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Clear skies over Asia’s new foreign investment landscape

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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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A multilateral investment facilitation agreement will help advance development

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Author: Karl P Sauvant, Columbia University

Negotiations for an Investment Facilitation Framework for Development are proceeding apace in the World Trade Organization (WTO) among over 100 of its members. The objective is to achieve a concrete outcome by the WTO’s Ministerial Conference beginning November 2021 in Geneva.

A worker stands on a construction site in Sihanoukville, Cambodia, 27 February 2020 (Photo: Reuters/Jorge Silva).

The pace of progress has been impressive. The idea was launched in 2015 by the author in the E15 Investment Policy Task Force organised by the International Centre for Trade and Sustainable Development and the World Economic Forum. From there, it was taken up in the WTO. After a few years of preparatory discussion, formal negotiations began in September 2020. These are now being conducted based on a consolidated text prepared in April 2021 by the Chair, Chile’s Ambassador Mathias Francke.

Developing countries are driving the negotiations. They know that foreign direct investment (FDI) can make a critical contribution to development and will have to play a significant role in reigniting economies in the wake of the COVID-19 crisis.

The purpose is to arrive at a binding multilateral agreement to facilitate FDI flows for development. The focus is entirely on concrete, technical investment facilitation measures, leaving aside the controversial issues of market access, investment protection and investor-state dispute settlement. Provisions for special and differential treatment of developing countries are being built in to assist implementation and capacity building, responsible business conduct and anti-corruption efforts.

The negotiations centre on raising the transparency of investment measures, streamlining and speeding up administrative procedures, creating focal points for investors, increasing domestic regulatory coherence and strengthening cross-border cooperation on investment facilitation.

These are measures that will make it easier for investors to establish themselves in host countries and operate within them, helping to increase FDI flows and advancing growth and development.

This approach is practical and timely. But it begs the question of whether it could be possible to include not only measures that facilitate FDI flows, but also measures that directly enhance the developmental impact of FDI in host countries.

One way would be to include a strong reference to responsible business conduct in host countries. This should require signatories not only to encourage foreign investors to voluntary incorporate internationally recognised standards into their business practices and internal policies, but also to ensure that these standards are being observed. This could be done by referring explicitly to existing standards and guidelines, especially the UN Guiding Principles on Business and Human Rights, the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, and the OECD Guidelines for Multinational Enterprises. Alternatively, the agreement could list key elements of responsible business conduct — or some combination of both approaches.

Similarly, it could require home countries to link their outward FDI support measures to internationally recognised standards and guidelines of responsible business conduct. Moreover, since many countries have a variety of measures in place on outward FDI, increasing their transparency would be helpful to investors, especially small and medium-sized enterprises. Transparency is a cornerstone of the agreement and, in providing guidance not only for host countries but also for home countries, it would introduce more balance into the agreement.

Another approach to increasing the developmental impact of investment would be to include concrete measures in the agreement that focus on facilitating sustainable FDI. It could, for example, encourage the establishment of supplier development programs in host countries. As linkages between foreign affiliates and domestic firms are one of the key avenues through which tangible and intangible assets are transferred, programs which build up these linkages would help advance host economies.

Countries could also support the development of marketing strategies that target sustainable FDI. A category of ‘Recognised Sustainable Investor’ could be created and allow WTO members to let recognised investors benefit from additional investment-facilitation measures. This would mirror the Authorized Operators provision in the WTO’s Trade Facilitation Agreement.

Identifying developmental measures and including them is vital for an agreement that is explicitly ‘for development’. It is also important because the implementation of measures would benefit from the technical assistance commitments that an agreement would have to stipulate — the stronger the agreement, the stronger the technical assistance commitments should be. This is critical because the investment facilitation agreement would be an influential commitment device, setting a benchmark for governments on what they are expected to do if they wish to increase FDI flows.

Beyond the WTO negotiations, facilitating FDI is set to become a bigger policy challenge as future economic treaties can be expected to include provisions on investment facilitation. This has been seen already in the recent Regional Comprehensive Economic Partnership agreement. With a noodle bowl of separate provisions and agreements on investment facilitation likely to emerge, a multilateral agreement would define a shared floor for investment facilitation provisions.

Given the importance of the negotiations, countries in Asia should be at the virtual negotiating table and be actively participating. They should ensure that the agreement reflects their interests in facilitating sustainable FDI for sustainable development. If you are not at the table, you risk being on the menu.

Karl P Sauvant is a Resident Senior Fellow at the Columbia Center on Sustainable Investment, Columbia University.

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Towards a multipolar order post-pandemic

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Author: Mely Caballero-Anthony, RSIS

Not since the end of the Cold War has the concept of multipolarity been more salient as the global community grapples with COVID-19. The pandemic is a threat multiplier, cascading from a health and socio-economic crisis to a political and security crisis as countries turn inward and adopt more populist and nationalistic policies. Since the outbreak of the pandemic, the call for global solidarity and deeper multilateral efforts to combat it has gained momentum across the globe.

Presidents of Brasil, Jair Bolsonaro, Russia, Vladimir Putin, China, Xi Jinping, South Africa, Cyril Ramaphosa, and India's Prime Minister Narendra Modi pose for a family photo as they arrive for the BRICS summit in Brasilia, Brazil, 14 November, 2019 (Photo: Reuters/Ueslei Marcelino).

