Tackling climate risk in Asia through AMRO and the NGFS


Author: Giridharan Ramasubramanian, ANU

Climate change will be a source of significant physical and socioeconomic risk in Asia. To manage the transition to a new climate reality, countries and international institutions in the region will need to account for climate risks when engaging in macroeconomic action. The ASEAN+3 Macroeconomic Research Office (AMRO) is particularly well placed to link with the Network for Greening the Financial System (NGFS) to advance sustainable finance in East Asia.

Abandoned houses in a flooded area which used to be the paddy rice fields are seen in Soc Trang province, Vietnam, 27 April 2021 (Photo: Reuters/Thanh Hue).

AMRO is a regional macroeconomic surveillance organisation that contributes to securing macroeconomic and financial stability in the ASEAN+3 region. It provides regional surveillance capabilities to members of the Chiang Mai Initiative Multilateralization (CMIM) — ASEAN’s 10 member states, and China, Japan and South Korea.

AMRO already engages in the analysis of short-term risks, including the impact of pandemics on the macroeconomic stability of East Asia. But it does not yet engage in systematic analyses of the physical and transition risks associated with the impacts of climate change.

AMRO should rectify this by incorporating the NGFS climate framework into its assessment of financial risk in Asia and the macroeconomic stability of East Asian countries. By exploring the economic impacts of various climate scenarios, the NGFS provides a common toolkit that AMRO could include in its analyses of long-term climate risk.

The NGFS is a coalition of the willing comprised of a network of 89 central banks and financial supervisors. Its purpose is to enhance the financial system’s role in managing risks and mobilising capital for green and low-carbon investments to ensure environmentally sustainable development. It currently has participants from several countries in East Asia. To expand its role and ensure that it is a significant player in Asia, the NGFS should establish institutional linkages with regional specialist organisations such as AMRO.

AMRO should consider joining NGFS as an observer to have a better sense of the cutting-edge thinking and practices developed there. The Asian Development Bank (ADB) is already an observer. Since AMRO maintains close formal and informal relations with the ADB, it will be well served to support the ADB in providing an East Asian regional perspective in NGFS discussions.

With the collective support of ASEAN+3 member countries, AMRO could sign a memorandum of understanding (MoU) with the NGFS to cement its position within international sustainable finance architecture. AMRO has already signed MoUs to institutionalise joint collaboration with the IMF, the European Stability Mechanism and other international financial institutions. By expanding the range of partnerships, AMRO can bolster its status in East Asia.

AMRO should also undertake greater thematic research into the short-term and long-term risks of climate change by studying its impact on the financial solvency of ASEAN+3 countries. This can create specific case studies of the impact of climate change on different countries. AMRO can also engage in comparative risk analysis of ASEAN+3 countries, providing a window into how they can tap into CMIM funds as the number of climate-related disasters increases in the future. This can be done by harnessing internal staff capabilities or in partnership with the ADB.

AMRO could then provide the NGFS with the deep country specific and region-specific analysis that it currently lacks to refine its conceptual framework. This will allow the NGFS to better apply this framework in other countries and regions.

Through these potential linkages, AMRO can also provide additional space for the central banks of the remaining ASEAN+3 countries — Brunei, Laos, Myanmar and Vietnam — to make a more informed judgement on joining the NGFS. By engaging with the NGFS and individual central banks, AMRO can enhance ASEAN countries’ familiarity with the relevance of climate risk in their countries and amplify East Asian voices in the NGFS. These countries can play a greater role in ongoing NGFS workstreams to better prepare East Asian countries to deal with the inevitable financial impacts of climate change.

By collaborating with NGFS, AMRO can provide data and research material that ASEAN+3 countries could use to expand the scope of the CMIM to respond to climate risks. Scholars have commented on the proliferation and fragmentation of financial swap lines in East Asia, potentially undermining the centrality of the CMIM. To ensure that the CMIM remains an important source of liquidity for East Asian countries, it needs to be responsive to future financial risks, including climate change. This will ensure that ASEAN+3 countries do not depend solely on IMF Article IV consultations, which recently started integrating climate analyses in annual country economic assessments.

Since its inception, AMRO has evolved to become more institutionalised. However, one challenge faced by AMRO is that its authority is both derived from and constrained by ASEAN+3 member countries. Regional institutions in the Asia Pacific have often established formal and informal strategic connections with other institutions to expand their operational space and enhance their influence.

AMRO should carefully design institutional linkages with regional and global financial institutions to strengthen its role in the region and ensure that it is at the forefront of supporting Asian countries in their transition to net-zero economies.

Giridharan Ramasubramanian is a PhD candidate at the Coral Bell School of Asia-Pacific Affairs, The Australian National University.

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Leveraging longevity and tackling intergenerational inequality in Japan


Author: Sumio Saruyama, JCER

Japan has the world’s most aged population. As the number of elderly people increases, the benefits the government funds, such as pensions, medical care and nursing care, have been swelling. Since these benefits are mainly financed by taxes and social insurance premiums paid by the working-age population, the burden will be heavier on future generations as Japan continues to age.

Elderly people stroll at a shopping street in Tokyo's Sugamo district on the Respect for the Aged Day, 21 September 2020 (Photo: Yoshio Tsunoda/AFLO).

‘Generational accounting’ measures the balance between government services (including social security) received and taxes and social insurance premiums paid by each generation. It is estimated that in 2010, the net burden of the 0-year-old generation will be 25 per cent heavier than that of the 90-year-old generation.

In Japan, life expectancy is increasing in parallel with an increase in the elderly population, but there is a bright side to longevity.

There is of course a utility to living longer. In Japan, the median life expectancy of those born in 1980 is 4.2 years longer than the population born in 1950. Those born in 2010 are expected to live 7.4 years longer. If we evaluate the economic welfare of each generation in terms of total lifetime consumption based on actual age-specific consumption data, the economic welfare of those born in 1980 will increase by 9–10 per cent and the economic welfare of those born in 2010 will increase by 9–13 per cent, thanks to longer life expectancy.

