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Avoiding a fractured digital global economy

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Authors: Shiro Armstrong, ANU, Rebecca Sta Maria, APEC Secretariat and Tetsuya Watanabe, RIETI

Digitalisation accelerated during the pandemic as societies adjusted to social distancing through rapid responses in healthcare, education and service delivery. The digital economy is the new economy, underpinning productivity growth, development and prosperity globally. Sources of innovation and technological progress are increasingly diffuse with the emerging world and China becoming important sources of new technology. But a global governance deficit and geopolitics are contributing to a digitally divided global economy.

Primary school students play video games on smartphones in Zhengzhou city, central China's Henan province, 17 July 2018 (Photo: Reuters).

Strategic rivalry between China and the United States is leading to digital decoupling and contributing to a more fragmented digital global economy. Different standards are being set in Europe, the United States and China.

The Asia Pacific includes China, the United States, and countries that are proactively engaged in rule-making. East Asia is the most data rich region in the world. There are shared global interests and common challenges, as well as huge potential productivity and growth gains, that should encourage agreement on principles and rules to govern the digital economy — and dialogue and cooperation for confidence and trust building along the way.

Middle powers like Australia and Japan will need to find creative solutions and groupings that are inclusive. ASEAN must also be at the centre of finding multilateral solutions and keeping regional arrangements open and outward oriented.

Digital protectionism is on the rise, fuelled by the lack of multilateral rules and norms, interest in promoting home-grown companies and geopolitical rivalry.

Since much of the digital economy has the features of a public good, barriers are detrimental for economic growth and development. A digitally divided global economy will affect supply chains, productivity, people’s livelihoods and the growth potential of economies, including those at the technological frontier.

There are major security challenges around data privacy, use and sharing, as well as cyber security. These are risks that are not uniquely posed by China and their mitigation and management will determine the pace of technological progress globally.

There are system differences between countries, with diversity across governments, economies, approaches to data privacy and ownership, governance regimes, and attitudes to international trade and investment. A multilateral digital governance regime will allow governments to set their own policies and retain sovereignty while multilateral rules can limit discrimination, promote transparency and predictability, and constrain governments from protectionist policies.

Rulemaking for the digital economy has progressed in bilateral and regional agreements like the Australia–Singapore Digital Economy Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. This bottom-up approach will increasingly have to be guided by multilateral principles to avoid lowest common denominator outcomes by building trust across different countries through technical and economic cooperation.

Multilateral initiatives include Japan’s Data Free Flow with Trust initiative at the G20, which had Chinese and American sign-on, and the WTO’s e-commerce plurilateral initiative. Progress in the Asia Pacific can help shape multilateral initiatives.

The practical way forward is for middle powers to mobilise governments, technical experts and business through regional groupings like APEC to promote economic cooperation on digital trade facilitation and regulatory coherence. APEC should create interoperability with other regimes.

Regional cooperation on the digital economy will have to comprehend a wider range of issues than traditional trade issues in existing agreements, including trusted access to data, protecting privacy and security, competition policy, and formulating norms to govern artificial intelligence and fintech.

Risk can be managed and mitigated with competition, technical solutions and agreed principles and rules. Introducing more competition takes time and needs to be done with governance that identifies and reduces risk within and across borders. This will require international cooperation and experience sharing.

Platforms that rely on large numbers of users and network effects will be punished by users and lose market share quickly if they breach the trust of consumers — provided the market is competitive and switching costs are not prohibitive. Platforms in any country have incentive to protect the data of their users and maintain trust through cyber security and transparent terms and conditions. That incentive can be enhanced with appropriate governance.

Hardware bottlenecks and choke points can be alleviated by competition. Concentration of the production and supply of semiconductors, strategic materials and other technologies are all risks that can be alleviated or avoided with increased competition. Avoiding vertical integration of production and allowing competition, including from foreign companies, in each stage of production will support alternative suppliers and shift risk to private enterprises.

Increased competition, including between China and the United States, under agreed multilateral rules instead of bans for strategic, security or protectionist reasons will lift innovation and productivity and reduce risks borne by governments and societies. Agreed principles and rules can lead to competition that leads to measures to outperform other countries instead of undermining them.

Domestic laws are important for protecting against data misuse or privacy breaches by foreign and domestic actors. Clear, consistent and enforceable domestic laws around privacy and market integrity requirements and compliance testing with serious penalties are an important protection against cyber risk. Experience sharing between countries can help get policies right.

There’s an urgency in guiding multilateral digital principles to avoid a fractured global system. As the G7, G20 and other groupings discuss ways forward, middle powers can shape global outcomes most effectively with progress in the Asia Pacific that builds an inclusive and workable cooperation agenda.

Shiro Armstrong is Associate Professor at the Crawford School of Public Policy, The Australian National University.

Rebecca Sta Maria is Executive Director of the APEC Secretariat, Singapore.

Tetsuya Watanabe is Vice President of the Research Institute of Economy, Trade and Industry (RIETI), Japan, and Visiting Professor at the Graduate School of Public Policy, The University of Tokyo.

They are co-authors of the joint expert report Towards an Asia Pacific Digital Economy Governance Regime.

All views expressed are those of individual authors and do not represent the views of the institutions to which the authors are attached.

The post Avoiding a fractured digital global economy first appeared on East Asia Forum.



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North Korea’s economy is recentralised and China-reliant

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Author: Sangsoo Lee, ISDP

In North Korea, many enjoy making money for themselves by selling products in private markets. Under Kim Jong-un, expanding these markets became a source of tax revenue for the regime. But this changed in the past year with the outbreak of COVID-19. The closure of borders coupled with economic sanctions exacerbated an already dire economic situation in North Korea. Year-on-year trade with its biggest trade partner, China, plunged 80.7 per cent to US$539 million in 2020 and North Korea’s economy may have shrunk by 8.5 per cent.