Political leaders in Asia have joined the global community in stressing the importance of collective action against this shared threat, but evidence of greater multilateral cooperation has not met expectations. The absence of global leadership amid major-power rivalry has resulted in a doubling down on self-interest rather than collaboration. Meanwhile, the rigidity of the world’s multilateral institutions makes them no longer fit for purpose in dealing with 21st century economic and security challenges.

Despite this, a reinvigorated multilateral system remains the only way for the international community to respond to transnational threats such as climate change and pandemics.

Much has changed in the multipolar order that defined international political and economic relations after the Cold War. While international politics is still influenced by superpower rivalry — this time between the United States and China — expanded ‘poles’ of power and influence have appeared as the European Union and emerging economies like Brazil, Russia, India, China and South Africa (the BRICS) hold increased economic clout.

The extent to which these poles have the power to influence the international economic order depends on how coherent their interests are in effecting change in the global economic agenda. BRICS countries for example, have pushed to reform institutions like the IMF to gain more voting rights but so far with only limited success.

The expansion of the G7 to the G20 is another indication of the realignment of interests among the diverse set of actors which intend to shape the contours of a new economic architecture. These changes have led to the notion of a ‘G-Zero’ world where no single country or bloc of countries has all the political and economic power to drive the international agenda.

Regions now play an increasingly important role due to the ‘spaghetti bowl’ of regional free trade agreements (FTAs), including the Asian mega-FTAs like the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP). Though Japan and ASEAN countries are taking the lead in the CPTPP and RCEP respectively, the diverse interests of member states mean that the goals of each trade bloc are diverse.

It’s still unclear how a big power like China might wield influence over RCEP, not to mention through its lead in creating multilateral financial institutions like the Asian Infrastructure Investment Bank and Belt and Road Initiative. These new arrangements and organisations are seen as less ‘Western centric’ and impose fewer conditions while being more sensitive to the ideological diversity of recipients and members.

The problems of coherence and divided interests can be mitigated if competing multilateral institutions channel efforts into common goals, particularly in addressing threats to global public goods like health, environmental and food security.

For instance, in tackling the COVID-19 pandemic, global and regional institutions are both important actors, providing assistance, resources and expertise to countries struggling to contain the virus.

As the largest economy in Asia, China has filled the supply gaps caused by vaccine nationalism by distributing vaccines to developing countries, which are acutely disadvantaged by export restrictions and limited vaccine supply. Thus, the capacity of multilateral institutions and networks, particularly those in Asia, presents a potential reservoir of resources that can be deployed to tackle a range of regional and global challenges.

The dynamics of a multipolar order are not limited to coalitions of the willing and the proliferation of plurilateral trade arrangements. The growing influence of big tech companies like Google and Facebook that have the capacity to change the rules of the game — especially given their dominance in the global markets and lack of regulatory frameworks — cannot be ignored.

Private foundations like the Bill and Melinda Gates Foundation have also contributed significantly to the fight against communicable diseases like tuberculosis, malaria and HIV/AIDS while spearheading research into COVID-19 vaccines and therapeutics. Similarly, civil society organisations are working both regionally and locally to help communities cope with natural disasters, which are increasing in frequency as a result of climate change and disproportionately affect vulnerable groups.

The complexity of the transnational issues confronting the world today underscores the growing interdependence of states and societies. These challenges are reshaping a multipolar order that is more diverse yet more connected, with a growing number of actors claiming influence over global governance. In such a world, regional institutions like ASEAN are important in fostering cooperation and promoting multilateralism. Civil society organisations and private actors also play a valuable role, together offering more pathways for development, peace and security.

Mely Caballero-Anthony is Professor of International Relations and Head of the Centre for Non-Traditional Security Studies (NTS Centre) at the S Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore.

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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Why Russia is betting on Myanmar’s military junta

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Authors: Artyom Lukin, Far Eastern Federal University and Andrey Gubin, Russian Institute for Strategic Studies

On 1 February 2021, Myanmar’s military junta declared a state of emergency and seized power from the civilian government led by Aung San Suu Kyi. The coup immediately created a political crisis and resulted in mass bloodshed, but the international response has been divided.

Military personnel participate in a parade on Armed Forces Day, Naypyitaw, Myanmar, 27 March 2021 (Photo:Reuters/Stringer).

While the US-led West and its key Asian allies such as Japan and South Korea condemn the coup and imposed sanctions on the junta, other key powers are more ambivalent. In the UN Security Council, China, India and Russia have made efforts to shield the perpetrators from harsher censure and potential UN sanctions.

From the very beginning Russia has refused to condemn the coup, with the Ministry of Foreign Affairs merely expressing hope for ‘a peaceful settlement of the situation through the resumption of political dialogue’. In the same statement, Moscow noted as an encouraging sign that the military intended to hold a new parliamentary election. Russian state-owned news agency RIA Novosti justified the coup by arguing that the Myanmar army, the Tatmadaw, is the only viable guarantor of the multi-ethnic country’s unity and peace.

The most visible manifestation of Russian support for the junta came in late March, when Deputy Minister of Defence Alexander Fomin became the highest-ranking foreign official to attend Myanmar’s Armed Forces Day parade in the capital Naypyidaw. While the military was violently cracking down on protestors, Fomin held talks with junta leader Senior General Min Aung Hlaing. He called Myanmar ‘Russia’s reliable ally and strategic partner in Southeast Asia and the Asia Pacific’ and emphasised that Moscow ‘adheres to the strategic course of enhancing relations between the two countries’.

There are several reasons why Russia is emerging as the most high-profile supporter of the Myanmar military government.

