CPTPP and Beyond: Multilateralism in an era of great power strategic competition (Summary)

The countries of the Asia-Pacific are forced to react to the ongoing strategic competition between two great superpowers to ensure economic prosperity and political security within the region. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is aiming to enable and enhance multilateral cooperation in the face of such circumstances. Meanwhile, the fast-changing global environment is presenting new challenges with regard to the digital economy and national security, pushing the need for new rules by core institutions such as the World Trade Organization (WTO). The forthcoming actions and policies of key players, including Australia and Japan, will play a vital role for the future integrity and sustainability of the region.

This symposium will explore how regional agreements can facilitate multilateralism in the context of the strategic competition between China and the U.S., and look at ways to keep the U.S. entrenched in Asia, engage China in rulemaking, and strengthen the centrality of the Association of Southeast Asian Nations (ASEAN).

YANO Makoto (Chairman, RIETI/Project Professor, Institute of Economic Research, Kyoto University/Professor by Special Appointment, Sophia University)

This symposium, co-hosted with the Australian National University (ANU), is titled "CPTPP and Beyond" and focuses on multilateralism in the era of great strategic competition. We are extremely honored by the participation of distinguished speakers and panelists. We will have a keynote speech and a presentation, followed by a panel discussion on the regional economic agreements toward multilateralism.

Given the current state of the world, I believe the theme of this symposium is highly important and relevant. I would like to express many thanks to Prof. ARMSTRONG for organizing this symposium and for greatly strengthening our research capacity on global issues which are quickly evolving, together with Vice President WATANABE.

HOSODA Kenichi (State Minister of Economy, Trade and Industry)

Good morning from Tokyo. I am HOSODA Kenichi, State Minister of Economy, Trade and Industry. I would like to thank the RIETI, ANU, and the panelists for the opportunity to speak today.

Since the establishment of the WTO in 1995, we have maintained economic relations among nations based on WTO rules. However, the WTO is becoming dysfunctional. Countries are increasingly leaning toward regional trade agreements and some are resorting to unilateral measures that the WTO was supposed to forbid. There is also growing movement regarding economic security, such as securing supply chains for essential goods and raw materials. Given this complex situation, how should we shape the new global economic order? What kind of international cooperation is necessary to support it? Policymakers around the world are currently facing these difficult questions.

Today, I would like to kick off the discussion by introducing Japan's initiatives on regional economic cooperation, the WTO, and economic security.

Regional economic cooperation

First, I would like to touch on the main topic of today's discussion, the spread of high-standard rules through regional economic partnerships. Unfortunately, WTO rules that support the global free trade system are out of date with regard to the current international situation, such as climate change, digitalization, and securing a level playing field. Considering this situation, we believe it is meaningful to establish a system of rules that can serve as a pioneer in matters of particular interest to countries within the fast-growing Asia-Pacific region. For this reason, along with our efforts in the WTO, we have been actively working to maximize the potential of regional economic partnership agreements.

In particular, the CPTPP is an agreement that establishes new 21st-century rules that are free and fair, leading to greater business predictability and stability for companies. The CPTPP achieved not only the elimination of tariffs on goods, but also the liberalization of services and investment in the Pacific region. Furthermore, the CPTPP Agreement contributed to the establishment of high standards of both market access and rules in a wide range of areas such as intellectual property, government procurement, state-owned enterprises, and labor disciplines. In that sense, it was a major step forward in building a new international economic order.

Several economies have expressed interest in joining the CPTPP. These aspirant economies must be sufficiently prepared to access and meet the high-standard rules of the agreement. These rules are what members have agreed to unanimously. By ensuring compliance to CPTPP rules without exceptions through the accession process, we hope the high-standard rules of the CPTPP will spread globally. Japan is ready to take a leadership role in this regard. The withdrawal of the U.S. from the Trans-Pacific Partnership (TPP) in 2017 was unfortunate. We are taking various opportunities to urge the U.S. to return to the TPP. It is necessary that the U.S. deepen its involvement in the regional economy to build a stable international economic order. We hope that the U.S. will show its leadership through concrete actions.

