Russia’s invasion of Ukraine has not only shaken the post-World War II security order centered around the United Nations but also could dramatically change the international trade order as well.
The United States and its allies have restricted trade with Russia and deprived it of the most favored nation status (MFN) that was granted under the World Trade Organization (WTO) Agreement. Furthermore, the U.S. legislation revoking Russia’s MFN status instructs the President to make efforts to drive Russia out of the WTO. Unless the Ukraine situation improves significantly, the decoupling of Russia from the international trade system is likely to become permanent.
However, fissures in the multilateral trade system that arose due to national security issues were already becoming apparent through the U.S.-China confrontation under the Trump administration. The issues behind the various measures taken by the United States against China are competition for technological supremacy related to China’s technology development through the “military-civilian fusion” initiative, and a conflict of values regarding human rights and democracy, of which the Uyghur and Hong Kong situations are recent examples.
In a speech in April, U.S. Treasury Secretary Janet Yellen stated that the United States aims to ensure “free but secure trade” with partners who are trusted based on shared values regarding the rule of law and national security, so that other countries cannot use their control over important resources and technologies to exercise geopolitical leverage.
Yellen also proposed a “friend-shoring” initiative to create supply chains among trusted countries in light of the supply chain disruptions caused by the energy and food crises resulting from the Ukraine situation, the U.S.-China confrontation and the COVID-19 crisis. In other words, her proposal represents a change of course away from the neo-liberalism that has been upheld by the WTO and from the efficiency-focused supply chain model.
Since the autumn of 2021, the United States has made vigorous efforts to develop institutional systems for those purposes. At the core of those efforts is the Indo-Pacific Economic Framework for Prosperity (IPEF), which was launched in Tokyo in May 2022. The United States and 13 other countries—a higher number than was expected—including, Japan, Australia, India, South Korea and Singapore—participated in the IPEF as the founding members (note: Fiji joined the initiative shortly after). According to a joint statement issued by those countries’ leaders, the IPEF is comprised of four pillars, but the statement contained few details of the pillars (see the table below).
At the Summit for Democracy in December 2021, the Joint Statement on the Export Controls and Human Rights Initiative was adopted, under which the United States and four other countries agreed to cooperate on export controls on advanced technologies that can be used to suppress human rights (e.g., security cameras).
At the bilateral level, since the autumn of 2021, the United States and Japan have established the Japan-U.S. Commercial and Industrial Partnership (JUCIP) and the U.S.-Japan Economic Policy Consultative Committee (the “two-plus-two” framework for economic dialogue) and have considered semiconductor supply chains, and export controls related to the 5G high-speed communication standard and artificial intelligence (AI). The United States has also established similar frameworks with each of South Korea and Taiwan.
Moreover, under security-related frameworks, such as QUAD, comprised of Japan, the United States, Australia and India, and AUKUS, comprised of the United States, the United Kingdom and Australia, discussions have been held on supply chain development and technical cooperation, with strategic goods and emerging technologies, including semiconductors, AI, and quantum computing, as possible areas for cooperation.
The European Union established the Trade and Technology Council (TTC) with the United States and adopted the Pittsburgh Statement in September 2021. The statement referred not only to export controls and investment screening but also to the development and use of AI in conformity with respect for human rights and democracy, trade in emerging technologies, and abolition of forced labor. At the second TTC meeting in May 2022, the EU and the United States agreed on establishing an early warning mechanism to predict supply chain disruptions and on cooperating in investment promotion in the semiconductor industry, and responding to the food crisis in view of the Ukraine situation. In April 2022, the EU also agreed with India on establishing a TTC.
As a result of the promotion of friend-shoring through those activities, the standardization of advanced technologies and the development of supply chains exclusively among allies will proceed, with the result that the allies will give each other precedence when sharing strategic goods and technologies and together strengthen their dominance in relation to those goods and technologies through export controls and investment screening.
