Research Group on 'The Indo-Pacific' FY2021－# 4

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With the 2020s experiencing a continuing COVID-19 pandemic and supply chain disruptions, the economic strategies of countries in the Indo-Pacific region have also become complicated.

Until a few years ago, the United States was trying to create rules for free trade and investment in the region excluding China by leading the Trans-Pacific Partnership (TPP) mega-trade agreement, which would become a leverage for the US in the economic integration.

Meanwhile, China launched its "Belt and Road Initiative" infrastructure investment strategy in 2013 pledging trillions of dollars in overseas infrastructure loans, thereby increasing its economic connectivity with neighboring regions and strengthening its own influence.

After four years of the Trump administration in September 2021, however, China formally applied for membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which came into effect among 11 countries after the US withdrew from the TPP.

In addition, the largest mega-regional trade agreement in history, the Regional Comprehensive Economic Partnership for East Asia (RCEP), in which China participates and whose members account for 30% of global GDP, was agreed upon among 15 Indo-Pacific countries in November 2020 and officially entered into force on January 1, 2022.

Despite all the trade actions in the region, the US has shown no signs of returning to the CPTPP and, instead, has been pursuing lackluster trade policies such as concluding digital agreements and advocating an Indo-Pacific Economic Framework (the details of which have yet to materialize). The US is rather more enthusiastic about infrastructure investment, which has been China's specialty. At the G7 summit in June 2021, the Biden administration, which also aims to rebuild the US economy after the COVID-19 pandemic, called on the international community to embark on "Build Back Better World (B3W)", a global version of the "Build Back Better" program it is pushing domestically. The US sought the support of the leaders of participating countries as a counter to the China-led Belt and Road Initiative. How on earth did such a reversal of strategic emphasis come about? While the geo-economic structure of the US-China confrontation is analyzed primarily at the international level, the strategies and policies are largely dictated by domestic politics and domestic factors in these countries.

China's "Dual Circulation" Economic Development Strategy

Why China is seeking to join the CPTPP? China's current economic strategy is part of a new development strategy that aims to establish a domestic-international dual circulation economy as presented by the Central Political Bureau of the Communist Party of China in May 2020. This development strategy, which seeks to upgrade industrial structure and innovation, is an evolution of the "Made in China 2025" roadmap for economic development announced in 2015. Under the philosophy of the 14th Five-Year Plan announced in March 2021 that calls for "innovation, cooperation, green, openness, and sharing", China aims to achieve high-quality economic development.

Looking at these goals from the perspective of China's domestic politics, we can point to the importance of using external pressure to reform the economic structure. Elsewhere, the author analyzed the reasons why the Chinese government published positive assessments of the TPP between 2013 and 2016¹. The author concluded that the reformist Chinese leadership, who wanted to promote economic reforms, had used the rhetorical strategy that participation in the TPP meant gaining international status as a "great power" and that any opposition to it was to hinder the rise of China's national prestige. This is said to have been a strong factor in China's application to join the CPTPP². In addition, in response to concerns about global supply chains' excessive dependence on China, whose problem has become more visible during the COVID-19 pandemic, and to increasingly pronounced moves to return manufacturing capabilities to home markets, China has a pressing need to solidify an inclusive free trade zone.

US Middle-Class Diplomacy

In the United States, on the other hand, a proactive trade policy is unlikely to emerge from the current domestic political climate. The Joe Biden administration came into power in January 2021 after defeating Donald Trump, who had an "America First" policy, with promises during the presidential election campaign that the United States would push for "middle-class diplomacy³."

This "middle-class diplomacy" is an approach designed to ensure the middle class at home feel the benefits of US diplomacy and to realize goals that help improve their lives⁴. One example is the "worker-centric trade policy" advocated by the Office of the US Trade Representative (USTR).

The biggest obstacle to this foreign policy approach by the Biden administration is the midterm election coming up this November (2022). Amidst the never-ending COVID-19 pandemic, support for the Biden administration has been stagnant, and Democratic candidates are expected to face uphill battles in the election. In electoral politics, support for free trade and proactive trade policies, including support for the CPTPP, will not only put candidates, especially those around the protectionist Rust Belt, in danger of losing their election but will also give Trump supporters around the country, who still retain strong political influence, additional ammunition with which to attack Biden. In this sense, it is unlikely that the US will return to the CPTPP anytime soon.

Instead, infrastructure investment has emerged to maintain US leadership in the Indo-Pacific and globally. Specifically, starting with President Trump's 2017 "Free and Open Indo-Pacific" speech in Vietnam that accorded with Japan's vision, the US has been formulating policies in line with the Japanese government's longstanding recommendation of investment in "quality infrastructure", from establishing the International Development Finance Corporation (DFC) to advocating the Blue Dot Network. The Biden administration has inherited this economic strategy and is connecting the domestic infrastructure investment plan, the "Build Back Better" bills debated in the US Congress, and its global version B3W as the centerpieces of its foreign economic strategy.

However, with the RCEP set to enter into force and China applying to join the CPTPP as part of an assertive geo-economic strategy in the fall of 2021, the Biden administration was forced to adopt more proactive countermeasures. Utilizing opportunities of visits to Asia by Secretary of Commerce Gina Raimondo, US Trade Representative Katherine Tai and Secretary of State Antony Blinken, the Biden administration announced a (proposed) plan called the "Indo-Pacific Economic Framework". This plan is a broad set of non-binding targets covering such areas as trade facilitation, digital technology, supply chains, clean energy, labor standards and infrastructure investment, which does not, however, include the most attractive elements for Asian economies, such as the opening of US markets. Several months after the announcement, the specifics of this framework are still unclear⁵.

Indo-Pacific Economic Diplomacy

Japan's Indo-Pacific economic strategy is thus of great importance at a time when the Asian economic order is caught up in turmoil between the US and China. The CPTPP is a free trade agreement in which Japan successfully took the initiative after the US's exit. "Quality infrastructure investment" has also been an important Japanese economic foreign policy since its formal announcement in 2015 and, at the 2019 Osaka G20 summit, Japan secured the agreement of all participating countries, including China, to the "G20 Principles on Quality Infrastructure Investment."

With the US shifting its focus to domestic political issues and becoming more reluctant to engage the Indo-Pacific region economically, it is Japan that can provide public goods and leadership for the region, including trade and investment rules and enhanced economic connectivity. China's application to join the CPTPP should be actively discussed as an opportunity if it means that China intends to adhere to the economic rules and support regional prosperity in the future. It will not be easy to rebuild a world economy fragmented by the US-China trade war and the coronavirus pandemic. However, it is certain that Japan's Indo-Pacific economic strategy will become even more important and have a significant impact on the future course of the global economy.

(This is an English translation of a Japanese paper originally published on March 8, 2022.)

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