William Krist's Blog, page 15

Emerging Economic Drivers in ASEAN

The first half of 2023 reminded us how resilient the global economy is. Despite persistent inflationary pressures and continued monetary policy tightening, there have been undeniable signs of progress. Headline inflation has moderated, energy prices have eased, whilst household consumption has strengthened. That said, challenges to ongoing recovery have become more prominent, especially as China, a major economic engine, is starting to exhibit waning growth momentum. The International Monetary Fund (IMF) projects global growth to slow to 3.0% in 2023, from 3.5% last year – the lowest it has been in three decades.

For Southeast Asia, growth prospects look comparatively better against the global backdrop at 4.6% as forecast by the Asian Development Bank (ADB). This was a slight downgrade from earlier predictions, due to lower export growth and a deceleration of industrial activity. Regional growth has been anchored by domestic demand and services, and the recovery of tourism activities. The need to fully leverage the region’s growth momentum amidst economic uncertainty and rising geopolitical risks was aptly highlighted by Indonesia’s ASEAN Chairmanship theme, ASEAN Matters: Epicentrum of Growth. The conclusion of the 43rd ASEAN Summit and Related Summits in September was once again a testament of Indonesia’s leadership, with over 90 documents issued and concrete deliverables announced throughout the three-day meetings that include several dialogue partners. Now that it has passed the baton to Laos, our Analysis contributors assess Indonesia’s Chairmanship and whether it has lived up to expectations.

Although it was unable to move the needle on the Myanmar crisis and the South China Sea, Jakarta managed to reaffirm ASEAN Leaders’ commitment to strengthen economic resilience. Among the Summit’s key economic outcomes were the launch of the Digital Economic Framework Agreement (DEFA) negotiations and the adoption of the ASEAN Blue Economy Framework. These outcomes embrace the region’s new growth drivers in an inclusive and sustainable way. With this in mind, this issue casts a Spotlight on the region’s many different emerging economic drivers. Our contributors look at potential growth engines in the region, from the quest for an ASEAN single QR payments network to the rise of unicorns, and the role of innovation in advancing digital health. Looking at external partners, regional experts examine how the Indo-Pacific Economic Framework for Prosperity (IPEF), the European Green Deal, and the Korea-ASEAN Solidarity Initiative can help unlock new economic and development pathways.

Beyond the economy, the region is facing another momentous development with several Southeast Asian countries undergoing leadership transitions. To help make sense of this changing political landscape and what it means for regional cooperation, ASEANFocus convened a roundtable featuring views from experts on seven ASEAN countries, namely Cambodia, Indonesia, Malaysia, the Philippines, Thailand, Singapore, and Vietnam.

 

ASEANFocus-Sep-2023-LR

 

To read the full report, click here.

The post Emerging Economic Drivers in ASEAN appeared first on WITA.

Emerging Economic Drivers in ASEAN

The first half of 2023 reminded us how resilient the global economy is. Despite persistent inflationary pressures and continued monetary policy tightening, there have been undeniable signs of progress. Headline inflation has moderated, energy prices have eased, whilst household consumption has strengthened. That said, challenges to ongoing recovery have become more prominent, especially as China, a major economic engine, is starting to exhibit waning growth momentum. The International Monetary Fund (IMF) projects global growth to slow to 3.0% in 2023, from 3.5% last year – the lowest it has been in three decades.

For Southeast Asia, growth prospects look comparatively better against the global backdrop at 4.6% as forecast by the Asian Development Bank (ADB). This was a slight downgrade from earlier predictions, due to lower export growth and a deceleration of industrial activity. Regional growth has been anchored by domestic demand and services, and the recovery of tourism activities. The need to fully leverage the region’s growth momentum amidst economic uncertainty and rising geopolitical risks was aptly highlighted by Indonesia’s ASEAN Chairmanship theme, ASEAN Matters: Epicentrum of Growth. The conclusion of the 43rd ASEAN Summit and Related Summits in September was once again a testament of Indonesia’s leadership, with over 90 documents issued and concrete deliverables announced throughout the three-day meetings that include several dialogue partners. Now that it has passed the baton to Laos, our Analysis contributors assess Indonesia’s Chairmanship and whether it has lived up to expectations.

Although it was unable to move the needle on the Myanmar crisis and the South China Sea, Jakarta managed to reaffirm ASEAN Leaders’ commitment to strengthen economic resilience. Among the Summit’s key economic outcomes were the launch of the Digital Economic Framework Agreement (DEFA) negotiations and the adoption of the ASEAN Blue Economy Framework. These outcomes embrace the region’s new growth drivers in an inclusive and sustainable way. With this in mind, this issue casts a Spotlight on the region’s many different emerging economic drivers. Our contributors look at potential growth engines in the region, from the quest for an ASEAN single QR payments network to the rise of unicorns, and the role of innovation in advancing digital health. Looking at external partners, regional experts examine how the Indo-Pacific Economic Framework for Prosperity (IPEF), the European Green Deal, and the Korea-ASEAN Solidarity Initiative can help unlock new economic and development pathways.

Beyond the economy, the region is facing another momentous development with several Southeast Asian countries undergoing leadership transitions. To help make sense of this changing political landscape and what it means for regional cooperation, ASEANFocus convened a roundtable featuring views from experts on seven ASEAN countries, namely Cambodia, Indonesia, Malaysia, the Philippines, Thailand, Singapore, and Vietnam. 

 

ASEANFocus-Sep-2023-LR

 

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European Business in China: Position Paper 2023/2024

Regaining Momentum 

How to Restore Business Confidence

After abruptly abandoning its ‘zero-COVID’ approach in late 2022, China reopened its borders on 8th January 2023. This decision was a welcome surprise, as pandemic control measures were one of the main reasons European companies had had an extraordinarily difficult year in 2022, and the removal of the restrictions gave rise to a belief that a swift economic rebound would follow. International banks revised up their growth forecasts for China, and businesses were expecting a surge in new orders resulting from pent-up Chinese demand.

