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US–China rivalry ramps up pressure on the Pacific islands

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Author: Denghua Zhang, ANU

It is said that when elephants fight, it is the grass that suffers. This may play out in Australia’s immediate neighbourhood. As the US–China geostrategic competition intensifies, Pacific island countries find themselves caught in the middle.Secretary of Defense, Mark T. Esper, during a press conference. The Republic of Palau has asked the Pentagon to build ports, bases and airfields in the island nation, offering a boost to the plans of military expansion of the United States in Asia. Washington, United States, 8 September, 2020 (Reuters).

The latest round of the US–China rivalry is playing out on many fronts, from diplomacy to trade, investment, technology and military affairs. Some issues — such as the Taiwan issue — are more significant in the Pacific. Of the 14 sovereign Pacific island states, 10 have diplomatic relations with China, while the Marshall Islands, Nauru, Palau and Tuvalu recognise Taiwan.

As US–China tensions rise, the US government is extending increased and open support to Taiwan. Washington expressed opposition to the diplomatic switch of Solomon Islands and Kiribati from Taiwan to China in September 2019. In November, the first ever joint US–Taiwan business delegation visited Saint Lucia, Taiwan’s partner in the Caribbean.

Aid is another contested area. China has significantly increased its aid to the Pacific islands since 2006, making it the region’s second largest donor. Its presence is particularly visible in the infrastructure sector. Meanwhile, the United States is the fifth largest donor, focusing on government and civil society, education and health.

Concessional loans dominate Chinese aid to the Pacific and will continue to do so as China bankrolls its Belt and Road Initiative in the region. The United States has called out China for setting debt-for-equity traps in developing countries — a claim dismissed by Beijing — and created the US International Development Finance Corporation with a budget of US$60 billion to offer alternative financial assistance.

Security competition between the two powers is also intensifying in the Pacific. China’s navy has accelerated its modernisation under President Xi Jinping and devoted more attention to breaking out of the three island containment chains. The northern Pacific islands sit along the second island chain.

China’s 2015 defence white paper, China’s Military Strategy, states that the People’s Liberation Army will abandon its traditional land-focused security mentality and improve its naval capabilities. It likely that China will strengthen its military and security cooperation with the Pacific islands. In response, the United States is also beefing up its security presence in the region. Washington is actively negotiating the expiring economic provisions of the Compact of Free Association (COFA) with the Federated States of Micronesia (FSM), the Marshall Islands and Palau.

The United States will push back against any move by China to substantially increase its military presence in the Pacific, such as the speculated building of a naval base in Vanuatu in 2018. The United States could also discourage Pacific island countries from cooperating with Chinese telecommunication company Huawei for security reasons. The United States and China have contrasting views on Tibet, Xinjiang, Hong Kong and human rights. China considers these issues critical to its core national interests, and will unswervingly compete with the United States for support.

China appeals to Pacific governments with its no strings attached aid, infrastructure support and emphasis on South–South cooperation. The attractiveness of the United States rests on its global superpower status, liberal values and culture, soft power, security cooperation and aid in ‘soft areas’ such as governance, gender equality and female empowerment.

Avoiding taking sides in this great power competition may seem optimal for many Pacific island countries. Papua New Guinea boasts a foreign policy of being ‘friends to all and enemy to none’ while Vanuatu and Fiji’s traditional support for the Non-Aligned Movement is well known.

In February 2019, the Pacific Islands Forum Secretary General Dame Meg Taylor rejected the so-called choice between China and traditional Western partners and supported taking a ‘friends to all approach’. She called for engaging with China collectively and exploring opportunities for partners to work together for the benefit of the region. The following month, the Forum’s Deputy Secretary General Cristelle Pratt emphasised strengthening US–Pacific relations, and stressed that the activities of both old and new partners should enable Pacific island countries to strengthen their strategic autonomy.

To persuade Pacific island countries to take sides, the United States and China will make their best effort to compensate them for the loss suffered by severing ties with the other. Palau and the Marshall Islands do not have diplomatic relations with China and they are bound by the COFA with the United States, so they are the most likely to throw their support behind the United States in ‘containing’ China’s influence in the North Pacific.

US Secretary of Defense Mark Esper’s visit to Palau in August 2020, a first by a US defence secretary, is Washington’s latest move to deepen US–Pacific security cooperation. Accusing Beijing of exerting growing financial and economic pressure on small countries, Esper vowed to reinforce US ties with Palau. Meanwhile, Palau invited the United States to establish a military base in the country.

The agreement regarding the military use and operating rights of the government of the United States in Palau concluded pursuant to Sections 321 and 322 of the COFA provides for US military forces to designate and occupy new defence sites in Palau.

But taking sides could be harder for the FSM. Although in similar compact relations with the United States, the FSM also enjoys close diplomatic and economic ties with China.

The growing US–China rivalry will loom large over the Pacific, placing more pressure on Pacific island countries. Protecting their sovereignty and national interests will be a big task, putting the leadership and skill of Pacific politicians to the test.

Denghua Zhang is a research fellow at the Coral Bell School of Asia Pacific Affairs, the Australian National University.

The post US–China rivalry ramps up pressure on the Pacific islands first appeared on East Asia Forum.



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ASIAN (H)

Singapore’s road to recovery

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Author: Faizal Bin Yahya, NUS

COVID-19 has severely impacted Singapore’s trade and economy. But the virus is also proving to be a catalyst for exploring alternate development pathways and for motivating Singapore’s greater integration into the ASEAN region.

People cross a street at the shopping district of Orchard Road amid the coronavirus outbreak in Singapore, 19 June 2020 (Photo: Reuters/Edgar Su).

Singapore’s business activities have been curbed due to social distancing measures that have adversely impacted the profit margins of firms. Hard lessons were learnt along the way when infection rates spiked among the 320,000 foreign workers living in dormitories. This required quarantine measures with the government assisting in paying wages, waiving levies and providing the costs of their care. The rate of infection in foreign worker dormitories continues to concern authorities.

There are also foreign workers living outside of the dormitories. Approximately 100,000 foreign workers from Malaysia’s southern Johor state crossed over into Singapore daily before the border closures were implemented on 18 March 2020. The Singapore government provided some funds at the beginning to assist companies to maintain their Malaysian foreign workers. Singapore’s dependency on foreign workers has been exposed as a key vulnerability by the pandemic.

Singapore’s second vulnerability is its relative exposure to supply chain disruptions. Singapore was forced to trade face masks for bed frames with Indonesia to establish care facilities for COVID-19 patients. This highlighted the need for Singapore to work more closely with its immediate neighbours for mutual benefit and to strengthen its free trade agreement network to increase diversification of source materials, including food supplies.