Moscow’s close ties with Myanmar date back to the 1950s. Given that for most of its modern history the Southeast Asian country has been governed by the military, Russia has developed a working relationship with its uniformed rulers. Incumbent strongman general Min Aung Hlaing has visited Russia on numerous occasions, most recently in June 2020 to attend the Victory Day parade in Moscow, and is known as a champion of Myanmar–Russia ties.

Under Min Aung Hlaing, Myanmar–Russia military cooperation has received a boost. After China, Russia is the country’s second largest supplier of arms, being the source of at least 16 per cent of weaponry procured by Myanmar from 2014–2019. Myanmar’s military is now awaiting the delivery of six Su-30 fighter jets ordered in 2019, and in January 2021 the two sides signed contracts for a Russian air defence system and a suite of surveillance drones.

Thousands of Myanmar’s military officers have also received training in Russia’s military academies. Tellingly, the Myanmar commander-in-chief maintains an official account on Russia’s VK social network while being banned from Facebook and Twitter. It is not coincidental that the Kremlin’s main interlocutor with Myanmar is defence minister Sergey Shoigu, who happened to visit the country just several days before the 1 February coup.

Given this long-standing and profitable relationship with the Myanmar military, it stands to reason that Russia is not going to condemn the coup, let alone sanction the junta. Russian President Vladimir Putin has never been known for his sympathies for pro-democracy movements backed by the West, and the Kremlin hardly sees the English-educated Aung Sang Suu Kyi, whose two sons are British nationals, as a desirable alternative to uniformed rulers.

Moscow’s support for a military dictatorship could damage its international reputation, but with what has already transpired between Putin and the West, the Kremlin could hardly care less about its reputational fallout from Myanmar. In defence of its stance on Myanmar, Russia could also point to Western hypocrisy — neighbouring Thailand is ruled by generals with dubious democratic credentials, but the country remains in the West’s good graces due to being a ‘treaty ally’ of the United States.

It is unclear to what extent Moscow will coordinate its Myanmar policies with Beijing, Russia’s main strategic partner and a fellow autocracy. The Chinese government has refrained from condemning the military takeover, but compared to Russia it has been conspicuously less supportive — China’s relationship with the Tatmadaw has always been complicated, and Beijing is hardly happy about the coup.

Whereas Moscow’s relationship to Myanmar is mostly limited to military-to-military ties, with scant social and economic interactions, China’s relations with its southern neighbour are more multi-dimensional. Beijing cannot afford to antagonise pro-democracy segments of Myanmar’s population, so it needs to adopt a more complex approach.

Moscow and Beijing are likely discussing the situation in Myanmar, but their strategies differ. Russia is driven by the desire to keep lucrative military contracts and possibly gain a foothold in the Indian Ocean. By contrast, Beijing is guided by more long-term strategic interests dictated by Myanmar’s immediate proximity to China’s Yunnan province.

Viewing itself as a global great power, Russia has a stake in maintaining a strategic presence in Myanmar, a geopolitically important country in the Indo-Pacific. To retain and expand Russia’s links with Myanmar, the Kremlin has banked on the generals. It remains to be seen if Moscow’s calculus will turn out to be the right one.

Artyom Lukin is Associate Professor at the Oriental Institute, School of Regional and International Studies, Far Eastern Federal University, Vladivostok.

Andrey Gubin is a Senior Researcher at the Russian Institute for Strategic Studies, Moscow.

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The United States and Japan agree in principle, but implementation is key

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Author: Glen S Fukushima, Washington DC

On 16 April, US President Joe Biden and Japanese Prime Minister Yoshihide Suga had their first in-person meeting in Washington.

U.S. President Joe Biden And Prime Minister Of Japan Yoshihide Suga Hold A Joint Press Conference (Photo: Reuters/Mills).

 

Inviting Suga to the White House as Biden’s first face-to-face meeting with another leader was meant to underline Japan’s importance as a US ally. It demonstrated to China that, despite Beijing’s efforts to woo Japan over the course of the Trump administration, Japan remains firmly allied with the United States. Biden used the opportunity to show domestic and foreign audiences alike that he rejects his predecessor’s denigration of partners and allies, and he will work closely with them to counter China’s growing influence. In Washington’s view, the meeting was a success.

The meeting also went well for Tokyo’s representatives. For Suga, the meeting was a chance to show the Japanese public that, despite his reputation for being a locally-minded politician, with little experience in foreign policy, he can be trusted to manage Japan’s relationship with the United States. Amid renewed tensions over the longstanding Senkaku Islands dispute the trip was also a signal to China that Japan maintains firm US support under the US–Japan Security Treaty. The leaders’ statement also included a message to North Korea that Japan maintains US backing including on the issue of Japanese abductees. The meeting was an opportunity for Suga to show that he deserves to be re-elected as president of the Liberal Democratic Party (LDP) this September, and that the LDP should be re-elected in general elections that must be called by October.

The three documents agreed between the two leaders — the US–Japan Global Partnership for a New Era statement, the US–Japan Competitiveness and Resilience (CoRe) Partnership and the US–Japan Climate Partnership on Ambition, Decarbonization, and Clean Energy — constitute the framework for cooperation between the governments. They build on the Joint Statement of the US–Japan Security Consultative Committee (2+2) issued in Tokyo on 16 March after a 2+2 meeting between US State Secretary Antony Blinken, US Defense Secretary Lloyd Austin, Japanese Foreign Minister Toshimitsu Motegi and Japanese Defense Minister Nobuo Kishi.