Yellen’s remarks indicate an intention to isolate China and Russia from the circles of allies. However, when it comes to the relationship with other Asian countries, it is difficult to use shared values and security as the founding elements of a new trade order in the Indo-Pacific region. The member countries of the Association of Southeast Asian Nations (ASEAN), which the United States regard as important partners under the Indo-Pacific strategy, have remained reluctant to support the series of sanctions imposed on Russia and the U.N. resolutions adopted against them. A joint statement issued at the U.S.-ASEAN summit meeting did little more than call for a ceasefire in Ukraine without naming Russia.
Rather, Indonesia, which will serve as the chair of the G20 Summit in the autumn of 2022, is supportive of inviting Russian President Putin to attend the summit, to which the United States is in opposition. India, a member of the QUAD group, has openly pointed out the need for Russian support for its national defense. Additionally, among the countries in the Indo-Pacific region, there are differences in terms of the level of relationships with China and Russia and the approach to shared values such as the rule of law and human rights, and therefore, it is not easy to promote friend-shoring across “a large number of trusted countries” as envisioned by Yellen.
In the case of the IPEF, which does not involve the liberalization of market access for goods and services or investment, there are limits to strengthening supply chain resiliency, and developing and emerging countries see few merits in participating in the framework. Even in the United States, some voices of skepticism have been heard regarding the feasibility or significance of the IPEF. For the moment, Prime Minister Kishida has done nothing more than offered his view that actual benefits will be realized by constructive discussions to be held in the future. At a time when the presidential Trade Promotion Authority (TPA) has expired, the Biden administration, with its emphasis on workers’ interests, aims to establish high labor and environmental standards through the IPEF while avoiding making a market access commitment, which is opposed by Congress, and particularly the Democratic left-wing. However, if the Biden administration tries to use the IPEF mainly to secure its own advantages without offering meaningful benefit to the other partners, it will be difficult to forge consensus even among the 13 founding member countries.
What Japan should do under these circumstances is strengthen supply chain resiliency in the Indo-Pacific region in a way that will be beneficial for Asia. It is necessary to proactively support the U.S.-led framework of “free but secure trade” by acting as a bridge to Asia in terms of the values that are shared with the United States based on the relationship of trust that Japan has forged with the region over many years, just as Prime Minister Kishida did when he obtained ASEAN’s understanding and cooperation with respect to the international pressure exerted on Russia during his visit to ASEAN countries during the Golden Week holidays.
In addition, Japan should strive to form a united front in the region by expanding the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as the basis for the IPEF. Japan should support participation in the IPEF by South Korea as well as by ASEAN member countries, such as the Philippines, Indonesia and Thailand. Now that the Russia has taken a threatening stance, South Korea is important as a U.S. ally in East Asia. South Korea also has a solid track record of experiences under the WTO regime and free trade agreements. It goes without saying that the return of the United States to the CPTPP, which Prime Minister Kishida called for at the recent summit meeting with President Biden, would be indispensable.
Moreover, the scope of friend-shoring extends beyond the Indo-Pacific region, as shown by the establishment of the EU-U.S. TTC. Now that the United Kingdom’s participation in the CPTPP has marked the first important step toward a “Western expansion” of the CPTPP, it is necessary to seriously consider participation by the EU. Cecilia Malmström, who formerly served as European Commissioner for Trade, has already mentioned the possibility of EU participation in the CPTPP. At a series of summit meetings that Japan held with European countries and the European Union in May 2022, it was agreed that the security of the Indo-Pacific region and the security of Europe have become closely interrelated since Russia’s invasion of Ukraine. In the future, the supply chain linkage between the two regions will only increase in importance.
Even so, there are differences between the terms of the EU’s FTAs and the TPP rules with respect to digital trade and investment. Rather than focusing on granting formal membership for the EU, it is important to explore a pragmatic approach, such as concluding an FTA linking the EU and the TPP members consisting of a rather simple market access agreement including tariff elimination and trade facilitation rules.
* Translated by RIETI.
May 26, 2022 Nihon Keizai Shimbun