By Professor Gary Hawke
JEF
with Australia-Japan Research Centre, ANU
ASIA PACIFIC FORUM 2022
Global fractures and the Asia Pacific economy
1-2 December 2022
For about twenty years Japan Economic Foundation has convened an annual Asia Pacific Forum. Its members are drawn, I think by invitation of JEF, from throughout East Asia and Southeast Asia (including Australia and New Zealand) and I have been the New Zealand participant. Through a stable (but not fixed) membership, often supplemented by interactions in other contexts, the Forum has built confidence which permits frank discussions. The Forum circulates among locations from where the members are drawn and the agenda is drawn up by agreement between JEF and a local institute. For the last three years, it has not been able to meet in person, but nevertheless this year the Australia-Japan Research Centre at ANU was the cohost. In the early years, the Forum focused on regional trade agreements – it started as Japan began to sign free trade agreements – but in recent years, the agenda has widened to include all aspects of international economic co-operation. In-person meetings took the form of a public forum with participants invited by the local organising institute and a separate Chatham House discussion among members. The demands of Zoom have made recent Forums shorter and without distinct parts. Nevertheless, the discussion has remained frank as well as searching and informed. In opening the Forum, JEF Chairman, Masakazu Toyoda, reflected on how the Forum had a tradition of exhibiting Strength in Diversity. As director of the the Australia –Japan Research Centre at ANU, Shiro Armstrong saw scope for varied expertise for a time characterised by “Global Fractures”.
Keynote address
The keynote speech was given by Craig Emerson, best known as a former Minister of Trade, one of the architects of TPP. He has a PhD in Economics from ANU, was an adviser to Bob Hawke, and is now a consultant. He argued that GATT was founded to promote peace through interdependence and is experiencing greater challenges now than ever before. Trump revived mercantilism! The American psyche sees not comparative advantage but unfair trading practices.
In her recent Lowy Lecture, the WTO DG, Dr Okono, said that the DG cannot be pessimistic, but a “single undertaking” has become impossible and “rounds” have ended. The future is plurilaterals. The region has APEC, AANZFTA, RCEP, etc but Emerson asked whether something bigger is possible? He advocates FTAAP by steps; effort to design it in advance would be pointless but it should be voluntary, nonbinding, and non-discriminatory. Similarly, for climate change he sees less value in set-piece agreements by leaders than in incremental steps, and uses comparative advantage to advocate trading in carbon credits. He would generalise the approach to decarbonisation as a whole and also to management of critical minerals. Political leadership cannot be circumvented entirely, and proposals to delegate accession to plurilaterals in a search for real non-discrimination are unrealistic. (I would argue that there will always be genuine issues in deciding how an applicant’s circumstances relate to the terms of an existing agreement, and that although the eventual decision must be consensus among the governments of existing members, commissioning an independent agency to determine how the rules apply to an applicant would clarify the distinction between genuine problems and opportunistic promotion of other objectives.)
Session 1 Geopolitics and the global Economic System Post-Ukraine Conflict.
Lauren Richardson, ANU, convened a panel of Murray McLean (Australia), Ahn Choong-yong (Korea), Jayasiri Jayasena (Malaysia), Somkiat Tangkitvanich (Thailand), Anita Prakash, (ERIA), and Shujiro Urata (Japan). Nobody dissented from the judgment that we see a dismal state of the world. But the recent interactions in Southeast Asia, G20, EAS and APEC show that diplomacy can still work. It was argued that the need is not for new arrangements but to consolidate and use existing agreements (with accessions).
Global problems can be described in various ways. Energy and food prices clearly figure, and so do pressures to fragment the international economy, but some give more weight than others to China’s slowing as a result of Covid and its property market problems, and to management of financial tightening and the potential of coordinated financial policies. North Korea is still a major problem for some. There was no dissent from the view that big powers use the name of security to control trade and use it as a weapon.