What attracted particular attention in Japan were the passages in the US–Japan Global Partnership for a New Era leaders’ statement that expressed ‘concerns over Chinese activities that are inconsistent with the international rules-based order’. The leaders underscored ‘the importance of peace and stability across the Taiwan Strait’ and encouraged ‘the peaceful resolution of cross-Strait issues’. This is the first mention of Taiwan in a US–Japan leaders’ joint statement since Richard Nixon and Eisaku Sato in 1969.

The Chinese government expressed its ‘strong dissatisfaction’ with the joint statement and countered that the expressions of concern meddled in China’s affairs. The United States and Japan are ‘ganging up to form cliques and fanning bloc confrontation’, according to the Chinese Foreign Ministry. Some in Japan worry that Suga may have gone too far in aligning with the United States against China and should have been more ambiguous in his language. Former Japanese vice foreign minister Yukio Takeuchi told the Asahi Shimbun that Japan had ‘crossed the Rubicon’ and must prepare for ‘retaliation’. Suga, under criticism from Beijing, stated in a Diet meeting on 20 April that the reference to Taiwan in the joint statement ‘does not presuppose [Japan’s] military involvement at all’.

The Japanese maxim soron sansei, kakuron hantai — to agree in principle but disagree on specifics, or to place the devil in the details — should be kept in mind. The four partnership documents contain specific programs and initiatives in which the United States and Japan will engage to deepen their ‘global partnership for a new era’. Yet the documents contain an abundance of statements of principles, aspirations and direction. Turning these into concrete action and tangible results will require considerable work, since whether in security, trade, technology, climate change, or human rights, American and Japanese concepts, interests, and priorities vis-a-vis China are not identical.

Though the meeting accomplished the objectives of both governments, there was a glaring perception gap between the two countries. The meeting was the top story in Japan across all news channels. In some newspapers, it occupied the first four pages. Yet few in the United States, except for foreign policy experts and Asia specialists, were even aware of the meeting. Suga appeared on-screen for about eight seconds on PBS NewsHour because he happened to be in the frame when a journalist questioned Biden on Iran. None of the five Sunday news talk shows covered the meeting amid discussions on Iran, Afghanistan, Russia, Cuba and special envoy John Kerry’s recent visit to China on climate change.

This difference in public attention and perception between the two countries may significantly affect the future implementation of the ‘global partnership for a new era’.

Glen S Fukushima is former deputy assistant US trade representative for Japan and China and was president of the American Chamber of Commerce in Japan.

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A clear agenda to save the WTO

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Author: Inu Manak, Cato Institute

The fate of the World Trade Organization (WTO) hangs in the balance after four years of assault by the Trump administration. But things are not as dismal as they appear. Turning the corner in 2021, the WTO has an opportunity to usher in a new era of trade cooperation.

Director-General of the World Trade Organisation Ngozi Okonjo-Iweala attends a session of the WTO General Council at the WTO headquarters in Geneva, Switzerland, 1 March 2021 (Photo: Fabrice Coffrini/Pool via Reuters).

To ensure the WTO remains fit for purpose, members should pursue changes in three areas: dispute settlement, negotiations and the WTO’s monitoring function.

Rules are only as good as they are enforceable. WTO rules have taken a hit with the continued blocking of appointments to its Appellate Body by the United States. Since the Appellate Body became defunct in late 2019, appeals to panel decisions have remained unresolved. As of March 2021, a total of 18 disputes have fallen into this crevasse.

While US President Joe Biden has not yet acted on lifting the impasse at the Appellate Body, there is hope that a solution can be found. The core of any compromise, however, requires a rethink of the Appellate Body.

Simon Lester has suggested that a possible compromise could involve limiting the scope of appellate review, increasing deference on ‘trade remedies’ and giving members more power to object to reasoning they disagree with in reports. Jennifer Hillman has put forward a number of strong suggestions such as an oversight committee, an amended set of the Walker Principles, and limiting the length of service of the Appellate Body Secretariat’s staff.

This idea should be taken further by limiting service to the Secretariat to five years, after which individuals must leave the WTO entirely. While this may sound like a radical proposition, it solves the problem of Secretariat staff being shuffled to the Legal Affairs or Rules Divisions where they then assist panellists with the drafting of panel reports, and also would breathe new life into the organisation every few years with a new cadre of young lawyers.

The next crucial area for reform is in the WTO’s negotiating function. The WTO has not concluded any major negotiating ‘rounds’ since its founding, though it has completed other important negotiations such as the Trade Facilitation Agreement (TFA). These stalled negotiations stem, in part, from disagreements over the level of commitment that developing countries should undertake.

Recent negotiations to eliminate subsidies that contribute to illegal, unreported and unregulated fishing, as well as subsidies that lead to overcapacity and overfishing, are a case in point. China leads the top five providers of subsidies, followed by the European Union, the United States, South Korea and Japan. Together they make up 58 per cent of all global fisheries subsidies. And while nine out of fifteen of the largest marine capture fish producers are developing members, many continue to request special and differential treatment (SDT).

The fisheries talks are important because the subject best illustrates modern challenges to trade. This is not just about subsidies, but environmental sustainability and development as well. How we navigate the intersection of these issues will test the WTO’s ability to adapt to new circumstances.

