By Professor Gary Hawke
ASIA FORUM
7 December 2022
Economics or Security? Or Cooperative and Comprehensive Security?
1. Introduction
2. Evolution, not a succession of orders
3. Economic interdependence not “trade”
4. “Security”?
5. The current state of evolution
6. Analysis not Feeling
Introduction
A couple of images dominate my approach to this exercise.
In the 1980s I overheard a couple of retired senior public servants in the Wellington Club exchanging complaints about the failure of the then government to respect what they had long thought an essential part of management of the public service. I still think the government they complained about to be a beacon of intelligent policymaking – it was guided by what would look good in history – and resolved to avoid the nostalgia of age.
I also occasionally contemplate a policy adviser who thinks clearly about an issue, promotes the best available response as strongly as possible, and if those in power cannot be persuaded, washes his hands of the issue.
And wonder what happened to Pontius Pilate. Did he retire to some classical equivalent of the Wellington Club and spend his time lamenting: “I told you it was a mistake – nothing good would come from it.”
I’m not sure whether these reflections are nostalgic or analytic.
Evolution, not a succession of orders
Conceiving the International Order as a new one is a mistake. Evolution is continual. It is interaction among countries and economies, not paper agreements, which constitute an international order. The notion of a stable “Liberal Institutional Order” is a product of either or both nostalgia and wishful thinking.
Economic interdependence is a significant part of international interactions and it is wideranging. At their centre for the second half of the twentieth century was the GATT.
Gatt Rounds
Rounds
1947 Geneva tariffs
1949 Annecy tariffs
1951 Torquay tariffs
1956 Geveva tariffs
1960-61 Geneva (Dillon Round) tariffs
1964-67 Geneva (Kennedy Round) tariffs and anti-dumping measures
1973-79 Geneva (Tokyo Round) tariffs, non-tariff measures, “framework agreements
1986-94 Geneva (Uruguay Round) tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles, agriculture, creation of WTO, etc
Economist 3 October 1998, “World Trade Survey”
There was a golden age of trade diplomacy. In the late 1940s, diplomats had a confined agenda, they could gather in a reasonably small rooms, there being 20-50 of them, and best of all there were limited facilities for national capitals to be consulted. But even then there were big issues to be resolved – or managed – as well as a myriad of tariff rates to be determined. The key issues included the policy space available to countries which then favoured the fashionable notion of development through import-substitution industrialization while top of the agenda for many Americans was dismantling of “imperial preference”. Consensus was never easy.
But as tariff levels were reduced, other barriers became more significant and obvious. Subsidies were readily characterised as “distorting” trade and so anti-dumping became a subject for negotiation and agreement. Discipline on any instrument brought other instruments into prominence and by the 1970s the terminology of “non-tariff barriers” and “framework agreements” was established. By the Uruguay Round which lasted from 1986 to 1994 the key issues were service, intellectual property, the disputes resolution system- and agriculture.
I deliberately still use an Economist 1998 table of GATT Rounds. The WTO embarked on the Doha Round – dubbed a Development Round – but it was never completed, and after her recent Lowy Lecture in Sydney, the Director-General of the WTO responded to a question from former Minister of Trade, Craig Emerson that her office required her to be optimistic but she did not expect any more “Rounds”. The issues have become too complex and wide-ranging and the number of parties too numerous – the WTO has 164 members and 24 candidates for membership – for the “Single Undertaking” to be revived.
That was not a sudden change. GATT was never a process of decisionmaking by equal members. The big trading economies determined what was possible, allowing for other economies which had a more than proportionate interest in a specific topic – Iceland for fish, New Zealand for temperate agriculture, etc. And within a system built for nondiscrimination – the most favoured nation clauses – groups of countries could form their own arrangements subject to such requirements as that they did not raise barriers against others and that their preferential agreements dealt with “substantially all trade”. Australia and New Zealand formed such a group in the 1960s although it was with CER in 1983 that an effective arrangement was made.