North Korean leader Kim Jong Un speaks during a conference of cell secretaries of the ruling Workers' Party, Pyongyang, 9 April, 2021 (Photo: Korean Central News Agency KCNA, KCNA/via Reuters).

As international sanctions continue to isolate North Korea, the lack of imports and production has blockaded domestic capital circulation and marketisation. As a result, centralised economic policies have reasserted themselves, particularly after the United States refused North Korean demands for sanctions relief during the Hanoi Summit in February 2019.

Kim has embraced a return to a heavily planned economy under the slogan of self-reliance. The new regulations afford the Central Committee of the ruling Workers’ Party even more power to monitor and exert control over local authorities and the entire civilian economy. Local party cadres now have to report on the management, creation and dissolution of markets to the Central Committee. Then the COVID-19 outbreak in January 2020 sped up the trend of recentralisation.

In January 2021, the regime officially reclaimed control over all foreign trade and domestic markets. During the 8th Party Congress, North Korea announced its new five-year economic plan (2021–25). It stresses centralised management in all sectors and advocates greater political control in day-to-day economic planning and management.

In tightening its control over economic activities, the Kim regime is apparently attempting to collect money from the middle class and business sectors to make up for the losses accumulated from sanctions and its own pandemic restrictions. These moves are certain to arouse strong discontent among many North Koreans, especially those who depend on market trade and private economic activity for survival. The regime is also aware that strict control over its markets and an emphasis on self-reliance is not a long-term solution to economic recovery.

While there is still no sign of when North Korea will relax its pandemic restrictions, the country cannot afford to maintain its lockdown on trade for another year. To escape economic disaster, it should resume cross-border trade with China — its biggest trade partner. The country seems to have prepared for a slow opening of its border with China, where COVID-19 has been relatively contained.

The Korea Institute for International Economic Policy predicts that China–North Korean trade may resume in small volumes in the second quarter of 2021, pointing to sterilisation equipment installed at the border city of Sinuiju. North Korea is also part of the COVAX global vaccine distribution initiative. High-ranking North Korean officials, border control officers and frontline trade officials will likely be among the first vaccinated, boding well for a partial reopening of the border, facilitating the import of more essential goods.

More urgently, raw materials imported from China are needed for North Korea’s construction sector. Large tourism facilities at Wonsan and Samjiyeon have suffered ever-increasing delays due to the lack of steel, cement and chemical materials. In March 2021, a North Korean business delegation, headed by the president of the Petrochemicals Trading Company housed under the Ministry of Chemical Industry, travelled to China — apparently in an attempt to acquire chemical materials for key construction projects in Pyongyang and tourist zones. The trip took place even after the country closed its borders and North Korean delegations had almost completely ceased travel abroad.

The Kim regime seems eager to expedite the completion of the Wonsan and Samjiyeon tourist zones to boost foreign currency flows, particularly from Chinese tourists. Chinese President Xi Jinping seems to have promised a steady stream of visitors to North Korea when he met with Kim in June 2019. North Korea expects to attract over 1 million visitors annually once the pandemic is under control, and is banking on Chinese tourists to help pay off national deficits in the coming years.

Reopening of the borders will not signal a return to decentralised market activity in North Korea. The Kim regime has reasserted the state as the primary economic player and benefactor in both the short and long term. Pyongyang may seek increased raw material imports to develop its domestic industries and tourism sector while cutting down on finished Chinese products by strengthening control over border trade. This two-track approach — consolidating control over the domestic market activity and resuming cross-border trade with China — is likely to define North Korea’s economy in the coming years.

Sangsoo Lee is Senior Research Fellow and Head of the Korea Center at the Institute for Security and Development Policy (ISDP), Stockholm.

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Understanding economic coercion

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Author: Youngseok Park, KIEP

In December 2020, China blocked Australian coal imports after an increasingly tense political confrontation between the two countries. In August 2019, Japan strengthened restrictions on exports to South Korea following a South Korean Supreme Court decision on disputed historical issues between the two countries. This economic coercion inflicts mutual harm because it disrupts economic exchange.

A logo of Huawei Technologies Co. Ltd. is seen at the 13th China Hi-Tech Fair in Shenzhen, Guangdong province, 16 November 2011 (Photo: Reuters/Stringer).

China’s measures against Australia create uncertainty and increase the costs of doing business. Japan’s restrictive measures largely backfired after Japanese companies shifted production to South Korea and Europe to supply the South Korean market. The deployment of coercive economic measures might appear impractical in the face of these costs.

Economic coercion can be best understood through the lens of game theory. The famous Coase theorem suggests that people won’t pass up an opportunity to cooperate through a mutually advantageous exchange. In this world, cooperation and settlements are (almost) always possible without major dispute.

Yet the doyen of market optimisation, Pareto, argued ‘the efforts of men are [used] in two different ways: they are directed to the production or transformation of economic goods, or else to the appropriation of goods produced by others’. The economist Hirshleifer said that seizing what others have produced is consistent with Machiavelli’s golden rule ‘he who gets to rule will get the gold’.

International relations are framed in a world of tension between the Coasian world, where legal protection of property and enforceable contracts are available, and the world of Machiavelli, where ‘might makes right’. It is difficult to enforce contracts in international relations because there is limited supra-national power capable of holding powerful states to account. The multilateral trade rules provide constraint if the superpowers back them and the system can impose costs on those countries that breach the rules.

Without rules that are strictly enforced by an outside authority, states are incentivised to skirt rules to produce outcomes that favour them. Game theorists call such devices strategic moves — one example of which is economic coercion.