Finally, one of the greatest achievements of the WTO is one of its least talked about functions — to monitor whether members uphold their obligations. This monitoring largely takes the form of peer-to-peer exchanges, but also includes thematic discussions on certain issues to avoid the emergence of trade barriers in the first place. A standout in this regard is the Technical Barriers to Trade (TBT) committee, where members can raise ‘specific trade concerns’ (STCs) against another member’s measure if it is thought to be in violation of the TBT agreement.

The committee provides a forum for discussion of regulatory outliers and gives members the opportunity to express why certain actions may have a negative impact on trade. Even during the pandemic, the TBT committee continued to function and had a record number of STCs submitted through a newly established written procedure. Its success should be studied and, if possible, replicated in other committee work throughout the organisation.

One persistent issue that has plagued the monitoring function is the submission of notifications. Members are obliged to notify measures that could potentially impact trade and these notifications serve as the basis for many of the discussions in committees. While this has received acute focus during the COVID-19 pandemic, as members called for greater transparency in trade actions, the notification problem touches a number of other areas.

For instance, notifications on subsidies are a key issue for the largest members, especially given the growing concern over industrial subsidies. Frustration with the lack of notifications has led some members to file ‘counter-notifications’ where they notify on another member’s behalf. But counter-notifications are a time and capacity intensive process, leaving less developed members at a disadvantage. The only solution is to improve the notification process across the board.

The WTO is a vital part of the international trading system. The problems it is currently facing may seem insurmountable, but that would be the case even if we were to try to create a new organisation from scratch. The options are clear — a return to beggar-thy-neighbour policies and a growing spaghetti bowl of rules, or a multilateral approach that makes the benefits of trade accessible to all. The choice is up to the WTO’s members.

Inu Manak is a Research Fellow in the Herbert A Stiefel Center for Trade Policy Studies at the Cato Institute.

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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COVID-19 won’t rattle East Asian supply chains

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Author: Fukunari Kimura, Keio University

In the early stages of the COVID-19 pandemic, there was a series of overreactions about the viability of global value chains (GVCs), with some mixed feeling about China.

Workers sew clothing at a Vietnamese garment factory in Hung Yen, December 2020 (Photo: Aly Song/Reuters).

Many claimed that the pandemic would mark the end of GVCs and that there would be a massive ‘reshoring’, with production pulled back from developing to developed countries. Others claimed that GVCs needed broadening to boost resilience and that companies should avoid concentrating their operations in one location such as China.

But GVCs have mostly remained intact over the past year, with more intensive use of communications technology.

The initial reactions were partially due to an insufficient understanding of the multiple shocks generated by COVID-19. Health policies — including lockdowns and other social distancing measures— created three kinds of shocks to GVCs: negative supply shocks, positive demand shocks and negative demand shocks. These shocks have emerged in different places at different times and have confused observers.

For countries other than China, the first impact of COVID-19 was negative supply shocks. In February 2020, imports from China — both parts and components, and final products — suddenly stopped. But as China successfully contained the virus, import supply was quickly restored. As COVID-19 spread to other countries, lockdowns and other measures caused negative supply shocks, though the effects were minor and temporary in East Asia.

In many countries, there were initial positive demand shocks for personal protective equipment (PPE), and countries importing such goods experienced panic around sudden spikes in demand. Some countries introduced export restrictions on PPE and other ‘essential’ goods to prioritise domestic demand, without regard to the credibility of the rules-based trade regime. But after the initial shock, things calmed down and the market ensured stable supplies of most goods — except vaccines.

COVID-19 also generated positive demand shocks for telework and stay-at-home-related goods. Sales of laptops, communication-related equipment, dishwashing machines and water purifiers boomed. East Asian exports to North America and Europe recovered primarily due to these positive demand shocks.

A third impact of COVID-19 was negative demand shocks. Lockdowns and social distancing, businesses closing and income losses reduced the demand for a wide range of goods and services. The slump in GDP was felt all over the world. But unlike the global financial crisis in 2008–09, many countries implemented mitigation policies on an unprecedented scale. So, there was no collapse of the financial sector and asset markets, and consumer purchasing power held up.

The trough of international trade was much shallower than that of GDP, both of which largely bottomed out across the world in May 2020. While particular sectors such as the garment industry, transportation, tourism and on-site services have suffered serious damage, major reshuffling of GVCs seems unlikely.

Initial concern about GVC viability was fuelled by overreaction to the initial negative supply shocks and positive demand shocks, and anxiety about China. But private companies remained calm. They had already optimised the balance between efficiency and risk management before COVID-19. They knew that negative supply shocks would be temporary, positive demand shocks might create business chances and negative demand shocks needed to be watched carefully to gauge their depth and length.

The world has not observed any massive reshoring or relocation of production operations. Machinery international production networks — characterised as a task-by-task international division of labour — have been more robust and resilient than other types of transactions as they proved to be in past crises including the GFC and the East Japan Earthquake.

To what extent did US–China decoupling already under way affect decision-making for GVCs during COVID-19?

For Japanese companies, to take one example, China is attractive for production sites and markets. But China is also prone to sudden politically driven policy changes. So, Japan’s China Plus One strategy to extend its GVCs has been in place since 2010 when disputes over the Senkaku (Diaoyu) Islands began to escalate. Labour-intensive operations started moving earlier in response to labour cost pressures and some quiet reallocation of production occurred in response to the US–China tariff war. COVID-19 aggravated the conflict and accelerated decoupling. That trend continued. However, most operations in China remain as they were.

