EM – In the struggle for economic supremacy in Asia, openness is essential

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Mireya Solís explains that economic supremacy is built by connecting with the world, by healing offers, boosting growth and building domestic resilience. The true measure of international leadership in the post-pandemic world is to avoid closures. This article was originally published in Japanese as a comment by Nikkei in his Economics Classroom column.

At a time when borders and minds are closing, it is difficult to argue for openness to project governance in Asia, the most dynamic region in the world, epicenter of US-China rivalry rocked by two years of endless pandemic crisis yet in sight. But a leader of one is not a leader at all. Indo-Pacific powers will steer the regional economic order in the desired direction only to the extent that they remain vibrant network economies that create growth opportunities for themselves and others, keepers of a rules-based order that provides security for a fragile global economy, and are able to embrace openness to increase their competitiveness in the midst of a technological revolution while building resilience to external shocks. Even if narrow-minded self-interest beckons, enlightened leadership to deliver public goods to overcome the global health crisis is the winning card. These factors will weigh heavily in the ongoing race for economic supremacy, and the outcome is yet to be determined.

The tectonic plates of Asian economic architecture are shifting. The animating force is connectivity. The world’s largest trade agreement, the Regional Comprehensive Economic Partnership (RCEP), which includes 15 nations (but not India), will cut tariffs on member countries, which account for a third of global GDP. The defining feature of this mega-trade deal is a renewed commitment to supply chain trade with lenient rules of origin that allow values ​​to be accumulated across all members to qualify for tariff preferences. Intra-Asian trade and further coupling with the Chinese economy lie ahead.

The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) is entering a crucial new phase of enlargement. Barriers to admission are high, requiring general elimination of tariffs, compliance with disciplines on border issues for trade and investment integration, and unanimous support from all existing members who have ratified the agreement. Regardless of these hurdles, the queue of applicants is growing, from the UK to China, Taiwan and probably South Korea. Sectoral trade agreements are also in motion. The digital transformation in our economies and societies, driven by technological change and adaptation to the pandemic, has placed a high priority on negotiating digital trade agreements that can maintain open data flows while protecting personal data. The Digital Economy Partnership Agreement initiated by Singapore, Chile and New Zealand in 2020 is gaining momentum as South Korea and China work towards joining.

And yet the United States has not joined any of these regional, pan-regional or digital trade agreements. Instead, the Biden administration has promised to release an Indo-Pacific economic framework sometime in 2022 that will include trade facilitation, supply chain resilience, cooperation in the digital economy, decarbonization, infrastructure and labor standards. As a result, the economic pillar of President Joe Biden’s Asia policy will miss the core of economic integration: market access. A return to the CPTPP is not planned, no new trade agreement is in sight and even the pursuit of a digital deal has stalled. There is a real danger that the Biden administration will not provide the region with what it most desires: deeper and binding trade liberalization that can withstand the whims of US domestic politics and propel the post-pandemic recovery. A loose cluster of economic dialogues will not be enough to reclaim US leadership in the region.

China’s economic diplomacy has been the complete opposite, with Beijing seeking inclusion in key trade deals to shape the future of economic governance from within . But China is not a model of openness, practices only selective globalization and undermines the rule-based order with economic coercion. Beijing is striving for self-reliance in advanced manufacturing with heavy subsidies and regulatory benefits for state-owned companies, and ramping up its digital protectionism. The gap to be closed in meeting CPTPP eligibility requirements is not growing and shrinking. China’s signature connectivity strategy, the Belt and Road Initiative, has boosted the country’s diplomatic standing, but the dogged pursuit of self-interest — with onerous credit conditions — tarnishes Chinese leadership. Denying access to the Chinese market in order to dish out political punishment is a tool that the Chinese leadership is using with increasing frequency. Forced statecraft yields immediate gains for Beijing but has long-term negative consequences, encouraging others to diversify, freezing landmark economic initiatives (such as the investment deal with the European Union), and redrawing the lines of security cooperation, as evidenced in the nuclear submarine – AUKUS Boat Agreement created by Australia, Great Britain and the United States.

In this world of sharp-edged interdependence, Japan has a unique opportunity to be a trendsetter in balancing economic connectivity and economic security. Tokyo has a strong track record of promoting regional integration through trade deals, infrastructure investments, and digital rules. But an international system fraught with state rivalry and economic dislocation places great emphasis on protecting critical technologies and infrastructure, strengthening supply chains, and alleviating semiconductor shortages. Japan is perhaps the first country to appoint a cabinet-level official with an economic security portfolio, and the government is drafting a comprehensive bill on economic security measures. The opportunity lies in finding the right balance between promoting interdependence and insuring against its risks; The danger is over-correcting with zealous security restrictions that discourage innovation and drain the engines of trade and investment.

Openness is critical to Japan’s next reinvention: digital transformation. The quest for economic dominance will depend on a nation’s acumen to attract talent with world-class digital skills. Closed borders defeat that purpose, as illustrated in the figure below, which highlights the performance of China, Japan, and the United States in the International Institute for Management Development’s World Digital Competitiveness Ranking. The United States still leads in its ability to attract foreign students and highly qualified professionals, while China is lagging behind in the internationalization of human capital. But Japan continues to lag behind in a few key areas. It ranks last and third from 64 economies in terms of international executive experience and the availability of staff with digital skills, respectively. A comparison between the US and Japan shows a large gap in the net flow of international students and the ability to benefit from foreign professionals. Goals to internationalize Japanese universities and increase the number of foreign workers have taken a major hit with the outbreak of COVID-19. Two years later, the Japanese government enacted some of the most restrictive border measures to deal with the Omicron variant, and again postponed the issuance of new student and work visas. Longer entry restrictions could become the most insidious factor in Japan’s feared digital defeat.

The pandemic continues to teach us the harshest yet most obvious lesson: only global solutions will work. As long as large numbers of people in the developing world remain unvaccinated, new variants will continue to circulate, preventing everyone from recovering. Equitable distribution of the 11 billion doses of COVID-19 vaccine that the World Health Organization believes is necessary to overcome the pandemic remains an elusive goal. While China boasts the largest vaccine shipments in the world, this is not a case of generosity, as the vast majority of doses are sold (1.59 billion) and only a fraction are donated (126 million). The United States and Japan need to step up their immunization diplomacy as only 318 million and 30 million doses had been donated respectively by the end of 2021.

The path of least resistance is to emerge from the pandemic with a weakened, therefore, withdrawn. By connecting with the world—by offering healing, spurring growth, and building resilience at home—economic supremacy is built. The true measure of international leadership in the post-pandemic world is to avoid closures.

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