GREAT-POWER RIVALRY is undermining economic interdependence as a source of prosperity and security in East Asia. Collective international action to support the multilateral system could avoid turning economic interactions into a zero-sum game and a source of rivalry and conflict.
Economic interdependence, built on confidence in an open, rules-based multilateral system, has brought countries in East Asia closer together economically, socially and politically. Political rivalries and unresolved historical issues have been kept in check in Northeast and Southeast Asia by deepening economic integration founded on an embrace of open economic policies. The same cannot be said, however, for neighboring South Asia, as well as for many other regions.
Weaponized interdependence and the securitization of trade threatens to unwind the pacifying effects of economic exchange. The retreat of US leadership in the multilateral trading system from enforcer to spoiler, combined with economic coercion from China and US-China strategic competition, threaten the regional and global order. Uncertainty from the war in Ukraine, new technologies, outdated multilateral rules, climate change and recovery from the pandemic, together with the mismanagement of domestic social policies, have all contributed to US-China strategic competition. Many countries, especially in East Asia, including US allies, are faced with narrowed policy options and false choices between security and prosperity or between China and the US.
REJECTING DECOUPLING
The trajectory of strategic competition between the US and China is not inevitable. The interventions from Japan and Europe at the G7 summit in May demonstrate agency by the rest of the world. The G7 rejected an anti-coercion instrument aimed at China and reportedly favored by the US, which would have been a retreat from the rule of law globally and a step toward vigilante-mob justice. Instead, the G7 emphasized the importance of the multilateral system, with the World Trade Organization (WTO) at its core, for economic resilience and economic security. Europe shifted Washington from decoupling to de-risking, potentially a significant de-escalation in the tussle between Washington and Beijing.
The protectionist stance and perceived national security interests of the US that drove policies to decouple advanced technology from China, with a “small yard and high fence” approach, presage a growing yard and a growing fence. The US’s extraterritorial, unilateral sanctions to achieve that decoupling have brought huge costs and increased risks for the rest of the world.
Discarding existing regional and global institutions because of their weaknesses and pursuing values-based co-operation may be politically expedient, but the approach fails to recognize the reality of a deeply interdependent global economy, especially in East Asia, and the necessity of interest-based global co-operation to overcome the biggest challenges faced by the global community, such as avoiding catastrophic climate change.
Decoupling is not realistic for East Asia. It has the most to lose from such an approach. Almost all supply chains go through China and decoupling would cause economic and political havoc. Efforts to decouple fail to recognize that a Chinese economy and society that is much less integrated into the global economy is one with far fewer constraints on it politically and is therefore much more of a security risk.
Preserving mutually beneficial economic exchange, or positive-sum engagement, is not just important for prosperity but for political security. Strategic competition that frames economic exchange as zero sum, that sees one country’s gain as a loss by another, has let loose geo-economic policies that involve pointing economic weapons inward, resulting in self-harm.
LEARN FROM HISTORY
The main elements of the current global economic order were forged during the throes of global warfare. The formulation of the Bretton Woods institutions was deeply influenced by the entanglement of economics and security in the 1920s and 1930s, a time when zero-sum economic competition in the Great Depression helped to fuel the national rivalries that propelled states into military conflict. The principles of the post-war order of multilateralism and liberalism were designed to avoid the fundamental causes of insecurity and conflict. They were not the creation of economic technocrats naive to the very real security challenges.
The multilateral trading system, built on the principle of equal treatment — the most-favored nation (MFN) principle — has kept the global economy open and acted to protect against economic shocks and aggression. The large global economy with alternative buyers and suppliers has protected countries against trade stoppages. The primary lesson of Australia’s 2020 experience of Chinese export bans for political purposes was that the economic weapons China fired were blunted by the multilateral trading system.
Deepening economic engagement and strengthening rules, rather than avoiding engagement, can mitigate and diffuse trade risks. Economic engagement builds national wealth and power — and when combined with multilateral rules, broadens the range of strategic policy options available to national policymakers.
Russia’s strategic use of gas supplies against Europe is sometimes cited as a counterpoint to the argument that interdependence promotes political security. But Russia was not integrated into European supply chains, and European energy dependence on Russia is qualitatively different from economic interdependence in East Asia. Interdependence underpinned by multilateralism effectively diffuses risks.
THE LESSONS OF ASEAN
Nowhere is the power of multilateralism understood better, and exercised more instinctively, than in Southeast Asia’s 10-member Association of Southeast Asian Nations (ASEAN). As the world transitions to a multipolar order, the principles of interstate interactions embedded in ASEAN’s Treaty of Amity and Cooperation (TAC) can be strengthened and expanded to keep Southeast Asia open and coherent. The dialogue partners that have signed onto TAC include Australia, China, Japan, India and the US. Multilateralization of TAC among the dialogue partners is a long-term objective.