The limited exceptions are companies with sensitive technologies that require semiconductors or sensitive materials such as rare metals, as well as companies producing PPE. Some of these re-shored and others moved part of their production from China to other countries. Japan’s Ministry of Economy, Trade and Industry provided two subsidy programs in 2020–21 for supply chains targeting these products. One was for reshoring and the other for diversification, mainly to ASEAN countries. Whether a policy tool such as a subsidy is optimal or not can be arguable, but the two programs were well accepted among Japanese companies.

The US–China confrontation has morphed from trade issues into great power competition. Countries such as Japan and South Korea heavily depend on a national security system underpinned by the United States and have an incentive to behave as good allies. Careful assessment of the extent of decoupling in terms of the types of technologies, products, and firm nationalities will be crucial in the coming years.

Further extension and deepening of international production networks are desirable for enhancing resilience. India’s participation in these would have helped do that so its decision to walk out of Regional Comprehensive Economic Partnership negotiations was unfortunate. By improving the investment climate and enhancing connectivity, South Asia could also participate in tightly connected East Asian production networks and thereby achieve more rapid economic growth and poverty alleviation.

Fukunari Kimura is Professor in the Faculty of Economics at Keio University and Chief Economist at the Economic Research Institute for ASEAN and East Asia (ERIA).

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

 

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Why China’s vaccine diplomacy is winning

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Author: Suisheng Zhao, University of Denver

Chinese COVID-19 vaccines have been shipped to more than 80 countries for market or emergency use. Among them, 53 countries received vaccines for free (including developing countries in Africa and some strategically important Asian countries such as the Philippines and Pakistan) and 27 middle-income countries paid for doses. Rolling out of vaccines to developing countries, Beijing has framed itself as a solution to the pandemic rather than the origin of the coronavirus.

People wearing protective masks sit as they queue before receiving a dose of China's Sinovac Biotech vaccine for the coronavirus disease (COVID-19) at the Tanah Abang textile market, as Indonesia drives mass vaccination for vendors in Jakarta, Indonesia, February 17, 2021 (Photo: Reuters/Ajeng Dinar Ulfiana).

China’s advanced vaccine diplomacy stands in contrast to the ‘me first policies’ of the United States and the European Union. With a shortfall in supplies, US and EU leaders have faced high infection rates and death tolls at home and feel the need to inoculate their domestic populations first. This has left the world’s poorest and most vulnerable people without vaccine supply and at risk. China has not faced these problems and can afford to send vaccines abroad.

Just by showing up and helping plug gaps in the global supply of vaccines, China has gained ground in vaccine diplomacy. President Xi Jinping pledged that Chinese vaccines would be provided as a global public good. But a large portion of Chinese vaccines are not free — some countries have paid Chinese vaccine makers. Still the absence of the United States and European Union from vaccine diplomacy is not lost on countries struggling to put shots in people’s arms.

Many countries would prefer US or EU-made Pfizer and Moderna vaccines over China’s vaccines if given the choice, yet they cannot access them. These countries are desperate and have jumped at the opportunity to receive Chinese vaccines.

Chinese companies are also more willing than their western counterparts to strike licensing deals to produce vaccines in foreign countries. For example, Indonesia has become a regional hub for Sinovac’s CoronaVac through its state pharmaceuticals company Bio Farma. The United Arab Emirates (UAE) chose Sinopharm because it was willing to conduct phase three clinical trials in the UAE and build native vaccine production capabilities. Sinopharm also arranged to manufacture its vaccine in the UAE for regional distribution.

Beijing’s vaccine diplomacy involves propaganda to boost perceptions of China as a generous and responsible power. Chinese media has covered every delivery of vaccine shipment. The scene is set by a standard script. When a cargo plane lands, it is greeted by senior local leaders accompanied by Chinese ambassadors fawning over the vaccine cargo.

Vaccine diplomacy has helped increase China’s influence and enabled it to capitalise on new opportunities. China has rolled vaccines out to participants of its Belt and Road Initiative (BRI) and enhanced preferential access to jabs alongside investments in infrastructure and connectivity projects. According to an April Think Global Health report, of the 56 countries to which China pledged doses, all but one were participants in its BRI.

Naming it the Health Silk Road, vaccine diplomacy has provided a foothold for China’s pharmaceutical industry that has been plagued by scandals and low levels of trust at home and abroad. Making Sinovac and Sinopharm household names in foreign countries, China may change these perceptions.

Although Chinese vaccine makers were among the earliest in the world to begin clinical trials and self-reported some key results, many have not published complete data in peer-reviewed journals. This has fuelled scepticism about their safety and effectiveness. Gao Fu, director of China’s Centre for Disease Control and Prevention, noted in April that Chinese vaccines were not as effective as hoped and mixing them was among the strategies being considered to boost their effectiveness.

Some countries have been reluctant to greenlight Chinese vaccines. Singapore received its first shipment of Sinovac vaccines in February, but Singaporean regulators have not approved its use, moving ahead with using Pfizer and Moderna vaccines. Polish President Andrzej Duda spoke with President Xi about buying Chinese jabs in March. Yet Poland’s health authorities have recommended against using Chinese vaccines because of a lack of data.

Concerns have also arisen about whether China’s production capacity is able to keep pace with an ever-expanding list of overseas customers and its domestic vaccination campaign. The Turkish government ordered 20 million doses of China’s Sinovac vaccine. But delayed shipments forced the government to repeatedly revise its vaccination timetable. Egypt purchased a total of 40 million doses of the vaccine from Sinopharm in January but had received only a tiny percentage of its vaccine order from China by the middle of April. This tension will intensify as China’s domestic demand for vaccines increases.