The political will in China also seemed to finally match businesses’ expectations for increased opening of the economy. At the 14th National People’s Congress, held in March 2023, China’s outgoing premier Li Keqiang delivered the government’s annual work report, reviewing the progress made on development plans from 2022, and setting out the key priorities for the coming year. The gross domestic product (GDP) target for 2023 was set at around five per cent, and Li’s presentation emphasised economic recovery and stability. The work report also outlined aims to encourage more foreign investment. The business community saw these as positive messages, as they suggested the Chinese Government would shift focus from ideological considerations—and an emphasis on self-reliance and national security concerns— to prioritising the economy and re-engagement with the world.

While economic indicators at the beginning of 2023 showed momentum was gathering, as the year progressed, China’s recovery began to wane, with many areas of the economy not performing as expected. A key factor in this was that the much-anticipated release of pent-up demand simply did not take place, resulting in an extended contraction of manufacturing activity, producer prices and industrial profits. While services fared somewhat better than manufacturing, growth in this sector showed signs of slowing after an initial strong rebound. On top of this, a host of serious challenges that China’s economy had already been facing—including mounting government debt and the unravelling of the real estate sector—are yet to be resolved. China’s demographic dividend is also fading, and urban youth unemployment broke historic records for several months in a row in 2023, adding more pressure to the country’s recovery. Official statistics, published until July 2023, suggested that one in five people between the ages of 16 and 24 were out of a job in China’s big cities. This data also highlighted the need for targeted policies in order for domestic consumption to live up to its potential as a key driver for the Chinese economy. Rebuilding consumer confidence will also require measures that can improve the outlook for the real estate sector, in which over 70 per cent of Chinese household wealth is tied up.

Some momentum for China’s economic recovery could be regained by providing policy support for the demand rather than the supply side. This is particularly important given that supply-side policies have been a contributor to the significant trade imbalances China has accumulated with both the European Union (EU) and the United States (US). There is a danger that, if not addressed, this may lead to reactions by overseas governments – the growing trade imbalance and the lack of reciprocal market access are often cited by European politicians as key grievances and reasons for dissatisfaction with the relationship with China.

European Business in China Position Paper 2023/2024, Executive Summary: 

EU_China_Business_Report_Exec

European Business in China Position Paper 2023/2024, Full Paper:

Full European_Business_in_China_2023_2024_Position_Paper

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Negotiating a Digital Agreement to Protect Workers

As negotiators are gathered in Bangkok, Thailand for another round of talks to advance the Indo-Pacific Economic Framework (IPEF), ALI has written its newest report, Negotiating a Digital Agreement to Protect Workers, which explains the importance of the U.S. negotiating an IPEF digital agreement that will protect workers in the 21st century data-driven workplace. We are pleased to share with you an excerpt from the introduction below:
 
The fast-paced growth of new technologies such as artificial intelligence (AI), cloud services, and data analytics have the promise to strengthen the middle class through wage growth and create economic and security benefits for the United States. However, these technologies also raise important concerns regarding privacy, safety, economic disruption, and especially new challenges confronting workers. Debates on these issues are currently playing out regarding the digital agreement being negotiated as part of the Indo-Pacific Economic Framework (IPEF).
 
While addressing these concerns as well as gaps in U.S. domestic regulations complicate our ability to promote an agenda globally, remaining on the sidelines is not an option if we want to advance rules that will protect workers and shared democratic values. If America doesn’t move quickly, it leaves the door open to China’s growing predatory technology leadership and autocratic internet standards, which threaten workers. China is currently pursuing these standards through its RCEP agreement with many of the same countries that are part of IPEF.
 
In fact, negotiating such an agreement is an opportunity for the U.S. to advance digital agreements that create worker rights for the 21st-century data-driven workplace.
 
ALI White Paper - Digital Agreement to Protect Wor

 
To read the full summary as it was originally posted by American Leadership Initiative, click here. 
 
To read the full report, click here.

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Toward a Green and Just Transition: A New Framework for Trade and Investment Rules and Climate Action

The very real threat posed by climate change is no longer in doubt. Research suggests that even a 1C increase in average temperature across the globe will have large projected economic impacts – concentrated in areas of the world where most of the global population lives. Other estimates show that, over the past 20 years, the Vulnerable Twenty (V20) Group of Finance Ministers of the Climate Vulnerable Forum, a dedicated coalition of 68 member countries that are systemically vulnerable to climate change, have lost out on 20 percent of their growth potential as a result of the negative physical impacts of climate change.

In response, national governments are taking large-scale action to combat climate change through emissions reductions and efforts to shift to a low-carbon economy. New initiatives at the International Monetary Fund (IMF) and the World Bank are underway to incorporate climate considerations in their financing arrangements. There is increasing pressure among World Trade Organization (WTO) members to reform the trade regime to align with climate commitments, and the European Union (EU) and the Organisation for Economic Cooperation and Development (OECD) are undergoing similar efforts to align their investment treaty commitments with global climate goals. 

Nevertheless, existing policy and financing action at the national and international level is far from sufficient to limit global warming. Experts agree that substantial investment and subsequent economic growth for most of the world will be needed to meet climate goals, as well as the UN 2030 Sustainable Development Goals, with predictions pointing to at least $1 trillion per year needed in domestic financing from emerging markets and developing countries (EMDEs) by 2025. Moreover, domestic financing alone is still not sufficient, as researchers have estimated an additional $1 trillion per year needed in external finance by 2030 – from developed country pledges, development banks and private lenders and investors

The current calculations around climate finance demonstrate a pathway forward, a necessary (though not sufficient) condition for a successful global response to climate change. Where countries can mobilize the necessary amount of financing ($1 trillion per year), and it is accompanied by additional necessary policy shifts toward a low-carbon future, the possibility arises that countries could “decouple” their economic growth from increased emissions. In other words, countries may be able to shift the composition of their planned policies and investment for economic growth such that they meet the dual purpose of development and accomplishing a clean energy transition. 

The same countries for whom sustainable long-term growth will rely on this “decoupling” effect are also the most vulnerable to climate change impacts and the most exposed to economic impacts of climate policy in high-income countries. On the other hand, they also have the most room to grow in the new, low-carbon global economy. Developing countries are keen to not be left behind in the green industrial revolution and are already taking steps toward a low-carbon transition and a net zero economy. 