A notable new regional initiative, in this regard, is the Indo-Pacific Economic Framework (IPEF), recently announced by the U.S. We believe that this could be a comprehensive framework to promote regional economic growth, address the climate crisis, and maintain a free and fair economic area. Japan would like to work with the relevant countries so that the IPEF could become a meaningful framework for the region. Additionally, the Regional Comprehensive Economic Partnership (RCEP), which entered into force this year, also prohibits technology transfer requirements as well as restrictions on cross-border data flows, and enhances the protection of intellectual property. It is a remarkable step forward that 15 economies, including China and some least developed countries, were able to agree on these rules despite different stages of development and institutional systems. We wish to develop this agreement as a regional platform on trade with a view to further improving and enhancing its rules, including in digital trade.

Today's symposium is co-hosted by ANU and RIETI. Australia is a like-minded country with which we share a common understanding of what I have just noted, and a trusted friend who has been a driving force and a great help in the process of the conclusion and entry into force of the CPTPP. We look forward to continuing to work together to establish a new economic order in this region.

The WTO

It is crucial to strengthen the WTO, the core of the free trade system, to create an international economic order for this new era. A quarter of a century after its establishment, the WTO has expanded to 164 members and the application of WTO rules has spread accordingly. Nevertheless, we have not achieved new agreements necessary to address new common issues such as securing the supply chains of essential goods. As we all know, the WTO operates through consensus. To update the rulebook, we need some creative solutions. We have been trying to address the stagnation in rulemaking mainly though plurilateral initiatives.

Joint Statement Initiatives (JSIs) have attracted the participation of many members, including developing countries. Last December, we successfully announce the conclusion of negotiations on the domestic regulation of services, and released joint statements on e-commerce, investment facilitation, and trade and environmental sustainability. In the initiative on environmental sustainability, we aim to address issues such as the removal of trade barriers, including regulations to facilitate the spread of products, services, and technologies that contribute to reducing carbon emissions. Also, Japan, Australia, and Singapore are the co-conveners of the WTO plurilateral negotiation on e-commerce negotiations involving 86 members which aim to achieve rules of free flow of data and source code protection as soon as possible. The trade rules that materialize the concept of Data Free Flow with Trust, proposed by Japan, will facilitate the growth of the digital economy. These are the new forms of global rulemaking and we aim to achieve tangible results in each area.

To ensure the effectiveness of these agreements, it is essential to restore a well-functioning WTO dispute settlement system which is applied to all WTO members. Japan will cooperate with partners to have concrete discussions as soon as possible so that the WTO will still work as a relevant body to restrain unfair policies and measures.

Economic Security

Economic security is one of the biggest issues in the world today. The intensifying competition for technological dominance between the U.S. and China and the spread of COVID-19 have exposed the vulnerability of global supply chains. In response to these security concerns related to economic activities, major economies are mobilizing comprehensive measures such as massive fiscal action to secure strategic goods and production bases and to improve technology, as well as strengthening unilateral export controls to prevent the leakage of sensitive technologies.

In light of this situation, Japan has set major goals for its economic security policy which include first, enhancing the autonomy of Japan's economic structure by strengthening the supply chain and ensuring the reliability of key infrastructure; and second, nurturing key technologies such as artificial intelligence and quantum technologies to ensure the superiority and even indispensability of Japanese technologies. For example, through economic security legislation, Japan will support the strengthening of supply chains and establish an advanced safety review system for critical equipment and systems in basic infrastructure such as electric power, telecommunications, and financial services. We will establish a system for the non-disclosure of patents on inventions that are sensitive to security. Also, we will support capital investment in key technology areas such as semiconductor manufacturing.

