Wendy Cutler: Please share with us, from an Asian perspective, why it’s so important for the United States to have an active economic agenda with its Asian trading partners?

Minister Han-koo Yeo: There are many countries in the region that want strong, credible, and also predictable U.S. leadership and economic engagement in the region. Let’s think of this as two categories of countries: first, advanced countries and second, developing countries in the region. First, advanced countries, including Korea, Japan, and Australia, have gone through a paradigm shift in the trade environment and have also experienced supply chain disruption, climate crises, and other challenges. These countries need to tackle these global challenges with a strong partnership with the United States. Additionally, China’s economic ride for the past couple of decades has been phenomenal, and I think the United States could play a constructive role of balancing it out in the region.

When it comes to developing countries in the region, e.g., ASEAN (Association of Southeast Asian Nations) countries, India, they need market access to the United States and they want to be integrated into the U.S.-led global supply chain. In fact, many countries in the region, starting with Japan, Korea, and Singapore, have moved up in the industrial and technology ladder through economic cooperation with the United States. So, from the perspective of both developed and developing countries, U.S. economic leadership in the region is critically important. The current U.S. administration should get credit for returning to the region and resuming its leadership, even if the economic and market access engagement in the region is not as robust as many would have preferred.

Cutler: You mentioned that developing countries in the region welcome becoming part of the U.S.-led supply chain network. But, would this not be at the expense of China?

Yeo: No. These countries are being rapidly integrated into the supply chain led by China. But they realize that if there is too much dependence or too much concentration on one country, that becomes a vulnerability and a risk. It’s a matter of overall overdependence on one partner, especially China. So, developing countries want to expand their trade and supply chain integration with China, while also seeking a more active regional role from the United States and participating in these U.S.-led supply chains as well.

Cutler: Under the Biden administration, the United States has basically retreated from pursuing market-opening agreements or free trade agreements. Is there still a hope in the region that at some point the United States will go back to that model, even if not as robustly as it has in the past? Are countries still interested in pursuing free trade agreements with the United States?

Yeo: Obviously, they woke up to this brutal reality that things have changed in the U.S. political environment. In my view, it’s inconceivable to go back to this previous era where the United States played a leadership role in bilateral, regional, and multilateral trade negotiations. But I also think that there’s wishful thinking that maybe four years or even eight years from now, a return to a market-opening agenda could happen.

Cutler: Let’s discuss the Indo-Pacific Economic Framework (IPEF), the cornerstone of the Biden administration’s economic engagement in the region. Many people, both in the United States and Asia, have been skeptical about this initiative. But I note, Minister Yeo, that you have been supportive and have written a number of pieces pointing to potential benefits and the importance of this initiative. Can you share with us your views on IPEF, and in particular do you think it will be able to deliver concrete outcomes and provide benefits to all its members the way it’s constructed now?

Yeo: Yes. We live in a different world right now. For example, Korea has gone through a series of supply chain shocks and disruptions for the past few years. Like others, we quickly realized the absence of a new template for internal cooperation to cope with these new kinds of global challenges. Korea is one of the most wired countries with its extensive FTA network with countries all around the world, including RCEP, and Korea has been aiming to join CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership). But these traditional FTAs weren’t really designed to deal with the new types of challenges that we are facing. That’s why I think that these new types of economic cooperation agreements, such as IPEF, could play a meaningful role to fill the gap left by more conventional types of trade agreements. I believe that we should continue to advance trade liberalization through conventional FTAs (bilateral and plurilateral) but also, we need these new templates for new challenges, such as supply chain resiliency, decarbonization, and so on. Although IPEF is not perfect, it’s a meaningful first step.

Cutler: If Vice President Harris becomes president, there is an assumption that she would continue many of Biden’s policies and initiatives in this space, including IPEF. If you could offer her some words of advice on how to build on the current IPEF to make it more meaningful for Asia, what elements would you suggest could use strengthening?

Yeo: Vice President Harris is known for her strong advocacy on climate change and her environmental agenda. So, for example, the clean energy agreement in IPEF could be a starting point on which to build. The current text creates a cooperative work program, which is a way in which IPEF member countries can launch concrete projects that are of common interest to these countries and then aim to produce tangible outcomes. For example, they launched a regional hydrogen power project, which is a promising new source of clean energy, with new supply chain development and new ways to trade hydrogen. However, there’s a lot of work to do to develop tangible ways to activate this hydrogen power market. I think that this kind of project could show that IPEF could be useful in bringing tangible outcomes and benefits to these member countries through dedicated implementation.

You may also know that a couple of months ago, Singapore hosted an IPEF clean energy investor forum, and it was reported that about $23 billion of potential clean energy investment opportunities were identified. Of course, what matters is how much of these investment pledges can actually materialize into projects; but in order to do that, IPEF members need to work together to resolve investor grievances, including extensive red tape and bureaucratic hurdles.

Cutler: As you know, the United States has put the IPEF trade pillar effectively on hold through the election season. A lot of progress was made, but we also hear that a number of developing country members of IPEF had concerns about the labor provisions, in particular. Do you think if these talks were resumed quickly after the election that they could be swiftly concluded or do you think that there are larger differences in positions between the countries that could necessitate a lengthy negotiation?

Yeo: I think it’s more of a problem on the U.S. side than for other IPEF members. What I’m particularly worried about is the digital trade component. Recently, the WTO (World Trade Organization) e-commerce plurilateral joint statement initiative was concluded with its text “stabilized.” Although there is a shortage of more ambitious outcomes, I still think this is a meaningful achievement. The digital trade and e-commerce market in the region is exploding. These markets have young populations and growing middle classes, and many are interested in joining the Digital Economy Partnership Agreement (DEPA). China is also showing interest in DEPA, so now the United States is falling behind. There are no rules of the road for digital trade and without globally agreed, high-standard, digital trade rules, I think these countries in the region tend to copy and paste the standards and infrastructure available from China. So, I am afraid that the United States is falling behind in developing new global standards and rules for digital trade.

Cutler: Former President Trump has made it clear that if he is elected, he would, early on in his administration, instruct the United States to exit IPEF, calling it “TPP-2” (Trans-Pacific Partnership). How do you think the region would respond to such a move? My sense is that many countries in the region are still trying to get over the U.S. exit from TPP, so how would such an act by President Trump be perceived in the region?

Yeo: First of all, IPEF is not TPP-2 — it’s completely different. U.S. withdrawal from IPEF is a very undesirable scenario that we want to avoid at all costs. I also think if that happens, the credibility of the United States will be damaged severely. And, I think it’s not just short-term fallout but would impact relations in the more medium and long term too. To have a flagship U.S. economic engagement project and make a 180-degree U-turn would be damaging to U.S. credibility and leadership in the region.

Cutler: Trump also has been very vocal about his intention to increase tariffs against China as high as 60%, but he is also advocating for an across-the-board tariff increase of 10% on all products and for all trading partners. While there may be exceptions, that’s his current proposal. How would these actions be viewed in the region?

Yeo: This is very, very worrisome. If you look at the big picture of what is happening in the region, I believe that U.S. industrial policy has been quite effective, at least up to this point, such as the U.S. Inflation Reduction Act (IRA) and the CHIPS and Science Act. Because of these policy actions, many cutting-edge companies from Korea, Japan, and Taiwan are investing massively in the U.S. market for semiconductors, batteries, EVs, etc. This new trend of diversification and “China plus one” business strategies is providing countries like ASEAN members or India with new opportunities to develop their industries. They weren’t really given such opportunities before because everything was concentrated in China, but now they are being integrated into new global supply chains led by the United States. Against this backdrop, if the United States takes a complete opposite turn in its policy direction and imposes tariffs against the products from its friends and allies, it will be very counterproductive to the momentum building in the region and will damage U.S. national interests in the end.

Cutler: A number of countries retaliated against the United States during the first Trump administration, when tariffs were imposed, particularly on steel and aluminum, and China retaliated with its own sizable tariffs on U.S. imports. Are countries in the region likely to try to negotiate a deal to head off tariffs, or do you think that they are already planning retaliation moves against the United States?

Yeo: I think China will definitely retaliate, but it’s a more complicated picture for other countries in the region. In terms of security cooperation, I think many of these countries are under the U.S. “nuclear umbrella” or under some sort of security arrangement, so countries will take into consideration economic aspects as well as security aspects when deciding on the appropriate response.

