The Geopolitics of Indo-Pacific Trade – RUSI Analysis

Credit: Original article can be found here

Trade has been at the heart of Asia’s economic growth over the past 50 years. Japan, followed by the four Asian Tigers of South Korea, Taiwan, Hong Kong and Singapore, and then – largest of all – China, pursued development strategies based on the export of manufactured products to the US and Europe. This growth was underpinned by a stable geopolitical framework that focused on economic integration and trade liberalisation, while relying on the US post-war security umbrella to maintain and, for the most part, fund security and keep sea lanes open.

The words ‘Asia-Pacific’ and ‘Chimerica’ captured the essence of this relationship, covering the trade flows from Asia across the Pacific and the close integration of economic activities between China and the US. Not all countries chose or were able to pursue this growth path – most notably India (albeit with success in back-office outsourcing services), but also Sri Lanka and Indonesia. As a result, these economies grew less rapidly and were less integrated into the global economy. The economic reality was indeed ‘Asia-Pacific’ rather than ‘Indo’-Pacific.

New Trading Dynamics in Asia  

The nature of trade has changed since the 1990s. Trade within Asia is now greater than trade from Asia to the rest of the world. Only Europe has a higher proportion of intra-regional trade. In part, this is because Asia is now a major market in its own right.

More importantly, most trade is in ‘intermediate’ goods, that are exported to the next stage of a manufacturing process, rather than ‘finished’ goods, ready for sale. Lower transportation costs and increased communications have led to the rise of global (typically, regional) value chains with manufacturing steps located in multiple countries.  

Within global value chains, it is the ‘lead companies’ such as Samsung, Toyota or Apple that determine which activity is located where. Countries recognise that they need to build their own ‘lead companies’ and not to simply attract foreign investment. Vietnam, where Samsung accounts for just under 20% of all exports, stands out for its focus on both foreign direct investment and building national champions. Vingroup, Vietnam’s largest company, has invested substantially to develop its own smart phones and car manufacturing.

China’s Complex Geo-Economic Role

China is bound firmly into this trading system. It is a larger trading partner than the US for every country in the region except for Bhutan. While companies are relocating some manufacturing out of China in response to higher costs and, in some cases, geopolitical tensions, most are not moving. Relocation is time-consuming and costly.

But the changing US–China relationship has shattered the illusion that these two countries can separate economic considerations from other realities. Indeed, all countries in the region are working through their own stance towards the US and China, wanting to avoid having to choose between them.

China’s sheer size makes it a vital trading partner. However, its increasing assertiveness on the international stage means countries cannot consider the economic relationship in isolation. Border disputes, most notably in the South China Sea and with India, raise tensions. China’s ‘wolf-warrior’ diplomats frequently hector and threaten countries through so-called ‘coercive diplomacy’. Australia is currently the focus: China has recently listed 14 grievances with Australia’s behaviour that it says account for the poor state of bilateral relations. South Korea and others have been targets before. China is becoming a stronger maritime power, with the potential to exercise greater control over the sea lanes necessary for trade. Across the region, there is public concern about China’s investment and military might, even though many see positives in China’s economic strength.

The Rise of Indo-Pacific Sub-Regional Frameworks

In an increasingly protectionist world, maintaining a vibrant Asian trading system is a high priority. The importance of trade to a country’s economy and the strength of the balance of payments position varies widely. But there is also a strong, shared interest in trade liberalisation, coupled with caution on the pace of market opening, so as to protect domestic interests. Increasingly, trade negotiations focus on reducing ‘non-tariff barriers’ rather than cutting tariffs further. Integration within the ASEAN Economic Community moves forward steadily, taking account of the widely-differing income levels and economic systems amongst its members. There is strong support too for an effective World Trade Organization.

The main action is, however, at the sub-regional level in the Indo-Pacific among groups of countries aligning themselves with the norms and standards that best match their interests. The result may be an increasingly fragmented picture with little leadership on either side of the Indo-Pacific.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership

The US first proposed a Trans-Pacific Partnership (TPP) but then withdrew from discussions in 2017. Asian countries went ahead with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP is very much an Asia-Pacific rather than Indo-Pacific agreement, with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam as its signatories. The UK may also join. The intentions of the incoming Biden administration are unclear.

China is notable by its absence. From the start, TPP was seen as a mechanism to strengthen trade, excluding China, or as an agreement that China might join later if it agreed to further liberalisation.  Indeed, President Xi Jinping has recently indicated that China will ‘favourably consider’ joining the CPTPP.

The Regional Comprehensive Economic Partnership

Many Asian CPTTP signatories have also agreed to sign the Regional Comprehensive Economic Partnership (RCEP) in November 2020. RCEP will include all 10 members of ASEAN plus China, Korea, Japan and New Zealand. RCEP requires less liberalisation than CPTTP but brings in China and all ASEAN members, rather just than those with the greatest willingness to open up.

With RCEP, it is India that is notable by its absence, as well as the US again. While an active participant in earlier discussions, Prime Minister Narendra Modi announced in 2019 that India would not join RCEP, primarily over fears that Chinese imports would overwhelm Indian firms. Continuing China–India border tensions and tense relations have reinforced India’s stance. For now, India is putting its effort into bilateral trade agreements. The shape of the new regional agreements remains Asia-Pacific rather than Indo-Pacific.

The Belt and Road Initiative

Not to be forgotten is China’s Belt and Road Initiative (BRI). BRI is typically characterised as an infrastructure rather than trade initiative. In fact, ‘unimpeded trade’ sits alongside ‘connectivity’ as one of the BRI’s five pillars. Investments in logistics, transport networks and industrial zones help enable greater trade. Well over 100 countries are reported to have signed BRI-related memorandum of understandings, though it is often unclear what this means substantively. Projects are spread widely across the Indo-Pacific. But again there are some clear absences: India, Australia and cautious engagement by Japan.

The BRI is different in nature to multilateral trade agreements. It has no formal institutional structure or rules. Agreements are mainly bilateral and not public. Joe Kaeser, the CEO of Siemens, was perhaps over-exuberant in stating that ‘China’s “One Belt, One Road” will be the new World Trade Organization’. But there are elements here of an alternative, more politicised approach to trade.

The Need for Indo and Pacific Leadership in Trade

Alongside this continued evolution in the Asia-Pacific, the ‘Indo’ part of the Indo-Pacific is beginning to grow stronger. Under Modi, India is keen to engage more with other Asian democracies such Japan and Australia. India and Japan’s joint promotion of the Asia–Africa Growth Corridor marks an effort to provide alternatives in Africa to China, which has led the way with financing for industrial and infrastructure projects. Asia also still depends on the Middle East for most of its energy needs. Yet, as the US’s reliance on Middle Eastern energy diminishes, the rationale for its security engagement there is lessening. The need to maintain stable energy supplies may then pull Asian interest strongly westwards across the Indian Ocean.

For a long time, Asian countries took a stable geopolitical framework as a given, while they pursued economic growth through trade. Now that framework is in flux, as China takes a stronger role in the region and the US role appears less clear-cut. China’s economic diplomacy, linking all elements of foreign policy together, is spurring other countries to react. How far these new Indo-Pacific initiatives will reshape Asian trade flows and the standards and norms of international trade that go along with this will become clear in the coming years.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

BANNER IMAGE: Courtesy of Keith Skipper