Episode 3: Indo-Pacific Geoeconomics: IPEF, CPTPP, Decoupling & More

Note: This is a podcast version of an earlier post published on August 28, 2024. This is not meant to serve as new content and is designed as a standard paired addition our dedicated website podcast section.

INTRODUCTION

ASEAN Wonk: Welcome to the ASEAN Wonk Podcast, where we bring you expert insights and regional perspectives on Southeast Asia and Indo Pacific geopolitics and geoeconomics. I'm your host, Dr. Prashanth Parameswaran. If you haven't already, please do subscribe to the ASEAN Wonk platform at www.aseanwonk.com so you don't miss our posts.

Our guest today is Dr. Deborah Elms, who is the head of trade policy at the Hinrich Foundation. She's advised policymakers, businesses, and institutions on a range of trade and economic issues. She previous previously held various roles, including as executive director of the Asia Trade Center which published the Talking Trade blog which I was a frequent reader of. She was also a senior fellow at the Rajaratnam School of International Studies in Singapore, which is one of its most renowned think tanks. We'll start our conversation talking about where Southeast Asia fits within geoeconomic pacts and derisking amidst U.S.-China competition. But do listen, read and watch the full episode where we'll discuss a range of other subjects, including the future of sectoral deals, U.S. geoeconomic statecraft after Biden, how to think creatively about economic cooperation in a challenging era, and trade fragmentation futures in the global order.

Episode 3: Indo-Pacific Geoeconomics: IPEF, CPTPP, Decoupling & More

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GEOECONOMIC PACTS: CPTPP, DEPA AND MORE

ASEAN Wonk: So with that, Deborah, welcome to the ASEAN Wonk Podcast, and I wanted to just jump right into it. We've got two of these big trade pacts that seem to be the subject of frequent conversation, and both of them are pacts which China is trying to join and the US is out of. One is the CPTPP or Comprehensive and Progressive Agreement for Trans-Pacific Partnership — a long acronym. It started as four-country pact with Brunei, Chile, New Zealand, and Singapore, expanded to include the United States, became the TPP, the US withdrew, and now we have the CPTPP agreement, which doesn't involve the US. Japan has taken it forward, and now China is trying to join it. So that's on the one side. We have also the Digital Economic Partnership Agreement, and it was started with Chile, New Zealand, and Singapore, but expansion has begun with Korea this year, and there are a bunch of other countries in the line as well — China, the UAE, Costa Rica, Peru, so on and so forth. So in both these pacts, China has applied to join and the United States is not part of them. There's been a lot of conversation about what the odds are of China actually joining these agreements, CPTPP and DEPA. If you were to think about the odds of China joining both of these agreements, what would you put it at in terms of a percentage, and where do you see this likelihood coming to play? Is this something that'll happen within the next year or is it a much longer term prospect and what are the implications?

Dr. Deborah Elms: Well, that's a great question. And as you were saying it, I was thinking this was a such a hot topic last year and has sort of fallen below the radar this year. Maybe there's just too much trade news in other areas, but I think it's worth reflecting on both China into DEPA and China into CPTPP because they they matter. So let me start with the potentially easier one first, which is DEPA, the Digital Economy Partnership Agreement. This is a digital-only deal that was, as you mentioned, started by three of the members in the TPP/CPTPP, who, when the agreement closed back in 2014, decided that the digital elements, which are important in CPTPP but pretty thin — because in digital terms, this was like eons ago — they decided that they were relatively thin and that they needed to start a process of developing new kinds of digital rules with a potentially different audience that could be easier to accommodate new technological developments.

So they started this DEPA and the idea was it would grow, right? We're gonna start with three small open economies just like the TPP started the same way and we would grow from there and we would create this sort of integrated digital-only deal. It came into force, DEPA did, slowly. Chile had some government issues; COVID happened. So it came into force very slowly and it took a while for people to start getting DEPA. But once they realized that this was available and that you could, in fact, join DEPA, there was a long line of countries. South Korea is the first one to finish the process of accession. And as you mentioned, China applied quite early to join as well, and they've started a working group for China to see if they can join DEPA.