Preferential trade agreements often had wider political or security motivations. It was not for economic reasons that the US strongly supported the evolution of the EEC including its Common Agricultural Policy and its first (modern) Preferential Trade Agreement was with Israel.
Nor was GATT ever the only game in town. From the 1960s, Japanese thinkers, businesses and governments were developing an “Asian Industrializing Region” – the “flying geese model” with Japan’s economic development spreading via business connections with Taiwan, Korea, Hong Kong and Singapore and gradually extending to Southeast Asia and eventually China (although China was always too big to be considered simply an addition to the flock of geese). The network was built by business connections, albeit always within legislative requirements and government oversight.
Economic interdependence not “trade”
Economic interdependence widened from tariffs to the business environment linking separate economies. In the Economics of Trade, from Ricardo onwards, analysis proceeded by showing different production costs in two economies, the gains available through specialization and trade, and the way that tariffs limited those gains. As a footnote, it was acknowledged that that any barriers to interactions had the same effect, and there was usually some discussion of transport costs. Economic historians always related the “globalization” of the late nineteenth century more to declining transport costs than to government agreements. “Trade barriers” was simply shorthand for “limitations of interdependence”. Unfortunately the gap between economic terminology and common language was ignored and so much media discussion proceeded as though “trade” was a self-contained area of activity.
Furthermore, most of the literature was created in Europe and North America. The focus was often on the exchange of one final industrial product for another. Some of the earliest discussion was about exchanging British textiles for Portuguese wine, and even though at least some of that wine must have been in barrels and needing further processing before consumption, it was treated as a final product. In New Zealand, it was recognised that some imports were materials and machinery used in the agricultural sector and the tariff schedules soon showed preferential treatment for such items but this was understood to be a matter of political economy – farmers’ needs versus urban luxuries – rather than explored as a central element of interdependence.
However, by the 1970s, the economic literature included a good deal of discussion of trade in “intermediates” – inputs to further processing rather than for immediate consumption. It all seemed a bit odd in New Zealand which was used to exports having a substantial element of carcasses for further processing, and wool for scouring, let alone spinning and weaving, while the representative import was ofen knocked-down packs for the car assembly industry.
But it was taken a lot further in the Asian Industrializing Region. Firms formed production networks which crossed international boundaries as components were created and brought together for assembly into final products. The process of manufacturing was “unbundled”. The discussion now is about the “Third Unbundling” as production of the components of components is separated – especially as the whole process is extended to services and as digitalization affects all aspects of production.
Once these developments were understood in Asia, the same developments could be recognised elsewhere. The Asian discussion was usually expressed as “production networks” but elsewhere the favoured term was “supply chain” or “value chain”. The former is preferable because it is more easily understood as encompassing alternative suppliers of the same component. “Chain” is often interpreted as a sequence of specific links, each unique. There are usually alternatives in the contemporary economy, especially in Asia where the terminology of “Factory Asia” is common.
“Security”?
I left the history of economic negotiations with the failure of Doha – I hope the connections among the end of Rounds, the growth of Preferential Trade Agreements, production dispersed across political boundaries, and the re-emergence of interdependence as understood in economic theory against the common notion of “trade” have generated ready recognition of the world we live in.
I want to turn an area in which I feel far less comfortable even though for a while I chaired the New Zealand component of the Council for Security Co-operation in Asia Pacific (CSCAP). It is the unofficial network built around the ASEAN Regional Forum, a premiere institution for international security relations among ASEAN members and its dialogue partners. There is a very substantial maritime element to any thought about security in East and Southeast Asia and the choke point of the Malacca Strait will always be prominent. CSCAP (and its official counterparts) have therefore always included India. Until recently, I thought that including India and excluding South America was the difference between Asia Pacific and Indo Pacific. I recall sitting in the office of Rogachev in the Kremlin when he was deputy to Shevardnadze and concerned mostly with the Cambodian War; behind his desk was a map which showed East Asia and the Pacific as seen from Moscow. It was a series of concentric arcs – the inner world, part of Siberia, Mongolia and China; the outer ring, India-South-east Asia, the Chinese coastline, Korea and Japan; and an echo, Australia, New Zealand, South America, and North America. I don’t think the question of Asia Pacific v Indo Pacific would have made sense to him.