Cutler: Under the Biden and the Trump administrations, the United States has retreated from its leadership role in the WTO. How do you see the WTO operating in the coming years, particularly as issues like supply chain resiliency, export controls, and advanced technologies become more and more prominent? Do you think the WTO risks becoming sidelined or irrelevant? Or, in light of the recent announcement on a digital trade agreement between many of the participants in the Joint Statement Initiative (JSI) on E-commerce, do you think that there is hope for the WTO to take on some of these challenging issues?

Yeo: Yes, obviously there’s a leadership vacuum at the WTO, and because of all these global challenges that we have discussed, today, more than ever, we need an organization like the WTO. But obviously, the WTO is not living up to the needs of the time. However, what is encouraging, despite overall difficulties that we are facing, is that recently middle-power countries have stepped up and have been playing a constructive leadership role. For example, the negotiations for the Investment Facilitation for Development (IFD) were led by Korea and Chile. The JSI e-commerce agreement that you mentioned, which was concluded recently, was led by Japan, Australia, and Singapore. I think, more and more, these middle-power country groups need to step up to fill the void left by the superpowers at the WTO. I also think that the WTO needs to tackle these newly emerging global challenges. For example, while there are widespread concerns with Chinese export surges and overcapacity issues, there is no global dialogue on this issue. I think the G7 is probably the only dialogue raising its voice on this issue, but its approach is more confrontational than collaborative.

If you look at WTO data on ongoing anti-dumping and countervailing duty investigations which were reported to the WTO after 2020, actions against China have comprised 30% to 40% of the total actions. This means that there is a structural issue, not just a case-by-case temporal matter. This also means we need more evidence-based, objective discussions on the extent and nature of the problem, bodog online casino and how it is impacting not just U.S. and China relations but also third nations including the EU, Korea, Japan, and the Global South. We need to explore global solutions to address these global issues. But there is no such global discussion underway right now. I think the WTO will need to play a more authoritative role as the only global trade body that is supposed to discuss and find solutions to these international trade issues. Also, as you mentioned, we have all of these newly emerging national security arguments regarding export controls, investment screening, and so forth. We have to decide whether to bring these matters into the realm of the WTO.

Cutler: How realistic is it though for the WTO to have a reasonable conversation on the overcapacity issue when top officials from China are denying that there actually is a problem?

Yeo: It is a difficult issue. I understand that some Chinese scholars acknowledge the need to have a global dialogue, but it’s very challenging to expect the WTO to have an effective role in taking up these very sensitive and difficult issues. However, if we were to find any place where we could have these kinds of conversations, I can’t see any other venue than the WTO.

Cutler: My final question is that if you had the opportunity to go into the Oval Office and brief our next president on these issues with very little time, what points would you highlight with respect to policy actions that they should or should not take? As the United States contemplates some of the policy measures we’ve been discussing, how would you urge the president to think about the region?

Yeo: It’s a very difficult question. If I had 30 seconds, I would make three points. First, U.S. trade and industrial policy can have a significant impact on shaping the economies and supply chains in the Indo-Pacific, as we have witnessed for the past few years. Second, nevertheless, sometimes the U.S. policy goal of strengthening U.S. leadership in the region and encouraging diversification and friendshoring of allies and partners doesn’t match its policy actions to achieve that. Third, therefore, it would be critical for the United States to step up its economic engagement in the region by providing tangible incentives for allies and partners with market access, industrial policy benefits such as the IRA tax credits, and digital trade rule-making leadership.

Han-koo Yeo is a Senior Fellow at the Peterson Institute for International Economics and Former Korean Trade Minister.

Wendy Cutler is Vice President at the Asia Society Policy Institute and the managing director of the Washington, D.C. office.

To read the interview as it was published on the Asia Society Policy Institute webpage, click here.

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Such challenges pose obligations, burdens, and expectations for countries like Canada that rely greatly on global trade for their economic growth and prosperity. Canada must prepare for an increasingly contested, complicated, and fractious global trade landscape that will only become more onerous to engage, negotiate, and leverage.

Four megatrends are dominating global trade:

First, U.S.-China security competition continues to cast a shadow over the trading system, affecting and rewiring regional economic partnerships. This seemingly persistent rivalry is compounded by muscular industrial policies from both countries and other powers (such as the European Union), further distorting trade patterns. Both ‘friend-shoring’ and ‘near-shoring’ could accelerate, despite constraints, with countries such as Mexico, South Korea, Thailand, and Vietnam benefiting disproportionately.

Yet, the adverse impacts could also be widespread, as this competition navigates terrains spanning semiconductors, artificial intelligence (AI), and electric vehicles. The battle for chip supremacy will reverberate across industries, affecting technological innovation and the climate transition. A potential restructuring of the global economy into blocs could reduce global GDP over the next few years.

Second, besides U.S.-China competition, other geopolitical fault lines (in Ukraine, the Middle East, and the South China Sea) will further stress world trade. Trade between regions is slowing as intra-regional trade grows. Southeast Asia, in particular, continues to benefit from this dynamic, at least for now. U.S. tariffs and export controls are pushing multinational firms to relocate manufacturing from China to Southeast Asia, boosting foreign direct investment and creating more jobs.

Firms are pivoting by reconfiguring cross-border supply chains, lowering costs, rethinking business financing, localizing innovation in certain markets, reorganizing functions like hiring, reassessing their exposure to geopolitical hotspots, and developing new revenue streams. Risk management for firms will increasingly entail understanding how Indo-Pacific countries, historically not central to global trade, operate and move. Governments and firms must also internalize the notion that economic security is critical and craft a playbook that maintains and protects resilience given unpredictable geopolitical events.

Third, trade patterns, tensions, and preferences intersect, drive, and occasionally conflict with the unfolding energy transition as countries craft policies to mitigate climate change. Climate change is already affecting trade. Firms have to adopt low-carbon business models to become and/or remain globally competitive. Increasingly, sustainability will be commercially priced and included in the cost of doing business. New investment opportunities accompany climate mitigation. Some developed countries are strategically using trade-related environmental policies, littered with requirements to measure and verify the environmental footprint of imports.

These burdens fall on unprepared and unhappy trade partners. It will therefore be critical for governments, firms, and interest groups to share vital information with respect to compliance as policies like the EU’s Carbon Border Adjustment Mechanism (CBAM) become mainstream. The CBAM works like a tax on energy-intensive European imports to ensure domestic manufacturers who produce similar goods are not competitively disadvantaged given their higher domestic standards.

That said, measures like the CBAM could also spur — and provide advantages to — developing economies to decarbonize faster, seizing opportunities in low-carbon energy like green hydrogen, fertilizer production, solar panels, etc. Finally, trade will become crucial in enabling flows of critical minerals, especially given their geographic concentration, to facilitate the spread of clean energy technologies that address issues such as pollution, carbon emissions, and electrification.

Fourth, technology is both enabling and constraining global trade. Although digital technologies are a key driver of trade, most countries have yet to effectively regulate their domestic and external effects. Digital trade measures have to be aligned across borders; this issue will become more important as countries pass laws on issues like data, AI, cybersecurity, and digital competition, which could affect digital trade.

For developing countries to benefit from digital services, they should create and support digital markets and provide adequate policy support related to privacy, consumer protection, and cybersecurity as their firms digitize. Simultaneously, developing countries will have to support broad-based digitalization, connecting citizens who lack broadband access. AI is already speeding up trade processes; it can further simplify supply chain management by enhancing inventory planning, production, and distribution. AI could also transform logistics planning and services as they move to optimal areas given production.

What do these trends portend for global trade?

These four trends could fragment the global economy further, as links and connections attenuate between specific ‘blocs,’ not within. This situation will likely fuel ‘reglobalization,’ splintering the global economy into highly competitive regions where trade and investment are concentrated and trade rules are harmonized. Security tensions and macroeconomic difficulties are compelling countries to bank on regions being and becoming new trade hubs and corridors, rewiring supply chains in the process.

Trade diversification for security reasons is precipitating new regional networks between ‘trusted’ partners that share security and economic concerns. This reality could spell trouble for Canada, which seeks to balance relationships with countries and not tether itself to any one camp. Friend-shoring and near-shoring are changing trade structures as countries reimagine economic partnerships to mitigate various risks.

Firms also appear to be pivoting after being subjected to shocks from the pandemic, the wars in Ukraine and Gaza, tensions in the South China Sea, and tariff rows between the U.S. and China. Countries like the United Arab Emirates and Singapore, which have solid and sophisticated trade infrastructures, will benefit.

Regionalization could thrive once again with potential costs and trade-offs for non-regional partners like Canada that appear strategically and institutionally distant. That Canada is reprioritizing trade within the Americas is positive, but that strategy must not come at the expense of deepening trade links in the Indo-Pacific.