Conclusion

Today, I outlined Japan's efforts and challenges. Japan will continue to take the lead to spread high-standard rules by utilizing regional economic partnerships while continuing to pursue global agreements at the WTO. Moreover, as economic mutual interdependence deepens on a global scale, economic security or the attempt to guarantee national security through economic measures is becoming increasingly visible. Economic security does not mean fragmenting the global economy into different blocs. Promoting partnerships among like-minded countries that share fundamental values like freedom, democracy, and the rule of law, and reinforcing our rules-based engagement such as through the CPTPP and RCEP also contribute to realizing economic security. How to engage beyond simply improving market access is the issue. We believe the IPEF may serve as a key test on this question.

Policymakers in Japan and around the world are struggling daily to find ways to respond to these simultaneous demands. Fortunately, we have renowned experts with us here today. I am looking forward to an active and insightful discussion on how to succeed and what the best mix of approaches is to shape the international economic order to meet contemporary challenges. Thank you very much.

Shiro ARMSTRONG (Visiting Fellow, RIETI/Associate Professor, Crawford School of Public Policy, Australian National University/Director, Australia-Japan Research Centre/Director, East Asian Bureau of Economic Research)

Policymaking has become more uncertain and we are seeing an entanglement of national security and economics. We have seen unilateral trade sanctions and economic coercion, where major powers are using economic leverage for geopolitical purposes, skirting or avoiding rules and norms when it suits them. They do not consider the costs on smaller powers.

The Australian experience

The open multilateral trading system has been a source of economic resilience for Australia, in addition to Australia's domestic institutions and flexible markets. Stuck between the U.S. and China, our policy options are being narrowed. With China as our largest trading partner, the idea of diversifying trade is extremely costly. We still have two-thirds of our trade with East Asia, which is economically integrated around supply chains so decoupling from China is similar to decoupling from the whole East Asian economy.

When large powers ignore rules and use unilateral measures, open and contestable markets can act as a protection force. China's interest in entering the CPTPP is an opportunity to enmesh China into more rules and open markets. At the same time, we need to avoid seeing the U.S. push deals with like-minded countries. When we are faced with great power strategic competition, the priority is to strengthen the multilateral system. For this, I would suggest the strategic pursuit of regional and plurilateral agreements.

Developments in regional architecture

In the Asia-Pacific, we have the RCEP that entrenches ASEAN centrality and the CPTPP that is looking to expand membership, as well as a suite of digital economy agreements. Recently, Indonesia has taken over the G20 Presidency, and it will also become the chair of ASEAN. I hope regional interests can be strengthened and emphasized by Indonesia.

I think we need to make the arrangements in the region more multilateral in character. This is where RCEP is going to become more important, but also the Asia-Pacific Economic Cooperation (APEC) and other forums where relevant parties can get together and discuss arrangements that are more open and outward-looking.

Moderator: WATANABE Tetsuya (Vice President, RIETI/Visiting Professor, Graduate School of Public Policy, The University of Tokyo/Visiting Professor, Juntendo University, Graduate Course for Data Science and Industrial Policy)

Mary E. LOVELY (Anthony M. Solomon Senior Fellow, Peterson Institute for International Economics (PIIE)/Professor of Economics at the Maxwell School, Syracuse University)

Multilateralism is in crisis. The WTO is unable to negotiate new rules and dispute settlement is often voided. The U.S. and China have been unable to reduce trade and technology tensions. The U.S. seems unlikely to engage on issues of economic importance to countries in Asia, especially further liberalization. China is seeking deeper engagement, particularly with entry into the CPTPP, but the terms of exchange are unclear. Nevertheless, there is a real opportunity to enmesh China in a high-quality agreement.

Drivers of U.S.-China economic tensions

The first driver is anxiety about technological dominance by the other. The U.S. and China see the need to meet growth and distributional challenges. The second driver is concerns over industrial supply chain security. This leads to strong domestic support for de-integration or so-called "friend-shoring." The third driver is the belief that the other will weaponize trade and investment. Both countries have weaponized trade and investment, resulting in a very low-trust environment for U.S.-China negotiations that makes any kind of progress very difficult. These challenges intersect and reinforce each other, and they limit options for further integration and liberalization.