Security issues arose in Southeast Asia earlier. It is sometimes suggested that the end of the Cold War brought the region into greater focus but my recollection is different. The standard line in the early 1990s was who would have thought that we would see German reunification, disintegration of the Soviet Union, and the end of apartheid in South Africa, but the Uruguay Round would still be continuing. The principal topic at APEC was whether it was possible to incorporate “the three Chinas” and that terminology was used to refer to PRC, Hong Kong and Chinese Taipei which fortuitously were distinct “customs areas” within GATT, making it possible to conceive APEC as a gathering of economies, so evading issues of sovereignty. The next leading topic was how APEC should proceed towards regional economic integration. The US led by Fred Bergsten had no doubt that a standard FTA should be developed. Asian members, led by Ippei Yamazawa, were much more aware that the Asian Industrializing Region had developed on the basis of agreed objectives, sharing of experience, and regular reporting of progress. ASEAN had adopted the same process, soon called “concerted unilateralism”, for its community-building processes. The “ASEAN-way” was often criticised by North American and European commentators for lack of decisions and creation of “talkshops” but it has been interesting to watch the EU adopt similar consensus-based processes as it tries to develop a more comprehensive single market.
The greater role of security issues in Asia Pacific institutions and processes came not with the end of the Cold War but with the War on Terror. Responses to 9/11 included demands that it be possible to trace the origins of imported products and that movement of people should be subject to more stringent surveillance and control.
The ASEAN Regional Forum and CSCAP ceased to be specialised and insulated. Strategic studies competed with economics for the attention of leaders. In CSCAP, there was a continuing theme of contest between those who wanted to develop close military cooperation, usually led by American participants but by no means confined to them, and those who wanted much greater emphasis on consultation as a response to regional disputes, and on disaster responses and other non-traditional elements of security. Asians were prominent in this line of thinking. The Japanese concept usually translated as “comprehensive national security” saw effective national security as going well beyond military preparedness, and the ASEAN foundation document, the Treaty of Amity and Cooperation provided for the principles of mutual respect for the independence, sovereignty, equality, territorial integrity and national identity of all nations; the right of every state to lead its national existence free from external interference, subversion, or coercion; non-interference in the internal affairs of one another; settlement of differences or disputes by peaceful manner; renunciation of the threat or use of force; and effective cooperation among themselves. It owed a lot more to nation building than was usual in defence alliances. Of course it does not provide clear answers to disputed issues any more than does the UN charter. The line between conditions for participation and external interference is not obvious and what constitutes a state entitled to be free from coercion can be debated. But there is a difference between establishing a framework within which dialogue and debate can be conducted and establishing and seeking to enforce “legally-binding” agreements. The former may produce frustrating indecision; the latter draws attention to the very limited availability of an international body with enforcement capabilities – virtual absence in the presence of vetoes in the UN Security Council.
The current state of evolution
I warned you that old men are inclined to dwell in the past. But where are we now?
Covid is often the immediate topic raised, and my Asian colleagues are quick to remind me that the pandemic is not yet a past event. Surely Covid has shown that there are dangers in relying on economic interdependence? There were certainly shortages on medical supply and equipment, and interruptions to some other movements of people and goods, often less the direct result of Covid than the consequences of policy responses to the pandemic. Many were surprised at how many imported goods depended on flights which became untenable in the absence of personal travel. However, as the WTO Director General responded in her Lowy Lecture, “Frequently overlooked is that cross-border supply chains subsequently became an engine for manufacturing and distributing masks, personal protective equipment, and later, vaccines. COVID-19 vaccines are made in supply chains cutting across as many as 19 countries. Trying to scale up production within purely national supply chains would have left all countries worse off: production volumes would have been lower, and costs higher.”
