Budget with Finance Minister Nirmala Sitharaman making several announcements for the State, including setting up of a Makhana Board, financial support for western Kosi canal and support for enhancing capacity of IIT Patna.

Also read: Union Budget 2025 industry reactions LIVE

The fiscal deficit for FY25 has been pegged at 4.8% of GDP and at 4.4% for FY26, Finance Minister said. This budget takes Ms. Sitharaman closer to the record of 10 budgets presented by former Prime Minister Morarji Desai over different periods.

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This Atlantic Council Strategy Paper explores the relationship between the status of the United States as a geopolitical superpower and the role of the US dollar as the world’s dominant currency. It examines how these two facets of US power have reinforced each other and how a decline in either of them could trigger a downward cycle in US influence around the world. The report discusses options for how the United States could counteract such trends, relying on its traditional strengths and strategic alliances.

How to keep the dollar at the center of global trade

Over the past eight decades, the status of the United States as an economic and geopolitical superpower and the role of the US dollar as the world’s dominant currency have reinforced each other. As a synonym for the dollar’s preeminent role in international currency transactions and foreign reserve holdings, dollar dominance has long been associated with the United States’ exorbitant privilege to finance large fiscal and current account deficits at low interest rates. This has helped the United States run a large defense budget and conduct extensive military operations abroad. In turn, the United States has used its military capabilities to support the free flow of goods and capital across the globe, boosting global growth while providing investors with confidence that investments in US financial instruments are secure. This virtuous cycle contributed to the long-lasting stability of the post-World War II international order, leading to a sustained rise in economic welfare in the United States and around the world.

As the size of the US economy relative to the rest of the world continues to shrink, this dynamic may begin to be turned on its head. Maintaining a global military presence would be harder to finance in the future if the US dollar were to lose its dominant reserve position, reversing the virtuous cycle and precipitating a US loss in global influence. This is one of the reasons why strategic competitors, such as China and Russia, currently work toward a “dedollarization” of their economic relations and global financial flows more broadly. Although last year’s BRICS summit failed to make progress on an alternative financial order, China and Russia are set on undermining the leading role of the dollar, limiting the United States’ ability to impose sanctions, and making it more costly to service its debt and finance a large defense budget.

There is currently no other currency (or arrangement of currencies) that could challenge the US dollar’s preeminence, however. Even a smaller role of the dollar in global trade transactions would not immediately challenge its reserve currency status, given the lack of investment alternatives in other currencies at a scale comparable to US markets. The dollar has also benefited from strong global network effects that would be difficult to replace (that is, the costs for any country to divest into other currencies remain prohibitively high unless other countries do the same). Nevertheless, the tariff measures recently announced by the Trump administration could lead to a decline in the global use of the dollar, especially if they were accompanied by a decline of trust in the United States as a safe and liquid destination for global financial assets. Similarly, a proposal by the current chair of the Council of Economic Advisers to use tariffs as leverage for negotiating favorable exchange rate parities with US trade partners and to restructure their US Treasury holdings into one-hundred-year bonds—a so-called Mar-a-Lago Accord—would deliberately weaken the dollar to support domestic manufacturing. This could further erode the currency’s global dominance. Both scenarios would involve high costs to the world economy, including for the United States. More fragmented markets and higher financial volatility would be associated with income losses and higher inflation. Facing higher borrowing costs, the United States would be forced to make difficult spending decisions between its military budget, social welfare programs, and other priorities. Its global leadership role would decline, allowing strategic antagonists to benefit from any vacuum that a smaller US role would leave behind.

It is therefore vital to US national security that the dollar retain its role at the center of global trade and financial networks. This paper proposes ways for the United States to maintain the attractiveness of dollar-denominated assets for foreign investors, arguing for a speedy resolution of tariff disputes that have a strong potential to weaken its global standing. It underscores the need to compensate for a relative decline in US economic and military capabilities with strong alliances, which would deny China and other autocratic states a strategic opportunity to weaken the United States’ influence on the world stage and the exorbitant privilege that the dollar’s role as the global reserve currency still confers.

A cargo ship docked at an industrial port in Hong Kong alongside shipping containers. Source: Unsplash/Timelab.

Strategic context

For the past eighty years, the United States’ economic and geopolitical preeminence and the role of the US dollar as the world’s dominant currency have contributed to a vast increase in global trade and capital flows. The “exorbitant privilege” to finance large fiscal and current account deficits at low interest rates helped the United States maintain its large geopolitical footprint, which contributed to the stability of the environment fostering global commerce and investment. However, as the center of the world’s population and economic activity has been shifting toward Asia and Africa, the virtuous cycle supporting the US-led global architecture threatens to come to an end, giving way to greater economic and geopolitical volatility.

The exorbitant privilege

The US dollar’s rise as a global reserve currency dates back to about a century ago, when the British empire was in decline after World War I. The United States had become the world’s agricultural and manufacturing powerhouse, its largest trading nation, and a major source of foreign capital around the globe. It was natural for the dollar to also become one of the major currencies used for international transactions, and it eventually started to replace the pound as central banks began to hold larger shares of their reserves in dollars in the late 1920s. The transfer was backed by the economic dynamism of the world’s richest democracy and, after 1945, its might as a victorious military power.

In the early years after World War II, the dollar was the anchor for the Bretton Woods system of fixed exchange rates, established on a US promise to exchange dollars for gold at a fixed parity. It became increasingly clear, however, that the gold-based system was not adequate for a fast-growing global economy that underwent a gradual liberalization of capital flows. In the meantime, French government officials accused the United States of exploiting the status of the dollar to run up large fiscal deficits (driven by the costs of the Vietnam war), a phenomenon they dubbed the “exorbitant privilege.” However, when the United States under President Richard Nixon decided to take the dollar off its gold parity in 1971, this did not provoke a major flight away from the US dollar—on the contrary, the dollar itself had by then become the anchor for the global financial system.

Today, more than fifty years after the “Nixon shock,” the United States still benefits from the dollar’s leading role in the global economy, even as the relative size of the US economy has shrunk. Until recently, dollar payments accounted for 96 percent of trade in the Americas, 74 percent in the Asia-Pacific region, and 79 percent in the rest of the world outside Europe. About 60 percent of global official foreign reserves were held in dollars, and about 60 percent of international currency claims (primarily loans) and liabilities (deposits) were denominated in dollars. The United States was the world’s largest investment destination, with foreign direct investment (FDI) totaling $12.8 trillion. Inward FDI flows have increased five-fold in the last three decades with $311 billion in new investment in 2023 (see Figures 1 and 2).

Figure 1. Inflows of foreign direct investment (FDI) to the United States were the same in 2000 and in 2023 (in millions of dollars)

Source: World Bank data, 2025, https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?end=2023&locations=US&start=2000&view=chart.

Figure 2. Stock of FDI in the United States has increased five-fold since 2000 (on a historical cost basis, in trillions of dollars)

Source: Statista data, 2025, https://www.statista.com/statistics/188870/foreign-direct-investment-in-the-united-states-since-1990/. Note: Under the historical cost basis of accounting, assets and liabilities are recorded at their values when first acquired.

In an era of floating exchange rates and liberalized capital markets, one should nevertheless be realistic about the benefits the dollar’s status as a reserve currency. It is true that the United States can borrow exclusively in its own currency; it also enjoys somewhat lower interest costs because other countries’ official reserves are being invested in US Treasury securities; and it generates seigniorage income from dollars being held abroad. But real interest rates among the advanced economies have moved broadly in tandem in recent years, and estimates for the interest savings on US treasury bonds due to the US dollar’s reserve currency status amounted to some 10 to 30 basis points at best. The exorbitant privilege therefore seems to lie mostly in the volume of debt the US government can borrow without incurring higher interest rates. One recent estimate, for example, suggests that the reserve currency status of the US dollar increases the sustainable level of US government debt by 22 percent.

US deficit financing

The large size of the US economy and demand for US government securities have made US financial markets the deepest and most liquid markets in the world, with about $27.4 trillion in outstanding US government debt as of July 2024. This has been supported by strong institutions and a transparent regulatory environment, the absence of capital flow restrictions, and the wide range of services offered by the US financial industry, which all have attracted foreign capital into the United States. The importance of US debt markets was also evident during times of crisis when global shocks tended to trigger a “flight to safety” into US assets.

The market depth and safety of US dollar assets are features that traditionally distinguished the United States from other major economies that also have large financial markets and issue bonds primarily in their own currency, such as the euro area, Japan, or the United Kingdom. Moreover, these countries do not have their own means to guarantee their geopolitical security; they depend on alliances with the United States as the ultimate sovereign guarantor. This is in large part a function of US military strength and the US nuclear arsenal, backing up NATO’s credibility as a collective defense organization. Although these factors used to be rarely invoked as an explicit factor in investment decisions, investors’ trust in the ability of the United States to preserve its dynamic economy and honor its financial obligations even during times of conflict lies at the heart of the US dollar’s global dominance.

The strong preference of investors for US dollar assets allowed the United States to run permanent current account deficits in recent decades, driven both by government spending and the low saving preferences of its households. As a side effect, the United States has often functioned as a “locomotive” for the global economy, providing growth impulses for export-oriented economies such as China, Japan, or Germany, whose high saving rates and current account surpluses are the counterpart to US deficits. Moreover, for many years, differences in the composition of US financial assets (largely FDI and other equity) and liabilities (lower-yielding bonds) provided the United States with a positive foreign income balance despite the growing amount of net foreign liabilities.

Will the good times last?

Even before the current administration sought to reorient global trade patterns by imposing tariffs on allies and other trading partners alike, the question was whether and how long the United States would be able to hold on to the dollar’s dominant role. There were several developments that pointed to a more difficult future ahead, including demographics, geopolitics, and technological trends. Already at that time, however, it was clear that domestic policy choices would ultimately determine whether the United States would hit a limit in the willingness of foreign investors to finance its rising liabilities vis-à-vis the rest of the world.

First, while the US dollar is still the world’s leading reserve currency, its share in central banks’ reserve holdings has gradually fallen in recent years. The dollar’s share declined from around 70 percent in the 2000s to 60 percent in 2022, when it was followed by the euro (20 percent) and several currencies in the single digits, including the yen, pound, and Chinese renminbi. The renminbi has gained some market share as a reserve currency in recent years; yet China, with its closed capital account and politically uncertain investment climate, has not been able to significantly increase international use of its currency. Instead, most gains have been made by a range of smaller currencies, including the Australian and Canadian dollars, reflecting digital technologies that have facilitated bilateral transactions without involving the US dollar as a bridge currency. Smaller currencies may indeed continue to gain market share, but there could also be other shifts in the global reserve composition, depending on the further evolution and impact of US trade and sanctions policies. The rise in gold prices, for example, has been attributed to central banks increasing their holdings within their reserve portfolios.

Second, US net foreign liabilities have increased sharply since the global financial crisis, increasing to about 70 percent of gross domestic product (GDP) by 2023. To put this in perspective, only Greece, Ireland, and Portugal are larger net debtors among industrial and emerging economies, and US net liabilities are equal to 90 percent of the net assets of all creditor countries combined. Since current account deficits have generally been modest over the past decade, the decline owes to valuation changes stemming from the strong performance of US equity markets relative to international markets, increasing the wealth of foreign investors holding US stocks. To serve these net liabilities, foreigners implicitly expect US companies to remain highly profitable and the United States therefore to run larger trade surpluses going forward. With the dollar gradually appreciating in recent years, it remains to be seen whether these expectations can be met or whether foreign investors will reduce their net holdings of US assets. The increasing negative interest balance (and the fact that much of the positive net returns on FDI were due to profit shifting into Ireland and other low-tax foreign domiciles) has caused some to argue that the extraordinary privilege is no longer in existence.

Third, prospects of continued large budget deficits could make it more costly to finance US government debt in the future. The Congressional Budget Office (CBO) has projected US budget deficits to remain above 6 percent of gross domestic product (GDP) over the coming years. This projection is made on the basis of current law, that is, assuming the expiration of both the 2017 Tax Cuts and Jobs Act (TCJA) passed during the first Trump administration and the healthcare subsidies passed during the Obama administration. Even under this optimistic assumption, government debt is projected to rise from 98 percent of GDP in 2024 to 118 percent of GDP in 2035. While the current administration has vowed to impose significant expenditure reductions to accompany the presumed extension of the 2017 tax cuts, failure to reduce the US deficit could drive long-term interest rates higher in coming years.

Even so, until recently, it seemed too early to worry about the safe asset status of US government securities per se. This was in large part because there are currently no instruments that could match the role of US government securities at comparable volumes. However, the stability of US debt dynamics rests in no small measure on the continued performance of the US economy, which in turn depends on strong institutions and sound economic policies. History shows that political polarization has the potential to undermine both of these pillars, a warning that would be important for the US government to heed while it is reducing government functions and cutting back its public workforce. As Steven B. Kamin and Mark Sobel write, “partisan divisions, political dysfunction, and the resultant inability to cope with the nation’s challenges” should be considered the main risks to long-term US economic prospects and dollar dominance. The administration’s willingness to risk a deep recession to launch an elusive manufacturing renaissance in the United States plays precisely into those concerns.

Even before April 2025, trade restrictions had significantly increased in recent years after declining for most of the twentieth century. The geoeconomic fragmentation driven by the COVID-19 pandemic, Russia’s war of aggression in Ukraine and, most recently, economic tensions between the United States and China, could now drive a major reorganization of global economic and financial relationships into separate blocs with diminishing overlap. A study by the International Monetary Fund (IMF) estimates that greater international trade restrictions could reduce global economic output up to 7 percent. In case of a wider trade conflict, smaller countries could be increasingly forced to choose sides, with those moving closer to China likely aligning their currency use for international transactions and reserves away from the US dollar and the euro.

Fifth, the United States has used sanctions as a tool of foreign policy, particularly against Russia in the wake of its 2022 invasion of Ukraine. This led to the suspension of trading in US dollars on the Moscow Exchange (MOEX), disrupting financial operations not only within Russia, but also affecting other international market players as a result of the extraterritorial nature of the US sanctions. Since 2014, following the sanctions related to the annexation of Crimea, Russia has increased its use of the Chinese yuan, which became MOEX’s most-traded currency (54 percent in May 2024). Concerns about their bilateral trade relations with Russia and China have other countries looking for alternatives to mitigate possible risks associated with US dollar transactions, for example, in the BRICS grouping, which is set to further expand its membership of emerging market economies in coming years. If accompanied by bilateral tariff increases, as currently envisaged by the Trump administration, this could have further implications for the dollar’s role in global trade transactions.

Finally, in the context of a geopolitical fallout, potential tariffs between the United States and the EU could significantly impact the transatlantic economy, which remains the most important bilateral trade and investment relationship for both partners. For example, a 10 percent universal tariff on all US imports is projected to reduce EU exports to the US market by one-third, and subsequent retaliation could similarly hurt US exporters. Higher interest rates in response to tariff-induced inflation would have additional growth implications. All this could heavily weigh on financial markets on both sides of the Atlantic, further reducing the attractiveness of US dollar-denominated assets.

Limits to military superiority

Any developments that weaken the US economy and the role of the dollar could also affect the United States’ ability to preserve its military superiority. China is in the middle of an extraordinary defense buildup that is challenging US strategic positions in the Indo-Pacific theater. Moreover, the Ukraine war has led to stepped-up cooperation between Russia, Iran, and North Korea (which has been contributing troops to compensate for Russia’s losses), and China increasingly supports Russia’s armament efforts by supplying it with drones and dual-use technology.

The United States and Europe have also been pushed on the defensive in Africa as China, especially, has made strategic inroads there, as have Russia, India, and countries in the Persian Gulf. Many countries are looking to China for help in developing their energy and transport infrastructure, imports of low-cost consumer and investment goods, and market access for their own exports, allowing the use of strategic ports and other locations in exchange.

At the same time, China has a hold on supply chains involving critical raw materials, controlling 85 percent of the world’s refined rare earth materials, which are crucial for high-tech military technologies. If made unavailable to the United States, this could significantly complicate the production of advanced weaponry. The global processing capacity for critical raw materials is also highly concentrated in China, providing it with means to influence market prices and access, and creating supply chain vulnerabilities and dependencies.

Advances in military technology toward low-cost weapons, lower procurement costs in competitor countries, and a relative decline in US manufacturing capabilities (e.g., in shipbuilding) pose significant challenges to US military strength. While the United States retains a large nominal advantage in military spending over other competitors, the discrepancy is smaller when considering cost differences; in other words, the United States has a smaller advantage in real terms than suggested by simple budget comparisons (see Figure 3).

Figure 3. Combined military spending by China, Russia, and India outstrips the US when calculated by purchasing power parity (2019, in billions of dollars)

Source: Peter Robertson, “Debating defense budgets: Why military purchasing power parity matters,” Column, VoxEU portal, Centre for Economic and Policy Research, October 9, 2021, https://cepr.org/voxeu/columns/debating-defence-budgets-why-military-purchasing-power-parity-matters.

In fact, a recent congressional review of US defense strategy has raised concerns that the United States is not ready for a multifront war spanning theaters in Europe and Asia. US forces have also been slow to adopt new battlefield technologies, including a trend toward autonomous weapons systems, which will take considerable time to redress. In addition, the end of the New START treaty in 2026 could trigger a nuclear arms race that would force the United States to expand its nuclear forces after decades of deep cuts.

While the United States is still the only country able to project military power at any point in the world, it is unlikely to be able to respond to these challenges on its own. The room to dedicate additional fiscal means to the US defense budget is increasingly circumscribed by growing interest and entitlement spending (see Figure 4), and even under optimistic assumptions, there is a risk of strategic overreach for the United States, given the magnitude of challenges across different regional theaters.

Figure 4. Projected federal outlays show entitlement spending and growing interest may curb defense spending (2025, as a percentage of federal revenues)

Source: Congressional Budget Office, The Long-Term Budget Outlook: 2025 to 2055, CBO, March 2025, https://www.cbo.gov/publication/61270, and calculations by the author.

While US presidents have long called for European nations to play a bigger part in their own defense, the second Trump administration has ramped up the pressure on NATO allies to take on a larger military role and financing burden in the European theater. However, raising the combat readiness of European armed forces will require several years under the best of circumstances. Unless the United States is willing to cede military dominance in Europe to Russia, it will need to continue supporting its European allies—including in arms production, securing supply chains, and military burden sharing—for the foreseeable future.

