australia and china in regional economic...
TRANSCRIPT
Key messAges
AustraliaandChinafacenewchallengesinAsiaandthePacificasaresultofthechangingstructureofregionalandglobaleconomicpower.TheeconomicandpoliticalriseofChinaischangingtheregionalaswellastheglobalorder.Regionaleconomicinterdependencenowincludesawidergroupofeconomies,includingIndia,andawiderrangeofissueareas.TheestablishedregionalinstitutionsandarrangementsinEastAsiaandacrossthePacificdonotencompassalleconomiesandwerenotsetuptodealwiththeinteractionbetweeneconomicandpolitical-securityaffairs,andtherearegapsincoveragewithinthearchitectureforeconomicandpolitical-securitycooperation.ThesechallengesrequireAustraliaandChinatoplayanactiveroleinforginganewconsensusaroundtheprinciplesthatwillguidefutureregionalcooperation.Overthepastthreedecades,Australia’sandChina’seconomicintegrationintotheregionalandglobaleconomyhasoccurredwithinaframeworkthathasbeeninclusive,hasavoidedarrangementsthatweakentheglobalsystemandhasledpoliticalcooperation.Thetwocountriescannowdirecttheirbilateralrelationshiptowardthesecommonregionalandglobalobjectives.
AustraliaandChinashouldworkwithotherpartnersinAsiaandthePacificto:
• Connectandextendexistingregionalarrangements,suchasAPECandtheEAS,sotheycanprovideaplatformtoaddressthenewprioritiesinregionalcooperation.
• Initiatehigh-levelpoliticaldialogueoncross-cuttingissuesthatrequireclosecooperation,includingtheenvironment,energytransformationandregionalinfrastructureinvestment.
• MobiliseacoalitiontodefinethepathforwardinforgingtheTPPandRCEPintoaFreeTradeAreaoftheAsiaPacific(FTAAP)thatstrengthenstheWTOandtheglobaleconomicsystem.ConsolidationoftheTPPandRCEPmaynotbeapracticalobjectiveinthemediumtermbutfindingwaystomakeboththeTPPandRCEPinclusiveandcomplementaryis.
• Seektoestablishacommonframeworkforinfrastructureinvestmentandfundingintheregion.Currentlymanyplayersareactingindependentlyandatcross-purposes.Ministersandseniorofficialscanmeettodiscusspriorities,strategiesandmutualinterestsininfrastructuredeliverytofurtherregionalconnectivity.SucharegionalforummightinvolvetheAIIB,ADB,WorldBank,country-specificinstitutionsandrecipientregionalgroupingssuchasASEAN.
• Useambitiousbilateralinitiativestoprogressregionalandglobalarrangements.ChinacouldusetheinvestmentchapterinChAFTAtopushforahigherqualityinvestmentchapterinRCEPandsetthebenchmarkforotherbilateralinvestmenttreaties.AustraliaandChinacanpioneerservicessectoropening,capitalisingonAustralia’spotentialroleasatestinggroundforwiderdomesticandregionalliberalisation.
• Initiateadialogueonthearticulationofacommon,plurilateralsetofprinciplestogovernforeigninvestment—bothforfacilitatinginvestmentbeforeitismadeandthetreatmentofinvestmentonceithasbeenimplemented.
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• Leveragethebilateralrelationshiptobuildcooperationinthirdcountriesinareassuchasaidanddevelopmentandinfrastructureandconnectivity.
• Furtherenhancebilateralsecuritytiesasanimportantstepincreatingeffectiveworkingrelationshipsonsecurityissuesamongallcountriesintheregion,therebystrengtheningthefoundationforpoliticalconfidenceandregionaleconomicprosperity.
ChinaandAustraliaarebothintegratedintotheregionalandglobaleconomy,andtheirbilateralrelationshipisnestedinahighlyintegratedEastAsianregion.Chinaisthecentreofregionalsupplychainsanditstradeandinvestmentexpansionhavebeenthedrivingforcesofitsrapiddevelopmentandindustrialisation.Goingforward,regionaltradeandinvestmentliberalisationandintegrationwillcontinuetobekeydriversofChina’sfutureeconomicdevelopmentandreform.TheshareofEastAsiainAustralia’stradeisoneofthehighestofanycountryintheworld,with66percentofAustralia’stradetakingplacewithinEastAsia(Figure7.1).Moreover,AustraliaisastableandsecuresupplierofenergyandrawmaterialstoChinaandtherestofNortheastAsia.
EastAsiaisoneofthemosteconomicallyintegratedregionsintheworld—onparwithEuropebyanumberofimportantmeasures.Economiccooperationhasledpoliticalcooperation,andregionaleconomicintegrationhasbeenmarket-ledratherthaninstitution-led.AsAsianeconomieshaveliberalisedandopeneduptoregionalandglobaltrade,institutionshavebeencreatedtohelpmanageandsecurethesethickeninganddeepeningeconomicrelationships.AsiancountriesopenedtheireconomiestointernationalcompetitionwithintheglobalinstitutionalframeworksanddidsobecausetheyhadgrowingconfidenceintheglobaltradingsystemandtheglobaleconomicordercreatedafterWorldWarIIaroundtheBrettonWoodsinstitutions.
AustraliaandChinahavealsoactivelyengagedinregionalcooperationandinstitution-buildingasawaytopromoteeconomicdevelopmentandreformathome,andtofostercloserpoliticalcooperationinthewiderAsianregion.TherelationshipbetweenAustraliaandChinahasdevelopedinthecontextofdeepeningregionaleconomicintegration,andstrengtheningthebilateralrelationshipservestofosterbroaderregionalcooperation.Forbothcountries,economiccooperationhasunderpinnedregionaleconomicdiplomacyandinstitution-buildingprocessesinAsia.Regionalpoliticalandsecuritycooperation,ontheotherhand,hasbeenpiecemealandlesscomprehensive,butincludesnotableachievements,suchascooperativeeffortsontheCambodianpeacesettlementandtheUnitedNationsTransitionalAdministrationinEastTimor.
ThediversitywithintheAsiaPacificregion—withcountrieshavingdifferenteconomicandpoliticalsystems,andbeingatdifferentstagesofdevelopment—demandsacollaborativeapproachtoregionalism.Regionalcooperationhasoccurredonavoluntarybasiswhereagreementswerebasedonforgingconsensusandorderedaroundpositive-sumeconomicinterests.Importantly,thepoliticalandsecurityrelationshipshavebeenunderpinnedbytheUSallianceframeworkcreatedafterWorldWarII,andUSrapprochementwithChinasince1972.
TheinstitutionsthathavefurtheredregionalcooperationinAsiaandthePacific,includingAPEC,ASEANanditsPlusThreeandPlusSixprocesses(includingthesubsidiaryChiangMaiInitiative),havedonesolargelyonthebasisofnon-bindingcommitmentsandwithoutthecessionofsovereigntytoanysupranationalregionalauthority.Theestablishmentof
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theseinstitutionswascharacterisedbyevolution,flexibility,consensusandvoluntaryparticipation,becauseofthedifferencesinpoliticalandinstitutionalsystemsintheeconomiesaroundwhichtheyhavebeenbuilt.Theyhaveservedtobuildpoliticaltrustandcooperationamongcountriesacrossaregioninwhichpreviouslytherehadbeenasubstantialdeficitinmechanismsthroughwhichthatcouldbedone.Thismodelofcooperationconstitutesanimportantinstitutionalinnovationthathasprovedvaluableinothertheatres,suchasintheglobalG20forum,whichhasasimilarmodusoperandi.
Asianregionalismhasthereforenotproceededattheexpenseof,orinamannerthatundermines,globalinstitutions.Onthecontrary,ithassoughttocomplementandreinforceglobalinstitutions.ThatremainsanoverarchingobjectiveforbothAustraliaandChinaintheirapproachtoregionalcooperation.Theprincipleofopenregionalism—thatis,regionalcooperationandintegrationthatisopentotherestoftheworldandwhichreducesbarrierstoallstatesinanon-discriminatoryfashion—onwhichAsiaPacificeconomiccooperationwasbuilt,hasensuredthatregionalcooperationhasstrengthened,ratherthandetractedfrom,globalcooperation.
Butthingsarechanging.TherapidpaceofeconomicgrowthandintegrationinAsiaisbringingaboutamorecomplexandmultipolarorder,andthrowingupneweconomicandpolitical-securitychallenges.AnewregionalconsensusisneededtoensurethattheprinciplesuponwhichAsia’seconomiccooperationwasbuilt—openregionalism,consensus-drivencooperationandstablerelationsbetweenthegreatpowers—arenoteroded.AustraliaandChinaarewellplacedtoworktogethertoforgethisnewconsensusbecausetheyhavesuccessfullyworkedtogetherinthepasttofosterregionaleconomiccooperationonthesesameprinciples.
ThischapterdescribesAustraliaandChina’sjointinterestsinregionaleconomicdiplomacyandsomeoftheprinciplesthathaveservedtheirpastcooperationwell.ItreviewsthechangestothestructureoftheregionalandglobaleconomythathavealreadyoccurredasaconsequenceoftheriseofChinaandtherestofAsia,andoutlinessomefuturetrends.Thechapterthenexamineswhethercurrentinstitutionalarrangementsareadequateundercircumstancesinwhichthestructureofregionalandglobaleconomicweighthaschangedsignificantly,anddiscussestheareasthataremostinneedofchange.ThechapterconcludesbyidentifyingcommoninterestsandgoalsforChinaandAustraliainregionaleconomicdiplomacy.
Australia and China’s joint interests in regional economic diplomacy
AustraliaandChinashareanumberofcommoninterestsintheirpursuitofregionaleconomicdiplomacy:
• usingregionaleconomicframeworkstostrengthenandreformtheirdomesticeconomies;
• promotinganopentradingenvironmentinAsiathatsupportstheglobaleconomicorder;and
• usingregionaleconomicinstitutionstobuildstrongerframeworksforpoliticalandsecuritycooperationinAsia.
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TheseinterestshaveunderpinnedAustralia’sandChina’sapproachtoregionaleconomicdiplomacyoverthepastthreedecades.AustraliaandChinahaveasuccessfulrecordofworkingtogetherinbuildingthefoundationsforAsia’sregionaleconomiccooperation.
FollowingWorldWarII,AustraliabuiltsteadilyitsengagementwithAsiaandreduceditseconomicdependenceonBritain.Australia’sMenziesgovernmentsignedamomentousbilateraltradeagreementwithJapanin1957,andrenegotiateditstraditionalpreferentialtieswiththeUnitedKingdomastheformationoftheEuropeanCommonMarketloomed.Thissteadydiplomaticshiftwasacceleratedwiththereformsofthe1980s,whichreorientedAustralia’seconomicandforeigndiplomacytowardsAsia.Australiasoughttocapitaliseonthelarge-scaleeconomicgrowthandstructuralchangestakingplaceinAsiaandtheirpotentialeconomicbenefitstoAustralia.TherewasrecognitionthatunlessAustraliaremoveditsprotectionisttradebarriersandundertookmajordomesticeconomicreform,itwouldnotenjoythebenefitsofAsia’seconomicascendancyandriskedbeingleftbehindbyrisingAsianpowers.TradeliberalisationthusbecameakeypolicystrategyandwasviewednotonlyasawaytounleashAustralia’sdomesticeconomicpotential,butalsoasawaytounderpinAustralia’sengagementwithAsia.