Now, why did China want to join the DEPA? A big part of it was that when they were trying to join the CPTPP there has always been talk that China can't do or won't do or isn't capable of doing — depending on who we talk to — digital. That their domestic structure for digital regulation and digital rules is so opposite everyone else that China can't do, won't do, couldn't do digital. And I think the Chinese response to that was to say, are you sure about that? We're gonna try to join DEPA at the same time as a way to demonstrate that we can, in fact, do digital and that we're serious about our CPTPP entry. So they applied to join DEPA.

I think that should be a relatively straightforward thing to do for China to join DEPA because the way that DEPA is structured is designed to allow countries to more easily join. So it's less ambitious in general; a lot of flexibilities. And most crucially in DEPA, the two most important parts of a digital economy agreement — data flows and where do you host the data; where you have to house that data — are carved out. So it's not that those are the hardest things for China. They're carved out of DEPA. So I personally don't think it's gonna be that difficult for China to join DEPA except for, of course, the politics, which is problematic. And it would require governments to say we are comfortable with making the political decision to allow China to join DEPA. It's not actually, in my view, a sort of technical, practical digital related element for DEPA. So I suspect it may happen.

But the other thing that has changed slightly is that I have heard a lot less out of China discussing DEPA. So I think their enthusiasm for doing DEPA was always a sort of sidebar way to get into TPP rather than we want to join DEPA for the sake of joining DEPA. We'll see. We'll see whether that moves forward or not. I think it could move very quickly if the members decided to do so. They've already got the working group open. China is also part of the joint statement initiative at the World Trade Organization on e-commerce. So China has agreed to a set of rules at the global body which are similar to or in alignment with what DEPA wants. And so I think once you've done it in one setting, it's hard to argue that you would somehow behave differently in another setting. So we'll see what happens with that on China. And I apologize for this long answer, but it's a kind of complicated set of things you've asked.

On CPTPP though, that's a bit more difficult and it's not in my view because China can't do CPTPP. It's a super complicated legal text with a thousand pages and all sorts of schedules and things. China, of course, could do CPTPP in my view. There are some challenging areas, like with all members, to be honest. There's always something. But I think it can do so. The real issue for China, of course, is the politics again, which is are the members prepared to make a statement about Chinese entry into this agreement? For a variety of reasons, some of the CPTPP countries — there are eleven CPTPP countries; now twelve with the UK becoming a formal member — those twelve members would have to say, we think China will abide by all of the rules in this agreement, and we feel comfortable making that statement. That is a little bit more challenging. It's not actually about the agreement as much as it is about the politics. And, you know, are those politics gonna change? They haven't moved in the direction that China would have wanted, I would say. It's not become easier for China. It's become potentially a bit more challenging for China rather than the reverse. But I do think that China wants to get into the CPTPP, and they have been taking steps with the various members to rectify what are often called bilateral irritants to say we are a perfectly good member of this larger organization. We are gonna be a rule-abiding member. You know, let's have those conversations.

US-CHINA ECONOMIC COMPETITION IN THE INDO-PACIFIC

ASEAN Wonk: Great. I like the way that you frame the sort of variation between both agreements. I'm just wondering: given what you said about the digital agreement and how some of the parts have actually been carved out already, including cross border data flows, which as you said — that's a sensitive issue not just for China, but even in Southeast Asia, there are different countries that have different approaches on that. On CPTPP, I guess the optics, going back to your point about politics versus the actual agreement, if China were to join, it would seem like this is an agreement that the US put a lot of emphasis on, it withdrew, now China is in. But in terms of the actual agreements and the rules that are being written on trade, what would that do to China's ability to have a greater influence on how the rules are are working? Because there are, as you said, several other members in both agreements that would be able to exercise their own agency as well. So it's not like China would be able to exercise sort of wanton dominance on either of the agreements. But to what extent does this actually affect the geopolitics and the geoeconomics of China's position other than the optics and politics?

Dr. Deborah Elms: Well, that's another good question. I think let me start with CPTPP where I think it's it's easier for me to answer. Why did China want to join the CPTPP is, I think, an important question. I think it's because even before this latest downturn domestically in the Chinese economy, there was a sense among policymakers in China that they were potentially headed for challenges. I don't think they expected quite what they've gotten, but they expected some challenges and that they needed to push through some potentially challenging but important domestic-level economic reforms. It is hard to push through unpopular reforms even in an authoritarian regime because you still have to accommodate domestic interests. And one of the ways that governments frequently do this is they they try to join something ambitious and then they can say to their constituents: “I would love to help you out. You know, I would love to continue to protect you or I would love to subsidize or I would love whatever. But unfortunately, I cannot because this other agreement has eliminated that as an option.” And so that's a very politically popular, palatable way for governments to push through reforms domestically that they are otherwise nervous about.