There is also a benefit to working for a longer time. Currently after age 65, people start to receive public pensions. The number of people who stop working increases with age. If people worked until the age of 75, paying taxes and social insurance premiums, the primary fiscal balance of Japan’s national and local governments would improve by 6–7 per cent of GDP. If this money is used to reduce the burden on the younger generation, they would be able to enjoy more consumption and the disadvantages facing them under the current social and employment structure would disappear.

If we redefine the ‘elderly’ as those aged 75 years or older, their share of the population would remain unchanged from 27 per cent in 2018 (the share of those 65 and older) to 27 per cent in 2060 (the share of those 75 and older).

The question is whether working until 75 is a realistic possibility. Challenges include the health of workers and where they would work.

First, on the health front, working until 75 is possible if Japan sets the year 2060 as the target year for this change. As life expectancy increases, healthy life expectancy is also expected to increase. By 2060, half of the Japanese population will be able to stay healthy until the age of 80, with the term healthy here referring to having no problems in daily life functioning.

Second, questions remain about whether the elderly will be able to secure a place to work. Japan is still in the process of establishing continuous employment until the age of 65, which will become mandatory in 2025. From April 2021, companies will be obligated to ‘make efforts’ to provide continuous employment until the age of 70.

But the situation will not change just because of this call to action. It can be troublesome for companies to continue hiring the elderly and labour costs will increase. Based on trends in Japan to date, it is estimated that by 2060 continuous employment will only be widely established up to the age of 70 and will not reach the age of 75. Providing recurrent education for middle-aged and older workers to update their skills will be important in ensuring that companies are willing to hire older workers.

It is also politically difficult to raise the starting age for pension payments. Politicians are reluctant to adopt policies that reduce benefits for the elderly if they are opposed by the elderly who have a high voter turnout.

As life expectancy increases, new policy efforts are needed to increase the age of retirement. In line with this, steady and continuous efforts to transform the economy and society will also be needed.

Japan is not the only country with an ageing population. By 2060, the percentage of people aged 65 and over will be 41 per cent in South Korea, 30 per cent in China and 25 per cent in Vietnam. If Japan gets its ageing policy right, the time will soon come when its neighbours seek leadership as they face their own ageing populations.

Sumio Saruyama is Lead Economist at the Japan Center for Economic Research (JCER).

This article is drawn from Sumio Saruyama, Saeko Maeda, Ryo Hasumi and Kazuki Kuroiwa, Intergenerational Equity Under Increasing Longevity, in Adam Triggs and Shujiro Urata (eds), Achieving Inclusive Growth in the Asia Pacific (PAFTAD 2020, ANU Press).

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Globalisation isn’t losing steam in China


Author: Song Hong, CASS

Why is China continuing to liberalise trade and investment as doubts and opposition to globalisation rise? While the opposite may be true in some developed countries, globalisation optimises China’s economic structure and improves efficiency. China’s opening-up and development is also contributing significantly to Asian regional integration.

Tesla China-made Model 3 vehicles are seen during a delivery event at its factory in Shanghai, China, 7 January 2020 (Photo: Reuters/Aly Song).

China has sought further liberalisation in investment and trade over the past few years, even during the COVID-19 pandemic and through the US–China trade war. During the Trump administration, China removed ownership, regional and minimum benchmark restrictions on foreign direct investment (FDI) in the financial sector, leading to a boom in foreign investment. China continued to reduce the length of its negative investment list — which designates sectors where foreign investment is prohibited or restricted — from over 100 items to 33 items. It also unilaterally reduced its tariff rate from 9.8 per cent to 7.5 per cent.

In 2020, China signed the Regional Comprehensive Economic Partnership trade agreement with 15 countries and the Comprehensive Agreement on Investment with the European Union. More FTAs are on the horizon. According to Beijing’s latest Five-Year Plan and its Long-Range Objectives Through the Year 2035 proposal, China will actively pursue the trilateral free trade area negotiation with South Korea and Japan; apply to join the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership; and continue to vigorously promote Belt and Road Initiative (BRI) construction projects. So far, China has signed 205 cooperation agreements with 171 countries and international organisations through the BRI.

Globalisation in some developed countries, especially the United States and the United Kingdom, is said to have gone too far and led to losses of efficiency. If only trade is liberalised efficiency will improve, and benefits flow to all. But if investment liberalisation is carried out at the same time, certain industries with comparative advantages will move out, and that can lead to a loss of high value-added products, services and high-income jobs. These and other consequences, if not attended to, include uneven income distribution and losses of welfare. This may be called a globalisation trap that needs national policy attention.

On the other hand, if a developing country actively attracts foreign investment, it may form a ‘super mix’ — that is, a mix of foreign factors such as advanced foreign technology, capital and open international markets, together with domestic factors such as cheap workers, facilities and networks. This ‘super mix’ creates new comparative advantages and can also set up a globally competitive industry in a very short period of time. It can reshape international competition patterns in almost every sector and market.

This is exactly what happened in China over the past 40 years. The country’s first superstar exporters were engaged in labour-intensive goods manufacturing. Most of them belonged to the processing trade with components imported, and were actively involved with foreign-invested firms in the 1980s and 1990s. Domestic private firms then grew quickly and became the major players in Chinese exporting. In 2020, these firms accounted for just over 54 per cent of China’s exports, compared with about 36 per cent from foreign-invested firms.

Recently, superstar exporters have targeted intermediate and high-tech goods. Although a lot of these export products are designed by foreign firms, the manufacturing or assembly lines are in China. This provides Chinese enterprises with a chance to catch up and potentially replace foreign firms.

In recent years, some industries in China have been moved out to nearby countries like Vietnam, Bangladesh and Cambodia. These moves represent efficiency-enhancing upgrades, providing opportunities for China to enter more efficient industries as inefficient industries and lower-level jobs move out.