China has continued with vaccine diplomacy in the absence of the United States and other Western countries. These countries should compete and cooperate with China to overcome bottlenecks in the global distribution of vaccines and ensure that all nations, particularly developing countries, receive the vaccines they need to finally beat COVID-19.

Suisheng Zhao is Professor and Director of the Center for China–US Cooperation at the Josef Korbel School of International Studies, University of Denver. He is Editor-in Chief of The Journal of Contemperary China.

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Bolstering the Quad beyond its military dimensions

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Author: John Blaxland and Ashok Sharma, ANU

The Quadrilateral Security Dialogue (Quad) — comprising the United States, India, Japan and Australia — has been reinvigorated in response to China’s growing assertiveness. Improved interoperability and collaboration over shared defence and security concerns may help deter China. But other measures are needed for the Quad to make a real difference, including prioritising trade, investment and the environment, and enhancing cyber and maritime security cooperation in the Indian Ocean.

Yoshihide Suga, Japan's Prime Minister, speaks while a monitor displays US President Joe Biden, Australia's Prime Minister Scott Morrison and India's Prime Minister Narendra Modi, during the virtual Quadrilateral Security Dialogue (Quad) meeting at his official residence in Tokyo, Japan, on Friday 12 March 2021 (Photo: Reuters/Kiyoshi Ota/Pool).

China has been engaging provocatively in the Quad’s periphery, notably in the East China Sea, South China Sea and the Line of Actual Control in the Himalayas. China has invoked trade sanctions and launched wide-ranging and intrusive cyberattacks while deftly avoiding open conflict. China strives to assert itself operating just below the kinetic tipping point while consolidating its position militarily across the maritime, land, air, space and cyber domains.

The Quad has responded with diplomatic signalling and soft balancing. Much more will be required for it to have a significant and enduring effect.

India has found common cause with Japan, the United States and Australia to deter further Chinese encroachment, but a military focus alone will not suffice. The recent deployment of the Quad’s naval forces for Exercise Malabar and the elevation of the Quad to the heads-of-government summit level has cleared the obscurity surrounding the Quad’s united front.

Additional collaboration can be expected in the cyber, space and maritime domains to enhance surveillance and deterrence. All four states have been the subject of extensive and persistent cyberattacks emanating from nation-state-supported institutions, notably from China.

The United States is investing in its Indo-Pacific strategy, bolstering its military capabilities particularly in the Western Pacific. President Joe Biden is placing renewed emphasis on environmental concerns but remains wary of regional trade arrangements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. India likewise has enthusiastically embraced enhanced regional security cooperation but has shied away from the Regional Comprehensive Economic Partnership. Australia has emphasised its ‘Pacific Step-Up’ but has dulled its impact through its reluctance to prioritise climate change concerns keenly felt in certain quarters in the Pacific.

While Biden has stressed the importance of mitigating climate change, other Quad partners must also prioritise climate concerns and the vulnerabilities of low-lying states. China has doubled down on its rhetoric espousing climate concerns, although it remains heavily reliant on fossil fuels.

The Quad’s security-focussed strategy is not going to be enough to significantly alter the balance of power in the Indo-Pacific or deter further abrasive assertiveness, especially while China strengthens its Belt Road Initiative (BRI). If the United States and India do not prioritise economics — notably their trade and investment opportunities — then the effect of military investment and environmental initiatives will be negated.

The Quad vaccine project is one example of a united front in this direction. The Johnson & Johnson vaccine was developed in the United States and will be manufactured in India. The vaccine is being funded by the United States and Japan, and Australia has promised to use its logistics capabilities to distribute it to Southeast Asian and Pacific nations.

The member countries have also agreed to collaborate in reducing reliance on China for vital rare earth materials used in products ranging from mobile phones to wind turbines and solar panels. China has an effective monopoly over a range of these. Before the February 2021 Quad Summit, Biden issued an executive order to dismantle China’s dominance of the supply chain for rare earth materials. Australia has vast reserves of rare earth elements, presenting this initiative with significant new opportunities. These developments will transfer the Quad members’ strategic convergence over security matters into the economic arena.

The Quad’s vaccine diplomacy is a significant move to match China’s equivalent initiative. For the Quad to have enduring utility and greater effectiveness, its member states will need to develop a comprehensive program of economic activities. This will need to benefit not only the Quad members but also other countries in the region.

The Indo-Pacific strategy is developing on a number of levels, pointing to the need to include more like-minded nations as part of a multilateral response to China’s geopolitical ambitions. These ambitions are manifested militarily in China’s maritime advances and economically through the BRI. Any Quad-plus expansion will have to be handled sensitively and inclusively to avoid undue pushback from ASEAN and its members. An expanded Quad grouping at some future time could look to involve countries like South Korea, New Zealand, Vietnam and other concerned ASEAN member states.

After some ups and downs, the Quad has emerged as a body which its members see as having considerable utility. If the Quad is to be successful in balancing and deterring an increasingly assertive China, it will need to extend its focus beyond security. It must venture into the realm of trade and investment with a focus on environmental issues to address the needs of states buffeted by growing great power competition.

John Blaxland is Professor of International Security and Intelligence Studies at the Strategic and Defence Studies Centre, The Australian National University.

Ashok Sharma is a Visiting Fellow at the Strategic and Defence Studies Centre, The Australian National University, and at the University of New South Wales Canberra at the Australian Defence Force Academy.