That's why Vietnam, for example, joined the CPTPP: because Vietnam said we have domestic reforms. We put a lot of them in place when we joined the World Trade Organization like China. But that sort of run its course. And in order for us to make the next level, we have to sign on to ambitious agreements like with the European Union, like the CPTPP. Vietnam did it very successfully. And I think China looked at that and said, you know, actually, for us, that would be useful too. Right? Like, we don't have to do this ourselves. We could do it in conjunction with others, and there are real economic benefits for being in the CPTPP. So I think the Chinese effort around CPTPP was really about how can we push those domestic reforms in areas that are otherwise challenging — like, as with every market, agricultural trade is always hard. I mean, China's an agricultural exporter of a lot of different things, but they also have, like every country, domestic restrictions on inbound agricultural imports sometimes. That is a problem. And so how do we make sure that we open up our market? Challenging, but CPTPP says all tariffs need to come off agricultural goods. All basically, all agricultural goods with a few very small — you know, cream cheese for Japan is the only real exception. So I think, again, China said, let's pursue this. It'll make us do domestic things that are important. And I think that that argument still holds. However, the larger geopolitics were always challenging and have gotten more complicated recently. And I think that's where the the issues around CPTPP entry have have landed, I guess, at least for the moment.

DECOUPLING, DE-RISKING, CHINA+1 AND SUPPLY CHAIN DIVERSIFICATION

ASEAN Wonk: That makes sense. I like the way that you drew the connection between how countries join these agreements in terms of their foreign policies or economic and trade policies, but that has domestic implications as well. That's an important connection to make. I wanted to to jump into another topic that gets a lot conversation but there's actually a lot of uncertainty about what exactly people mean when they talk about it. This conception began earlier with more fearful metaphors and analogies around decoupling. Now we've sort of repackaged it and talked about de-risking, and lots of buzz, especially about U.S. efforts to diversify Indo Pacific supply chains away from China. And Southeast Asian leaders have expressed concerns privately and and publicly. I think Singapore Prime Minister Lawrence Wong last year noted that even selective decoupling in areas like technology would would be disastrous and quite concerning. That's on the one hand, the sort of fears that are happening. At the same time on the trade front, you sort of see differing perceptions depending on what data you look at. And I recall last year, the Peterson Institute of International Economics came up with a study last September that said, actually, there was a marked increase if you look at the past decade in terms of concentration of supply chains rather than diversification, which raises the question: how difficult is this going to be in practice to diversify, given that we're seeing actual concentration over the past decade? I wonder if I could pose it to you. As we're talking about these things like de-risking of supply chains away from China, it's interesting to talk about, but how much of that is actually happening or is possible?

Dr. Deborah Elms: That's a great question. I mean, it's very easy for media and politicians to say, you should de-risk. You should decouple. You should de-risk. We should think about fences and yards and whatever else. Like, that's very easy to say. It is much more challenging to actually do it. And so you know, an example that I regularly give is to back up and ask the question, why is it that China has become such a manufacturing powerhouse in the first place? And how easy is it to replace what China does?

You start with something like, I don't know, let's take the little mouse on my computer. Right? You say, if if you wanna make this mouse in China, you send them a vision. You say, well, you know what? I'm to start with this mouse here, this one here, but I don't like how big it is. Can you make this for me half the size? And they will come back. Within twenty four hours, you'll find a supplier who will deliver to your desk a half-sized gizmo in twenty four hours. And then you look at it and you say, oh, actually, you know what? It's too tall. Make it shorter. Another one twenty four hours later. Then you say to them, well, actually, you know what? We've got this special event coming out. I want it in pink for some sort of event we're doing. And you get five samples in different shades of pink twenty four hours later. And you say, this is the one that I want. I need ten thousand of them, and I need it delivered by Friday. And boom. Ten thousand pink exactly as you designed it. Things arrive in your warehouse or whatever on Friday. Nobody else can do that because that requires not just the manufacturing capacity, but a whole ecosystem that allows you to say, how do we make plastic covering and all of the components smaller? And how do we deal with, like, even things like making it pink requires you to have connections to folks who have dyes and chemicals or whatever else that make pink. And in quantities that you can get quickly, deliver the packaging for the box to put it in, and then the box around those boxes to get it to you on Friday. Nobody else can do that.

