RIETI-ANU Symposium

Asian Integration and the Global Economy: Economics of geopolitics (Summary)

Information

  • Time and Date: 14:00-17:00, Thursday, November 21, 2019 (Registration starts at 13:30)
  • Venue: RIETI's Seminar room (METI Annex 11th floor, 1121) (Tokyo 11th floor, Annex, Ministry of Economy, Trade and Industry (METI)1-3-1, Kasumigaseki Chiyoda-ku)
  • Host(s): Research Institute of Economy, Trade and Industry (RIETI), Australian National University (ANU)

International economic and security policy is becoming a very complex issue around the world, especially in the Asia-Pacific region. With the ongoing trade war between two of the world's largest economies and military superpowers, the United States and China, the rest of the world is faced with hard choices in economic and strategic policy. Even more so, with their supply chains, prosperity, and multilateral rules-based order at risk, countries caught directly in the middle, such as Japan and Australia, need to balance their security interests with the United States and their economic interests with China to ensure their prosperity.

This symposium, co-hosted by RIETI and the Australian National University (ANU), will cover a broad range of topics and raise several questions around these aspects of economy and security, particularly within and around Japan and Australia. The symposium is joined by three experts in the fields of economy and public policy from Australia, as well as by several colleagues from both academia and the government of Japan.

Summary

Opening Remarks

NAKAJIMA Atsushi (Chairman, RIETI)

This symposium is the third joint symposium held by RIETI and ANU. The title and topic of this meeting is Asian Integration and the Global Economy: Economics of geopolitics.

The Asian economy is playing a very important role in the globalization and development of the global economy. However, there has been trade friction and instability between the U.S. and China. As a result, the free trade regime is being shaken and there has been disruption of international supply chains, along with stagnation of global economic activity, especially in trade, and investmentIn addition, the friction is spreading from trade to aspects of intellectual property and industrial competition. Therefore, we have seen a rapid increase in activities to protect national economy and industry through the imposition of more rigorous management of trade and investment by major countries. We would like to discuss the economic security risks we are faced with and the necessary efforts to overcome such risks.

From Australia, we have Dr. Gordon DE BROUWER, who will give the keynote speech, and Professor Christopher FINDLAY. From Japan, we have Mr. HOSAKA Shin and Dr. URATA Shujiro. Professor IIMURA Akiko and Mr. OKADA Kohei will join us in the panel discussion. Dr. Shiro ARMSTRONG from ANU will serve as the moderator of the panel discussion. I hope we can learn a lot about Asian integration and the global economy and security.

Keynote Speech

Gordon DE BROUWER (Honorary Professor, ANU / Former Secretary, Department of the Environment and Energy, and Former Associate Secretary of the Department of the Prime Minister and Cabinet and G20 Sherpa / Panel Member of the Independent Review of the Australian Public Service)

Setting the scene

The forecast for global growth is 3.5% over the next several years, but it is a very difficult outlook with most of the risks on the downside. There are the economic risks which we are all used to, and they are correlated to the security risks which are deep and profound. We are moving into a world where the relationship between the U.S. and China, which are probably the two countries that matter the most to Japan and Australia, is moving into a position of strategic competition and away from international frameworks and institutions. It is a profoundly disturbing shift that we have not seen before.

Technology is where economics and security come together. Digital data are profound for our economies and they are changing the ways markets and institutions work. They can be very good for inclusive economic growth, but radically transformative in markets and across the economy. They can also create vulnerabilities to cyberattacks.

How we frame the problem really matters. For countries like Japan and Australia, framing economics and security in a binary, exclusive manner does not help. While China does not resonate with the way that we talk about our politics, it is a profoundly important economy that we simply cannot ignore. We are in the Asian region and we have to live with and engage with China. The U.S. is the pre-eminent military power in the world and a fantastic source of innovation, growth, and ideas, but it has become increasingly unpredictable so we should not have an overreliance on the U.S.

Principles and strategies

There are two very important principles or strategies of how we deal with this. We should always refer back to the national interest of which there are three really important components: security, prosperity, and social well-being. We have got to come back and think of those when we think about a particular problem or proposition. Sometimes the solution to dealing with a risk may be found in another domain. It is all about risk analysis and practical risk mitigation.

