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December 18, 2013

America's Economic Commitment to Asia in Perspective

By

America’s Economic Commitment to Asia in Perspective

Testimony before the
Subcommittee on East Asian and Pacific Affairs
Committee on Foreign Relations
United States Senate
 
December 18, 2013
 
Walter Lohman
Director, Asian Studies Center
The Heritage Foundation

My name is Walter Lohman. I am director of the Asian Studies Center at The Heritage Foundation. The views I express in this testimony are my own, and should not be construed as representing any official position of The Heritage Foundation. 

I commend the subcommittee for taking such a concerted, detailed look at America’s interests and role—what, I would argue, should be its continued leadership role—in the Asia-Pacific. You will find broad agreement among the foreign policy community with the commitment to Asia implied in the President’s rebalance. There are disagreements over the priorities of the commitment, whether “rebalance” is the most constructive way to frame it, or whether enough resources are devoted to it. Some would even question whether a rebalance is actually underway.

It is important, however, for foreign audiences in particular to understand that the American commitment to its interests in the Western Pacific—what Chairman Royce has called America’s “near west”—is very widely supported in Washington. As is the case with many national priorities, the debates occur over how the commitment is put into effect and which priorities constitute it.

Strategic Picture

America’s commitment to the Western Pacific is both about the challenge posed by China’s rise, and about something much broader.  It’s about China, yet it’s not about China. In that conundrum may lay the reason for confusion and misperceptions in Beijing and other Asian capitals about the rebalance. 

On the political and diplomatic side, America’s Asia policy is largely about China. This is because whatever may have been the situation in the region more than 150 years ago, before China’s “century of humiliation,” it is the U.S. and its allies who have shaped today’s regional order. That order is best characterized by the pursuit of a secure liberal international order, characterized by such things as freedom of navigation and commerce and promotion of political liberty. It benefits China—if not always the Chinese Communist Party—as much as it does any other country in the region. This is essentially the same vision that the George W. Bush Administration and many Administrations before it have pursued. 

The problem is that Chinese government does not necessarily see it this way.  It poses an alternative to this vision that seems more tightly focused on China’s narrowly drawn national interests. 

The regional order established by the U.S. in the decades following World War II was not just strategic and institutional. A concrete geographical order accompanied it.  It included Taiwan’s de facto independence, Japan’s administration of the Senkaku Islands, and the claims of Southeast Asian nations to land features in the South China Sea.  This is today’s status quo.  Awakened after 150 years, what the Chinese call their core interests revolve around changing this status quo, and not necessarily through means now acceptable to the rest of the region. China’s narrow interests are driving its disposition to the broader order.  Thus, much of the diplomatic and security side of America’s Asia policy requires pushing back against China and channeling the conflicting interests into administration of established institutions and norms, such as the peaceful settlement of disputes and adherence to customary international law. 

The Obama Administration has sought to frame this effort by appealing to an ASEAN-centric architecture, that is, a set of institutions created by the Association of Southeast Asian Nations intended to enmesh external regional powers in a web of interlocking regional relationships. Involvement in these institutions, the East Asia Summit, the U.S.–ASEAN Leaders Summit, and many others, is a good thing. My only reservation is that the Administration’s approach seems to underappreciate ASEAN’s severe limitations in dealing with contention. It also seems to either underestimate American power vis-à-vis the ASEAN countries, or seeks to purposely blunt that power in the cause of an amorphous accumulation of soft power. At its worst, this amounts to serving ASEAN’s interests in pleasing all comers and muting differences among them—not necessarily American interests. America has some very critical interests in Southeast Asia that in the absence of heavy, uncomfortable pressure on ASEAN will not be served. Among them are human rights and security issues, freedom of the seas being the most important of the latter. At best, excessive deference to ASEAN’s sensitivities and mechanisms will result in an underutilization of time, focus and resources. 