The ‘choppiness’ of geopolitics is fuelled further by the recent industrial policies of China, the EU, and the U.S. Other powers, such as India, are still scarred by the pandemic, the ongoing climate crisis, and persistent supply chain difficulties. World Trade Organization rules have generally limited how countries use policies or subsidies to support specific industries within their borders to increase exports.

Yet, the selective application of these trade rules, due to China’s economic rise and experience, have altered the context around these efforts. National security considerations drive such policies given how specific goods and services can be weaponized by trading partners. According to Global Trade Alert, in 2023, countries used more than 2,500 policy interventions that were trade-distorting and discriminatory.

Considerations for Canada

What distinguishes this round of targeted interventions is that they are driven not by purely economic factors but a desire to strengthen resilience, protect national security, and advance climate mitigation. Resilience, rebuilding, and sustainability are now key trade objectives. These massive interventionist efforts to revive and restructure specific industries are hard for countries like Canada, which has limited fiscal capacity, to match. Canada and other smaller economies will find such policies untenable and unaffordable and will have to rely on other measures to compete.

Where does this scenario leave trade-reliant countries like Canada? Besides deploying capital to help various strategic industries, Canada has to take the lead in drafting, negotiating, and mainstreaming new forms of trade agreements with other ‘likeminded’ trade partners, including Australia, Japan, New Zealand, Singapore, South Korea, and the U.K., as well as with developing countries including Brazil, Indonesia, Malaysia, Mexico, and the Philippines, which find value in reviving and consolidating trade patterns.

Opportunities exist for these countries to drive trade initiatives now that the U.S., China, and the EU are disinclined to seek multilateral solutions to the trade challenges elucidated above. The U.S. has balked on trade given political difficulties while the EU’s trade and technology unilateralism sows resentment amongst its partners far and wide as they begrudgingly comply with European rules. China is not trusted to lead or drive multilateral trade solutions despite Beijing’s interest.

This situation generates space for other countries to explore newer agreements on trade issues like digital trade, green economy, and AI that advance mutual goals. Bilateral trade solutions such as the Australia-Singapore Green Economy Agreement (GEA) could serve as a viable template and example. Canada could benefit from such bilateral, open-ended, flexible agreements that facilitate green trade and investment across sectors to lower emissions.

The need to co-ordinate trade rules and standards is urgent with the regulatory demands for firms rising due to the extraterritorial effects of policies like the EU’s CBAM, General Data Protection Regulation, and EU Deforestation Regulation. Climate change and national security considerations have led to the proliferation of such measures. The competitiveness of firms and economies will become linked to the inking of coordinated trade rules and standards that help firms export goods and services.

Canada must deftly handle this complex landscape. Trade is no longer just trade; it is about establishing and correcting the conditions that enable countries to exchange goods and services and setting appropriate domestic rules to regulate problems and using those measures and market power to force compliance by other countries.

Trade, which plays a central role in Ottawa’s Indo-Pacific Strategy, relies on initiatives like trade missions, gateways, and agreements with India, Indonesia, and other bodog casino Asian economies. These measures are necessary but insufficient for a region where trade is fundamentally strategic and inflected through issues like security, climate, and technological change. Canada’s trade policy must reflect and advance the ambitions of its climate transition, security concerns and interests, and technological strides. Anything less will not be fit for purpose.

To read the dispatch as it was published on the Asia Pacific Foundation of Canada webpage, click here.

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As it was originally conceived in the late 2000s, the Middle Corridor’s main transit-trade route ran from Europe—through Turkey, the Caucasus Mountains, the Caspian Sea, and Kazakhstan—to China. The countries along the path of that route referred to it as the Trans-Caspian International Transport Route (TITR). Since then, they have worked to make it a viable alternative to Eurasia’s other major east-west trade routes—the Trans-Siberian railway in Russia (or the “Northern Corridor”) and the Indian Ocean (or the “Southern Corridor”). Though more work remains to be done on the TITR, Russia’s 2022 invasion of Ukraine shone an international spotlight on it. Suddenly, Europe sought a new overland trade route to East Asia that bypassed Russia, and the Middle Corridor fit that bill.

Capitalizing on the interest, Middle Corridor countries have tried to hasten their development of other transit-trade routes. Of those, the Turkmenistan-Uzbekistan route has made the most progress. Surely, it would help the two countries to develop economically and reduce their reliance on Russia. But the potential addition of a transit-trade spur from the Turkmenistan-Uzbekistan route to Iran (and possibly to the Gulf) could make China and Iran the biggest beneficiaries of the wider scheme. The combination of the two transit-trade routes could offer Iran an economic lifeline and a closer link to China, its most important great-power ally. By the same token, the combination of those routes could enable China to expand its trade footprint and its influence in Africa and the Middle East. Perhaps more important for Beijing, it could help China to overcome its “Malacca Dilemma” and thus better position itself in its rivalry with the United States.

Fear of Missing Out in Turkmenistan and Uzbekistan
In December 2022, a freight train loaded with ninety-one, twenty-foot shipping containers left the outskirts of Tashkent bound for Turkmenistan’s port of Turkmenbashi with little fanfare. Their cargo of copper was the first shipment to travel through the Turkmenistan-Uzbekistan route. At Turkmenbashi, the shipping containers were transferred onto a ship and taken across the Caspian Sea to Azerbaijan’s port of Baku, where they were transported along the TITR across Azerbaijan, Georgia, Turkey, and finally to Europe. The shipment was the culmination of years of effort by Turkmenistan and Uzbekistan that had laid the groundwork for their eponymous route. Having seen how the Middle Corridor helped Kazakhstan to attract foreign investment and realize parts of its Bright Path (Nurly Zhol) economic development strategy, Turkmen and Uzbek officials hoped that the Middle Corridor would do the same for their countries.

To be sure, interest in trade networks is not new for Turkmenistan. It has long sought conduits for its exports, most notably of oil and natural gas. Thus, unsurprisingly, it had been an early supporter of the Middle Corridor. As one Turkmen official put it “Turkmenistan is making efforts to implement transit on several routes” simultaneously. In fact, Turkmen officials discussed a possible transnational highway to China in 2023. Demonstrating its commitment to the Middle Corridor, Ashgabat invested $1.5 billion to expand its key intermodal transshipment port at Turkmenbashi during the 2010s. In anticipation of greater trade across the Caspian Sea, Ashgabat wanted Turkmenbashi’s port facilities to be able to handle as much as seventeen million tons of cargo, including 400,000 shipping containers, every year.

Similarly, an important part of Uzbekistan’s economic development strategy has been to build a globally integrated market economy. As a result, Tashkent has worked to overhaul not only its national railways, but also its financial and legal systems for over half a decade. In 2017, it allowed its currency to freely float. Then in 2019, it removed capital controls. Uzbekistan has also supported tax and regulatory reform to further raise the country’s economic competitiveness. All these moves would facilitate trade and encourage foreign investment.

Opportunity for China and Iran
In parallel with Turkmen and Uzbek efforts to advance their east-west transit-trade route, there has been talk of a spur route that would connect the Turkmenistan-Uzbekistan route to Iran. Such a combination of routes would certainly create opportunities for China and Iran, especially if the spur to Iran was extended to the Persian Gulf or Arabian Sea. For one, the combination would give Iran a new trade conduit, one that it has long sought given that 85 percent of its international trade travels by sea. Commenting on his country’s potential link to the Middle Corridor, Iran’s Minister of Roads and Urban Development noted that his country “has unique geographical advantages and transit opportunities that can be used” to boost regional trade. Indeed, Iran has already sought to become a transportation hub for its neighbors. In early 2022, Iran began to transport cargo through its ports and railways to Turkey and the United Arab Emirates.

But a link to the Middle Corridor would also be strategic for Iran. More than just another transit-trade route, such a link could help Iran to mitigate the effects of Western economic sanctions on it. The link would enable Iran to trade more freely with China—a country with which Tehran has had a “comprehensive strategic partnership” since 2016 and signed a twenty-five-year cooperation agreement in 2021—along a route that is beyond the physical control of the United States and administered by countries that have been lukewarm towards sanctions monitoring. Plus, considering China’s surging demand for raw materials from Africa and the Middle East, the link could serve as a profitable transit-trade route between the Turkmenistan-Uzbekistan route and the Iranian ports of Bandar Imam Khomeini in the Persian Gulf and Shahid Rajaie on the Arabian Sea, offering Iran an economic lifeline.

