The fatal flaw in US Indo-Pacific strategy
The law of unintended consequences is undermining U.S. strategy for the Indo-Pacific, as trade ties between U.S. allies and partners in Asia with China are growing despite U.S. admonitions against dependence on China.
Recent data show that China's trade with all 10 ASEAN nations rose 71 percent last year and grew 49 percent with India. In fact, despite sanctions and tariffs, China's trade with the U.S. grew to $657 billion in 2021, a 28 percent increase over 2020, and was projected to increase in 2022.
Aligning global trade and investment with geopolitical goals rather than market forces is often problematic. In the case of U.S. policy toward Asia, there is a lack of appreciation for the degree to which Washington is fighting geography and economic gravity.
Geography (time and distance) is an important factor in trade, especially between major powers like China and the 14 smaller nations with which it shares borders.
Similarly, it is no accident that U.S. trade with Canada and Mexico accounted for 41 percent of the $4.6 trillion in U.S. global trade in 2021. NAFTA and its successor, the U.S.-Mexico-Canada (USMCA) trade agreement, arose to regulate booming market-driven trade and investment, not the other way around. As U.S. firms shift production from China and rewire supply chains, Mexico and Canada are becoming still more important in the near-shoring of production.
Complex supply chains with hundreds of components, often going back and forth across borders, are not easily reconfigured.
Moreover, as China is a key supplier of a number of materials and components, even friend-shored supply chains may need some components from China.
The Biden administration is trying to include ASEAN nations in "friendshoring." But as the U.S. and others redirect supply chains away from China, Southeast Asian nations may lose out, as will U.S. businesses outside regional trade arrangements.
There is a growing trend not just of friend-shoring but of weaponizing economic interdependence. The Ukraine war, where trade, financial and technology sanctions have unplugged Russia from the international economic system, is a prime example of sanctions as the U.S. weapon of choice.
China has honed to an art form economic coercion against those that criticize it, conveniently banning goods - pineapples from Taiwan, bananas from the Philippines and rareearth minerals and fruits and vegetables from Japan. Economic coercion is just one aspect of growing economic nationalism that is rewiring trade and investment patterns. Contrary to popular opinion, these trends don't signal the end of globalization. Despite increased protectionism, global trade continues to grow. The World Trade Organization (WTO) forecasts 3 percent trade growth in 2023.
But globalization is diminishing with regard to capital flows, while trade and investment patterns are shifting dramatically. It is less global and more centered on regional networks. Here, the contradictions in Biden's Indo-Pacific strategy come into sharp relief. The combination of a bipartisan trade allergy, near-shoring and "Buy American" policies while Asia is deepening its economic integration is reducing U.S. economic centrality in a region where, as they say, "the business of Asia is business."
Witness the growing regional trade arrangements, such as the Regional Comprehensive Economic Partnership (RCEP) of 15 Asia-Pacific nations - including all U.S. allies and China. RCEP lowers tariffs and regularizes rules and standards for trade, making it easier to trade with China, not with the U.S., which is absent from the arrangement. Thus, China offers cheap electronics and other consumer goods and equipment popular in Asia.
Similarly, a higher standard accord, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), boosts trade among 11 AsiaPacific nations. The Bush administration started the accord as TPP, and President Obama finalized it. It was conceived as a pillar of U.S. Asia strategy to set rules and standards pressuring China to reform or be isolated. But President Trump withdrew from TPP, and bold leadership by Japan's Prime Minister Shinzo Abe renamed it and brought it to life, absent the U.S. Ironically, China has applied for membership in CPTPP.
Yet the National Security Strategy released by the White House last October says, "Recognizing we have to move beyond traditional Free Trade Agreements, we are charting new economic arrangements to deepen economic engagement with our partners, like the Indo-Pacific Economic Framework for Prosperity (IPEF)…" But why are no U.S. trading partners moving away from such trade arrangements? According to the WTO, there are 355 regional trade agreements and more pending. Is the U.S. right and everyone else wrong?
The administration invented IPEF to fill the economic hole in U.S. Indo-Pacific strategy. It intends several useful things, such as trade facilitation, digital standards, clean energy, tax and anti-corruption. It is voluntary, not a binding accord, and Asian partners can pick and choose which areas to cooperate with. But there is no market access or tariff reduction. Its impact remains to be seen.
IPEF neglects one of the secrets of U.S. success in Asia - access to U.S. markets. It was this lure and a U.S. regional security umbrella that fostered the economic miracles of Japan and South Korea after World War II, and later of Hong Kong, Singapore, Taiwan and China itself.
“It is no accident that U.S. trade with Canada and Mexico accounted for 41 percent of the $4.6 trillion in U.S. global trade in 2021. NAFTA and its successor, the U.S.-Mexico-Canada (USMCA) trade agreement, arose to regulate booming market-driven trade and investment, not the other way around. As U.S. firms shift production from China and rewire supply chains, Mexico and Canada are becoming still more important in the near-shoring of production. Complex supply chains with hundreds of components, often going back and forth across borders, are not easily reconfigured.”