For Singapore to facilitate recovery, economic development strategies need to pivot in new directions by leveraging internally on Industry 4.0 initiatives and externally by accelerating earlier initiatives such as regionalisation through high-tech parks.

Mitigating the more adverse impacts of COVID-19 on businesses and workers to boost economic recovery requires three things. First, the economic transformation through Industry 4.0 pathways that began in 2015 needs to be accelerated. Companies already on Industry 4.0 transformation journeys are reaping the rewards of digitalisation — remote work arrangements and contactless processes have enabled business continuity. The manufacturing sector comprises about 20 per cent of the Singapore economy but locals are reluctant to work in this sector. There is a need to create smart factories in Singapore, coupled with the utilisation of regional high-tech parks to manufacture components at larger scales.

Singapore has already developed several high-tech industrial parks in surrounding countries, including Indonesia, China, India and Vietnam. Small and medium enterprises (SMEs) represent the majority of investors in these tech parks. For example, in 2016 Singaporean SMEs had invested cumulatively S$9.4 billion (US$6.9 billion) in the Suzhou Industrial Park. The redesign of business models and workflow processes by using these high-tech industrial parks will not only enhance revenue streams for the companies involved but also enables them to create employment opportunities in Singapore and reduce overall business costs.

Second, the pandemic has highlighted the need for diversifying Singapore’s supply chain networks, the importance of ‘near shoring’ and a ‘China Plus One’ strategy. This would involve utilising more ‘near shore’ high-tech industrial parks and developing new ones, like those already appearing in Indonesia. For example, the Batam Industrial Park was established in 1989. The manufacturing outputs from Batam are usually transported to Singapore ports to be exported overseas. The concept of industrial parks has endured and evolved into digital parks like the Nongsa Digital Park in Batam.

Third is human resources, innovation and ecosystems. It is critical to accelerate reskilling, especially in popular local sectors. The professional, manager, engineer and technician (PMET) category comprises 57 per cent of Singapore’s total labour force. This employment category will be the most disrupted during transformation and comprises a large number of mid-career and mature workers.

Fortunately, the innovation start-up scene is expanding in Singapore and collaborating with regional start-up hubs such as Nongsa. In their journeys to maturity, Singapore start-ups also require industry and professional experience. The PMET category can provide this. The blend of youthful start-up developers and mature PMETs provides complementary strengths for business growth and expansion.

The Singapore economy has to embed itself more and evolve with the ASEAN region and beyond. Collaborations with regional economies and diversification will also add to Singapore’s ability to enhance its resilience and navigate a potentially divided economic world order post-COVID-19.

Faizal Bin Yahya is a senior research fellow at the Institute of Policy Studies, Lee Kuan Yew School of Public Policy, National University of Singapore.

This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.

The post Singapore’s road to recovery first appeared on East Asia Forum.



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ASIAN (H)

Lessons from Kerala’s COVID-19 response

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Authors: M Niaz Asadullah, University of Malaya and Antonio Savoia, University of Manchester

Compared to Southeast Asia, COVID-19 success stories are few and far between in South Asia. Country performance is also less varied — India, Pakistan, Bangladesh and Nepal are all struggling to flatten the curve. One exception to this trend in infection and fatality rates is Kerala. It was the first Indian state affected by COVID-19 in January 2020 but is now widely acknowledged as a success story for tackling the pandemic.

Women stand in a queue to receive relief supplies provided by local community amid the coronavirus disease (COVID-19) outbreak in Dhaka, Bangladesh, 1 April, 2020 (Photo: Reuters/Mohammad Ponir Hossain).

 

Kerala’s achievement is no accident. It is partly rooted in its historical advancements in human development, human rights and an inclusive model of transformation. The Kerala model is the outcome of investments dating back to India’s pre-independence years. The state has stood out in India in terms of social gains through the Millennium Development Goals (MDGs) campaign, despite a modest income level, leapfrogging most other Indian states in social development.

Kerala is an exemplar. Other regions on the subcontinent have unique circumstances and characteristics that demand unique responses. Still, they can and should all try to emulate the Kerala story through adaptations that cater to their local contexts.

Governments in the region face a much greater challenge. A large proportion of the region’s 1.9 billion people live below the poverty line, mostly in dense settlements, and the region has been hit the hardest among all developing regions by COVID-19. Evidence suggests that as many as 400 million more people in the region will be pushed into poverty.

To protect livelihoods, most governments have already reopened their economies despite a rising COVID-19 caseload. The region made significant progress in improving health and education outcomes and poverty reduction during the MDGs era. But following this pandemic, there is a serious risk of reversing past gains.

In Bangladesh, an MDGs success story, the total number of infections is approaching 300,000. With a death toll over 3500 — contrast to under 200 in Kerala — Bangladesh is facing a catastrophic crisis. Like Kerala, the existing social customs of communal gathering in Bangladesh represent a challenge for self-isolation efforts. Given high population density, physical distancing is also not an option for many. This calls for state intervention in diagnosing problems, coordination and enforcing rules.

On this front, three policy approaches were critical to Kerala’s success: a rigorous testing regime, a clear communication and people management strategy, and functional health planning and administration.

Kerala’s COVID-19 management and control received the highest political and administrative commitment. As many as 18 committees were set up to coordinate contamination and mitigation efforts. The committees met daily, held evening meetings to evaluate the situation and updated the public through media releases on progress in quarantine, test and recovery efforts.

Kerala has a well-functioning public health system and trust in the government is high. The state intervened early with a clear strategy, whereas governments elsewhere in South Asia have been both late and haphazard.

In the case of Bangladesh, rising corruption, a weak health care system, poor citizen trust and lack of incentives in contact tracing have combined to increase the risk of both higher infection and death rates. Half a year since the first reporting of COVID-19 and government action is yet to have an impact on containing the virus.

Following years of steady growth, Bangladesh’s economy has seen rising incomes rising to unprecedented levels. But progress in economic development was not accompanied by increased investment in the health sector and meaningful governance reforms. It has, instead, seen the country sliding towards authoritarianism. With the weakening of accountability mechanisms within the political system, elites have reduced incentive to invest in state institutions and infrastructure that could manage the pandemic.