In1989,theAustraliangovernmentproposedanewmechanism—APEC—topromoteregionalobjectivesintheGATTUruguayRoundandtofosterlongruneconomicdevelopmentcooperation.APECwasdesignedtofostertradeliberalisationandeconomicreforminAsiaandtobolstertheglobaltradeliberalisationagendaoftheUruguayRound.But,importantly,APECalsoservedAustralia’sgoalofpullingtogetherthetwohalvesofAsiaandthePacific—EastAsiaandNorthAmerica—inacooperativeendeavour.ThisgoalwasdrivenbythealignmentofAustralianandEastAsianinterestsinimprovingaccessforlabour-intensiveandothermanufacturesinNorthAmericanandotherinternationalmarkets,andimprovingAustralia’sowndirectengagementwiththeEastAsianeconomies.APECwasthereforeexplicitlydesignedtolinkthecountriesoftheWesternPacific(includingAustraliaandNewZealand)andEastAsiawiththoseofNorthAmerica,viacommonmultilateraleconomicopeningstrategies.
Crucially,thisperiodofreformcoincidedwithChina’sowneffortstoreformandopenitseconomyandtodeepenitseconomicanddiplomaticengagementwithAsia.Afterthreedecadesoflimitedtradeandothereconomicinterdependence,theintroductionofDengXiaoping’s‘reformandopening’policiesin1978pavedthewayforgreaterChineseengagementwithregionaleconomies.AustraliasoughttoharnessthesechangestakingplaceinChinabyinvolvingtheChineseleadershipinthedevelopmentofideasaboutAsiaPacificeconomiccooperation.EconomistandformersecretaryoftheAustralianDepartmentofTrade,SirJohnCrawford,ledamissiontoChinain1980totalkaboutChina’sparticipationininformalprocessesofregionalcooperation.In1986,China,ChineseTaipeiandHongKongwere,atAustralia’sinitiative,invitedtojointhetripartitePacificEconomicCooperationCouncil(atitsVancouvermeetingofthatyear).AustraliaalsoattemptedtoengageChinainthefirstforeignandeconomicministers’meetinginCanberrain1989,althoughtheTiananmenIncidentearlierthatyearmadethispoliticallyimpossible.In1991,ChinajoinedtheAPECmeetinginSeoul,andin1993,China’sthenpresidentJiangZeminattendedthefirstAPECLeaders’SummitinSeattle.
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APECprovidesChinawithanimportantchannelforparticipatingintheprocessofinternationaleconomicgovernanceandregionaleconomicintegration,aswellaspromotingitsowndomesticpolicyagenda(ChinaAPECDevelopmentCouncil2009).LikeAustraliabeforeit,theChinesegovernmentusedparticipationinAPECandtheregionaltradeliberalisationagendatopushpoliticallysensitivetariffreductionandeconomicreformsathome.AtAPEC’sOsakasummitin1995,Chinaannouncedreductionsintariffson4900items,andwithinayearthesimpleaveragetariffratewasreducedfrom36percentto23percent.ByOctober1997,Chinahadreduceditssimpleaveragetariffrateevenfurther,to17percent.APEC’sagendacloselycoincidedwiththeglobalagenda,anditwasinthiscontextthatChinaundertooktheliberalisationandeconomicreformsnecessaryforitsaccessiontotheGATT/WTO.ButChina’sunilateraltradeliberalisationeffortsandactiveparticipationalsohelpedtobringmomentumtoAPEC,andbroughteconomicgainstoChinaanditstradingpartners,suchasAustralia.
Afterlayingthefoundationsforregionaleconomiccooperationinthe1980s,the1997–1998Asianfinancialcrisisrevealedthebenefitsbutalsothelimitationsofexistingregionaleconomicframeworks.Australia’seconomicsystemandinstitutionsallowedittobenefitfromeconomicintegrationwithAsiawhileprotectingagainstmuchofthepotentialfinancialvolatility.Thefloatingexchangerate,forexample,waskeytoAustraliaavoidingrecessionoranyseveredownturnduringtheAsianfinancialcrisis.Theexchangerateactedasashockabsorberasexchangeratemovementsprotectedagainstvolatilityinthedomesticeconomy.InChina’scase,theAsianfinancialcrisisdeepeneditsunderstandingofthebenefitsofregionaleconomiccooperation.Thecontagion-likespreadofthefinancialcrisisaroundtheregiondemonstratedthatregionaleconomieswerenowdeeplyinterconnected,andthatinthiseraofglobalisation,statescouldnotactaloneintryingtoprotectagainsteconomicvulnerability.Chinareceivedinternationalaccoladesforresistingpressuretodevalueitscurrency—thusavoidingbeggar-thy-neighbourexchangeratecompetition—andforprovidingaidpackagesandlow-interestloanstoitscrisis-affectedneighbours.TheAsianfinancialcrisisincreasedChina’sconfidenceinitsabilitytoplayaconstructiveleadershiproleintheregion,butalsodemonstratedthelimitationsofexistingregionalandglobaleconomicmechanismssuchasAPEC,theWorldBankandtheIMF.
TheAsianfinancialcrisisthereforespurredgreaterregionaleffortstodevelopnewEastAsianeconomicarrangements,suchasASEANPlusThree(includingChina,JapanandSouthKorea)andtheChiangMaiInitiative(CMI).Atatimewhenglobalfinancialarrangementswereperceivedtohavefailedtheregion,thesenewEastAsianarrangementssoughttostrengthenanddeepenEastAsianregionaleconomicandfinancialcooperationaswellasregionalregulatorycapacity.BolsteredbyitsleadershiproleduringtheAsianfinancialcrisis,Chinaplayedanimportantroleinthisregionalcooperationprocess,joiningtheASEANPlusThreegroupandsubsequentEastAsianeconomicarrangementswithenthusiasm.Chinaunilaterallyliberalisedmanyofitskeysectors,includingagriculture,therebyopeningitsmarketstoSoutheastAsianexports.In2002,ChinainitiatedaframeworkagreementfortheChina–ASEANFreeTradeAgreement.China’scommitmenttofurtheropeningup,anditswillingnesstosignuptotherulesandnormsoftheglobaltradingsystemthroughaccessiontotheWTOin2001,gavetradingpartnersconfidenceinthedirectionofChinesereforms.UnilateraltradeliberalisationalsocreatedsignificantgoodwillbetweenChinaanditssmallerSoutheastAsianneighbours.EveninNortheastAsia,wherepoliticalandsecurityrelationshipswaxedandwaned,tradeandeconomicexchangegrewrapidly.
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Beyondeconomicbenefits,AustraliaandChinahavealsoviewedregionaleconomicdiplomacyasawayofbuildingstrongerpoliticalandsecuritycooperationinAsia.Thelegacyofcolonialism,ColdWardivision,andunresolvedhistoricaltensionsbetweenJapananditsneighbourshadstymiedinstitution-buildingprocessesinAsiasincetheendofWorldWarII.AlthoughASEANhadbeenestablishedinSoutheastAsiain1967,thewiderAsiaPacificregionremainedinstitutionallyunderdeveloped.Theregionwascomprisedofstateswithverydifferentpoliticalsystems,aswellasmanynewlyindependentstatesthatwerefiercelyprotectiveofanyperceivedthreatstotheirsovereignty.Indeed,thesefactorshadledASEAN,theregion’smostsignificantexistinginstitution,todevelopparticularpracticesofconsensus,flexibility,non-interferenceininternalaffairsandnon-bindingresolutions,asawayofreassuringpostcolonialstates’anxietiesaboutinternationalinstitution-building.
Giventheseobstacles,theAustralianandChinesegovernmentshavebothobservedthevalueofeconomiccooperationasanon-threateningwayforregionalstatestodevelophabitsofdialogueandcooperation,andtheASEANapproachtoinstitution-buildingasawaytofostertrustandultimatelypoliticalcooperationintheregion.Inaddition,participatinginAPECprovidedavaluablewayforBeijingtoreassureregionalneighboursofitspeacefulrise,andtohelpbuildastableregionalenvironmentthatwouldbeconducivetoChina’sfutureeconomicgrowth(Zhang2014;Zhongetal2014).ChinawasencouragedbythewayinwhichAustralia,JapanandtheSoutheastAsianstatesusedregionaleconomicinstitutionsasawaytoenmeshChinaintoaregionalwebofrelationships,andtodemonstratethebenefitsofregionalcooperation.Chinapubliclyacknowledgedthesebenefitsin1997whenits15thPartyCongressofficiallydeclaredthat‘multilateralism’wasaguidingChinesepolicyprinciple(Harris2000).
Asia’s economic integration
China,AustraliaandthewiderAsiaPacificregionhavebenefitedgreatlyfromthestunninglevelsofregionaleconomicintegrationthathavebeenachievedsincethelate1980s.Despitethecomparativelylowerdensityofitsmultilateraleconomicinstitutions,ascomparedwithEuropeforexample,Asianowenjoyshighlevelsoftradeinterdependenceinresourcesandintermediategoods,andhighlevelsofexportsoffinalgoods.Bymanymeasures,EastAsiaisthemosteconomicallyintegratedregionintheworld,ledbyitsextensiveproductionnetworks(ArmstrongandDrysdale2011).
TheongoingsuccessofAsia’seconomicintegrationiscriticallyimportanttoAustraliaandChina’sprosperity.TradewithEastAsiaaccountsfor66percentofAustralia’stotaltrade(Figure7.1).ThismakesAustraliathemostEastAsian-orientedtradingnationintheworld.Justunder46percentofAustralia’stradeiswithNortheastAsia(ASEAN’s‘PlusThree’countries),higherthananyothermajorEastAsiancountry.AustraliaalsohasthehighesttradedependencewithASEAN,at15percent,oftheothernon-ASEANeconomiesintheASEANPlusSixarrangement(NewZealand,India,China,JapanandSouthKorea).IndonesiaandMalaysiaalsohaveover60percentoftheirtotaltradewithintheASEANPlusSixgrouping,withoveraquarteroftheirtradewithintheASEANgrouping.InChina’scase,justunder27percentofChina’stradeiswiththerestofEastAsia.TheChina–ASEANfreetradeareaisnowtheworld’slargestfreetradeareacomprisedsolelyofdevelopingcountries,withtradeofUS$480billionin2014andtotalmutualinvestmentreachingmorethanUS$150billion.By2020,China–ASEANtradeisexpectedtoreachUS$1trillion(Zhong2015).
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Figure 7.1: Asia Pacific economies’ share of trade with east Asia, 2014
0
10
20
30
40
50
60
70
%
China
Japan
South K
orea
Austra
lia
New Zealand
India
US
Canada
Russia
Indonesia
Malays
ia
Thailand
Vietnam
Singapore
ASEAN+6 ASEAN+3 ASEAN
Source:UNComtradeandauthors’calculations.