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Managing the Vietnam–Indonesia North Natuna Sea dispute

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Author: Xuan Dung Phan, RSIS

Overlapping exclusive economic zone (EEZ) claims in the waters surrounding the Natuna Islands in the South China Sea have been an irritant in Vietnam–Indonesia bilateral relations for decades. Pending an EEZ delimitation agreement, the two Southeast Asian neighbours should promote confidence-building measures to better manage the dispute.

Two Indonesian officers stand near a vessel from Vietnam which is secured at the Pier of the Pontianak Fishery and Marine Resources Monitoring Station in Kubu Raya Regency, West Kalimantan Province, Indonesia, 12 April, 2021 (Photo: Arief Nugroho/Opn Images/Cover Images via Reuters).

Vietnam and Indonesia signed an agreement on a continental shelf boundary in 2003, but the EEZ between the two states in the North Natuna Sea remains contested. Due to competition over jurisdiction in these waters, Vietnam and Indonesia frequently clash over the issue of illegal, unreported and unregulated (IUU) fishing.

In 2017, a Vietnamese coast guard vessel reportedly intercepted an Indonesian attempt to escort Vietnamese boats that were caught fishing in the disputed waters. The incident resulted in an Indonesian officer being held by the Vietnam Coast Guard. A diplomatic squabble took place in 2019 when Indonesia destroyed 38 Vietnamese flagged vessels accused of engaging in IUU fishing. Hanoi protested the action, arguing that Jakarta wrongly arrested Vietnamese fishers. The latest incident was in late March 2021 when the Indonesia Coast Guard arrested two Vietnamese fishing vessels that Vietnam claimed were operating in their waters.

So far, both countries have tried to manage the dispute amicably. Top Vietnamese and Indonesian defence officials have pledged to treat fishers humanely and not resort to the threat or use of force.

There is also political will from both sides to end the current state of uncertainty. Since 2010, Vietnam and Indonesia have engaged in 12 rounds of talks on EEZ delimitation. The latest one took place in 2019. The two Southeast Asian neighbours have expressed a desire to expedite the negotiation process and are discussing a provisional guideline to prevent further maritime spats.

The conclusion of EEZ delimitation talks will strengthen Vietnam–Indonesia bilateral ties and allow the two countries to better address the shared concern of IUU fishing. Experts have long suggested that Southeast Asian states solve intra-regional maritime contestation to enhance coordinated efforts to push back against Chinese maritime expansionism. As the Vietnam–Indonesia overlapping EEZ claims lie within China’s nine-dash line, a delimitation agreement will further showcase both countries’ rejection of Beijing’s unlawful claims.

The issue has become protracted because of conflicting legal perspectives. Vietnam favours a single boundary for both the continental shelf and the EEZ. Indonesia insists on treating the EEZ and the continental shelf as two separate legal regimes and thus favours the equidistance principle as the method of demarcation. Reaching an agreement will require mutual understanding and accommodation from both sides.

The continued maritime encounters in the North Natuna Sea may erode trust and pit public opinion in the two countries against each other, undermining the negotiation process. To better manage their dispute, Hanoi and Jakarta should engage in confidence-building measures pursuant to Article 74(3) of the United Nations Convention on the Law of the Sea. The Article provides that coastal states ‘make every effort to achieve a provisional arrangement [pending a maritime delimitation agreement]’.

Both countries should establish provisional zones in the overlapping areas for joint fisheries exploitation. This is a common practice among states with unresolved maritime boundaries. A temporary measure such as this allows both parties to address fishery issues cooperatively while bypassing the bilateral dispute itself. A Vietnam–Indonesia fishery agreement should include provisions on maritime conservation as well as a joint jurisdiction arrangement.

There are strong incentives for Hanoi and Jakarta to pursue this provisional arrangement. For Vietnam, its fishers will be able to expand their operations. In recent years, many Vietnamese fishing boats have been forced to fish offshore due to depleting inshore fish stocks and Chinese assertiveness in the South China Sea. For Indonesia, it could enlist the Vietnam Coast Guard to support it in fending off China’s claim to traditional fishing grounds that cover their overlapping EEZ.

In addition, the two countries should jointly conduct public information campaigns to raise awareness among Vietnamese fishing communities. Many Vietnamese fishers who engaged in IUU fishing have limited knowledge of neighbouring coastal states’ maritime boundaries and maritime laws. Workshops should be held in the Vietnamese Provinces of Khanh Hoa, Ba Ria-Vung Tau and Binh Thuan, the origins of many fishing vessels Indonesia has apprehended in recent years.

Finally, Vietnam and Indonesia should step up coast guard cooperation. In 2017, the two countries signed a letter of intent to enhance coast guard cooperation to ensure maritime security and safety in areas around the continental shelf boundary. Both sides should conduct frequent exchanges, as well as joint training exercises focussing on search and rescue, combating IUU fishing and countering piracy.

As political and economic heavyweights of Southeast Asia, Vietnam and Indonesia should demonstrate that they can manage their bilateral disputes amicably and in accordance with international law and the ASEAN way of consultation, consensus and non-confrontation. Efforts in this regard will enhance mutual trust between the two countries and ultimately facilitate EEZ delimitation.

Xuan Dung Phan is a graduate student and research assistant at the S Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore, and a member of the US–Vietnam Next-Generation Leaders Initiative at the Pacific Forum.

The post Managing the Vietnam–Indonesia North Natuna Sea dispute first appeared on East Asia Forum.



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