By the end of the MDGs era, Bangladesh fared as the lowest within South Asia in terms of public spending on health. Decades of underinvestment in health infrastructure combined with weak state institutions caused the lockdown — and associated relief program — to fail. The state capacity deficit in terms of enforcing national public health policies has been laid bare. On the other hand, years of investment in state institutions and sufficient democratic accountability played a critical part in ensuring an adequate state response in Kerala.

What are the main policy lessons for others?

First, human development progress is necessary but not sufficient to develop resilience against shocks. Kerala’s past developmental legacy has paid off in this time of crisis, but so too in the past had Bangladesh made global headlines for its successful fights against disease, such as diarrhoea and cholera.

Second, the success of the Kerala model reiterates the importance of political accountability and state effectiveness. Evidence shows that Sustainable Development Goals (SDGs) gains from simultaneous improvement in state capacity and public expenditure in South Asia would be very significant.

Higher government spending on education and health alongside improvements in state capacity, reaching levels similar to other developing regions such as East Asia, could enable South Asian countries like Bangladesh to make significant progress in achieving the SDGs. Kerala has the highest per capita spending on health in India, accounting for 1.5 per cent of its GDP, while this is less than 1 per cent in Bangladesh.

Without such improvements, South Asian countries will continue to remain vulnerable to future global crises.

M Niaz Asadullah is Professor of Development Economics at the University of Malaya and Southeast Asia Lead of the Global Labor Organization.

Antonio Savoia is a Senior Lecturer in Development Economics at the University of Manchester.

The post Lessons from Kerala’s COVID-19 response first appeared on East Asia Forum.



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ASIAN (H)

North Korea’s evolving cyber warfare strategy

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Author: Michael Raska, RSIS

While South Korea and the United States focus on North Korea’s growing nuclear weapons and ballistic missile capabilities, the alliance must increasingly prioritise countering the development of North Korea’s cyber capabilities.

North Korean leader Kim Jong Un gives field guidance at the Sci-Tech Complex in Pyongyang, 28 October 2015 (Photo: Reuters/KCNA).

 

The use of cyber weapons of mass effectiveness alongside weapons of mass destruction provides Pyongyang with a unified asymmetric strategy designed to pressure the United States and the wider international community to recognise its legitimacy.

Moreover Pyongyang can effectively counter strict economic sanctions through cyber operations, raising hundreds of millions of dollars to support the Kim regime and its nuclear and ballistic missile programs.

North Korea’s cyber warfare units have come a long way since the mid-1990s, when  the country’s computer infrastructure was rudimentary at best. The 2009 US National Intelligence Estimate dismissed North Korea’s cyber capabilities and long-range missile programs, noting it would take years to develop them into a meaningful threat.

That same year, North Korea reportedly unified all of its intelligence and internal security services and brought them under the direct control of the National Defense Commission to cement the control of current North Korean leader Kim Jong-un. It merged intelligence organisations and its various cyber units such as Bureau 121 into the Reconnaissance General Bureau (RGB).

The RGB became North Korea’s primary foreign intelligence service as well as headquarters for special and cyber operations. The RGB absorbed Bureau 121, increased its size to 3000 people and upgraded its status to that of a ‘department’.

In 2013, the RGB reportedly also established Unit 180, tasked with hacking international financial institutions to extract foreign currency in support of North Korea’s nuclear and ballistic missile programs. It would also install malicious backdoors in software development businesses in Japan and China. Over the years, the focus of Unit 180 shifted toward targeting cryptocurrency exchanges while Bureau 121 has expanded its cyber operations beyond South Korea by attacking foreign infrastructure elsewhere.

These operations have been linked to another unit — Unit 91 — which has been ‘acquiring [the] advanced technologies needed for nuclear development and long-range missiles from developed countries’ since 2014. The Korean People’s Army (KPA) and its General Staff Department (GSD) have also been integrating cyber capabilities into conventional military operations.

In 2016 the GSD established a new department for Command, Control, Communication, Computer and Intelligence (C4I) to enhance the defensive cyber capabilities of the KPA’s command and control systems. These have been reportedly targeted by a top secret US military program. To counter such measures, North Korea is developing quantum encryption technology in an effort to build a highly secure command and control link between Pyongyang and key missile launching sites.

North Korea’s cyber units have progressively developed their resources, assets, malware arsenals and coding capabilities based on their experience from attacking different targets. They are also collaborating on attack campaigns by sharing networking infrastructure and continuously adapting malware code in order to avoid detection.

The sophistication of North Korea’s cyber operations shows an increasing emphasis that Pyongyang is placing on cyber-enabled economic and political warfare, with cyber units and state-sponsored hacking groups aiming to counter international sanctions, while at the same time generating resources for North Korea’s economic and military-technological development.

North Korea’s cyber operations reflect at least three distinct characteristics.

First, North Korea’s cyber units and hacker groups have shown considerable diversity in terms of their capabilities and experience — a range that has made attribution more challenging.

The line between low-end and high-end North Korean cyberspace operations has frequently been blurred. North Korea can employ non-state actors as surrogates, utilise low-cost, off-the-shelf tools that are freely available and exploit known techniques such as denial of service attacks.

Second, North Korea has gradually demonstrated a resolve for cyber-escalation — targeting the critical infrastructure of other nation states as well as private corporations and banks for varying political motivations. Increasingly, North Korea aims to achieve illicit financial gain by bypassing international sanctions and generating foreign currency.

Third, the essential ‘dialectics of North Korea’s cyberspace’ is still asymmetric. North Korea’s internet infrastructure is isolated from global networks, with the country’s entire internet traffic channelled through only two providers — China’s Unicom and Russia’s TransTeleCom. The country is largely unplugged from the global internet and is ringfenced by China’s ‘Great Firewall’.

North Korean hacker groups have therefore been widely dispersed places elsewhere, such as China, Russia, Southeast Asia, and even Europe, acting independently or mutually supporting each other based on their specific cyber missions.

Against this backdrop, South Korea’s Ministry of Defense initiated the Master Plan for Defense Cyber Policy in 2011 to integrate all South Korean military capabilities against cyber threats. South Korean forces have also enhanced their civil-military cooperation in the cyber domain.

Seoul has also prioritised joint efforts with the US military to ensure that the alliance leverages cyber operations as effectively as possible. In this context, South Korea’s cyber capabilities have evolved in the strategic framework of the US–ROK alliance, with joint programs developing artificial intelligence-based technologies to counter a range of cyber threats.

But these measures have arguably not stipulated major changes in the ways and means through which the US–ROK Alliance leverages advanced technologies. US–ROK forces have not been fully able to align their military-technological potential with the required organisational, conceptual and operational innovation needed to utilise advanced technologies in new ways.