Another beneficiary of such a transit-trade route would be China. The country’s key role as the Middle Corridor’s eastern terminus was always likely to expand Chinese influence in Central Asia. At one time, that had been something Moscow tried to keep in check by orchestrating Russian-dominated initiatives like the Eurasian Union, a European Union-like organization for post-Soviet countries. But Russia’s need for Chinese support after its 2022 invasion of Ukraine has given Beijing a freer hand to reshape Central Asian trade flows. So far, China has focused its attention on the TITR, allowing other routes, like the China-Kyrgyzstan-Uzbekistan railway, to languish. However, if a transit-trade route from the Middle Corridor through Iran proves to be successful, it could easily capture China’s interest and help to enhance its influence in not only Central Asia, but also Africa and the Middle East.

Strategically, combining the Turkmenistan-Uzbekistan route and a transit-trade spur to Iran could improve China’s ability to deal with potential contingencies. Such a combination could lower China’s reliance on the seaborne transport of cargo across the Indian Ocean. Doing so would help mitigate what former Chinese General Secretary Hu Jintao once called China’s “Malacca Dilemma”—the vulnerability China feels because much of its trade, particularly its imported oil and natural gas, passes through the Malacca Strait, a chokepoint that the United States could throttle. It is a concern that resurfaced with Beijing’s increasing tensions with Washington over Taiwan and the South China Sea. Having trade routes that bypass the Malacca Strait would reduce American leverage over China and strengthen China’s position in its rivalry with the United States. Though an earlier Chinese attempt to create such a trade route by using the Belt and Road Initiative to finance the China-Pakistan Economic Corridor foundered, the combination of transit-trade routes through Central Asia and Iran could give Beijing a second chance.

Implications of Middle Corridor Expansion
The prospects for the Middle Corridor’s expansion today are as good as ever, especially if Houthi attacks on merchant shipping in the Red Sea persist. But the Middle Corridor still has a ways to go. Although trade volume along the TITR has soared, reaching roughly 1.5 million tons in 2022, it remains a small fraction of the 144 million tons of cargo that Russia’s Trans-Siberian railway transported in 2020. Moreover, much of the corridor’s status as a viable east-west trade route rests on the safety and reliability of its path over the Caucasus Mountains, which has been threatened by periodic bouts of conflict between the Caucasian countries of Armenia and Azerbaijan, including in September 2023. Should hostilities intensify or spread, freight insurance rates through the region would likely rise, making the Middle Corridor less attractive to shippers. Both hurdles will likely encourage Middle Corridor countries, particularly Turkmenistan and Uzbekistan, to support a transit-trade spur to Iran as an alternate outlet.

Certainly, a Middle Corridor expansion that includes a link between the Turkmenistan-Uzbekistan route and Iran would further cement the strategic bond between Beijing and Tehran—something that will likely worry Washington. What may equally concern the United States is the possibility that such an expansion could move Turkmenistan and Uzbekistan away from their traditional strategic neutrality and closer into China’s orbit. At the very least, the link would provide both countries with an economic incentive to ensure the unimpeded trade flow between China and Iran. That, of course, would complicate any American efforts to levy economic sanctions on either China or Iran in the future.

Felix K. Chang is a senior fellow at the Foreign Policy Research Institute and the Chief Operating Officer of DecisionQ, an artificial intelligence engineering company.

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Analysts have described the Indo-Pacific Economic Framework (IPEF) as the Biden administration’s attempt at reigniting U.S. economic statecraft in Asia that was neglected by his predecessor. The U.S.’s engagement of Asian countries through the IPEF is also seen as a means to counter China’s strong influence in the region.

Trade agreements were historically used by the U.S. to build relationships with allies and partners, and to cement American international influence. However, the IPEF is not meant to be a traditional trade agreement as there are no new market access benefits on the table for participating countries. It instead opts for a modular approach where countries are free to select specific pillars of the IPEF in which they wish to participate while opting out of others.

Each pillar represents other non-market access related aspects of trade and economic cooperation. As it stands, the IPEF is organised along four pillars: (1) trade, (2) supply chains, (3) clean energy, decarbonisation and infrastructure, and (4) tax and anti-corruption. Instead of market access, the “trade” pillar encompasses other trade-related issues such as environmental and labour standards. On these two fronts, the U.S. looks poised to push for more stringent standards that Southeast Asian countries might find tough to accept. If the goal of the IPEF is to strengthen relationships with countries in the region and act as an alternative to what China has to offer, pushing for tough environmental and labour standards might prove to be a contentious issue that would detract from these broader geopolitical objectives.

In May 2022, U.S. Trade Representative Ambassador Katherine Tai had already signalled that the IPEF will involve the pursuit of strong labour and environmental standards. The expectation is that these standards will involve some emulation of the US-Canada-Mexico Agreement (USCMA), which Ambassador Tai hailed as “a new model for trade agreements”. The USCMA contains the most stringent environmental and labour standards in any trade agreement ever ratified, which bodog sportsbook review Congressional Democrats had a hand in pushing through.

bodog sportsbook review Congressional Democrats have historically made their support for potential U.S. trade agreements contingent upon the inclusion of environmental and labour protections. Even though the IPEF, in its current form, does not require congressional approval, the Biden administration would likely still face pressure from the Democratic Party to include such standards in the IPEF.

The USMCA contains several provisions that essentially allow the U.S. to withdraw trade benefits if environmental or labour standards have been breached. Labour standards include prohibitions on forced labour, respect for the right of association with a union and collective bargaining, and protection for migrant workers. On the environmental front, of note is the mention of obligations to combat illegal fishing and logging and the obligation to commit to seven multilateral environmental agreements, including the Montreal Protocol and Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES). Contravention of standards enumerated in the agreement would allow the U.S. to trigger a dispute settlement procedure which might ultimately lead to the imposition of coercive trade measures, such as raising tariffs or withdrawing other trade benefits. Additionally, the USCMA allows the U.S. to block imports from specific facilities found to have been in breach of labour rights obligations.

The U.S. seems determined to use the USCMA as a model for enshrining potential environmental and labour provisions in the IPEF. However, it is hard to see how these provisions might work considering that even if they were violated, the U.S. cannot withdraw market access benefits. Pushing hard to include these standards without commensurate market access offerings would likely raise contentions among Southeast Asian signatories of the IPEF.

There are already signals that labour rights issues will prove to be contentious for Southeast Asian countries. The U.S. has identified Vietnam’s textile industry as part of a cotton supply chain that uses forced labour from the Xinjiang region in China, which could trigger import blocks under the U.S.’s recently passed Uyghur Forced Labour Protection Act. Thailand may find itself in a similar position on its use of cotton imports from China. Earlier, two Malaysian companies, Sime Darby Plantation Berhad and FGV Holdings Berhad, had their palm oil exports blocked at the U.S. border in late 2020 on allegations of forced labour practices.

In the negotiations to come, several scenarios might play out. Market access has been the primary carrot that has historically incentivised the U.S.’s trade partners to swallow tough pills. If the U.S. is insistent on including strong environmental and labour standards in the IPEF, it might find itself hard pressed to design an alternative incentive structure to make these provisions more palatable for Southeast Asian signatories. Experts have speculated that this may involve improving trade facilitation such as removing technical and regulatory barriers to trade to boost exports to the U.S. Whether this would be enough to replace traditional market access benefits such as lower tariffs remains to be seen.

The U.S. could also take a softer approach by leaving out coercive enforcement and instead focusing on cooperative mechanisms such the provision of technical assistance and capacity building to work towards higher environmental and labour standards. Southeast Asian countries might be more willing to accept tough standards in exchange for such goodies.

If nothing can fill the void of market access benefits and the U.S. insists on including strong environmental and labour standards, the risk is that Southeast Asian countries may opt out of the IPEF’s “trade” pillar entirely. In this scenario, it is doubtful how the goal of strengthening economic engagement can be achieved, given that the “trade” pillar is likely to form the core of IPEF. Moreover, the IPEF is not only about trade and economic engagement but also about fulfilling the geopolitical objective of strengthening and cementing relationships with key partners in Asia amidst the U.S.’s intensifying competition with China. With this in mind, Biden’s administration will need to think through how to reconcile domestic pressures to include strong environmental and labour standards with the IPEF’s broader geopolitical goals.

Darren Cheong was Research Associate with the Regional Strategic and Political Studies Programme, ISEAS – Yusof Ishak Institute.