ChinaisatthecentreofregionalsupplychainsandhasbeenahubforEastAsiantradewiththerestoftheworld.InthepastitplayedamajorroleintheassemblyofmanufacturedgoodsthatwouldbeexportedtoNorthAmericaandEurope,butthevalue-addedinChinaduringtheproductionprocesshasalreadystartedtoincreaserapidlyandChinaisbecomingamuchlargerconsumerofthosefinalgoods(seeChapter2).ChinaisnowfocusedonfurtherliberalisingregionaltradeandinvestmentaswellasstrengtheningregionalconnectivityandintegrationasawaytoenhancetheinternationalcompetitivenessoftheChineseeconomy,andtograduallybuildaglobal,high-standardsfreetradearea.ChinaisalsothelargesttradingnationgloballyanditsvasttraderelationshipswithNorthAmerica,Europeandtherestoftheworldmeanthatitisakeyglobaltrader.
shared principles
ThesuccessofAsia’sregionaleconomicdiplomacyandtheachievementofdeepeconomicintegrationhasbeenunderpinnedbythreecoreprinciples:openregionalisminsupportofglobalframeworks;consensus-drivencooperation;andstablerelationsbetweenAsia’sgreatpowers.
Open regionalism in support of global frameworks
Regionaleconomicintegrationhasbeenopenandhasdevelopedinsupportofglobalframeworks.Asia’seconomicsuccessesoutlinedabovehavebeenachievedbecauseAsia’seconomicarrangementshavegenerallybeenoutward-lookingratherthaninward-looking.Thatis,theyhaveworkedtostrengthenratherthansubstituteglobaleconomicarrangementssuchastheGATTandWTO.Astradingnations,AsiaPacificregionaleconomieshavelearnedthattheirowneconomicprosperityreliesonopenengagementwithNorthAmerica,Europeandotherpartsoftheglobe.
Openregionalism—regionaleconomicintegrationthatisnotattheexpenseofeconomiesoutsideoftheregionandissupportiveoftheglobaltradingsystem—canbeseenmostprominentlyinAPECandASEAN.AttheAPECsummitinBogor,Indonesiain1994member
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economiesagreedtothe‘Bogorgoals’.ThesewereasetofambitioustargetsthataimedtoachievefreeandopentradeandinvestmentintheAsiaPacific,by2010forindustrialisedeconomiesandby2020fordevelopingeconomies.TheBogorgoalsencouragedmembereconomiestoundertakeunilateralliberalisation—thatis,notpreferentialorbetweenmembersonly—andthereforepromotedfreeandopentradewiththerestoftheworld,ratherthanjustamongAPECmembers.
MuchofAsia’sregionalcooperation—economicallyandgeopolitically—isorderedaroundtheASEANgrouping,whichhasalsopursuedopenregionalism.ThisisbecausemostofASEAN’smajoreconomicpartnershavealwaysbeenoutsideofSoutheastAsia—includingChina,Japan,Australia,theUnitedStatesandtheEuropeanUnion.ForASEANtohavepursuedinward-lookingarrangements—thatis,liberalisationattheexpenseofthesemajoreconomicpartners—wouldnothavebeenpoliticallyoreconomicallysensible.ThisapproachisrecognisedinthedesignoftheASEANFreeTradeArea(AFTA),whichwaslaunchedin1992.AFTAinitiallypursuedpreferentialliberalisationbyonlyremovingborderbarrierstogoodstradedwithintheASEANzone.However,fromtheoutsettherewasanagreementthatthesepreferenceswouldbeextendedtoallexternaltradingpartnersaswell,andthusmultilateralised,whenitbecamepoliticallyfeasibletodosoineachdomesticpolity.
MorerecentlytheASEANregionhasbeenpursuinganambitiousASEANEconomicCommunity(AEC),whichwasestablishedinNovember2015.TheaimoftheAECisto‘transformASEANintoasinglemarketandproductionbase,ahighlycompetitiveeconomicregion,aregionofequitableeconomicdevelopment,andaregionfullyintegratedintotheglobaleconomy’by2020(ASEAN2008).TheAECwouldallowthefreeflowofgoods,services,investmentandskilledlabour,andthefreermovementofcapitalacrosstheregion.BecauseintegrationintotheglobaleconomyisoneofthefourpillarsoftheAEC,integrationintheASEANregionwillnotdiverttradeorcommerceawayfromnon-memberstowardstheASEANgrouping.ThegoalisambitiousbutwouldhelpmoveASEANtowardsasinglemarketandproductionbasethatfurtherstheopportunitiesandeconomicengagementofChina,AustraliaandotherneighboursintheAsiaPacific.
consensus-driven cooperation
ConsensualprocesseshavedrivenAsia’seconomicintegration.Consensushasbeencriticalforachievingcooperationamongagroupofstateswithdiversepoliticalsystemsandlevelsofeconomicdevelopment.ConsensushasalsoencouragedthecooperationofAsia’smanypostcolonialstates,whichhadlittleornopriorexperienceofmultilateralismbeforeWorldWarII,andwhichhavethereforealwaysbeenstronglyattachedtotheprotectionofstatesovereignty.Butthisapproachtoregionalandinternationaldiplomacyhasenduringvalue.Consensus-formingstrategiesreassuresmallpowersthatlargepowerswilltaketheirviewsintoconsiderationinadoptingpolicypositionsandthattheywillnotdominateinstitutions;theyalsoreassurelargepowersthatsmallercountrieswillnotbandtogetheragainstthem.Thisconsensus-buildingapproachhasencouragedAsia’sdiversemixofstatestoparticipateinregionalinstitutions,evenattimeswhentheyhavebeenuncomfortablewiththemembership,structure,approachesortheissue-focusofaparticularinstitution.
Thoughoftencriticisedforbeingprocess-driven(ratherthanoutcome-driven)‘talkshops’,theTrack1.5andTrack2dialogues,meetingsandotherprocessesthathaveaccompaniedthecreationofinstitutionssuchasAPECandtheASEANPlusprocesseshavebeencrucialinshapingsharedregionalunderstandingsabouttheimportanceoftradeandinvestment
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liberalisation,economicreformandmultilateraleconomiccooperation.Inparticular,Asia’sregionalinstitutionshaveactedasforumsforbuildingcriticalconsensusonthreeissues:first,thatopeninguptotradeandinvestmentbenefitsone’sowneconomy;second,thatthesebenefitsarecompoundedifopeningupoccursinconcertwithothercountries;andthird,thatopeningupwithoutdiscriminatingbetweentradingpartnersisthebestmodeofstrengtheningeconomicrelationships.AchievingconsensusontheseissuesunderpinnedAsia’srapidexpansionintradeandinvestmentinthe1990s,liftedtheincomesofAsiaPacificeconomies,andensuredthateconomicrelationshipsdeepenedevenintheabsenceofstrongpoliticalrelationships.ThatAsiahasbeenabletoachievetheselevelsofregionalcooperationandeconomicintegrationisbecauseinstitutionalarrangementshaveevolvedthroughconsensualprocesses,haveprotectedstatesovereignty,havebeenvoluntaryandhaveallowedadiversegroupofstatestomakenon-bindingcommitmentsthatareappropriatetotheirlevelsofeconomicdevelopment.
BOx 7.1: AsiA PACiFiC RegiOnAL iniTiATives AnD THe gLOBAL sysTem
WhenAPECwascreatedin1989,disadvantagetonon-membereconomieswouldhavebeeninconsistentwiththeimportanceofeconomiclinksbetweenmembereconomiesandthoseoutsidethegrouping.APECcooperationwasfoundedontheprincipleofaligningAsiaPacifictradestandardswithglobalstandards,andresultedinextendingandstrengtheningtheglobalGATTprocess.APEChastakeninitiativestothegloballevel.
In1996,APECinitiatednegotiationsonanInformationTechnologyAgreement(ITA)intheWTO,andtheagreementwasconcludedinDecemberthatyear.TheITApreventedcountriesfromintroducingtradebarriersforwhatwerethenrelativelynewformsoftradeininformationandcommunicationstechnology(ICT)goodsandservices.ByrequiringcountriestoapplyzerotariffsandotherbarrierstonewlyemergingICTgoodsandservices,theITAencouragedrapidexpansioninthetradeofthesenewtechnologies.Thisinturnmadepossibletheproliferationofsupplychainsintheelectronicsindustry,whichhavefundamentallychangedthewayinwhichcountries’internationalbusinessisintegrated,andwhichhavedeepenedeconomicinterdependenceacrossAsia.Supplychainsrelyonlogisticsdrivenbyrapidcommunicationsandtechnology,andtheproliferationofsupplychainshasbeencriticalintransformingChinaintothe‘factoryoftheworld’.WithouttheITA’sagreementonzerotariffsfornewlyemergingICTtrade,supplychainswouldnothavedevelopedsoreadilyastheydid.
Morerecently,theITA‘model’hasbeenemulatedfortradeinenvironmentalgoods.In2012,APECnegotiatedtheEnvironmentalGoodsAgreement(EGA),whichremovestariffsontradeongoodssuchasequipmentforairpollutioncontrolandwastewatermanagement.TheglobalmarketforthesenewenvironmentalgoodsandtechnologiesisexpectedtoexpandtoaroundUS$3trillionby2020(DFAT2015a).BuildingonAPEC’sregionalagreement,negotiationsonanEGAweresubsequentlylaunchedonaplurilateralbasis(thatis,withmanybutnotallmembersparticipating)intheWTOin2014.
TheCMI,whichwascreatedin2000inthewakeoftheAsianfinancialcrisis,representsanothercaseinwhichregionalcooperationhassoughttostrengthen—notdivertfrom—globalfinancialarrangementssuchastheIMF.TheCMIendorsesglobal,market-basedprinciplesoffinancialcooperation,andonlypermitsasmallpercentageofitsfundstobereleasedtoailingeconomieswithoutIMFapproval.
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Notallregionalarrangements,processesorinstitutionalinnovationshavebeentheproductofconsensus,butthosethathavehadsuccess,buy-inandownershipbycountriesintheregionhavedonesothroughaprocessofbuildingconsensus.Forexample,theformationofAPECwasaninitiativetakenbyAustraliaandJapan,buttheideaofAPECrequiredmuchsocialisationamongotherAsiaPacificeconomiesbeforeitcouldbeintroducedandaccepted.APEChassubsequentlyevolvedandhasbeenshapedovertimebyitsmembers.TheADB(Box7.2)isanotherexampleofthewayinwhichconsensushasunderpinnedAsia’sapproachtoregionaleconomiccooperationandinstitution-building.Ultimately,exampleslikeAPECandtheADBdemonstratethateconomicinstitutionsandotherregionalarrangementshavehadtoevolveanddevelopthroughconsensualprocesses.Itisoftenassumedthatastatic‘rules-basedorder’wascreatedin1945andhasremainedunchangedsincethattime.Thatisnotthecase.Asneweconomicissuesanddemandshavearisenintheregion,newinstitutions,norms,rulesandregionalarrangementshaveevolvedthroughprocessesofconsensus,communicationandsocialisation.