This phenomenon is a source of Chinese export competitiveness. It could be argued that the stellar performance of Chinese exports is not the result of unfair practices or theft of intellectual property rights. Rather, in addition to the mix of factors mentioned above, China also has other advantages such as a huge domestic market, high-quality labour, extensive production-supply networks and substantial research and development investment.

China’s continued opening-up will reshape worldwide trade and economic patterns in three ways.

First, China will transfer more labour-intensive industries to neighbouring and nearby countries, which will drive regional economic development and promote the expansion of regional integration in Asia. Investment in manufacturing will also deepen BRI cooperation with many of these countries.

Second, China is trying to attract more foreign investment in high-tech industries, which will deepen and expand Asian regional production networks. In 2020, China became the largest FDI destination in the world, with most new investment going into services.

Third, China provides a huge market for development and integration in other Asian countries. In decades past, East Asian economies such as Japan, South Korea, Taiwan, Singapore and Hong Kong adopted export-oriented strategies and were highly dependent on the US market. Trade volumes from East Asian economies account for about one-third of the US market, which makes East Asian integration vulnerable with limited intra-regional trade flows.

With China’s economic rise, other markets in Asia will expand and the proportion of intra-regional trade will increase. Meanwhile, dependence on external markets will decline. These factors will enable Asia to become an even larger production and consumption centre and further accelerate the eastward shift of the world’s economy.

Song Hong is Professor, Senior Fellow and Deputy Director-General at the Institute of American Studies, Chinese Academy of Social Sciences (CASS).

An extended version of this article appears in the most recent edition of East Asia Forum Quarterly, ‘Reinventing global trade’, Vol. 13, No 2.


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South Korea’s diplomatic balancing act with Russia


Author: Anthony V Rinna, Sino-NK

Russia is reengaging with the Korean Peninsula after its normally active diplomacy in the area came to a screeching halt in 2020, and South Korea is the primary object of attention amid North Korea’s self-imposed isolation. But as Russia–US tensions continue, South Korea faces difficult choices between competing strategies to deal with North Korea.

Russian Foreign Minister Sergei Lavrov speaks during a joint announcement with South Korean Foreign Minister Chung Eui-yong at the Foreign Ministry in Seoul, South Korea, 25 March 2021 (Photo: Ahn Young-joon/Pool via Reuters).

Russia’s policies toward the Korean security crisis are increasingly aligning with those of China, but its relations with Seoul still deserve their own consideration. Russia’s relations with South Korea may not be as strong as Beijing’s, but then Russia doesn’t face nearly the same degree of mistrust. When it comes to North Korea, South Korea will likely find itself having to navigate between a pressure-based policy from Washington and a more dialogue-oriented approach from Moscow. At the heart of the divergence in these two methods will be the role of sanctions.

The fact that Russia’s outreach comes amid relentless hand-wringing over South Korea’s position between China and the United States is raising concerns that Moscow’s pursuit of its interests on the Korean Peninsula could place extra stress on Seoul’s already-tenuous diplomatic position. But compared with China–US tensions, the chill in ties between Russia and the United States poses a significantly lesser challenge to South Korea. South Korea enjoys greater leverage in Russia than in China — as evidenced by Moscow’s comparatively mild behaviour during the THAAD crisis — and the United States also considers Russia to be a less formidable player in the Indo-Pacific.

Still, the challenges Russia poses to US–South Korea relations are hardly negligible.

A recent succession of visits from high-ranking Russian officials to Seoul underscores the Kremlin’s diplomatic offensive. In late March 2021, Russian foreign minister Sergei Lavrov visited Seoul for talks with his counterpart Chung Eui-yong. Lavrov lamented that COVID-19 largely froze contacts between South Korea and Russia and expressed hope for a revival of dialogue over North Korean denuclearisation involving members of the former Six-Party Talks. The two senior diplomats also discussed the possibility of Russian President Vladimir Putin making a state visit to Seoul once the public health situation permits, and Chung praised Russia’s role in the Korean Peninsula peace process.

Following Lavrov’s visit, the Russian and South Korean vice defence ministers also met in Seoul, where they inked an agreement on bilateral defence cooperation and resolved to collaborate on denuclearising the Korean Peninsula.

The recent focus on security balances out the heavy slant toward economics in the Russia–South Korea relationship, which has recently been driven by a confluence of Russia’s ‘turn to the East’ and South Korea’s New Northern Policy. Indeed, a focus on security is appropriate given that this series of high-level meetings roughly coincided with North Korea’s most recent missile tests. The Kremlin downplayed the threat posed by those tests and stated that additional sanctions on North Korea would be counterproductive, despite some concerns that technological flaws in North Korean projectiles could cause them to land in Russian territory.

Opposition to sanctions has been a staple of Russian diplomacy toward the Korean Peninsula since 2017, when the United Nations applied punitive economic measures on the North in response to a series of provocations. Citing a lack of a major weapons test since then, Moscow argues that punitive economic measures are no longer effective in pursuit of North Korean denuclearisation. In Russia’s current view, sanctions exacerbate the poor humanitarian situation in North Korea and deprive it of opportunities to advance its economic interests across the Korean Peninsula, while also contributing to the lack of trust between North Korea and the United States.

Throughout 2020, Russia consistently doubled-down on its calls for lifting sanctions against North Korea, blasting the United States’ ‘maximum pressure’ campaign as ineffective . Moscow’s push for sanctions relief no doubt stems in part from the fact that it perceives the United States to be deliberately undermining its interests on the Korean Peninsula.

Given that Russia has a strong interest in pursuing collaborative economic projects involving both North and South Korea, particularly under South Korea’s New Northern Policy, the biggest challenge Seoul faces regarding Russia–US tensions will be responding to Russian diplomatic overtures that involve projects and initiatives that run counter to the current sanctions regime.

Senior Russian officials, for their part, express doubt that the United States would be favourable toward South Korea engaging in trilateral cooperation with North Korea and Russia. As South Korea gears up for presidential elections in 2022, it remains to be seen whether Moon Jae-in’s successor will maintain the New Northern Policy, launch a new analogous project, or abandon prospects of such trilateral cooperation altogether.

