Remarks to ASEAN Business Council Webinar, 26 April 2023

REMARKS TO ASEAN NZ BUSINESS COUNCIL WEBINAR, 26 APRIL 2023

STEPHEN JACOBI, EXECUTIVE DIRECTOR

WHEN ELEPHANTS FIGHT – US/CHINA TENSIONS AND IMPLICATIONS FOR ASEAN

It’s great to join this webinar with my good friend Siah Hwee Ang.

Thanks to the ASEAN NZ Business Council and the ASEAN Business Alliance for bringing us together.

This is a very timely discussion.

Our friends in ASEAN are worried – worried about major power rivalry and the possibility for collateral damage.

It was once rightly said – “When elephants fight, it gets tough on the grass”.

Speaking at the recent Boao Forum in China, Prime Minister Lee of Singapore said “any clash between (the US and China) would have grevious consequences, for themselves and for the world”[1].

Prime Minister Anwar of Malaysia, speaking at the same Forum had this to say “rivalry can take on a productive or destructive tone … unfettered competition must give way to spirited co-operation”[2].

I’d like to examine the potential implications for ASEAN of major power rivalry by looking at three aspects:

• What is happening between the US and China?
• What are the current effects on ASEAN?
• What does this mean for New Zealand?

As “the trade guy” I’ll concentrate primarily on the economic aspects, but it is important to recognise that there are complex political and security considerations in all of this which should be borne in mind.

What’s up with US and China

I’ve previously described the relationship between the US and China as a complex “Game of Thrones”.

It’s a case of “House of Dragon meets House of Eagle”.

The world’s largest economy and the second largest are increasingly coming head to head in a global competition for economic supremacy and influence.

At the same time, they maintain the world’s largest economic relationship in terms of trade and investment – whether they like it or not, they are both partners and competitors.

Two-way trade between them is valued at around $700 billion and the stock of two way investment is $160 billion.

Yet the two countries are finding it increasingly difficult to get on in this emerging multi-polar world order.

Whether or not bilateral relations are at the lowest point ever is hard to say – think back to the time of the tragic events at Tiananmen Square or to the height of Trump’s not-so-easy-to-win trade war.

Things have moved beyond the bluff and bluster of the Trump years with a more level-headed Administration in Washington, but the problem is that the trajectory of the relationship seems to be on a downward spiral.

The US points, not without justification, to continuing human rights repression in Xinjiang, Tibet and Hong Kong, to bellicose behaviour in the South China Sea and Taiwan Strait and to apparent economic coercion in a number of countries.

China points to US rallying of democracies in G7, Quad and now AUKUS to seek to contain China, to instruments like the CHIPS Act and its $52 billion worth of subsidies which seem directed to undermine their economic development and to apparent abandoning of long held positions related to the “One China” policy.

Throw into the mix the occasional balloon, sharply differing views on Russia’s immoral and illegal war in Ukraine and on the origins of the pandemic and you have a long list of litanies on both sides.

Some will argue of course that there is not a “moral equivalence” between the issues raised by each side.

Should abuse of human rights bear the same score as an industry subsidy in this game of thrones?

Be that as it may, the worrying thing is that, despite a promising discussion between Presidents Biden and Xi in Bali in November last year, both sides appear far off from finding an effective way of managing these polarised points of difference.

That management is urgently required in order to minimize where possible the impact on global security and the global economy.

There is right now a very real risk of a serious miscalculation or an accident that could have terrifying consequences as each side feels feels compelled to respond to each other’s actions in an effort to have the last word.

Even co-operation on something as globally critical as climate change has been impacted.

To quote Prime Minister Lee at Boao:

“Progress on tackling urgent problems such as climate change, energy and food security, and pandemic preparedness has been severely impeded. … The bifurcation in technological and economic systems is deepening. And this will impose a huge economic cost on countries, as well as further exacerbate rivalries and frictions”.

Impact on ASEAN

So much for the elephants, what about the rest of us on the grass?

Last month I had the opportunity to spend time in Singapore and Kuala Lumpur and the theme of today’s webinar was very much a hot topic of discussion.

What is clear is that ASEAN economies and New Zealand share the same concern as we observe anxiously this difficult and degrading situation.

We have different histories of course, but both of us have security interests to protect and economic interests to advance.

When it comes to security, ASEAN members have long lived alongside China and some of them are involved in difficult territorial disputes.

Even so, China is ASEAN’s largest trading partner while ASEAN is China’s third largest trading partner after the EU and US.

Some ASEAN economies are more engaged in trade with China than others – Myanmar, Cambodia, Laos and Viet Nam in particular, but other members – Singapore, Malaysia, Indonesia, Philippines, Thailand– all have sizeable relationships.

All ten ASEAN economies are participants in China’s Belt and Road Initiative with major infrastructure projects underway, further enhancing integration with China.

Earlier this year “The Economist” magazine sought to coin a new term – “Altasia” – to describe a new alternative Asian supply chain which is evolving as a result of this geo-political rift[3].

Certainly, the idea that manufacturing would begin to move out of China, most particularly because of rising Chinese production costs is nothing new.

The Trump trade war and rhetoric about economic decoupling added to this and Covid also drew new attention to risks of supply chain concentration.