If the United States were to forgo a deepening of its alliances in Europe and become outmatched by China in Asia, it could in principle still benefit from the relative safety of its continental geography. However, it would face a loss of military stature and reduced global reach. No longer being a global hegemon, the United States would not be able to protect global trade and financial flows in the way it has done in the past, hurting itself and other economies that similarly benefited from open trade. The United States would leave a vacuum of power that would most likely be filled by China and other autocratic countries, with detrimental effects for its own security and economic stability.

Goals

This paper proposes a strategy to preserve the US dollar’s lead role in international markets, allowing it to continue attracting foreign capital at favorable interest rates. As laid out above, the dominant role of the US dollar has been a key element in a decades-long virtuous cycle that allowed the United States to finance its large military apparatus while expanding its social safety net and keeping a low tax burden.

With the rise in public debt and the sharp increase in net international liabilities, this cycle cannot continue indefinitely. The time has come for the United States to begin reining in deficit spending and rebuilding its fiscal position. Notwithstanding the Trump administration’s commitment to this objective, this process will take time, given continued pressure on defense and entitlement spending. Continued dollar dominance would therefore be critical for keeping a lid on interest rates while nurturing a political consensus that could lead to a lasting decline in government deficits over several administrations.

Continued dollar dominance would also be beneficial from a geopolitical perspective, providing the United States with leverage in shaping the future of global finance, leadership in multilateral organizations, and the continued possibility of sanctioning opponents to raise the cost of acting against US interests. Having said that, the United States’ ability to dominate global developments on its own will likely continue to diminish. To maintain and reap the full benefits of the dollar as a reserve currency, it will need to rely more on networks with countries that have trade, financial, and security interests that align with those of its own. These networks evolve around shared interests, and they will only thrive in an environment of mutual respect and give-and-take.

Breaking up such networks by way of a US isolationist withdrawal—the possibility of which is as high as it has been at any time in the past century—would trigger a fragmentation of the global economic and security landscape with large losses in general welfare (i.e., prosperity and well-being) both in the United States and abroad. It would accelerate the decline in the dollar’s reserve status as it could force countries to fundamentally rethink their security arrangements, possibly leading to a reorientation of trading and financial relationships toward China and other illiberal states.

In fostering US interests, the objective for US policymakers should therefore be to maximize the mutual advantages accruing from working with countries that benefit from the United States’ global economic and security footprint, as well as the stability provided by the dollar as a leading currency. If the United States manages to pursue its domestic interests while remaining at the center of a network of powerful alliances, the dollar’s reserve currency status and its exorbitant privilege could serve US interests for years to come.

Major elements of the strategy

In principle, the new US administration has a strong opportunity to address the geopolitical challenges facing the United States, given its decisive electoral victory and control over both houses of Congress. While there is clearly a risk that ideological priorities might preempt serious work on other issues, the presence of growing external threats should eventually refocus attention on several objectives that would be in the strategic national interest.

Foster strong and robust long-term growth

The first objective coincides with one of the administration’s key priorities, namely, to create the conditions for strong US economic growth and employment over the long term. This is a necessary condition for the United States to retain its economic and military superpower status: Without a strong economy, the burden of maintaining a global footprint would eventually become suffocating and capital would become increasingly unavailable to support a growing debt burden. In the worst case, the United States would follow the example of the United Kingdom, whose leading global status was gradually eclipsed by other powers during the last century (see Figure 5).

Figure 5. China’s GDP growth rates have outpaced those of the United States and the European Union for more than two decades (2000–2024, measured at constant prices)

Source: “World Economic Outlook Database,” International Monetary Fund, accessed March 1, 2025, https://www.imf.org/en/Publications/WEO/weo-database/2023/October/select-country-group.

The question is how the dynamism of the US economy can be maintained against the background of weakening demographics, rapid technological change, and fragmenting global trade. These trends challenge the business model of established US companies, especially those competing against Chinese or other firms that benefit from the tools of state capitalism being deployed by their home countries. Moreover, supply chains for critical raw materials and intermediate products seem more tenuous in the future, given the dominant position of China in key industries.

From a trade perspective, there are two considerations that the administration should have balanced. On the one hand, firms should be allowed to continue to operate in an open and competitive market environment that rewards innovation and efficiency, in turn allowing the United States to reap the productivity gains necessary to generate future gains in income and welfare. On the other hand, it would be naive to expect US companies (or industries) to thrive in sectors where state-backed competitors enjoy large-scale cost advantages due to extensive subsidies or other forms of state support. This suggests that the new administration should have avoided a protectionist trade stance, shielding a large part of the US economy from foreign competition. However, it should also have been prepared to stave off an economic decline of sectors that could be critical for long-term economic or military purposes.

In early April, however, the administration took an opposite approach by raising tariffs on almost all other countries in proportion to bilateral trade imbalances. (Many of the highest tariff rates were temporarily paused a week later, leaving a 10 percent rate on most of the world for now.) Apart from their economic and financial fallout, these measures are unlikely to significantly reduce the overall US trade deficit, given (a) the substantial difference in domestic saving rates between the United States and large trading partners; (b) retaliatory measures taken by many countries; and (c) trade diversions and exchange-rate adjustments that will counter some of the effects of the tariffs.

It remains to be seen whether investment in the United States will pick up to a significant extent, given the uncertainty about the extent and duration of the trade restrictions currently in place. Moreover, labor-intensive manufacturing industries will have a hard time regaining a footing in the United States, given the falling costs of automation and persistent labor cost differentials with emerging markets and developing countries. A major plank of a strategy to boost employment and long-term growth should therefore lie in a speedy resolution of trade negotiations and a reduction in bilateral tariff rates between the United States and its largest trading partners, particularly Europe, Japan, and China.

The United States should also focus its industrial policy on boosting innovation, protecting or regaining technological advantages, especially in artificial intelligence (AI) and quantum computing, preserving access to supply chains and export markets, and maintaining strategic production capacities, preferably in conjunction with its European and Asian allies.

Beyond trade policies, there is a much larger agenda to strengthen the growth fundamentals of the US economy. This includes building a growing and better educated workforce that can translate AI and other innovative technologies into commercial products that can be sold in a global marketplace. Given the significant returns to scale in digital technologies, the United States should ensure that its institutions are strong enough to ensure a fair and transparent marketplace and combat monopolistic practices.

All of this would help the United States preserve its productivity advantage vis-à-vis the rest of the world, a key condition for durable real wage growth and rising living standards. To ensure that gains are distributed broadly throughout society, the expiration of key provisions of the 2017 TCJA provides an opportunity to boost incentives for new investment and labor-market participation while generating additional revenues from higher incomes and economic rents.

Moreover, while the new administration has a critical view toward illegal immigration, cutting off the legal flow of well-educated foreign students and productive workers into the United States, a key ingredient for its past economic success, would be an unforgivable own goal.

Street view of the US Department of the Treasury building in Washington, D.C. Source: Unsplash/Connor Gan.

Regain fiscal room to maneuver

Despite the projected increases of US government debt in coming years, the United States has been able to easily finance large deficits and is expected to do so in the future. However, the increasing amount of outstanding debt, as well as the rise in the average interest rate paid by the federal government, are constraining the budgetary room for new initiatives by the incoming administration. The share of discretionary spending—that is, spending not mandated by debt obligations or entitlement programs such as Social Security and Medicare—has already fallen from around 50 percent in the 1990s to below 30 percent today. As this share is projected to shrink further over the coming years, the trade-off between defense spending (which currently accounts for about half of all discretionary expenditure) and other priorities (such as infrastructure spending) is becoming stronger.

Everything else equal, reining in the fiscal deficit would therefore have a positive impact on long-term interest rates and crowd in private investment, a key ingredient for long-term growth. Although the creditworthiness of the United States is not yet in doubt, the increase in US government bond yields after the 2021 inflation scare, as well as the rise in bond yields after the April tariff announcements, has been a wake-up call, indicating a departure from the low-interest environment of the 2010s. It also increased the cost of private-sector investment, including higher mortgage rates that have contributed to a significant drop in new housing construction.

The first-best option to realize budgetary savings would be on the back of sustained robust growth, as discussed in the previous section, whereas deficit-financed tax cuts or spending increases would deepen the United States’ long-term fiscal quandary. Fiscal policy should instead focus on enhancing the efficiency of the tax system and reducing public expenditure—especially in the health sector, where the United States outspends other advanced economies by a large margin while achieving inferior outcomes.

However, imposing across-the-board spending cuts and labor-force reductions are not a proven tool to generate significant fiscal savings. They have a relatively small budgetary effect but a possibly significant impact on the government’s ability to function, which will eventually have to be rectified through new hirings. Given the demographic trajectory, there also is a need at some point for better targeting or changing the economic parameters of US entitlement programs (the “third rail” of US politics), but with continued dollar dominance, the United States would still have the space for a gradual phase-in of policy reforms.

Maintain deep and liquid financial markets

US financial markets are attractive to foreign investors because of their openness and underpinning by transparent and market-friendly rules established by US law. As a result, foreign portfolio holdings in US equities amounted to $13.7 trillion in 2023, and foreign investors owned $7.6 trillion in Treasury securities, equivalent to about a third of publicly held federal debt. Moreover, foreign deposits in the US banking system have steadily risen to about $8 trillion in 2024, highlighting the important role of foreign capital for the functioning of the US economy. Besides maintaining a welcoming framework for foreign investors, the United States will also need to ensure that financial market regulations remain effective and stay up to date with technological developments.

The more volatile geopolitical and economic environment has already tested the resilience of US financial markets, and both regulators and private entities should be prepared to deal with future shocks. As in other advanced economies, for example, US banking regulations have considerably tightened since the 2007–2009 global financial crisis; but the failures of Silicon Valley Bank and several other midsize institutions have revealed continued supervisory problems. US and European regulators were close to concluding an extension of the Basel Accord (Basel 3.1), but momentum has been lost given strong resistance by the financial industry on both sides of the Atlantic. Even if the new administration were unwilling to pursue negotiations within the Basel Committee, or planning to consolidate regulatory agencies, it must not lose focus on ensuring that banks remain well-run and adequately capitalized.

In a similar vein, there have been episodes in recent years when liquidity in US government bond markets collapsed, threatening to severely disrupt the workings of the global economy (with daily trading volumes in the Treasury bond market averaging $600 billion in 2023). Both the September 2019 repo crisis and the March 2020 meltdown required emergency intervention from the Federal Reserve system to keep the markets operational. Changes to the functioning of markets, including channeling a larger number of transactions through clearing agencies and improving transparency, should help reduce uncertainty during times of crisis, provided they are left in place by the new administration.

This, of course, assumes that there are no policy accidents, such as the US Congress not authorizing a debt ceiling increase, which could lead the United States to default on its government bonds and seriously undermine the US dollar’s standing abroad. Similarly, a forced change in the terms of US government bonds as has been proposed by some analysts, especially if directed at foreign investors, carries the risk of a large repricing of US financial instruments that could be traumatic for financial markets worldwide.

In the realm of financial regulation, the United States had until recently taken a conservative approach to innovative technologies such as stablecoins and cryptocurrencies. A 2022 report by the Financial Stability Oversight Council found that activities involving crypto assets “could pose risks to the stability of the US financial system if their interconnections with the traditional financial system or their overall scale were to grow without adherence to or being paired with appropriate regulation, including enforcement of the existing regulatory structure.”

The new administration has adopted a more welcoming approach, with several crypto proponents taking on key roles in US regulatory agencies. This pro-cryptocurrency stance may well lead to stronger innovation, but it could also contribute to heightened market fluctuations and uncertainties. Even under a lighter touch, new rules and regulations are likely to emerge from this transition phase. While this will pose some compliance challenges for companies, it will still be important to balance innovation with financial stability concerns. Introducing appropriate safeguards and maintaining a strong commitment to ethical practices will prove essential for helping businesses navigate the evolving landscape, build trust with consumers and regulators, and ensure the long-term success of digital payments.

By contrast, the Trump administration’s negative stance on the creation of a US central bank digital currency (CBDC) creates a potential risk to the dollar’s global standing. While there is indeed no clear use case for a CBDC at present, and adoption of retail CBDCs in most countries so far has been small, technological developments in this area are hard to predict. The United States might prefer to foster US dollar-based stablecoins rather than a CBDC to cement the dominant role of the dollar, but there is a risk that it could fall behind if a large number of other countries were to shift to CBDC-based settlement technologies. Moreover, given the challenging nature of digital currencies, the United States would not be able to shape international regulations that promote the efficient use of CBDCs and address critical concerns related to money laundering, fraud, and consumer protection.

Strengthen relations with emerging markets and developing countries

As the United States and Europe vie to preserve their geopolitical primacy against the onslaught from Russia and China, it is important to keep in mind that the world’s demographic center of gravity has already begun to shift toward Africa, India, and Southeast Asia. The geopolitical weight of these regions is still relatively modest, but their economic role is expected to steadily increase due to powerful demographics. Compared to China, the United States has been slow to recognize the importance of intensified trade relations with countries that may relatively soon become key export markets for US companies and engines for global growth.

Not long ago, the United States and other industrial countries were the major source for development finance, including through bilateral aid and in their role as majority shareholders in the Bretton Woods Institutions. The results of this decades-long engagement were decidedly mixed, however. Numerous large emerging-market countries thrived after the crises of the 1990s, but loans to many developing countries turned sour as countries failed to sustainably generate increases in per capita incomes. Member countries of the Organisation for Economic Co-operation and Development (OECD) consistently missed their targets for grants and other development aid, and developing countries have accused the industrialized world of not providing adequate compensation for the damage caused by past CO2 emissions.

China has used this opportunity to project itself as a friend and partner for many developing countries. Deploying its ample foreign exchange reserves (which it has been keen to direct away from US Treasury bonds), China’s Belt and Road Initiative has financed investment projects in resource-rich and strategically located developing countries—surpassing one trillion dollars—deepening trade and political relationships in a way that the West has been unwilling to match, and making China the world’s largest debt collector. China has leveraged these relationships to secure access to critical minerals and set itself up as the market leader in their processing and refining, gaining geopolitical leverage against the United States in the event of a future trade war. China has also received considerable diplomatic support from developing countries for its policy of unification with Taiwan.

The United States and its Western partners should urgently contest China’s position as an informal leader of the developing world. There is space to do so, as many countries have been disillusioned by China’s self-interested motives, which have often left them with badly executed infrastructure projects and high debt that proved difficult to restructure. To be successful, however, the United States and its allies must increase the speed and volume of their engagement with developing countries, offering projects and loans that exceed those of Chinese lenders in quality while being competitive in cost and timeliness. The Trump administration should therefore advance the planned restructuring of the former US Agency for International Development (USAID) under the State Department or the Development Finance Corporation (DFC), resuming support for partner countries in need of economic assistance.

Moreover, given tight national budget constraints, the Bretton Woods institutions should be more tightly integrated in a strategy to support friendly countries in the developing world. To do so successfully, they will need to remain firmly under Western control. However, to preserve their legitimacy as international institutions, they will need to stay focused on their essential mandates, which still enjoy widespread support.

However, the past few decades have shown that a strategy based merely on loans and development aid is not enough. Developing countries also require better market access to boost exports and raise their growth trajectories. While this will be hard to legislate both in the United States and Europe, there could be significant long-term benefits from a gradual market opening. First, it would preempt Chinese companies from cornering markets in countries with strong population growth, and second, pressures for migration could diminish as income in source countries would rise over time. Taking the long view, healthy trade and investment relations with the dynamic economies of tomorrow would benefit the standing of the US dollar.

Finally, the use of sanctions as a tool to achieve geopolitical objectives is a double-edged sword, and they should be used in a more targeted and sustained manner. The primacy of the dollar enables the United States to effectively exclude targeted individuals and economies from the global financial system. However, the effectiveness of sanctions declines over time as actors find ways to circumvent them; at worst, the broad application of sanctions against other countries can lead to a reorientation of global trade and financial relations that could undermine the dollar’s preeminence. For example, the desire of BRICS countries to develop alternatives to the use of the dollar may be inconsequential at present, but it could eventually become one of many factors that relegate the dollar to a less dominant position in global payments and reserve arrangements.

Preserve military superiority

The US National Security Strategy (NSS) recognizes China as a major national security challenge, emphasizing its ambition and capacity to alter the rules-based international order. As a result, the 2022 National Defense Strategy (NDS) focuses on bolstering US deterrence against China, with a strong emphasis on collaboration with allies and partners. Russia also poses a direct threat to US and transatlantic security, particularly in light of its invasion of Ukraine and the resurgence of traditional warfare in Europe. Additional challenges include threats from North Korea, Iran, and terrorist organizations as well as the rise of authoritarian powers, disruptive technological advancements, global economic inequality, pandemics, and climate change.

To preserve its power, strengthen deterrence, and build an enduring advantage, the United States should better integrate its military efforts with the other instruments of national power, such as economics and diplomacy. In an era defined by strategic competition and the rapid diffusion of disruptive technologies, preserving technological superiority is essential. This requires robust investment in research and development, particularly in innovative technologies like advanced weapons systems, satellites, AI, autonomous systems, and human-machine teaming to enhance the efficiency and effectiveness of US military forces.

The US defense budget, which was $816 billion in 2023 (see Figure 6), constitutes about 40 percent of global military spending and is projected to increase by 10 percent by 2038 (after adjusting for inflation), reaching $922 billion (in 2024 dollars), according to the CBO; 70 percent of that increase would go to compensate military personnel and pay for operations and maintenance. However, defense spending comprises 3.5 percent of US GDP, down from 5.9 percent in 1989, and 13.3 percent of the federal budget compared to 26.4 percent in 1989 (see Figure 7).

Figure 6. US military spending has increased sixfold from 1980 to 2023 (in billions of dollars)

Source: SIPRI military expenditure database, https://www.sipri.org/databases/milex.

Figure 7. US military spending has remained steady as a percentage of GDP but fallen as a share of federal spending (1980–2023)

Source: Peter G. Peterson Foundation, https://www.pgpf.org/article/chart-pack-defense-spending/.