If Seoul maintains that Russia can play a helpful role in the Korean peace process through economic collaboration, then Russia’s opposition to sanctions — and the United States’ insistence on maintaining them — will elevate tensions within South Korea’s own foreign policy decision-making. This may not be nearly as pressing an issue as Seoul’s increasingly untenable ‘strategic ambiguity’ between China and the United States, but it is an issue that South Korea will likely be forced to contend with.

Anthony V Rinna is a senior editor and specialist on Russian foreign policy in East Asia for the Sino-NK research group.

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Can China’s commercial space sector achieve lift off?


Author: R Lincoln Hines, Cornell University

China announced in 2014 that it would allow private investment into its traditionally state-dominated space sector. This decision led to rapid proliferation of Chinese space companies — creating one of the fastest growing commercial space sectors on the planet. Yet, despite the explosive growth of China’s commercial space sector, space companies there face daunting challenges both domestically and globally.

Zhuque-1, a privately developed Chinese carrier rocket by Beijing-based Landspace, lifts off from the launch pad at Jiuquan Satellite Launch Centre, Gansu province, China, 27 October 2018 (Photo: Reuters/Stringer).

China’s space industry is dominated by two state-owned enterprises (SOEs): the China Aerospace Science and Industry Corporation (CASIC) and the China Aerospace Science and Technology Corporation (CASC). These massive SOEs and their subsidiaries have allowed China to send humans into outer space and a probe to the far side of the Moon. Like in the United States, the emergence of commercial space companies — those which seek profits rather than simply implementing government goals — is changing the landscape of China’s space industry.

By focussing on private investment, commercial space companies may be more agile than SOEs in navigating market pressures, and thus produce more cost-effective and innovative capabilities. For example, in the United States, SpaceX has pioneered reusable rocket technology which could reduce costs for spaceflight.

But critics claim the opposite is happening in China. Propped up by the state, Chinese companies are insulated from market pressures. This protection might even allow Chinese space companies to provide more affordable launches, satellites and imaging services than their genuinely private American counterparts.

But the reality is more complex than either of these arguments suggest. China’s commercial space sector consists of state-owned, mixed-ownership and private companies. Many of these companies are also supported by provincial governments rather than Beijing, which provides for considerable autonomy in their operations.

China’s commercial space companies play a largely complementary role to government-sponsored activity. Whereas SOEs are tasked with high-profile projects such as landing on the Moon and Mars, commercial companies fill niche gaps overlooked by state players. The majority of Chinese space companies focus on building satellites and their components, including microsatellites and small satellite constellations in low Earth orbit. Exceptions include the firms Landspace, iSpace and OneSpace, which focus on small launch vehicles.

Yet, expanding beyond this marginal role in China’s overall space ecosystem may bring China’s private space companies into competition with the SOEs that currently dominate the industry. Insulated from market pressures, these SOEs tilt the playing field to their advantage over commercial space companies. And although it may be in China’s economic interests to increase competition domestically, it is hard to imagine the Chinese Communist Party (CCP) abandoning its national champions, which have allowed it to accrue prestige with domestic audiences.

Although some analysts worry about Chinese space companies receiving unfair government assistance, the government may actually not have done enough to promote the country’s space companies. Unlike other major space powers, China does not have a national space law. Without one, commercial space companies and industry investors alike are unclear about their legal rights and restrictions and uncertain about the market. It is perhaps for these reasons that Chinese companies are less bullish about their prospects than pundits. Chinese companies have far less confidence about the trajectory of China’s commercial space industry than outside observers.

Even greater constraints lie abroad. Regardless of how independent Chinese commercial space companies may be from the central government, they have an inherent branding problem. There is a widespread perception in the United States among commercial space actors that Chinese space companies receive nearly unlimited access to central government funding. This perception that Chinese space companies are simply an extension of the state may repel potential international customers wary of interacting with the CCP or the People’s Liberation Army.

This creates problems for Chinese space companies seeking to expand their operations outside of Chinese borders. While countries with close geopolitical ties to China may readily welcome business opportunities with Chinese space companies, countries with more adversarial relations with China may be reluctant to engage with its space companies no matter the price. For Chinese space companies, the looming presence of China’s government constrains its global market potential. More concretely, export controls and other restrictions by the United States and its allies and partners place hard limits on China’s abilities to import space technologies and expand into international markets.

Still, this may only be a short-term constraint on China’s commercial space sector. In the long term, it may well benefit from focusing, by necessity, on indigenous innovation.

While it is too soon to determine the trajectory of China’s complex and evolving commercial space sector, its strengths are often exaggerated and its limitations ignored. Chinese space companies have a long way to go before they can compete with their American counterparts. Exaggerated threats about China’s commercial space sector will only further strain an increasingly tense US–China relationship — both on Earth and in space.

R Lincoln Hines has a PhD in Government from Cornell University.

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Japan’s Senkaku public awareness campaign at risk of backfiring


Author: Toshiya Takahashi, Shoin University

The Japanese policy debate on the Senkaku/Diaoyu islands is heating up. China’s new Coast Guard Law, passed in January 2021, stimulated nationalistic reactions in Japan. Hinting at the possibility of using the Japan Self-Defense Forces, the National Defense Division of the ruling Liberal Democratic Party (LDP) proposed a revision of the Japan Coast Guard (JCG) Law in March 2021 to enable the JCG to shoot intruders who attempt to land on the islands.

A Japan Coast Guard boat and vessel sail past one of the disputed Senkaku/Diaoyu islands, 18 August 2013 (Photo: Reuters/Ruairidh Villar).

Pro-defence lawmakers in the LDP and defence experts want to ‘tame’ public opinion and enable further para-military and military measures against the increasing presence of the China Coast Guard (CCG). But the Japanese public is somewhat hesitant and there are signs of caution even in the government.