A major obstacle that many of these countries face, however, are the international trade and investment rules embodied in the WTO agreements, as well as hundreds of free trade agreements (FTAs) and thousands of international investment agreements (IIAs). Although intended to encourage and promote increased flows of trade and investment, which often drive economic growth, they also constrain policymakers in their use of policy tools to harness trade and investment for strategic growth. Specifically, these rules make it harder for countries to build up upstream and downstream industries through local content requirements, or to prioritize diffusion of essential climate technologies through changes to domestic intellectual property laws. 

In November 2022, the Boston University Global Development Policy Center hosted a workshop to develop a research agenda for evaluating the progress and addressing the pitfalls of ensuring the trade and investment regime is compatible with achieving global climate goals and development. Drawing from presentations and discussions among experts in trade and climate at the workshop, this policy brief reflects three major conclusions: 

The global green industrial revolution requires a new, inclusive framework for economic change, focused on building capacity sustainably for developing countries. 
To combat climate change, the world needs rapid, diverse and experimental climate action by all nations, regardless of development or income level, that aligns with principles of climate justice to protect against negative spillovers. 
A key component of the climate action required is a reformed trade and investment regime that removes obstacles to climate action and facilitates economic restructuring toward a low-carbon economy. 

BU FF Piece

 

To read the full summary as it was originally published by Boston University Global Development Policy Center, click here.

To read the full policy brief, click here.

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Jump-Starting U.S. Trade and Economic Engagement in the Indo-Pacific

Countries in the Indo-Pacific region are actively looking to both the United States and China as they seek to bolster their economic growth, development, supply chain resiliency, and innovative capabilities. Many countries would prefer to align more closely with the United States, but they remain disappointed with Washington’s declining interest in trade agreements. Moreover, they are finding it increasingly difficult to resist China’s active overtures to strengthen economic ties.

The Biden administration is pursuing enhanced U.S. trade with the region through the Indo-Pacific Economic Framework (IPEF). However, the IPEF outcomes released to date in the supply chain pillar represent only a modest step forward, emphasizing process over substance. Further, ongoing IPEF negotiations on other pillars do not include the types of enforceable provisions contained in trade agreements such as the United States-Mexico-Canada Agreement (USMCA), which would allow the United States to secure additional market access for its farmers and workers or proactively shape supply chain decision-making. This omission raises questions about whether the eventual IPEF agreement will be seriously considered as an alternative to the more comprehensive trade agreements that China is offering.

To put it bluntly, if the United States does not take a bolder approach, we risk becoming spectators as our partners work among themselves and with China to strengthen supply chain connectivity and regional economic integration. This will substantially undermine the United States’ long-term economic, national security, and geopolitical influence.

China’s active trade agenda should be inciting a greater sense of urgency among U.S. policymakers to step up our regional economic engagement. Just as the Belt and Road Initiative allowed China to gain a strategic advantage over the United States with respect to its global development, infrastructure, and security objectives, China’s pursuit of regional trade agreements threatens to do the same with respect to supply chains and economic security. Further, the more countries in the region become economically dependent on China, the easier it will be for Beijing to use economic coercion against them to achieve a broad range of geopolitical objectives.

Paramount among China’s recent trade achievements is the 15-member Regional Comprehensive Economic Partnership (RCEP) — the largest trade agreement in the world — which entered into force in 2022. Under the RCEP, new tariff cuts among the members take effect each year, putting those countries on a continuous path toward greater integration with China. Even more economies are seeking to join the RCEP: Bangladesh and Hong Kong recently announced their interest. As more and more tariff reductions take place among the growing membership, the RCEP’s impact will continue to grow, to the further detriment of U.S. interests.

The RCEP is only the beginning of China’s ambition. In fact, Beijing is actively seeking membership in the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), an agreement that was largely shaped by the United States. Despite otherwise wishful thinking by U.S. policymakers, numerous CPTPP members appear positively inclined toward China’s membership. If China succeeds in its accession efforts, it will have scored a strategic coup beyond its wildest dreams. Not only will the United States have failed to achieve its original objective of using the agreement to set regional standards and norms without China, but China would be able to flip the table and use the CPTPP to set regional standards and norms without the United States.

Beyond the RCEP and CPTPP, China is engaged on other fronts. This engagement includes negotiations to join the Digital Economy Partnership Agreement, a leading regional digital pact among New Zealand, Singapore, Korea, and Chile. China is also working to upgrade its trade agreement with the 10 members of the Association of Southeast Asian Nations (ASEAN), focusing on emerging issues like digital trade and the green economy.

Successful negotiations on these and other agreements could turbocharge trade, investment, and supply chain connectivity between China and key trading partners. Indeed, trade between ASEAN and China is already increasing at an unprecedented rate — 64% from 2017 to 2022. Given the implementation of RCEP and negotiation of China-ASEAN FTA upgrades, the trend toward deeper economic ties between China and ASEAN is likely to continue to strengthen absent a change in U.S. policy. While the United States has not concluded a new comprehensive market access trade agreement in more than 10 years, China has supplanted the United States as the trading partner of choice for much of the world, and its dominance only continues to grow.

In light of the above, the United States must intensify its economic and trade engagement with this dynamic region, going well beyond the current IPEF negotiations. The United States can take several paths to achieve this goal, and none will be easy or without political and practical challenges. The following discussion sets out the key options in an effort to kick off a conversation about which path (or paths) is worth pursuing.

Options for Next Steps on U.S. Regional Economic Engagement


 
Rejoin A Reimagined CPTPP

The most straightforward way for the United States to step up its economic engagement in the Indo-Pacific region and provide a true alternative to China’s ambitious trade agenda would be to join the CPTPP. Of course, joining this agreement as it currently exists is not a realistic political option, nor would it achieve U.S. economic and strategic objectives.