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The COVID-19 pandemic, however, has been a major complication for the BRI. Since January 2020, China has closed its borders to the world, cutting off most in-person exchanges and crippling businesses’ ability to evaluate, negotiate and conclude new deals (Figures 1 and 2).

Figure 1: China’s international air passengers, inbound and outbound (millions persons)

Source: Civil Aviation Administration of China, CEIC

Figure 2: Outbound tourists from China, 2014-2021, millions

Source: Chinese Outbound Tourism Research Institute.

At the same time, negative sentiment about China has grown in many countries, particularly developed economies in Europe and Southeast Asia (see here, for example). Sentiment analysis based on big data from news feeds also showed a clear deterioration globally in 2020 of positive perceptions of China’s and the BRI, though there has been some recovery since (Figure 3).

Figure 3: Big data media sentiment toward China and BRI

Source: GDELT

The pandemic’s negative economic effects on many developing countries have also reduced interest in the BRI. Many prominent BRI partner countries, such as Sri Lanka, now face debt distress arising from unrelated pressures including a strong dollar, high oil and food prices, and a collapse in the tax base during the pandemic. This has made Chinese banks and firms relatively less interested in projects in many of these countries, while undermining the ability of host countries to contemplate ambitious capital expenditures in the BRI’s traditional sectors, such as transport and logistics.

Many BRI projects underway before the pandemic appear to have been abandoned. The Overseas Development Institute (ODI) detailed 15 projects worth over $2.4 billion that faced financial difficulties in 2020, including the Kunzvi Dam electricity project in Zimbabwe, contracted to Sinohydro. Fifteen projects with problems is surely an underestimate. Given the opacity of China’s reporting on BRI projects, it will likely be at least another year until the extent of this downsizing can be quantified.

Predictably, Chinese overseas FDI during the pandemic declined everywhere (see data from theAmerican Enterprise Institute and Mergermarket, a provider of information on merger and acquisiton deals globally). China’s investment overseas sometimes includes control (foreign direct investment or FDI) through acquisitions of companies or greenfield investment, and sometimes is poor lending, especially project finance. As Figure 4 shows, all of these measures of China’s outward FDI globally plummeted 72% in 2020 from the average of the previous five years. In BRI countries, Chinese FDI was down 62%.

The decline in FDI hit the Middle East and emerging Asia harderthan Latin America and Africa (Figure 5). This is perhaps surprising, as Latin America was the region hardest-hit by the pandemic. Chinese investors have sustained their interest in Latin America partly because many governments in the region have moved to privatise state assets, such as utilities, to repair their finances after the pandemic. Most of the Chinese M&A deals in Latin America announced during the last two years are privatisations of state-owned power or resource extraction companies.

Figure 4: Chinese outbound investment ($ billions)

Sources: Mergermarket Note: Averages over period.

Figure 5: Chinese investment in BRI countries, regional breakdown ($ billions)

Sources: Mergermarket , American Enterprise Institute 

Chinese development finance (lending rather than equity purchases) into BRI geographies has also plummeted (Figure 6). This is particularly problematic for countries that are highly dependent on Chinese lending to finance their infrastructure. Some of these countries have growing current account deficits which they will need to finance.

Figure 6: Chinese development finance (lending, $ billions)

Source: Boston University Global Development Policy Center

Macroeconomic constraints

The BRI faces two main macroeconomic constraints this year. The first is that China is far from exiting the COVID-19 pandemic. Its dynamic zero-COVID policy is impeding cross-border business exchange. China’s economy has rapidly decelerated in the first half of 2022, because of the central government’s draconian restrictions and the attempts of local officials to over-comply with instructions. The slowdown is putting additional pressure on banks to lend domestically rather than overseas. Such lending is essential in the financing of major infrastructure projects overseas. Furthermore, the tighter grip of overseas regulators (especially the US) has been limiting Chinese corporations’ ability to raise funds in hard currency, whether through listings in foreign stock exchanges or offshore bond issuance.

However, the BRI has helped China expand its trade, even faster than for the rest of the world. In other words, the BRI has acted as an important source of external demand since 2015, when compared with the rest of the world.

Figure 7: Chinese trade, value (% of GDP) and growth by partner

Source: United Nations Conference on Trade and Development 

What comes next?

What is the longer-term prognosis? Will the current abrupt slowdown reverse, or will the BRI fade into irrelevance? This depends partly on Chinese domestic politics. The longer China remains locked within its borders, and the deeper the Chinese economy slides in the second half of 2022, the harder it will be to maintain the same level of ambition. As long as borders are closed, China’s overseas investment is bound to remain muted, limiting the number of new projects Chinese firms will want to take on. Cross-border mobility restrictions will also hamper China’s ability to send workers overseas for construction and logistics purposes.

Nevertheless, there is a wealth of reasons to believe that the BRI remains central to the global ambitions of China’s leadership. A more plausible scenario is that the BRI is evolving to serve better the interests of Chinese leaders under the current, rapidly changing, circumstances. China’s leadership remains deeply committed to the BRI as emphasised in February 2022 by Politburo Standing Committee member Han Zheng, chairman of the Leading Small Group responsible for the Belt and Road. However, he also advised Chinese banks and companies to focus on projects that “improve people’s sense of gain in participating countries,” and for the leadership to seek “greater alignment” of the BRI and China’s domestic macroeconomic strategies such as dual circulation, while strengthening “risk monitoring and prediction”. These comments were implicit criticisms of how the BRI has been rolled out to date, for two main reasons. The first is the international pushback, both from recipient countries after having increased their debt to finance unviable projects, and from developed economies, especially the US, the EU and Japan, who see their global influence curtailed by China’s expansion overseas. The second reason is domestic, stemming from the rather low return on investment for China as a good part of BRI related projects have failed or been delayed, or have ended up with cost overruns.

Notwithstanding these challenges, the Chinese government does not seem ready to abandon the BRI, but rather to transform into a sort of BRI 2.0. China seems to be losing interest in funding infrastructure and would prefer to increase its soft, and possibly even hard, power through other means of influence. The BRI is also linked increasingly to China’s geopolitical objective of proposing an alternative global order to the liberal order led by the United States.

Power instrument

One example of how the BRI may be an instrument for China to expand its hard power is the signature of a security pact with the Solomon Islands, which could have as objective reshaping the strategic balance in the South Pacific, where security is currently dominated by Australia and the US. While the pact was not formally connected to the BRI, the Solomons joined the BRI in 2019, and China and the Solomons continually referred to the BRI as they negotiated the security deal, suggesting that the two are linked. When Chinese Foreign Minister Wang Yi went on a follow-up tour in May, hoping to secure a broader regional security deal, he visited Kiribati where he signed 10 outcome documents, including an expanded BRI cooperation plan. Along the same lines, there are some indications that China wants to establish a naval facility in Equatorial Guinea, as a door to the Atlantic Ocean. Equatorial Guinea is also a recent BRI member. Finally, Chinese media are increasingly explicit about treating the BRI as a soft power tool, instructing party cadres to ‘tell the BRI’s story well’ as part of a broader effort to ‘tell China’s story well’.

These incremental steps allow the BRI to touch on issues far more closely related to security than was the case before the pandemic. A strong signal bodog poker review of the latter was given by President Xi at the Boao Forum for Asia in April 2022, where he proposed a new Global Security Initiative (GSI). Elaborating on Xi’s comments, Foreign Minister Wang Yi wrote in the People’s Daily that the initiative “contributes Chinese wisdom to make up for the human peace deficit and provides a Chinese solution to cope with the international security challenge”. This is very similar language to the ‘Chinese wisdom’ that propagandists claim is motivating the BRI. In talks with Jordanian counterparts late last month, the Chairman of the Standing Committee of the National People’s Congress Li Zhanshu made a single integrated pitch for the BRI and GSI. These are all hints that the BRI is evolving from an infra-centric strategy to a security one.

In conclusion, since the COVID-19 pandemic started, the BRI has faced short-term macroeconomic headwinds because of China’s much worsened economic situation, and because of recipient countries’ negative sentiments about China as some projects fail to deliver their expected benefits and debt continues to pile up. This, however, should not be read as the end of the BRI. The strategy is just too important for the Chinese leadership. If anything, it is more important than ever as China needs to build alliances in its strategic competition with the US. The BRI is transforming from an infrastructure-led project to a more political one where soft, and even hard, power are central. In other words, Xi Jinping’s grand vision of the BRI is evolving into a more versatile and hard-edged instrument of statecraft. This is much more in line with China’s broader domestic goals, as financial resources are increasingly needed within its own borders. It is potentially also more effective at furthering China’s interests abroad.