During the first Trump administration, the US defense budget saw significant increases focusing on military modernization and development of new technologies, as well as the creation of the Space Force as a new branch of the military aimed at addressing emerging threats in space. The second Trump administration will likely focus on increasing defense budgets as the “peace through strength” doctrine advocates for a robust military presence to strengthen deterrence.

Aligning defense spending with the goals of the NDS requires prioritization of investment in nuclear modernization, missile defense and defeat programs, and resource allocations across air, sea, and land forces in line with strategic objectives, ensuring the efficient use of budgetary appropriations with a focus on the quality of military capabilities over quantity.

This effort would help sustain the global dominance of the US dollar by deterring geopolitical challenges and ensuring stability in international financial and trade systems, minimizing economic coercion, and reassuring global investors of the security and profitability of the US market. The US Navy plays a crucial role in securing global trade routes by keeping sea lanes open, facilitating the free flow of goods and capital. Additionally, strategic alliances and security arrangements with key oil-producing nations, particularly the Gulf states and Saudi Arabia, reinforce the petrodollar system, sustaining global demand for the US dollar in energy markets. Furthermore, US military and geopolitical strength underpin the credibility of economic sanctions, a critical tool of financial influence and dollar dominance.

Leverage military alliances

The 2022 US NSS emphasized alliances and partnerships as fundamental aspects of the US foreign policy to maintain a competitive edge in an era of strategic competition, including military collaboration, economic partnerships, and diplomatic interactions throughout the transatlantic and Indo-Pacific regions. In this aspect, strengthening relationships with key partners such as India and Japan is regarded as pivotal in addressing China’s increased influence. This includes joint military exercises, as well as sharing intelligence, and combining resources for defense initiatives.

The United States should collaborate with allies to create a secure environment by prioritizing comprehensive resilience in a community that can effectively respond to any security or defense crisis posed by adversaries, authoritarian regimes, malign state and nonstate actors, disruptive technologies, or threatening global events such as pandemics and climate change.

To bolster national security, strengthen military capabilities, foster economic resilience, and maintain global competitiveness, the US administration must prioritize a robust division of labor and responsibilities across key strategic areas, such as manufacturing, military operations, supply chain management, and weapons production. The division of labor with allies and partners enhances further efficiency and productivity, allowing partners to focus on their strengths, streamlining processes in specialized manufacturing companies while reducing costs, and providing access to advanced technologies critical for national defense. Pooling resources and know-how enables allies to share advanced technologies, coordinate and streamline production processes, and build strategic stockpiles.

Collaboration with allies plays a vital role in fostering resilient and redundant supply chains that are critical for diversifying sources of critical materials and reducing vulnerabilities in the face of global disruptions; it also fortifies national defense while promoting mutual security and economic stability. Securing critical supply chains is crucial to safeguard national security and the US administration should develop a National Defense Industrial Strategy to coordinate efforts across government agencies to prioritize resilience and protect the integrity of supply chains critical to defense manufacturing and operations.

Some elements of the above are already in place but need further enhancement and stronger commitment, particularly by leveraging economic opportunities. The United States must align economic and security interests within its alliances. Strengthening NATO’s economic coordination can ensure allies remain integrated into the dollar-based system through trade and defense procurement; it also can promote dollar-based investments in European defense, especially as European NATO partners are committing more resources to the defense sector.

Similarly, an expansion of international alliances and cooperation with a larger number of countries would reinforce dollar-based trade conditions in security agreements and promote standardization with US financial institutions among Indo-Pacific partners. Recommended actions include:

Expanding the AUKUS security pact (with Australia and the United Kingdom) and the role of the “Quad” alliance (including Australia, India, and Japan) in economic security.

Enhancing naval cooperation in key maritime regions and with nations that control strategic trade chokepoints.

Increasing coordination through a strategic allied council, as warranted.

In addition, effective communication would be essential to articulate the nature of the threat with clarity and promote credible narratives to safeguard the information space against propaganda campaigns, cyber influence operations, and the weaponization of social media. Proactive information strategies devoted to strengthening partnerships with like-minded democratic nations can protect public trust and reinforce resilience.

The bull sculpture in front of the Shenzhen Stock Exchange in Shenzhen, China. Source: Shutterstock.

Assumptions and alternatives

This strategy paper is based on several assumptions that are central to its proposals and the period over which they should be implemented.

First, there is no fundamental change in the principal characteristics of the Chinese economy, namely a heavy degree of state intervention and a closed capital account. India is also assumed to maintain capital account restrictions, and Europe will not implement a single capital market for some time. A change in these conditions could prompt some reserve flows into the respective currencies, but it would still be deemed unlikely that capital markets in these countries would evolve to a point where they could compete with the United States in depth and liquidity.

Second, US deterrence in key military theaters (Europe, South China Sea, Korean Peninsula) will remain effective for the time being, and the United States does not get drawn into an active military conflict, for example, over Taiwan. Otherwise, the United States would have to shift toward a more decisive and short-term war strategy.

Third, the United States remains dominant, or at least competitive, in developing critical technologies such as AI, microchip production, cryptology, and communications. It will be able to defend strategic assets, such as major military bases, carrier groups, space technology, or command, control, and communications (C3) infrastructure, against physical or virtual attacks. Failure to do so would make the United States more dependent on the technological capacities of its allies, requiring more effective coordination and systems integration that would be hard to achieve over a short time horizon.

Fourth, another important assumption is that the new administration will also realize that the United States is indeed lacking the resources to remain the sole military hegemon for much longer. Adopting a more realistic approach will not come without challenges to its own credibility, as the wider US public has yet to realize that technological progress has narrowed the military advantage held by the United States over its competitors, that the room for discretionary government spending could narrow dramatically over the coming years, and that US manufacturing would not be capable of supporting a major military conflict for long. In the event of a future conflict, public support for the Trump administration, or for any US government down the road, could evaporate quickly if these expectations were not corrected through public communication in good time.

The new administration may fear that collaborating more closely with political allies, including the necessary compromises it would require, could lead to a perception that foreign interests are driving US policies. At the same time, the increasing cooperation between China, Russia, and North Korea highlights that the Trump administration would not be able to focus on China alone, as it has stated in the past, while leaving its European partners to deal with Russia entirely by themselves. On the contrary, the lack of an effective European nuclear deterrence might force Europe to increasingly fulfil Russia’s geopolitical demands to avoid armed conflict, potentially allowing Russia to undermine political and economic relations between the United States and Europe. Since Europe remains the United States’ largest trading and financial partner by a significant margin, it should be clear that such a strategy would be entirely self-defeating.

As for some of the tariff and exchange-rate pronouncements by the Trump administration, it is important to keep in mind that an economy with free capital movements and an independent monetary policy cannot pick a specific value for its foreign exchange rate (the “impossible trinity” of economics). In the case of the United States, this means that an imposition of tariffs to weaken the dollar, as has been floated by President Donald Trump during the election campaign, will not change the fact that the US dollar exchange rate remains market determined as long as the United States allows unrestricted capital inflows and outflows and has an independent Federal Reserve. In particular, the exchange rate of the dollar would continue to reflect differentials in saving rates among major trading partners, over which the United States has limited influence.

If the new administration were serious about attempting to depreciate the value of the dollar, it could only do so by undermining its appeal as a safe asset to foreign investors. One way to do this would be to renege on the US commitment to free and open trade and capital flows, which have formed the basis for robust growth over many decades. Tampering with the independence of the Federal Reserve, let alone with the US legal system more broadly, could trigger significant financial volatility, including increases in the market interest rate on US government debt, major stock market losses, and a shock to the US economy that could dwarf any gains from what might be considered as a more favorable exchange rate. The self-defeating nature of such moves would quickly become evident; but if confidence is lost, it would be difficult to restore.

Indeed, there are few credible alternatives for any US administration other than leveraging the strength of the US economy and its currency against the growing autocratic threat while operating in close alliance with other democracies.

Withdrawing into self-isolation, as in the 1930s, could provide a false sense of security in today’s interconnected world. It would undermine the global dominance of the dollar by weakening its economic and strategic influence as allies and partners may hedge against US unpredictability, seeking alternative financial systems to diversify. Moreover, such a policy would allow other countries to occupy geostrategic positions to the detriment of the US economy and national security.

Similarly, accommodating strategic opponents like Russia or China would undermine trust in US leadership and lead to strategic losses in all theaters. Without the United States providing strong global leadership, other countries would not be able to thrive without catering to the interests of the other powers, and the United States could enter a phase of economic decline.

Finally, the most likely alternative to the strategy outlined above would be that the United States remains mired in a polarized political environment that leads to short-sighted policy decisions that fall short of the strategic challenges ahead. Most importantly, the United States would not be able to improve its fiscal situation and eventually would lack the resources needed to maintain its strategic financial and economic dominance and the superiority of the dollar. The continued erosion of US power might not be catastrophic for the United States itself, but it could trigger bouts of political instability and economic volatility around the globe, with negative consequences for the role of the US dollar and the welfare of US citizens.

Conclusion

This paper outlines a strategy for the United States to maintain dollar dominance. It argues that the United States will likely remain the world’s largest economic and military power, though it will face increasing difficulties in pursuing its strategic objectives on its own. There is a risk of military overreach as US defense spending is competing with other public expenditure priorities. Additionally, high fiscal deficits could further weaken the exorbitant privilege that has enabled the United States to sustain large fiscal and currency account deficits in the past.

The stakes are now higher compared to eight years ago, when Trump first took office, both because of the run-up in public debt during that period and because Russia and China are now more closely aligned in trying to weaken the democratic West. While reining in the fiscal deficit and boosting the US economy’s growth potential, the administration should proceed cautiously, preserving economic and diplomatic relations with existing allies. The United States should also strengthen partnerships with emerging markets and the developing world, where countering China’s efforts to co-opt countries into its economic and political orbit should become a strategic priority.

Atlantic Council Strategy Papers Editorial Board

Executive editors

Frederick Kempe

Alexander V. Mirtchev

Editor-in-chief

Matthew Kroenig

Editorial board members

James L. Jones

Odeh Aburdene

Paula Dobriansky

Stephen J. Hadley

Jane Holl Lute

Ginny Mulberger

Stephanie Murphy

Dan Poneman

Arnold Punaro

The Scowcroft Center is grateful to Frederick Kempe and Alexander V. Mirtchev for their ongoing support of the Atlantic Council Strategy Paper Series in their capacity as executive editors.

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Though political systems vary across the 24 countries surveyed, citizens in each call for similarly broad changes to government rules and norms. In most countries surveyed, government reform – including calls for transparency, term limits and adjusting the balance of power between institutions or across levels of government – are in the top three most referenced changes. While many themes cross borders, there are some very specific proposals mentioned in each country to adjust the governmental system, such as abolishing the House of Lords in the UK or establishing a Sixth Republic in France.

The need to curb the influence of special interests and combat corruption ranks in the top half of the 17 substantive topics coded, with people broadly calling to limit the financial benefits given to career politicians, control the influence of special interest groups and deal with outright corruption. Still, country specific complaints emerge, such as the influence of super PACs in the U.S. or the amakudari system in Japan.

Media reform is mentioned less frequently in most places. But in Hungary, Australia, South Korea, the U.S. and Sweden, changing the media is one of the top 10 coded topics, with complaints centering on issues like the need for a free, independent and unbiased press.

Government reform

In most of the countries surveyed, government reform is frequently mentioned as means to improve democracy. In half of the 24 countries surveyed, government reform ranks among the top three improvements for democracy. In most of the rest, it is a top-five issue.

Notably, in the U.S., calls for system-level reform were more common than any other response, tied with politicians. (For more on views of politicians, read Chapter 1.)

The reforms suggested address a breadth of issues. One common refrain is the concept of transparency: legislative transparency, budget transparency, decision-making transparency and so on. In fact, the words “transparency” or “transparent” were used by respondents in countries spanning all global regions and income levels in the survey. Other ideas that are emphasized include “honesty,” “efficiency,” “less bureaucracy” and “good governance.”

In a variety of countries, people identify general constitutional reform as the key to improving democracy. One Argentine called for the “Constitution to be modified,” and a man in France said his country needs to “change the Constitution put in place by General de Gaulle. It no longer fits.” In Israel and the UK, two of only a few countries globally without codified constitutions, several people suggested creating one.

“The best way to improve democracy is to restructure Nigeria and decentralize power. All the arms of government should be independent and local government autonomy should be upheld.” Man, 44, Nigeria

In a few cases, people want to wholly “change the political system,” but keep democracy. For instance, an Australian respondent said, “Become a republic.” And a Canadian said she wants to “remove the monarchy” because she “definitely doesn’t want King Charles to be the head of Canada.”

But where some seek broad, general changes, others drill down on specific reforms they would like to see in their democracies. These largely fall into two categories related to the structure of government: the balance of power – between the branches and levels of government as well as regions of the country – and term limits for elected officials.

While these themes are dominant, they are not totally exhaustive of the types of “political reengineering” respondents suggest. In several countries with parliamentary systems, there are calls for fewer seats in the legislature or even calls to eliminate pieces of the legislature altogether:

“Remove the House of Commons.” – Man, 31, Canada

“We don’t need so many politicians and parties to make democracy work.” – Man, 76, Germany

“Reduce the number of politicians.” – Woman, 46, Japan

“Get rid of the House of Lords and stop electing people to be Lords because it’s stupid.” – Man, 72, UK

In some countries, references to government reform are more common among men than women. And ideological differences exist in a few places, but their direction depends on the type of change being called for. For example, Israelis who place themselves on the ideological left are more likely than those on the right to make general calls for government reform, but less likely to request changes to the balance of power in government.

Correcting the balance of power

In each country surveyed, there are branches of government that are meant to have responsibilities independent of one another. Many respondents who mention balance of power want to see their governments better respect this distribution. One Spanish man said democracy would improve with “the division of powers and effective respect among the three branches of government: legislative, executive and judicial.”

“Elected members of Congress need to reassert their authority over their own turf and not allow executive orders, unelected bureaucrats and the judicial branch to usurp the official duty of controlling the purse strings.” Man, 75, U.S.

But some want to fundamentally change which branch gets certain powers, or power in general. In many cases, people want to see less power reside in the executive branch. A Canadian woman called for “a little less power in the prime minister’s office and more in the actual Parliament.” And a woman in Hungary suggested that “the head of government shouldn’t make decisions on his own.” One 54-year-old man in Kenya went so far to suggest that his country add “a prime minister in government so that power can be shared.”

Several French respondents mentioned a Sixth Republic, a sentiment made popular after President Emmanuel Macron raised the national retirement age without parliamentary approval. The suggested Sixth Republic, as opposed to the current Fifth Republic, would possibly mark an era of limited power in the French presidency.

Appeals for checks on power in South Korea are unique. There are many mentions of “prosecutors staying out of politics,” “weakening the prosecutors’ power,” and ending the “prosecution kingdom” or “prosecution’s dictatorship” in a country that had, just one year prior, elected a former prosecutor general to the presidency.

And Israelis stand out for several calls to give the executive branch more power. An Israeli woman suggested democracy would be better if “the prime minister had more extensive powers.” One 47-year-old man wanted “to give the prime minister more power and independence and not take into account the opinion of the attorney general.” (For more on Israeli views of judicial system reform, read Chapter 6.)

Balancing power between levels of government

“If we’re starting with a clean slate, we would endeavor to have only two levels of government: a large regional government and a federal government. States are an historic anachronism based on colonialism.” Man, 70, Australia

Some respondents want their country to shift the balance of power between levels of government. In Australia, for example, there are requests to do away with state-level governments and move forward with regional and federal administrations only. Meanwhile, in Japan, some propose adding a regional level of government by introducing “a system of provinces” to “deliver the voice of the people to the Diet.”

In the U.S., there are also plenty of calls to “give states back their power and decentralize government.” One American man wanted “to reduce federal government and allow states to rule themselves.”

Balancing power between regions

In some instances, the concern over balancing power in the government has to do with regional or geographic fairness. In many places, these reforms are unique to the way a country defines regions and allots representation.

Take Nigeria as an example, where there is a geopolitical zoning system that divides the country into six regions. In general, power is shared between the North and the South, but one man suggested that “power should be shared among the six zones.” Others call for rotating government leadership among the six zones.

In the U.S., some believe modifying the way that congressional representation is divided among the states will improve democracy. One American man wanted to “expand the number of representatives in the House to give more populated states a better presence.” Airing similar dissatisfaction, a woman said, “There is too much power being given to rural people who have an outsized voice in our democracy because each state gets two senators no matter the size.”

In other countries, there is concern that people in rural areas do not have enough power or representation compared with those in urban areas and major cities. One Dutch man suggested there should be “more representatives from the countryside, instead of only from the Randstad.” One Australian woman said, “Listen to rural Australia more,” and a Canadian man wanted “better representation of rural Canada.”

There are also country-specific calls for more independence or autonomous power in certain regions like Quebec in Canada, Scotland in the UK and Catalonia in Spain. A few Americans advocate statehood for Washington, D.C., and territories like Puerto Rico.

Term limits for elected officials

Some say their democracy would improve if there were additional, or new, limits on a politician’s time in office. In fact, mentions of term limits appear in more than half of all responses coded as government reform in the U.S., a much larger share than any other country surveyed.

“We need to limit the number of years politicians can serve. No one should be able to serve as a politician for 40+ years, like Joe Biden. I don’t have anything against him. I just think that we need limits.” Woman, 43, U.S.

Suggestions vary depending on the country and the elected position in question. Some call for shorter terms between elections for any elected official (Elected positions in the democracies surveyed often have some limit on the number of years a person can hold office without facing reelection.) Many responses calling for term limits are also concerned with the number of times someone can enter that reelection process.

An Australian man wanted to “only have the prime minister in office for two terms.” And one American man suggested “limiting the number of consecutive terms senators and representatives can serve.” (Currently, the Australian premier can hold office in perpetuity if they maintain government support, and American lawmakers can be reelected indefinitely.)

For other respondents, the introduction of shorter or fewer terms includes an age limit for public office. A Canadian man said simply, “There should be an age limit on politicians.”