So it's one thing for politicians to say, you know, it's risky for you to make all of those pink mice in China. And a firm could say, yeah, it's, you know, okay. Maybe it's not the highest risk kind of category, but, yes, it could be risky. We should diversify. But then they start going around the universe and they say, well, you know, where else could we find people who can make mice? And the answer is actually there aren't that many places that can make them in the first place. And if you find someone who can make the mouse, which is great, they can't change it to pink. And if they can change it to pink, they require suppliers who get the dyes and the chemicals from China. That's another six week lead time. And then you get the prototype another four weeks after that, and then you have to decide. You know, your event is long since gone. So it's harder than you think to quickly diversify, first of all. It costs a lot more, crucially, because China has not just speed but scale and also cost. So even though stuff out of China is not necessarily cheap, the alternatives tend to be much more expensive and much more lengthy in terms of time. And and then you say, well, you know, we're facing, especially now, inflation headwinds. We've got consumers that aren't buying that many mice for their computers. They're not companies that want a branded pink mouse for this event we're hosting. Is this the moment when we wanna switch to a higher cost supplier? The answer is usually no.

So we are seeing supply chains diversify because there are some things that you say, wow. Actually, that is kind of dangerous. We should think about this, or we're prepared to pay a different cost. Or maybe we do the search and we discover, actually, as long as we have a long enough lead time, we're okay with taking a little bit longer to get the mouse as long as we get what we want. So there are some data that do show that there is the beginning of some movement, but it's not as fast as a politician or the media would make you think. And I think this is where the concentration comes from. Who's moving supply chains? It's the Chinese manufacturer of paint dyes that is moving into, say, Vietnam. It's not that the Vietnamese have themselves said, oh, we should we have this incredible opportunity to make, you know, paint dye. It's the Chinese manufacturer who says, actually, we can see how the trend lines look. We should move some of our production into Vietnam so that we're capable of managing this if necessary. That's the shift in the supply chains. It's not so much a firm in Vietnam says wow: here's an opportunity. Let's take advantage of it.

US ECONOMIC STATECRAFT AFTER BIDEN: IPEF, JETP, ECONOMIC CORRIDORS & MORE

ASEAN Wonk: That makes a lot of sense. And I like how you clarified as well that when we're talking about diversification of supply chains and de-risking, we really need to be clear as well as to what industries we are looking at or to use the the U.S. term, you know, how big is the yard and and how high is the fence and what are we putting in there and and so on and so forth. And I wanted to actually shift now to talk about the U.S. And you've written about this quite a bit, actually, including on the Office of the US Trade Representative. But the lack of — from a Southeast Asian perspective — real US trade policy with market access and the U.S. really getting into things like it was under the Obama administration with the TPP and so on and so forth. I think that for the Biden administration folks, despite those obstacles, we've seen at least some inroads in terms of how they're thinking about new economic initiatives. So things like the Indo Pacific Economic Framework and thinking about supply chains that we just talked about, economic corridors and just energy transition partnerships. We've seen those economic corridors now in the Philippines and Africa. We've got JETPs now with South Africa, Indonesia, and Vietnam. So there are new economic ideas, but that's not the same as trade policy, right? And this is just one administration. We have an election coming up — we've gone through now two cycles of administrations that have behaved very differently on trade than the sort of traditional thing that Southeast Asian countries might expect of the U.S. I guess the bigger question might be — you know, whichever party wins and if we see, you know, President Kamala Harris or President Donald Trump — is this really the new normal in U.S. trade policy, where the U.S. is finding ways to talk around trade rather than actually doing trade policy? Or is there maybe a scenario where maybe this is not all baked in? I mean, might we actually see an administration have a more active trade policy in a different environment? How baked in is this given the domestic dynamics in Washington? And what's your perspective on how that might play out after the election, which is the big question everyone's talking about and planning for given the next few months?

Dr. Deborah Elms: Once again, you've asked a fantastic question. And the way that you phrase it, I think, is particularly good. You know, let me back up just a bit….[Note: This is the end of a free preview podcast, with the full version in an earlier post published on August 28, 2024 available to our paying subscribers. This is not meant to serve as new content and is part of our free preview content within the dedicated website podcast section].