Under these conditions, North Korea has been gradually gaining a strategic advantage by pursuing cyber capabilities in conjunction with nuclear and ballistic missile programs as asymmetric capabilities, which provide a relatively low-cost but effective means to exert influence. They also provide Pyongyang with a capability for political, economic and military coercion without triggering major armed conflict.

Michael Raska is Assistant Professor and Coordinator of the Military Transformations Program in the Institute of Defense and Strategic Studies at the S Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore.

The post North Korea’s evolving cyber warfare strategy first appeared on East Asia Forum.



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Middle powers can shape a new security framework

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Author: Yoshihide Soeya, Keio University

Day by day, the US–China confrontation is heating up. The trajectory now appears irreversible. The nations of the Indo-Pacific, Japan included, are sandwiched between the United States and China. It is high time for them to consider strengthening effective regional cooperation by building on ASEAN-centred processes.

Australian supply ship HMAS Sirius and Japanese helicopter carrier Ise during exercises in the Pacific in August 2020 (Photo:  LSIS Christopher Szumlanski/Australian Department of Defence).

The key players are Japan, Australia, India and South Korea, which could be called a ‘middle power quad’ (MPQ). Souring Japan–South Korea relations could be subsumed in the regional cooperation an MPQ grouping would create. If realised, the grouping could become a step towards creating a larger ASEAN–MPQ framework.

China’s recent behaviour signals its resolute determination to ‘recover’ its traditional sphere of influence in Asia and beyond. The enactment of the Hong Kong national security law virtually ends Hong Kong’s political autonomy and democracy. Many worry about its tacit but intrinsic implications for Beijing’s Taiwan policy, with worries compounded by the build-up of Chinese anti-access and area-denial capabilities against US military intervention in the East China Sea and the Western Pacific.

The United States sees Chinese assertiveness as a challenge to US primacy in the Indo-Pacific as well as a danger to democratic institutions and values. The pandemic further complicates the bilateral relationship and accelerates the rivalry between the two countries.

Left unattended, deteriorating US–China relations will have a two-fold impact on the future regional order in the Indo-Pacific.

First, the space for independent action of countries in the region will continue to shrink as confrontation intensifies. Second, COVID-19 has caused many countries to tighten border controls and take unilateral action to cope with the spread of the virus, discouraging them from thinking and acting regionally. As a result, countries are being forced into choosing sides.

Revitalised multilateral cooperation is needed to avoid these countries losing autonomy. Many in Japan consider the Free and Open Indo-Pacific (FOIP) strategy a means of achieving this. The FOIP concept, as advocated by Japanese Prime Minister Shinzo Abe, is considered a counterweight against Beijing’s Belt and Road Initiative.

Yet in mid-2018 the Abe administration stopped calling this initiative a ‘strategy’ and instead labelled it a ‘vision’. This coincided with Abe’s official visit to China in October 2018 — the first in seven years by a Japanese prime minister. Abe met President Xi Jinping and Premier Li Keqiang, confirming the bilateral relationship was back to normal. Xi’s proposed state visit to Japan has since become an important item on the agenda to strengthen relations, though the visit has been postponed due to COVID-19.

The Japanese vision of a FOIP has now become a rebranded version of long-held regional policies since the end of the Cold War, including re-affirmation of ASEAN-centred processes and institutions. ASEAN itself adopted an ‘ASEAN Outlook on the Indo-Pacific’ in June 2019 and declared that the ‘ASEAN way’ is still effective in managing Indo-Pacific cooperation.

Key elements of the ASEAN way are institutions such as the ASEAN Regional Forum, established in 1994, ASEAN+3 since 1997, the East Asia Summit created in 2005, and the ASEAN Defence Ministers’ Meeting-Plus, held since 2010.

But the ASEAN way is a double-edged sword under intensifying US–China rivalry.

Inclusiveness is an important precondition for cooperative security but ASEAN could equally become a venue for big powers to control smaller members. Differing ASEAN member state attitudes toward China and the United States are said to have already weakened the group’s institutional solidarity.

The new approach proposed here is to create a framework of regional security cooperation that excludes both the United States and China.

Before involving the two superpowers, the long-standing ASEAN way needs to be reinforced by greater engagement with non-ASEAN countries such as Japan, Australia, India and South Korea—most of whom have increased cooperation with one another in recent years.

From 2007 to 2009, these MPQ countries signed a series of bilateral declarations on security cooperation including the Japan–Australia Joint Declaration on Security Cooperation in March 2007, the October 2008 Joint Declaration on Security Cooperation between Japan and India, the Joint Statement on Enhanced Global and Security Cooperation between Australia and the Republic of Korea of March 2009 and the November 2009 India–Australia Joint Declaration on Security Cooperation. Building on these bilateral declarations, Japan, Australia and India held four trilateral dialogues between June 2015 and December 2017.

If Japan–South Korea relations were improved by a similar security agreement, then a trilateral arrangement that involved Australia would be conceivable. According to a former South Korean official, Seoul studied the 2007 Japan–Australia declaration before making a statement on security cooperation with Canberra in 2009. The contents of the two documents are quite similar — they mostly concern non-traditional security cooperation in such areas as international peace and disaster relief operations.

Japan and Australia concluded an Acquisition and Cross-Servicing Agreement (ACSA) — which would permit the exchange of the most common types of military support, including fuel, transportation, ammunition and equipment between the two militaries — in May 2010 that was revised and upgraded in January 2017. Japan and India started talks on a bilateral ACSA in late 2019.

The next step should be to elevate these bilateral agreements into a trilateral and eventually a quadrilateral agreement. Although the MPQ is no substitute for ASEAN, it should be designed so as to aid ASEAN’s ultimate goal of achieving cooperative security.

In the end, the prospect of realising the MPQ and eventually ASEAN–MPQ cooperation depends on sound strategic thinking and political leadership. This is easier said than done, but the alternative is a loss of autonomy for Indo-Pacific countries in the US–China confrontation.

Yoshihide Soeya is Professor Emeritus of Political Science and International Relations at the Faculty of Law, Keio University.

This article appears in the most recent edition of East Asia Forum Quarterly, ‘Japan’s Choices’, Vol. 12 No. 3.

The post Middle powers can shape a new security framework first appeared on East Asia Forum.



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COVID-19 exposes gaps in South Korea’s social security system

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Author: Jae-jin Yang, Yonsei University

South Korea has experienced three economic crises since its democratisation in 1987: the Asian financial crisis (1997–1999), the global financial crisis (2008–2009) and the current COVID-19 economic crisis. Like the two crises before it, the COVID-19 economic crisis has given renewed impetus for expanding social welfare support in South Korea.