The idea of an age limit is notably common in Japan, though there is no consensus on what the retirement age for politicians should be. One Japanese woman said, “Diet members should retire at 65,” while another suggested “setting the retirement age for lawmakers to 70.” Regardless, there is a push to use this sort of reform to get younger voices in the government of one of the world’s fastest-aging societies. (For more on the inclusion of young and otherwise diverse voices in government, read Chapter 1.)

Special interests

“I want politicians to not be dazzled by money, but to look at the future of Japan and do their jobs properly.” Man, 71, Japan

In each country surveyed, people want to change – or eliminate – the role money plays in their political systems. Concern lies with three central topics: the financial benefits of a career in politics, the influence of special interest groups and outright corruption.

The emphasis placed on these issues varies substantially relative to other factors commonly mentioned in responses. In Mexico, the U.S. and Australia, references to special interests rank in the top three topics cited when asked how to improve democracy. In most other countries this issue is in the top half of the 17 substantive topics coded.

In a few places – Canada, France, Hungary, Italy, the Netherlands, South Africa and Spain – non-supporters of the party or parties in power at the time of the survey are more likely to mention the role of special interests than those who do support the governing party. (For more information on how we classify governing party supporters, refer to Appendix D.) The opposite is true in the U.S., where Democrats and Democratic-leaning independents take issue with the role of money in American politics more than Republicans and Republican-leaning independents.

Politicians’ salary, benefits and career

Many people who mention special interests are concerned about politicians reaping financial benefits during and after their time in office. People commonly call on their governments to “lower the salaries of parliamentarians and politicians” or “reduce benefits for holding public office.” One British woman said, “I think they should take a pay cut and put that back into running the country.”

A specific suggestion seen in several countries is for politicians to receive “base salaries” or pay that is “in keeping with the lower-middle class.”

“Media should take the money out of politics and let people vote. No lobbying. No bonus or pay day when politicians leave office. There is too much incentive for politicians to focus on special interests instead of what citizens want.” Man, 41, Canada

Political pensions are another issue. One British woman pointed out that former Prime Minister Liz Truss’ unprecedently short stint in office earned her a lifetime salary. A man in Spain called for “lifetime payments” and “bonuses and allowances” for parliamentarians to be cut altogether.

In some places, people see space to improve democracy by restricting politicians from holding other jobs or affiliations during and after their time in office. A 52-year-old Dutch man said, “People with side jobs don’t belong in politics.” And a British woman suggested, “If we had MPs who didn’t have second jobs, they could focus on the job they’re supposed to be doing in Parliament.”

As for careers after time in government, one man in Japan called for “amakudari illegalization.” (Amakudari is the practice of giving private-sector positions to retired senior-level politicians.) And one American suggested a “five-year prohibition on working for companies whose sector they previously regulated.”

In a few countries, there is frustration with nepotism in government. As a woman in Indonesia said, “Don’t support someone just because they are the children of some politician.” This sense that people should not leverage their family’s position and power to advance their own political career also exists in Japan, where one man said, “I want hereditary people to quit,” and in South Africa, where a woman said politicians “must not only employ family members.”

The role of lobbying

Concerns related to money and politics extend beyond politicians’ income and career prospects. In many countries – mostly advanced economies – people share concerns about the power and practices of special interest groups. This includes lobbying and the ways that political parties and organizations fundraise.

“Ban donations from tobacco, gambling and property developers. Don’t provide funding based on votes for political parties, it makes it impossible for independents to campaign and entrenches major parties.” Woman, 50, Australia

Plenty of people say that “getting rid of” or “forbidding” lobbying would improve the way democracy is functioning in their country. An American man went so far as to suggest “taking all the lobbyists and putting them on a boat to the Bermuda Triangle.” Others do not call for an outright ban but suggest limits on lobbying and better monitoring of political donations.

For some, limits and transparency are most important when related to elections and campaign advertising. This is especially common in the United States, where campaign finance reform is often identified as a way to improve democracy. In a similar vein, Citizens United came under fire from multiple respondents dissatisfied with the 2010 Supreme Court ruling that allows for unlimited corporate and PAC spending on elections.

Corruption and bribery

In many countries surveyed, people see eliminating corruption – an abuse of power for financial gain – as the key to improving their democracy. As one young Nigerian man said: “All we need are good, uncorrupt leaders.”

“An end to the f—king corruption.” Man, 56, Mexico

In fact, if all other types of special interests mentioned were ignored, corruption would still stand as one of the top five things mentioned in Mexico, South Africa and Indonesia. On balance, corruption is more commonly cited as a problem in the middle-income countries surveyed (Argentina, Brazil, India, Indonesia, Kenya, Mexico, Nigeria and South Africa), while general special interests are more commonly mentioned in high-income countries.

Some mention crimes like theft, fraud and bribery. One American man said democracy would be improved by “ferreting out politicians, bureaucrats and activists who are willing to lie, cheat and steal to gain power.” Though people more frequently make simple and broad-reaching calls to address corruption:

“Fight against corruption.” – Woman, 67, Hungary

“Let there be less corruption.” – Woman, 53, Argentina

“Corruption must be finished.” – Man, 22, India

“Be free of corruption.” – Woman, 62, Kenya

(For more on how people want to deal with politicians and parties who are found to be corrupt, read Chapter 6.)

Media reform

“The media must be much broader than today. It is important to write from all perspectives, otherwise there is a risk of losing democracy through misinformation.” Woman, 71, Sweden

“The news media should have to report the truth, the whole truth and nothing but the truth, not their version of the news.” Woman, 79, U.S.

For a few people, media reform is key to improving democracy in their country. In five places – Hungary, Australia, South Korea, the U.S. and Sweden – changing the media is in the top 10 issues of the 17 coded.

Accurate and unbiased information

Many people who mention media reform are concerned with the availability of factual, unbiased information. An Australian man called for “more truth in the media. Actual news about what is going on in the world would be good. All we seem to get is lies and spin.” In Italy, one man said democracy would improve “if the Italian press was more truthful! No fake news.” Britons, Poles, Hungarians, Canadians and Swedes share similar frustrations with the content they get from the media.

Several people note that accurate reporting by the media is crucial for their ability to make informed decisions in their everyday life. One Swede explained: “Information that I, as a citizen, receive through newspapers and TV is not sufficiently factual. When you judge, for example, a debate based on rhetoric instead of facts, I think you are out of line. If I don’t get the right information, democracy cannot work. I cannot make my choice based on factual information if I do not receive it.” (For more on how people view citizens’ responsibilities, read Chapter 4.)

In the push for truthfulness, some people are concerned with the political bias of major news sources. One man in Japan wanted “the media to be neutral in its reporting,” and an Australian said that “the media should seek to be impartial.” An Israeli woman suggested “that the media should stop behaving like a political party in and of itself and supporting a certain side instead of doing its job.”

“A more plural communication media. I believe that in the media there is a lot of fake news and a right-wing monopoly. There is a lack of pluralism and truth, a lot of toxicity and many campaigns that do not correspond to the reality we live in.” Man, 53, Spain

In the U.S. there are calls to “get rid of Fox ‘News’,” on one side and on the other to “report on many things they presently seem to be covering up, such as the president’s son’s laptop.” Meanwhile, other Americans want a “less polarizing media” altogether. A young woman said “the media is bent on villainizing any platform that disagrees with its agenda de jour.”

A free and independent press

Beyond concerns about accuracy and bias, there are also issues with media ownership and government interference. “A strong and independent news media” – void of interference from the government and special interests – is a tenet of democracy that respondents in several countries address.

For a few people, this means better “publicly funded news broadcasting.” One American man spelled out his suggestion: “I also have this crazy idea where I think there should be a much stronger, publicly funded media ecosystem that ensures higher-quality journalism and either outcompetes or purchases existing news outlets like Fox News and MSNBC.”

“Free, unbiased and uncompromised news media is crucial for a democracy to function well in the service of all citizens – not just a minority with the requisite wealth and influence. A very good start would be to remove or drastically curtail Rupert Murdoch’s malign impact on Australian social and political affairs.” Man, 70, Australia

Others are concerned with private influence in the media industry. An Argentine woman said she wants to explicitly “avoid a media monopoly.” A man in the UK said, “We cannot have democracy and the Daily Mail. We need to stop billionaires who do not live in this country from influencing voters with false impressions of patriotism. Having a Union Jack on your box of eggs does not make you a patriot.” And in Australia, several respondents question the impact of billionaire media mogul Rupert Murdoch.

Censorship and social media

Though not dominant themes across countries, there are a few people who are concerned with social media, censorship and its impact on democracy.

One Brazilian woman clarified the importance of “having complete freedom to speak one’s mind on social media and not be banned or surveilled for it.” A woman in Japan thought that “experts should share opinions on TV, YouTube, etc.” And in India, a woman said democracy would improve through “internet, social media and education.”

On the other hand, some people think increased restrictions or censorship on social media would benefit their democracy. An American woman suggested, “Social media companies should monitor disinformation more.” A Swede said it would be beneficial to “shut down all social media during the election campaign.” And one 19-year-old woman in India went so far as to say that “social media should be banned.”

Summary

In July 2023, Koreans will mark the seventieth anniversary of the end of the Korean War. But a durable and just peace continues to elude the Korean Peninsula. North Korea is accelerating its nuclear weapons program. China’s economic rise has triggered a major military buildup by the People’s Liberation Army (PLA). The war in Ukraine has heightened tensions around Taiwan. And China is determined to become the preeminent military power in East Asia. But it is not just traditional security threats that worry South Korea. Seoul is critically dependent on free trade, foreign oil and natural gas, and global supply chains. As one of the world’s major semiconductor producers, South Korea sees that growing U.S.-China decoupling and Washington’s rush to build its own semiconductor fortress puts South Korean firms in the middle of a new fault line. In more ways than one, it’s time for the Republic of Korea (ROK) to undertake a comprehensive review of its national security system and implement, as warranted, across-the-board reforms.

The primacy of economic and technology-focused intelligence is gaining critical prominence after the global pandemic and growing supply chain vulnerabilities compounded by the war in Ukraine. Yet South Korea’s ability to forge a more comprehensive and bipartisan national security strategy is stymied severely by endemic political polarization that has only deepened in 2022. President Yoon Suk Yeol has spearheaded a strengthening of the U.S.-ROK alliance as a key element of his foreign and defense policies in addition to highlighting Korea’s shared values with other key liberal democracies. This is a positive turn that must be maintained. At the same time, the opposition Democratic Party that continues to have a majority in the National Assembly has blocked virtually all new bills proposed by the Yoon administration.

The Yoon government faces major headwinds. Most importantly, however, North Korea has continued with unprecedented provocations such as sustained ballistic missile tests since January 2022. Pyongyang also declared a new nuclear doctrine insisting that North Korea is a nuclear weapons state, regardless of whether the international community accepts it or not. The reason why South Korea’s national security system needs an overhaul is because of rising vulnerabilities and the emergence of new drivers, including:

a nuclear-armed North Korea with tactical nuclear warheads, including submarine-launched ballistic missiles (SLBMs);

China’s accelerated military modernization and buildup that could severely undermine South Korean as well as U.S. Forces Korea (USFK) and U.S. Forces Japan (USFJ) operations in a major conflict on the Korean Peninsula;

deepening U.S.-China strategic rivalry and competition in military, economic, and technological domains;

the growing importance of economic security and, increasingly, the securitization of critical technologies and matching intelligence capabilities;

critical manpower shortages in the armed forces due to demographic shifts and the need to optimize technology-intensive modernization, coupled with enhanced warfighting capabilities;

the unparalleled importance of technology firms, including defense corporations, in shaping the contours of AI-driven military modernization;

domestic political shifts in the United States that could significantly impact the longer-term efficacy of U.S. extended deterrence;

South Korea’s growing exposure to key regional contingencies, such as a massive military crisis in Taiwan and out-of-area threats (such as the ongoing war in Ukraine);

rising opportunity costs owing to deepening political enmity between the major political parties and polarization that severely constraints the building of a more bipartisan national security paradigm; and

the need to build and strengthen secure channels of communication and collaboration with key allies and partners across the world, especially in the Indo-Pacific, the EU, and the North Atlantic Treaty Organization (NATO).

As South Korea looks ahead, it’s time to create a national security review commission that covers all facets of national security, given that such an effort has never been undertaken by any South Korean government. Since the restoration of democracy in 1987, every administration has created a defense reform commission, but no government has ever conducted a bottom-up review of South Korea’s overarching national security system. Even after North Korea’s first nuclear test in 2006 and the sinking of a ROK naval vessel in 2010, no comprehensive national security review was undertaken. Specifically, such an assessment should include the following:

a whole-of-government approach that encompasses all critical elements of national security;

a thorough assessment of South Korea’s mid- to longer-term intelligence requirements and needs;

a review of existing decisionmaking structures and national security–related ministries and agencies and, if necessary, adopting organizational reforms including the setting up of new offices or agencies;

an assessment of the necessity and desirability of forming an economic and technology security committee within the National Security Council to spearhead all-source collection and coordination of intergovernmental guidelines and policies;

the creation of new channels of communication and cooperation of critical economic and technology intelligence and information with the active participation of government-funded research institutes;

enhanced government and private sector cooperation on economic and technology intelligence, while fully respecting privacy issues and necessary firewalls;

strengthened national security cooperation, including the economic, defense, and technology sectors, with key allies and partners such as members of the Association of Southeast Asian Nations (ASEAN), Japan, Australia, NATO members, and major partners in the Middle East;

a published national security strategy white paper within the first year of a new administration.

Is Business as Usual Sustainable for South Korea?

Seventy-two years after the outbreak of the Korean War in 1950, durable peace continues to elude the Korean Peninsula. North Korea is accelerating its nuclear weapons program. China’s economic rise has triggered a major military buildup by the PLA. The Russian invasion of Ukraine has heightened tensions around Taiwan. And China is determined to become the preeminent military power in East Asia. But it is not just traditional security threats that worry South Korea. Seoul is critically dependent on free trade, foreign oil and natural gas, and global supply chains. As one of the world’s major semiconductor producers, South Korea sees that growing U.S.-China decoupling and Washington’s rush to build its own semiconductor fortress puts South Korean firms in the middle of a new fault line. If these military, economic, and technological challenges weren’t enough, South Korea is also beset by the world’s lowest birth rate, its status as the fastest-aging society among the developed economies, and exponentially rising social welfare costs.1

The last time South Korea came under North Korean attack was when a South Korean naval vessel, the Cheonan, was sunk by a North Korean submarine in April 2010. In October 2010, North Korean artillery hit Yeonpyeong Island in the Western Sea. While both attacks happened when then president Lee Myung-bak, a conservative, was in office, the government didn’t conduct a full-scale national security review. In hindsight, these strikes should have prompted the Lee administration to push through a bipartisan national security review with matching institutional changes including a wholesale reassessment of South Korea’s defense posture and the making of a new Korea doctrine. More recently, on November 2, 2022, a North Korean missile that was part of a larger barrage crossed the South-North maritime border, known as the Northern Limit Line (NLL), for the first time since the Korean War. Of several short-range ballistic missiles fired by North Korea, one missile fell in the high seas 26 kilometers (16 miles) south of the NLL and 167 kilometers (104 miles) from Ulleung Island. In response, the South Korean Air Force’s F-15K and F-16K fighters fired three precision-strike missiles into the high sea north of the NLL. This was also the first time that South Korean missiles were fired across the NLL.2

Most importantly, after North Korea conducted its first nuclear test on October 9, 2006, the government of then president Roh Moo-hyun failed to undertake any meaningful countermeasures. Progressives, including former president Kim Dae-jung, argued prior to the 2006 nuclear test that North Korea did not have any intention of developing nuclear weapons. After North Korea crossed the nuclear threshold, however, Kim and other progressive politicians asserted that Pyongyang had every intention of denuclearizing since nuclear weapons were a bargaining tool to negotiate with the United States. North Korea’s first nuclear test in 2006 and its armed attacks in 2010 should have compelled both conservative and progressive South Korean governments to reassess South Korea’s national security framework.

Fast forward to 2022, and North Korea’s nuclear weapons arsenal has continued to grow. And while not yet fully operational, North Korea has nuclear-tipped SLBMs. To be sure, South Korea has not just stood by. In October 2022, the ROK military released footage of a Hyunmoo-5 medium-range ballistic missile with a reported conventional payload up to 8 tons and the ability to reach a target 100 meters (nearly 330 feet) underground.3 This newest missile is the most lethal in the ROK inventory as part of a South Korean triple axis to decapitate the North Korean leadership. But advanced weapons are only one dimension of a nation’s comprehensive national security posture. Today, outstanding geopolitical, geoeconomic, and geotechnological threats are hitting South Korean shores simultaneously. While the ROK has faced key economic crises before (such as the 2008 global financial crisis and the 1997 Asian financial crisis or much earlier ones like the oil embargo by the Organization of Petroleum-Exporting Countries [OPEC] of the early 1970s), it has never before faced enormous dislocations, disruptions, and crises all at the same time as illustrated in figure 1.

Asia is a major driver and innovation hub of the global economy, but it simultaneously has the world’s highest concentration of military hotspots, a burgeoning arms race, and intense nationalistic and ideological disputes.4 And South Korea is right on, or very close to, some of the region’s most intense geopolitical, geoeconomic, and geotechnology fault lines. No other region in the world is both an enabler and a disrupter at the same time to this degree. Three additional traits can be added to this picture. First, there is a growing politicization of major economic and technology policies fueled by U.S.-China decoupling, intensifying high-technology competition, and the push for new global standards. Second, there has been a breakdown of traditional barriers and a new, unparalleled degree of connectivity between a diverse range of threats that curtails policy responses. Third, exponential demands for intelligence collection and analysis are growing in tandem with bureaucratic inertia that at times inhibits wider and deeper collaboration between different parts of government. With South Korea located right in the middle of these growing U.S.-China fault lines, there is arguably no other major Asian player that faces such a daunting landscape. For this reason and many more, Seoul must undertake a fundamental review of its national security posture and enact crucial organizational, legislative, and structural national security reforms.