Furthermore, Asian production networks were much more resilient than much media presentation would have you believe. The alternative implicit in “production network” dominated the experience of “Factory Asia”. It is not unrelated that much Asian debate now focuses on services as personal travel is taking longer to recover. And Asian experience differs from that elsewhere in degree, not in kind.
Most countries face inflationary pressures and declining rates of productivity growth. The immediate focus is the direct and indirect effects of the war in Ukraine and the response to it with food and energy prices occupying prime places along with high interest rates as central banks attempt to contain inflation, whether because of food and energy shortages or the continuing impact of the fiscal response to Covid. We might note that according to the FAO and OECD “One in five calories consumed around the world is traded across borders” and this share has been rising. But then contrary to what may have been inferred from discussion of “reshoring” and “friendshoring” trade is at record levels.
Behind the immediate issues are more long-term ones. For 40 years, the single most important driver in the international economy has been the incorporation into the international economy of underemployed resources in China. Increased availability of Chinese products has facilitated growth in incomes at relatively stable prices. This is not a complete explanation of the significant period of stable prices and growing prosperity, and not everyone shared in it, but developments in China were dominant.
Rapid shifts in the balance of economic and political power can be destabilizing if not unnerving. I sometimes amuse myself by thinking of the contemporary relevance of British experience between 1945 and 1956 when its leaders recognised that the “American cousins” were no longer to be called on when needed but were an indispensable party to international decisions. The parallel now is not complete since the Americans were “cousins”, perhaps uncouth but not usually antagonistic, and we cannot expect Americans to see Chinese in that way.
But we can expect eventual recognition that America is no longer in a position of unique dominance. Dr Ngozi Okonjo-Iweala put this very diplomatically when she identified one of the issues facing the WTO as “gaps in rules as with subsidies – as practised by China or in industrial policy elsewhere”. The usual expression is “rules on SOEs”; government-business relations can be expressed in ownership or through government wishes expressed in regulation and government procurement which is implicitly “you should do it in the same way as we do iy”. This is most obvious in how business draws on public subsidisation of education and research. The rhetoric has moved from nationalised industries to SOEs but this reflects North American and European perspectives. An international rule will come from consideration of boundaries to government-business interaction as a whole. (I often associate this with Henry Lang’s response when I talked about insulating SOEs from ministerial interference: “You think ministers don’t lean on private businesses.”) The issues of intellectual property rights are even more complex, but we can be sure that international rules will not be American rules applied to everyone.
The end of rounds discussed earlier actually helps. International rules will be developed by regional and plurilateral groupings always working within an overall existing framework of agreed international rules. The process will not be easy, but then it never was. It is only in hindsight that the path forward became obvious. And obviously incremental rather than by creating or maintaining an international order.
And security? Surely Xi Jinping is different from Jiang Zemin or Hu Jintao, let alone Deng Xiaoping? Yes, evolution generates change. But it is worth remembering that Deng said “Bide your time. Hide your strength”. I interpret that to have a time dimension. It is “Take your time”, not “accept your subsidiarity”.
China’s economic growth will slow. It is a matter only of arithmetic that it would otherwise become the source of a very large share of world production. China has economic issues but slowing economic growth is not one of them. Maintaining prosperity requires more reliance on the Chinese domestic economy and that is what “dual circulation” is about – how China relates to the world economy, not separating China from the world economy. I owe to Duncan
Campbell the explanation: “In common speech, dual circulation is referred to in Chinese simply as Shuang xunhuan 双循环 which means, literally, paired or dual circulation. But in formal discourse, this is always preceded by the qualifier: Guonei guoji 国内国际 which … means ‘Domestic and international.’” We are used to looking at the growing number of economies for which China is the principal trading partner. It shouldn’t surprise us that China is looking at itself as an eco nomic partner.