We tend to talk about security as a public good, but we also need to think of how to mitigate a risk in a way that does not have to be provided by the state. A lot of risk mitigation is on strengthening the role of businesses and strengthening the nature of our social community interactions. They are often much more effective when they are embedded deeply in the behavior and preferences of businesses and people. While we tend to frame the debate between security and prosperity, the social dimension is also really important. A strong relationship between people can mitigate extreme reactions by a government.

Let us look at some examples. In terms of infrastructure, it is important to have a range of players in providing investment so that no one country has leverage over you. It is also important to think about how to mitigate or reduce the risk of that investment being used against you. In terms of foreign investment, it is important to identify where the risks are and how to manage them. Foreign investment actually gives another country a primary interest in your success, but there are cyber-related risks which must be taken into account. It is important to have a strong domestic legal system and protections to manage cyber-related risk. In terms of dual-use technologies, it is important to very carefully protect the defense and security dimension of the technology and to continue to compete for the lead.

Strengthening domestic and international institutions

How do we design our own government systems to deal with these issues of security, prosperity, and social well-being? I think it matters very much how your Cabinet talks about these issues. We both have Cabinet systems of government with committees and sub-committees. The security committee of the Cabinet has a voice on security, but it does not really have a voice on prosperity or social well-being. We have traditionally segmented these things. The Cabinet needs to be a place that brings these together to have an honest, open, and balanced discussion.

I think in many countries, we have set up economic units in foreign or home affairs departments and have set up security units in economic departments. That is a good step, but it is not the final step. It is a good step because we are talking about different perspectives, but it is not the final step because ultimately each department will see things through their own perspectives. It is important to make full use of analytical tools and it is necessary for another office to be responsible for looking at the situation from a broader perspective, like the Prime Minister's department or office.

What do we do about it together? We are in a world where our prosperity and our security face different sources of risk. We are in a world where the two biggest countries we have relied on or have engaged with are volatile and unpredictable on these issues. We should not let that define what we do. We should define what we do. It is a matter of countries taking up those issues themselves and pursuing their own national interests around them. We should not let our national interests be defined by someone else. For this, Asia-Pacific Economic Cooperation (APEC), as well as forums like this, are a really valuable tool.

Panel Discussion

Moderator:

Shiro ARMSTRONG (Visiting Scholar, RIETI / Director, Australian-Japan Research Centre, ANU)

Panelists:

Christopher FINDLAY (Honorary Professor, Crawford School of Public Policy, ANU)

HOSAKA Shin (Director-General, Trade and Economic Cooperation Bureau, METI)

URATA Shujiro (Faculty Fellow, RIETI / Professor of Economics, Graduate School of Asia-Pacific Studies, Waseda University)

OKADA Kohei (Deputy Director-General for Trade and Economic Cooperation Bureau, METI)

IIMURA Akiko (Professor and Head, Research Strategy Department, University Research Administration Center, Tokyo University of Science)

Gordon DE BROUWER (Honorary Professor, ANU / Former Secretary, Department of the Environment and Energy, and Former Associate Secretary of the Department of the Prime Minister and Cabinet and G20 Sherpa / Panel Member of the Independent Review of the Australian Public Service)

Introduction

Shiro ARMSTRONG (Visiting Scholar, RIETI / Director, Australian-Japan Research Centre, ANU)

A lot has changed in the global economy, including the associated economic and security risks. The U.S. is walking away from its leadership role, China is asserting itself internationally, and the strategic competition between the two countries is complicating policy choices for us. Economics and security are now much more closely and explicitly linked, but in a way where economic tools are often deployed for national security or geopolitical purposes. I think this quite often leads to bad economic outcomes and weakened national security outcomes. It turns a virtuous cycle of economics and security into a vicious cycle.

Just because the U.S. and China are deploying their policies in this manner, does not mean that the rest of the world, like Australia and Japan, has to go down the same path. I think our countries are weighing these choices differently, even between ministries. We have to think about the balance of the choices that our countries are making between economics and security. We have to frame our choices and get our policy frameworks right so that we can return to a positive feedback loop between economics and security. We do not want to be forced into choices between the U.S. and China. I think this is where Australia and Japan share the same challenges, and where we need to be working much more closely, both privately and publicly.