South Korea weathered a massive economic meltdown during the Asian financial crisis of 1997–1998. The South Korean government undertook massive restructuring in addition to critical financial reforms under Kim Dae-jung. The wholesale revamp of the South Korean economy continued throughout the early 2000s. But a major silver lining was that South Korean conglomerates, including family-run power houses known as chaebols, were forced to reform, inject new management practices, and most importantly, compete head-on in global markets. The net result has been exponential growth for firms like Samsung, LG, SK, and Hyundai Motors since the 2000s and the rise of new high-tech start-up giants such as Naver and Kakao. Sadly, similar whole-of-government efforts to reform the national security sphere—akin to the 9/11 Commission in the United States after the September 11, 2001, al-Qaeda attacks—has eluded every South Korean government going back to the first North Korean nuclear test in 2006.

The Primacy of Economic and Technology-Focused Intelligence

However, South Korea cannot afford to wait for a major crisis. The outbreak of the war in Ukraine in February 2022 should have been a wake-up call. Nearly ten months into the grueling war, Ukrainian President Volodomyr Zelenskyy remains undaunted. Although Ukraine continues to receive crucial military assistance from the United States and other NATO members, no foreign force is waging war on Ukraine’s behalf. There is very little, if any, correlation between Russian President Vladimir Putin’s warmongering and what Chinese President Xi Jinping may attempt in Taiwan. But as Xi begins an unprecedented third term as general secretary of the Chinese Communist Party (CCP) and the most powerful Chinese leader since Mao Zedong, it may be difficult for China’s leaders to control ultranationalists in the party and the armed forces amid calls to finally unify the motherland, so to speak, under Xi’s watch.

In more ways than one, South Korea has faced a department store of security threats. So far, none have triggered a new war or a massive economic crisis. But the best time to prepare for the coming vortex is when South Korea has the wherewithal to enact critical reforms that will mitigate and minimize potential fallout. Only time will tell if Seoul manages to do so. But prolonging a business-as-usual approach in the national security field is going to entail significant opportunity costs. If the progressive political opposition to Yoon’s government continues to pin hopes on thawed relations with North Korea and its leader Kim Jong Un, if the conservatives keep emphasizing the importance of a strong U.S.-ROK alliance, and if the South Korean military continues to highlight the importance of high-tech weapons, vital national security reforms including revamping the South Korean intelligence community will not happen.

The importance of economic security cannot be overemphasized. Yet there is no overarching mechanism within the South Korean government that oversees and coordinates foreign economic and technology intelligence. The National Intelligence Service (NIS), Ministry of Economy and Finance, Ministry of Science and ICT, and Ministry of Foreign Affairs each undertakes economic intelligence collection and assessments. But in an era in which the private sector, including start-ups, remains far ahead of government agencies, assessing foreign economic and technology trends must include corporations and nongovernment entities.

Preparing for Hybrid Conflicts

South Korea has several first-rate, government-sponsored, economics think tanks such as the Korea Development Institute, the Korea Institute for Industrial Economics and Trade, and the Korea Institute for International Economic Policy. In the technology sectors, the Daedeok Science Park in Daejon, for example, houses most of the government-run technology R&D centers, including the Korea Institute of Science and Technology, Electronics and Telecommunications Research Institute, and the Korea Atomic Energy Research Institute. Yet efforts to maximize horizontal and vertical information flows and exchanges remain limited. Most importantly, a dedicated national hub in the Office of the President must be created to coordinate foreign economic and technological intelligence. Relatedly, the ROK must significantly enhance its foreign economic and technology intelligence within the NIS and the broader intelligence community.

The ROK government should undertake a whole-of-government national security review and enact key structural reforms. Like the United States and Australia, South Korea should seriously consider forming its own version of the office of the director of national intelligence. For a country so dependent on the global economy, South Korea must put economic and technological intelligence at the heart of its national security operations. The government must create new mechanisms to cooperate extensively with the private sector and foster unparalleled, horizontal cooperation between key governmental economic and technology institutes. In short, the ROK must rethink national security and prepare for unprecedented economic and technology competition. Of course, South Korea cannot ignore North Korea’s nuclear tipping point, and neither can it afford to sit on the sidelines if China attacks Taiwan. There is no blueprint or field manual that lays out the contours of intensifying hybrid conflicts. But accentuating the primacy of AI to the future of warfare and transforming the country’s armed forces into a “smart military” are, at best, cosmetic measures. As General Douglas MacArthur said,

The history of failure in war can almost always be summed up in two words: “Too late.” Too late in comprehending the deadly purpose of a potential enemy. Too late in realizing the mortal danger. Too late in preparedness. Too late in uniting all possible forces for resistance.5

If South Korea wants to mitigate the fallout from inevitable crises and better prepare for hybrid warfare, MacArthur’s warnings should be taken to heart more than at any other time since the beginning of the Korean War.

Polarized Politics and Public Perceptions on National Security

Fractured politics is hardly unique to South Korean democracy. But the depth of political enmity between the country’s political left and the right has significantly eroded the possibility of any meaningful bipartisan compromise. When the conservative People Power Party won the presidency in March 2022 by an extremely slim margin of under 1 percent,6 the progressive Democratic Party was shell-shocked. In June 2022, a month after Yoon was inaugurated, the now ruling People Power Party won a resounding victory in crucial local elections including mayoral races in Seoul and Busan. However, while the conservative party gained key political ground by winning the presidency and local elections, the first six months of the Yoon administration have been a rocky ride. Unless Yoon fundamentally resets his political agenda, there is little guarantee that voters will give the conservatives a working majority in the National Assembly. Until April 2024 or the next general election, the opposition Democratic Party continues to hold a majority with 170 seats in the 300-seat legislature.7

The current head of the Democratic Party, Lee Jae-myung, lost to Yoon in the March 2022 presidential race and is consumed with achieving two overriding objectives: deflecting multiple investigations begun by the Supreme Prosecutor’s Office, which began when former president Moon Jae-in was in office, and incessantly attacking Yoon to bolster the opposition’s chances in the April 2024 National Assembly election. Lee is also betting that if he can somehow stave off criminal investigations and his party continues to retain a majority after 2024 (though this is hardly guaranteed), he has a good shot at rewinning the party’s nomination for president going into the March 2027 presidential election. Hence, while Lee and the Democratic Party pay lip service to strengthening defense and national security, as long as he remains as party leader, prospects of any meaningful bipartisan consensus on defense are likely to be severely limited.

As expected, Lee has refused to support the government’s efforts to strengthen U.S.–South Korea–Japan trilateral security and defense cooperation amid worsening North Korean provocations. On October 7, 2022, when U.S., South Korean, and Japanese naval vessels participated in a joint antisubmarine exercise, Lee denounced the exercises as “extreme pro-Japanese” actions meant to inflame anti-Japanese sentiments to score political points.8 For the Democratic Party, castigating Yoon for upgrading trilateral military exercises entails significant political costs, especially when North Korea’s nuclear and ballistic missile capabilities are maturing. If Lee thinks he can push Yoon into a political corner by attacking trilateral exercises, it will be yet another example of how far the Democratic Party has shifted its thinking about South Korea’s national security posture, displaying a persistent attachment to peace overtures to Pyongyang while downplaying North Korea’s growing nuclear and ballistic missile threats.

How South Koreans Perceive National Security and the Military

For the most part, South Koreans’ views of North Korea have remained fairly objective. At the height of Moon’s and former U.S. president Donald Trump’s engagement with Kim and North Korea in 2018 and 2019, the South Korean public welcomed potential breakthroughs in inter-Korean and U.S.–North Korea ties. But by the same token, they did not expect, as Moon and Trump did, a fundamental resetting of these relationships. In the March 2022 Korea National Defense University (KNDU) poll noted below, the South Korean public’s perception of the prevailing security environment reflected tangible changes in South-North relations. Concerns rose sharply when North Korea threatened “fire and fury” with the United States in 2017. In 2016, a relatively high percentage (44.2 percent) responded that South Korea’s security situation was “unsafe,” while only 20.9 percent said that it was “safe.” Just a year later in 2017, however, a peak of 60.9 percent said the situation was “unsafe.” But from 2018 to 2021, their security perceptions returned to more normal bandwidths, as illustrated in figure 2.

As shown in figure 3 below, perceptions of North Korea as a military threat dropped from a height of 68.8 percent in 2017 to 29 percent in 2019. In 2018, Moon held three summits with Kim, and Trump met with Kim for the first-ever U.S.–North Korea summit in Singapore in June 2018. But after the second Trump-Kim summit cratered in Hanoi in February 2019, the public’s concern over North Korea’s military threat jumped back to more normal levels of 40 to 50 percent.

Other than external factors, when South Koreans were asked which domestic factors could be seen as national security threats (see figure 4), an overwhelming 49.3 percent answered “domestic political instability” followed by “economic insecurity” (31.5 percent) and “fuzzy security perceptions” (31.2 percent)9.

The fact that 50 percent of South Koreans felt that domestic political instability should be construed as a national security threat speaks volumes about how negatively the public views domestic politics. To put this into context, just slightly more (55 percent) said that North Korea’s military was the most important national security threat. Interestingly, South Koreans also lacked a lot of confidence in their military though, importantly, they also felt that defense spending should be increased to better meet an expanding array of defense and security threats. In the 2021 KNDU poll, 40.8 percent responded that South Korea’s defense budget should be increased (including the 6.9 percent who supported a major increase), a 10 percent jump compared to the 2020 poll. A total of 51.7 percent of experts answered that South Korea’s defense budget should be increased, including the 13.3 percent who said that the ROK needed to significantly increase defense outlays.10 (The government requested a 4.6 percent increase in defense spending for 2023, some $42 billion, although the exact dollar amount is likely to shift due to changing exchange rates).11

When asked whether or not respondents trusted what the Ministry of National Defense reported or announced, around 71 percent answered that they did not (see figures 5 and 6). Interestingly, the same question posed to sixty experts yielded a higher level of trust: 55 percent said they trusted what the ministry said to some degree.12

As to why they didn’t trust what the Ministry of National Defense reported, 76.6 percent of the public and 79.2 percent of experts answered that it was because of a “lack of transparency.” As an example, on October 4, 2022, the ROK military on the country’s eastern coast fired a Hyunmoo-2C ballistic missile in response to a string of North Korean ballistic missile tests, but the missile misfired and crashed in a nearby golf course. According to press reports, it took the military eight hours to announce the failed missile test. In a prescheduled annual National Assembly oversight hearing, General Kim Seung-gyeom, the chairman of the Joint Chiefs of Staff, told the defense committee that he was “deeply sorry” for the military’s delayed announcement of the failed missile test.13 In the same survey, only 35.1 percent of respondents said that they “trusted” the military, a significant drop from a rate of 64.7 percent noted in a 2020 survey.

One possible explanation for such a dip is the ongoing fallout from North Korea’s brutal killing of a South Korean Ministry of Fisheries and Maritime Affairs official on September 21, 2020. At that time, the Moon administration asserted that Lee Dae-joon, who was on sea duty near Yeonpyeong Island in the Western Sea (Yellow Sea), allegedly tried to defect. Lee was killed by North Korean soldiers, and his body was burnt at sea. In October 2022, the Board of Audit and Inspection requested the investigation of some twenty persons, including former high-level national security–related officials in the Moon government. According to the board, government agencies pushed the story that Lee was a defector although there was insufficient evidence.14 Former minister of defense Suh Wook and Coast Guard Commissioner General Kim Hong-hee were arrested in October 2022 for their alleged covering up of facts and distorting circumstances. The final verdict will rest on a prolonged trial that is most likely to reach the supreme court.15

When the Yoon administration came into office in May 2022, it ordered a wholesale review of the case. In June 2022 after seemingly contradictory evidence was uncovered, the maritime police apologized for its initial October 2020 finding that the victim Lee had tried to defect. The Board of Audit and Inspection is continuing to examine this case to ascertain if Moon administration officials in the president’s office pressured the maritime police and the Ministry of National Defense into arguing that Lee was unfortunately killed as he was trying to defect. With the exception of when his presidency was about to end in May 2022, Moon and his senior staff referred to North Korean missile launches as unconfirmed projectiles.16 In January 2022 when North Korea fired a Mach 5 hypersonic missile, the Moon government called a National Security Council meeting and said that it was “carefully observing recent development in North Korea” and said that it had “deep regret” over the North Korean test.17 At the same time, however, Moon officials stressed the “importance of restarting dialogue with North Korea.”18

While the South Korean public supports a robust national defense posture, they are also mistrustful of a military that has gone out of its way to support the Moon government’s kowtowing approach to North Korea. What the public wants from its military is both political neutrality and at the same time, armed forces that are unafraid of emphasizing critical defense needs and determined to fully defend the territorial and political integrity of the ROK.

Coping with the North Korean Enigma

If entrenched partisan politics is a key impediment to genuine national security reforms, another major factor is the deep ideological divide on South Korea’s strategy toward the North. One of the most divisive (and, in many respects, corrosive) spillovers of South Korean democracy has been diametrical shifts in North Korea policy. Since 1987, South Korea has had conservative presidents—Roh Tae-woo (1988–1993), Kim Young-sam (1993–1998), Lee Myung-bak (2008–2013), Park Geun-hye (2013–2017), and Yoon Suk Yeol (2022– present)—and progressive presidents, including Kim Dae-jung (1998–2003), Roh Mu-hyun (2008–2013), and Moon Jae-in (2017–2022). Engagement with the North is no longer taboo. Four inter-Korean summits, beginning with Kim Dae-jung’s meeting with then North Korean leader Kim Jong Il in Pyongyang in 2000, have educated South Koreans on the highs and lows of summitry. Moon initially captivated the South Korean public with his three summits with Kim Jong Un in 2018. However, Pyongyang’s refusal to begin denuclearization talks in earnest, Moon’s pleas for dialogue, and the failure of Trump’s summits with Kim in Singapore in June 2018 and in Hanoi in February 2019 dampened hopes for a fundamental breakthrough (see figure 7).

When Moon was in office, he heralded a new era in South-North relations, as in July 2019 when he said that “not only South and North Korea but also North Korea and the [United States] have declared the end of their hostile relationship and the true beginning of a new era of peace, not through signatures on a document but through action.”19 Moon also constantly stressed not only that Kim had vowed to denuclearize but also that military tensions would be reduced irreversibly with Seoul and Pyongyang’s signing of the September 19, 2018, South-North Military Comprehensive Military Agreement (officially titled the Agreement on the Implementation of the Historic Panmunjom Declaration in the Military Domain). As illustrated in figure 7, even in 2020 when support for Moon’s North Korea policy was at its height, only 3.6 percent of respondents said that South-North ties were “very positive,” while 38.4 percent said “mostly negative” and 36.2 percent answered that relations were “very negative.” After the Yoon government came into power, more than three-quarters of participants responded that inter-Korean ties were “mostly or very negative.”

The same August 2022 poll by the Korean Broadcasting Service (KBS) showed that 40 percent of respondents felt that North Korea is a country that one should be “vigilant” about, and 32.7 percent responded that North Korea was an “enemy state.” Only 18.9 percent of respondents felt that North Korea should be seen as a “cooperative partner,” while 6.9 percent saw North Korea as a country that should be given aid. Interestingly, only 1.1 percent of South Koreans in the survey said that North Korea should be seen as a “competitor”—an affirmation across numerous surveys that highlights the perhaps irreversible economic and development gap between the two Koreas. At the same time, however, and despite the fact that multiple South-North summits since 2000 have not resulted in a fundamental resetting of South-North relations, much less substantive progress in denuclearization, 72 percent those polled by KBS in August 2022 answered that inter-Korean summits “must be held” or “some need to be held,” while 18.7 percent responded that such meetings were “not necessary” or “shouldn’t be held at all.”20

Hardening South Korean Views Toward the North

As seen in figure 8, 53.1 percent of respondents remarked in 2021 (the last full year Moon was in office) that they were “mostly against” or “strongly against” his North Korea policy. This was a major rebuke of Moon’s legacy since he devoted so much of his time in office to emphasizing self-described breakthroughs in South-North relations and heavily politicizing intelligence assessments of North Korea. But by the same token, Yoon has only been in office since May 2022 (only two months before the survey was conducted on July 8–12, 2022), yet nearly 56 percent of respondents said they were “mostly against” or “strongly against” Yoon’s North Korea policy. These traits reflect the built-in ambiguity and structural inconsistencies of how most South Koreans see North Korea, and these findings also may have been affected by generational differences and ideological preferences.

Table 1: Political Preferences and Attitudes on South-North Relations (2021) Aid Recipient Cooperative Partner Competitor Need to be Vigilant Adversary Progressive 9.80% 57.80% 6.80% 18.20% 7.40% Centrist 10.50% 52.30% 5.70% 22.20% 9.30% Conservative 12.50% 34.80% 7.50% 27.20% 18.00% Source: Seoul National University, “Survey on Unification Attitudes 2021,” Institute for Peace and Unification Studies, 2022, 79, https://ipus.snu.ac.kr/blog/archives/research/6084

Table 2: Perceptions of Possible North Korean Provocations by Age Group (2015–2021) 2015 2016 2017 2018 2019 2020 2021 20s 74.50% 66.90% 77.90% 57.60% 60.20% 64.90% 60.40% 30s 71.00% 69.80% 72.70% 58.80% 62.00% 66.20% 57.20% 40s 70.00% 63.10% 71.30% 53.10% 57.10% 54.10% 54.00% 50s 68.40% 65.70% 66.30% 53.40% 57.30% 57.70% 55.80% 60s 68.80% 65.90% 65.30% 58.10% 54.10% 63.90% 54.60% Source: Seoul National University, “Survey on Unification Attitudes 2021,” Institute for Peace and Unification Studies, March 2022, 90, https://ipus.snu.ac.kr/blog/archives/research/6084

Seoul National University’s Institute for Peace and Unification Studies publishes an annual survey on public attitudes toward unification, and the most recent survey (2021) was uploaded in March 2022. The 2021 survey reflected the enduring inconsistencies of South Korean attitudes toward North Korea and South-North relations. For example, nearly 58 percent of progressives saw North Korea as a “cooperative partner,” while only 7.4 percent believed North Korea to be an enemy or an adversary. Unsurprisingly, 45.2 percent of those who considered themselves to be conservative regarded North Korea an “adversary” or a country with which one had to be “vigilant.” Interestingly, however, nearly 35 percent of conservatives felt that North Korea should be seen as a “cooperative partner,” while 25.6 percent of progressives felt that one should be “vigilant” about North Korea or even considered Pyongyang an adversary (see table 1).