Possible scenarios

The first scenario is a partial decoupling. The problem here is that the U.S. cannot decouple from China without decoupling from Asia. The second scenario is clubs and trusted networks. Here, the question arises of whether this is consistent with the multilateral system. The third scenario is to try to limit the damage until we get a clearer idea of the situation. The problem here is that the events may be overtaking the patience of trading partners.

The road ahead is rocky. The world trading system will likely limp along, and that may be the best we can expect. The U.S.-China tech decoupling has the potential to tear apart global value chains and disrupt established trade relations across Asia. Limiting the damage of current tensions may be the best option among those currently available.

Lili Yan ING (Lead Advisor (Southeast Asia Region), Economic Research Institute for ASEAN and East Asia (ERIA))

ASEAN has been very active in promoting trade and investments, as well as forming trade agreements to facilitate them. Recently, ASEAN, with its five main trading partners, concluded the RCEP. It is the largest economic bloc in the world. Even without India, the RCEP accounts for 31% of the world's population, 31% of global gross domestic product (GDP), and 33% of global foreign direct investment (FDI). By comparison, the CPTPP represents only 7% of the world's population, 13% of global GDP, and 20% of global FDI.

Will ASEAN join the CPTPP?

I believe it will be less likely for most ASEAN countries to join the CPTPP in the absence of the U.S. The first reason is the economic reason. There are high adjustment costs for relatively smaller benefits than the RCEP. The second reason is the domestic political economy. The CPTPP contains more ambitious provisions that require broader, deeper, and shorter time for adjustments in domestic laws such as for state-owned enterprises (SOEs), intellectual property rights (IPRs), competition policy, and labor and environmental standards. The third reason is the ASEAN centrality of the RCEP. Even though it does not call for liberalization at same level of the CPTPP, its impact on member countries and the world economy will be massive. Therefore, ASEAN's current top priority is the implementation of the RCEP.

U.S.-China trade tensions

The prolonged U.S.-China trade and technology tensions will only increase uncertainties that will translate into costs for everyone. I think the tensions further intensify the urgency of strengthening the rules-based multilateral trading system. We should let the WTO serve its three main functions of trade rules, negotiations, and dispute settlement, but we should not entangle one to another. It is important to strengthen the dispute settlement body, as well as develop open plurilateral agreement mechanisms. While free trade agreements (FTAs) can be a stopgap solution, there is no substitute for a well-functioning multilateral trading system.

SONG Hong (Deputy General Director and Senior Fellow at the Institute of American Studies (IAS), Chinese Academy of Social Sciences (CASS))

The Asia-Pacific is the most dynamic region in terms of development. After World War II, the Japanese economy quickly rose, followed by the newly industrialized economies (NIEs), China, ASEAN, and others. In terms of trade and investment, it has the most open economy. Also, most of the rapidly growing economies of the world are in this region. For China, its application for CPTPP membership is one part of its overall strategy for development.

China in the Asia-Pacific

The Chinese economy is deeply integrated with the Asia-Pacific region. In terms of exports, more than 20% of Chinese exports were with East Asia, while another 20% was with the North American Free Trade Agreement (NAFTA). In terms of imports and exports together, it is highly integrated with East Asia, followed by NAFTA, ASEAN, and the EU. Therefore, this region is the most important trading partner for China.

When China opened up to the outside world, it was forced to integrate with its neighboring economies. It became a regional hub of manufacturing that imported components and parts from neighboring economies and exported goods to all over the world. In the future, it will import more labor-intensive goods, as well as forms of energy and other materials, so its integration with the region will only expand moving forward.

China's application for CPTPP membership

China's application for CPTPP membership is very serious and also very efficient. It wants to contribute because the CPTPP application process will lead to the opening of bilateral markets. It must naturally comply with the high-standard rules, but its formal application indicates that it intends to fully comply with any rules.

