The final trimester of the year is usually a time for Asian multilateralism to take center stage; this year, not so much. The Asia Pacific Economic Cooperation (APEC) Leaders Meeting, which was supposed to take place in Chile, was cancelled (due to civil disturbances in the host country) while the East Asia Summit (EAS) proceeded without either US President Donald Trump or Vice President Mike Pence (his normal stand-in) in attendance. Regional economic developments (and US trade actions impacting the broader Indo-Asia-Pacific region) grabbed the headlines instead. Regional Comprehensive Economic Partnership (RCEP) participants gathered along the EAS sidelines to finalize their trade agreement, sans India, which balked at the last minute. Meanwhile, the White House and US House of Representatives, while locked in a battle over impeachment, nonetheless reached common ground on the US-Mexico-Canada Trade Agreement (USMCA) while the administration announced a “phase one” trade deal with Beijing. There appears to be less than meets the eye in both agreements, but each impacts the region writ large. Finally, not to be overshadowed, the State Department issued its own explanation of the Free and Open Indo-Pacific (FOIP) strategy, complementing the Pentagon’s version, which was analyzed in our last issue.

APEC Leaders Meeting Abandoned

It was perhaps symbolic of multilateralism during the Trump era that the annual Asia Pacific Economic Cooperation (APEC) Leaders Meeting, scheduled to take place in Santiago, Chile in November, was canceled weeks before it was to commence. Mass protests triggered by Chilean President Sebastián Piñera’s neoliberal economic policies were to blame. If this year’s get-together was to have followed in recent tradition, little of substance would have been accomplished at the meeting itself, but US President Donald Trump and Chinese President Xi Jinping were supposed to sign a deal that would signal a truce in their trade war. That signing is now expected some time in January. The US reportedly offered to host the summit but APEC members must reach consensus on an alternative and no such agreement has emerged.

Chile cancels the November 2019 APEC meeting to focus on restoring order and security following mass protests. Photo: BBC

EAS: Right Message, Wrong Messengers

US participants at the EAS and associated meetings (such as the US-ASEAN 10+1) delivered all the right messages about US commitment to the region. The message was both reassuring—“The Trump administration is extremely engaged in and fully committed to this region”—and blunt: “The region has no interest in a new imperial era where a big country can rule others on the theory that might makes right. America is helping our ASEAN friends uphold their sovereignty.” The messengers were US Commerce Secretary Wilbur Ross, in the region for an Indo-Pacific Business Forum, and Robert O’Brien, the newly appointed National Security Advisor who was a complete unknown in Asia (and not exactly a household name in the US).

Trump’s decision to send Ross and O’Brien in his place was seen as an insult by many EAS heads of state. Last year, Pence was the senior representative; Ross was the lowest ranking official to ever represent the US at an ASEAN leaders’ event. Making matters worse, O’Brien was sent to the US-ASEAN meeting that seven out of 10 ASEAN heads of state boycotted in favor of their foreign ministers. Making matters even more worse, one US diplomat noted, “We are extremely concerned by the apparent decision [to send lower level officials to the meeting],” further noting that “a full or partial boycott by ASEAN leaders will be seen as an intentional effort to embarrass the President of the United States of America and this will be very damaging to the substance of the ASEAN-US relations.” Really? O’Brien also relayed the following personal invitation from his boss: “I would also like to take this opportunity to offer an invitation to all the leaders of the ASEAN to join me in the US for a special summit meeting at a time of mutual convenience in the first quarter of 2020.” It will be interesting to see if they take him up on this offer.

Meanwhile, the EAS Chairman’s Statement contained all the standard elements: the importance of ASEAN centrality, the need for Korean peninsula denuclearization, support for a South China Sea Code of Conduct, and the need “to keep markets open, inclusive and competitive through the rules-based multilateral trading system as well as improving transparency and predictability of the business environment.” Participants also remained “mindful of the potential severe impacts of climate change on the region’s socio-economic development and people’s livelihood.”