The same survey also highlighted key generational differences. Although those in their twenties were more likely to have more progressive views on a range of social issues, only 37.6 percent of this subset of respondents saw North Korea as a “cooperative partner,” a much lower share than those in their thirties (50.3 percent), forties (52.4 percent), and fifties (55.2 percent).21 Even more interestingly, on questions that traced how South Koreans perceived the possibility of North Korean provocations from 2015 to 2021, those in their twenties had the highest average score (66 percent) out of all age groups (see table 2). In part, such a result is not a huge surprise since draft-eligible men are mostly in their twenties and are likely to be more sensitive to potential shifts in North Korean behavior including provocations such as missile tests.

It is far too early to forecast just how South-North relations are likely to evolve during the remaining four and a half years of Yoon’s term, which will end in May 2027. While Kim met with Moon three times in 2018 at the height of the Moon administration’s bid for an inter-Korean détente, he did so largely as a way of reaching out to Trump. When the second U.S.–North Korea summit collapsed in Hanoi in February 2019, Pyongyang subsequently lashed out at Moon for standing in the way of U.S.–North Korea talks. Even though Moon continued to send one-way messages to Kim to rekindle South-North talks until the very end of his term, Kim had no interest in engaging with Moon. Indeed, from January to November 2022, North Korea conducted more than twenty ballistic and cruise missile tests, the highest number on record.22 North Korea launched two short-range ballistic missiles right after U.S. Vice President Kamala Harris visited Seoul in September 2022 and as the United States, South Korea, and Japan conducted antisubmarine exercises for the first time in five years.23 Although the Yoon administration has confirmed, for now, that it will uphold all of the inter-Korean agreements signed by the previous government and said it looks forward to restarting South-North talks, Kim is not likely to respond favorably. Indeed, that same month Pyongyang made an explicit announcement of its nuclear doctrine, including the conditions in which it would use nuclear weapons, such as when its leadership or strategic assets were on the verge of being attacked or actively under attack.24

Despite a range of views on how best to cope with North Korea, most South Koreans do not believe that North Korea will ever give up its nuclear weapons. In the 2021 survey released by the KNDU in February 2022, when asked “do you believe North Korea has the intention of completely giving up nuclear weapons?,” 70.6 percent answered “no.”25 To be more specific, 28.2 percent answered “no” and 42.4 percent said “absolutely not,” while only 2.8 percent answered “absolutely,” 9.4 percent replied “yes,” and 17.3 percent said “fifty-fifty.”26 Interestingly, those who answered that North Korea was not likely to denuclearize rose by 16 percent from 2020. Compared with other surveys, including the ones noted above, the 2021 KNDU annual survey also reflected negative views on North Korea. When asked whether they considered North Korea “an adversary that threatens the ROK’s security,” 61.3 percent replied in the affirmative, while 22.1 percent answered that North Korea was a “cooperative partner.”

The ROK’s Expanding Threat Landscape

One of the defining characteristics of inter-Korean relations is that while the range of military threats from Pyongyang has worsened since the 2000s, South Korean policy toward North Korea has fluctuated widely depending on whether the right or the left wins the presidency. Among major U.S. allies in the Indo-Pacific, South Korea experiences changes in government that result in significant policy swings over North Korea, ties with the United States and China, and attitudes toward businesses. In Australia and Japan, for example, changes in prime ministers rarely have resulted in major foreign policy shifts.

In Japan, structural continuity has been embodied by the Liberal Democratic Party, which has been in power since 1955 (except the periods 1993–1996 and 2009–2012). This is particularly the case with Japan’s attitudes toward North Korea. In early October 2022, North Korea test-fired a ballistic missile that crossed Japanese airspace for the first time since 2017. While Tokyo did not take steps to shoot down the missile, Japanese Minister of Defense Yasukazu Hamada said Japan would not “rule out any options including counterattack” measures.27 Results from a September 2021 EAI-Genron poll showed that 72.8 percent of Japanese respondents felt that North Korea was the biggest military threat, followed by China with 72.1 percent and Russia with 62.2 percent.28

A more urgent issue, however, is that the ROK’s national security apparatus, intelligence flows and coordination, counterintelligence mechanisms, and efforts to set a new national security strategy are not designed to effectively manage the multiple security vortexes the country faces. A combination of reasons has led to successive governments’ inability to implement structural national security reforms. Foremost among them are deeply divergent views between the left and the right on how best to cope with the North Korean threat. Entrenched bureaucratic interests and inertia led by the Ministry of National Defense and the three services have stymied structural defense reforms. Since presidential terms are limited to a single five-year term interspersed with local and National Assembly elections, presidential authority begins to wane considerably after an incumbent’s third year in office. And given the primacy of getting reelected, members of the National Assembly rarely spend political capital on undertaking bipartisan national security, intelligence, and defense reforms unless they have a direct bearing on their constituencies. The end result has been years of political criticisms of a particular government’s national security policy without calling for, or more importantly, supporting bipartisan national security reviews. The opposition Democratic Party has rarely strongly condemned North Korea’s string of military provocations, such as the 2010 sinking of a Korean naval vessel that resulted in the death of more than forty ROK Navy sailors. Nevertheless, it remains unlikely that the National Assembly and Korea’s major political parties will adopt the necessary bipartisan national security reforms. If such a trend continues, however, South Korea will pay a higher price down the road, given the National Assembly’s unwillingness to push for bipartisan national security reforms.

Four Chief Security Concerns

As noted previously, the ROK faces four major threats: (1) North Korea’s growing nuclear arsenal and increasingly sophisticated ballistic missile program, (2) expanding geopolitical threats triggered by China’s contestation of U.S. military supremacy in the Western Pacific, (3) U.S.-China economic decoupling in conjunction with the South Korean economy’s overdependence on the Chinese market and the need for more resilient and reliable global supply chains, and (4) growing uncertainty driven by worsening global technology competition as well as greater rivalry between allies and partners, all while AI and other crucial technologies of the Fourth Industrial Revolution become more prevalent. Moreover, just when South Korea, like other advanced economies, faces anemic economic growth, the country’s rapidly expanding social welfare costs are going to become increasingly problematic as its tax base decreases owing to its status as the world’s fastest-aging society and the country with the lowest fertility rate in the Organization for Economic Cooperation and Development.29 All of these issues are coming to a head as domestic politics is more deeply divided that at any other time since the restoration of democracy in 1987.

To be sure, South Korea has consistently faced a long menu of security and economic threats. For a country that relies totally on foreign oil and natural gas imports (as Japan does), even small perturbations in global energy markets trigger major ripples in the South Korean economy. The oil embargo by OPEC in the early 1970s, the outbreak of the 1997 Asian financial crisis, and the 2008 global financial crisis significantly impacted South Korea’s economic well-being. What is different in the 2020s, however, is the sheer scale and rapid convergence of noteworthy military, economic, and technological threats. In 2021, South Korea’s trade dependency index (its total trade volume as a portion of GDP) came to 63.5 percent, a slight drop from 2020 but still a remarkably high figure. By contrast, U.S. dependence on foreign trade was 19.3 percent and Japan’s was 28.1 percent.30 In 2020, 24.7 percent ($131 billion) of South Korean exports were destined for China, and if one includes Hong Kong with 5.83 percent ($30 billion), the number jumps to 30.52 percent ($161 billion) according to OECD data.31 Moreover, almost all of South Korea’s core exports—integrated circuits, cars, cargo ships, and electric batteries—are heavily dependent on global supply chains.

A Looming Taiwan Crisis

The expanding range of threats that South Korea faces is not limited to more tangible or measurable hazards. Equally significant are intangible variables such as political cohesion, the country’s prevailing national security consensus, the military’s fighting ethos, and the future of the U.S.-ROK alliance. The South Korean public understands the importance of maintaining a robust defense posture as evinced by recent surveys and the growing realization that North Korea is highly unlikely to give up its nuclear arsenal.

One worrisome consideration is what steps, if any, the ROK should take in case of out-of-area contingencies such as a possible Chinese invasion or naval blockade of Taiwan. Indeed, Taiwan is one of the many plausible hot spots where a crisis would have almost existential implications for South Korean security and wide-ranging implications for the U.S.-ROK military alliance. Short of North Korean missile attacks against South Korea and the outbreak of a second Korean War, Chinese military operations against Taiwan and how the ROK would opt to respond are among the most consequential potential developments in a highly fluid regional security environment.

While South Korea is very aware of the growing military threats posed by North Korea and China, whether the public and even the government would provide military assistance in a Taiwan contingency remains doubtful. In the 2021 KNDU poll, when asked whether the ROK should dispatch forces even in “dangerous zones,” 35.8 percent answered that they should only be sent to “safe zones.” Only 28.7 percent answered that in order to assist in the safeguarding of international security, the ROK should send forces to danger zones. A clear majority of experts (65 percent), however, answered in the affirmative.32 Indeed, one of the enduring hallmarks of South Korea’s security perceptions is the overwhelming primacy of coping with the North Korean threat at the cost of pushing aside other significant security threats. Although it is beyond the scope of this report to delve into likely South Korean responses, if China were to invade Taiwan or implement a naval blockade, it is very difficult to imagine how the ROK could avoid (1) helping counter a naval blockade of Taiwan and seeking to safeguard the freedom of navigation that is vital to South Korea’s economic survival; (2) providing military and logistical assistance to U.S. Forces Korea (USFK) for Taiwan-specific contingencies, especially if elements of the USFK (including the Seventh U.S. Air Force based at Osan Air Base in South Korea) are deployed to Taiwan; (3) defending ROK forces and the USFK in case China opts to undertake offensive military operations; and (4) coordinating intelligence, surveillance, and reconnaissance (ISR); missile defense; and contingency operational planning with USFK, U.S. Forces Japan, and the Japanese Self-Defense Forces.

While actual Chinese operations will be situation-specific, if U.S. and Chinese forces collide in Taiwan, it is not improbable to imagine that U.S. military bases in South Korea could become targets for the PLA. In addition, China could undertake preemptive military actions against the USFK or ROK forces to deter, deny, or diminish U.S. reinforcements to Taiwan.33 Some analysts have argued that South Korea should continue to pursue hedging by providing indirect military support to the United States, saying that “the strategy of indirect support is clearer than ‘strategic ambiguity,’ and more prudent than ‘strategic clarity.’”34 Nevertheless, although such theoretical circuit-breakers may be preferable, it would be extremely difficult for the ROK to offer only remedial or indirect military support in the event of actual U.S.-China military conflict in a Taiwan contingency.

South Korea’s Hardening Views on China

Aside from the topic of North Korea, an overwhelming majority of South Koreans believe that China is one of the country’s top national security threats. In the 2021 KNDU poll, 81.3 percent of respondents said that “China’s growing military power will have a negative impact on our security.” Unsurprisingly, 92.9 percent of those surveyed said that the United States was the most important country for South Korean security, while 71.5 percent also cited the United States as the most important country for South Korea’s economy. Given the reintroduction of U.S.-ROK-Japan trilateral military exercises under the Yoon government, 63 percent replied that trilateral security cooperation was necessary.35

In a Pew Research Center poll released in June 2021, 77 percent of South Koreans had a negative view of China—only behind Australia (78 percent), Japan (88 percent), and Sweden (80 percent).36 Almost all of the seventeen countries surveyed were advanced economies and established democracies. When asked whether the Chinese government infringes on the personal freedoms of its people, 92 percent of South Koreans answered in the affirmative—just second to Swedes with 95 percent and followed by Australians (91 percent) and Americans (90 percent).37

South Korea’s negative views on China are not likely to change. In a June 2022 Pew Research Center poll of nineteen countries, South Koreans had the most positive view of the United States (89 percent) right below Poland (91 percent).38 Only 19 percent of South Koreans had favorable views of China, 70 percent fewer than those who felt that way about the United States. In a September 2022 Pew survey that looked at global attitudes toward China during the rule of Chinese Communist Party General Secretary Xi Jinping, 80 percent of South Koreans had unfavorable views of China compared to only 31 percent in 2001.39 Interestingly, all of the top U.S. allies in the Indo-Pacific—including Japan, South Korea, and Australia—had similar, negative views on China and Xi.

Singapore had the highest approval rating of Xi at 69 percent followed by Malaysia with 62 percent; meanwhile, among European allies, 33 percent of Greeks said that they had “some” or “a lot of confidence” in Xi—the highest mark among U.S. allies in Europe and Asia.40 As shown in figure 10 below, even those countries that were more favorably disposed to Xi (such as Singapore and Malaysia) felt that China’s growing military power was a serious problem. A total of 62 percent of Malaysians responded that China’s military power is a problem versus 56 percent of Singaporeans. Only 9 percent of Japanese felt that rising Chinese military power was not a problem, followed by South Korea with 12 percent. Again, Australia (90 percent), Japan (88 percent), and South Korea (85 percent) all showed the highest levels of concern over rising Chinese military power.41

China’s aggressive military stance, including more frequent intrusions into South Korea’s air defense identification zone (KADIZ), has contributed to rising concerns of growing Chinese military power. While air defense identification zones are not binding, all aircraft must notify and receive permission from the ROK Joint Chiefs of Staff twenty-four hours prior to a flight into the KADIZ. The ROK expanded the zone in December 2013, which was soon after China had announced an expansion of its own air defense identification zone that included a South Korean–held island south of Jeju Island. Since then, the PLA (at times with Russian combat aircraft and bombers) have made repeated intrusions into the KADIZ. On May 24, 2022, just two weeks after the Yoon government came into office, two PLA Air Force H-6 bombers and two Russian Tu-95 bombers and two fighters entered the KADIZ in the Eastern Sea.42 The South Korean Ministry of National Defense estimated that Chinese and Russian flights into the KADIZ spiked in 2018 with 200 and 30 flights respectively, a figure that dropped in 2020 and 2021 (see figure 11).43

A 2022 survey by the Lowy Institute affirmed worsening relations between Australia and China. In 2009, 41 percent of Australian respondents said that China was either a very likely (15 percent) or somewhat likely (26 percent) military threat to Australia in the next twenty years. Fast forward to 2022, and 75 percent of Australians said that China was a very likely (32 percent) or somewhat likely (43 percent) military threat in the next two decades.44 Of the many threats facing Australia, 65 percent responded that Chinese foreign policy was a “critical threat” in addition to military conflict between the United States and China concerning Taiwan (64 percent) and North Korea’s nuclear program (58 percent).45

South Korea’s negative feelings toward China are not just driven by national security and economic issues. After Seoul opted to deploy the U.S. missile defense system known as the Terminal High Altitude Area Defense (THAAD) in July 2016 following the fourth North Korean nuclear test that January, China retaliated with a partial economic boycott, curtailing market access to South Korean goods and services and preventing Chinese tourism to South Korea. The Moon administration decided in July 2017 to agree to the so-called Three No’s agreement: “no additional deployment of THAAD batteries, no ROK participation in a U.S.-led regional missile defense system, and no creation of a trilateral military alliance involving the United States, South Korea, and Japan.”46 When the Yoon government came into office, Seoul stated that the THAAD issue was not subject to negotiations with China since it was the sole purview of South Korea and the United States. In August 2022, the Chinese Foreign Ministry claimed that the ROK had agreed to limit the operation of the THAAD battery in Seongju, South Korea, in addition to maintaining the Three No’s agreement. According to the Yonhap News Agency, a South Korean government official said, “our government clearly states that THAAD is a self-defensive defense tool aimed at protecting our people’s lives and safety from North Korea’s nuclear and missile threats and a matter of security sovereignty that can never be subject to negotiation.”47

What stands out about South Korean perceptions of China is that Beijing is not just seen as a growing military and economic threat but also a place that utilizes cultural imperialism. In a study published by Stanford University’s Freeman Spogli Institute for International Studies in February 2022, South Korean views of China were even more negative than feelings for Japan—a significant development given the never-ending historical enmity between Japan and South Korea. In this survey, on a scale of 0 (very negative) to 100 (very positive), of the 1,000 South Koreans who were surveyed, feelings toward China averaged 26.5 compared to 30.7 for Japan and 69.1 for the United States.48

While defense threats and risks have dominated South Korea’s national security landscape, the country is facing a growing array of economic and technology-related threats. The irony of Seoul’s expanding threat landscape is that it is based on its remarkable economic transformation since the 1970s. After going from being one of Asia’s poorest countries to the world’s tenth-largest economy and the fifth-largest trading power, the flip side of South Korea’s economic success is its growing vulnerability to nontraditional security threats. Nearly three years of living through the coronavirus pandemic has awoken South Koreans to the real perils of these threats. South Koreans are more aware of nontraditional security threats such as cybersecurity (77.8 percent) and pandemics (73.2 percent). More importantly, according to the 2021 KNDU poll, 78.8 percent felt that South Korea should prepare for nontraditional and nonmilitary security threats. Among experts, 96.7 percent answered affirmatively.49

Reforming the ROK’s National Security Grid

The vast array of multifaceted threats that South Korea faces has raised the possibility of institutional reforms to match the scale of these challenges. Wholesale national security reforms only usually happen after a major war (like World War II) or a catastrophic attack (like the 9/11 terrorist strikes). In the United States, intelligence reforms were instituted after the Watergate scandal, strategic lessons from the Vietnamese War, bottom-up reviews after the end of the Cold War, and 9/11. Partial or wholesale reviews took place but perhaps none more important than the passage of the 1947 National Security Act, which created the Department of Defense, the National Security Council, and the Central Intelligence Agency (CIA). In the aftermath of the 9/11 attacks, the Department of Homeland Security was established in addition to the Office of the Director of National Intelligence.

