Globalisation is now under threat.
Expanding global trade outpaced and buoyed a growing global economy in the decades leading up to the global financial crisis in 2007 and 2008. The advanced industrial world, led by the United States and Europe, created and sustained that system in the past but the slow recovery in industrial economies since the global financial crisis has seen them preoccupied with domestic challenges and show signs of turning their back on globalisation.
Populist anti-trade and anti-immigration sentiments seem to be capturing the North Atlantic. Brexit was a major turning point for the United Kingdom and Europe. Europe’s internal challenges are unresolved, and the election of Donald Trump has already seen the United States effectively kill the twelve-member Trans-Pacific Partnership that was signed, sealed and waiting to be delivered.
After bouncing back from the sharp decline during the global financial crisis, world trade grew by less than 3 per cent in 2012 and 2013, compared to the pre-crisis average of 7 per cent. Chinese trade growth has slowed dramatically from 22.6 per cent a year in the decade since WTO accession in 2001 to less than 6 per cent in 2014 and slower since. Global services trade has held up better than goods trade but for China and the rest of the world, the growth in trade is now slower than growth in GDP. Some slowdown is to be expected for China as it transitions from an investment and export-led growth model to one focused on services and consumption.
About three quarters of the structural slowdown in trade is due to the stagnation of global economic growth and low investment. The rest is due to rising protectionism, the maturation of global value chains and China sourcing more intermediate goods domestically. One silver lining is that we may not have a proper handle on how to measure the impact of the new digital economy and e-commerce which has been booming.
Even with China’s rebalancing towards a slower more sustainable growth model, Asia is still growing at a higher rate than the world on average and any other region. And there are large, poor and young populations in Asia, concentrated in India and Indonesia but also elsewhere in Southeast and South Asia, that mean growth potential will be high for decades to come.
But economic development in a hostile external environment will make a difficult job much harder. A great deal is at stake given much of South and Southeast Asia are yet to attain the middle or high incomes of some of their Asian neighbours and there is still much poverty to eradicate. But it is also the more prosperous Asian economies in East Asia that need an open international economy to sustain the march towards higher incomes. Deepening reforms is a much harder task in the face of a global trading system in retreat. Asia’s major economies face difficult structural reform challenges including the third arrow of Abenomics in Japan, China’s supply-side reforms and India’s Make in India reforms. Having an external environment that facilitates these and other reforms in Asia and globally is helpful to success.
Developing and developed Asia needs a well-functioning and open global economy and given Asia is still growing faster than the rest of the world it now has a peculiar responsibility to protect that global system. Asian economies need to lead the push-back against protectionism and inward looking-ness, whether they are ready or not.
There are important ways in which Asia can provide leadership.
Asia can champion unilateral reforms. The reforms that need to be undertaken now for many countries are the more difficult behind the border and institutional reforms, not just removing border barriers. These are the types of reforms that are only achievable by building domestic coalitions for change instead of forced change through external agreements. International agreements can help reinforce these reforms but they are deeply dependent on winning domestic support. Asian economies can focus on implementing these domestic reforms unilaterally or in concert with willing partners in the region — it is in their own interest. A more dynamic and open Asian economy will be a strong fillip to the global economic system.
Many of these reforms can help create a more conducive investment environment. With investment stagnating in advanced economies, but also on the wane more broadly, there is urgency in mobilising infrastructure investment to serve the development needs in Asia. The Asian Infrastructure Investment Bank, China’s Belt and Road Initiative and Japanese ODA should be welcomed but can be extended.
Initiatives in the multilateral arena, such as the implementation of the WTO’s Trade Facilitation Agreement, need support. If the era of major single-undertaking multilateral rounds at the WTO is a thing of the past, then plurilateral agreements and other initiatives that promote international commerce and support the global system are needed and Asia needs to be a proactive and positive force in delivering both.
The East Asian Regional Comprehensive Economic Partnership, or RCEP, presently under negotiation, provides a platform from which Asia can provide leadership. To do so RCEP needs to be credible and ambitious. Comprised of the ten ASEAN states plus Australia, China, India, Japan, New Zealand and South Korea, RCEP has potential to be a positive force beyond Asia, globally. With huge diversity in levels development and systems, RCEP members need to take a different approach from the TPP and have creative and flexible ways to achieve ambitious targets. If those targets are not ambitious enough or if countries don’t bind themselves to meeting them, RCEP will not achieve this goal.
RCEP or any other Asian agreement, because of regional diversity, needs to have regional economic cooperation as its centrepiece. Whether that is building capacity, infrastructure or experience sharing, the cooperation agenda will be central to meeting the major challenges brought by implementation of reforms, technological disruption, dealing with distributional issues, the movement of people, tackling new cross border issues and energy transformation and climate change.
The global economy that acted as a tailwind for Asia in the past has turned to a headwind. Asia’s overriding interest today is to help anchor the global trading system and economy and reverse the headwinds of anti-globalisation.
Mari Pangestu is former trade minister of Indonesia and currently a visiting fellow at Columbia University and Shiro Armstrong is co-director of the Australia-Japan Research Centre at the Australian National University.