A couple wearing masks walks in an empty shopping distrct amid the coronavirus disease (COVID-19) pandemic in Seoul, South Korea, 25 August, 2020 (Photo: Reuters/Kim Hong-Ji).

 

In response to the Asian financial crisis, the progressive Kim Dae-jung government expanded social security. In 1998 as a result of the crisis, South Korea’s economy contracted by 5.8 per cent and the unemployment rate rose to over 8 per cent. South Korea was not prepared for mass unemployment. The Employment Insurance Scheme (EIS), which had just been introduced in 1995 and initially covered only 4.1 per cent of the country’s 13.6 million employees, was unable to cope. Poverty soared and income equality deteriorated. These dismal social consequences prompted drastic pro-welfare reforms, including coverage expansion of the EIS and the introduction of a universal public assistance program.

This expansion of social security helped South Korea fare better during the global financial crisis. South Korea’s export-oriented economy was strongly impacted by the global financial crisis given its heavy dependence on foreign trade. GDP fell by 3.4 per cent in the fourth quarter of 2008 and 4.2 per cent in the second quarter of 2009. But social problems were not as serious as in the Asian financial crisis. The EIS helped exporting firms maintain employment by providing subsidies to be used for paid leave and the reduction of working hours rather than layoffs. Unemployment benefits and public assistance also worked relatively well.

COVID-19 has presented mixed challenges for South Korea. The South Korean government successfully responded to the health crisis caused by COVID-19. Similar to China, the number of confirmed cases surged abruptly in February 2020 and hit its peak on 3 March with 851 new confirmed cases that day. Daily confirmed cases have since generally declined to as low as around 30 in August and hovering around 100 in September.

This successful response was made possible by massive testing, quarantine of infected patients, tracking of movements and swift isolation of people exposed. Successful containment has mitigated the adverse economic effects of COVID-19 on the economy, which shrank by 3.3 percent in the second quarter of 2020. Most other OECD countries have experienced their worst economic retreats since the Great Depression, with alarming contractions in Japan (27.8 per cent), the United States (33 per cent) and the European Union (12.1 per cent).

Yet the pandemic has managed to reveal flaws in South Korea’s social safety net, especially for those who are self-employed, as social distancing has generated an unexpected ongoing de facto lockdown effect on small businesses. South Korea has a significant small business sector, with self-employment accounting for about 25 per cent of total employment. But these self-employed workers are not covered by the EIS and are also not usually eligible for public assistance as asset holders.

Protecting these small business owners from disastrous loss has become an urgent new policy agenda item.

Two policy alternatives are being discussed. One option is a universal basic income, touted by presidential hopeful and Gyeonggi Province Governor Lee Jae-myung. The other option is the expansion of the EIS in two ways. The first way is to substitute the EIS with a Danish-style unemployment insurance system based on an individual’s total income regardless of employment type. The self-employed and freelancers would be obliged to enrol in this system. The second way is to provide German-style unemployment allowances to the uncovered on the condition that they engage in job searching or training.

Proponents of the universal basic income succeeded in introducing a variant of such a policy, the Emergency Relief Allowance (ERA), for the entire population during the April 2020 general election that took place amid the COVID-19 crisis. The ERA was initially proposed by the government to protect those not covered by the EIS. But escalation in bidding among ruling and opposition parties eventually led to a universal ERA covering the entire population.

As part of the ERA, the government paid out 1 million won (US$900) to households with four members and 400,000 won (US$350) for single-person households in May. It was the first time in South Korean history that the government provided benefits regardless of social risks and needs. The one-time ERA cost 14.3 trillion won (US$12 billion) — far exceeding the total unemployment benefit outlay of 9 trillion won (US$7.6 billion) in 2019.

Supporters of a strengthened EIS criticise the ERA as borne out of populism and an inefficient safety net for the self-employed. The ERA of 400,000 won (US$350) for single-person households is just a fifth of the monthly unemployment benefit.

After the election, the South Korean government distanced itself from the ERA as a universal basic income. The second ERA, to be paid out late September, has been revised as selective benefits to uncovered small business, irregular workers and freelancers who have been hard hit by the prolonged economic recession. The government also passed a law to provide means-tested unemployment allowances for six months to job seekers who are not covered by the EIS.

The government is now preparing a roadmap for a universal employment insurance scheme by which all people engaged in economic activities can file for unemployment benefits if they have lost income. Whether it would follow the Danish or German system is yet undecided. What is clear is that COVID-19 has exposed a weak point in the South Korean social security system and the government is faced with the difficult task of economic crisis-induced reform.

Jae-jin Yang is Professor in the Department of Public Administration and Director of the Institute for Welfare State Research at Yonsei University.

This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.

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Modi’s military procurement missteps

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Author: Bharat Karnad, Centre for Policy Research

As part of Indian Prime Minister Narendra Modi’s ‘self-reliant India’ policy, Defence Minister Rajnath Singh issued a list of 101 defence items in August with different timelines beyond which their import will be banned, with a second list soon to follow. From December 2020, the armed forces will not be able to purchase some 69 types of foreign-sourced military goods, including many major weapons systems and platforms: ship-borne cruise missiles, diesel submarines, missile destroyers, light combat aircraft and helicopters.

An Indian Air Force light combat aircraft 'Tejas' performs during Indian Air Force Day celebrations, Hindon Air Force Station, New Delhi, India, 8 October 2019 (Photo: Reuters/Anushree Fadnavis)

Most of these are already produced in India under licence, so the government is confident the ban will force the Indian defence industry to achieve self-sufficiency within a decade. Because imports will not be allowed for any reason, the military will be compelled to become stakeholders in indigenous programs. However, there has been minor pushback, with immediate purchases from abroad being approved to fill ‘voids’ in the war wastage reserve and the war stock just in case hostilities flare up with China in Ladakh.

Singh promised contracts worth US$54 billion to the Indian defence industry, but instead spawned scepticism because this figure includes funding for procurements that are already underway. The reality is that the Indian government has awarded US$34 billion of contracts to foreign arms suppliers, far exceeding the US$20.25 billion for Indian companies. Since defence budgets are written annually, there is no hint of long-term government funding for particular programs.