BOx 7.2: COnsensus AnD THe CReATiOn OF THe AsiAn DeveLOPmenT BAnK
TheprincipleofconsensushasbeenacriticalelementunderpinningtheevolutionofrulesandnormsinAsia.OnekeyexampleistheADB,whichwascreatedin1966.TheADBwascreatedonthebackofJapan’srisingeconomicpower.JapanwasdissatisfiedwithitslackofrepresentationinglobalinstitutionssuchastheWorldBankandInternationalBankforReconstructionandDevelopment(IBRD),whichweredominatedbytheinterestsofcountriesinEuropeandNorthAmerica.JapanalsoviewedtheADBasawayofachievinggreaterinternationalpoliticalpower,andofmaintainingitsexport-ledeconomicgrowthstrategy.ThoughfellowAsianstatessupportedJapan’sdevelopmentalagenda,theywerealsofearfulthattheADBwouldbecomeaplatformforJapaneseregionaldominance.Atthesametime,theUnitedStateswaswaryofJapan’sdevelopment-stateapproachtoeconomicdevelopment.
Thus,althoughJapanhasalwayscontributedthelargestshareofcapitaltotheADB,andholdsthelargestnumberofofficialpositions—includingthatofBankpresident—JapanhasnotdominatedtheADB.Instead,sincethe1980sinparticular,thealmostequalvotingsharesheldbytheUnitedStatesandEuropehavebalancedJapan’svotingshare.Thishasrequiredmemberstatestoengageinaconsensus-buildingprocesstodeterminetheBank’sprinciplesonprocurement,lendingpracticesandissuefocus.Forexample,theUnitedStates’preferenceforprivatecapitalandmarket-basedeconomicdevelopmenthasalwaysbeenbalancedbyJapaneseandEastAsianpreferencesformorestate-activistapproachestoeconomicdevelopment.Sinceitscreation,theADBhascontinuedtoevolveasamultilateraldevelopmentfinancinginstitution.
stable relations between Asia’s great powers
TheachievementofdeepeconomicintegrationinAsiahasbeenunderpinnedbystable,peacefulrelationsamongAsia’sgreatpowers.ThemostimportantoftheserelationshipsisthatbetweentheUnitedStatesandChina.US–Chinarapprochementin1972transformedtherelationshipbetweenthesetwocountriesinwaysthatwereofgreatbenefitnotonlytotheUnitedStatesandChinabutalsotothewiderregion.Since1972,ChinaandtheUnited
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Stateshavedevelopeddeepdiplomatictiesandhighlevelsofeconomicengagement,andhaverecognisedthatstablebilateralrelationsaretheonlywaytoensureapeacefulAsianregion.Moreover,theleadershiproleplayedbytheUnitedStateshasbeenofgreatvaluetobothAustraliaandChina.TheUnitedStateshasplayedaleadingroleincreatingandunderwritingtheglobaleconomicandfinancialsystem,andhasstronglyencouragedChina’sintegrationwithinthatsystem.TheUnitedStates’diplomaticandmilitarypresenceinAsiahasalsoservedasanimportant‘backstop’,whichhasencouragedregionalstates—manyofwhomhaveadversarialpoliticalandsecurityrelationships—tofeelsecureenoughtopursueeconomiccooperationandinstitution-building.ThesearrangementshavebeenhelpfulinanumberofwaystoAsiannationsinthepast,includingthosethatarenotUnitedStatesalliancepartners,suchasChina.
Alongsidebilateralcooperationbetweentheregion’sgreatpowers,Asia’seconomicandotherinstitutionshavealsoservedasimportantvenuesfortrust-building,dialogueandsocialisationaroundregionalnormsofbehaviour.Thisisdue,inpart,tothe‘ASEAN-way’principlesofconsensus,non-intervention,sovereigntyandnon-bindingresolutionsonwhichtheyarebuilt.TheseprincipleshavebeencriticallyimportantinenmeshinggreatpowerssuchastheUnitedStatesandChinaintoregionalmultilateralprocesses.Theseinstitutionshaveneverreplacedtheneedfordirectnegotiationsbetweenthegreatpowersthemselves.Buttheseinstitutionshaveprovidedimportantoccasionsforbringingthegreatpowerstogetherinframeworksrespectfulofwiderinterests.Theyhavealsoprovidedopportunitiesforgreatpowerstoholdoff-the-record,informalmeetingsonthesidelinesofpublicsummits,andhaveimpelledthegreatpowerstolistentotheconcernsofsmallerstatesintheregion.
Changing structure of regional and global economic power
Forthepastthreedecades,Asiahasbeenaremarkablypeacefulandprosperousregion.Asia’speaceandeconomicvibrancyhasbeenunderpinnedby:theUnitedStates-ledeconomic,politicalandsecurityordercreatedattheendofWorldWarII,China’sacceptanceofthatordersince1972,andbytheeffortsofChina,Australiaandotherstofosterregionaleconomiccooperationsincethe1980s.Butthisexistingorderisnowunderstrain—partlybecauseofitssuccessandthedramaticeconomicriseofChinaandotherregionalstates.
Thelatterhalfofthe20thcenturysawtherapidindustrialisationandriseoftheJapaneseeconomyinthe1960sthroughtothe1980s,withthenewlyindustrialisedeconomies(NIEs)ofSingapore,SouthKorea,TaiwanandHongKongfollowinginthe1980sand1990s.ThemajorforceofgrowthintheglobaleconomysincetheturnofthecenturyhasbeenChina,withanaveragegrowthrateof10percentperyearoverthe30yearssincereformandopeningin1978(Figure7.2).ThegrowthratesoftheeconomiesofJapan,ChinaandtheNIEshaveslowedastheyhavebecomelargerandmorematureeconomieswithhigherpercapitaincomes.India’seconomicdevelopmentandtheriseofotherSoutheastAsianeconomiessuchasVietnam,MyanmarandIndonesiaarealreadyshowingpromiseasthenextdrivingforceofgrowthinAsiaandtheglobaleconomy.
China’seconomyhasalreadygrowntobeaslargeasthatoftheUnitedStatesinpurchasingpowerparity(PPP)terms(seeChapter1,Figure1.6).ForwardprojectionsoncurrenttrendswithconservativeassumptionswillseeChinaovertaketheUnitedStatesasthelargesteconomyintheworldinnominalmarketexchangeratetermsbytheendofthe2020s,withmanyprojectingthistohappenearlierinthatdecade.
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PartnershiP for Change
ThegrowthofChina’simportanceintheworldeconomyhasoccurredveryrapidly.ThisswiftchangeiscreatingsomeuncertaintyabouthowtomanagethenewresponsibilitiesandchallengesposedbytheriseofChinaandotherregionaleconomies(Zhang2015).ThereisariskthatsomeoftheresponsestothesequickchangescouldunravelthesharedprinciplesthathaveunderpinnedAsia’seconomicachievementstodate.
threats to open regionalism
First,therearegrowingchallengestomaintainingtheprimacyofopenregionalisminAsia.Inthepast,Asia’sdeepeconomicintegrationwasbuiltonthebasisoftheMostFavouredNation(MFN)principle,whichextendstradeandothereconomicbenefitstoallstates,regardlessofwhethertheyaremembersoftheagreementornot.Now,wearewitnessingtheproliferationofexclusive,preferentialtradeagreements(PTAs)inAsia,whichserveonlytodeepeneconomictiesbetweenPTAmembercountries.Someoftheproposedmultinationalpreferentialagreements—suchastheTrans-PacificPartnership(TPP)agreementandRegionalComprehensiveEconomicPartnership(RCEP)—areparticularlylargeandcomprehensive.Whiletheselargeandcomprehensivepreferentialagreementsoffermorebenefitstotheirmembersthannarrowerbilateralagreements,theyalsohavethepotentialtoimposemoreadverseeffectsonnon-membereconomies.Thiscanbeavoided.Agreementsandarrangementsthatarepreferentialandexclusivecanbemademoreinclusiveovertime,justastheAFTAwas,andcreativewayscanbefoundtoextendbenefitstonon-members.HowtonegatesomeoftheadverseconsequencesofnewregionalagreementssuchastheTPPandRCEPisdiscussedlaterinthechapter.
Figure 7.2: Waves of regional and global economic growth
0
2
4
6
8
10
North A
meric
a
& Europe
Australi
a
Japan
South K
orea
Taiw
an
Singapore
(a)
Malays
ia(a)
Thailan
d
Indonesia
China
India
1950–73 1973–97 1997–2010
Waves 1 & 2 Wave 3
%
Source:AustraliaintheAsianCenturyWhitePaper2012andauthors’calculations.
threats to consensus-driven cooperation
Second,therearegrowingthreatstoAsia’sconsensus-basedapproachtoregionalcooperation.Ascross-bordereconomicissueshavebecomeincreasinglycomplex,andhavebeguntoaffectawiderrangeofinterestsandcountries,ithasbecomemoreandmoredifficulttoachieveconsensus-basedregionalcooperationamonglargergroupsof
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CHAPtER 7: Australia and China in regional economic diplomacy
countries.Attimes,theprincipleofconsensushasalsobeenusedandabusedasawayforcountriestoavoidmakingprogressonreform.Inthesecircumstances,smaller‘coalitionsofthewilling’havebeenformedtoachievefasterprogressonissuesincludingtradeandinvestmentliberalisation.Forexample,withtheDohaRoundoftradeliberalisationstalled,somecountrieshaveresortedtobilateralorplurilateralagreementsinordertoopenupmarketaccess.Similarly,inareassuchasinvestmentliberalisation,wherethereisnoexistingglobalorregionalregime,smallgroupsofcountrieshavebegunworkingtogethertoprogressbilateraldealsorregionalagreements.Thereisnothinginherentlywrongwithsmallergroupsofcountriesworkingtogethertointroducenewarrangements.Indeed,thepresenceofcoalitionsofthewillingisawell-establishedpracticeinAsia.APEC,forexample,hashistoricallyusedtheapproachof‘pathfinderinitiatives’toachieveprogress;theseallowsomemembereconomiestoworktogetherinestablishingnewcooperativearrangements,whicharethencommunicatedtootherAPECmemberswhoareencouragedtoparticipatewhentheyareready.Inorderfortheseinitiativestosucceedingainingacceptancebynon-participants,however,itisimportantthattheybecommunicatedtransparentlytoothercountriessoastoavoidsurprises,andtobedevelopedinamannerthatdoesnotdisadvantageothercountries.
threats to stable relations between the great powers
Finally,theexistingeconomic,politicalandsecurityorderinAsiaisunderstrainbecauseoftheeconomicriseofChinaandothersintheregion.Thetransitiontoamoremultipolarorderisinevitable,butthechallengefacingtheregionishowtomanagethatordertransitionpeacefully.China’svasttrade,financial,demographic,environmentalandmilitaryfootprintgivesitagrowingandlegitimateinterestinplayingalargerregionalandglobalrole.Atthesametime,whilemajorshiftsintheregionaldistributionofwealthandpowermakecomparableshiftsintheregionalstrategicorderinevitable,AustraliaandotherregionalstatesverymuchpreferthattheUnitedStatesretainsastrongandstabilisingroleinwhateverneworderemerges.ThegoalmustbetoreconfigureanewregionalorderthatenablesaleadingroleforboththeUnitedStatesandChina.ThisnewregionalordermustalsoallowspaceforotherestablishedpowerssuchasJapan,andforrisingpowerssuchasIndiaandIndonesia.Anynewregionalordermustensurethatsmallerandmiddlepowers,suchasAustralia,SouthKoreaandSoutheastAsiancountries,continuetofeelsecureandabletoparticipatewithindependentvoices.