The Russia – Ukraine conflict is not yet “post”, but its impact on the region has been “muted”, the conflict being distant and not involving major trade partners, but it has had impact through supply chains and export markets (including indirect impacts). Trade is a force for growth during as well as after the Ukraine conflict. Leadership is paramount especially the need for a global vision (and it is not obvious). Surveys of opinion in Southeast Asia usually find China recognised as the most significant power but neither China nor US is trusted as both are seen as self-interested. The strongest result is that choosing sides should be avoided, and reduced rivalry for hegemony in infrastructure is welcome. Preferred destinations for education are the US or UK, but then that was true when the Non-Aligned Movement was most aligned with the Soviet Union. Top choice for tourism is Japan and ASEAN welcomes Japanese leadership. But Japan’s pursuit of economic security is problematic, especially in its implications for the supply chains for articles like semiconductors and because provisions for technical progress and security systems have impacts on small businesses which include significant costs. The same is true more generally of restrictions on investment flows.
Discussion of plurilaterals recurred throughout the forum. A JEF Study Group recommended that Japan should join the Multi Party Interim Agreement, a plurilateral agreement to provide a substitute for the crippled Appellate Body of the WTO Dispute Settlement System. The Study Group also recommended reform of the WTO system, to avoid law-making by the Appellate Body and accommodate some other US demands, and the Japanese government preferred to prioritize the WTO, perhaps because it was unwilling to offend the US government. This illustrates how plurilateral agreements always interact with multilateral frameworks.
Managing tensions between conflicting objectives, each of which is desirable in isolation, is a common feature. ASEAN centrality would be more influential if ASEAN were united, but on some issues it is not and greater reliance on plurilaterals internationally could be paralleled within ASEAN by a greater willingness to work with coalitions of the willing and not insist on unanimity. But care would be needed to avoid relegating small members to insignificance. Even within countries, such tensions have to be managed. The Modi government took note of the adverse reaction to its withdrawal from RCEP, is insistent on its industry policy, but the economic partnership agreements it has formed with Australia, the EU and others, albeit weak, suggest a balance which includes more outward willingness.
Life would be simpler if it were possible to draw a line between trade and security but reflection on the production and use of semiconductors or on the complexity of commitments to cross-border investment shows the futility of such hopes. For optimism, we have to reflect that interdependence can be a source of security, not a risk to it.
Session 2 Rule-Based Economic Recovery
Naoyuki Haraoka, JEF, chaired the second session with a panel of Zhang Yunling (China), Yose Rizal Damuri (Indonesia), Gary Hawke (New Zealand), Mignonne Chan (Taiwan) and Sachin Chaturvedi (India).
The discussion included some surprisingly negative views of APEC, with a suggestion that the “APEC vision” has failed. The thought seemed to arise from identifying APEC with FTAAP, seeing the issue of Indo-Pacific versus Asia Pacific as a problem and also seeing a proliferation of groupings such as RCEP, CPTPP, ASEAN FTAs with China, India, Australia & New Zealand etc as confusing. FTAAP is a vision but a positive development of the Asia Pacific economy does not depend on its “completion”. The compatibility of RCEP and other regional agreements is important but their separate existence is not. Plurilaterals can be exclusive so that their compatibility with the WT0 and ensuring that they are properly open to accession is important but their proliferation is a matter for management, not concern. Like MPIA they can provide alternatives when multilateral processes are disrupted, and APEC is a possible vehicle for building on DEPA, responding to the EU’s GDPR and carbon tax proposals, and developing responses to additional issues as they arise.
There is no shortage of issues. Trade & investment rules need to provide for recovery with sustainability and without restrictive discriminatory policies. Rules are needed on monetary policy and development financing, including debt restructuring and the recent G20 showed that solutions have still to be developed. Plurilaterals are an obvious place for experimentation.
I was asked to discuss the theoretical background and append my contribution. Other contributions extended the analysis. Does the APEC peer review mechanism reconcile nonbinding with rule-based? Could it be used in the security context? The challenge from geopolitics is obvious and as the UN is ineffective, perhaps a region security mechanism is desirable? It has been suggested that multilateralization of the Asean Outlook on Indo Pacific provides a way forward but there was also support for proceeding by smaller steps. The contemporaneous FIFA World Cup stimulates thoughts about rule-based competition with credible referees, a manifestation of cooperation and problem-solving.
“Indo Pacific” essentially links India to East and Southeast Asia, and the Indian Ocean may be important especially for accessing essential minerals. IPEF offers an opportunity for a new focus on supply chains rules as well as on development and green finance. But the relevant “Indo Pacific” is that of the ASEAN AOIP, not a mechanism for excluding China. The zero-sum approach to China and US makes the hope of a rule-based system illusory, and “securitization” of economic integration is a disaster.