There are also more fundamental problems with the plan. It is ironic that a country more-or-less capable of making its own strategic armaments — nuclear warheads, long-distance missiles and ballistic missile submarines — is unable to produce conventional weapons. Because strategic weaponry is not available at some arms bazaar, these were developed in-country under a special dispensation — the ‘technology mission’ mode — directly under the Prime Minister. This precluded the procedural hassles, niggling financial oversight and bureaucratic foot-dragging usually faced by conventional weapons development projects. The arms self-reliance policy will be boosted if all indigenous conventional weapons projects too are developed under a similar regime.

India’s mindbogglingly complex defence procurement system, tilted against local industry, has been only superficially reformed. The latest version of the Defence Procurement Procedure defines a hierarchy topped by indigenously designed, developed and manufactured (IDDM) items. Next are items satisfying the ‘Make in India’ (MII) initiative, which includes equipment reproduced by foreign companies from their international product lines — Lockheed Martin’s F-16 fighter aircraft, for example, which will be sold as the new F-21.

IDDM items must include at least 60 per cent Indian content (whether by weight or value is unclear), with the same requirements applying to spares, special tools and test equipment. The MII category allows foreign firms to get away with only 40 per cent, skewing the competition cost wise in their favour. This pushes the armed services towards the MII option, involving munitions that are proven but that quickly become obsolete.

This process is complicated by the lack of procedures to assess the use of local content in either category — the defence force will have to take foreign firms at their word, which isn’t always reliable. In this case, kicking the crutch of foreign weaponry from underneath the armed services will not advance the cause of a ‘self-reliant India’ without first removing the anomalies in the procurement procedures.

The military has a habit of finding anything imported acceptable and anything Indian-made suspect. The travails of the Indian-designed and developed 4.5 generation, near all-composite Tejas light combat aircraft are well known. The Indian Air Force (IAF) contributed little to the project other than frequently changing the Air Staff Qualitative Requirements, imposing delays in the prototype and certification stages and, when the aircraft rolled out, claiming it was technologically dated. The IAF was finally pressured into buying a squadron’s worth of Tejas, and, with the push for indigenisation, will soon order an additional 83.

The Indian Armed Forces were also unconvinced by the Indian-designed Arjun main battle tank, buying too few to support the necessary economies of scale. Despite outperforming the Russian T-90 MBT in all field tests, the army contends the Arjun is wider and heavier than the specifications. Meanwhile, their T-90 fleet keeps growing.

The precedent for the stepmotherly treatment of locally-produced armaments was established in the mid-1970s, when the IAF favoured the British Jaguar low-level strike aircraft at the expense of the HF-73, the advanced variant of the Indian-designed Marut HF-24 — the first supersonic jet fighter to be produced outside of North America and Europe.

Compared with their peers in the public sector, private-sector defence industrial firms boast better designing wherewithal, work ethic and labour productivity. But the Modi government continues to relegate private firms to the role of sub-contracting for the apathetic and wasteful defence public sector units, resulting in time and cost over-runs, delayed delivery schedules and alienated military customers.

The government has so far ignored the economically sensible solution of making the defence industry more profit and export-minded. That would entail Hindustan Aeronautics Ltd. sharing the design and source code for the Tejas LCA with Tata Aerospace and Mahindra Aerospace, creating multiple production lines for a combat aircraft with a ready market in the developing world. They could also task Larsen & Toubro, the engineering giant that puts together the Arihant SSBN, with producing conventional submarines.

A more ambitious approach would be to divide the public-sector research and development and defence industrial assets into two giant competing combines, each under the managerial control of leading private sector companies such as Tata and L&T. These two complexes would then bid for weapons contracts, with the Defence Ministry funding development in the prototype and selection phase.

Absent such optimal use of defence industrial resources, prospects are bleak for a militarily self-sufficient India.

Bharat Karnad is Emeritus Professor in National Security Studies at the Centre for Policy Research, New Delhi.

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US political decline means more ‘ninja diplomacy’

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Author: James L Schoff, Carnegie Endowment

Bitter and deepening political division in the United States is a serious challenge for Japanese foreign policy — a challenge that is likely to grow in the coming year amid political dysfunction and the impact of COVID-19.

A US Navy F/A-18F Super Hornet flies past Mount Fuji, Japan, 29 January, 2020 (US Navy/Lt. Alex Grammar/Handout via Reuters).

US political decline is not a new phenomenon but it is becoming more acute under President Donald Trump, who has taken an already politicised US electorate and amplified it. Unfortunately, the promise of US democracy — and the vitality that often flows from its liberty and diversity — is in danger of being overwhelmed by tribalism and economic inequality. This would make the United States a less reliable bilateral and multilateral partner for Japan.

Japanese foreign policy was already turning away from a central focus on alignment with the United States to a more proactive, nimble and often quiet approach. This Japanese ‘ninja diplomacy’ contrasts with China’s more abrasive ‘wolf warrior diplomacy’ or the United States’ brash ‘cowboy diplomacy’.

Ninja diplomacy maintains a low profile but is constantly active, and tries to shape outcomes as part of a broader strategy involving many other actors. In this case, those actors are Japan’s various government ministries, its private sector and other countries and international organisations. Applying this type of cultural iconography might seem a superficial way to describe a nation’s foreign policy strategy, but it conveys succinctly key aspects of its character.

Japan is gradually hedging its heavy reliance on the US–Japan relationship. It signed on to new security and economic cooperation agreements with countries including Australia, India, Canada and the Philippines, as well as collective agreements with NATO and the European Union. Japan is also investing in international organisations such as ASEAN, the Asian Development Bank and APEC.

None of these new or expanding partnerships can substitute for the depth of US–Japan cooperation across economics, security and technology — nor have they needed to so far. The alliance has been mutually beneficial throughout the post-Cold War era, and Japan has a large stake in US success.

Japan cannot choose between the US alliance, bandwagoning with China or pursuing middle power diplomacy. Instead, it must pursue all of them together, requiring deft manoeuvring and — at times — plausible deniability. Tokyo will need to double down on its two-pronged diplomatic strategy that tries to support US standing in the world while also diversifying its international relationships and influence.

There were times in Japanese history when the main foreign policy debate was about choosing between a predominantly Western versus Asian orientation. Contrasting Trump’s protectionist policies with economic dynamism in Asia, one might think a ‘return to Asia’ approach could gain favour in Tokyo. But while Beijing is promoting the concept of ‘Asia for Asians’, Japanese policymakers have little confidence that their Chinese counterparts will accommodate Japan’s interests sufficiently.

China’s excessive claims and coercive behaviour in the South and East China Seas, its bullying behaviour against Australia and its smothering of political dissent in Hong Kong continue to push Japan into an ‘all of the above’ approach. This approach embraces multiple regions around the world to expand partnerships and blunt Chinese diplomatic advances, while still promoting a stable and productive relationship with China.