The Japan–China relationship has improved since 2017 but the issue of the Senkaku/Diaoyu islands — where both countries continue to claim sovereignty — has seen no sign of mutual concession. While Japan maintains de facto administration of the islands, it has avoided constructing administrative facilities and stationing public officers. It maintains only a small lighthouse, originally built by a Japanese activist group, and deploys JCG vessels to ward off foreign intrusions in the territorial waters.

This so-called ‘weak’ administration of the Senkaku/Diaoyu islands derives from a tacit understanding between Japan and China. While the Japanese government denies it today, there was speculation during and after the 1972 normalisation of diplomatic relations that Japan and China agreed to shelve the issue for the future. There was an implicit consensus to maintain the status quo of the islands in order to avoid escalating tensions.

The Japanese government purchase of three of the islands from a private Japanese owner in 2012 — done to prevent nationalist Tokyo Governor Shintaro Ishihara from buying the islands himself — changed the situation. Since then, the presence of the CCG around the islands has strengthened and para-military confrontations between the two countries have become routine.

Though the Senkaku/Diaoyu issue is a territorial dispute, the Japanese government has presented to the public that Japan’s sovereignty over the Senkaku islands is uncontested. While China points to records of the islands in its historical documents, Japan asserts its discovery in 1884 as terra nullius. Under this official view, the Japanese public believes that Chinese claims on the islands are provocative and the CCG presence in the territorial seas is illegal. Japanese political elites from the right and left are united in this belief.

From the 2010s, the LDP government has focussed on raising public awareness of Japan’s territorial integrity and security. Japan has two other territorial disputes, the Northern Territories and Takeshima, but these islands are occupied by Russia and South Korea, respectively. The Senkaku/Diaoyu islands are the only ones that Japan controls. For the LDP, which has a conservative supporter base, any concession over the islands is not a policy option.

The second Abe government implemented this LDP stance as policy. The defence of Japanese territories became a sub-title in the preface of Japan’s 2013 defence white paper. In 2013, Japan created the Office of Policy Planning and Coordination on Territory and Sovereignty in the Cabinet Secretariat. It aims to strengthen public awareness of Japan’s territorial integrity and promote Japan’s official view on the three territorial disputes.

In line with the government view, Japanese school textbooks of civic studies, geography and history are now required to include references to the three ‘territories’. After curriculum guidelines were revised in 2017–18, publishers revised textbooks to include phrases such as ‘territory inherent in Japan’, ‘Northern Territories illegally occupied by Russia’ and ‘no territorial dispute over the Senkaku islands’.

While this ‘policy of public awareness’ may appeal to conservative Japanese voters, the resolution of territorial disputes requires mutual concessions between contending countries. The policy may only harden the public’s attitude to territorial issues and make mutual concessions more difficult.

But Japanese interest in the Senkaku/Diaoyu islands has not necessarily increased, especially among younger generations. According to Japan’s Cabinet Office, 74.5 per cent of those surveyed had a strong or moderate interest in the Senkaku in 2014, but this percentage dropped to 62.2 in 2017, then rose to 65.9 in 2020. Respondents below the age of 39 had the least interest because they considered the islands unrelated to their life.

Raising awareness of Japan’s territorial integrity might be important for defence, but territorial disputes need a different approach. The national government should consider whether its policy of public awareness will escalate territorial disputes. There is a risk that the public might come to view territorial disputes as zero-sum games and even push for military confrontation.

While the waters around Senkaku/Diaoyu may have strategic importance, the islands themselves are small and barren. They have been excessively securitised by both China and Japan as a nationalistic symbol. To resolve the territorial dispute peacefully, a broader bargain with China over the East China Sea is needed. Central to such a bargain is the idea of common interest, which was considered in the joint agreement between the two countries on the Shirakaba gas field in 2008.

An excessive focus on Japan’s territorial integrity will bear little fruit. A willingness to share the sea is needed for a sustainable diplomatic solution.

Toshiya Takahashi is Associate Professor of International Relations at Shoin University.

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Moscow’s interests in Myanmar are fuelled by rivalry with the West


Author: Alexander Bukh, Victoria University of Wellington

On 27 March, Myanmar’s junta held a military parade in Naypyidaw to celebrate Armed Forces Day amid nationwide anti-junta protests and killings of unarmed protesters. Representatives from several countries attended the parade, but it was the Russian delegation that drew international attention and criticism due to the high profile of its members.

Demonstrators protest in front of Russian embassy against the military coup and demand for the release of elected leader Aung San Suu Kyi, in Yangon, Myanmar, 12 February, 2021 (Photo: Reuters/Stringer).

Russia’s Deputy Minister of Defence Alexander Fomin headed the delegation which also included the Chairman of the Public Council at the Ministry of Defence, Pavel Gusev. This gesture did not go unnoticed by the junta and prompted an expression of ‘profound gratitude’ from its leader, General Min Aung Hlaing.

What explains the dispatch of such a high-profile delegation amid international criticism of the junta? Russia’s muted response to the coup should be understood in the context of Russia’s trade relations with Myanmar, the Kremlin’s ideology and the current state of Russia’s relations with the West.

Russia’s cordial relations with Myanmar go back to the Cold War years, but until the 2000s the relationship was largely without content. Bilateral trade started to gain momentum from 2014 and by 2019 Russian exports to Myanmar grew more than fivefold, from less than US$47 million in 2014 to over US$266 million in 2019.

But these figures should be put in perspective. For example, in 2019 Russia’s exports to Vietnam — its closest ally and most important trading partner in Southeast Asia — stood at a hefty US$1.4 billion and exports to Thailand at US$614 million. Myanmar ranks only 83rd among Russia’s trading partners and its exports to Myanmar account for a mere 0.07 per cent of Russia’s exports.

Still, the importance of Myanmar as an export destination lies in the nature of the exports rather than their overall scale. According to Russia’s trade data, ‘secret code’ exports (arms, military-related equipment and certain nuclear materials) to Myanmar grew from less than US$8 million in 2014 to over US$115 million in 2020 and came to account for 51 per cent of all exports.