Alicia García Herrero is a Senior Fellow at European think-tank BRUEGEL. She is also the Chief Economist for Asia Pacific at Natixis, and a non-resident Senior Follow at the East Asian Institute (EAI) of the National University Singapore (NUS). Alicia is also Adjunct Professor at the Hong Kong University of Science and Technology. Finally, she is a Member of the Council of Advisors on Economic Affairs to the Spanish Government and an advisor to the Hong Kong Monetary Authority’s research arm (HKIMR) among other advisory and academic positions.

Eyck Freymann is a doctoral candidate in Area Studies (China) at Balliol College, University of Oxford. His research examines why democratic countries engage with China’s One Belt One Road initiative, and how Chinese mega-projects influence their domestic politics. Eyck holds an MPhil from the University of Cambridge, where he was a Henry Scholar; an AM in Asian Studies from Harvard University where he won the Joseph Fletcher prize for top thesis in Asian studies; and an AB in East Asian History with highest honors, also from Harvard.

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Two explanations account for the trade intensity. Except for Indonesia, each country is of insufficient size to sustain the full range of industries that support a modern economy. For many nations in the region, productivity improvement through specialization is an effective route to economic growth. Therefore, Thailand has developed into an auto manufacturing center. Singapore is the hub for financial services and trans-shipment. The Philippines has fostered a comparative advantage in business process outsourcing. Malaysia has cultivated its semiconductor industry. And Vietnam has created industrial clusters for textile manufacturing and mobile phone production.

Secondly, ASEAN member states, at the forefront of the early wave of globalization, attracted significant amounts of export-orientated foreign direct investment (FDI). According to the United Nations Conference on Trade and Development (UNCTAD), the stock of inbound FDI in the ASEAN countries has reached US$ 2.9 trillion in 2020 – equivalent to 95% of the combined GDP of the ten member states.[ii]

Meanwhile, the economic rise of China looms large. China’s rise has impacted the region in two conflicting ways. While China’s growth has been a source of demand for ASEAN products, its dominance in manufacturing has also provided stiff competition, both domestically and in third markets. The second of these factors has been more prominent. On balance, China’s growth may hinder rather than promote Southeast Asia’s economic performance.

Compare, for example, China’s GDP in 1994, then equal to the combined GDP of the ASEAN member states, with the current size of China’s economy, which is five times larger than ASEAN’s. Then compare the growth of manufacturing value-added. China’s global market share has risen from just 6% in 2001 – when it joined the World Trade Organization – to 28% in 2020. In contrast, ASEAN’s share of manufacturing value-added in 2020 is only 4.4%. Twenty years earlier, its share was 2.5%.[iii]

China has been extremely successful in attracting export orientated FDI that otherwise Southeast Asia may have received. Several factors may have helped. Infrastructure development in China has been rapid and advanced. Access to the domestic market can be a critical incentive. The industrial workforce is comparatively highly skilled. The undervaluing of the currency was maintained while the country’s industries attained sufficient scale to be competitive. Lastly, government subsidies help create a competitive environment.

While ASEAN exports to China have grown, the marginal propensity of China to import from ASEAN remains very low. In 2011, ASEAN members exported US$ 140 billion of goods to China, a number that grew to US$ 218 billion in 2020. That amounts to a US$ 78 billion increase.[iv] Over the same time frame, China’s economy nearly doubled from US$ 7.5 trillion to US$ 14.7 trillion – US$ 7.2 trillion of growth. Hence, every US$ 100 of China’s growth only produced US$ 1 of export growth from Southeast Asia.

Conversely, in 2011 ASEAN members imported US$ 155 billion from China. Over the next ten years, this figure grew to US$ 300 billion – that is a 94% growth worth US$ 145 billion. Over that time, the combined GDP of ASEAN member states rose by US$ 700 billion. Hence, every US$ 100 of ASEAN GDP growth was accompanied by US$ 20 of imports from China. The marginal propensity to import from China is twenty times higher than China’s marginal propensity to import from ASEAN.

The clear consequence of this asymmetry has been the widening of ASEAN’s trade deficit with China, which has grown from US$ 15 billion in 2011 to US$ 82 billion in 2020. Due to the five-fold increase, ASEAN’s bilateral deficit with China amounts to 2.7% of GDP.

How does intra-ASEAN trade compare? In contrast, intra-ASEAN trade has fallen, shrinking from US$ 582 billion in 2011 to US$ 567 billion in 2020 – that is a 3% decline. Relative to overall trade, it shrank from 24% to 21% despite economic diplomacy efforts to encourage inter-connectivity of the region. Thus, intra-ASEAN trade is only marginally larger than trade with China, which accounts for 19.4% of total trade.

Furthermore, exports to the United States doubled between 2011 and 2020, expanding by more than US$ 100 billion. This represented both a greater dollar growth and percentage growth than exports to China.

Four conclusions can be drawn from the above analysis. First, the narrative that a fast-growing Chinese economy is a boon for Southeast Asian growth looks increasingly false. The growth in China’s domestic market has not resulted in a large increase in exports to China because the marginal propensity of China to import from ASEAN is so low.

Second, despite its geographic distance, the United States rivals China as an export market for ASEAN. Between 2011 and 2020, the share of exports going to the US increased from 8.5% to 15%. These figures are at odds with the popular view that the United States’ importance is waning in the region.

Third, China’s economic prowess has impacted trade patterns in ASEAN in terms of import dependency. Between 2011 and 2020, China’s share of ASEAN imports rose from 13% to 23%. This largely represents China’s exports of capital goods and components that go into assembling products for export out of ASEAN.

Lastly, the import dependency is in part a function of ASEAN’s struggles to develop a high level of vertical integration and inter-connectivity within Southeast Asia. China has shed lower value-added industries such as footwear and garment manufacturing to Vietnam, Cambodia, and Myanmar. But there remains a heavy level of import dependency on the inputs and capital goods that are essential to the industries. Combined, ASEAN’s economy is large enough to support globally competitive scale in the petrochemicals and other industries required for the inputs. Individually, however, the economies are not.

All this begs the question, how might the Belt and Road Initiative impact future trade patterns? It is in China’s interests to maintain its industrial centrality in Asia’s manufacturing processes. As China’s cost base has risen and it looks to move up the value chain, an opportunity will arise for some Southeast Asian economies to replace China – a trend accelerated by the trade war and geopolitical tensions. However, breaking the dependency on China will involve a far higher degree of vertical integration and intra-ASEAN connectivity. BRI projects may help at the margin but there is an equally strong underlying current that points to greater Sino centrality stemming from regional infrastructure projects.

Consider, for example, the Myanmar oil and gas pipelines. In 2012, Myanmar did not export any minerals fuels to China. As the pipelines came on stream, China’s share of Myanmar’s mineral fuel exports increased – first to about a quarter and now to about 45%. This trade diversion increases China’s importance to Myanmar’s ability to earn foreign exchange.

It may be too soon to tell much from the newer BRI projects. However, trade flows over the past decades suggest measures to facilitate trade between China and Southeast Asia have an asymmetric impact. The goods tend to flow south, and earnings flow north. Greater intra-ASEAN trade can alter this dynamic.

Stewart Paterson is a Research Fellow at the Hinrich Foundation who spent 25 years in capital markets as an equity researcher, strategist and fund manager, working for Credit Suisse, CLSA and most recently, as a Partner and Portfolio Manager of Tiburon Partners LLP.

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Comprised of the United States and eleven other Pacific Rim countries—including economic heavyweight Japan—the TPP was found by a 2016 Cato analysis to result in net trade liberalization. A study by the U.S. International Trade Commission calculated a real U.S. GDP increase of $42.7 billion through 2032 as a result of TPP membership while a Peterson Institute for International Economics (PIIE) working paper foresaw gains to U.S. real incomes of $131 billion through 2030.

But the United States withdrew from the TPP, and those gains never happened.

The TPP, however, was aimed at more than just lowering trade barriers. It was also an attempt by the United States—along with like‐​minded allies—to help shape the rules governing trade in the Asia‐​Pacific region. As Asia’s center both geographically and economically, China is already assured of having a significant say in such matters. The TPP was meant to ensure the United States had a prominent seat at the table when such rules were being hammered out—before it opted to push away.

In other words, U.S. losses from its TPP withdrawal have not just been economic but geopolitical. And if the TPP was deemed a useful tool in countering China’s influence during the years it was being negotiated, it would be even more of an asset now given the bilateral relationship’s increasingly acrimonious nature.