It could be that US political decline is emboldening Chinese diplomats and military leaders to be more aggressive in protecting what they believe are China’s core interests. The United States alone will be increasingly less inclined or able to stymie Chinese gains in Asia, and if Beijing can deter other Asian countries from acting together, then its dominance in the region is virtually assured.

Japan’s diplomacy aims to avoid this worst-case outcome. Its ability to coordinate among multiple domestic and international actors and interests will be especially important when Japan’s long-serving Prime Minister Shinzo Abe completes his final term as head of the ruling party.

Japan cannot afford to oppose China bluntly or aggressively — China remains Japan’s largest trading partner and a valuable market for direct investment. Addressing regional challenges including North Korea’s nuclear weapons development, environmental degradation and crisis management will also benefit from cooperation with China. Simply joining a US-led anti-China coalition, sanctioning Chinese firms and shaming Chinese officials will be self-defeating.

At the same time Japan wants to undercut China’s ability to leverage its massive domestic market to make diplomatic and economic gains at Japan’s expense. Japan also needs to protect its firms’ intellectual property and compete effectively in emerging technologies.

Japan is working with the United States, Europe and others to divert sensitive supply chains away from China, establish high standards for digital trade and protect the integrity of data flows along undersea cables. It also aims to provide investment alternatives for Southeast Asian countries, push for reform at the World Trade Organization and limit Chinese investment in Japanese high-tech companies. Japan is seeking an open regional and global order based on predictably enforced rules, rather than one where ‘might makes right’. On this last point, Tokyo will be seeking partners internationally to counter both Beijing and — more quietly — Trump’s Washington.

Overall, Japan will need to keep up Abe’s active and multi-directional diplomacy by building or supporting coalitions wherever feasible while avoiding confrontation with China. The goal will be to help countries in Asia avoid Chinese coercion without choosing sides on sensitive political issues. Ideally, this will force Beijing to soften its diplomacy.

The United States can still be an important and constructive player in this effort, and can coordinate with Japan’s ninja diplomacy to protect their many shared interests. While Japan cannot afford to wait for the United States when promoting international agreements (such as the World Health Organization), it should make an effort to not leave Washington behind.

James L Schoff is a senior fellow in the Asia Program at the Carnegie Endowment for International Peace.

This article appears in the most recent edition of East Asia Forum Quarterly, ‘Japan’s Choices’, Vol. 12 No. 3.

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Domestic policies key to the Supply Chain Resilience Initiative

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Author: Ken Heydon, LSE

Reports are circulating of a trilateral exploration by Japan, India and Australia of a ‘Supply Chain Resilience Initiative’ (SCRI) seeking to secure supply chains and reduce dependence on China. The initiative — seemingly instigated by Japan — will likely be broached at an India–Japan summit in coming weeks. It is envisaged to eventually extend to ASEAN and the United States.

Workers are busy at producing vehicles at a factory of Dongfeng Honda, a 50:50 joint-venture between Dongfeng Motor Group and Honda Motor Company, Wuhan city, central China's Hubei province, 7 April 2020 (Photo: Fachaoshi/ Reuters).

The initiative prompts some critical questions. What, for example, is the degree of shared ambition? India and Japan have clear economic motivations — including fostering Indian pharmaceutical activity in Japan and Australia, and Japanese motor vehicle production in India. But distinctive strategic concerns also arise from recent border tensions with China in East Ladakh and the Senkaku Islands.

The driving ambition of the United States is no less than to constrain China’s rising technological and strategic prowess. But although Australia may wish to have fewer eggs in the China basket, it will not want to jeopardise crucial trade links with the region’s largest market. And ASEAN members, whose participation is unlikely, are reluctant decouplers as emerging beneficiaries of Chinese offshoring.

Another question is one of principle. Is it possible to designate and foster prospective areas of economic activity — such as semiconductors, aerospace, medical devices, textiles, chemicals and rare earths — without falling into the trap of picking winners? This danger is very real for Japan, having budgeted US$2.2 billion to reconfigure supply chains. The risk is also particularly acute in the framework of the global value chains (GVCs). The temptation will be to reduce import restrictions on intermediate inputs while increasing them on final products, raising the spread of tariffs (tariff dispersion) and hence trade distortion.

A related question is one of practical feasibility. How realistic is it to seek to displace China in GVCs? Some firms, like Toshiba and Komatsu, have shifted production elsewhere in response to US penalty tariffs against China. But this has been at great cost and in defiance of the advantages that China offers with its vast domestic market and workforce, deep supplier networks and reliable infrastructure.

India and the United States might, by virtue of their size, be considered possible alternatives to China within certain supply chains — yet both have policy settings that mitigate against this. India consistently fails to capitalise on its comparative advantage in manufacturing, and the United States imposes self-harming restrictions on the spread of its technology.

The challenges to reconfiguring supply chains are compounded by the fact that they tend to be sticky, given the high fixed costs involved in establishing them. Foxconn, for instance, had to spend US$8.8 billion to build a single plant. Moreover, although the disruption caused by COVID-19 is a principal driver of the pursuit of supply chain restructuring, the hit to firms’ cash flows in the wake of the pandemic makes it harder to meet the costs of reconfiguration.

So while some adjustments will be made to supply chain structures — such as for choke points in medical supplies — a major shift in global trade patterns is a fantasy.

This is not to say that there is no role for the SCRI. But the focus will need to be less on sectoral reconfiguration and picking winners, and more on cooperative efforts to improve overall supply chain functioning. This calls for better harnessing of technology in supply chain management, freer cross-border data flows and greater regulatory coherence in digital trade protocols.

The SCRI may also have a role in energising international bodies. Two examples stand out — instigating efforts by G20 trade ministers to avoid vaccine nationalism and disruption to COVID-19 vaccine supply chains, and promoting action in the World Trade Organization to secure greater Chinese respect for intellectual property rights. Such collective action should be welcomed by Canberra, which does not need another David and Goliath moment.

Still, the overriding requirement in improving global supply chain resilience and effectiveness is better domestic economic policies within the countries engaged in them. These are policies that strengthen both backward and forward linkages.

For prospective SCRI participants, such policies will be country-specific. India must develop simpler labour laws, improve basic infrastructure and promote openness in the digital economy. Japan should foster improvements in productivity via enhanced corporate governance to offset the impact of falling labour inputs. The United States would do well to return to more open policies of technological development, enabling it to ‘run faster’. And Australia, in line with its Department of Foreign Affairs and Trade’s COVID-19 parliamentary inquiry submission, should avoid ‘rigid production systems based on the worst and most infrequent of events’.