Take the Australia–China trade conflict. Assuming that Australia chooses not to use Huawei’s 5G network infrastructure for security reasons and that China imports Australian products, China will still remain better off importing from Australia, even if it loses it Huawei market in Australia. The least preferred outcome for Australia occurs when Australia uses Huawei and China does not import Australian products. In this instance, Australia will be clearly worse off than China in the long run.

Australia always prefers the case in which Huawei is not used. The best outcome for China occurs when Australia uses Huawei and China imports Australian products. The worst outcome occurs when Australia does not use Huawei and China does not import.

Both countries have dominant strategies — regardless of the other’s choice, Australia will choose not to use Huawei and China will choose to import. When China imports and Australia does not use Huawei, Australia has no incentive to make another strategic move. Still, China has one it can try — the threat of economic coercion — to achieve a better outcome for itself.

Yet, China must make the threat of economic coercion — and its willingness to carry it out — credible. If Australia continues to ban Huawei, China might be tempted to refrain from carrying out the threat of banning Australian imports because China is clearly worse off under the scenario with a reciprocal import ban.

If blocking imports was China’s best response to Australia’s Huawei ban, then China would have no incentive to make the threat in the first place. Because the threat of economic coercion remains a viable option to China in the bargain, it locks China into punishing Australia to possibly make itself relatively better off in the long. Economic coercion is still costly for China to carry out because it inflicts mutual harm.

The use of strategic moves and their credibility in practice is fraught with difficulty.  Making them work in practice depends on the context and tactics used.   As Dixit warned, ‘use such strategies at your own risk’.

Youngseok Park is a Research Fellow at the Korea Institute for International Economic Policy.

The post Understanding economic coercion first appeared on East Asia Forum.



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Moon’s last hope for reconciliation with North Korea

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Author: Jeffrey Robertson, Yonsei University

The Moon administration has set itself up to be judged against a self-imposed objective to promote reconciliation with North Korea. This objective has been a metaphorical strategic pot of gold at the end of the progressive rainbow — an impossible objective that will always be just out of reach. With one year left in a single five-year term, President Moon Jae-in must now consider whether there’s a better way to pursue this goal.

South Korean President Moon Jae-in, speaks during a ceremony of the 102nd anniversary of the March 1st Independence Movement Day in Seoul, South Korea, 1 March, 2021 (Photo: Pool via Reuters).

His administration has achieved several foreign policy successes. It de-escalated tension with North Korea. It handled an increasingly difficult relationship with the United States during a period of significant turbulence and upheaval. And it presided over a period of substantial growth in South Korean soft power, aided by global attention to the inter-Korean summits, K-pop fandom and an invitation to the G7.

As Moon considers his legacy in his final year, failure to promote reconciliation with North Korea likely looms large. With increasingly ominous signs from Pyongyang and a North Korea policy review still underway in Washington, it is easy to predict that the Korean Peninsula will again descend into crisis diplomacy.

Crisis diplomacy is a repetitive cycle on the Peninsula. North Korea escalates, South Korea manages and de-escalates. North Korea secures limited gains and South Korea secures limited respite. Crisis diplomacy never transforms the root causes of tension. This is where summitry with North Korea failed — and was always going to fail.

The Moon administration should now look past summits and consider alternatives. An international commission on the Korean Peninsula should sit atop the list.

An international commission is an ad-hoc transnational investigative mechanism, which can be constituted as either a temporary intergovernmental organisation (IGO) or a non-governmental organisation (NGO). International commissions have specific advantages.

First, international commissions create space outside the day-to-day pressures of international affairs to encourage new ideas. They investigate and collect alternative options from a wide range of sources, such as experts in multilateral processes, policymaking, and socio-economic, political, military and strategic affairs. The largest problem for addressing Korean Peninsula security issues is the absolute lack of new ideas. The debate is constrained by partisanship, path dependency, a sclerotic economy and a neurotic political system. There are no new ideas to resolve Peninsular issues, only tinkering at the edges.

Second, international commissions can transform thinking about how a global problem may be addressed. The end result of an international commission is a comprehensive and authoritative report. The report acts as a guide for efforts to find policy solutions. Previous commissions of this sort transformed understandings of development, the environment and sovereignty.

The Korean Peninsula is a global challenge. It was seen as such when the United Nations committed forces to repel the invasion by North Korea in 1950, and when the Geneva Conference was held in 1954 to find a long-term solution. The Cold War and purposeful neglect shrunk its importance. Peninsular issues today are often considered under the purview of just six countries: members of the Six-Party Talks. All too often, it’s even considered a bilateral issue concerning only North Korea and the United States. An international commission would return the Korean Peninsula question to the global agenda.

Third, an international commission is a characteristic middle-power initiative. It allows middle-power states more freedom. It gives them space to secure ideas and best practices, and to garner assistance and support. Most importantly, international commissions allow middle powers to build coalitions, thereby increasing their capacity to influence and persuade major powers.

One likely obstacle is North Korean participation. Policies based on the premise of North Korean action are inherently risky. Participation would be North Korea’s prerogative. It could either secure a global audience to highlight its own concerns and aims, or it could see itself more alienated and excluded from policy discourse and global consensus building. Yet, an international commission could still proceed to investigate new ideas and solutions to the global problem of Korean Peninsula security even without North Korean participation.

There are also domestic benefits. The authority of an international commission reduces the tendency to see policy options through domestic political lenses, thereby increasing consensus — something sorely lacking in current South Korean politics.

Finally, establishing an international commission on the Korean Peninsula would create a long-lasting legacy for the Moon administration. A commission’s influence might last up to 10 years or longer if intermittent reviews are undertaken. For an administration that has set itself to be judged against its objective to promote reconciliation with North Korea, there could be no more appropriate legacy.

While an international commission should have been launched while the diplomatic fruit was ripe, it’s still not too late. But time for the Moon administration to make a long-term contribution to resolving the question of Korean Peninsula security is rapidly running out.