Other countries have been less short‐​sighted in their trade policies. Following U.S. withdrawal, the remaining TPP members went back to the negotiating table and struck a new deal: the Comprehensive and Progressive Trans‐​Pacific Partnership (CPTPP). As a result, these countries often have easier access to each other’s markets than what Americans enjoy. That’s a boon to consumers and businesses in CPTPP members who enjoy cheaper imports and expanded export opportunities.

Indeed, the CPTPP has proved so alluring that China and Taiwan have both applied to join while South Korea has taken initial steps toward becoming a member. Even the United Kingdom wants in.

Other notable trade liberalization initiatives have taken place in recent years as well. In late 2020, 15 countries of the Asia‐​Pacific region concluded the Regional Comprehensive Economic Partnership (RCEP). Entering bodog online casino into force on January 1 of this year, the RCEP—which notably includes China—contains tariff reductions and regulatory harmonization measures meant to spur trade between member countries. And in 2018, Japan and the European Union signed a trade deal that took effect the following year.

Amidst such trade integration, the United States has largely been left on the outside looking in. This means that not only has the country foregone the TPP’s projected benefits but the competitiveness of U.S. firms has been eroded owing to the lack of preferential market access enjoyed by their foreign counterparts.

As a result, a 2017 PIIE analysis calculated that the TPP/CPTPP’s net impact on the United States had swung from a $131 billion gain to a $2 billion loss. The United Nations Conference on Trade and Development, meanwhile, found that RCEP will shrink U.S. exports by over $5 billion as trade is diverted away from U.S. firms and toward foreign competitors subject to lower tariff rates under the agreement.

Even U.S. leaders have implicitly recognized that U.S. withdrawal from the TPP placed the United States on the backfoot in trade. In 2019, President Trump concluded a limited “mini‐​deal” with Japan to claw back some of the lost gains from TPP withdrawal. Presented as the prelude to a more comprehensive agreement (which never happened), the market access improvements realized from the agreement—mostly on agriculture and industrial goods—were still inferior to what would have been gained via the TPP.

Art of the deal, indeed.

On the geopolitical front, meanwhile, a recent Wall Street Journal piece points out that U.S. inaction on trade liberalization has handed a possible opportunity to China:

Beijing’s pro‐​trade steps have fueled concerns among American businesses and close allies. They worry that the U.S.’s absence in regional trade agreements gives Beijing an opening to establish its leadership in setting rules and standards for trade and economy, particularly in emerging technologies such as artificial intelligence and digital trade.

In a bid to reassert U.S. economic leadership the Biden administration is readying a new initiative called the Indo‐​Pacific Economic Framework. Although its exact contours are unknown, all indications are that it will not include improved market access measures such as tariff reductions. That means the United States will be competing for influence with China with one hand effectively tied behind its back. While Beijing offers improved access to its vast market through its participation in RCEP—and possibly the CPTPP—Washington will have few obvious enticements with which to sway other countries toward adopting its preferred set of trading rules and standards.

All of this could have been avoided. Had the United States remained in the TPP and Congress approved the deal, American consumers and businesses would be enjoying cheaper imports and expanded exports while U.S. diplomats would be better positioned to set trade rules in the Asia‐​Pacific region. Instead, all Washington has to show for its efforts is a less than comprehensive trade deal with Japan and a new economic initiative whose allure for U.S. trading partners is unclear. Rather than pursuing such half measures, the United States should return to the TPP/CPTPP. That, however, will require both vision and leadership, two commodities that are unfortunately currently lacking in Washington.

Colin Grabow is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies where his research focuses on domestic forms of trade protectionism such as the Jones Act and the U.S. sugar program.

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It was less of a deal and more of a détente, after 18 months of competing tariff rate increases on hundreds of billions of dollars of goods and belligerent statements between the White House and Beijing. President Trump seemed determined to prove that unilateral pressure would compel the Chinese government to make significant and lasting changes to its economic management practices and predatory trade policies.

Trump, of course, didn’t get those changes made, and instead cut a very transactional deal in an attempt to show progress on an important political goal during a re-election year. The agreement was branded as Phase One of continuing negotiations, implying they’d come back to the important stuff later.

But Trump has since lost re-election and returned to his home in Florida, and we’ve reached the end of the détente. China has fallen short of its Phase One purchasing commitments by, as the Wall Street Journal put it, a “wide margin.” And it’s President Biden’s problem now.

Should Biden hold China accountable for breaking the deal, which would mean the re-imposition of tariffs and likely Chinese retaliation while the American economy is fragile? Should he let China off the hook, which was the modern norm before his belligerent predecessor took office in 2016? Or should he buckle down, assemble likeminded trading partners, and return to the negotiating table to discuss the raft of important issues on which little progress was made?

President Trump always misrepresented trade negotiations as a cakewalk, while no one should have been under the assumption that this was going to be easy. But the third option – buckling down – is the only choice. Ignoring these problems will further erode U.S. industrial capabilities just as most Americans are coming to understand how woefully unprepared we really are.

The main takeaway from the January 2020 agreement was that China would purchase approximately $74 billion of agricultural goods, $211 billion of manufactured products and $68 billion of energy products from the United States. The latest figures show it’s roughly $12.5 billion, $86.5 billion and $42 billion short of those obligations. Meanwhile, the 2021 U.S. goods trade deficit with China – a decent barometer for the health of the domestic manufacturing sector that has proven so important in this age of strained global supply chains and scarce reserves of critical products – will be a whopping $350 billion or so when the numbers are made official in a few weeks.

That’s not the highest it’s ever been – it reached a high of $418 billion in 2018 – but it’s in spite of a pandemic-induced recession and tariffs remaining on a significant amount of Chinese imports, and it speaks to the serious dependence the American economy still has on Chinese inputs.

And that’s not all it suggests. The Economic Policy Institute estimates Chinese import competition drained 3.7 million jobs from the American economy between 2001 and 2018, and these sustained deficits hint at the kind of economic activity we’ve outsourced now for decades.

It should be clear to even the most wild-eyed optimists that the Chinese government has no serious intent to reform its economy and unwind state ownership. The opposite seems to be true. Industrial subsidies, chronic and intentional overcapacity, the participation of state-owned enterprises, predatory investment, currency manipulation and misalignment, state-sponsored cyber theft, denigration of labor rights, lax environmental rules, and discriminatory tax policies remain well entrenched.

Should we expect President Biden to do something that no other president has managed to achieve on China? I think not. But it should still be held to account.

And there are hopeful signals of a shift in strategy: investments in our own industrial capabilities, enlisting allies in our efforts, and a continuation of an aggressive trade enforcement posture. Made in America infrastructure, clean energy, and advanced technology investments are promising starts to our industrial policy if they can be sustained. Europe, along with our Asian and North American allies must join us in adopting bolder policies to confront China’s economic aggression. And the administration must be willing to deploy new tools in this competition. Last month the president signed a bill that bans most imports from China’s Xinjiang region, where the state is assimilating its minority Muslim population via what can be plausibly called a cultural genocide and is using forced labor to do it. That must be a first step, not a last word.

The détente is ending, and the status quo of a persistent goods trade deficit simply isn’t tenable. The economic health of the United States demands there must be a strategic uncoupling of critical supply chains and bolder measures to block unfair trade practices. Phase Two of a U.S.-China trade deal must be transformational rather than transactional.

Scott Paul is president of the Alliance for American Manufacturing.

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Krugman calls particular attention to the “trade policy revolution” in developing countries. (At the time, the managing director of the International Monetary Fund (IMF), Michel Camdessus, called it the “silent revolution.”) The opening of markets and reduction in trade barriers in China, India, Mexico, and many other countries during the 1980s and 1990s fundamentally reshaped the world economy. As Krugman put it, “We wouldn’t be importing all those goods from low-wage countries if those countries were still, like India and Mexico in the 1970s, inward-looking economies living behind high tariff walls.”

What accounts for this trade policy revolution? Many factors could have played a role, such as lobbying by exporting interests in each country or strong-arm tactics by the IMF and World Bank. But Krugman claims that ideas about policy brought about the change. Is that right?

Yes! After World War II, import substitution—an approach to economic development that emphasized protecting domestic industry with barriers against imports—was popular among economists and policymakers around the world. By the 1970s, as a result of theoretical developments (optimal policy ranking, effective rates of protection) and the successful experience of export-oriented countries (such as Taiwan and South Korea), support for this view diminished considerably. This sea change in economic ideas about trade policy—led by economists such as Bela Balassa, Jagdish Bhagwati, and Anne Krueger—eventually proved influential among policymakers in the 1980s.