In brief, if the SCRI is not to be a slippery slope it will need to focus less on decoupling from China and more on domestic and cooperative action to improve the enabling environment in which supply chains operate.

Ken Heydon is a visiting fellow at the London School of Economics. He is formerly an Australian trade official, deputy director-general of Australia’s Office of National Assessments and senior member of the OECD secretariat. His latest book is The Political Economy of International Trade: Putting Commerce in Context (Polity, 2019).

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The multilateral system: use it, or lose it

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Author: Editorial Board, ANU

Asia’s businesses and households rely on a global system of rules and institutions to do business overseas. That global system is under attack, and Asian governments are yet to mobilise to stop it. Governments in the region weaken the system every time they preference short-term bilateral band-aids over long-term multilateral solutions; from managing US–China tensions to the response to COVID-19. Now is the time for Asian governments to show leadership on the global system and its reform. If they don’t use it, they’ll lose it.

Workers remove the International Monetary Fund (IMF) emblem and nation flags from the podium after a World Bank/IMF ceremony in Hong Kong (Photo: Reuters).

Losing it would be a big problem for the region. Asia relies on the global system for its prosperity. Asian governments rely on the World Trade Organization to settle trade disputes and rely on the global trade rules for the majority of their trade. They rely on the Paris Agreement to address climate change, the WHO to address global health challenges and international law to bolster security. Asia relies on the US-led global financial system for investment, finance and stability.

The global system is vital to Asia’s interests. Yet, one by one, global rules and institutions have been undermined in recent years. The United States has shelved the WTO dispute settlement process, shown contempt for trade rules and trade partners, withdrawn from the Paris Agreement and cut funding to the WHO. The United Kingdom has threatened to breach international law in its Brexit negotiations. China has responded to US flouting trade rules with managed trade and shows disrespect for international human rights law in Hong Kong and in its treatment of Uighurs in Xinjiang. The United States, China, Japan and South Korea have sidelined the multilateral system in their trade disputes. During the COVID-19 crisis the cooperation and solidarity of the global financial crisis has been replaced with confrontation and suspicion.

The multilateral system is far from perfect. It’s fragmented, inefficient and out of date. It’s been 27 years since the WTO concluded a comprehensive trade round. Its trade rules are silent on the digital economy, data flows, subsidies, state-owned enterprises, technology transfer and all the things fuelling tensions today. Attempts to plug the gaps with plurilateral and hundreds of bilateral trade agreements have created a noodle bowl of inefficient and incompatible rules that businesses and households struggle to navigate.

Finance is no better. The IMF is too under-resourced to fend off a widespread shock. Its governance structure is from a bygone era. Countries remain hopelessly reliant on the US dollar, scrambling to build mountains of costly reserves that divert resources away from development programs while hurting US exports and inflaming trade tensions. Attempts to create regional substitutes for the IMF have made crisis responses slower and less effective, often creating a false sense of security.

Whether it’s trade, finance, technology, climate, human rights or geopolitical conflict, the global system has failed to keep up with the growing need for international cooperation. But these deficiencies should inspire reform, not retreat. If out of date trade rules are fuelling tensions, the solution is to update the trade rules, not to let even more trade take place outside the rules. Global problems require global solutions. Yet the response of many countries, most notably the United States, has been to abandon the system, creating more problems and tensions in the process.

Asia’s efforts to protect the global system are not commensurate with its incentives to do so. Asia’s dependency on the global rules-based system means it has a huge stake in protecting it. Too many Asian governments have imprudently favoured short-term bilateral band-aids over long-term multilateral solutions. Responses to COVID-19 have focused on bilateral deals on trade in personal protection equipment, vaccines, borders and financial support rather than promoting regional or global cooperation. Attempts to manage spill-overs from US–China tensions have often been bilateral rather than working with other countries in the region that are in the exact same boat. While Indonesia has shown leadership in pushing for WTO reform in the G20, too few Asian countries have supported it, focusing instead on trying to put out bilateral spot fires and win favour with superpowers.

There is a better way. If Asia wants the multilateral system to survive, it needs to promote it, use it and, most importantly, reform it. US–China tensions, combined with the November US presidential election, makes reform difficult. Working with other countries in the region is the best way to build support. COVID-19 has provided many opportunities for multilateral cooperation: from financial stability, regional travel protocols and the distribution of COVID-19 diagnostic tests and treatments, to food security, coordinated structural reform and advancing Asia’s flagship trade agreement, the Regional Comprehensive Economic Partnership. The G20 Summit in November is an opportunity for Australia, Japan, South Korea and India to work with Indonesia to push for more than just rhetoric on WTO reform.

Asia should identify practical and constructive ways to engage the United States in the region. If the polls are correct and November delivers a President Joe Biden, his emerging agenda provides areas for potential cooperation, including strengthening regional action on climate change, building consensus on principles and rules around infrastructure and investment, strengthening domestic energy systems, promoting regulatory consistency in the digital economy and setting common standards for emerging technologies.

In this week’s lead essay, Chris Legg discusses an emerging part of the multilateral system: the Chinese-inspired Asian Infrastructure Investment Bank (AIIB) which recently marked four-and-a-half years of operations at its 2020 Annual Meeting. The meeting focused on how to build on the AIIB’s success in establishing itself as a respected multilateral financier of quality infrastructure investments, while pivoting in support of its members’ response to COVID-19. The question now is to ensure that the AIIB remains an anchor for consensus in the region.

There are questions to be resolved, warns Legg. How far should the Bank seek to transform itself into a global as opposed to regional lender? Should it extend its operations higher up the project cycle and how should it seek to influence the investment and policy environment? Should the Bank build on some aspects of its COVID-19 response such as lending for social infrastructure? How can it better address the needs of its low-income members without seeking additional grant resources?

Geopolitics are an important subtext to all these questions. A critical challenge is to determine the scope to expand the AIIB’s role in promoting technology-enabled infrastructure, but ‘think about how support for facial recognition technologies by “China’s bank” could be misconstrued’, notes Legg. ‘On all these fronts, aspirations will need to be tempered by good political judgment. Increased geopolitical tensions are not helpful for an expanded agenda’.

As the full impact of COVID-19 is laid bare, two things are certain: governments will be desperate for growth, and a world with a weakened global system will mean a slower recovery for all.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.

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