Jeffrey Robertson is Associate Professor of Diplomatic Studies at Yonsei University.

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Can ASEAN offer a way out of the US–China choice?

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Author: Joel Ng, RSIS

The first Quad summit, held in March 2021, signals that a contest for both influence and methods is underway in the Indo-Pacific between China and the United States. The Quad’s alliance of major power democracies presents the firmest counter to Chinese hub-and-spoke system.

Japanese Prime Minister Yoshihide Suga (top right), US President Joe Biden (top left), Australian Prime Minister Scott Morrison (bottom left) and Indian Prime Minister Narendra Modi (bottom right) during the Quad Summit on 12 March 2021 (Photo: The Yomiuri Shimbun via Reuters/Ryohei Moriya).

The Quad presents itself as a regional problem-solver, but it cannot escape the perception that its members are united by their problems with China. From Southeast Asia’s perspective, growing US–China tensions risk dividing the region. ASEAN needs to adapt to this changing environment.

For all of former US president Trump’s sabre-rattling against China, his unilateral and impulsive approach to foreign affairs hindered any multilateral action from US allies. Trump’s legacy may have hardened the US posture towards China, but President Joe Biden’s approach poses a more consistent challenge to China’s growing regional assertiveness.

If there was any doubt that Biden would pick up where Trump left off, this was put to rest in Anchorage, Alaska in March, when his administration met with senior Chinese officials for the first time. Each side traded undiplomatic barbs and criticisms. The Quad will be more sustained this time because positions have also hardened in the other Quad capitals of Canberra, New Delhi and Tokyo. Perceptions of China have converged in recent years and the country is now largely seen as a threat.

The Spirit of the Quad statement describes the agenda as ‘inclusive, healthy, anchored by democratic values, and unconstrained by coercion’ — a contrast to the more ambiguous ‘free and open Indo-Pacific’. It promises institutional stability with the creation of expert working groups, regular foreign minister meetings and a leaders’ summit by the end of 2021. Stated challenges included COVID-19 and its economic impacts, climate change, the maritime order and the crisis in Myanmar.

The unstated hope is that by serving the interests of uncommitted states, the Quad may blunt Chinese assertiveness.

By contrast, Chinese multilateral engagement consists of a hub-and-spoke system with China at its centre. Each partner bilaterally connects with Beijing. While China engages with these partners’ multilateral projects when it suits it — such as ASEAN’s Regional Comprehensive Economic Partnership — most of the conflux of activities goes through Beijing. This structure gives China greater leverage, but for this reason, China remains the least trusted major regional power.

The relative weakness of ASEAN members as small states was once an advantage that gave the organisation centrality. But this was predicated on the condition that no major power sought to assert dominance over the region. With the rise of China and the return of the Quad, this condition is evaporating as major powers seek regional influence and leadership.

ASEAN states have repeated their desire not to choose between the United States and China. Their voices are being sidelined by the national interests of both powers, driving them towards a critical moment of choice.

But there is another possibility. As antagonisms rise between the great powers, ASEAN itself can become not merely a platform for engagement, but an alternative course of action. ASEAN offers the potential to avoid a binary choice, but to do so it must become more effective at problem solving.

For example, US concerns about China’s dominance in the Mekong led to the Mekong–US Partnership, directly comparable to the Lancang–Mekong Cooperation. While rivalry could develop from these two competing institutions, ASEAN has an alternative: the ASEAN Mekong Basin Development Cooperation (AMBDC). Reviving the AMBDC and insisting that minilateral arrangements work through ASEAN’s multilateral structures may be needed to blunt divergent interests.

ASEAN states must also take raising governance standards in such projects seriously, to avoid both corruption and capture by sub-national interests that may lead them into messy dependencies or commitments to external actors. Just as some Belt and Road Initiative (BRI) projects have been multilateralised through institutions like the Asian Infrastructure Investment Bank, Quad projects must also be multilateralised, potentially bringing ASEAN members in if funds are insufficient.

Some argue that ASEAN’s ‘fundamental purpose is not to solve problems but to manage mistrust and differences among its members’ yet the US–China rivalry not only threatens regional stability but ASEAN’s unity itself. If great power influence cleaves its members, the damage will be far greater. For better cohesion, ASEAN needs to find a stronger common purpose and look beyond diplomatic-level problems to assert its relevance among its people.

Some may caution against demanding too much from ASEAN, but the region is only of interest to great powers because ASEAN states have grown rapidly. Like China, the capacity of ASEAN states will continue to transform as they develop and their people’s aspirations and expectations grow. ASEAN should stop playing the poor dependent and start demonstrating the superiority of its methods — or risk being sidelined.

Joel Ng is a Research Fellow in the Centre for Multilateralism Studies at the S Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore.

The post Can ASEAN offer a way out of the US–China choice? first appeared on East Asia Forum.



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Energy partnership bolsters China–Russia relations

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Author: Francesco Sassi, University of Pisa

Russia’s Novatek and China’s Shenergy signed a new gas deal in February 2021, highlighting the primacy of energy ties in China–Russia relations. Under the provisions of the agreement, Novatek will ship around 3 million tonnes a year of liquefied natural gas (LNG) to Shenergy’s Shanghai terminals over the next 15 years.

 

Gas will be sourced from Novatek’s gargantuan Arctic LNG-2 project on the Yamal peninsula, in which the Chinese state-owned China National Petroleum Corporation (CNPC) and China National Offshore Oil Corporation (CNOOC) participate as shareholders. With its first train coming online in 2023, Arctic LNG-2 is a trump card for the Kremlin in gas geopolitics and Russian Arctic development.

