International order necessary for ‘derisking’

 In November, the Asia-Pacific Economic Cooperation (APEC) summit will be held in the United States.

 President Biden has indicated the intention to exclude Russian President Vladimir Putin from the meeting and invite Chinese President Xi Jinping.

 This is a shift from the traditional decoupling (segregation) policy to a derisking (risk reduction) policy that emphasizes cooperation with China, excluding the security domain.

 This shift was led by the European Union (EU), which wanted to avoid the segregation from China.

 The Japan Center for Economic Research estimates that the EU suffers a spillback loss of 4% of its production due to trade sanctions against Russia. In contrast, the costs of imposing similar sanctions on China would be far greater. This is because Russia’s economic size is less than the one tenth of China, and the economic interdependence between the EU and China is more than three times deeper than Russia’s.

 According to Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in the United States, the future economic order in the Asia-Pacific will be either a China-centered system led by “Regional Comprehensive Economic Partnership in East Asia” (RCEP) framework or a U.S.-centered system, where the U.S. returns to “Comprehensive and Advanced Trans-Pacific Partnership Agreement” (CPTPP) framework.

 While China has expressed its intention to join the CPTPP, the United States has no intention of returning to the CPTPP. The consequence is clear.

 In my view, it is possible for Japan and the Association of South-East Asian Nations (ASEAN) to restructure “Asia-Pacific Free Trade Area” (FTAAP), which encompasses CPTPP and RCEP, with CPTPP as the main axis.

 APEC adopted the Bogor Declaration at the summit meeting held in Indonesia in 1994, which stated to “achieve an open and free trade and investment regime in the Asia-Pacific region by 2020 at the latest”

 We must not forget that RCEP was established under the leadership of ASEAN. According to the Asian Development Bank, Vietnam has the second largest trade benefits after Japan gained from RCEP and CPTPP. Other ASEAN countries and South Korea would also benefit greatly from joining CPTPP.

 The EU takes a bilateral approach to Asian countries. If the EU, along with the UK, joins the CPTPP, it will greatly open up new perspective for global trade and investment liberalization.

 The issue here is ASEAN’s position. If ASEAN tries to maintain its non-aligned policy in terms of diplomacy, it will have to navigate between the two reefs of the United States and China in terms of trade policy.

 This is especially important when it aims to become a production hub for electric vehicles (EV). The region is rich in important minerals essential for EV production. If it tries to develop the manufacturing industry with a focus on refining and processing, there is a risk of falling into resource protectionism, such as banning the export of important minerals.

 For the de-risking policy to be successful, it is essential to build a free and open trade system that allows important minerals to be procured from a variety of producing and processing countries at any time. Derisking policy should place the liberal international order at its core.

(English translation of Morning Edition of the Nikkei with 2023/10/13)