It should be noted that the Obama Administration, as the Bush Administration before it, also believes that conflicts arising from differences in U.S. and China world views can be ameliorated through extensive direct contact with China on political and security issues. The effectiveness of this set of tactics is a topic for another hearing. Suffice it to say for purposes of today’s hearing that the effort, and especially the rhetoric representing it, contributes to the perception of incoherence in the rebalance.

Economic Commitment to East Asia and Pacific

The economic side of the American role in Asia is very different. It is not about China. And, there are overwhelmingly more advantages in this engagement than risk. The challenge the U.S. faces lies in simultaneously countering China in the diplomatic and security areas while maximizing the upside of Asia’s burgeoning economies, including China. This can be accomplished with a principled clarity in America’s vision for the transpacific economy, robust bilateral and ad hoc multilateral economic agreements, engagement of the region’s economy-focused diplomatic architecture, and the most effective use of other tools available to American officials. 

The vision is pure and simple: the promotion of a liberal economic order. This should be the fundamental goal of our international economic policy. It is not the success of American companies per se, pursuit of which can produce misallocation of resources and inefficiency. It is support for an open, rule-based economic environment in which American companies can fully compete and the market can determine winners and losers. This applies at home as well as abroad. There is nothing of inherently greater value in exports than in imports, and nothing inherently better about American investment at home, than foreign investment here. Politically sensitive market segments at home are not more justifiable objects of protection than the protections of our trading partners. Both are distortions of the market mechanism. Companies ought to be able to avail themselves of international value chains and finance with as few restrictions as possible. They should also bear the cost and risks. 

Free Trade and the Trans-Pacific Partnership

The first thing this economic vision means is energetic presidential-level support for free trade, and in particular the conclusion of a Trans-Pacific Partnership (TPP) that is no less open and encompassing than the agreements that have come before it. The TPP is today the explicit economic “centerpiece” of the Administration’s rebalance. There are several key areas that free trade advocates will be weighing in order to determine how free the agreement actually is. In general, they will be judging it against the most recent trade agreement the U.S. has struck in Asia, the Korea–U.S. Free Trade Agreement. It was not perfect. It would be nice to see aspects of it—like precedents in managed auto trade and exclusion of trade in rice—rolled back. But at the very least, the TPP should not get worse in terms of protection. It should also redress protectionist provisions in previously concluded agreements, such as the U.S.–Australia Free Trade Agreement, which retains restrictions on Australian access to the U.S. sugar market. 

Beyond this general guidance, however, the manner in which the following several specific areas are addressed will determine the nature, quality, and value of the TPP: State-owned enterprises (SOEs), intellectual property rights (IPR), the services sector, and rules of origin.[1] 

First, SOEs. As former Heritage Foundation senior fellow Derek Scissors has pointed out, there are two main issues involved in consideration of SOEs in trade talks: definition of SOE and subsidies.  “Subsidies” can come in many forms, from actual government budget allocation to favorable access to credit to favorable regulatory treatment. Several of the participants in the TPP talks have major SOEs, especially Vietnam, but also Singapore and Malaysia. The U.S. also has SOEs if one includes “government sponsored enterprises” like Fannie Mae and Freddie Mac, and the precedents set for government involvement in the private sector following the 2008 economic crisis. The TPP ought to embrace the broadest possible definition of SOEs, and get at the wide range of available subsidies by providing for true competitive neutrality.[2]  This is one of the most difficult issues at stake in the TPP negotiations.  The very nature of state-ownership is preferential and discriminatory.  How it is dealt with in the TPP negotiations has broad implications beyond the current participants.  

Second, IPR. Poor intellectual property rights protection is essentially a tax on innovation. It is a redistribution of resources from the business that invests in research and development to the business that steals the product. IPR is important to the U.S., as it has a strong comparative advantage in innovation. But it should be important to other economies as well. Some, like Japan, are in desperate, structural need of more innovation. Others have interest in attracting investments from world-class businesses and locking in rules today that will benefit their own businesses in the long run.