Managingthisordertransitionwillnotbeeasy.Anditwilllargelybeajobforthegreatpowersthemselves.Nevertheless,Asia’smiddlepowersstillhaveavitalroletoplay.TheyshouldcontinuetouseAsiaPacificinstitutionstohelpmanagetheorderlytransition,playingapositiveroleinpromotingcooperativeregionalinitiativesandmoderatinggreatpowerrivalry.Thereisaneedtoensurethatcurrentregionalinstitutionsandarrangementsaresuitableformanagingeconomicintegration,structuralchangeandpoliticalcooperationasAsia’sorderchanges.FrequentdialoguebetweentheUnitedStatesandChinaiscriticallyimportant,anditisimperativethatthisdialoguetakesplaceroutinelyandwithinframeworksthatinvolveinterestsandissuesbeyondtheUS–Chinabilateralrelationship.TherearetworegularmeetingsayearbetweenthepresidentofChinaandthepresidentoftheUnitedStateswithinaframeworkthatincludesothercountries:theAPECsummitandtheG20summit.Whilethereareotheroccasionsforbilateralmeetings,includingstatevisitsandmeetingsoftheUNGeneralAssembly,forexample,theAPECandG20summitsallowforUS–Chinacooperationinthecontextofbroaderregionalandglobalcooperation.Thoseoccasionsshouldbemadeasproductiveaspossibleforbuildingconsensustowardseffectinggradualandpeacefulordertransition.
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PartnershiP for Change
AustraliaandChinashouldseektoenhancetheirbilateralsecuritytiesasanimportantelementthatcontributestobuildingeffectiveworkingrelationshipsonsecurityissuesamongallcountriesintheregion.Closerbilateralsecuritytieswillhelptostrengthenthefoundationsofpoliticalconfidenceonwhichregionaleconomicprosperitycancontinuetogrow.AustraliaiscommittedtoitslongstandingalliancewiththeUnitedStates,butthisdoesnotprecludesecuritycooperationwithChina.Thedevelopmentofcloserbilateralsecuritycooperationonarangeoftraditionalandnon-traditionalsecurityissueswillbeanimportantelementinelevatingtheAustralia–ChinarelationshiptoaComprehensiveStrategicPartnershipforChangeandindeepeningstrategictrustbetweenthetwocountries.ThechangingregionalordermakesitincreasinglyimportantforChinaandAustraliatoclearlyunderstandeachother’sapproachtoregionalpoliticalandsecurityaffairs.AparticularareainwhichthereisscopeforexpandingdialoguethatwillcontributetothisunderstandingisrelatedtoChina’sevolvingthinkingaboutitsmaritimeeconomy,inwhichbothcountrieshavedirectmutualinterests.
moving forward with common interests
TheeconomicandpoliticalriseofChinaandotherregionaleconomiesischangingtheAsianorderandbringingaboutneweconomicandpolitical-securitychallenges.Basedontheirsuccessfulhistoryinjointlybuildingregionaleconomiccooperation,AustraliaandChinaarewellplacedtoworktogethertoforgeanewconsensusaroundtheprinciplesthatwillguidefutureregionalcooperation.
AustraliaandChinacandirecttheirbilateralrelationshiptowardcommonregionalinterestsinanumberofpracticalways.Jointcooperationwiththirdcountriescanbenefitfromcomplementarycomparativeadvantagesandcanadvancebroaderregionalcooperation.Thereisscopeforworkingtogether—givenAustralia’sexpertise,regionalinterestsandconnectionstotheUnitedStates—onChineseglobalgovernanceinitiativessuchastheAIIB.Therearealreadyareas,suchasindevelopmentcooperationinthePacific,whereAustraliaandChinaactivelyworktogether.Thesecooperativeendeavoursshouldbeextendedsothatprogressindevelopmentcooperation,infrastructureinvestmentandotherinitiativescanhelptodeepenprogressattheregionallevel.
AsChina’seconomyundertakesitshugestructuraltransformation,manyopportunitieswillbeopenedupinlabour-intensivemanufacturingandthesectorsthatChinatransitionsoutof.India,therestofSouthAsiaandmuchofSoutheastAsiacanemulateChinaandNortheastAsia’seconomicsuccess,realisetheircomparativeadvantageandtransitionintolow-costmanufacturing.RealisingtheseopportunitiesinSouthandSoutheastAsiawillassistinChina’sowntransition.AndChina’sregionalinfrastructureandconnectivityinitiativescanplayamajorrolealongsideexportingChina’sover-capacity,surplussavingsandexpertise.
ThelargestopportunityliesinIndia.Indiacanrealiseits‘MakeinIndia’economicreformagendathroughliberalisinglabourlaws,improvinginfrastructureinvestmentandfinancing,openingtoforeigninvestment,andpursuingregionaleconomicintegration.RegionalcooperationthatfacilitatesamoreopenanddynamicexternalenvironmentwillhelpIndiaandothereconomiesundertakesuchdifficultreforms.SuccessfulreformsinIndiawillleverageitsabundantandgrowinglow-costlabourresourcestoexploitacomparativeadvantageinlabour-intensivemanufacturesandservices.AustraliaandChinahaveastronginterest,andcanplayanactiverole,insupportingIndia’seconomicgrowthambitions.
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CHAPtER 7: Australia and China in regional economic diplomacy
strengthening and connecting existing institutions
Asiaisnowhometoacomplexweb,or‘variablegeometry’,ofregionaleconomic,politicalandsecurityinstitutionswithdiversemembershipsandfunctions.EconomicinterdependenceinAsiaandacrossthePacificincludesawidergroupofeconomies,suchasIndia.Inrealitythereisnosingleregionalinstitutionthatcurrentlyaddressesalloftheregion’seconomic,politicalandsecurityissues.
Theestablishedregionalinstitutions,arrangementsandgroupingsinEastAsiaandacrossthePacificdonotencompassalleconomiesandwerenotsetuptodealwiththeinteractionbetweeneconomicandpoliticalaffairs,andtherearegapsincoveragewithinthearchitectureforeconomicandpoliticalcooperation(Figure7.3).
APECremainstheregion’sprimaryvenuefordiscussionofeconomicissues,andhasaparticularfocusontradeandinvestmentliberalisation.ItistheprimaryinstitutionforUSengagementonregionaleconomicaffairs,andtheAPECSummithasprovedtobeanimportantvenueforleaderstodiscusswin-wineconomicissuesandpromoteeconomiccooperationinitiatives.TheroutineworkdoneamongcountriesattheofficiallevelofAPEChasalsoservedtobridgeunderstandingbetweenmembers,todeepencooperationandtoleadtooutcomesthathavebenefitedmembersandnon-membersalike(Box7.1).Thenetworkofofficials,theworkprogram,andtheleaders’meetinghasmeantthatmembereconomiesfeelownershipoftheprocessandtheinstitution.YettherearemajorgapsinAPEC’smembership.AsFigure7.3shows,whileAPEC’smembershipisbroad,thereareanumberofregionaleconomies—includingIndia,Cambodia,LaosandMyanmar—whoarenotAPECmembers.APEC’sdiversemembershipofeconomies,ratherthanstates,makesitaninappropriateplatformfordiscussingEastAsia’spoliticalandsecuritychallenges.WhileinformalmeetingsonpoliticalandsecurityissuestakeplacebetweenleadersonthesidelinesofAPEC,theseissuesarenotonthemainagenda.
Figure 7.3: AseAn, APeC, eAs and ARF membership compared
ARF
EAS
ASEAN+6
ASEAN+3
ASEAN Brunei
Papua New Guinea
New Zealand Australia
India
South Korea
China Japan
Myanmar Laos
Cambodia Thailand
Philippines Indonesia Vietnam
Singapore
Malaysia
Pakistan
North Korea Mongolia
European Union
Bangladesh Canada
Russia United States
Hong Kong Chinese Taipei
Peru Mexico
Chile
Sri Lanka
Timor-Leste
APEC
Source:Authors’schema.
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TheASEANRegionalForum(ARF),createdin1994,hasfocusedmoreonregionalsecurityissues.Itisalargeanddiverseorganisation,involving27participants,includingtheEU.Thoughithasbeenausefulplatformforregionalstatestogettoknowoneanother,andtoparticipateinconfidence-buildingmeasures,theARF’ssizeandthediversecharacterofitsparticipantshasmadeitverydifficulttoachievesubstantialprogressonregionalsecuritydisputes.
TheEastAsiaSummit(EAS)wascreatedin2005andisanotherASEAN-ledinstitution.TheEASemergedoutofproposals,intheearly1990s,tocreateanEastAsianEconomicCaucus.TheAsianfinancialcrisisthenpromptedASEANcountriestoworkwiththeir‘PlusThree’NortheastAsianneighbours—China,JapanandSouthKorea—tobuildanEastAsianeconomiccommunity.WithJapaneagertobroadenitsmembership,India,AustraliaandNewZealandsubsequentlybecamefoundingmembersoftheEASin2005.In2011,membershipoftheEASwasfurtherexpandedtoincludeRussiaandtheUnitedStates.ThisexpansioninmembershiphasalsochangedthecharacteroftheEASfrombeinganorganisationpredominantlyfocusedoneconomicissues,toonewherepoliticalandsecurityissueshavecometodominatetheagenda.IncomparisonwithAPEC,theEAShasneverenjoyedthesamedensenetworkofinstitutionalisedofficialactivityamongitsmembers.Givenitsshiftawayfromeconomicissuesinrecentyears,thereisariskthatmuchoftheEASagendawillbecomedominatedbycountries’politicaldeclarationsratherthaninstitutionalisedcooperation.EAS’mainassetisthatitsagendadoesencompasssecurityissues,andthatitsmembershipincludesallofthemajorpowersinAsiaandthePacific,includingIndia.
Theseinstitutionsandarrangementshaveservedtheregionwelltothispoint,butinquitedifferentways.AsrelativeeconomicandpoliticalpowershiftsintheAsiaPacificandglobally,thereisapressingneedtoconnectandextendexistingregionalarrangementssothatthereisareadyplatformtoaddressnewprioritiesinregionalcooperation.Regionalcooperationhastobuildonandmovebeyondthecoreeconomicagenda.Thewebofeconomic,politicalandsecurityinstitutionsinAsiamustnowbebetterlinkedtoaddressthegapsinmembershipandfunction.TheflexibilityofAsianregionalarrangementsallowsopportunitiestoconnectexistingarrangementsinwaysthatallowthemtoaddressthesenewchallengesandopportunities.
Attheregionallevel,oneoptionwouldbetostrengthentheconnectionbetweentheannualAPECEconomicLeaders’MeetingandtheEastAsiaSummit.Thesetwomeetingsarenowheldback-to-backinNovemberinordertoallowtheUSpresidenttotraveltoAsiaonceayear.Currently,leadersmovefromonehostcountrytotheotheranddiscussdifferentagendaswithdifferentmemberships.ThismeansthatthereisadistinctcontrastinthenatureofthediscussionsatAPECandtheEAS.TheChineseheadofstatedoesnotcurrentlyattendEASmeetings.TheAPEChostandASEANChair(whichhoststheEAS)couldworktogethertoensurethatAPEC’seconomiccooperationagendafeedsintotheEAS’politicalandsecurityagenda,withoutdilutingtheissuefocusofeach.ThiscouldbefacilitatedviajointmeetingsbetweentheAPECandEAS‘troikas’(thatis,theprevious,currentandfutureAPEChostsandASEANChairs)inadvanceoftheannualLeaders’MeetingandSummit.