As most Arctic LNG-2 production is intended for the Asia Pacific, the project will tap into the enormous growth in regional gas consumption expected over coming decades. This will allow Moscow to vie for a share in the regional gas market with LNG superpowers such as Qatar and Australia.

Arctic LNG-2 will double Yamal LNG production, becoming a major cornerstone of Moscow’s Arctic Strategy up to 2035 and supporting the growth in transit through the Northern Sea Route. The project also provides a new diplomatic tool to sidestep isolation from Western financial institutions as it raises the interest of many state-backed institutions in both Asia and Europe.

The agreement will further develop Russia’s ‘pivot to Asia’, a strategic shift in the wake of the 2014 annexation of Crimea. According to Novatek Chairman Leonid Mikhelson, the agreement with Shenergy responds to Novatek’s diversification strategy toward the Asia Pacific aimed at ‘delivering affordable, secure and sustainable natural gas for many decades’.

In this sense, Arctic LNG-2 is key for Novatek in developing its Asian strategy. It will also strengthen the company’s stance as Russia’s LNG champion in the face of Gazprom, the Russian state-owned giant and Novatek’s main competitor on both foreign and domestic gas markets, and also legitimise the widespread support the Kremlin has given it over the last decade.

Like its Russian peers, Novatek has cut capital expenditure and announced a possible delay in implementing its Arctic projects due to COVID-19. The company remains ready to pursue bold logistics and marketing strategies to reap the benefits of a sooner-than-expected year-round Arctic navigation. In order to achieve this goal, Moscow would need additional infrastructure investments and transport capabilities throughout the entire Arctic region. In line with the company’s strategy, Novatek is planning to raise approximately US$11 billion by the end of the first half of 2021 from international investors to finalise the Arctic LNG-2.

The COVID-19 pandemic has not slowed China’s thirst for gas. President Xi Jinping has put forth ambitious climate goals, pledging to achieve carbon neutrality by 2060 and personally endorsing a long-term coal-to-gas transition as a response to domestic air pollution and environmental degradation. By the first half of the 2020s, China will likely become the world’s largest LNG importer, consuming an extra 100–130 billion cubic meters of gas.

Beijing has also introduced unparalleled market-oriented reforms in China’s energy system. Increasing liberalisation of domestic gas prices, third-party access and competition are accelerating the reboot of the gas industry, with scope to expand domestic production, stimulate investments and optimise China’s gains from the commoditisation of gas.

Beijing has also reclaimed coordination of the country’s gas policy and strategy from national oil companies (NOCs) by institutionalising a new midstream company called PipeChina. This encourages foreign and domestic entities including Shenergy, a municipal state utility, to invest in China’s gasification, bolstering competition. These second-tier gas importers have been ramping up a new wave of LNG deals and in 2020 were securing the majority of new China’s LNG import contracts, pursuing their challenge to NOCs’ domestic predominance. Shenergy delivers more than 90 per cent of Shanghai’s gas consumption, and the agreement with Novatek will assist the expansion of gas in the local energy mix.

China’s energy system had undergone tremendous stress amid extreme weather conditions during the winter of 2020. A mix of economic stimulus, a government cap on domestic prices and a colder than usual autumn and winter have forced Beijing to significantly increase imports, including from the Sino–Russian gas pipeline Power of Siberia. As China accelerates its coal-to-gas transition, the country is likely to face new strategic challenges from its growing foreign gas dependency.

Once considered a weak link, economic cooperation between China and Russia has shown a relentless capacity to withstand political and financial turmoil, with raw materials and oil becoming the driving force behind bilateral trade. The scale of the Novatek–Shenergy agreement may pale in comparison to recent Gazprom–Novatek and CNPC–CNOOC contracts, but the deal goes beyond gas security.

Both Xi and Russian President Vladimir Putin have doubled down on promises to double trade to US$200 billion by 2024. In the longer-term, natural gas could help expand the commercial partnership by attracting investments in infrastructure. As Russia and China reform their domestic gas sectors, the Novatek–Shenergy deal could help synchronise the two countries’ agendas, displaying a growth in mutual confidence.

Given the intertwining of energy transition and gas geopolitical dynamics, the deepening of energy ties could bring unforeseen changes to China–Russia relations. This requires a delicate balancing of state and market interests to preserve the required stability of the Beijing–Moscow strategic partnership.

Francesco Sassi is a PhD candidate in Political Science at the University of Pisa.

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Kang Kyung-wha’s legacy for South Korean women

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Author: Kathryn Botto, Carnegie Endowment

Kang Kyung-wha said goodbye to her role as South Korea’s foreign minister in February as Chung Eui-yong assumed the post. Kang leaves behind a legacy of achievements in a particularly thorny period in South Korean diplomatic history. Not least of all, Kang’s role as the first woman to serve as foreign minister in the country marks a period of progress for South Korean women in public service.

Former South Korean foreign minister Kang Kyung-wha speaks during a briefing for foreign diplomats on the situation of the COVID-19 outbreak, at the foreign ministry in Seoul, South Korea, 6 March 2020 (Photo: reuters/Jung Yeon-je).

Her appointment in 2017 was not the first time Kang had broken a glass ceiling. In 2005, she became the second woman to serve at the director-level in the Ministry of Foreign Affairs. Kang also reached new heights at the United Nations, where she held key posts for over ten years. Her appointment as deputy high commissioner for the UN Human Rights Office in 2006 marked the first time a South Korean woman held such a high-level role at the United Nations.

Kang’s background set her apart from the ‘old boys club’ of South Korean diplomacy in another way — she was also the first foreign minister to never take the foreign service exam, a notable anomaly in a field where highly competitive exams are typically the gatekeeper to public service positions. Her background in multilateral diplomacy is also unconventional, as most of her predecessors — and her successor — have had more North Korea or US-centric expertise.

