Asia’s Murky Roadmap for Growth

Sweeping change is afoot in Asia. China has clearly become the single biggest power within Asia, and Beijing has outlined clear visions for its diplomatic and economic aspirations across the region and beyond. Washington, on the other hand, is seemingly going the other direction and less willing to be as formidable a Pacific presence as it has been. Having spent over seven decades defining and protecting regional security, there are growing doubts about U.S. commitment to the Asia-Pacific region, and how Washington views its future as a Pacific power. One issue, however, is clear. Asia remains not only the world’s most populous region, but also the most dynamic economically. As a slew of multilateral frameworks for cooperation emerge, the question remains whether any of them will be successful in ensuring continued growth across Asia and the world.

Of course, there is broad consensus among Asian nations that political and economic stability go hand in hand. There is also a shared belief that increased exports can lead to growth, and that the region could benefit from greater investment in infrastructure development. Yet there is concern that some of the proposals currently under consideration could actually increase tensions, rather than encourage greater cooperation, given the competing visions for leadership in Asia.

Cynicism Toward Free Trade Hampers U.S. Leadership in Asia

In the case of the Trans-Pacific Partnership (TPP) agreement, for instance, the struggle to have the trade deal ratified by member countries has strained relations, especially with the United States. Granted, the Obama administration continues to push for TPP ratification, and the White House touts that the deal will be concluded successfully before he leaves office in January 2017. Yet with both the Democratic and Republican presidential candidates opposing TPP, U.S. public opinion has clearly turned sour against free trade, which has become synonymous with the downside of globalization. Certainly, Washington has failed to leverage the TPP negotiations to encourage domestic reform, from investing in workforce education that would create the skills necessary for industry in the 21st century, to pumping more money into infrastructure projects including maintaining roads, bridges, railroads, and airports. In short, policymakers have fallen short in addressing the numerous domestic issues that result from the losses incurred as a result of lower tariffs. They have also not been able to highlight the gains that would be available not just to major multinational corporations, but also to small and medium enterprises and startups: more open borders entail greater access to global markets, particularly  through e-commerce and other technological innovations.   

The end result has been that public support for the TPP has been tepid at best in the United States, and it is increasingly likely that the trade agreement will not be considered by Congress for months, if not a year or two, after the new administration is established. Meanwhile, the 11 other member countries have already begun the ratification process, often facing considerable opposition within their own governments, and all have made clear that they would not be open for renegotiation of the treaty. Bearing in mind that Hillary Clinton, who was a staunch supporter of the TPP as secretary of state, has stated as presidential hopeful that she could not accept the treaty as is, the road ahead for U.S. ratification remains rocky. Without U.S. ratification, the treaty is dead.

More importantly, though, U.S. reluctance to embrace the TPP has put U.S. credibility itself at stake. For more than eight years the United States has supported negotiations on the TPP and the Obama administration has made clear that the trade deal is a key part of the U.S. rebalance to refocus its attentions on Asia economically, as well as militarily. Should Congress vote against the TPP, it would be seen as a vote against furthering U.S. commitment to the region, and would keep Washington away from the rulemaking process that will govern Asia’s future trade relations. Indeed, U.S. Assistant Secretary of State for the Bureau of East Asian and Pacific Affairs Daniel Russel cautioned at a public forum in early October that “I think members of Congress believe that America should lead, and will recognize the implications for diminished leadership if the U.S. falters.” He argued that what the United States has provided for the region since the end of World War II has been the establishment of rule of law and norms of governance, which depend on strong partnerships.

There is a strong case to be made for the economic benefits of the TPP, but its contribution to regional security can actually be greater. As the TPP will lower tariffs across member nations, enhance intellectual property protection, facilitate cross-border transactions, improve cross-border trade efficiency and the like, the agreement is expected to raise U.S. GDP by one percentage point when fully implemented, according to the Peterson Institute for International Economics. That, of course, is no small increase, given the overall size of the U.S. economy. Nonetheless, the biggest impact of Washington moving forward with the TPP will be to indicate clearly that the United States is committed to remaining a Pacific power. By ratifying the TPP, Washington will show its commitment to remain engaged in the process of defining trade rules for the 21st century. But more importantly, the decision to adopt the TPP will demonstrate U.S. commitment to engage with Asian countries based on consensus.