AnotherwayofstrengtheningtheconnectionbetweenregionalinstitutionalarrangementsmightbetoreachouttoinviteIndiaandotherASEANstatestojointheAPECprocess—notnecessarilyasformalmembersinitiallybutratherasparticipants.TheAPEChosthastherighttoinvitegovernmentleadersfromnon-APECmembereconomiestoattendtheannualLeaders’Meeting.BuildingontheinitiativetakenbyChinawhenithostedAPECin2014,futureAPEChostscouldinviteIndia,Cambodia,LaosandMyanmar—thatis,thosecountrieswhoaremembersoftheEASbutnotAPEC—toattendtheAPECLeaders’Meeting.TheAPEC
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EconomicLeaders’MeetingwillnextbeheldinEastAsiain2017whenVietnamhostsAPEC.In2017,therefore,thereisanimportantopportunityforVietnamtoinviteIndia,Cambodia,LaosandMyanmartoattendAPEC.LeaderscouldthentraveltothePhilippines(whichwillbetheASEANChairin2017)fortheEastAsiaSummit.FindingcreativesolutionstohaveallASEANmembersjoinAPECmeetingswillmakeiteasiertomoreeffectivelyconnecttheseregionalprocesses.EastAsiaandthetrans-PacificrelationshipshavebenefitedgreatlyfromASEANcentralityandthereisgoodreasontopreserveandstrengthenASEANasthefulcrumofregionalcooperation.Australia,ChinaandtherestoftheregionhaveastakeinthesuccessoftheASEANEconomicCommunityandaunifiedandintegratedASEANmakesbroaderAsiancooperationeasier.
Important,cross-cuttingissuesthatrequireclosecooperationsuchasenergyandenvironmentaltransformationshouldbethefocusofhigh-levelpolicydialogueledbyacoalitionofinterestedpowersintheregionandcarriedacrossdifferentforums.Theseissuescutacrossenergysecurity,climatechange,andpoliticalandeconomiccooperation.Theseareissuesthataffectallstatesintheregion,andcanbeadvancedbyleader-levelagreementamongallofthemajorregionalplayers.Theenergytransitionfromfossilfuelstorenewableswillbringnewopportunitiesandchallengesthathavelargetransnationalspillovers.Focusingonanissuesuchasenergytransformationcouldliftthelevelofcooperationbetweencountries,giveregionalarrangementsnewimpetusandprovideaframeworkforcloserpoliticalcooperation.ThisisanissuethataffectsChinaandAustraliaacutely,butalsoaffectsJapan,theUnitedStates,India,Indonesiaandeveryothercountryintheregion,whethertheyareenergyproducers,consumersorboth.Thereiscurrentlynoregionalforumortheatreinwhichenergyissuesareprominentlyontheagenda,butasmallcoalitionofcountriesincludingAustraliaandChinacouldinitiateadialogueinoneormoreoftheestablishedregionalplatformsandcarrypolicydevelopmentforwardacrossalltheseforums.
Atthegloballevel,AustraliaandChinahaveasharedinterestinfeedingregionalinterestsandinitiativesintoglobalarrangements.TheAsianmembersoftheG20—Australia,China,Japan,India,IndonesiaandSouthKorea—andthePacificmembersoftheG20—Canada,MexicoandtheUnitedStates—areallleadersinthevariousAsiaPacificregionalforums.AbetterconnectionbetweentheregionalforumsandtheG20atthegloballevelwillhelptoshapetheG20agenda,toimplementG20outcomesthroughregionalinstitutionsandtobuildconfidenceamongcountriesthatarenotmembersoftheG20initsinclusivenessandcredibility.TheAsianG20membersarethemostimportanteconomiesintheregion,andindividuallyandcollectivelytheyrepresentimportantvoicesinglobalaffairs.Theyalreadyexerciseameasureofinfluenceglobally,andcanrepresenttheinterestsandviewsthatareexpressedinregionalforumsthatoperatethroughaprocessofconsensus.
RegionalinstitutionssuchastheChiangMaiInitiativeMulilateralization(CMIM)andtheASEANPlusThreeMacroeconomicResearchOffice(AMRO)surveillanceunitcanacttostrengthenandreinforcetheglobalfinancialsafetynetandglobalsurveillance.AlthoughthecurrencyswapsinCMIMhaveyettobedrawnon—evenduringtheglobalfinancialcrisis—CMIMandAMROcanbuildtrustandcapacityandplayanimportantroleaspartofthebroaderglobalfinancialsafetynetintheeventofafuturefinancialcrisis(seeChapter8).ThesenewAsianarrangementsmarkasignificantstepforwardinAsianfinancialandmonetarycooperation.Tobetrulyeffective,theyneedtobecoordinatedwiththeIMF.Asia,lefttoitsowndevices,wouldfinditdifficulttomobilisetheresourcesorimposetheconditionsonneighbouringcountriesneededtomanagefinancialcrises.AstrengthenedAMROthat
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coordinateswiththeIMFwillhelpregionalfinancialsurveillance.AustraliaisnotpartytoCMIMorAMRObecausetheyemergedfromASEANPlusThree,butAustraliahasaninterestinhelpingtobuildAMRO’scapacityandplayingasupportingrolewithinCMIM.Morebroadly,theAustralia–Chinabilateralrelationshipshouldincludedialogueandcooperationonissuesthatcanfeedintoandshapethoseregionalforumsandarrangementsinwhichonlyonecountryisamember,suchasCMIM.ThereshouldbecreativewaystohaveAustraliabecomeadefactopartnerinAMRO.ItisinAustralia’sinteresttohelpstrengthenthecoordinationbetweentheIMFandregionalfinancialarrangements(seeChapter8).
TheinstitutionsandarrangementsthathaveservedChina,AustraliaandAsiawellinthepastmustevolvetoreflectnewregionalrealitiesandinterests.Thereislittleappetiteintheregiontocreateentirelynewinstitutions,butexistinginstitutionscouldbere-energisedandtheirconnectionsstrengthened.Andregionaleffortsshouldbeconcentratedonimportantcross-cuttingissuessuchasenergytransformation.AustraliaandChinacanworktogetherwithregionalpartnerstoreformandstrengthentheseexistinginstitutionsandarrangements.
moving towards inclusive regional agreements
TheAsiaPacificregionhasseenaplethoraofbilateralandregionaltradeagreementssignedsincetheearly2000s.ButnoneoftheregionalorplurilateralagreementssignedtodatehavebeenasconsequentialorlargeinmembershipastheTPP,RCEPortheTransatlanticTradeandInvestmentPartnership(TTIP).Theseregionaleconomicagreementsaimtomakemajorprogressontradeandinvestmentliberalisationwheretheglobalsystemhasstalled,andtofurthercross-bordercommerceandexchangeinnewareasofimportancetobusiness,insomecasesbycreatingnewinternationalrules.
RegionalagreementscandeepenregionalandglobaleconomicintegrationandmakeprogresswheretheWTOhasbeenunableto,andintheprocessstrengthenprospectsforprogressatthegloballevel.Yettherearerisksthattheseagreementscanharmnon-members,andthatdifferentagreementswithdifferentmembershipscanbecomeavenuesforcompetitiverule-making,thusfragmentingregionalandglobaleconomicintegration.Thereisstronginterestinavoidingoramelioratingtheseadverseconsequencesinordertobuildaninclusive,globaleconomicsystem.
The12-memberTPPincludesAustralia,theUnitedStates,Japan,Canada,Mexico,Vietnam,Brunei,Singapore,Malaysia,NewZealand,ChileandPeru.LargeAsianeconomiessuchasChina,IndonesiaandIndiaareyettojoin.GiventhestandardsthattheTPPappliesandthefactthatnewmemberswillberequiredtonegotiatebilateralagreementswithallothermembersandberatifiedbyUSCongress,itisunlikelythatChinawillbeabletojointheTPPinthenearfuture.However,theTPPdoesprovidesomecountry-specificcarve-outsandspecialanddifferentialtreatmentfordevelopingmembersregardingtheirtransitionperiods.
ComparedtotheTPP,RCEPcoversabroaderrangeofcountrieswithmorevariedlevelsofeconomicdevelopment.ASEAN’saimisforRCEPtoconsolidateandharmonisetheexistingASEANPlusOneFTAswithChina,SouthKorea,Japan,IndiaandAustralia–NewZealand.TheseFTAsvaryconsiderablyintermsoftheirscope,comprehensivenessandmarketaccesscommitments.RCEPisexpectedtobecharacterisedbyasetofcommonrules,butwithflexibilityfordevelopingcountriestocommittocertainstandardsinreasonabletimeframes,andmarketaccesscommitmentsbyindividualcountriesthattakeaccountoftheirlevelofeconomicdevelopment.
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Figure 7.4: AseAn, RCeP, TPP and possible FTAAP membership
FTAAP
Papua New Guinea Russia
Hong Kong Chinese Taipei
TPP
RCEP
ASEAN Brunei
New Zealand Australia
India
Japan
Myanmar Laos
Cambodia Thailand
Philippines Indonesia
Vietnam
Singapore Malaysia
South Korea China
Canada United States
Peru Mexico
Chile
Source:Authors’schema.
AustraliaispartytoboththeTPPandRCEPandhasaroletoplaywithotherpartners,suchasJapan,indialogue,capacitybuildingandexperiencesharingtobridgethegapbetweenmembersandnon-members.Thisbridge-buildingroleisvitalbecauseAustralia,JapanandothershaveanumberofimportanttradingpartnersthatarenotmembersofboththeTPPandRCEP.TheTPPandRCEPagreementsshouldbeusedtodeepenmarket-basedeconomicinterdependenceandanybarriersagainstnon-membersshouldbewatereddown.Theagreementsneedtobe‘living’agreementsthatchangewithcircumstancesandgiveallmembersavoice.Thecriteriaforaccessiontotheseagreementswillalsobeparticularlyimportantifthebenefitsoftheseagreementsaretobeexpandedbeyondtheoriginalsignatories.
TheTPPandRCEPshouldnotbecomecompetingblocsbutinsteadneedtobemadecomplementary.RCEPdoesnotincludetheUnitedStatesandtheTPPdoesnotincludeChina.ThesearrangementsshouldbedirectedtoenhanceeconomicintegrationinAsiawithoutfragmentingeconomiclinkageswithintheregionorbetweentheregionandtherestoftheworld.