So while Myanmar still does not rank very highly on the list of Russia’s arms export destinations, the relationship is gaining momentum with a new deal signed just a week before the coup. The deal included supply of military drones — the first of such deals for Russia — which is expected to boost interest in Russian drones in other countries as well.

Myanmar’s wariness of overreliance on China, its main trading partner and arms supplier — coupled with new international sanctions — may also increase Russia’s share of Myanmar’s arms imports if the junta maintains its hold on power. Russia saw its share in the highly competitive international arms market decline over the last five years, so building upon its relations with Naypyidaw is important to boost its arms trade.

Russia’s economic interests in Myanmar are not limited to arms exports. Russia’s exports to Myanmar include machinery and industrial equipment, while its imports mostly consist of textiles and agricultural products. Since 2013, Russia’s de facto state-owned enterprise Bashneft has been involved in oil exploration in Myanmar and the two countries recently boosted cooperation in the field of nuclear energy. This cooperation could potentially revive a decades old plan for the construction of a nuclear reactor in Myanmar by Rosatom, Russia’s state-owned nuclear energy corporation.

Myanmar’s importance for Russia can also be traced back to the principle of non-interference and an emphasis on sovereignty. Strong opposition to the (perceived or real) attempts by the West to export democracy under the guise of ‘colour revolutions’ has become one of the main tenets of Russian President Vladimir Putin’s ideology.

Russia has not condoned the coup and supported the UN Security Council statement that condemned violence against peaceful protesters. But in line with its policy of non-interference, Moscow also blocked a stronger condemnation of the coup and opposed sanctions against the junta.

Another ideological factor potentially motivating the Russian presence at the Armed Forces Day parade is the Soviet victory in the Second World War — a key domestic political tool for the Kremlin used to mobilise patriotism, criticise the West and justify Russia’s role as a major power in international affairs. In 2020, General Min Aung Hlaing, at that time the commander-in-chief of Myanmar’s Armed Forces, was one of a handful of high-ranking foreign guests attending the Victory Day parade. Carefully orchestrated by the Kremlin, the parade plays an important part in this ideological construct.

So Russia’s high-profile delegation could be interpreted as a gesture aimed not only at emphasising the importance of bilateral relations, but also at expressing personal gratitude to the junta’s chief for his attendance in Moscow a year earlier. Putin’s loyalty to those he considers true friends is well-known.

A decade or so ago, the need for stable relations with the West may have outweighed all these factors in Moscow’s response to the coup. But today, Russia’s foreign policy is defined mostly by the state of its relations with the United States and the European Union, which are at their lowest point since the Cold War.

In the context of this broader rivalry between Russia and the West, Russia is seeking to establish closer ties with various authoritarian regimes around the world. While further deepening relations with the junta in Myanmar could potentially strain Russia’s relations with ASEAN and China, Moscow seems to see good relations with the junta as an asset, rather than a liability.

Alexander Bukh is Associate Professor (Reader) in International Relations at Victoria University of Wellington.

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The international economics of self-harm


Author: Carlos Kuriyama, APEC Secretariat

Implementing or threatening another territory with economic sanctions in order to achieve a nation’s political end is an age-old tactic. In ancient and medieval Europe, trade blockades were put in place to obtain commercial privileges or to compel opponents to surrender. Today, with globalisation, territories are more connected and interdependent, and the mechanisms of economic coercion are evolving in these new circumstances.

A view of vessels in the Singapore Strait, 3 April 2019 (Photo: Reuters/Henning Gloystein).

Common coercive tools in trade include import tariffs, trade remedies and export prohibitions or restrictions affecting specific goods from a particular source or origin. Other methods include cutting foreign aid, freezing financial assets, removing banks from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) clearance system, rejecting regulatory approvals and the boycott of particular products.

Yet, in today’s highly interdependent global economy, most of these coercive actions have proven ineffective. For example, in negotiating the US–China Phase One trade deal, the Trump administration failed to compel China to increase purchases of select manufacturing, agricultural, energy products and services from the United States as initially agreed. Chad Bown’s recent study shows that US exports to China of goods included in that deal totalled US$94 billion by the end of 2020, an increase of 13 per cent over 2019 and representing only 59 per cent of the commitment.

Economic coercion also impacts those who aim to coerce. US firms and consumers have paid for the tariff hikes on Chinese products through the increased price of imported consumer goods and the higher cost of components and equipment imported from China to produce goods and provide services in the United States. Before the COVID-19 pandemic, US exports of goods to China decreased by 11.2 per cent in 2019, due to retaliatory tariffs imposed by China after the Trump administration increased tariffs against a range of Chinese products. This retaliation affected workers in US firms that suddenly faced unfavourable terms on which to compete in the Chinese market.

The phase one deal also impacted third parties negatively, as China began importing more from the United States at the expense of others. In 2019, for example, China increased its imports of US soybeans by 77 per cent (from US$7.9 billion to US$14.2 billion) but reduced soybean imports from Argentina by 38 per cent (from US$3 billion to US$1.8 billion).

Economic coercion complicates the restoration of relationships based on mutual trust. It intensifies nationalism and generates antipathy towards the coercing state among vast segments of the population in the state that’s targeted.

In 2019, Japan implemented tighter export controls on hydrogen fluoride, fluorinated polyimide and photoresists — three key chemicals for semiconductor production — to South Korea, claiming that those chemicals could be used for military purposes if on-sold to hostile third parties.

In South Korea these measures were considered as a retaliation against a Supreme Court decision that ordered particular Japanese firms to compensate Koreans who were used as forced labour during the Second World War. Japan’s export controls prompted immediate consumer boycotts in Korea against Japanese products, resulting in the withdrawal of automaker Nissan from the Korean market. South Korea retaliated with Japan’s removal from a ‘white list’ of preferred trade partners.

The Japan–South Korea export controls have affected IT product supply chains, as firms in South Korea were largely importing those chemicals from Japan. It is unsurprising that Korean chaebols have been looking for strategies to partially decouple from Japan, such as identifying other import sources and investing in the domestic production of these chemicals that are critical to semiconductor production.