In light of this, we recommend that the United States seek to update and renegotiate core areas of the agreement as we outlined in a previous report, Reimagining the TPP: Revisions that Could Facilitate U.S. Reentry. That report identified 12 specific areas in which the United States could work with its partners to modernize the CPTPP and address key shortcomings, drawing on lessons learned from the successful negotiation of the USMCA, among other more recent developments. The United States would need to negotiate changes in key areas, such as rules of origin, so that only parties to the agreement benefit, to ensure it does not become a back door for Chinese content; to strengthen provisions on labor and environment; to update provisions in areas like digital trade and intellectual property; and to add new sections on supply chains and economic coercion. One benefit of trying to achieve the United States’ goals on labor, environment, and digital trade through the CPTPP instead of the IPEF is that Indo-Pacific nations are much more likely to make meaningful commitments in the context of a deeper and more comprehensive agreement with market access commitments. Such commitments would also provide substantive incentives to link supply chains together, which are lacking in the current version of the IPEF.

Overall, we have received a very positive response to our work from a broad range of U.S. policymakers, stakeholders, and trading partners. There appears to be growing recognition that the United States is not doing enough to counter China’s ambitious regional agenda. Further, many of the countries in the region that are concerned about China’s growing influence have suggested a willingness to modify the agreement to meet the United States’ needs. On the other hand, many U.S. policymakers point to the political baggage associated with the CPTPP as an obstacle to moving forward with this approach.

Therefore, although we still view renegotiating the CPTPP as the preferred approach, we also believe the United States should consider other ways to achieve similar objectives. We outline three additional options here.

Embark On “Phase 2” IPEF Negotiations

The United States, along with 13 partners, is working hard to conclude the IPEF negotiations by November 2023 to coincide with the Asia-Pacific Economic Cooperation (APEC) Leaders’ Summit in San Francisco. The negotiations appear to be mostly on track, with the possible exception of more controversial aspects of the trade pillar, such as digital trade. Negotiating impactful agreements with such a diverse set of countries is no easy feat, and IPEF negotiators should be commended for the substantial conclusion of their supply chain work in May. That said, the supply chain results, while a useful first step, are modest in scope. If this is any guide to what the rest of IPEF will likely entail, we can expect limited outcomes in other areas as well.

This opens the door for the United States to inject an additional dose of ambition into the agreement and use it as the basis for further regional economic engagement by leading a “phase 2” IPEF negotiation following the APEC Leaders’ Summit. The supply chain work could transition from a sector-agnostic approach to sectoral negotiations focused on the most critical areas. For example, the United States could pursue negotiations with substantive commitments on areas like critical minerals, which are core components of many emerging technologies, or health-related products, which frayed during the COVID-19 pandemic. Other ideas for further work in this pillar are included in a recent ASPI issue paper, Strengthening Regional Supply Chain Resiliency through the Indo-Pacific Economic Framework (IPEF). Likewise, the trade pillar could be expanded to include provisions traditionally found in U.S. agreements, such as intellectual property, services, and industrial standards. One area ripe for emphasis is reducing non-tariff barriers and establishing common standards. These underappreciated measures can play a pivotal role in facilitating trade, investment, and supply chain integration.

Importantly, the United States could also propose tackling market access, which has been off the table to date, in a second phase. Such negotiations are crucial to prevent the United States from falling further behind in efforts to link supply chains across a range of areas in the region. For example, consider a business setting up shop in Vietnam that needs critical electronic components as inputs for final production. The decision to source these components from China at a 0% tariff instead of the United States at a 35% tariff would be a no-brainer given the current rates. That is exactly why market access negotiations are needed to change the dynamic. However, given the sensitivities, the United States could consider negotiating market access in an incremental way. For example, Washington could work with its partners to eliminate or reduce tariffs in targeted sectors, such as critical minerals, clean energy, or medical-related goods, which would help strengthen U.S. supply chains with like-minded countries.

Encourage New Partners to Dock Onto the USMCA

A third approach to enhance engagement in the region could center around expanding the most popular U.S. trade agreement in recent memory — the USMCA — which continues to receive broad bipartisan support in the United States. In light of the unprecedented backing for this trade agreement, this option may be politically and practically appealing. By “docking” onto the agreement, new partners — which could include the United Kingdom, Taiwan, or any number of countries in the Indo-Pacific (or Western Hemisphere) — would be expected to agree to the existing USMCA rules, including the strong rules of origin, robust provisions on labor and the environment, and equivalent market access commitments. This would help integrate the economies of this network with the United States as well as Canada and Mexico, both of which are CPTPP members.

However, this approach is not challenge-free. First, the United States would need to seek the agreement of Canada and Mexico, and it is not clear whether they would go along. Expanding the USMCA membership may be a particularly tough sell to Mexico, which could be wary of welcoming potential commercial competitors into the pact. Its advantage as the lower-cost supplier in the trilateral agreement and an attractive destination for foreign direct investment could be undermined by the addition of new members. Second, accessions would require congressional approval, which could create an opportunity for those who wish to make unrelated changes to the existing agreement. Third, the strict USMCA rules of origin, which were intended to promote manufacturing production in the three North American countries, could be diluted if new participants’ inputs could be cumulated in the origin calculations.

Start From Scratch: Embark on New Free Trade Negotiations With Indo-Pacific Countries

A fourth option to increase Indo-Pacific economic engagement would be to go back to the drawing board and develop a new template for a trade agreement. By doing so, negotiators would not be bound by the contours of any existing agreement but would have the flexibility to draw from all of them, including the USMCA, CPTPP, and IPEF, while adding new and emerging issues and tweaking existing provisions. As part of this effort, the United States could engage a wide range of stakeholders and enlist their participation from the outset, setting up an inclusive process and investing them in the exercise. Under a new negotiation, the United States would have the flexibility to enlist partners that share its values and norms and its interest in achieving ambitious and concrete results. Such an effort could start with a series of bilateral agreements or a small group of close U.S. partners, such as Japan, Taiwan, Australia, or Korea, and expand the list over time.