TheTPPandRCEPwillservetheirpurposeonlyiftheyareusedtofosterdomesticeconomicreformagendas.ChinahasbeenhighlysuccessfulinitsstrategyofusingmembershipofexternalorganisationsliketheWTOtoleverageandentrenchmajordomesticreforms.Chinanowhasanopportunitytopursueanewroundofreformsviaexternalengagement,includingfinancialsectorandinvestmentreform,reformofSOEs,lockinginimprovedenvironmentalandlabourstandards,andfurthermodernisingitseconomy.ButtheprospectofachievinganyofthesereformsviatheTPPwillbelongtermratherthanshortterm,particularlybecauseChinaisnotamemberoftheTPPandtherewillbemanyhurdlesfornewmemberstojoiningtheTPP,anditisnotclearwhenaccessionmightbecomepossibleforChina.Moreimportantly,thosereformsandcommitmentsthatChinawillhavetomakeinordertojointheTPPwillhavetobestructuredinawaythatisconsistentwithChina’sdomesticreformgoals.ThemajorchallengeforChina,butmorebroadlyfortheTPP,willbewhethertheTPPisabletocreateanexternalenvironmentforChinaandothernon-membersthatisconducivetotheir
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pursuitofdomesticreforms.Anexclusivesetofarrangementsintheregionthatmakestheexternalenvironmentmoredifficultforfurtheropeningupofeconomiesandimplementingofdomesticeconomicreformsneedstobeavoided.
TheRCEPprocess,ontheotherhand,showsmuchmoreimmediatepromisethroughChina’sparticipationinnegotiatingtheopeningupofborderstotradeandinvestment.China’sWTOaccessionexperiencedemonstrateshowinterestscanaligntocreatewin–wincommitmentsvianegotiation.Itishardertonegotiatedomesticreformexternally.Reformismoresustainableifitisimplementedwithexternalsupportintheformofagreeingtomutuallybeneficialgoals,capacitybuildingandexperiencesharing,andbygivingcountriesspacetofindthebestreformpathfortheirowncircumstancesandinstitutions.Soratherthanexternallymandatingreforms,internationalagreementscanworktoprovideexternalimpetusforongoingdomesticeconomicandregulatoryreformprocesses.
TheRCEPagreementhasthepotentialtocreateanenvironmentforbothmembersandnon-membersthatisconducivetoopeningupofmarketsandtheprosecutionofdomesticreforms.ThereistheopportunitytocreateanagreementthatextendstheprinciplesandmodesofcooperationofASEAN,especiallytheAEC,toabroadergroupingthatincludesmajor-economyneighbourssuchasChina,JapanandIndia,aswellasadvanced-economyneighbourssuchasAustralia,SouthKoreaandNewZealand.ByRCEP’ssettingbindinggoalsandallowingsomecountriestoreachthosegoalsinthemostsuitablewayforthemovertime,withcapacitybuildingandexperiencesharingalongtheway,thebroaderEastAsianregionwillmoveclosertoasinglemarketandproductionbase.
MuchbroaderanddeeperintegrationwouldoccurwiththeEastAsianeconomiesthroughRCEPadoptingthefourpillarsoftheAEC—asinglemarketandproductionbase,acompetitiveeconomicregion,equitableeconomicdevelopmentandintegrationintotheglobaleconomy—andcommittingtomajorliberalisation.Thiswillinvolvecommitmentstocomprehensivefreeingoftradeingoods,servicesandinvestmentandwithaframeworkforeconomiccooperation.Recognisingthatasuccessfulagreementwillrequireanongoingprocess,membersshouldcommittoambitiousbindinggoalsfordeliveryby2025,withbuilt-ininstitutionssuchasworkinggroupsforongoingimplementation.
RCEPhasrealpotentialtoavoidoverlyprescriptiveoutcomes,byprovidingcountry-specificmarketaccesscommitmentsandsettingsomeagreedrulesanddirectionsforfuturework.AswiththeexperienceofASEAN,multilateralisingpreferences—sothatbenefitsareextendedtonon-members—overtimewillbeimportanttoavoidanexclusivemembershipthattruncateseconomicintegrationacrossthePacificorwiththerestoftheworld.WhetherRCEPultimatelyresultsinopenregionalismdependsonthemodeofcooperation,theendgoalsandhowthosearepursued.
RCEPcountriesalreadyaccountforalargershareoftheglobaleconomythandotheTPPcountriesanditsmembersalsoincludeafastergrowinggroupofcountries,ledbyIndiaandChina.RCEPisdiverse,withsomeoftheleastdevelopedcountriesintheregionsuchasCambodia,LaosandMyanmar,whicharenotAPECorTPPmembers.TheGDPoftheRCEPgrouping—onconservativeprojections—couldbeclosetodoubletheTPP’ssizein15years(Figure7.5).
PursuinganambitiousRCEPagreementalongsidetheTPPwillbeimportantforfurtheringeconomicintegration,andAustraliaandChinahavearoletoplayinsettinghighstandardsinthisprocess.Indoingso,AustraliaandChinacanusethebestfeaturesofChAFTA—
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includingtheliberalisationofservicesandinvestmentaccess—tosetthebenchmarksforRCEP.StronginitialliberalisationandcommitmentsforphasedliberalisationininvestmentbyChinaandotherswouldhelptodevelopcompetitiveliberalisationbetweenRCEPandtheTPP.ItwouldalsoensurethatafutureUS–ChinaBITcouldincorporatethebestfeaturesofboththeTPPandRCEP,takingaccountoftheinterestsofthewholeregionratherthanjustbilateralinterests.Thisapproachwouldhelptoachieveconvergencebetweenthetworegionalagreements,therebyaddressingthebiggestproblemtheycurrentlyface:namely,thattheUnitedStatesandChinaarenotpartytobothagreements.
EarlyconsolidationoftheTPPandRCEPisanunrealisticobjective.Thetrackrecordofconsolidatingsmallerbilateralagreementshasnotbeengoodandhastendedtoleadtothecreationofadditionallayersratherthanconsolidation.Thelonger-termconvergenceoftheTPPandRCEP,however,canbepursued.Apracticalwayforwardwouldbetomobiliseacoalitionofthewillingtoworktogetherindefiningthepathforwardinlinkingthesetworegionalagreements.Australia,asamemberofbothagreements,hasacrucialroletoplay,butChinaandothersthatarepartyonlytooneagreementarealsoimportantforfindingcreativewaystobridgethegapsbetweentheTPPandRCEP.
Figure 7.5: gDP projections of RCeP and TPP groups, 1980–2050, at purchasing power parity
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Note:IMFprojectionsto2020followedbyprojectionsbasedonanestimateofpotentiallabourproductivityforcountriescurrentlyintransitiongiveninstitutionalqualitymeasuredbytheWorldEconomicForum’sGlobalCompetitivenessIndex.Source:HubbardandSharma2016.
ArelatedinitiativeistheefforttodeveloptheFreeTradeAreaoftheAsiaPacific(FTAAP),whichwasputbackontheregionalagendain2014whenChinahostedAPEC(APEC2014a).TheFTAAPbuildsontheongoingregionalundertakingsoftheASEANPlusThree,TPPandRCEPandaimstofurtherAPEC’sregionaleconomicintegrationagenda.Consistentwiththeprinciplesofeconomiccooperationthathaveservedtheregionsowelluntilnow,APECleadershaveagreedthattheFTAAPshouldsupportandcomplementthemultilateraltradingsystem,worktohelpachievetheBogorgoals,andbepursuedwithastep-by-step,consensus-basedapproach.Itwouldalsoneedtobeahigh-quality,‘nextgeneration’agreementandruninparallelto—notaspartof—theAPECprocesssothatnon-bindingvoluntarycooperationcanbepreservedinAPEC.
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TheprinciplesthathaveservedEastAsiaanditstrans-PacificcooperationsowellinthepastshouldguidetheformationandarchitectureoftheFTAAPsothatitstrengthenstheWTOandtheglobaleconomicsystem.RecognitionoftheimportanceofASEANcentralityandextendingthebestfeaturesoftheAECwillbeimportantinachievingahigh-qualityagreementthatmovestheregiontowardsasinglemarketintheAsiaPacific.BuildingonthesharedprinciplesthathaveunderpinnedAsia’seconomicintegrationtodate,itisalsoimportanttoensurewherepossiblethatregionalagreementsdonotunderminetheglobalmultilateralsystembyadverselyaffectingnon-members.
BOx 7.3: BuiLDing A muLTiLATeRAL Regime FOR gOveRning FOReign DiReCT invesTmenT
TheglobaltradingsystemhasbeenintegralforChina’sintegrationintotheglobaleconomyandregionalarrangementssuchasAPEChavehelpedinthis.Asinvestmentflowshavebecomemoreimportantintheregion,thelackofaregionalorglobalinvestmentregimeisemergingasasignificantgapinthemultilateralarchitecture.Chineseoutwarddirectinvestmentisalreadylargeandwillonlybecomemoreimportantregionallyandglobally.AustraliaisamajorrecipientofChineseinvestment,andbothcountrieshavearoletoplayindevelopingarrangementsattheregionalandgloballevelsthathelpwiththemanagementofforeigninvestmentandfurtherregionaleconomicintegration.
Currently,thelackofaregionalorglobalregimeforinvestmenthasledtoamixofbothunilateralpolicies(mostlyonthepartofrecipientcountries)andbilateralpolicies,usinginvestmenttreatiesandeconomicagreementsthathavevaryingprovisionsandprotections.AustraliaandChinahaveaninterestininitiatingdialoguearoundthearticulationofacommonsetofprinciplestogovernforeigninvestment—bothforfacilitatingpre-establishmentforeigninvestment(beforeitentersacountry)andthenationaltreatmentofpost-establishmentforeigninvestment.ThismightbeginwiththeimplementationofChAFTA(seeChapter4).AustraliaandChinacanalsocarrytheirworkonaninvestmentagreementundertheaegisofChAFTAintotheRCEPnegotiations.Withoutregionalguidingprinciples,thereisariskthatagreementsbetweenlargecountries—suchastheUnitedStates–ChinaBilateralInvestmentTreaty(BIT)—willbecomethedefaulttemplateforthosebetweenallstatesintheregion.Itisimportantthattheinterestsofsmallercountriesarerepresentedinthesediscussionssothatoutcomesareintheinterestsofallinvestorsandrecipients.
Promoting infrastructure investment as multilateral regional goods
PromotinginfrastructurefundingandinvestmentisaparticularpriorityinAsiaandthePacific.TheWorldBankhasestimatedthateachadditional10percentofglobalinvestmentininfrastructureincreasesglobalGDPgrowthbyonepercentagepoint.Giventhemodestandunevengrowthintheglobaleconomy,increasinginfrastructureinvestmentisimportantformanycountries.Inparticular,thereisgreatdemandforinfrastructureinvestmentwithintheregion.TheADBhasestimatedthatAsiawillneedUS$8trillioninnationalinfrastructureandUS$290billionininfrastructureconnectingeconomiesby2020(ADB2009).MeetingthatUS$8trilliondeficitinregionalinfrastructuredemandby2020iscriticaltothecontinuing
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growthanddevelopmentofregionaleconomies.Yet,asiswidelyrecognised,therearecurrentlyanumberofconstraintsoninfrastructureinvestment.ThescaleoffundingthroughthemultilateraldevelopmentbankssuchastheWorldBankandtheADB,whicharesmallrelativetothesizeofdemand,hasshrunkinrecentyears.Indeed,sincethe1990s,someoftheexistingmultilateralbanks,suchastheWorldBank,haveincreasinglyfocusedonfunding‘social’projectsinareassuchaseducation,health,environmentandurbandevelopment,ratherthanfundinginvestmentinroads,railways,portsandotherinfrastructureprojects.Moreover,theAPECConnectivityBlueprint(2015–2025)releasedatthe2014APECSummitrecognisesthatthequalityanddistributionofinfrastructureintheregionremainsuneven,andthatmanycountrieslackfinancialsupportforinfrastructurefunding.ThereisclearscopeforintermediatingAsiansavingsandfacilitatinggreaterprivatesectorfinancingtocopewiththehugeshortfallinregionalinfrastructureinvestment.