Session 3 Implications of Climate Change and Energy.
Frank Jotzo (ANU) chaired the third session. He has no doubt that net zero is the appropriate objective and that solar and wind are cost effective and increasingly so. While familiar from much discussion in New Zealand and the international media, this contrasts with the emphasis in the analysis of the Economic Research Institute for ASEAN and East Asia on the need to balance energy security with decarbonization with consequents reliance on gas as a key component.
The Panel was composed of Daw Khine Khine Nwe (Myanmar), Josef Yap (Philippines), and Vo Tri Thanh (Vietnam). The discussion was less animated than in the preceding two sessions, reflecting the specialisms of most participants. Nevertheless, all could see the challenge in the view that investment in clean energy has to increase globally from the $2 trillion currently envisaged to something like $4-5 trillion. The challenge of scale becomes more complex as countries seek competitive advantage through industrial policy.
The private sector must clearly be involved. Responsible business practices have to be distinguished from “green washing”. Public-private partnerships were advocated but in the sense of cooperation rather than specific vehicles. A pathway such as “co-operation – energy transition – climate” is intuitive but it requires concessional finance, co-operation on trade, standards, emission trading etc. It is threatened by US-China relations. China’s dominance in the supply chain of solar panels is unlikely to change quickly. Strategic competition in standards is disruptive. National interests diverge, as illustrated by the border carbon tax issue. The WTO legality of carbon border tax adjustment has yet to be tested and is subject to US-European strategic competition. Vietnamese experience is instructive. Government strategy is formulated and implemented. Firms with commitment benefit. But the impact is limited and it is clear that Vietnam needs friends and looks to the APEC cooperation agenda for structural reform and to ASEAN too.
Basle rules and the procedures of rating agencies are obviously important to the recruitment of private Green finance. But proposals which amount to risk-bearing by public schemes and profitabiity for private investors have obvious limitations. There should be a more concentrated effort to learn from long experience with development finance generally. The core issue is usually the compatibility of the interests of lenders and borrowers. Most borrowers want energy and do not want to pay for it to be “green”. Lenders want a commercial return on the whole package.
Wind and solar need a network backup – the energy mix is important and problematic. The acceptability of nuclear power depends on cost and safety (small scale generators are becoming feasible but are still some way off) and disposal of nuclear wastes has yet to be resolved. Other possibilities such as in blue hydrogen, are still experimental and commercialisation is far from assured. An “Asian Zero Emissions Economy”, building on Japan-Australia-ASEAN remains visionary.
Wrap-up
In drawing the Forum to a conclusion, Toyoda-San noted the range of issues discussed: the prominence of plurilateralism, including its relationship with multilateralism and the WTO and MPIA, the question of Asia Pacific or Indo Pacific, the challenge of climate change, the safety of nuclear power, decarbonization and border taxes. Over all is the shadow of China-US relations, but also frequent references to “middle powers”. Shiro Armstrong underlined this, starting with how the fracture of the global order makes achievement of carbon zero much harder and more expensive. The need for a strategic approach to plurilaterals and WTO remains central, and securitization is system damaging.
Next year’s Forum will be held in Vietnam.
Appendix
Rule-Based Economic Recovery
Gary Hawke
The theoretical argument for open economic development is as strong as ever. Given resources will generate their maximum contribution to economic welfare if there are as few restraints as possible on their allocation to specific uses. Restricting movement of people, goods, services and investment across political boundaries is a constraint.
This cannot be translated into policy action without qualification. The biggest qualification is that not all resources are “given”; successful innovation means that what was formerly useless becomes a valuable resource, or more goods and services can be generated from an unchanged amount of resource. This is not carte-blanch for R & D expenditure or “industry policy”; the important part of innovation is not the initial expenditure but the monitoring of the increased welfare it makes possible. Furthermore, innovation is itself likely to involve co-operation across political borders. It is more likely to be frustrated than promoted by a retreat to national borders.
Countries may also seek a larger share of the increased welfare which international exchange makes available. Debate and dialogue cannot be circumvented.
The “economic welfare” referred to is a subset of policy objectives. Governments, and in democracies, their electorates, may choose to sacrifice material wellbeing in order to achieve greater security or promote their conception of human rights. It is even more likely that they will sacrifice economic welfare in misguided acceptance of arguments about threats to security or enthusiastic promotion of ineffectual gestures in response to decisions by other governments.