ASEAN has responded to its external circumstances with initiatives that include the Regional Comprehensive Economic Partnership (RCEP) and the ASEAN Outlook on the Indo Pacific (AOIP). Alongside the convening power of ASEAN, they demonstrate the utility of the grouping.
RCEP was brought into being at a time when protectionism was on the rise in Europe and the US. It importantly includes an economic co-operation agenda that has the potential to upgrade rules and standards over time and address new issues, including beyond narrowly economic issues, given the agreement has a ministerial and leaders’ level process. There is an opportunity to keep the region free and open by working with ASEAN to build economic security through intensifying economic co-operation in RCEP, including with China.
Consistent with ASEAN’s focus on inclusive arrangements that preserve centrality and an open approach to regionalism, a comprehensive regional security arrangement that affirms a commitment to multilateral economic rules and signs on to TAC principles will help secure a free, open, inclusive, prosperous and politically stable region. This frames a vision for the region in which ASEAN dialogue partners would shape their future in a way that references principles of crucial importance to prosperity and security.
Small- and medium-sized powers are protected by international rules and markets. Open, contestable markets constrain big powers that skirt established rules and use economic leverage, without thought for its ramifications. Even if big powers deviate from the rules, defending and extending the multilateral system is still the top priority for the rest of the world — not following larger powers down a self-destructive road.
THE WTO YET LIVES
Preservation of the multilateral system should be the priority for the global community to protect its economic and security interests. The WTO is showing signs of life after a package of agreements concluded in Geneva in 2022, including the WTO’s first multilateral agreement since the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) concluded in 1994.
The strong emphasis on the multilateral trading system at the G7 summit in Hiroshima was preceded by Japan’s entry into the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) in March that means the WTO’s rules are enforceable between Japan and 52 other WTO members. WTO rules have not been enforceable since 2019 because of the US veto of the appointment of judges to the Appellate Body in the organization’s dispute settlement system.
The European Union led the creation of MPIA in 2020 with Australia, Canada, Singapore and, importantly, China, among the original members. Trade ministers agreed in Geneva to make progress on restoring the dispute settlement system by the end of 2024, but more countries will need to join MPIA as insurance against US blackmail of the system during an election year. Singapore is the only ASEAN member of MPIA.
The WTO is in need of reform. The rulemaking process and the trade rules need to be updated. It’s no surprise that the areas of contention between economies — in the digital economy, industrial subsidies, investment and technology — are largely where there are no established rules.
Much of the rulemaking is happening outside of the WTO, in bilateral, regional and plurilateral agreements. These overlapping agreements are keeping the global economy from fracturing but rely on the WTO underpinning them, given the gaps in coverage, membership and rules. Regional agreements will have to be open and inclusive, otherwise they risk weakening the multilateral system, not strengthening it.
Digital rulemaking, for example, is happening in the WTO e-commerce plurilateral, the CPTPP, RCEP, DEA and DEPA. The bottom-up processes are guided by multilateral processes and principles in APEC and the Data Free Flow with Trust process that Japan initiated at the Osaka track alongside the G20 summit.
The Indo-Pacific Economic Framework (IPEF) excludes China by design, but the membership includes many countries that will want to avoid the exclusion of China. Despite all the problems with the WTO and the challenges it faces, neither the US nor China have walked away from it. In fact, the resolution of some trade disputes between Australia and China — with barley, for example — have been due to cases at the WTO, with both parties respecting the dispute settlement process. The global economy, including China, has a huge stake in the WTO’s functioning.
The existing economic order is under threat but the trajectory of the global economy is not inevitable or predestined. The transition to a new multipolar order does not require another world war. Collective leadership can help shape Chinese and US behavior and avoid great power strategic competition from causing catastrophic disorder.
The biggest challenges that face the global community require global co-operation to overcome. The best hope of avoiding the existential risk of climate change will require China and the US to work together. It will also require technological progress and open exchange of goods, capital and technology. Technology decoupling between the world’s two largest producers of knowledge and innovation will significantly raise the costs of decarbonizing the global economy. That overwhelming positive-sum interest may be the best hope of avoiding zero-sum games that lead to a prisoner’s dilemma equilibrium of much lower living standards and extreme insecurity.
Economic interests and co-operation are usually the first casualty of geopolitical tensions and heightened security challenges. But to retreat to a world in which trade is frustrated from delivering its positive-sum outcomes risks unwinding interdependence and the prosperity and security that it provides.
This article first appeared on Global Asia in September, 2023 (Vol.18 No.3). Reproduced with permission.