Parties should be looking to a TRIPS-Plus approach (Trade-Related Aspects of Intellectual Property Rights-Plus), that is, protection of intellectual property that goes beyond the commitment that negotiators have already made in the World Trade Organization (WTO), to include among other things, data exclusivity and increased protection against coercion of trade secrets.  Trips-plus has been the standard in US negotiated FTA’s.  TPP is certainly not the time to back away from it.

Third, services. In services, negotiators should be looking to apply a negative list—that is, creating a presumption of openness—on both investments and services trade across borders. Open investment regimes and ensuring free flow of data across borders are perhaps the most important factors in maximizing services trade.  TPP should also be looking to enhanced liberalization and protection for investment in financial services.   

Fourth, rules of origin. The TPP countries are already tied up in a number of free trade agreements (FTAs) among themselves: America’s FTAs with six of the TPP countries; the P-4 Agreement among Brunei, Chile, New Zealand, and Singapore, which served as the launching pad for the TPP; the ASEAN Free Trade Area (AFTA); and an ASEAN–Japan FTA, among others. In rationalizing their rules of origin, the aim should be a common set of rules that is as loose as possible across the board, including for textiles and apparel. Rules of origin are extremely important to determining the character of the final agreement. Closed rules create a disposition toward trading blocs. Trading blocs by their nature are predominantly political in purpose and therefore not conducive to maximizing economic benefits. As such, tight rules of origin detract from the broader, longer-term goals of global free trade, and in their worst case implication, can lead to open conflict.

In the end, the traditional supporters of free trade, like analysts at The Heritage Foundation, are going to be looking for a truly economy-freeing agreement.

China ought to be permitted to join the TPP as long as it can fulfill the provisions of the agreement, and as per the process, all the currently participating countries agree to its participation. The only stipulation on China’s entry beyond technical compliance with the agreement should be the extension of equal opportunity to Taiwan. Similar arrangements were made for China’s entry into the Asia-Pacific Economic Cooperation (APEC) and the WTO. Taiwan’s economy is larger than most of those currently represented in the TPP.  It would also be among the more developed economies represented in the negotiations. The prevention of its participation would be an artificial political barrier. Taiwan has been generally neglected in the Administration’s rebalance. Exclusion from the TPP would be a serious blow to its efforts to fully and formally keep pace with the economic integration taking place around it, and would leave it, by default, overly dependent on China.

In lieu of China’s inclusion in the TPP, the U.S. can engage China in its free-market perspective through mechanisms such as the strategic and economic dialogue (S&ED), the Joint Commission on Commerce and Trade (JCCT), negotiation of a bilateral investment treaty, and global forums like the WTO.

Principled Engagement of Government-to-Government Architecture

In addition to ad hoc multilateral trade negotiations like the TPP or bilateral trade talks, the U.S. can pursue its free trade vision through the many pieces of architecture already in place. The TPP, and the 16-member China-centric Regional Comprehensive Economic Partnership (RCEP), have been formally identified by APEC leaders as building blocks for an eventual APEC-wide free trade agreement, or a Free Trade Agreement of the Asia Pacific (FTAAP).[3] Continued leader-level and robust participation in APEC is important to ensure that the FTAAP tracks APEC’s American-inspired vision for a “comprehensive, high quality agreement.” APEC is important for other reasons besides. U.S. participation in APEC is critical to its broader strategic position in the region. In turn, an active, leader-oriented APEC is a pull on the region to remain outwardly oriented—in this case, looking east across the Pacific. 

APEC could do more on this score by also reaching westward toward India. The U.S. should encourage it to do so. APEC has already brought India into its plans for the FTAAP by referencing RCEP negotiations as a basis for its long-term vision for trade liberalization. (India is a part of those negotiations.) If APEC is to maintain its dreams of an FTAAP, it must begin to socialize India in the more routine details of its mission. These include information sharing on regulatory standards, rules, procedures, capacity needs, and multilateral initiatives conducted by member states outside its rubric, and voluntary harmonization in the direction of freer markets.