But whether “Altasia” is a thing, is not completely backed up by the evidence.

It appears that there has been some movement out of China to Viet Nam in particular with foreign investment in Viet Nam growing faster than the ASEAN average.

Some of this foreign investment is however by Chinese companies.

Similarly in Kuala Lumpur I was told of solar panel manufacturers relocating from China to Malaysia.

Surveys about the future intentions of American businesses in China also suggest there is planning underway to that end.

But the latest AmCham survey from 2021 suggested that 72% of manufacturers producing in China had no plans to move any production out of China in the next three years[4].

Of the remaining 28% that plan to move any production, only two companies (1.6%) expected to move all production in the next three years.

In Washington last week Treasury Secretary Janet Yellen, in a speech notable for its somewhat more positive tone, said that the US “does not seek to decouple our economy from China’s. A full separation of our economies would be disastrous for both countries. Rather we know that the health of the Chinese and US economies is closely linked”.

It is worth asking how likely it is that ASEAN might be the recipient of any diverted investment from China.

First, it is clear that those businesses who are manufacturing for China are more likely to want to stay in China.

Second, it is not clear that other locations offer the same supply-chain eco-system advantages as China, even if costs are rising.

Third, ASEAN has some way to go to make itself a more attractive location by speeding up the process of integration through the ASEAN Economic Community.

This involves a mix of policies aimed at deepening ASEAN economies’ participation in regional value chains.

As the Malaysian think tank IDEAS has said, attention is required to regulatory coherence across ASEAN, addressing non-tariff barriers which penalise intra-ASEAN trade and liberalising and improving trade and investment policies[5].

And as Prime Minister Lee said in Boao, one way of mitigating global risks is for “countries in Asia … to build a dense mesh of co-operation and interdependence”.

What about New Zealand?

When elephants fight it gets hard on the grass – will growing thicker grass help?

Not entirely – mice can still get trampled.

The aim surely should be to prevent elephants fighting in the first place.

This is where New Zealand and ASEAN share a fundamental interest and where we are already engaged in thickening up the ties that bind in the region, especially through AANZFTA, RCEP, CPTPP and even the newish “Indo Pacific Economic Framework” or IPEF.

Again, to quote PM Lee:

 “These groupings are not mutually exclusive. They have varying memberships and often overlap with one another. Not every country needs to be in every group. But collectively, the different groupings build a resilient and interlocking network of co-operation among countries in Asia… and this gives our external partners a stake in Asia’s peace and prosperity”.

It seems to me that after thirty years of effort, New Zealand is well and truly part of this network of co-operation and can use it to good advantage to navigate our own path though these choppy geo-political seas.

Our high-quality relationships with ASEAN economies can assist in deepening our understanding of change and risk in the region.

Our access to ASEAN through an upgraded ANZFTA and a fully implemented RCEP can provide new options for trade and investment.

In some ways we have only scratched the surface of the opportunities open to us – we need not necessarily look to far off Europe for these, they are at our door step.

Writing recently about AUKUS in the Australian Foreign Affairs journal the legendary Kishore Mahbubani from Singapore said:

“Australia has no idea what a powerful partner ASEAN could be. Many in Canberra, for example, celebrate Australia’s current closeness with Japan in the Quad. Japan’s economy was eight times bigger than ASEAN’s in 2000. However, it’s now only 1.5 times bigger. By 2030, ASEAN’s economy will be bigger than Japan’s”[6].

The same could be applied to New Zealand.

Even as we struggle to avoid picking sides in this widening Game of Thrones, we do need to pick our own side and work to expand key relationships with our ASEAN friends.

Conclusion

In an increasingly contested global environment, where the challenges are greater than any one country, even the larger ones, to solve, there is an urgent need for countries to find what Prime Minister Anwar at Boao called “spirited co-operation”.

That is true for the US and China, but it is equally true for the rest of us.

The future is hard to discern, but the way forward needs to be informed by an understanding of what is happening on the ground, especially when that ground is decidedly shaky.

That’s why this gathering today is a timely one.

The ASEAN NZ Business Council has long carried the torch of deeper relations between New Zealand and ASEAN economies.

When elephants begin to fight, that deepening is required more than ever.

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[1] https://www.pmo.gov.sg/Newsroom/PM-Lee-Hsien-Loong-at-the-Boao-Forum-for-Asia-Annual-Conference-2023

[2] https://www.straitstimes.com/asia/se-asia/malaysian-pm-anwar-calls-for-revived-push-on-china-s-belt-and-road-projects

[3] https://www.economist.com/graphic-detail/2023/03/03/these-countries-could-lure-manufacturing-away-from-china

[4] https://www.amcham-shanghai.org/en/article/amcham-shanghai-releases-2021-china-business-report

[5] “Post Covid Supply Chain Reconfigurations: Convergence or Divergence in ASEAN Economic Integration?” API 2020 Briefing Paper No 1, IDEAS, August 2020.

[6] https://www.australianforeignaffairs.com/afamonthly/the-view-from-singapore?ct=t(POLITIKToday_07_10_2016_10_6_2016_COPY_01)&mc_cid=318c3b035e&mc_eid=40efc1e65d