Conventional or not, Kang’s expertise made her the ideal person to be at the helm of South Korean diplomacy during the COVID-19 pandemic. At a time when some of the world’s greatest powers are looking inward and shunning cooperation, South Korea stands out as an engaged global partner and leader. Kang’s leadership in positioning South Korea as a responsible international stakeholder during this crisis will prove to be one of her most defining achievements as foreign minister.

Despite her obvious skill and successes, Kang’s non-traditional background sometimes drew negative attention, especially amid suspicions that the foreign ministry was bypassed in important negotiations and decisions. But Kang’s atypical path may also be one reason she was able achieve so much success — in the United Nations, where there is greater gender parity, Kang likely faced an environment where women’s contributions were rewarded more frequently.

Traditional paths to leadership have certainly not served South Korean women well in the past, and that’s not for a lack of women in public service. By 2003, South Korea was easily meeting its mandate that 30 per cent of new hires in all government departments be women, so much so that it revised the mandate to apply the quota to men as well. And in 2018, women made up 50 per cent of civil servants for the first time.

Still, South Korean women occupy few public leadership positions, particularly in diplomacy — female ambassadors consistently number in the single digits, and as recently as 2014 there were no female ambassadors.

The Moon Jae-in administration set out with aspirations to address gender equality and parity. Kang was one of four women appointed to Moon’s cabinet, the highest number of women to ever serve in cabinet-level positions simultaneously. Moon also appointed Pi Woo-jin to be the first female Minister of Patriots and Veteran Affairs, one of six non-cabinet minister positions.

Though this was a historic milestone, it fell short of Moon’s stated goal to appoint a cabinet of at least 30 per cent women. Four years into his five-year term, Moon has yet to reach that threshold, and the number of women in his administration has decreased. With Kang’s departure, just three cabinet positions are currently held by women, making it just 16 per cent female.

Despite Moon’s recent lack of concern for gender parity in his cabinet, other gains for women in South Korea cannot be discounted. In addition to the first female foreign minister, Moon also appointed the first women to lead three other ministries — Trade, Labor and Employment; Land, Infrastructure and Transport; and Patriots and Veterans Affairs. South Korean women also made major strides in electoral politics. The 2018 National Assembly election saw a record 57 women elected to parliament, accounting for 19 per cent of the 300 total seats. The ballot also included a feminist party, the Women’s Party, for the first time.

Still, these sorts of gains do not always stick, and a higher number of women in leadership positions does not necessarily equate to more power for women. Though women make up a greater share of public servants than 20 years ago, South Korea — like most countries — has a long way to go before women in government leadership becomes the norm rather than the exception. Kang’s service as foreign minister brings South Korea a step closer to achieving that reality.

Kathryn Botto is a Senior Research Analyst in the Asia Program at the Carnegie Endowment for International Peace.

The post Kang Kyung-wha’s legacy for South Korean women first appeared on East Asia Forum.



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Realistic ambitions for US alliance system in Asia

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Author: Kori Schake, AEI

US allies in Asia have many and often conflicting desires. They want the commercial freedom to benefit from Chinese investment, markets and supply chains without unwelcome Chinese influence. They want protection from military intimidation or attack by China without going to war or interrupting commerce.

Joe Biden stands at a window looking out to the South Lawn in the Oval Office at the White House in Washington DC, 14 April 2015 (Photo: Reuters/Jonathan Ernst)

They want US domestic politics to stop at the water’s edge, even as their own domestic politics require complicated detours. They want Washington to commit to them, but do not want to choose between Washington and Beijing. They want US involvement — but not too much. Often, they are disappointed.

The key to success in US alliances is that most countries have no better alternatives. Countries in the region have no greater reservoir of trust in their neighbours than in the United States, and Washington brings advantages of diplomatic heft, an economy of scale and a capable expeditionary military.

One weakness of the US alliance system is that most of its regional allies don’t like each other much. Another is that they are economically enmeshed with China, while the United States — never the most reliable ally — is more self-absorbed than usual.

While the Biden administration portends some Asia policy changes, they will likely be less than anticipated. There is a strong bipartisan consensus that the ‘responsible stakeholder’ approach to China is unsustainable — China’s behaviour indicates it does not want to accept the existing order.

Some scholars argue that ‘great power competition is not a coherent framework for US foreign policy’, that it ‘risks confusing means and ends, wasting limited resources on illusory threats and undermining cooperation on immediate security challenges’. But competition does not mean ‘unrelenting struggle’, and President Biden is making it clear that a more confrontational approach to China does not preclude cooperation on climate or non-proliferation.

Two US experts on Asia policy, Michael Green and Evan Medeiros, argue that ‘an ambitious new strategy’ is required, entailing the ‘bold and somewhat risky moves [of past US administrations] that confirmed American strength, decisiveness and leadership’.

Their daunting list of requisite policies includes a digital trade agreement, a government–private sector infrastructure alliance, an Asia-specific initiative to set rules on state competition and the United States to volunteer to host APEC in 2023. And that’s before they address the specifics of cooperation over infrastructure, bringing European allies into the mix for ‘economics, technology, human rights and climate’, or doubling down on the United States’ role as a security provider.

While all good ideas, it is unlikely they will eventuate. But the failure of these ambitions will not result in China’s hegemony. The prevailing view of China is as a stampeding success, sweeping aside the existing order and supplanting US influence. But, as Michael Beckley’s work demonstrates, China’s growth model is more expensive than it can afford. We may already be seeing a stalling — and potentially failing — China.

A failing China brings problems of a different character. Increasing repression at home and aggression abroad may reflect a country seeking to claw as much change as it can while it sinks. Even if China’s predation is the result of its accomplishments, its choices are strengthening the antibodies against its continued success.