While starting anew has appeal, it also presents serious obstacles. Developing a domestic consensus on a new template for a trade agreement could take a long time — something that is in short supply given China’s ambitious agenda. Further, given the disparate views among stakeholders, it is far from certain that common ground could be found. Even assuming success on the domestic front, it may be difficult to attract new partners. The U.S.’ closest trading partners may be reluctant to embark on such an initiative, given their fears that a new administration may change course, as experienced with CPTPP; they may also have “new initiative fatigue,” as they are already parties to the CPTPP, RCEP, and IPEF. Finally, a bilateral approach would make it more challenging to fully integrate supply chains with the United States, and it would take much longer than China’s regional agenda.

Conclusion

There are a number of ways for the United States to get back in the game when it comes to trade in the Indo-Pacific. Reimagining TPP, punching up the IPEF, expanding the USMCA, or starting afresh are all options that deserve serious consideration to ensure that the United States can provide a meaningful economic proposition to the Indo-Pacific, as well as an alternative to China. Just as China has gained a major diplomatic and national security advantage over the United States through its Belt and Road Initiative, it is now potentially on track to do the same through its vigorous pursuit of trade agreements around the world, and specifically in its backyard. Regardless of the approach that the United States ultimately decides to pursue to address this concern, it must act with a sense of urgency.

Jump-starting U.S. Trade and Economic Engagement in the Indo-Pacific_0 (1)

To read the article as it was originally posted on Asia Society Policy Institute’s website, click here

The post Jump-Starting U.S. Trade and Economic Engagement in the Indo-Pacific appeared first on WITA.

Jump-starting U.S. Trade and Economic Engagement in the Indo-Pacific

Countries in the Indo-Pacific region are actively looking to both the United States and China as they seek to bolster their economic growth, development, supply chain resiliency, and innovative capabilities. Many countries would prefer to align more closely with the United States, but they remain disappointed with Washington’s declining interest in trade agreements. Moreover, they are finding it increasingly difficult to resist China’s active overtures to strengthen economic ties.

The Biden administration is pursuing enhanced U.S. trade with the region through the Indo-Pacific Economic Framework (IPEF). However, the IPEF outcomes released to date in the supply chain pillar represent only a modest step forward, emphasizing process over substance. Further, ongoing IPEF negotiations on other pillars do not include the types of enforceable provisions contained in trade agreements such as the United States-Mexico-Canada Agreement (USMCA), which would allow the United States to secure additional market access for its farmers and workers or proactively shape supply chain decision-making. This omission raises questions about whether the eventual IPEF agreement will be seriously considered as an alternative to the more comprehensive trade agreements that China is offering.

To put it bluntly, if the United States does not take a bolder approach, we risk becoming spectators as our partners work among themselves and with China to strengthen supply chain connectivity and regional economic integration. This will substantially undermine the United States’ long-term economic, national security, and geopolitical influence.

China’s active trade agenda should be inciting a greater sense of urgency among U.S. policymakers to step up our regional economic engagement. Just as the Belt and Road Initiative allowed China to gain a strategic advantage over the United States with respect to its global development, infrastructure, and security objectives, China’s pursuit of regional trade agreements threatens to do the same with respect to supply chains and economic security. Further, the more countries in the region become economically dependent on China, the easier it will be for Beijing to use economic coercion against them to achieve a broad range of geopolitical objectives.

Paramount among China’s recent trade achievements is the 15-member Regional Comprehensive Economic Partnership (RCEP) — the largest trade agreement in the world — which entered into force in 2022. Under the RCEP, new tariff cuts among the members take effect each year, putting those countries on a continuous path toward greater integration with China. Even more economies are seeking to join the RCEP: Bangladesh and Hong Kong recently announced their interest. As more and more tariff reductions take place among the growing membership, the RCEP’s impact will continue to grow, to the further detriment of U.S. interests.

The RCEP is only the beginning of China’s ambition. In fact, Beijing is actively seeking membership in the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), an agreement that was largely shaped by the United States. Despite otherwise wishful thinking by U.S. policymakers, numerous CPTPP members appear positively inclined toward China’s membership. If China succeeds in its accession efforts, it will have scored a strategic coup beyond its wildest dreams. Not only will the United States have failed to achieve its original objective of using the agreement to set regional standards and norms without China, but China would be able to flip the table and use the CPTPP to set regional standards and norms without the United States.

Beyond the RCEP and CPTPP, China is engaged on other fronts. This engagement includes negotiations to join the Digital Economy Partnership Agreement, a leading regional digital pact among New Zealand, Singapore, Korea, and Chile. China is also working to upgrade its trade agreement with the 10 members of the Association of Southeast Asian Nations (ASEAN), focusing on emerging issues like digital trade and the green economy.

Successful negotiations on these and other agreements could turbocharge trade, investment, and supply chain connectivity between China and key trading partners. Indeed, trade between ASEAN and China is already increasing at an unprecedented rate — 64% from 2017 to 2022. Given the implementation of RCEP and negotiation of China-ASEAN FTA upgrades, the trend toward deeper economic ties between China and ASEAN is likely to continue to strengthen absent a change in U.S. policy. While the United States has not concluded a new comprehensive market access trade agreement in more than 10 years, China has supplanted the United States as the trading partner of choice for much of the world, and its dominance only continues to grow.

In light of the above, the United States must intensify its economic and trade engagement with this dynamic region, going well beyond the current IPEF negotiations. The United States can take several paths to achieve this goal, and none will be easy or without political and practical challenges. The following discussion sets out the key options in an effort to kick off a conversation about which path (or paths) is worth pursuing.

Options for Next Steps on U.S. Regional Economic Engagement


 
Rejoin A Reimagined CPTPP

The most straightforward way for the United States to step up its economic engagement in the Indo-Pacific region and provide a true alternative to China’s ambitious trade agenda would be to join the CPTPP. Of course, joining this agreement as it currently exists is not a realistic political option, nor would it achieve U.S. economic and strategic objectives.

