At a time when borders and minds are closing, it’s hard to argue for openness to project leadership in Asia, the world’s most dynamic region, epicenter of the US-China rivalry, and reeling from two years of never-ending pandemic distress still in sight. But a leader of one is not a leader at all. Indo-Pacific powers will shape the regional economic order in the desired direction only to the extent that they remain vibrant network economies that generate growth opportunities for themselves and others, custodians of a rules-based order that provides security to a fragile global economy, and are be able to leverage openness to increase their competitiveness in the midst of a technological revolution while building resilience to external shocks. While narrow-minded self-interest beckons, enlightened leadership to deliver public goods to overcome the global health crisis is the winning card. These factors will weigh heavily in the ongoing race for economic superiority and the outcome is yet to be decided.
The tectonic plates of Asian economic architecture are shifting. The inspiring force is connectivity. The world’s largest trade agreement, the Regional Comprehensive Economic Partnership (RCEP), made up of 15 countries (but not India), will cut tariffs on member economies that account for a third of global GDP. The defining feature of this mega trade agreement is a renewed commitment to supply chain trade with flexible rules of origin that allow the cumulation of value between all members to qualify for tariff preferences. Intra-Asian trade and further coupling with the Chinese economy are looming.
The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) is entering a critical new phase of enlargement. The threshold for admission is high and requires a general tariff elimination, adherence to the disciplines of border issues for trade and investment integration and unanimous support of all existing members that have ratified the agreement. Despite these hurdles, the line of applicants is growing, from the UK to China, Taiwan and probably South Korea. Sectoral trade agreements are also in flux. The digital shift in our economies and societies, spurred by technological change and pandemic adaptation, has given a premium to the negotiation of digital trade agreements that can support open data flows while protecting personal information. The Digital Economy Partnership Agreement initiated by Singapore, Chile and New Zealand in 2020 is gaining momentum and South Korea and China are working on admission.
And yet the United States is not a party to any of these regional, trans-regional, or digital trade agreements. Instead, the Biden administration has promised to release an economic framework in the Indo-Pacific sometime in 2022 that will facilitate trade, supply chain resilience, digital economy cooperation, decarbonisation, infrastructure and labor standards. As such, the economic pillar of President Joe Biden’s Asia policy will miss the core of economic integration: market access. No return to CPTPP is foreseen, no new trade deal is in the offing, and even the pursuit of a digital deal has stalled. There is a real risk that the Biden administration will not provide the region with what it wants most: deeper and binding trade liberalization that can withstand the vagaries of US domestic politics and boost post-pandemic recovery. A loose collection of economic dialogues will not recoup US leadership in the region.
China’s economic diplomacy has been the opposite, with Beijing seeking inclusion in key trade deals to shape the future of economic governance from within. But China is not a model of openness, it merely practices selective globalization and undermines the rules-based order with acts of economic coercion. Beijing seeks self-sufficiency of advanced manufacturing with heavy subsidization and regulatory benefits for state-owned enterprises and is doubling down on its digital protectionism. The gap to close to meet the CPTPP eligibility requirements is widening, not narrowing. China’s signature connectivity strategy, the Belt and Road Initiative, has elevated the country’s diplomatic status, but its persistent pursuit of self-interest – with tough loan terms – obscures China’s leadership. Denying access to the Chinese market to inflict political punishment is a tool that Chinese leaders use more often. Coercive statesmanship brings immediate gains to Beijing, but has long-term negative consequences by encouraging others to diversify away, freezing historic economic initiatives (e.g. the investment agreement with the European Union) and redrawing the lines of security cooperation, as we have seen in the AUKUS nuclear-powered submarine agreement launched by Australia, the UK and the United States.
In this world of harsh interdependence, Japan has a unique opportunity to be a trendsetter in reconciling economic connectivity and economic security. Tokyo has a strong track record of promoting regional integration through trade agreements, infrastructure investment and digital rules. But an international system fraught with state rivalries and economic disruption has put a lot of emphasis on protecting critical technology and infrastructure, strengthening supply chains and reducing the shortage of semiconductors. Japan may be the first country to appoint a cabinet-level official with an economic security portfolio and the government is to compose a comprehensive bill on economic security measures. The opportunity is to strike the right balance between promoting interdependence and hedging its risks; the danger is to correct too much with diligent security restrictions that discourage innovation and drain the engines of trade and investment.
Openness is critical to Japan’s next reinvention: digital transformation. The bid for economic superiority will depend on a country’s understanding of attracting talent with first-class digital skills. Closed borders defeat this goal, as shown in the image below highlighting the achievements of China, Japan and the United States in the International Institute for Management Development. World Digital Competitiveness Ranking. The United States continues to lead the way in its ability to attract foreign students and highly skilled professionals, while China is no match for the internationalization of human capital. But Japan is lagging further behind in a number of key areas. It ranks last and third among the last 64 economies in terms of the international experience of senior managers and the availability of digitally skilled workforces, respectively. A comparison between the US and Japan reveals a large gap in the net flow of international students and the ability to take advantage of foreign skilled workers. The goals of internationalizing Japanese universities and increasing the number of foreign workers took a major blow with the outbreak of COVID-19. Two years later, the Japanese government took some of the most restrictive border measures to tackle the omicron variant, once again delaying the issuance of new student and work visas. Prolonged access restrictions could become the most insidious factor in Japan’s feared digital defeat.
The pandemic continues to teach us the most difficult yet most obvious lesson: only global solutions will work. As long as large numbers of people in the developing world remain unvaccinated, new variants will continue to circulate and hinder everyone’s recovery. The equitable distribution of 11 billion COVID-19 vaccine doses that the World Health Organization deems necessary to overcome the pandemic remains an elusive goal. While China boasts the largest vaccine shipments in the world, this is not a case of generosity, because the vast majority of doses are sold (1.59 billion) and only a fraction is donated (126 million). The United States and Japan must step up their vaccine diplomacy, with only 318 million and 30 million respectively doses donated from the end of 2021.
The path of least resistance is to get out of the pandemic that has retreated behind the borders and has therefore abated. It is by connecting with the world – providing healing, stimulating growth and building domestic resilience – that economic superiority will be built. The true measure of international leadership in the post-pandemic world is the avoidance of closure.