None of the measures implemented during the Japan–South Korea trade row have been effective at forcing the other party to change its stance. On the contrary, the pressure to decouple frustrated established synergies based on comparative advantages and imposed higher costs of doing business.

Similarly, recent Chinese actions against Australian exports have not been effective at forcing Australia to reverse its decisions to block Chinese foreign investment deals in strategic sectors — including the ban on Huawei to provide equipment for an Australian 5G network and its call for an independent World Health Organization inquiry about the origin of COVID-19.

Chinese tariffs and other trade restrictions have affected Australian firms by diverting purchases to other suppliers. China’s imposition of anti-dumping measures and countervailing duties on Australian barley reduced Australia’s barley exports to China — its main foreign market — from US$410 million to US$330 million between 2019 and 2020.

A consequence of these trade-related actions is the rapid deterioration of China’s reputation in Australia and around the world. A 2020 Pew Research Center survey shows that 81 per cent of Australian respondents had negative views of China, up from 32 per cent in 2017. This survey suggests that China’s actions are counterproductive in influencing Australian groups to lobby for policy changes that meet China’s political interests.

Working together is vital in the era of globalisation, as interdependence is high and the costs of economic coercion are two-way and have complex effects on third parties. Building long-term trust-based relationships among governments is an important step towards reducing the use of economic coercion and resolving disputes in an amicable manner.

Carlos Kuriyama is a Senior Analyst at the APEC Secretariat’s Policy Support Unit.

An extended version of this article appears in the most recent edition of East Asia Forum Quarterly, ‘Reinventing global trade’, Vol. 13, No 2.

The views expressed in this article are the author’s own and do not represent the views of the APEC Secretariat or its members.

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Asia needs to push back against the lurch to self-reliance


Author: Editorial Board, ANU

In a world where confrontational geopolitics and the concentration of production of crucial industrial components like semiconductors and medical supplies in particular locations is high, the call for self-reliance has become a political stampede. Politicians and populists around the world have captured nativist fears about reliance on others for everything from food to COVID-19 vaccines to urge that production be brought home. The danger of a lurch towards global autarky is real.

Shipping containers stand at a port in Bangkok, 30 March 2015 (Photo: Reuters/Athit Perawongmetha).

The case for government interference in the efficient operation of global supply chains is minimal. Producing masks, hand sanitisers and ventilators to top-up imports during a global shortage makes sense. Restricting exports of those supplies to other countries, as many have done and continue to do, makes no sense at all if critical domestic needs have been met. Shortages will not be filled by imports when others are also restricting exports.

The increasingly protectionist Indian Prime Minister Narendra Modi’s call to be ‘vocal for local’, at a time when his country needs all the international help that it can muster; the security review of supply chains by the Biden administration; the Australian government’s push for supply chain ‘diversification’; the Japanese government’s subsidies to encourage supply-chain onshoring; the EU’s declaration that it will double chipmaking capacity and achieve self-sufficiency in battery making; China’s ‘dual circulation’ strategy to insulate the domestic economy: all threaten an open, prosperous and secure international economy.

Nowhere is the damage of the self-sufficiency mindset to the economy and health security seen more starkly than in the approach to COVID-19 vaccination strategies. Restrictions on vaccine exports from the United States and the European Union have withheld vaccine supplies from millions whose vaccination would have helped secure global health outcomes, while vaccines have gone unused. Vaccine patent protectionism denies billions of people protection against COVID-19 and leaves the world vulnerable to virus mutation and continuing health risks.

In Australia, the mindless quest for self-sufficiency in vaccine production has delayed and led to a shambolic vaccination rollout. This was, first, a consequence of support for the development of a (failed) local vaccine program and, second, the opting for an inferior vaccine, importantly because it could be locally produced, while technologically advanced alternatives required importing. Both health authorities and politicians have been less than candid about the decision-train that favoured self-sufficiency over effectiveness and led to economically costly, inferior health outcomes.

Claims that the COVID-19 pandemic would spell the end of global supply chains, and that there would be a massive ‘reshoring’ of international production back from developing countries (including China) to developed country markets were vastly overstated. Global supply chains have largely remained intact, with more intensive use of communications technology underpinning their resilience and competitive efficiency.

The reactions over supply chain insecurity partly reflected inadequate understanding of the multiple shocks generated by COVID-19. Worries about global supply chain resilience were fuelled by overreaction to the initial negative supply shocks and positive demand shocks, and anxiety about China’s reliability. None of these worries were fatal. But the companies involved in delivering along global supply chains were not shaken. They had largely struck the balance between efficiency and risk management before the COVID-19 outbreak.

Although the pandemic and recession have caused much speculation about the future of foreign investment and global supply chains in Asia, the change in the foreign investment and international production landscape seems likely to be less than politicians and others have supposed, David Dollar argues in our lead article this week.

Despite the disruptions of the US–China trade and technology war, Dollar says, ‘US trade data shows only a small decline in imports from China (3.6 per cent), despite 25 per cent tariffs and a sharp recession — Americans clearly still want Chinese electronic products, medical equipment and protective gear’. What has taken a big hit is Chinese direct investment in advanced economies (the United States, European Union and Australia) where tightened security screening and investment restrictions have cut investment inflows by more than 50 per cent between 2016 and 2019.

Meanwhile Chinese foreign direct investment in Southeast Asia has increased by nearly 50 per cent over the same period and Chinese investment there is now on par with that of the United States and the European Union.

Nor has foreign investment into China fallen. Quite the opposite. In 2020, China was the largest recipient of foreign investment globally, for the first time outranking the United States. And, as Dollar observes, there has been no rush by US firms to leave China and re-shore investment home since ‘leaving would mean foregoing China’s lucrative domestic market’. Instead, surveys of American firms in China suggest that the vast majority there are expanding at the same time as they are looking for low wage-cost production bases and extending global production chains elsewhere in Asia.