In light of this, we recommend that the United States seek to update and renegotiate core areas of the agreement as we outlined in a previous report, Reimagining the TPP: Revisions that Could Facilitate U.S. Reentry. That report identified 12 specific areas in which the United States could work with its partners to modernize the CPTPP and address key shortcomings, drawing on lessons learned from the successful negotiation of the USMCA, among other more recent developments. The United States would need to negotiate changes in key areas, such as rules of origin, so that only parties to the agreement benefit, to ensure it does not become a back door for Chinese content; to strengthen provisions on labor and environment; to update provisions in areas like digital trade and intellectual property; and to add new sections on supply chains and economic coercion. One benefit of trying to achieve the United States’ goals on labor, environment, and digital trade through the CPTPP instead of the IPEF is that Indo-Pacific nations are much more likely to make meaningful commitments in the context of a deeper and more comprehensive agreement with market access commitments. Such commitments would also provide substantive incentives to link supply chains together, which are lacking in the current version of the IPEF.

Overall, we have received a very positive response to our work from a broad range of U.S. policymakers, stakeholders, and trading partners. There appears to be growing recognition that the United States is not doing enough to counter China’s ambitious regional agenda. Further, many of the countries in the region that are concerned about China’s growing influence have suggested a willingness to modify the agreement to meet the United States’ needs. On the other hand, many U.S. policymakers point to the political baggage associated with the CPTPP as an obstacle to moving forward with this approach.

Therefore, although we still view renegotiating the CPTPP as the preferred approach, we also believe the United States should consider other ways to achieve similar objectives. We outline three additional options here.

Embark On “Phase 2” IPEF Negotiations

The United States, along with 13 partners, is working hard to conclude the IPEF negotiations by November 2023 to coincide with the Asia-Pacific Economic Cooperation (APEC) Leaders’ Summit in San Francisco. The negotiations appear to be mostly on track, with the possible exception of more controversial aspects of the trade pillar, such as digital trade. Negotiating impactful agreements with such a diverse set of countries is no easy feat, and IPEF negotiators should be commended for the substantial conclusion of their supply chain work in May. That said, the supply chain results, while a useful first step, are modest in scope. If this is any guide to what the rest of IPEF will likely entail, we can expect limited outcomes in other areas as well.

This opens the door for the United States to inject an additional dose of ambition into the agreement and use it as the basis for further regional economic engagement by leading a “phase 2” IPEF negotiation following the APEC Leaders’ Summit. The supply chain work could transition from a sector-agnostic approach to sectoral negotiations focused on the most critical areas. For example, the United States could pursue negotiations with substantive commitments on areas like critical minerals, which are core components of many emerging technologies, or health-related products, which frayed during the COVID-19 pandemic. Other ideas for further work in this pillar are included in a recent ASPI issue paper, Strengthening Regional Supply Chain Resiliency through the Indo-Pacific Economic Framework (IPEF). Likewise, the trade pillar could be expanded to include provisions traditionally found in U.S. agreements, such as intellectual property, services, and industrial standards. One area ripe for emphasis is reducing non-tariff barriers and establishing common standards. These underappreciated measures can play a pivotal role in facilitating trade, investment, and supply chain integration.

Importantly, the United States could also propose tackling market access, which has been off the table to date, in a second phase. Such negotiations are crucial to prevent the United States from falling further behind in efforts to link supply chains across a range of areas in the region. For example, consider a business setting up shop in Vietnam that needs critical electronic components as inputs for final production. The decision to source these components from China at a 0% tariff instead of the United States at a 35% tariff would be a no-brainer given the current rates. That is exactly why market access negotiations are needed to change the dynamic. However, given the sensitivities, the United States could consider negotiating market access in an incremental way. For example, Washington could work with its partners to eliminate or reduce tariffs in targeted sectors, such as critical minerals, clean energy, or medical-related goods, which would help strengthen U.S. supply chains with like-minded countries.

Encourage New Partners to Dock Onto the USMCA

A third approach to enhance engagement in the region could center around expanding the most popular U.S. trade agreement in recent memory — the USMCA — which continues to receive broad bipartisan support in the United States. In light of the unprecedented backing for this trade agreement, this option may be politically and practically appealing. By “docking” onto the agreement, new partners — which could include the United Kingdom, Taiwan, or any number of countries in the Indo-Pacific (or Western Hemisphere) — would be expected to agree to the existing USMCA rules, including the strong rules of origin, robust provisions on labor and the environment, and equivalent market access commitments. This would help integrate the economies of this network with the United States as well as Canada and Mexico, both of which are CPTPP members.

However, this approach is not challenge-free. First, the United States would need to seek the agreement of Canada and Mexico, and it is not clear whether they would go along. Expanding the USMCA membership may be a particularly tough sell to Mexico, which could be wary of welcoming potential commercial competitors into the pact. Its advantage as the lower-cost supplier in the trilateral agreement and an attractive destination for foreign direct investment could be undermined by the addition of new members. Second, accessions would require congressional approval, which could create an opportunity for those who wish to make unrelated changes to the existing agreement. Third, the strict USMCA rules of origin, which were intended to promote manufacturing production in the three North American countries, could be diluted if new participants’ inputs could be cumulated in the origin calculations.

Start From Scratch: Embark on New Free Trade Negotiations With Indo-Pacific Countries

A fourth option to increase Indo-Pacific economic engagement would be to go back to the drawing board and develop a new template for a trade agreement. By doing so, negotiators would not be bound by the contours of any existing agreement but would have the flexibility to draw from all of them, including the USMCA, CPTPP, and IPEF, while adding new and emerging issues and tweaking existing provisions. As part of this effort, the United States could engage a wide range of stakeholders and enlist their participation from the outset, setting up an inclusive process and investing them in the exercise. Under a new negotiation, the United States would have the flexibility to enlist partners that share its values and norms and its interest in achieving ambitious and concrete results. Such an effort could start with a series of bilateral agreements or a small group of close U.S. partners, such as Japan, Taiwan, Australia, or Korea, and expand the list over time.

While starting anew has appeal, it also presents serious obstacles. Developing a domestic consensus on a new template for a trade agreement could take a long time — something that is in short supply given China’s ambitious agenda. Further, given the disparate views among stakeholders, it is far from certain that common ground could be found. Even assuming success on the domestic front, it may be difficult to attract new partners. The U.S.’ closest trading partners may be reluctant to embark on such an initiative, given their fears that a new administration may change course, as experienced with CPTPP; they may also have “new initiative fatigue,” as they are already parties to the CPTPP, RCEP, and IPEF. Finally, a bilateral approach would make it more challenging to fully integrate supply chains with the United States, and it would take much longer than China’s regional agenda.