China as only a formidable regional power would still complicate US and allied security. Preserving US attention and leadership in Asia may be harder if China doesn’t pose a global challenge. But the failure of China’s global ambitions will also diminish countries’ willingness to accede to Chinese power plays, so the equation may balance.

US baseball pitcher Satchel Paige once advised: ‘Throw strikes. Home plate don’t move’. He meant that there is no substitute for doing the things that are known to succeed. The same is true for US foreign policy. If the Biden administration wants allies to make difficult choices with costly consequences, it must make some itself.

Green and Medeiros argue that Biden should re-join the Trans-Pacific Partnership, but ‘domestic politics won’t allow him to do so’. That’s not strictly true. They mean that the Biden administration is in favour of trade protection and has six months before Trade Promotion Authority expires, allowing Congress to modify any agreements. It doesn’t want to expend the political capital to get a trade agreement ratified by Congress.

The same goes for ratifying the UN Convention on the Law of the Sea, a treaty that the United States was instrumental in negotiating, abides by and enforces, but will not ratify. The gaps between the policy poses Washington strikes and the effort it is willing to make has made allies sceptical of US leadership.

The Biden administration is putting human rights front and centre in its political messaging, but while rhetoric about the importance of protecting human rights shapes most public statements by both Secretary of State Antony Blinken and National Security Advisor Jake Sullivan, policy actions beyond economic sanctions are not yet apparent.

The United States does not need a sweeping and bold agenda to preserve the existing international order against Chinese efforts to establish a new order Focussing on a few key areas is probably good enough, given the cost of the choices China is making. Fortunately for a solipsistic society, paramount among those areas is strengthening the domestic foundations of US strength.

Kori Schake is Director of Foreign and Defence Policy Studies at the American Enterprise Institute (AEI).

An extended version of this article appears in the most recent edition of East Asia Forum Quarterly, ‘Asia after Biden’s election’, Vol. 13, No 1. 

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Resolving Indonesia and Singapore’s UNCLOS dispute

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Author: Aristyo Darmawan, University of Indonesia

Over the last several years, Indonesia and Singapore have been dealing with different interpretations of Article 51 of the United Nations Convention on the Law of the Sea (UNCLOS) — specifically, whether Singapore has traditional rights to conduct military exercises in Indonesian archipelagic waters or not.

Indonesia's President Joko Widodo inspects an honour guard with Singapore's Prime Minister Lee Hsien Loong at the Istana in Singapore 8 October, 2019 (Photo: Reuters/Feline Lim).

 

The Article stipulates that ‘an archipelagic State shall respect existing agreements with other States and shall recognize traditional fishing rights and other legitimate activities of the immediately adjacent neighbouring States in certain areas falling within archipelagic waters’. Singapore argues that traditional military exercise rights are included in the term ‘other legitimate activities’ and that Indonesia is obliged to grant Singapore the right to conduct them.

It also stipulates that ‘the terms and conditions for the exercise of such rights and activities, including nature, the extent and the areas to which they apply, shall, at the request of any of the States concerned, be regulated by bilateral agreements between them’. Here another issue arises.

Indonesia argues that there should be a ‘terms and conditions’ prerequisite to the obligation to respect ‘other legitimate activities’ because foreign military exercises in Indonesian waters could be dangerous. The term ‘other legitimate activities’ in Article 51 sounds ambiguous, but based on records of historical negotiations — captured by the Virginia UNCLOS commentaries — we know the final text of the Article was originally jointly proposed by Singapore and Indonesia.

Article 51 is the result of a long negotiation process between the two countries from 1974–1982. Singapore asked Indonesia to permit traditional military exercises in its waters, in exchange for it recognising Indonesia as an archipelagic state under UNCLOS. Indonesia rejected the proposal because it was a sensitive topic and would have likely been rejected by the Indonesian parliament, so it agreed to put ‘other legitimate activities’ in the text instead and negotiate on the issue of military exercise rights.

Indonesia and Singapore used to have a Defense Cooperation Agreement (DCA) that granted Singapore the right to conduct military exercises in specific areas of Indonesia’s archipelagic waters. But the DCA expired in 2003 and the Indonesian parliament failed to ratify a renegotiated version in 2007.

Afterwards, Indonesia argued that Singapore could not conduct military exercises in Indonesian archipelagic waters without a DCA. Singapore, on the other hand, continues to assert its own interpretation of Article 51 — that it has the right to military training as granted under the Article, even without the terms and conditions.

With diverging interpretations of Article 51, there is a possibility that Singapore could refer the issue to the International Tribunal on the Law of the Sea (ITLOS) or to an arbitral tribunal as regulated under Article 287 (3) of UNCLOS. Singapore and Indonesia are both members of UNCLOS and both are bound by the compulsory dispute settlement mechanisms. Under the Convention, ITLOS has jurisdiction over all disputes concerning the interpretation or application of the Convention.

Indonesia has not stopped sending diplomatic notes to Singapore protesting military exercises in the absence of a DCA or terms and conditions. In the future, there is a possibility that the Indonesian air force and navy could intercept Singaporean naval vessels or ships during these military exercises.

To avoid this, the two countries should seek to resolve their differences. By renegotiating the DCA and arriving at an agreement on interpreting the terms and conditions in Article 51 for Singapore to conduct its military activities, there is a good chance that Jakarta could get the Indonesian parliament to ratify it.

There is already some momentum towards a resolution. Both countries have agreed on a framework laying out the core principles and considerations concerning military training in accordance with UNCLOS. At a high-level leaders’ retreat in October 2019, Singaporean Prime Minister Lee Hsien Loong told Indonesian President Joko ‘Jokowi’ Widodo that he would like to start working on the issue in an ‘open and constructive manner’. Jokowi said Indonesia welcomed the framework and encouraged negotiations to be ‘speedily achieved with concrete results’.