Even if it is difficult for China and the U.S. to have bilateral engagement, we must have cooperation in the region, and Australia and Japan must play a very important role. If we do not, it will be very difficult for the two countries to reach a solution.

Grace GOWN (Head of Global Government Advisory, Access Partnership)

Digital trade rules enable interoperability or the ability of different systems to talk to each other. They facilitate digital trade in that they remove barriers that impede trade. They also act as building blocks. They allow rules in digital trade agreements to be scaled as other members join them, and see commitments that offer a path forward.

What do we mean by digital trade? In our research work, we divide digital trade into four buckets. These are: digital goods and services, digital delivery of tangible goods and services, digital enablers of trade, and emerging transformative digital technologies.

The potential for digital trade growth in ASEAN

By separating digital trade into different buckets, we are able to look at digital economies and identify potential for growth. In ASEAN, the potential for growth is huge. From 2018 to 2025, the projected growth is exponential across the region. Furthermore, by looking at digital trade in this way, we are able to identify the key sectors that can be further accelerated or enabled.

Key areas of progress

I think three priority areas stand out in terms of further accelerating digital trade across the region. They are: digital transactions, digital logistics and delivery, and digital trust. Digital transactions are a core enabler of digital trade, and have the potential to enhance all aspects of trade. The use of e-invoices can be a core part of digital trade enablement, resulting in significant savings for businesses. AI can benefit businesses, government, and academia by dramatically improving productivity, demand forecasting, predictive maintenance, and personalization of services.

Digital trade agreements are providing the rules of the road for going forward, including the building blocks for different economies to utilize. We are also seeing international standards being leveraged. The key is to make sure that these agreements can be measured to be able to assess their impact on the region so that we can further double down on them.

WATANABE:
Are traditional or conventional agreements like FTAs sufficient to address the issues we are facing in the Asia-Pacific?

LOVELY:
I think the region has to stress that an economic framework is also key to the national security issues. Economic security and national security are linked, and therefore you must offer some form of economic progress in the framework to have it be truly meaningful.

WATANABE:
Is China sufficiently prepared to meet the high-standard criteria set out in the CPTPP?

SONG:
China's application for the CPTPP is very serious. We have a comprehensive assessment of the rules. I think some of the rules are challenges for China, but it is an opportunity for us to reform our system, as well as practices and policies, to comply with the new rules of the CPTPP.

WATANABE:
Do you have any perspective on Indonesia chairing the G20?

ING:
Indonesia has three main issues that we would like to highlight in the Indonesian G20. The first is economic recovery. The second will focus on the new world economic order. The third is inclusive growth and sustainable development.

WATANABE:
Would personal information concerns be a barrier for cross-border digital trade?

GOWN:
Consumers, organizations, and governments are increasingly understanding that the safe and secure transfer of information (even personal information) across border is vital. We are increasingly seeing privacy principles and data transfer mechanisms (enabled by provisions in digital trade rules) being developed and utilized across the region.

WATANABE:
Professor ARMSTRONG, what is your view after hearing all of the comments?

ARMSTRONG:
A question for me going forward is on the digital trust issue. How do we get governments or communities comfortable with having Chinese companies owning local data assets? What kind of regional or multilateral frameworks do we need to make that happen?

The U.S. is going to continue to be a source of uncertainty going forward in the international economy. The idea of "friend-shoring" is a terrifying idea for me. That was tried in the interwar period and it led to a fracture of the global economic system.

Australia and Japan should actively try to shape U.S. policies, but I think we should not underestimate the importance of Indonesia. They could create space for the rest of ASEAN and East Asia to contribute when it comes to rules and leadership.

The WTO needs strategic political intervention. A group of countries have created an alternative dispute settlement system, but Japan and Indonesia are not members of it. Perhaps it is time for these countries to take a leadership role and move towards making the rules more enforceable.