India Backs Out, Reshapes RCEP

As Satu Limaye notes in his chapter on India’s relations with the region, plans for the Regional Comprehensive Economic Partnership (RCEP), a 16-member trade agreement, were jumbled when India decided at the last minute to not join the deal. Talks were launched in 2012, and after numerous delays, agreement was anticipated by year’s end. And, indeed, by their November get-together, leaders from 15 of the 16 nations involved—all 10 ASEAN members, Australia, China, Japan, New Zealand, and South Korea—were happy with the deal. Indian Prime Minister Narendra Modi was the lone holdout; Indian officials explained that the agreement was not the “level playing field” that he sought.

The November 2019 RCEP Summit was held in Bangkok, Thailand. Photo: Bloomberg

Limaye explains Modi’s thinking in depth but the decision warrants mention here for two reasons. First, it rebalances internal dynamics among RCEP members. India was viewed as a strategic counterweight to China; without Delhi, Beijing is the dominant voice in the group. Second, the outcome suggests limits to optimism about India’s engagement in initiatives that would require it to depart from its history of nonalignment or be more forward leaning in the provision of public goods. In short, Delhi still defines its national interest narrowly.

Still, RCEP matters. When it goes into effect—it is expected to be signed early next year—it will be the world’s largest trade agreement by population and GDP. The Brookings Institution estimates that RCEP could grow global real incomes by $285 billion annually if in place by 2030, a pace twice that of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). While it is a lowest common denominator deal—in contrast to the “higher level” CPTPP—it makes important progress on several fronts. It provides for single rules of origin for members, reduces tariffs, and steps up intellectual property protections. Analysts note that it fails to advance rules on e-commerce and has limited provisions concerning services, investment, and labor and environment standards. (A detailed assessment is available here.)

If Modi changes his mind, little is required to join. The RCEP provisions that are designed for India will be frozen and the agreement has a general accession provision for later entrants.

A North American Trade Deal Ripples Through Asia

In December, the US finished political negotiations (between the Trump administration and the Democratically controlled House of Representatives) on the US, Mexico, Canada trade agreement (USMCA), the successor to the North America Free Trade Agreement (NAFTA), which Trump denounced “as the worst trade deal in history.”

USMCA is a modest improvement over NAFTA; one official assessment concluded it would have a “moderate” impact on the US economy, creating 176,000 jobs (the US added 266,000 jobs in November) over six years and raise GDP 0.35%. Experts note that many of the USMCA improvements were in the abandoned Trans-Pacific Partnership.

Still, the deal has a couple of items that matter for the Indo-Pacific region. First, clause 32.10 says that the US can withdraw from the USMCA if signatories sign a free trade agreement with a nonmarket economy—a code phrase generally assumed to refer to China. There is concern that the US will insert that clause in other trade deals to be negotiated, although it is hard to find a case where it might apply. The US has nearly two dozen agreements with other countries in the region and they are unlikely to agree to such a revision. The US is negotiating a trade agreement with the Philippines, but Manila already has an FTA with China through ASEAN. Vietnam could be a target—it is a nonmarket economy—but it is also a member of the CPTPP and the US has sought to improve relations with Hanoi; punishing it in this way is strategic incoherence.

Second, USMCA tightens rules of origin and has a minimum wage rule that will affect automakers that exploit the single North American market by sourcing manufacturing and assembly in Mexico or Canada. The new deal requires 75% of vehicle components to be manufactured in the US, Mexico, or Canada to qualify for zero tariffs; it was 62.5% in NAFTA. USMCA also requires that 40 to 45% of auto manufacturing be done by workers who earn at least $16 an hour by 2023. Both provisions will force companies to shift supply chains as manufacturers reduce sourcing of parts from cheaper-labor destinations in Asia (and Mexico). These provisions will also raise the price of North America-manufactured cars, making them less competitive at home and on international markets.

The new rules have forced Japanese automakers in particular to rethink strategies and approaches to the North American market. In some cases, they may change supply chains; in others, they could decide that some products aren’t worth selling in the US. Honda Motor Co. Executive Vice President Seiji Kuraishi explained the industry position when he revealed that “We will think of how to achieve the best allocation in the world.”