China’slaunchoftheAIIBisanimportantmomentintheemergenceofChinaasacontributortoregionalandglobalpublicgoods(Lin2015).ChinaalreadyhasanumberofexistingavenuesthroughwhichitfinancesinfrastructureprojectsinAsia,includingtheChinaDevelopmentBank,itsnewOBORinitiative,theSilkRoadFundandtraditionalbilateralfinancing.Throughtheseavenues,ChinaseekstostrengthenAsianconnectivityandeconomicintegrationthroughinvestmentinroad,rail,shipping,aviation,telecommunications,powerandenergypipelineinfrastructure.ButtheAIIBrepresentssomethingnew.IndevelopingtheAIIB,Chinahasvoluntarilycommitteditsresourcestoamultilateralbodywithformalgovernancestructuresandwithexternaloversight.WhilethismultilateralapproachnecessarilylimitsChina’sfreedomofaction,itoffersmanyadvantagestoChinaandthewiderregion.
First,multilateralisingfinancingdecisionscaninsulateChinafrombilateralpoliticaltensions.Withcompetitionamongrecipientsforlargeinfrastructureinvestmentprojects,investmentdeployedthroughmultilateralprocessesarelesslikelytobecomepoliticised.Whencommercialdecisionstakeplaceonaunilateralorbilateralbasis,theyruntheriskofbeingsecond-guessed,orbeingviewedasconnectedtounrelateddisputesordisagreements.
Second,itisinChina’sdirectinteresttoensurethattheAIIBmeetsallthestandardsofamultilateralinstitution.TheAIIBisunderintensescrutinyandtheinternationaltoleranceformisstepswillbelow.WhileChinaoriginallyformedtheconceptoftheAIIB,itsgovernancearrangementshavebeenshapedbyitsmanyfoundingmembers,andshouldensurethattheAIIBmeetsalltheaccountabilityandtransparencystandardsofothermultilateraldevelopmentbanksandhasanappropriatelyskilledinternationalworkforce.ThedownsideofbuildinginthoseprocessesandproceduresisthatitmaytakelongerthanChinaandrecipientcountriesmaywishfortheAIIBtobecomeasignificantplayerintheregion.ButChinawillbenefitsignificantlybecausethereisnoquestionthattheAIIBtrulyisamultilateralinstitutionandnotonecontrolledbyChina.ThisdoesnotmeanthattheAIIBneedstomirroralloftheproceduresoftheexistingmultilateraldevelopmentbanks.Onthecontrary,theAIIBshouldseektobemoreeffectiveandefficientthantheothermultilateraldevelopmentbanks.Indoingso,thisdemonstratesthatChinacanmakeaneffectivecontributiontoprovidingglobalpublicgoodsandactivelyleadamultilateralorganisation.Moreover,theareasoftheAIIB’soperationswheretimeandcareshouldbetaken—suchasrigorouscreditassessments,carefulprojectselection,carefulattentiontoenvironmentalandsocialissuesandstrongaccountingandtransparencyarrangements—areoneswhereChinacanlearnfromtheexperienceofothers.Assuch,thereareanumberofindirectbenefitsthatChinacangainfromthecarefulestablishmentoftheAIIB.
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TheOBORinitiativeaimstoconnectAsia,theMiddleEast,EuropeandAfrica.ItisaboldplanbyChinathatcouldgreatlyfacilitateinfrastructureconnectivityandeconomicintegrationwithinandacrossregionsandsub-regions(StateCouncilofthePeople’sRepublicofChina2015).China’ssurplussavingsandinfrastructuredevelopmentexpertisecanbemobilisedforthebenefitofthedevelopmentofothercountriesthatlackcapitalandinfrastructuredevelopmentexpertise.ItcanalsoeasesomeoftheovercapacityissuesinChinawhileexpandingtradeandcommerceforChineseandothercompanies.AsthesuccessofthisChineseinitiativerequiresactiveinvolvementofothercountriesbasedontheirowninterests,theOBORinitiativecanalsoprovideaplatformforcooperationbetweendevelopedanddevelopingeconomies(Zhang2016b).AustraliaisactivelydevelopingtheNorthernAustraliaregionandhasstronginterestinbeingpartoftheOBORinitiative.BeyondthebilateralinterestinAIIBandOBOR,bothAustraliaandChinahaveaninterestinregionalinfrastructurebuildingandconnectivitythatwouldbemademoreeffectivethroughbilateralandregionalcooperation.
Ultimately,China’scontributionsviatheAIIBandOBORformanimportantplankinAsia’swiderconnectivityagenda.China’sneighbourhoodinSoutheastAsiahasawell-developedASEANMasterPlanforConnectivity(AMPC).TheAMPCisaregionalplanfortransportandinstitutionalconnectivitydesignedtobringcountriesclosertooneanother,andtofacilitatebetteraccesstotrade,investment,tourismandpeople-to-peopleexchanges.TheAIIBandtheAMPCsharesimilargoals.China’scapitalandexpertiseinbuildinginfrastructureisalreadyhighlysoughtafterinSoutheastAsiaandelsewhere—Chinese-developedports,high-speedrailandmajorinfrastructureprojectssuchastheTrans-AsianRailwayNetworkandAsianHighwayNetworkhaveearnedChinaanimpressivereputation.WorkingalongsidetheAMPCwillhelpChinatoprioritiseinvestmentandembedcooperationamongrecipientcountries.Forinstance,roadsandrailnetworkswillconnectcountrieswithsharedborders,whileasystemofshortseashippingwilllinkmaritimeSoutheastAsiawithportsforroll-onroll-offvessels.
TheAIIBrepresentsanimportantstepinChina’sprovisionofregionalandglobalpublicgoods.AsuccessfulAIIBwillmeanChinesefunds,expertiseandleadershipcanbeleveragedtosupportdemandforinfrastructureinvestmentinAsiaandbeyond.ItisintheinterestsofAustraliaandthewiderregiontoseetheAIIBsucceed.
ButtheAIIBisnottheonlyimportantinfrastructureinvestmentinstitutionoperatinginAsia.TheADB,WorldBank,andunilaterallendersanddonorsareallimportantforinfrastructuredevelopmentinAsia.Apositivedevelopmentisthatinitsinitialoperations,theAIIBisfocusingonco-financingarrangementswiththeADBandtheWorldBank.However,thereisadangerthatsomeoftheplayersmayactindependentlyandattimesatcross-purposes.Itwouldbeproductivetoensureacommonunderstandingandcoherencetotheinfrastructureinvestmentnetworkintheregion.Therewouldbevalueinministersandseniorofficialsfromthecountriesintheregionregularlydiscussingpriorities,strategiesandmutualinterestsininfrastructuredeliverytofurtherregionalconnectivity.Regionalinfrastructurefundingandinvestmentisclearlyacross-cuttingissuethatwouldbebestservedbyhigh-levelpoliticaldialogue.WhileASEANhastheAMPCforadvancingconnectivityamongitsmembers,AustraliaandChinacouldinitiateabroaderdialogueinvolvingregionalcountries,regionalandmultilateraldevelopmentbanks,internationalfinancialinstitutionsandrecipientregionalgroupingssuchasASEAN.Movingtowardsestablishingacommonframeworkforinfrastructureinvestmentandfundingintheregionwouldbeamajorcontribution.Existingarrangementsshouldbeusedcreativelyandnon-exclusivelytofosteranimportantdialogueofthiskind.
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Australia, China and the next decade of regional cooperation
AustraliaandChinahaveenjoyedgrowingprosperityasadirectresultofthedomesticeconomicreformsandregionaleconomicintegrationinitiativestheyhavejointlypursuedoverthepastthreedecades.ButlargechangesarenowunderwayinAsiaduetothechangingstructureofregionalandglobaleconomicpower.Closecooperationandcommunicationisrequiredinordertoavoidmisunderstandingsanddisputes,tonarrowdifferences,andtomaintainandbuildtrustamongcountriesintheregion.Theshifttowardsamorecomplexandmultipolarorderhasalreadycreatednewtensionsandhasbeguntoerodesomeoftheregion’ssharedprinciples.ThemajorchallengesnowfacingAsia’sregionaleconomyrequireinnovativesolutions.
AustraliaandChinashareacommoninterestinforginganewconsensusonthesharedprinciplesofcooperationthatcanbringfurthereconomicinterdependence,buildpoliticalcooperationandmaintainstablerelationsbetweentheregion’sgreatpowers.
Theregionalandglobaleconomicsystemsarechangedasaresultofwhatlargeeconomiesdobythemselvestomanagetheirinteractionswithothereconomiesandpolities.Butifwearetoachieveapeacefultransitiontoamoremultipolarworld,thesechangesmusttakeplacethroughcollectiveconsensusamongallthecountriesthatareaffected.ThischapterhasidentifiedanumberofareasinwhichcollaborationbetweenChina,Australiaandtheirpartnersinregionaleconomicdiplomacywillbeofspecialimportanceinthecomingdecades.
Practicalprogresscanbemadeinstrengthening,extendingandbetterconnectingtheestablishedregionaleconomiccooperationarrangements,suchasAPEC,theASEANPlusframeworksandtheEAS,andinsecuringaframeworkforpoliticalconfidenceandsecuritywithinwhicheconomicprosperitycanbeattained.AstartingpointwillbetobetterconnectthecooperationanddialogueoneconomicissuesthattakesplaceinAPECandtheASEANPlusprocesseswiththecooperationanddialogueonpolitical-securityissuesdiscussedwithintheEAS.Important,cross-cuttingissuesthatrequireclosecooperation,suchasenergyandenvironmentaltransformationaswellasregionalinfrastructurefundingandinvestment,shouldbethefocusofdialogueledbythemajorpowersintheregionandcarriedacrossdifferentforums.
AustraliaandChinahaveastrong,sharedinterestinmobilisingacoalitionfordefiningthepathforwardinforgingtheTTPandRCEPtogethertowardsaFTAAPthatstrengthenstheWTOandtheglobaleconomicsystem.TheChAFTAagreementcansetbenchmarksthatwillhelpwithambitiousandhigh-qualityoutcomesintheRCEPagreement,especiallyintheinvestmentchapter.AustraliaandChinacanpioneerservicessectoropening,capitalisingonAustralia’spotentialroleasagoodtestinggroundforliberalisation.ChinacanuseChAFTAasatestinggroundforahighqualityUS–ChinaBIT.
Asia’sfutureeconomicgrowthandintegrationisincreasinglydependentoninvestmentincriticalinfrastructure.AustraliaandChinawillbothbenefitiftheregionisbetterconnectedthroughsea,roadandrailnetworksandotherconnectivityprojects.TheAIIBisanimportantnewchanneltofundingAsia’sinfrastructureneeds.Startingahigh-leveldialogueamongalltheactorsintheregion—bothfundersandrecipients—aimedtowardsestablishingacommonframeworkforinfrastructurefundingandinvestmentwouldreducecosts,bringbetterunderstandingandhelpimproveconnectivity.
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