Conclusion

There are a number of ways for the United States to get back in the game when it comes to trade in the Indo-Pacific. Reimagining TPP, punching up the IPEF, expanding the USMCA, or starting afresh are all options that deserve serious consideration to ensure that the United States can provide a meaningful economic proposition to the Indo-Pacific, as well as an alternative to China. Just as China has gained a major diplomatic and national security advantage over the United States through its Belt and Road Initiative, it is now potentially on track to do the same through its vigorous pursuit of trade agreements around the world, and specifically in its backyard. Regardless of the approach that the United States ultimately decides to pursue to address this concern, it must act with a sense of urgency.

Jump-starting U.S. Trade and Economic Engagement in the Indo-Pacific_0 (1)

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Rethinking International Rules on Subsidies

The World Trade Organization needs an updated toolbox in the face of rising industrial policies across the globe.



“The United States should lead the effort to reshape the global rules to better serve its own interests and the international trading system’s changing realities,” claims a new Council Special Report, Rethinking International Rules on Subsidies. The authors, CFR trade experts Jennifer A. Hillman and Inu Manak, contend that such an effort “would give the United States a powerful tool to address its twin concerns over competition with China and fighting climate change. It would also allow the WTO and the world to come closer to a more equitable, resilient, and sustainable international economic order.”

The report examines the growing reliance of the United States on using domestic subsidies to address global challenges: “the [Joe] Biden administration has maintained and expanded on the [Donald] Trump administration’s tariff policy, defended at the time as helping the United States compete globally against a rising China, by introducing major new subsidy programs. Importantly, the primary motivation for those efforts falls into two buckets—to counter China and to fight climate change.” That adoption of industrial policy “has prompted cries from across the globe that the United States is fostering unfair competition and breaking the rules it helped shape as part of the World Trade Organization (WTO).”

In the aftermath of simultaneous political and economic crises, “the perception of countries’ urgent need to build up their resiliency in critical goods and services, coupled with the existential threat of climate change, means that moving toward industrial policies and increasing subsidies is warranted and indeed essential,” Hillman and Manak write. “However, the urgency of the problems does not mean abandoning well-founded concerns that industrial policy—done wrong—can stifle innovation, create substantial inefficiencies, exacerbate the concentration of corporate power, waste precious taxpayer funds, and fuel crony capitalism.”

The authors outline the deficiencies of the current international rules governing subsidies and provide recommendations. In particular, Hillman and Manak highlight the failure of many WTO members to report their subsidies, the ineffective remedies available, and the lack of special recognition by WTO rules of beneficial subsidies aimed at tackling climate or public health challenges, among other issues.

To lead the charge on reforming the WTO rules, the authors propose that the United States should

“revisit what constitutes good and bad subsidies and propose limiting overall subsidy levels while carving out areas in the common international interest”;
“encourage countries to disclose their subsidies, both by using the incentive of a ‘safe harbor’ for subsidies that have been properly notified and enforcing penalties for those that consistently fail to make timely notifications of their subsidies”; and
“strengthen the penalties for noncompliance with international subsidies rules.”

“At its core, one of the WTO’s critical roles is to help its members draw the line between protectionist measures and sound industrial policies, while ensuring that wherever that line is drawn, it does not unduly privilege some or harm others,” Hillman and Manak conclude. “To do that in the face of rising industrial policies across the globe, the WTO needs an updated toolbox.”

Jennifer Hillman is the Senior Fellow for Trade and International Political Economy and Inu Manak is the Fellow for Trade Policy at the Council on Foreign Relations.

Rethinking International Rules on Subsidies

 

To read the full Council Special Report, please click here.

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Supply Chain Resilience Policy: Theory, Practice, and Action

Recent shocks like the COVID-19 pandemic and Russia’s invasion of Ukraine have demonstrated the fragility of many critical supply chains. In some cases, firms have built supply chains so fabulously long and complex that, despite the efficiency gains, they are worryingly brittle. In others, non-market autocracies have engaged in unfair trade and economic practices to promote dependency and overreliance. In response, open societies have proposed a myriad of policy interventions to make their supply chains more resilient. This includes investments in domestic manufacturing and new trade agreements to diversify sources of risk. Yet, these interventions have generally not benefited from an organized approach; plenty of practice, but little theory.

Tension exists, over the short-term, between resilient and efficient supply chains. Investments to build resilient supply chains marginally reduce their efficiency just as policies to make supply chains more efficient can undermine their resilience. The challenge for policymakers is to navigate this trade-off to find a balance which promotes societal well-being. In service of that end, this project intends to be a guide for policymakers.

It begins with a theoretical framework for supply chain resilience arguing for an approach centered on supply chain vulnerabilities. Policymakers can identify, and even quantify, various supply chain vulnerabilities, such as overreliance on China for critical minerals or excessive import reliance for personal protective equipment (PPE). Vulnerabilities, by themselves, do not cause harm. However, shocks—wars, pandemics, or natural disasters—exploit these vulnerabilities to reduce societal well-being. Policymakers can mitigate the impact of shocks by building resilience against those vulnerabilities. Since not all vulnerabilities threaten critical functions like national security or the life and health of citizens (e.g. New Zealand is heavily import dependent on furniture), policymakers should prioritize building resilience against the most critical vulnerabilities.

To build resilience, policymakers have three types of interventions available. Transparency interventions, like stress tests and supply chain reviews, help companies help themselves by improving the flow of supply chain intervention in the market. Diversification policies, such as different trade arrangements, promote resilience by spreading risk widely. And industrial interventions bring subsidies or public procurement to bear to drive investment in domestic manufacturing. However, policymakers must be attuned to the costs of deploying these interventions since, over the short-term, marginal investments in resilience mean marginal decreases in market efficiency. Just as optimizing for efficiency sees the entire production of a good produced by a foreign adversary, over-optimizing for resilience might result in crippling autarky.