Presentation

Christopher FINDLAY (Honorary Professor, Crawford School of Public Policy, ANU)

5G and why it matters

5G technology is expected to be transformative and have significant effects on our economy. It has significant defense applications and creates more opportunities for intrusion and disruption. For all of these reasons, 5G has attracted a lot of attention from members of the security community, and has been driving policy choices in a number of countries.

Responses and resolutions

In Australia, there is a policy to ban vendors who are likely to be subject to directions from a foreign government. The use of a risk-based approach led to a ban, but opinions differ on the scope for more precise risk management. We should consider the application of other institutions such as our legal system. There is quite a large toolbox for responding to these issues.

It is not certain that a ban, as applied by the U.S. and others, is going to be efficient. More likely, it seems that when considering the trade-offs between security benefits and economic consequences, you would be led to a sort of middle position. Economies in Europe seem to be following this approach. In Southeast Asia, many are much more concerned about the benefits of access to Chinese technology and are reluctant to give up that opportunity.

The U.S. earlier in the year announced bans on both sales to and purchases from Huawei. It was reported that they wanted to protect U.S. technology, but I would say that this was done in a wider context with concern about the growth of China. I think both export and import bans are costly options that illustrate the impact of a geo-economics way of thinking. While a cooperative approach may be constrained by the weight of strategic considerations, it could create more options and a less costly result.

Presentation

HOSAKA Shin (Director-General, Trade and Economic Cooperation Bureau, METI)

Japan's perspective

Japan is a promoter of free trade and has benefitted greatly from it. We are in a position to maintain free trade. Looking elsewhere in the global stage, economic security and free trade needs to be balanced. The friction between the U.S. and China is increasing. In Europe, personal data protection is being prioritized in view of their concern for human rights' violations. Japan needs to take some measures in view of all of these developments.

Challenges and solutions

In our department or at the government level, we have to discover where chokepoints exist and also talk about what technologies need to be protected. When China restricted its export of rare earths, we diversified our sources of rare earths, and now half of the rare earths imported by Japan comes from Australia. This diversification provides economic security. I think this perspective needs to be employed in different areas as well.

There is a range of different challenges. With the passage of the Foreign Exchange and Foreign Trade Act revision in the Upper House, we will be able to take steps to increase security on a daily basis. As we receive foreign researchers, we have to be mindful of the possibility or the risk of a shadow lab somewhere. We have to come up with relevant frameworks for these risks.

There are also other areas where the government can and should be taking actions. International trade control used to be the framework with which we used to handle critical and emerging technologies, but now that this area is expanding, we have to revise the way we deal with them. On a global scale, with rising security issues, we have to find a solution that best rebalances the need for free trade and other risk factors.

Presentation

URATA Shujiro (Faculty Fellow, RIETI / Professor of Economics, Graduate School of Asia-Pacific Studies, Waseda University)

National security and international economic policy

The economy and national security are becoming very important topics nowadays because of recent policy changes, many of which have been introduced for the purpose of national security. The trade war against China is currently ongoing and a lot of impacts have been seen in the global economy as a result. More specifically, trade between the U.S. and China has been significantly reduced, compromising the economic growth levels of both countries. The impact has also spread to other countries as well, so this issue needs to be overcome.

Response by Asian Economies

Global value chains and similar networks have been the best ways to achieve economic growth in Asia. In order to realize further economic growth, it is necessary to expand trade and investment further, along with advancing global value chains (GVCs).

In Japan, we have the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP11) in which rules are rigorously formulated and applied across the region. Framework institutions such as APEC need to come up with clear rules. The Regional Comprehensive Economic Partnership (RCEP) is expected to play an important role because China is a member. As a first step, we will need to make RCEP a success and then eventually work for China to join TPP11. If that can be realized, it will be a very favorable situation. World Trade Organization (WTO) reform is also something that will need to be promoted. Japan and Australia can play a very important role in this regard.

When it comes to national security, areas such as capital, digital economy, energy, and natural resources will be important going forward. We need to discuss, collaborate, and cooperate on these issues, and work on and establish appropriate international rules and enforcement to avoid further frictions.

Q&A

IIMURA:
What are the similarities and differences between the Belt and Road Initiative (BRI) of China and the Free and Open Indo-Pacific (FOIP) framework?