The risks of not ratifying the agreement are great; not least are the lost economic opportunities. The single biggest risk, though, is that this may well be the United States’ only chance to be part of establishing a trade agreement at this scale. The world will not stand still and wait for the United States to reach a decision about how to move forward. Instead, the allure of other options which do not include Washington will gain greater momentum.

Increased Appetite for TPP Alternatives Across Asia

A significant delay in the implementation of the TPP would be a boon to other regional trade agreements, most notably the Regional Comprehensive Economic Partnership (RCEP). RCEP membership consists of the 10 Association of Southeast Asian Nations (ASEAN) member countries plus Australia, New Zealand, Japan, South Korea, and India as well as China; the United States is noticeably missing from the group. Many analysts have been critical of RCEP, not least because it is focused mostly on reducing tariffs  – less aggressively and at a slower rate than the TPP – rather than addressing new rules that are critical for modern commerce. Nevertheless, uncertainties facing the TPP have made RCEP all the more attractive to the member countries, even if the standards are not as high.

Indeed, expectations are high that RCEP would reach a successful conclusion by the end of next year, and the deal would certainly facilitate cross-border trade and increase efficiency across supply chains, even with its lower standards and diluted ambitions compared to the TPP. It will undoubtedly represent a bigger trading bloc in terms of the population in Asia, and could also lead to further cooperation in the region in other areas. The ultimate goal for the region, though, would be the establishment of the Free Trade Agreement of the Asia-Pacific (FTAAP), which would include all 21 member countries of the Asia Pacific Economic Cooperation group including the United States and China. Indeed, at the 2015 APEC summit meeting, the member countries stated that they were united in “our belief that the FTAAP should be pursued as a comprehensive free trade agreement by building on ongoing regional undertakings.”

Yet the real value of trade agreements goes far beyond economic gains, as enhanced economic relations contribute to greater diplomatic ties and possible military cooperation as well. For instance, Japan’s relations with Australia surged in 2014 when the two countries not only enhanced their security cooperation, but also concluded a bilateral free trade agreement in July 2014. The trade agreement came into force in January 2015 and since then, cooperation between the two sides on economic as well as military issues has increased.

Meanwhile, even though South Korea’s free trade agreement with China, successfully concluded in December 2015, has come under criticism for having low standards on tariff reductions, the fact of the matter is that the FTA has made clear what is obvious: namely that China is now Korea’s single biggest and therefore most important trading partner. The deal was also innovative insofar as it gave preferential treatment for products made in North Korea’s Kaesong industrial complex, which would boost demand for Kaesong-made products and also lead to potential investments from China into the North Korean endeavor. Granted, that initiative has been put on hold indefinitely since North Korea conducted missile technology tests in February, resulting in an end to operations at the Kaesong complex. Given that Pyongyang has since stepped up its testing, it is unlikely that North Korea will be able to take advantage of the economic support that the China-Korea bilateral FTA could have provided.

What is clear in the case of both the Japan-Australia FTA and the China-Korea FTA, though, is that with every trade agreement comes a blueprint for greater cooperation. As the United States has no significant regional trade pact in the pipeline other than the TPP, which is facing so much uncertainty in Congress, Washington now lacks a comprehensive, alternative vision which would allow it to remain an economic leader in Asia. The lack of options other than the TPP also brings into question Washington’s commitment to the region not just economically, but also politically and militarily.