Taiwan provides a concrete example of Krugman’s claim that economic ideas matter for policy. As explained in a new PIIE working paper, How Economic Ideas Led to Taiwan’s Shift to Export Promotion in the 1950s, economist S. C. Tsiang (then working at the IMF but acting in an unofficial capacity) convinced K. Y. Yin (a leading policymaker) to support a devaluation of Taiwan’s overvalued currency, the end of foreign exchange rationing, and a dismantling of import controls. After heated debate within the Taiwanese government, Yin emerged victorious and was promoted to oversee far-reaching changes in the country’s trade regime from 1958 to1963. Taiwan did not change its policy because of export interests, which were politically weak, or because international financial institutions insisted upon a different policy stance. Nor was Taiwan in an economic crisis that required major policy adjustments. Instead, Tsiang’s then-novel idea that a realistic exchange rate and an open market in foreign exchange would promote exports and reduce distortions proved to be compelling to government officials—particularly in an environment where foreign exchange was scarce.

As a result, Taiwan became the first developing country after World War II to shift away from import substitution and focus on incentives for exports. Its economic success in doing so was widely noted at the time, and the country soon became a model for others.

The experience of Taiwan is not unique. Lasting policy reform does not happen deus ex machina; it is rarely initiated by pressure from domestic interest groups and cannot be imposed from the outside. Instead, policy advisers must provide convincing arguments to political leaders that a different set of policies can improve a country’s economic performance—and, perhaps more importantly to the politicians, increase their popular support.

The deeper question is knowing which ideas are best suited for the specific challenges that confront a particular economy and understanding how those ideas win acceptance by politicians in power.

Douglas A. Irwin, nonresident senior fellow at the Peterson Institute for International Economics since February 2018, is the John French Professor of Economics at Dartmouth College. He is a research associate of the National Bureau of Economic Research. 

To read the full commentary from the Peterson Institute for International Economics, please click here.

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As discussed in a recent PIIE Policy Brief, the new Chinese anti-sanctions law bars Chinese nationals from complying with US sanctions. That law, promulgated by the National People’s Congress (NPC) in June 2021, may soon be applied to individuals and firms doing business in Hong Kong. The NPC will shortly consider appending it to the Hong Kong Basic Law, handing a powerful tool against those seeking to maintain Hong Kong as a special administrative region for legal and economic matters. Threats and denunciations in the West have done little to deter China’s growing dominance over Hong Kong’s Legislative Council and legal system, eroding the “one country, two systems” guarantee in the 1984 Sino-British Joint Declaration.

Chinese responses to US sanctions had been relatively low key partly because most US sanctions against China involved violations of US secondary sanctions against North Korea and Iran and were limited to the imposition of fines against the guilty parties. That playbook has changed as Chinese policies in Xinjiang and Hong Kong increasingly have become the primary target of US sanctions. US officials, invoking the Hong Kong Autonomy Act of 2020, the Global Magnitsky Act, and various executive orders, have increased the number of Chinese and Hong Kong individuals and entities subject to trade, finance, and travel sanctions over the past year.

In turn, Chinese officials have begun to upgrade their sanctions arsenal. In September-October 2020, China amplified its existing “Unreliable Entity List” and Export Control Law, akin to those administered by the US Commerce Department and used to restrict trade with Chinese firms. These measures were supplemented in January 2021 with new Chinese sanctions blocking rules, subsequently embodied in the June 2021 anti-sanctions law, to force Chinese nationals not to comply with US and other foreign sanctions. Then soon after the Biden administration issued a business advisory warning on July 16, 2021, about “growing risks” for US companies doing business in Hong Kong, China announced that it plans to incorporate the new anti-sanctions powers into Hong Kong law, which reportedly will be done by the NPC Standing Committee when it meets on August 17–20, 2021.

The prospect for success in changing the other’s policies via sanctions is remote. Sanctions rarely “work” (meaning contribute at least modestly to a change in the target’s policy) in cases seeking major changes in the target regime’s policies. But both the United States and China seem intent on using them with increasing frequency against each other.

HONG KONG: WILL US SANCTIONS BOOMERANG?

Sanctions often generate unintended and costly consequences. Two troubling developments regarding Hong Kong already have arisen in the wake of the tit-for-tat US and Chinese sanctions. First, US sanctions have abetted an accelerated push by Chinese leaders to remove the veneer of independent administrative and legal practices that have provided Hong Kong its special status since China took back control of the territories from the United Kingdom in July 1997. Second, China adopted a new law barring Chinese nationals (including foreign firms invested in China) from complying with foreign sanctions, which will soon be enforceable in Hong Kong.

The Trump administration removed Hong Kong’s special customs status in response to the imposition of the national security law. US officials seemed to have calculated that US trade sanctions would bite and that Beijing would not risk undercutting Hong Kong’s status as an international financial center by imposing more control on its legal and political system. They misread the situation: The US action had minimal impact on US merchandise trade with Hong Kong; US firms don’t buy much that is produced in Hong Kong—most goods shipped from Hong Kong are re-exports subject to US customs duties applied to their originating countries. Moreover, Hong Kong had long since become a services economy rather than a manufacturing hub, and its value as a financial center depends increasingly on access to Chinese capital markets.

Removing Hong Kong’s special status worked at cross purposes to US interests. The US action did little to punish China, and Chinese officials continue unabated in their goal of accelerating Hong Kong’s immersion in the Chinese mainstream.

In addition, US sanctions against Chinese “domestic” policies led China to promulgate its own anti-sanctions law. When annexed under the Hong Kong Basic Law, another area of nationwide Chinese policies will become Hong Kong law without action by the Hong Kong Legislative Council, just as occurred with the national security law in 2020. And like the national security law, the anti-sanctions law will likely be enforced and litigated increasingly strictly by Hong Kong authorities and courts consistent with policy directives from Chinese Communist Party officials.

Financial firms that fund and help execute trade and investment in China have so far avoided being hit by the sanctions tussle and are surprisingly complacent about the current business climate. But the risk is growing. International financial firms operating in Hong Kong will be increasingly vulnerable to US penalties as more of their Chinese clients are targeted by US sanctions. And then they will also come under the threat of Chinese countersanctions, unless they ignore foreign sanctions targeting Chinese nationals and take their chances with US sanctions enforcers.

CLASH OF THE SANCTIONS TITANS?

Tit-for-tat sanctions are likely to be the new normal in US-China relations. The imposition of sanctions is built into US trade and export control laws, and Congress is in no mood to lessen the pressure of such actions against China. And now China seems determined to reciprocate in kind with the new legal authorities wielded by officials in both Beijing and Hong Kong. And as the sanctions war escalates, so too does the risk that financial institutions will be caught in the sanctions’ web of one or both countries.

Sanctions have made doing business with China more complicated and costly. US sanctions and China’s new anti-sanctions policy are likely to force firms operating in China to pick sides: us or them. Some will comply with Chinese laws and forgo the US market; others will leave the Chinese market. High tech firms already are facing this commercial reality and restructuring their supply chains. If financial institutions are forced to exit the US or Chinese market because of sanctions policies, the collateral damage to trade and investment will increase.

One would presume that neither side wants a sharp decoupling of their economies, though rabid political voices in both countries are trying to incite that outcome. Both are worse off in economic terms with the escalation of tit-for-tat sanctions. But neither side is likely to shift its policies in the face of economic coercion by the other; each will likely accept increased economic costs in defense of its strategic interests.

Can the escalating cascade of sanctions be contained or restrained before the measures rupture economic relations critically important to both countries and their trading partners? More is at stake than bilateral and regional commercial relations; the ongoing sanctions war also complicates the task of the two superpowers working together on climate change, nuclear nonproliferation in Asia, and responses to the current and future pandemics. Thus, a counsel of caution is in order; US and Chinese officials should be very careful about how they escalate sanctions against each other.

Before the two powers embark on another costly clash, they should consider other strategic responses as a complement or substitute for sanctions. China is already doing so by aligning more closely with Asian neighbors in the Regional Comprehensive Economic Partnership and its Belt and Road Initiative. The United States could follow that example and support the accession of more democratic nations to its original Trans-Pacific Partnership and should consider—to strengthen relations with strategic allies in the region—a return to the pact in 2022.

Jeffrey J. Schott joined the Peterson Institute for International Economics in 1983 and is a senior fellow working on international trade policy and economic sanctions. 

To read the full commentary from the Peterson Institute for International Economics, please click here.

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