The healthy state of bilateral relations between Singapore and Indonesia should help propel the negotiations further. In March 2021, a bilateral investment treaty between the two countries came into effect, highlighting their long-standing economic ties. Jokowi’s coalition also enjoys strong support in parliament, so it should be easier for the administration to ask for parliament’s approval and resolve this longstanding issue.

Aristyo Rizka Darmawan is a Lecturer and Senior Researcher at the Center for Sustainable Ocean Policy, Faculty of Law, University of Indonesia, and a Young Leader at the Pacific Forum.

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What carbon neutrality means for the future of coal in China

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Authors: Wei Li, Sydney University and Lei Zhang, Yanzhou Coal Mining Ltd

When President Xi Jinping committed China to achieving carbon neutrality by 2060 at the UN General Assembly, this was good news for many, including electric vehicle manufacturers and the renewable energies industries. One sector that stands to lose is the coal industry. The biggest contributor to greenhouse gas emissions in China, thermal coal accounts for almost 60 per cent of China’s energy mix, down from 80 per cent in 1990 and 70 per cent in 2010, but still more than double the global average.

A man walks near a coal-fired power plant in Harbin, China, 27 November 2019 (Photo: Reuters/Jason Lee).

Reducing reliance on coal power will be a major challenge because of its stability as a baseload power source, the relatively young age of China’s coal-fired powerplants, and the country being the largest producer, importer and consumer of coal.

But China’s motivation and ability to shift energy usage away from coal should not be underestimated, as accelerating reforms have shown. Recent coal industry reports coinciding with the gradual release of details from the 14th Five Year Plan confirm that radical restructuring is underway and carbon neutralisation is being rapidly integrated into China’s overall development plan.

State-owned companies carry out most coal mining and power production in China. The coal sector has been tackling overcapacity for a few years already. The number of coal mines shrunk from 12,000 in 2013 to 4700 in 2020, and employment in the coal mining and dressing industry has halved since 2013.

Mergers and acquisitions among state-owned coal mining companies have been encouraged. In 2017, Beijing approved the merger of coal company Shenhua Group with one of the nation’s big five state-owned power generators, China Guodian Corporation. The goal of such mergers and acquisitions is not to expand coal production capacity in China but to enhance cost effectiveness and efficiency.

According to a recent report by the China National Coal Association, ten super-large coal enterprises will emerge out of the consolidation in the next five years, each with an output of 100 million tonnes. Annual coal production will be controlled at a level of 4.1 billion tonnes by the end of the 14th Five Year Plan, compared with 3.9 billion tonnes in 2020. These mergers will allow China to improve national energy efficiency and increase the concentration of power generation.

Besides limiting production expansion and increasing efficiency, China is also slowing down coal consumption. As the government intensifies its war on pollution, the cost advantages of coal as an energy source will gradually shrink. Unlike most other developing countries, China has over the last decade established regulations and regulatory bodies down to the township-government level. This framework will help overcome the lack of enforcement and monitoring at the township level, with the central government forcing local leaders to make better decisions on natural resources usage, including coal.

China’s renewable energy industry is growing faster than capacity in fossil fuels and nuclear power generation. Booming industrial clusters have enabled China’s regional economic centres to emerge as world leaders in renewable energy and technologies such as electric vehicles. China is the world’s largest producer of solar and wind energy. In 2020, slightly less than 30 per cent of Chinese energy consumption came from non-fossil fuel output, including hydropower, wind, solar and biomass. By 2030, China plans to raise its minimum non-fossil fuel power purchase volume to 40 per cent.

Overseas Chinese mining investment is also transitioning away from thermal and fossil fuels to minerals relating to nuclear and renewable energy. In 2020, China Molybdenum acquired a 95 per cent stake in the Kisanfu copper-cobalt project in the Democratic Republic of Congo from US company Freeport. The deposit holds 6.3 million tonnes of copper and 3.1 million tonnes of cobalt. The acquisition will make China Molybdenum a top supplier of cobalt globally in the near future.

Ongoing frictions between Australia and China appear likely to impact seaborne coal shipments, as Chinese importers are somewhat reluctant to place orders for Australian thermal coal. Exports in 2020 were 199 million tonnes, declining by 6.1 per cent compared with 2019. Thermal coal exports to China were zero in January 2021, where average monthly exports were 4.5 million tonnes in the past.

For China, the gap left by Australian coal imports needs to be filled by other countries. Russia is planning to increase coal exports to Asia by 30 per cent, equivalent to 34 million tonnes a year. Canadian coal exports to China increased 18.3 per cent to 5.8 million tonnes in 2020.

China’s import volume of coal will likely drop over the next five years. China will control coal consumption at around 4.2 billion tonnes per year by the end of the 14th Five Year Plan. This means that by 2025, China’s annual coal imports may not exceed 100 million tonnes per year, compared with 304 million tonnes in 2020.

Most globally diversified producers continue to hold a small coal segment in their asset portfolio, while the thermal coal valuation gap is increasing relative to other precious and base metals. As countries around the world pursue decarbonisation and investors and banks pull away from thermal coal, divesting from thermal coal assets has become a clear agenda for almost all major mining companies.

Australian thermal coal exporters will likely face challenges when managing declining exports to China through diversification into Vietnam, India and other alternative markets. As two of the largest coal production countries in the world, Australia and China should increase bilateral exchanges to balance their transition plans as the coal industry declines and — most importantly — support the economic transition for coal communities.

Wei Li is a Lecturer in International Business at the University of Sydney Business School.

Dr Lei Zhang is the Chief Investment Officer of Yanzhou Coal Mining Company Ltd.

The post What carbon neutrality means for the future of coal in China first appeared on East Asia Forum.



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