The Trade War Spillover

The world is awaiting the terms of the “phase one” trade truce reached between the US and China. (Despite all the attention, as this is being written, actual documents have not been released and the Chinese government has been conspicuously quiet about what it agreed.) Nonetheless, there has been a sense of relief following announcement of a deal. There is virtual unanimity among business strategists and economists that the trade war poses a significant risk for the global economy; Gita Gopinath, IMF chief economist, warned that global GDP would be cut by 0.6% as a result of the fight, adding that additional tariffs would increase the damage. The UN Economic and Social Commission for Asia and the Pacific (ESCAP) noted that for the first time in over a decade, Asia-Pacific economies’ trade in goods and services will decline by both volume and value.

The impact is uneven. The Asian Development Bank (ADB) noted in its 2019 Development Outlook Update that GDP expansion in developing Asia, while still strong, is anticipated to slow from 5.9% in 2018 to 5.4% in 2019, then increase to 5.5% in 2020, and the bank attributes part of the decline to the trade fight. (Another factor is a general slowdown in the US and Chinese economies, to which the trade war could also contribute). China experienced a 12% drop in exports in the first half of 2019, compared to the previous first six months of 2018, while exports from other developing Asian countries to the US rose by 10% over the same period. For example, Vietnam’s exports to the US were up 33%, while those of Bangladesh rose by 13%. ESCAP data shows export values from Australia, Japan, New Zealand, and South Korea estimated to decline by 6.9% in 2019; among developing nations as a whole, the fall will be a more modest 2.6%. The overall result is a net negative in economic terms, however, as Asia’s gains are less than China’s losses.

There is a second, less obvious but no less damaging, dimension to the trade war: the harm it does to the US role as the country leading and safeguarding an open trade system (or the perception of such). Trump has declared himself “tariff man” and insists that he will never relinquish that tool of economic statecraft. His unilateralism to ensure “fair trade” has had mixed success at best and, more worrying, inspired other countries to copy him. It has allowed Xi Jinping to argue that he is the status quo power when it comes to economic diplomacy, a case that is in fact hard to justify given China’s protectionist policies, but is nonetheless appealing to many (especially given their feelings toward the US president). Fortunately, other leaders have tried to fill the leadership vacuum; Japanese Prime Minister Abe Shinzo’s efforts are especially praiseworthy.

FOIP: Take Two

One of the criticisms leveled at the Obama administration’s pivot to Asia was that it appeared, the attempt to create a Trans-Pacific Partnership notwithstanding, to be more of a military than a multidimensional strategy. The same has been said for the Free and Open Indo-Pacific Strategy. In November, the State Department tried to remedy this by putting out its own report on A Free and Open Indo-Pacific: Advancing a Shared Vision. It describes a region in which “all countries prosper side by side as sovereign, independent states. That vision, shared with billions of people in more than 35 countries and economies, is based on values that have underpinned peace and prosperity in the Indo-Pacific for generations. Free, fair, and reciprocal trade, open investment environments, good governance, and freedom of the seas are goals shared by all who wish to prosper in a free and open future.”

While the report focused heavily on trade, investment, and economic development, it pulled no punches when it came to China’s South China Sea territorial claims, noting that Beijing’s “maritime claims in the South China Sea, exemplified by the preposterous ‘nine-dash line,’ are unfounded, unlawful and unreasonable.” It also stressed the importance of engagement with key allies and partners like Japan, South Korea, and India, while further noting that “We are committed to upholding a free and open Indo-Pacific in which all nations, large and small, are secure in their sovereignty and able to pursue economic growth consistent with international law and principles of fair competition.”

Meanwhile, as official strategy documents continue to talk about the centrality of US alliances as the foundation of any Indo-Pacific strategy, Trump keeps tweeting about the need for four-fold (or more) increases in host nation support from Korea and Japan as the price for keeping US boots on the ground. It’s no wonder US allies in Asia (as elsewhere) remain concerned about Washington’s true commitment to the region.

The first few months of 2020 may well set the tone for the year to follow: negotiations over the US force presence will make plain Trump administration thinking about the value of alliances while the US-China trade deal will demonstrate its commitment to genuinely trying to reform Chinese economic policies. Of course, there is always the prospect of unexpected developments reshaping the narrative—as the world was reminded during the first week of the new year, with the crisis between the US and Iran. With impeachment and an election looming in the US, it promises to be a busy and difficult year.

Chronology by Pacific Forum Program Manager Taryn Ino