Competing With China’s Grand Strategy for Asia and the World

On the other hand, a lack of strategic vision and long-term goals is definitely not an issue for China. Rather, Beijing’s challenge may well be that it has too many ambitious proposals to assert its influence across Asia and beyond. President Xi Jinping’s New Silk Road initiative of 2013, which sought to assert a new direction for Chinese trade and investment that would link the country to Europe, certainly is not lacking in bold ideas. The subsequent One Belt, One Road plan launched in 2014 has financial backing to the tune of $40 billion, which aims in part to reduce China’s excess capacity at home by bolstering exports across the region. Meanwhile, the establishment of the Asian Infrastructure Investment Bank (AIIB), also in 2014, would allow not just China, but also other countries in the region, to finance their ever-growing infrastructure development needs.

While U.S. wariness toward the AIIB in particular was notable at the bank’s inception, the White House has subsequently come to regret making its skepticism toward the bank so public. In fact, after sharply criticizing the capabilities of the AIIB at the beginning, the Obama administration has since changed its tune to welcome the establishment of a new bank that would meet the financing gap of infrastructure projects in the region. Indeed, the Asian Development Bank estimates that over $1 billion is needed each year to meet the infrastructure demands of Asia alone, with half that amount required for electricity projects, and about 30 percent for building roads. While multilateral financial institutions like the ADB and World Bank do meet some of those needs, the establishment of a new bank to fill the gap has undoubtedly been welcomed by emerging Asian nations, as can be seen by their support for the institution. Moreover, strong support from industrialized nations, with the notable exceptions of the United States and Japan, make clear that developing Asian infrastructure is seen as necessary to generate new business opportunities worldwide.

One striking aspect of the support from developing Asian nations may be that they strongly sympathized with China’s decision to found an Asian-led development bank in the first place. Having been frustrated with the governance structures of the existing international financial institutions, which do not adequately reflect the changing global economic order, China’s decision to establish its own alternative bank rather than simply waiting for change within the existing system was perhaps not that surprising. That frustration is shared by other emerging nations. In addition, while the World Bank and ADB focused increasingly less on infrastructure development projects and have pumped more money into other sectors such as education, healthcare, and governance, there was a rallying cry for infrastructure projects to be given priority once again among client countries, especially in Southeast Asia. In addition, given that China is already the single largest trading partner for the majority of countries in the Asia-Pacific nation, support for the AIIB was a logical tactical move.

Asia’s Hunger for New Visions

Certainly, China’s bold new initiatives have filled a void in the region. The United States’ rebalance to Asia policy had, by and large, been warmly welcomed by its allies. In fact, the biggest concerns to date have been that Washington will not be able to follow up on the vision first made public by Obama in a speech to the Australian parliament in November 2011. Rhetoric from this year’s presidential elections certainly has not helped, as Republican presidential candidate Donald Trump has repeatedly called for the United States to commit less to security alliances in Asia and Europe. His call for countries like Japan and South Korea to step up their military contributions and consider becoming nuclear powers has been greeted with much trepidation. Regardless of the election results, it is clear that some U.S. policymakers also share those views, and how such opinions within the United States will temper continued U.S. engagement in the region on the military front, as well as in economic and diplomatic relations, will be a major challenge for the next administration.

Meanwhile, Washington must also heed political developments in the Philippines, and not simply dismiss the anti-U.S. sentiment expressed by President Rodrigo Duterte. As a democratically elected leader of a country that has been a staunch supporter of the United States and a key U.S. alliance partner, the turn in Filipino public sentiment against Washington is alarming, to say the least. The case of the Philippines makes clear that even the most committed of U.S. allies could turn against the United States, especially when Washington is unable to define a clear roadmap for growth and stability. That roadmap is needed in a region that is facing tremendous challenges, from territorial disputes in the South and East China Seas, to a North Korea bent on being acknowledged as a nuclear power, regardless of international pressure to abandon that pursuit.

Stability in Asia will be key for global growth in coming years, yet how the existing multilateral roadmaps for regional growth will actually contribute to prosperity remains uncertain at best. But just as Asian nations can no longer simply rely on export-led growth, the existing institutions and rules are simply not adequate to meet the evolving needs of Asia’s dynamic economies. Establishing rules and institutions that will meet the needs of the 21st century is critical. The question remains how those rules and institutions will be established.