Trying to unscramble Asia’s economic interdependence with China

The security thinking that’s now captured Washington calls on allies and partners everywhere ‘to reinforce, renovate and buttress a world order that favours freedom’. The US Indo-Pacific strategy is shaped around the idea of integrated deterrence which US Secretary of Defense, Lloyd Austin, says means ‘using every military and non-military tool in our toolbox, in lockstep with our allies and partners’.

One element of integrated deterrence aims to deepen force interoperability through military-to-military arrangements among close allies and select partners. This will be achieved through the acquisition of US military hardware, personnel exchanges and placements, base location and joint training. In the US alliance relationship with Australia, these elements have long been present, as they have too in the US alliance relationships with Japan and South Korea.

What’s different in the Australian case is the commitment to lifting them to another scale, a process that began slowly with the Gillard–Obama agreement in 2012 on North Australian US troop rotation but has been taken to new heights in the past two years.

The AUKUS nuclear-powered submarine initiative promises commitment on all these fronts. The security analysts argue that its deterrence effect is ‘staggered’ — with delivery of its core components two decades, perhaps more, down the track — but the announcement of AUKUS defence cooperation itself delivers deterrent punch. A more sober assessment might be that it adds marginally to US deterrent power and subsumes Australian national defence largely within American defence and strategic interests. That’s a debate that has hardly dared declare itself open in Australia yet, but will find its time.

Another more amorphous element of integrated deterrence is the US intention to build coherence across its hub-and-spokes alliance relationships and other partnerships in a coherent common strategic cause. This involves triangulating military interoperability where possible — between Australian and Japanese defence forces for example — but also constructing a framework that emphasises common interests and building capacity to resist non-military coercion and ‘grey zone’ tactics. This mission, it’s argued, doesn’t require formal treaties or arrangements that aggregate assets or capabilities but can be pursued through a network (or ‘latticework’ as US National Security Adviser Jake Sullivan calls it) of loose coalitions communicating common deterrence postures against adversaries.

US allies and partners in Asia welcome key aspects of the US Indo-Pacific strategy and its acknowledgement that the region’s security and prosperity are vital to American security and prosperity. Yet articulating both its military and non-military dimensions is still very much a work in progress.

How the United States frames its economic relationships with allies and Indo-Pacific partners is now seen as a critical element in these ideas of strategic deterrence. US President Joe Biden is set this month to launch the Indo-Pacific Economic Framework (IPEF) which will define his administration’s economic strategies toward the region.

In our first lead this week, Joshua Meltzer points out that the IPEF is an ‘opportunity to promote US leadership and deepen US ties with Indo-Pacific countries at a critical geopolitical moment’. Yet the idea of pursuing any economic agreement is domestically fraught. ‘The challenge’, Meltzer says, ‘will be finding a path to achieve a high standards agreement, consistent with US domestic constraints, while providing sufficient benefits to attract US Indo-Pacific partners’.

The United States, under Trump, walked away from the Trans-Pacific Partnership, and the Biden administration hasn’t been prepared to sign on to its successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The IPEF will therefore offer none of the US market access benefits of a traditional free trade agreement for the region but rather comprise a modular set of agreements with countries (exclusive of China) choosing what to or what not to sign on to.

The comprehensive and ambitious suite of issues that the framework is expected to embrace includes supply chain resilience, digital standards, trade facilitation, infrastructure and clean energy transition — all worthy causes. But whatever is eventually negotiated will be driven by a US Presidential Executive Order, easily overturned by Mr Biden’s successor. The participants in the framework may well be limited to rusted-on alliance partners such as Australia, Japan and South Korea and countries like Singapore or Vietnam in Southeast Asia.

The plan, says Mary Lovely in our second lead this week, envisages ‘unprecedented cooperation so that the strategic environment of the Indo-Pacific is fundamentally changed’. But it’s cooperation that offers ‘autonomy and options’ not only to potential partners but also to the United States itself. ‘The framework’s optimistic tone’, cautions Lovely, ‘obscures a precarious assumption underlying the strategy: that partners in this endeavour share the American desire to build China out of regional economic and technology networks’. Beijing is fingered as a source of the region’s mounting challenges.

China is at the heart of Asian value chains and economic interdependence. Japan’s and South Korea’s major market is China and a large proportion of their imports from China are sourced from their own foreign invested firms based there. Cutting ASEAN out of Chinese production networks, it’s estimated by the OECD, would cause an 11 per cent hit to the region’s GDP. Policies that aim to unravel trade with China would undermine trade across the entire region.

‘While many Indo-Pacific nations want to bolster defences against Chinese coercion and aggression’, Lovely concludes, ‘it is doubtful that they share the US view that China can or should be excluded from regional economic arrangements and decision-making forums’.

Almost all the economies that are the target of IPEF (including India) are closely integrated with China. The United States proclaims support for ‘ASEAN centrality’ as Lovely points out, but ignores the presence of ASEAN at the heart of the Regional Comprehensive Economic Partnership (RCEP), of which China is a founding member’.

Meanwhile, US trade with China continues to grow, by over US$77 billion or 12 per cent between 2019 and 2021, from 11.3 per cent to 12.1 per cent as a share of total US trade, absorbing markets diverted from Australia by Chinese trade coercion. And investment from American and Japanese companies is contributing to the record US$661 billion investment into China, including US$334 billion of direct investment.

A US strategy that does not comprehend the nature and importance of economic interdependence to Asian security is bound to founder one way or another.

The original article can be found here at East Asia Forum.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.