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Economy

The Economic Dimension of the “Free and Open Indo-Pacific”

Aug 31 , 2018

In the past year, U.S.-China relations have considerably worsened, as the two countries have become embroiled in a budding trade war, mounting tensions in the Taiwan Strait, and simmering strategic rivalry. Indeed, U.S.-China tensions and President Xi Jinping’s consolidation of power have driven the Chinese administration’s charm offensive to patch-up relations with major regional players such as Japan, India, and South Korea. At the same time, the broader volatility of Trump’s economic agenda, which is narrowly obsessed with correcting U.S. trade imbalances with allies and competitors alike, has nudged China’s counterparts to a degree of bilateral engagement with Beijing to preserve the global economic commons. For instance, Trump’s threatened 20-25% tariffs on imported automobiles and parts would deal a major blow for Japan’s leading export industry.

For the above reasons, after an eight-year hiatus, Japan and China in April held an economic dialogue at which representatives from both governments reiterated the benefits of win-win cooperation and their preference for the free flow of trade and investment, based on an open international economic system centred on the World Trade Organization. Recent conversations I had in Tokyo suggest that China hastened the preparations for the High-Level Economic Dialogue, the trilateral Japan-South Korea-China meeting, and the concomitant official visit to Japan by Premier Li Keqiang. Yet, it is noteworthy that Prime Minister Abe Shinzo has also shown a willingness to cooperate with Xi’s Belt & Road Initiative since last year, specifically in supporting Sino-Japanese private joint ventures operating in Southeast Asia. Japan is also hedging, to an extent, against the risks of a disruptive Trump White House. Yet, a panoramic view of the broader state-led regional economic initiatives suggests that Sino-Japanese rivalry extends to that field as well, with the United States government also chipping in.

Along with an emphasis on maritime security and greater military coordination between the U.S., Japan, Australia, and India, the “Free and Open Indo-Pacific” vision rests on economic foundations. According to the Asian Development Bank (ADB), the Asia-Pacific is in need of $26 trillion of infrastructure investment between 2016 and 2030. As argued in a recent paper, the Japanese government has been an early driving force of connectivity through grants and loans aimed at the construction of high-quality infrastructure in the region. Yet, China’s entry into the game through its Belt & Road Initiative has prompted the Japanese government to devote a substantial amount of resources into overseas infrastructure investments, either through its own agencies or via the ADB. Abe steadily increased Japanese funding for regional infrastructure, doubling his earlier pledge in favour of $110 billion-worth of investments, and providing an additional $50 billion to the ADB.

These monies would allow Japan to preserve a degree of political leverage on recipient countries, especially those in the immediate neighbourhood. India, for instance, is the biggest recipient of Japanese Official Development Assistance (ODA), making Japan India’s biggest bilateral donor. Interestingly, Sino-Japanese infrastructure competition has played to the advantage of local leaders, especially in Southeast Asia: for example, Rodrigo Duterte has cleverly played Chinese economic pledges to extract financial concessions from Japan. In 2017, Abe promised $9 billion to Duterte over five years, with projects tailored for the development of the Philippine President’s impoverished stronghold in Mindanao. As evident from this example, great power rivalry – rather than China’s “authoritarian influence” – ought to be understood as one of the engines behind democratic retrenchment in developing countries.

Moreover, Japan’s push for infrastructure projects aims to kill two birds with one stone: blunt its political rival’s financial inroads in the region, while aiding its own industries abroad. Yet, it’s not clear whether returns on state-led investment abroad will prove economically sustainable for China and, to a lesser extent, Japan. After all, some of these projects are strongly clouded by political considerations and potentially noxious proximity between public and private actors. The Japan-sponsored mammoth Ahmedabad-Mumbai highspeed railway project is a case in point: the size of its generous yen-denominated ODA loans for that project alone – $13 billion — amounts to almost one third of Japan’s ODA committed to India since 1958 ($39 billion), and more than half of the amount of Japanese ODA loans to China ($30 billion) between 1979 and 2013, although these numbers should be adjusted for inflation to make proper comparisons of scale.

More recently, the United States has been fleshing out its economic participation in the  Indo-Pacific. Following U.S. Secretary of State Pompeo’s underwhelming offer of $113 million for the region, representatives from the Australian government and Japan’s and the United States’ policy banks have inaugurated a trilateral partnership for infrastructure investment in the region. Japan’s Bank for International Cooperation (JBIC) and the United States’ Overseas Private Investment Corporation (OPIC) will coordinate infrastructure financing. An OPIC representative will be based in Tokyo for this purpose. Finally, the United States is in the process of creating a “mega-OPIC” through the Better Utilization of Investments Leading to Development Act that will more than double its budget to $60 billion, thus allowing the new U.S. policy bank to work hand-in-hand with JBIC and its budget of roughly $100 billion.

Yet, these initiatives are all embryonic and it remains to be seen how they’ll pan out. At this stage, India’s presence in these multilateral efforts should be understood, at best, as rhetorical support (e.g. in the vague Japan-India Asia-Africa Growth Corridor initiative); India is clearly a net recipient of Japanese and American economic diplomacy. Secondly, the Trump administration is reportedly more inward-looking in terms of financing infrastructure building, to the extent that Japan will create a sovereign wealth fund to invest in the U.S. Trump is much more interested in extracting trade concessions and is unlikely to recommit the U.S. to the Trans-Pacific Partnership, a bold free trade agreement also aimed at shielding medium-size economies from economic dependency on China. The economic legs of the Indo-Pacific vision are still wobbly and we’ll have to wait a while for the U.S., Japan, and likeminded countries to walk the walk of effective multilateral economic cooperation in the Indo-Pacific.

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