The Director-General of the WTO is a former minister and is therefore much more practical than a former academic like me. “Trading and investing only with friends could lead to fragmentation. And wider fragmentation would be economically costly for all economies.” Many countries do not want to choose between blocs and there is an alternative, Re-globalization meaning “Deeper and more diversified markets would enhance supply resilience in a world of more frequent exogenous shocks. Reduced concentration in sourcing would make trade harder to weaponize. … let businesses manage risks and diversify in a sensible manner, but if governments seek to intervene, to encourage this through subsidies or other incentives, then push for a broader, wider diversification to many more geographies, wherever the investment environment is appropriate.”
In the wider security sphere, Shiro Armstrong suggests multilateralization of the ASEAN Treaty of Amity and Cooperation. Shiro thinks “The first regional priority is to ensure the United States remains committed to the Western Pacific to help constrain Chinese assertiveness.” I wonder if the US “security shield” is perhaps a reason for uncertainty in East Asia – Chinese assertiveness might be better restrained if it were not fixated on the US. As usual, there is need for balance. In the absence of world government – and that is not likely to change soon – we have to rely on a benevolent hegemon or mutually assured destruction as a nuclear shield, but that should not be extended into a security shield. The TAC certainly takes us away from military alliances towards Comprehensive Security. As I suggested earlier, I am less inclined to think that formal agreements are important but creating opportunities to develop mutual understanding and trust is certainly important. I’d look to develop existing institutions, ARF etc, rather than create a new framework
The rules for different policy domains obviously have to be consistent. And disagreements in any area will obviously flow into the attitudes and feelings of confidence which influence agreement in other areas. International negotiations will never be free from disagreement and even conflict any more than will any national political debate. But it is sensible to aim for consensus and acquiescence in compromise.
The immediate objective should be intense scepticism of any proposal to weaponise one area of policy in pursuit of distinct policy objectives. The first step is to scrutinize effectiveness. It pays to remember that British efforts to maintain its monopoly of textile machinery by prohibiting exports were unsuccessful. It pays also to consider unintended consequences. The satisfaction of imposing hardship on an opponent dissipates when those most affected are not the intended target, but friends or even the imposer.
Ability to draw on a wide range of alternatives is likely to be much more secure than a retreat to autarchy. Interdependence can be a source of security, not a risk to it.
Analysis not Feelings
I’ll finish on that note. Trade does not guarantee peace but it certainly helps. It is no accident that “Equality of trade conditions” was among Wilson’s Fourteen Points for peace after World War 1 – it was probably partly aimed at Imperial Preference – while the Atlantic Charter of 1941 included “the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity”. (I’m not sure that the “universality” implicit in that lasted through Yalta and Potsdam.)
“Co-operative and Comprehensive Security”, like “Open Regionalism” (and its descendant, “Open Plurilateralism”), and “Concerted unilateralism”, originate in Asian thinking. We should look to our geography and not to our history whenever we are asked to choose between economics and security, or worse, trade versus security, or even values versus interests.
I am distinctly ambivalent about “Indo Pacific”. The best response I have heard was from an Indian diplomat, “Which Indo Pacific do you mean?” The Indo Pacific Economic Framework has a welcome emphasis on what are now important elements of economic diplomacy – management of supply chains (which would be better expressed as production networks), digitalisation etc – rather than on tariffs although this is sometimes interpreted as having no relevance for “market access” as though tariffs were the entire conditions for market access. But IPEF is clearly aimed at excluding China, and tends to promote fragmentation rather than cooperation alongside competition.
Knowledge building uses categorization, but it is not enough to create labels that simply attract positive feelings. It is not enough to rely on traditional friends. Analysis is required, not least to understand and interpret data. Simplicity is desirable, oversimplification is dangerous, and getting hung up on the distinction would be the occupational hazard of the academic if it were not their occupation.