There are also complications to all policy objectives related to timing. Any population is likely to contain different views on how the future should be valued relative to the present, whatever element of collective choice is under consideration. Populations have overlapping generations, and at least some of the future matters more to the young than to the old (even allowing for varying degrees of concern for the wellbeing of descendants.) Contemporary environmental arguments involve advocacy for a greater weight on future costs and benefits and often claims for valuation of what others regard as insignificant.
It is the variation of views within each population which ensures that international economic relations will always be contested. Governments, whether or not democratic, will find life easier if they attract support rather than opposition within their borders. They will therefore try to find a balance among outcomes of economic welfare, security, human rights, and environmental impacts that attracts more acceptance than criticism. Especially as the media tends to be one-dimensional, there is usually more discussion of individual objectives (and inevitably of failure to achieve each perfectly) than there is about the essential policy objective, finding an optimal balance among them.
Each government tries to influence the behaviour of other governments. Many issues of security, human rights, and environment are influenced at least as much by what happens in other countries as by what happens within national borders. Policy generally, not only economic policy, is as much international as domestic.
It is a long time since international economic interactions were governed entirely by tariffs. The agenda rapidly expanded to subsidies, government procurement, standards, sanitary and phyto-sanitary requirements, professional licensing, and it has expanded further in recent years especially in relation to investment, services and digitalization. Market access remains important, not least because individual exporters lobby their governments for assistance to operate in other economies, but it involves much more than tariffs. The media will often give the impression that “trade” is a distinct activity, but the economic issue was always the interdependence of national economies and policy discussion has always to take place in that setting.
The regional and international context currently is problematic. Most countries face inflationary pressures and declining rates of productivity growth. The immediate focus is likely to be on 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. But behind these 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.
There were adjustment issues. Those products where Chinese production was most readily added to world supply supplanted competing products. Their producers in other countries found that they had to change. Jobs and whole communities were disrupted and those most affected did not find consolation in the cheaper goods and services available to those who were able to buy them. Resort to protectionism was a more popular response.
I have deliberately emphasised political issues within countries and the familiar difficulty of managing change when many people benefit a little and a few people incur significant adjustment costs. However, those issues occur in a context where countries are interdependent. And that interdependence constrains their choices as they seek economic prosperity, security, and social goals such as human rights, while they respond to innovation and prepare for the future. Foreign policy is not an optional extra; it is a core part of policy development and implementation.
Foreign policy is, however, not the preserve of diplomats. The agenda of international economic issues, tariffs, subsidies, government procurement, standards, sanitary and phyto-sanitary requirements, professional licensing, investment, services and digitalization, means that the entire regulatory regime is involved. Economies will naturally focus of those parties with whom there are most interactions but the growth of international production networks inevitably widens the group of relevant parties. Bilateral agreements become less common than regional agreements, and the compatibility of regional agreements highlights the importance of the multilateral agreement.
A similar argument can be made for any element of policy – security, environmental, etc. It is clearly better that issues should not always be considered as new and distinct. Some can be foreseen and preparation made for them in advance. There can be international rules.
There is no doubt about the importance of rules. What can be disputed is the content of the rules, and especially how rules should be adapted to changing circumstances. Stable international rules have to be made and maintained by agreement. Small economies are naturally predisposed to favour rules – although not necessarily the precise content favoured by other parties – while large economies are more likely to think they can impose their views on others. Even they are constrained by other large economies and by the cost of monitoring and enforcing rules on reluctant partners.
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 efforts to reach 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 any one area of policy in pursuit of distinct policy objectives. The first step is to scrutinize effectiveness. It pays to remember that British efforts in the eighteenth and early nineteenth centuries to maintain its monopoly of textile machinery by prohibiting exports were unsuccessful. Repetition of failure is seldom worthwhile. 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.
Above all, the underlying analysis has to be correct. The Covid pandemic caused interruptions to some supplies but international production networks, especially in Asia, proved to be resilient. The terminology of “production network” draws attention to the availability of substitutes and alternatives in a way that “supply chain” or “value chain” does not, and thereby is a more realistic representation of reality.
And ability to draw on a wide range of alternatives is likely to be much more secure than a retreat to autarchy.