To navigate these trade-offs, and identify the most effective interventions, this project proposes the Supply Chain Resilience Checklist. The Checklist is a five-step process to help policymakers ask the right questions to effectively identify vulnerabilities, winnow those to the most critical, assess what steps the private market has already taken to build resilience, and tailor an intervention to effectively seal the vulnerability. Although the economic contours of vi each open society will be different, the Checklist is designed to apply broadly, giving policymakers flexibility to focus their efforts on their own country.

Having built a conceptual foundation, this project then explores the variety of recent supply chain resilience policies as they have been practiced by open societies. It selects a basket of ten countries—Australia, the European Union, India, Israel, Japan, New Zealand, Singapore, South Korea, United Kingdom, United States—from which to discuss and analyze their different transparency, diversification, and industrial interventions. In doing so it draws lessons from the positives and negatives of these interventions to further guide future policymaking in an effective direction.

Combining theory and practice, this project concludes with action. It proposes the Security and Trade Agreement for Resilience (STAR), a new plurilateral agreement for supply chain resilience. The STAR would unite open societies to deploy all three types of interventions to build resilience comprehensively. It would liberalize trade in the most critical goods, require parties to make minimum investments in domestic manufacturing, promote trade facilitation and short-supply cooperation, and include provisions targeted at the unfair practices used by non-market autocracies to undermine supply chain resilience. In proposing the STAR, this project also offers a case study for how policymakers would use the Supply Chain Resilience Checklist to effectively deploy interventions in response to supply chain vulnerabilities.

2023-08-Sam-Mulopulos-Axford-Fellow-Supply-Chain-Resilience-Policy

To read the full paper, click here.

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In U.S.-China Trade War, Bystander Countries Increase Exports

Higher demand from U.S. and China means expanding into new markets

Trade wars are usually bad for the countries involved. After the U.S. and China launched tit-for-tat tariffs on imports from each other in 2018, prices rose for American consumers, jobs were lost and corporate profits fell. Economic growth in both countries slowed. 

There was also some fear that the Trump administration’s tariffs, which hit other U.S. trading partners, would suppress global exchange and lead to a new period of protectionism. 

But for countries not in the middle of the trade war, research suggests, the opposite happened. 

In a working paper, UCLA’s Pablo Fajgelbaum, Yale’s Pinelopi Goldberg, UC Berkeley’s Patrick Kennedy, Yale’s Amit Khandelwal and the World Bank’s Daria Taglioni describe how “bystander countries” — those on the sidelines of the U.S.-China dispute — increased their exports of products subject to the tariffs to both the U.S. and to the rest of the world. (Exports to China were mostly unchanged.) 

The findings suggest that these countries didn’t just shift goods from their existing trading partners to fill a gap caused by the higher tariffs. Instead, they were able to boost production and increase exports of targeted goods into new and expanded markets. Overall, bystander countries increased their exports of taxed items an average of 6.7% during the period studied, compared with nontaxed products.

Winners and Losers 

“The trade war created net trade opportunities rather than simply shifting trade across destinations,” the authors write. 

Not all countries benefited, though. Some — notably Vietnam, Thailand, Korea and Mexico — were able to boost exports significantly, in part by providing substitutes for goods subject to the U.S.-China tariffs. Others, such as Ukraine and Colombia, saw a decline, largely because their exports complemented goods hit by the tariffs. 

The U.S.-China trade war began in mid-2018 when then-President Donald Trump hit China with a series of rising tariffs on a variety of imported goods and China retaliated by raising duties on U.S. products. (At the same time, the Trump administration also imposed duties on steel, aluminum and machinery imports from other trading partners.) The U.S. tariffs affected about $350 billion in imports from China, or about 18% of the total, while China’s tariffs covered about $100 billion, or about 11%, of goods imported from the U.S. 

Although trade tensions eased in 2020 when the two countries agreed to put a freeze on plans for additional trade duties, the existing tariffs remain in place.

Tariffs Caused a Huge Shift in Trade

The tariffs quickly had an impact. An analysis by the Peterson Institute for International Economics found that in 2022, Chinese imports subject to the highest U.S. tariffs — including semiconductors, furniture and some consumer electronics — were about 25% below their levels before the start of the trade war. The decline wasn’t due to a larger economic slowdown — Chinese imports that weren’t covered by added duties, such as laptops and computer monitors, increased by 42%.

But what about the rest of the world? To see how the trade war affected exports from bystander countries, the authors examined data from the United Nations’ Comtrade database about the trading patterns of the 48 largest exporting countries, (excluding oil exporters) between 2014 and 2019. 

They found that bystanders increased exports to the U.S. for products with high tariffs, but not to China. Shipments to the rest of the world increased for products subject to both U.S. and Chinese tariffs. Not only was there considerable variance among exporting countries, but also the most successful were those that were able to increase exports to the rest of the world, not just to the U.S. 

Two factors seem to explain the difference. For one, successful exporters tended to ship goods that were substitutes for Chinese imports. So when U.S. customers looked for a replacement for, say, smartphones made in China, countries like Vietnam that made phones were poised to benefit.  

What’s more, they were able to scale up production and achieve economies of scale so that the unit costs of their goods fell. This meant that the countries not only could compete successfully with the higher cost of taxed items, but their products became more competitive in markets that weren’t subject to the tariffs. 

Vietnam, for instance, was one of the biggest winners from the trade war, increasing its exports of tires, sweatshirts and vacuum cleaners to both the U.S. and the rest of the world. 

The study also suggests that successful countries weren’t just lucky enough to already specialize in products that would increase in demand after the trade-war tariffs hit. Instead, country-specific factors — such as a strong labor market or preexisting trade agreements — likely accounted for all the variation among countries.

Michael Totty is a freelance reporter and editor. Previously, he was a news editor with the Wall Street Journal in charge of assigning and editing Journal reports on technology, energy, health care, management and other topics. Totty works from Berkeley, California.

THE US-CHINA TRADE WAR AND GLOBAL REALLOCATIONS

To read the full research brief, please click here. 

To read the full report as it was originally published by the National Bureau of Economic Research, click here.

 

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