DE BROUWER:
I would not be too focused on the rhetoric of the two approaches. They come from a particular history and appeal to domestic constituencies.

ARMSTRONG:
The BRI is evolving, but has had huge problems. It has been essentially a failure. The joint China-Japan infrastructure investment projects in third markets is a sign that the Chinese are open to outside influence and engagement.

OKADA:
From a technological viewpoint, are there any things that only Chinese companies can do, or can other non-Chinese companies play the same role?

FINDLAY:
There are non-Chinese companies that can provide the equipment and technology. I think a good regime to have is an open one in which these companies can compete with each other.

IIMURA:
I believe that non-Chinese companies like Nokia or Ericsson can handle the technology. The difference would be the cost factor. Chinese companies can do it more cheaply.

ARMSTRONG:
Australia made it clear that Huawei or Chinese technology is not going to play any role in its 5G network. What led Australia to that? Do they have a different risk assessment or decision making structure than other countries?

FINDLAY:
I assume that a risk assessment was applied, but that the outcome resulted from a strong perception of the risks involved. My observation and concern is that the decision was made in a very unilateral fashion. If it was made in a more cooperative environment such as APEC, it could have given us more options to think about.

IIMURA:
I believe that the outcomes of risk analyses are shared among some countries, but the mitigation measures that they take may vary because of different domestic legal frameworks.

ARMSTRONG:
How can we justify government interventions?

URATA:
In the case of subsidies, a good position may be established, but if other countries come with their own subsidies, it will become a race to the bottom which would be a waste of resources. I think government intervention in certain cases can be justified, but a game theory perspective is very important.

OKADA:
It is very difficult to calculate and balance the costs and benefits of certain new controls, so we ask industries for input. Technology is always developing, so we need to continue surveying new technologies and their effects on national security.

FINDLAY:
As for whether interventions are worthwhile or not, we need to be specific, come up with multiple solutions, and find data with the integrity to allow us to choose. Including the voice of public policy could be beneficial as well.

ARMSTRONG:
How do small countries mitigate risks?

OKADA:
Some years ago certain African countries looked like under the very strong influence of China. But it is observed that both China and African countries are changing their attitude to each other through their experiences.

URATA:
If we have a solid set of rules, we can rely on the rules. Right now, we lack the rules with which to deal with China and its demands.

ARMSTRONG:
In the case of the WTO, China actually has a very good track record of complying with rules. The problem is the gray areas, or places where the rules do not exist. We need to create rules with China, not around China.

DE BROUWER:
When you have an asymmetry of power, you can either change the bigger country to a smaller one, or you could get bigger yourself through collective action.

ARMSTRONG:
What do you think about India's exit from RCEP? It was reported that the deal was done, but at the very last minute because of domestic pressure, Mr. MODI undid some of what was already agreed. I think it is important that we proceed with the RCEP agreement while we keep the door open to India and help them join the agreement, without compromising on standards.

OKADA:
Personally, I think that without India, RCEP is not very meaningful. In this context the Japanese government can share their own experiences with past structural reforms with India.

ARMSTRONG:
Considering the Chinese investment in the Port of Darwin, when does ownership matter?

DE BROUWER:
For the most part, I think people overstate the importance of ownership to security. Generally, they are separable. Blocking ownership may not actually address the risk and there are already good ways of mitigating and addressing risk.

ARMSTRONG:
What is the exit strategy from the situation between Japan and South Korea?

IIMURA:
In the beginning, certain comments by the Japanese government were considered to weaponize the measure. That was an unfortunate occurrence, but it is moving forward. I think we need to tell the global community what we are doing.

ARMSTRONG:
We are moving to a world that is ruled by power, rather than by rules. What priorities should we have, individually and collectively?

DE BROUWER:
We should not allow others to say that rules do not matter. We should strengthen our rules-based frameworks and open and liberalize our markets.

FINDLAY:
We should look for groups of economies with the collective interest to manage the RCEP framework. I think that is going to be extremely important.

OKADA:
Prime Minister Abe clearly stated in the last Diet session that Japan might be able to cooperate with BRI if the projects meet four conditions, namely fiscal soundness, openness, transparency and economic viability.

IIMURA:
I think the BRI and FOIP frameworks have complementing factors. They should not be a binary choice. I hope to see a combination based on rules.