There have been numerous cases of state-sponsored terrorism by North Korea since the Korean War. Among the most notable was the October 1983 killing of twenty-one people (including members of then president Chun Doo-hwan’s entourage) in Yangon, Myanmar, by North Korean bombs. And on November 29, 1987, North Korean agents planted a bomb on Korean Air Flight 858, which flew from Baghdad with a brief layover in Abu Dhabi. All 115 passengers and crew members were killed when it detonated.50 In June 1999 and June 2002, the South Korean and North Korean navies clashed in the Western Sea (Yellow Sea) when North Korean patrol vessels attacked South Korean corvettes. On March 26, 2010, an ROK Navy vessel called Cheonan was destroyed by a North Korean torpedo in an incident that resulted in forty-six deaths.51 It was the most lethal North Korean attack since the Korean War. Then president Lee Myung-bak confronted another major North Korean provocation on November 23, 2010, when North Korean artillery shelled South Korea’s Yeonpyeong Island. Two ROK military personnel were killed and fifteen were wounded.52 Lee initially ordered that retaliatory measures should be taken but not at the risk of escalation. He came under withering criticism for not ordering decisive reprisals against North Korean forces.

As noted previously, South Korea also has faced key economic crises such as the 1987 Asian financial crisis, which led to massive structural reforms. In 1979 and 1980, the South Korean economy registered negative growth on the heels of Park’s assassination in October 1979 and massive political disruptions throughout 1980 including the brutal military crackdown in Gwangju in May 1980.53 The subprime mortgage crisis in 2007 and 2008 that led to the global financial crisis also affected the South Korean economy. According to OEC.world data, in 2020, 24.7 percent of South Korean exports went to China (and an additional 5.82 percent to Hong Kong), followed by the United States (14.1 percent) and Vietnam (9 percent).54 Due to the pandemic and changes in global supply chains, however, data from the Korea International Trade Association indicated that from January–June 2022, exports to China were $81.4 billion, up 6.9 percent from the previous year. But exports to the United States increased by a larger margin of 18.2 percent, reaching $54.9 billion from January–June 2022 and accounting for 15.7 percent of South Korea’s total exports.55 Disruptions to free trade, the rise of new trade blocs, and new protectionist measures have had major repercussions for South Korea’s long-term economic competitiveness. On top of trade disruptions and supply chain worries, South Korea must pay greater attention to continuing spillover effects from intensifying U.S.-China technology competition.

In October 2022, the Biden administration announced “sweeping export controls that will severely complicate efforts by Chinese companies to develop cutting-edge technologies with military applications.”56 Given South Korea’s leading edge on semiconductors and the importance of the Chinese and U.S. markets, Seoul is worried that South Korean companies will also be prevented from exporting high-end chips to China. As one U.S.-China and technology expert noted, the recent U.S. move was a “major watershed”; the United States “has essentially declared war on China’s ability to advance the country’s use of high-performance computing for economic and security gains.”57 For its part, Beijing is betting that such U.S. moves will spur Chinese self-sufficiency in semiconductors and that regardless of growing U.S. pressure, China’s R&D efforts on AI and quantum computing, for example, will eventually overtake U.S. efforts.

South Korea’s Existing National Security Framework

As illustrated in figures 12 and 13 below, Seoul’s current national security grid has remained fairly unchanged since the 2000s, although incoming administrations have made some tweaks to specific offices and personnel in the Office of the President. The administration of Roh Moo-hyun (2003–2008) was the first South Korean government to create the post of director of national security (equivalent to the U.S. national security adviser), and all successive administrations since then have retained the basic framework, as seen in figure 14. The current Yoon government created the post of secretary for economic security in May 2022. The senior secretary for economic affairs, the secretary for economy and finance, and secretary for industrial policy oversee the coordination of economic policies and strategies together with the relevant ministries, the prime minister as well as the president, and the Office for Government Policy Coordination—a critical subcabinet office in charge of the day-to-day management of domestic policies.

Given the high concentration of power in the South Korean presidency, all presidents have opted to run national security from the Office of the President through either their senior secretaries for foreign and national security affairs (prior to 2003) and the Office of National Security Affairs thereafter.

The current system is headed by a director, principal deputy director, and deputy director. During Park’s presidency (2013–2017), the national security office was run by the director of national security with a senior secretary for foreign and national security affairs. While some new secretaries have been appointed by the Yoon administration (such as the secretary for economic security), much of the basic structure has remained unchanged. Given the growing importance of cybersecurity, a secretary of cybersecurity has been a feature of the president’s office over the past decade.

No flowchart fully reflects decisionmaking processes, the impact an office or unit has on affecting the flow of key papers and documents (including intelligence briefings), or the political forces that determine one’s effectiveness, such as presidential support or external pressures. The president also taps into informal national security networks, absorbs domestic and foreign press reports, and most importantly, applies their own intuition on a range of national security issues. What is increasingly critical to the South Korean president is the growing importance of economic security and intelligence, the impact of technologies on national security, and limited measures to offset abrupt changes in the global economy. In November 2022 during a meeting on the sidelines of the East Asia Summit in Phnom Penh, Cambodia, the leaders of the United States, South Korea, and Japan pledged to work closely on key security and economic issues given the “importance of trilateral cooperation to strengthen the rules-based economic order to enhance economic security.” Washington, Seoul, and Tokyo also agreed to begin a trilateral dialogue on economic security.58 The growing U.S.-China technology tug-of-war, for example, is just one facet of how governments are at the forefront of new protectionist measures when it comes to retaining national technological edges while denying an adversary’s access to national security–related technologies. If nuclear weapons and ballistic missiles entered the national security lexicon after World War II, the post-pandemic world’s major security threat drivers will likely be economic disruptions and technology diffusion. This is especially true for a country like South Korea that is so dependent on foreign trade and global supply chains and so vulnerable to intensifying global economic competition.

Like in most governments, those in power in South Korea rarely have direct economic or technology backgrounds. Unsurprisingly, the ROK continues to place a premium on meeting a range of geopolitical threats such as North Korea’s rapidly maturing nuclear capabilities; China’s growing anti-access, area-denial assets, which could disrupt, deter, or even selectively rollback U.S. miliary operations and reinforcements; and the potential for Sino-North Korean and even Russian-North Korean military cooperation in major crises or conflicts. Alliance management also incorporates intensified crisis management as evinced by the fallout of Trump’s denigration of the alliance, vitriolic opposition to U.S.-ROK military exercises, and threats to withdraw U.S. forces if Seoul did not exponentially increase its annual defense-sharing costs from about $1 billion to $5 billion.59

As noted above, previous governments conducted defense reviews, such as the Roh administration, which began negotiations with the United States to revert full operational control over the ROK forces to accentuate the importance of a more self-reliant defense posture. The Lee administration’s Defense Reform Plan 307 stressed strengthening the ROK military’s jointness, especially in the aftermath of the 2010 North Korean attacks. Under the Park administration, the ROK formalized its so-called three-axis system to defend against North Korea’s nuclear weapons and ballistic missiles, and while the Moon government maintained it, it sometimes used different names. The South Korean three axis consists of systems known as (1) Kill Chain, (2) Korea Air and Missile Defense, and (3) Korea Massive Punishment and Retaliation. In essence, the three-axis package is designed to thwart North Korean attacks as effectively as possible with South Korea’s own counteroffensive strike capabilities as well as missile defense. Crucially, however, South Korea continues to rely on U.S. extended deterrence in the face of North Korea’s growing nuclear weapons capabilities. How effective South Korea’s non-nuclear forces are likely to remain, including its three-axis system, depends on numerous factors such as the ROK’s ability to manufacture and deploy much larger numbers of key ballistic missiles such as the Hyunmoo-4 (and under development, the Hyunmoo-5), enhanced intelligence, surveillance, and reconnaissance or ISR assets (especially an array of micro satellites), and sustained defense budgetary support. The Yoon administration revived the three-axis concept and stated that it would strengthen it in the face of a nuclear-armed North Korea. In October 2022, the South Korean government announced that it planned to set aside $21 billion to enhance its three-axis defense system from 2023 to 2027 and allocated the money to some ninety-three different defense development and procurement projects.60

A notable development in the Yoon government is the establishment of a Joint Strategic Command, which will unify South Korea’s counterstrike capabilities under the three services by 2024. While details remain limited, a unified command would include the Hyunmoo surface-to-surface missiles; air defense batteries such as Patriots; ISR assets; and SLBMs. According to press reports, the new command would also oversee cyber warfare operations and, over time, space-based capabilities.61 At the tail end of the Moon administration, the Ministry of National Defense established a Strategic Missile Command under the army and the Missile Defense Command under the air force. As the ROK gathers enhanced ISR capabilities, the military believes that together with strengthened U.S.-ROK extended deterrence, South Korea will be able to meet the full array of threats from the North. Although improving South Korea’s strike capabilities augments deterrence, if North Korea conducts a seventh nuclear test soon (as many expect), South Korea must rethink the best way of maintaining deterrence. A robust U.S.-ROK alliance remains as the best deterrent, but if Trump reenters the White House or a president with similar worldviews assumes office, alliance cohesion and the viability of U.S. extended deterrence cannot help but be questioned.

The Need for a Bottom-up Review

For the ROK, traditional approaches to national security no longer suffice. Emphasizing the importance of economic security is a step forward. But it is only a small step toward significantly upgrading and resetting South Korea’s national security grid. What is needed is a fundamental review and overhaul akin to the 9/11 Commission and follow-on measures in the United States. The South Korean national security system needs an overhaul because of rising vulnerabilities and emerging drivers:

a nuclear-armed North Korea with tactical nuclear warheads including SLBMs;

China’s accelerated military modernization and buildup that could severely undermine South Korean as well as USFK and USFJ operations in a major conflict on the Korean Peninsula;

Deepening U.S.-China strategic rivalry and competition in military, economic, and technological domains;

the growing importance of economic security and, increasingly, the securitization of critical technologies and matching intelligence capabilities;

critical manpower shortages in the armed forces due to demographic shifts and the need to optimize technology-intensive modernization coupled with enhanced warfighting capabilities;

the unparalleled importance of technology firms, including defense corporations, in shaping the contours of AI-driven military modernization;

domestic political shifts in the United States that could significantly impact the longer-term efficacy of U.S. extended deterrence;

South Korea’s growing exposure to key regional contingencies such as a massive military crisis in Taiwan and out-of-area threats (such as the ongoing war in Ukraine);

Rising opportunity costs owing to deepening political enmity between the major political parties and polarization that severely constraints the building of a more bipartisan national security paradigm; and

the need to build and strengthen secure channels of communication and collaboration with key allies and partners across the world but especially in the Indo-Pacific and with the EU and NATO.

To the greatest extent possible, the Yoon administration should stress bipartisan national security reforms, although deeply divisive domestic politics and entrenched approaches to North Korea significantly inhibit across-the-aisle cooperation. But it is still possible for the government to undertake a series of measures to help improve and modernize certain elements of the country’s national security apparatus. Again, all governments have stressed various defense reforms, since they provide political mileage for undertaking tangible force improvements. However, given the convergence of multiple threats, unparalleled global economic and technological disruptions, and the growing magnitude of threats from North Korea and China, the government should seriously consider the following steps to upgrade and augment South Korea’s national security framework.

Establishing a Presidential National Security Review Commission

The South Korean government should create a presidential commission to undertake a comprehensive national security review. To be sure, how the president adopts core national security reform proposals depends heavily on the level of presidential interest, political feasibility, and level of bipartisan support and participation. While defense reforms are increasingly important amid the multiple challenges South Korea faces (even in the face of mounting military manpower shortages), no president has ever conducted a comprehensive national security review. The sinking of the Cheonan in April 2010 and the subsequent multinational investigation team’s report would have been an ideal moment to upgrade South Korea’s national security framework. While the Lee administration created a defense reform commission to review military lessons and upgrades, there was no comprehensive national security review. In part, this was because the Lee administration was entering its final two years in office (in 2011–2012) and had very limited bandwidth or political capital as political parties (both ruling and opposition) turned their attention to the then-critical December 2012 presidential election.

The Russian invasion of Ukraine in February 2022 has triggered concerns in South Korea, such as the repercussions for energy and food prices as well as exacerbating global supply chain shortages already strained due to the pandemic. Yoon has also been consistently vociferous in his condemnation of Russia’s brutal invasion. But perhaps the biggest lesson for South Korea is the possibility of a major Taiwan crisis precipitated by Chinese military operations. Clearly, there is no direct link between the Russian invasion of Ukraine and what the Chinese leadership may opt to do in Taiwan. Nevertheless, the Ukrainian war highlighted awareness in South Korea of possible Chinese actions vis-à-vis Taiwan. As CIA Director William Burns stated in July 2022, “our sense is that it probably affects less the question of whether the Chinese leadership might choose some years down the road to use force to control Taiwan, but how and when they would do it.”62

If such a commission is created, it should cover all facets of national security given that such an effort has never been undertaken by any government. As noted above, even after North Korea’s first nuclear test in 2006 and the sinking of a ROK naval vessel in 2010, no comprehensive national security review was undertaken. Specifically, such a review should include the following:

a whole-of-government approach that encompasses all critical elements of national security;

a thorough assessment of South Korea’s mid- to longer-term intelligence requirements and needs;

a review of existing decisionmaking structures and national security–related ministries and agencies and, if necessary, adopting organizational reforms including the setting up of new offices or agencies;

an assessment of the necessity and desirability of forming an economic and technology security committee within the National Security Council to spearhead all-source collection and coordination of inter-governmental guidelines and policies;

the creation of new channels of communication and cooperation of critical economic and technology intelligence and information with the active participation of government-funded research institutes;

enhanced government and private sector cooperation on economic and technology intelligence while fully respecting privacy issues and necessary firewalls;

strengthened national security cooperation, including economic and technology security issues with allies and key partners including key members of the Association of Southeast Asian Nations, Japan, Australia, key NATO members, and Israel; and

a published national security strategy white paper within the first year of the new administration.

Optimizing the Intelligence Community for an Evolving Landscape

The history of South Korea’s National Intelligence Service (NIS) dates back to 1961 with the founding of the Korean Central Intelligence Agency (KCIA) shortly after the military coup of May 1961. In 1981, the KCIA was renamed the Agency for National Security Planning when the director of the KCIA assassinated Park in October 1979. Then president Kim Dae-jung renamed it the NIS in January 1999.63 Prior to democratization in 1987, South Korea’s main intelligence agency was heavily involved in domestic politics and served as an indispensable coercive arm of authoritarian governments. Under a revised NIS Law passed in October 2021, the NIS is forbidden from undertaking domestic intelligence operations unless specifically related to counterintelligence under stringent guidelines or when intelligence collection and operations are conducted against such organizations or individuals under the National Security Law.64 The bill was passed by the Moon administration with nominal bipartisan support.

Australia offers one example of a move that South Korea could consider. In 2017, Australia followed the United States by deciding to create its Office of National Intelligence responsible for coordinating the intelligence functions of the country’s six main intelligence agencies.65 A parliamentary review in part concluded, “in our view, that pace of change is set to intensify with the major influences on Australia’s national security outlook over the coming decade coalescing around three key focal points: fundamental changes in the international system, extremism with global reach and the security and societal consequences of accelerating technological change.”66 After the passage of the Office of National Intelligence Act in November 2018, the office was launched in December 2018 and brought together nine organizations within the Australian intelligence community, including key offices such as the Australian Secret Intelligence Service, Australian Security Intelligence Organisation, and the Defense Intelligence Organisation.67

Whether South Korea needs its own version of a national intelligence office needs to be assessed thoroughly. Given the NIS’s undisputed authority within the South Korean intelligence community, there is likely to be enormous resistance from the NIS for creating a Korean office of national intelligence. For its part, the Ministry of National Defense and the military with its intelligence agencies such as the Defense Intelligence Agency, Defense Intelligence Command, and Korea Imagery Processing Center, among others, are also likely to challenge the creation of a South Korean national intelligence office since it would place military intelligence organizations under nominal civilian control. What is undeniable, however, is that the NIS and defense-related intelligence organizations have only limited built-in expertise on increasingly complex economic and technology intelligence. Although major ministries in charge of economic, finance, trade, and industrial policies have significant know-how, their organizational structures are not geared for comprehensive intelligence collection, analysis, and dissemination. Nor is the Ministry of Science and ICT really suited for collecting technology-related intelligence. There are key research centers such as the Science and Technology Policy Institute, but they are not designed or staffed for intelligence collection and analysis purposes.

Prioritizing Economic and Technology Security

In May 2022, the Japanese Diet passed a piece of legislation on economic security that, according to one expert, will “bring Japan’s infrastructure, technology and supply chains under greater watch” and task government ministries with implementation.68 Key priorities include securing crucial supply chain materials such as semiconductors, strengthening the security of basic infrastructure, accelerating research on innovation and technology development, and classifying certain Japanese patents to protect critical technologies.69 Earlier, in April 2020, Japan’s National Security Secretariat added an economic division, and in October 2021, Prime Minister Kishida Fumio created a new cabinet-level minister for economic security. In March 2022, the Diet also passed the Economic Security Promotion Act.70

For South Korea, which faces similar geoeconomic and technological challenges, it makes sense to create a new ministry or at least a cabinet-level office that deals exclusively with economic and technology security. The Office of National Security that currently houses a secretary for economic security is woefully inadequate in meeting the exponentially rising economic security threats and risks South Korea is contending with. The same holds true for technology intelligence and policy coordination. Given accelerating Chinese inroads in AI, quantum computing, and nuclear fusion and South Korea’s need to maintain a leading edge in semiconductors and other critical high-end technologies, technology intelligence cannot be relegated below traditional national security agendas. Indeed, in many ways, they are more important. The Office for Government Policy Coordination (OPC) in the Prime Minister’s Secretariat is the clearinghouse for virtually all national policies and is headed by a minister of the OPC and two vice ministers. Within the OPC are several director generals, including for foreign affairs and national security, economic and financial policy, and industry, science, and small and medium-sized enterprises. The OPC handles economic security and technology policy coordination, but it is simply overwhelmed by running the country’s government machinery. Adding economic security to its already bloated mandate is not the answer.

What is needed is enhanced intelligence, information, policy, and strategy coordination in the Office of the President, although Yoon argued during the transition that presidential office personnel will be slimmed down.71 But given the magnitude of threats and challenges relating to economic security and technology, creating a third office such as an office of economic and technology security in the president’s office would be a major step toward significantly strengthening the ROK’s approach to economic and technology security. In addition, corporations are on the front lines of unparalleled economic and technological warfare. Virtually every aspect of intensifying U.S.-China economic and technology competition has enormous implications for South Korean firms. Creating channels of communication and cooperation are essential especially as foreign intelligence operations expand against South Korean firms.