Global value chains have proved resilient because they are a very efficient form of industrial organisation. Multinational enterprises mainly contribute different types of intellectual property: patents, brands, trade secrets, managerial know-how and sales networks. By one estimate, 85 per cent of the value of the large firms in the S&P500 index consists of intellectual property. Operating globally enables these firms to use their assets in the largest market possible. For developing countries, including China, the spread of global production networks has helped accelerate and reinforce economic progress and security.

There are many worrying international policy trends that threaten international integration around the spread of global value chains. But in Asia, Dollar suggests, the conclusion of the Regional Comprehensive Economic Partnership (RCEP) agreement, comprising ASEAN, China, Japan, South Korea, Australia and New Zealand, is a positive step that should cement Asia’s place at the heart of many value chains and encourage direct investment in different directions. Karl Sauvant notes, in another feature this week, that progress on the WTO’s Investment Facilitation Agreement by the 100 members involved in its negotiation accentuates the opportunity for positive development on investment arrangements like those in  RCEP.

The problem, of course, is that the United States is not a participant in RCEP or the other regional arrangement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which might facilitate its engagement in the resumption of the region’s trade and economic growth post-COVID-19. And India has also turned inward, retreating from participation in RCEP.

It’s China’s economy that remains the engine of Asia’s continuing economic dynamism. That is so because Chinese firms and foreign firms operating in China are integrated into open international markets. China’s commitment to market systems and rules are central to its economic success and security. Whatever has changed in China, this fact has not. If it should, the confidence in China and the rest of the world in that commitment that sustains that success will fracture it and help tear it down.

Hopefully US recommitment to global trade and economic reform will build the foundation for United States economic re-engagement in Asia with China since that would be good for both the region’s prosperity and security.

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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Clear skies over Asia’s new foreign investment landscape


Author: David Dollar, Brookings Institution

Compounding the fallout of the US–China trade war, the global pandemic and recession have caused considerable speculation on the future of foreign investment and global value chains (GVCs). But though there is likely to be some permanent change, it will probably not be as great as politicians expect.

A man wearing a face mask walks past an electronic board showing currency exchange rates at a securities firm in Tokyo, March 2021 (Photo: James Matsumoto/SOPA Images/Sipa USA via Reuters)

The United States is alarmed at China’s technological advance. It has instituted a range of restrictions on sales of high-tech products to China and Chinese investment in the United States, and is heavily taxing imports from China. These measures were introduced by the Trump administration and are under review by the Biden administration — but most of them will likely remain in place, reflecting a bipartisan distrust of China.

China, in turn, has doubled down on industrial policies aimed at generating domestic innovation and limiting technology imports. The pandemic caused temporary global shortages for medical equipment, raising concerns about dependence on imports for key products and leading to calls for increased domestic production of these items.

Despite these disruptions, some aspects of trade and investment held up strikingly well in 2020. US import prices were down only 1 per cent despite world GDP dropping 3.4 per cent, probably as a result of US economic stimulus measures. US trade data shows only a small decline in imports from China (3.6 per cent), despite 25 per cent tariffs and a sharp recession — Americans clearly still want Chinese electronic products, medical equipment and protective gear.

One flow that has been disrupted is China’s outward investment into advanced economies. China had been using high-tech acquisitions in the United States and European Union to enhance its own firms’ technical capabilities. Both jurisdictions have tightened security screening and investment restrictions, reducing the inflow of Chinese direct investment by 50 per cent between 2016 and 2019. Meanwhile, Chinese direct investment into the four largest ASEAN economies increased by nearly 50 per cent over the same period. It is now on par with Chinese investment into the United States and European Union.

Interestingly, direct investment into China has not decreased. In fact, 2020 saw record inflows. The US government has urged US firms to leave China and ‘re-shore’ to the homeland, but there is no evidence of this happening. Surveys of American firms in China find that the vast majority are expanding there. Virtually none are returning production to the United States, as leaving would mean foregoing China’s lucrative domestic market. But while they are not moving back to the United States, about one-sixth are considering moving some production to other Asian countries, usually lower-wage ones.

The reason why GVCs have proved resilient is that they are a very efficient form of organisation. The main contribution of multinational enterprises to the value chain consists of different types of intellectual property: patents, brands, trade secrets, managerial know-how and sales networks. By one estimate, 85 per cent of the value of the large firms in the S&P500 index consists of intellectual property. Operating globally enables these firms to use their assets in the largest market possible.

For developing countries, participating in GVCs speeds up the development process — it increases labour productivity and living standards and upgrades the capabilities of domestic firms. Naturally, each side grumbles about the bargain. Advanced economies worry that they are losing factory jobs, while developing countries bristle at being dependent on imported technology. In each case, there are domestic policies that could address the concerns.

While there are some worrying policy trends, especially US technology restrictions and Chinese nationalism, there are also positive developments. The RCEP, comprising ASEAN, China, Japan, South Korea, Australia and New Zealand, is a significant trade liberalisation agreement that should cement Asia’s place at the heart of many value chains and encourage direct investment in different directions. China has also signed a bilateral investment treaty with the European Union that opens new sectors and provides confidence in policy stability.

China will likely emerge this decade as the world’s largest economy; it is already the largest trading nation, and was the largest recipient of direct investment in 2020. Given Asia’s dynamism and the new agreements, it is likely that both interregional and intraregional investment will expand rapidly. Developing countries that can provide the complementary infrastructure, institutions and human capital will be the winners in attracting investment and benefiting from this expansion.

The one cloud on the horizon is the absence of the United States from any Asia Pacific agreements, and the risk of growing US protectionism. The United States remains the largest global economy, and joining the Asia Pacific trade and investment liberalisation would benefit both it and its partners. Furthermore, while China’s Asian partners are happy to share the economic benefits of its rise, they are nervous about China’s military advance and increasingly confrontational foreign policy. A United States that remains engaged in the Asia Pacific would be good for both the region’s prosperity and security.

David Dollar is a Senior Fellow in the John L Thornton China Center at the Brookings Institution.

An extended version of this article appears in the most recent edition of East Asia Forum Quarterly, ‘Reinventing global trade’, Vol. 13, No 2.

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