Conclusion

All major countries face hybrid threats, and South Korea is not unique in that respect. Still, the combined magnitude and intensity of the geopolitical, geoeconomic, and technological risks confronting the country are unprecedented in its history. Whether Seoul can weather these cascading crises and enact institutional and bipartisan national security reforms remains uncertain. But while the country’s existing national security framework has been updated from time to time, the ROK has never conducted a whole-of-government review and necessary overhaul of its national security apparatus. Modernizing and improving South Korea’s command and control mechanisms, reforming the intelligence community, injecting economic and technological intelligence at all key levels of national security planning, and finding ways to cooperate with the private sector to build more resilient supply chains are key tasks that must be addressed. Such preparations would help Seoul face the simultaneous crises at its doorstep including a fully nuclear-capable North Korea, rising spillovers from U.S.-China competition, severe economic dislocations, unparalleled foreign intelligence operations against South Korean firms, and worsening global technology competition.

Going forward, the ability of South Korea’s national security system to formulate and implement timely and effective policies and countermeasures will become increasingly tested. Japan also faces a similar national security situation. But as explained above, Japan’s focus on economic security and statecraft for much of the post–World War II era has provided it with significant bureaucratic advantages. Moreover, given the longevity of the Liberal Democratic Party’s dominance of Japanese politics for more than sixty years, policy consistency (albeit in a heavily bureaucratized form), including on foreign and security affairs, has been a hallmark of the Japanese national security system.

Meanwhile, South Korea’s national security grid remains largely unchanged. So far, changes in government between the left and the right have resulted in major security policy shifts including different approaches to North Korea, alliance management with the United States, ties to China, and depth of global engagement. One major reason why a comprehensive national security review has not been undertaken by previous governments is because once a new administration comes into office, they spend a lot of time and political capital on course corrections with little time or, equally important, political will to conduct a thorough national security review.

If the left continues to espouse policies that underemphasize the North Korean threat, bow to harsher Chinese demands, and distance South Korea from the United States and Japan, Seoul’s ability to cope with the many crises it is grappling with today and will face tomorrow will weaken considerably. Equally significant is the need for the right to place greater emphasis on modernizing and upgrading South Korea’s existing national security system. Strengthening the country’s core alliance with the United States is a cornerstone of Yoon’s national security policy in addition to becoming a “global pivotal state”.72 But if the ROK is to play a greater international role commensurate with its growing economic, technological, and military capabilities, it must do so based on a comprehensive national security review and the reforms that such an exercise endorses. A robust U.S.-ROK alliance is a key facet of enhancing South Korea’s strategic capabilities, but it is only one dimension of an overall strategy that incorporates complementary and necessary national security reforms at home.

Notes

1 Gawon Bae and Jessie Yeung, “South Korea Records World’s Lowest Fertility Rate–Again,” CNN, August 26, 2022, https://edition.cnn.com/2022/08/26/asia/south-korea-worlds-lowest-fertility-rate-intl-hnk/index.html.

2 Kim Soo-yeon and Chae Yun-hwan, “(5th LD) N. Korea’s Missiles Flies Across NLL for First Time; S. Korea Sends Missiles Northward in Its Show of Force,” Yonhap News Agency, November 2, 2022, https://en.yna.co.kr/view/AEN20220307009057325.

3 “S. Korea Considering Reveal of Hyunmoo-5 as ‘Warning to N. Korea,’” The Dong-a Ilbo, October 17, 2022, https://www.donga.com/en/article/all/20221017/3703606/1.

4 Evan A. Feigenbaum and Robert A. Manning, “A Tale of Two Asias,” Foreign Policy, October 31, 2012, https://foreignpolicy.com/2012/10/31/a-tale-of-two-asias.

5 Quoted in Eli Amdur, “Too Late,” Forbes, March 11, 2021, https://www.forbes.com/sites/eliamdur/2021/03/11/too-late/?sh=2ea5682f1dbe.

6 “South Korea: Conservative Candidate Yoon Suk-yeol Elected President,” BBC, March 10, 2022, https://www.bbc.com/news/world-asia-60685141.

7 Ko Jun-tae, “Democratic Party on Track to Put Legislative Branch Back to Work on Its Own,” Korea Herald, June 28, 2022, https://www.koreaherald.com/view.php?ud=20220628000627.

8 Oh Hyeon-seok, “Ee jaemyung, hanmiil hulyreone ‘guekdanjeok chinil gukbang,’…yeo tto jukchangga,” [Lee Jae-myung, ‘extremely pro-Japanese defense,’ on Korean-U.S.-Japanese exercise . . . Ruling party ‘another leftist battle cry,’” The JoongAng, October 7, 2022, https://www.joongang.co.kr/article/25107623#home.

9 “Perception on National Security Affairs, 2021,” Research Institute for National Security Affairs, Korea National Defense University, February 2, 2022, 7, https://www.kndu.ac.kr/rinsa/bbs/data/view.do.

10 Ibid., 163.

11 Jon Grevatt and Andrew MacDonald, “South Korea Proposes 4.6% Increase in 2023 Defence Budget,” Janes, September 2, 2022, https://www.janes.com/defence-news/news-detail/south-korea-proposes-46-increase-in-2023-defence-budget.

12 “Perception on National Security Affairs, 2021,” Research Institute for National Security Affairs, 149.

13 Park Ji-yeong, “Kim Seung-hyep hapchameuijang, Hyunmu-2C naktane ‘jeogsie seolmyeong mothae maeu songku,” [JCS Chairman Kim Seung-hyup “Deeply Sorry for Delayed Explanation” of Failed Hyunmu-2C Missile], Chosun Ilbo, October 6, 2022, https://biz.chosun.com/policy/politics/2022/10/06/GW6HXKEDEJGB5NVN4Q7OJDABK4.

14 Seo Ji-eun, “Koreas State Audit Agency Requests Investigation of 20 Officials in Fisheries Official Case,” Korea JoongAng Daily, October 16, 2022, https://koreajoongangdaily.joins.com/2022/10/16/national/politics/Korea-fisheries-murder/20221016185742341.html.

15 Kim Tong-hyung, “South Korea Arrests Former Top Officials Over 2020 Killing,” AP News, October 22, 2022, https://apnews.com/article/seoul-south-korea-north-government-and-politics-arrests-8b4513abcf2b1c0fcca947297e878ac0.

16 “North Korea Launches Projectiles Into Sea, Spurns Future Talks With South Korea,” France24, August 16, 2019, https://www.france24.com/en/20190816-north-south-korea-projectiles-kim-jong-un-moon-jae-reunification-talks.

17 Lee Wan, “N. Korea’s Hints at ICBM, Nuke Tests Leave Blue House at a Loss,” Hankyoreh, January 21, 2022, https://english.hani.co.kr/arti/english_edition/e_national/1028324.html.

18 “Saseol: Moon pyeionghwa geutorok waecheoneundae buk dobal Pak Geun-hye jeongbueui 6bae,” [Editorial: Moon’s Relentless “Peace” Harping but North’s Provocations 6 Times Under Park Geun-hye], Seoul Gyeongjae, January 12, 2022, https://www.sedaily.com/NewsView/260U2QNF9V.

19 Lee Wan and Noh Ji-won, “Moon Says N. Korea-US Have Declared End of Their ‘Hostile Relationship,’” Hankyoreh, July 3, 2019, https://english.hani.co.kr/arti/english_edition/e_northkorea/900370.html.

20 Research Team, “2022 Unification Perception Research of Korean Nationals,” KBS Public Media Institute, August 11, 2022, 301081660304404385 (2).pdf

21 “Survey on Unification Attitudes 2021,” Institute for Peace and Unification Studies, Seoul National University, January 2022, 79, https://ipus.snu.ac.kr/blog/archives/research/6084.

22 Heather Foye, “North Korea Ramps Up Missile Tests,” Arms Control Association, November 2022, https://www.armscontrol.org/act/2022-11/news/north-korea-ramps-up-missile-tests.

23 Choe Sang-Hun, “North Korea Launches Two Ballistic Missiles, Fourth Test in a Week,” New York Times, September 30, 2022, https://www.nytimes.com/2022/09/30/world/asia/north-korea-ballistic-missile-test.html.

24 Son Deok-ho, “Kim Jeong Un joongshim jihweebu gonggyeok ttaen ‘jadong haek takyeok’…buk, gonsaejok ‘haekmuryeok beobryeong’ chaetaek” [North Approves Offensive ‘Nuclear Force Doctrine’…If Kim Jong Un’s Leadership is Attacked ‘Automatic Nuclear Strike,’], Chosun Ilbo, September 14, 2022, https://biz.chosun.com/policy/politics/2022/09/09/XHHODOW5FJEWLAB5P4MVVPYKIA.

25 “Perception on National Security Affairs, 2021,” Research Institute for National Security Affairs, 125.

26 Ibid.

27 “North Korea Conducts Longest-Range Missile Test Over Japan,” The Asahi Shimbun, October 4, 2022, https://www.asahi.com/ajw/articles/14734203.

28 “The 10th Survey on Mutual Perceptions of South Korea and Japan,” East Asia Institute and Genron NPO, September 1, 2022, 41, http://www.eai.or.kr/new/en/etc/search_view.asp?intSeq=21399&board=eng_event.

29 Jhoo Dong-chan, “Korea to Become the World’s Most Aged Society by 2067,” Korea Times, September 2, 2019, https://www.koreatimes.co.kr/www/biz/2019/09/367_274967.html; and “Korea’s Fertility Rate Drops Even Further to 0.81 Percent in 2021,” Korea Times, February 23, 2022, https://www.koreatimes.co.kr/www/nation/2022/02/281_324402.html.

30 Bae Hyunjung, “South Korea’s Trade Dependency Slips in 2019 Amid Sluggish Reports,” Korea Herald, October 18, 2022, https://www.koreaherald.com/view.php?ud=20201018000119.

31 “South Korea,” OEC.world historical data, 2020, accessed November 18, 2022, https://oec.world/en/profile/country/kor.

32 “2021nyeon beomkukmin anboeuishik josabogoseo,” [Perception on National Security Affairs, 2021], Research Institute for National Security Affairs, Korea National Defense University, 173.

33 Yang Wook, “Daeman chimgong 2ju mane jeomryeong mothamyeon ‘segye daejeon’” [Possibility of “World War” if Taiwan Isn’t Occupied Two Weeks After an Invasion], Sisa Journal, no. 1720, October 1, 2022, https://www.sisajournal.com/news/articleView.html?idxno=244165.

34 Sungmin Cho, “Indirect Support: South Korea’s Strategy in the Middle of U.S.-China Strategic Competition,” Periscope, no. 289, Korea Institute for Maritime Strategy, June 2022, https://kims.or.kr/issubrief/kims-periscope/peri289.

35 “Perception on National Security Affairs, 2021,” Research Institute for National Security Affairs, 53.

36 Laura Silver, Kat Devlin, and Christine Huang, “Large Majorities Say China Does Not Respect the Personal Freedom of Its People,” Pew Research Center, June 30, 2021, https://www.pewresearch.org/global/2021/06/30/large-majorities-say-china-does-not-respect-the-personal-freedoms-of-its-people.

37 Ibid.

38 Laura Silver, Christine Huang, and Laura Clancy, “Across 19 Countries, More People See the U.S. Than China Favorably—But More See China’s Influence Growing,” Pew Research Center, June 29, 2022, https://www.pewresearch.org/fact-tank/2022/06/29/across-19-countries-more-people-see-the-u-s-than-china-favorably-but-more-see-chinas-influence-growing.

39 Laura Silver, Christine Huang, and Laura Clancy, “How Global Public Opinion of China Has Shifted in the Xi Era,” Pew Research Center, September 28, 2022, https://www.pewresearch.org/global/2022/09/28/how-global-public-opinion-of-china-has-shifted-in-the-xi-era.

40 Ibid.

41 Ibid.

42 Min Byeong-kwon, “Joongreo pokgyeokgi jeontugi yeonieo KADIZ chimbeom…Han gonggun jeonsuljochi” [Chinese-Russian bombers and fighters successive KADIZ intrusions . . . Korean air force takes tactical responses], Seoul Gyeongje, May 24, 2022, https://www.sedaily.com/NewsView/2663G4RRYQ.

43 Ha Chae-rim, “Gun ‘Jinanhe joong gunyonggi 70yeoheo KADIZ jinib…Reo gunyonggi 10 yeohoe” [Military, ‘Chinese military aircraft enters KADIZ 70 odd times . . . Russian military aircraft 10 odd times,’], Yonhap News, October 3, 2022, https://www.yna.co.kr/view/AKR20221003040151504?utm_source=pocket_mylist.

44 Natasha Kassam, “Lowy Institute Poll 2022,” Lowy Institute, June 29, 2022, https://poll.lowyinstitute.org/report/2022.

45 Ibid.

46 Joe He-rim, “China Demands Korea Uphold ‘Three Nos’ Policy,” Korea Herald, July 28, 2022, https://www.koreaherald.com/view.php?ud=20220728000666.

47 Lee Haye-ah, “(3rd LD) THAAD Issue Is Not Subject to Negotiation: Presidential Office,” Yonhap News Agency, August 11, 2022, https://en.yna.co.kr/view/AEN20220811006453315.

48 Gi-wook Shin, Haley Gordon, and Hannah June Kim, “South Koreans Are Thinking What China Means to Their Nation,” Stanford University, Freeman Spogli Institute for International Studies, February 8, 2022, https://fsi.stanford.edu/news/south-koreans-are-rethinking-what-china-means-their-nation.

49 “Perception on National Security Affairs, 2021,” Research Institute for National Security Affairs, 187.

50 Danielle Haynes, “The Tale of KAL Flight 858, How Woman Who Bombed It Walks Free,” United Press International, January 24, 2020, https://www.upi.com/Top_News/World-News/2020/01/24/The-tale-of-KAL-Flight-858-how-woman-who-bombed-it-walks-free/7101579813401.

51 “NK Sailors Awarded Hero’s Title for Attack on S. Korean Warship: Defector,” Korea Times, August 12, 2012, https://www.koreatimes.co.kr/www/news/nation/2013/08/113_126450.html.

52 Mark McDonald, “’Crisis Status’ in South Korea After North Shells Island,” New York Times, November 23, 2010, https://www.nytimes.com/2010/11/24/world/asia/24korea.html.

53 “Overview of the Korean Economy in the 1980s and 1990s,” K Developedia, from Jinsoo Lee, “Foreign Capital in Economic Development: Korean Experiences and Policies (Seoul: KDI School of Public Policy and Management, 2013), accessible at https://www.kdevelopedia.org/Development-Overview/all/overview-koreeconomy-1980s-1990s–201412170000439.do.

54 “South Korea,” OEC.world historical data.

55 “Korea’s Exports to China Fall and Those to U.S. Rise Amid Shift in Trade Order,” Pulse, July 25, 2022, https://pulsenews.co.kr/view.php?sc=30800018&year=2022&no=653573.

56 Demetri Sevastopulo and Kathrin Hille, “US Hits China With Sweeping Tech Export Controls,” Financial Times, October 8, 2022, https://www.ft.com/content/6825bee4-52a7-4c86-b1aa-31c100708c3e.

57 Demetri Sevastopulo and Kathrin Hille, “US Hits China With Sweeping Tech Export Controls.”

58 “Phnom Penh Statement on Trilateral Partnership for the Indo-Pacific,” White House, November 13, 2022, https://www.whitehouse.gov/briefing-room/statements-releases/2022/11/13/phnom-penh-statement-on-trilateral-partnership-for-the-indo-pacific.

59 Lee Haye-ah, “Trump Threatened to Pull Troops if S. Korea Didn’t Give $5 bln; Bolton Memoir,” Yonhap News Agency, June 22, 2020, https://en.yna.co.kr/view/AEN20200622004700325.

60 Jon Grevatt, “South Korea to Invest USD21 Billion on ‘Three-Axis’ System,” Janes, October 24, 2022, https://www.janes.com/defence-news/news-detail/south-korea-to-invest-usd21-billion-on-three-axis-system.

61 Cho Soo-hyun, “Jeolryak saryeongbu neun ‘3chuk chaegye’ heksimbudae…2024nyeon jjeum changseol chujin” YTN, July 7, 2022, https://www.ytn.co.kr/_ln/0101_202207070107599640.

62 “Ukraine War Forcing China to Rethink ‘How and Why’ It May Invade Taiwan, CIA Chief Says,” The Guardian, July 21, 2022, https://www.theguardian.com/world/2022/jul/21/ukraine-war-forcing-china-to-rethink-how-and-when-it-may-invade-taiwan-cia-chief-says.

63 “History of NIS,” Republic of Korea National Intelligence Service, https://eng.nis.go.kr/EID/1_5_2_1.do.

64 For additional details, see “National Intelligence Service Law,” Korea Law Information Center, Ministry of Government Legislation, no. 18519, effective October 19, 2021, https://www.law.go.kr/%EB%B2%95%EB%A0%B9/%EA%B5%AD%EA%B0%80%EC%A0%95%EB%B3%B4%EC%9B%90%EB%B2%95.

65 Carl Baker, “Intelligence Community Reforms,” Parliament of Australia, https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook46p/IntelligenceCommunity.

66 Ibid.

67 For further information, see “Office of National Intelligence Act 2018,” no. 155, 2018, Australian Federal Register of Legislation, https://www.legislation.gov.au/Details/C2018A00155.

68 Sheila Smith, “Japan Turns Its Attention to Economic Security,” Council on Foreign Relations, May 16, 2021, https://www.cfr.org/blog/japan-turns-its-attention-economic-security.

69 Ibid.

70 Kana Itabashi et. al., “Japan: New Act on the Promotion of Japan’s Economic Security Enacted,” Global Compliance News, July 10, 2022, https://www.globalcompliancenews.com/2022/07/10/new-act-on-the-promotion-of-japans-economic-security-enacted240622.

71 “Slimmer Presidential Office,” Korea Times, May 2, 2022, https://www.koreatimes.co.kr/www/opinion/2022/05/202_328396.html.

72 “Middle Power Powerhouse: South Korea as Global Pivotal State,” Asia Society event, May 30, 2022, https://asiasociety.org/korea/events/middle-power-powerhouse-south-korea-global-pivotal-state