The U.S. also has a critical role to play in helping ASEAN achieve its goal of “a stable, prosperous and highly competitive ASEAN Economic Region in which there is a free flow of goods, services and investments, a freer flow of capital, equitable economic development and reduced poverty and socio-economic disparities.”[4] It can only do that if it is at the table. Forums like the ASEAN Economic (Trade) Ministers, the ASEAN Finance Ministers Meeting, and other sector-specific meetings are useful venues for a free-market American message.

Regional economic integration is real. Most of it is organic, that is, the result of millions of individual business decisions, and unilateral government activity to facilitate them. The governments in the region are pushing to formalize and expand integration. ASEAN integration is the most formally developed. Completion of it will be far from European Union-style integration, as ASEAN members have always made abundantly clear. It is also behind schedule to meet its December 2015 completion deadline.[5]  Yet, given the size and diversity of the ASEAN market, it will be a major achievement.  The U.S. should help it achieve its goal.

Nuts and Bolts of Economic Engagement

Because of ASEAN’s consultative nature, the history of U.S. economic policy toward it is replete with reference to new initiatives, all essentially aimed at the same thing—building the capacity that will help it achieve its integrated, free-market vision. The alphabet soup of initiatives include the EAI (Enterprise for ASEAN Initiative); the ACP (ASEAN Cooperation Plan); the ASEAN–U.S. Enhanced Partnership; the U.S.–ASEAN TIFA (Trade and Investment Framework Arrangement); ADVANCE (ASEAN Development Vision to Advance National Cooperation and Economic Integration); and, now, at least two more, the E-3 initiative (U.S.–ASEAN Expanded Economic Engagement); and ACTI (ASEAN Connectivity through Trade and Investment). 

The U.S. has not lacked new initiatives—the latter two being initiatives of the Obama Administration. ACTI is essentially the follow-on to the Bush-initiated ADVANCE program. Its most important trade-enabling component is the assistance it provides to the ASEAN effort to establish a single customs window, first at the national, and then the regional level. In concept, ACTI is a very useful, constructive program—as was ADVANCE before it. However, even at its modest price ($18 million over five years) it must maintain a focus on the intersection of America’s and ASEAN’s free trade visions in order to be of most value.

Some in the business and strategic communities will bemoan the lack of real U.S. investment in the development of ASEAN’s infrastructure.  But the U.S. government tinkering at the edges of ASEAN’s infrastructure needs—estimated by the Asian Development Bank (ADB) at $8 trillion—is a distraction. If those needs represent opportunity for American business, they will find their way to them. American participation in ASEAN forums and the assistance that flows from it should support the infrastructure of economic freedom. On an individual country basis—still the much more relevant measure of economic performance in ASEAN—the region lags significantly. Singapore has been consistently ranked No. 2 globally in The Heritage Foundation’s annual Index of Economic Freedom. The closest in the region after that in the 2013 Index were Malaysia at No. 56, and Thailand at No. 61. Roads and rail lines developed by the Japanese, Koreans, Chinese, or ADB are public goods. To see them as an area of national competition that the U.S. is losing is playing ASEAN’s game to maximize the economic contributions of all its interlocutors, not America’s. 

The E-3 is also a useful initiative, to the extent it is used as a path for lesser-developed economies, such as the Philippines and Indonesia, to join the TPP. The Administration’s expressed intention to use it to negotiate a U.S.-ASEAN Trade Facilitation Agreement and region-wide bilateral investment treaty can help reach that goal.  However, if the E-3 does not succeed in readying governments for participation in the TPP, it will remain just another clever acronym in the alphabet soup—doing good work, but marginal to achieving either ASEAN’s or America’s economic vision. 

Conclusion

Criticism of the rebalance that it is overly focused on the military is misplaced. Economic engagement for the U.S. is not a government activity. This makes it different from some of the other governments in the region. It is certainly much different from American military engagement. If the Commander-in-Chief determines that a carrier strike group should move from the Persian Gulf to the South China Sea, it goes. If he determines that 60 percent of the U.S. Navy will now be stationed in the Pacific, it happens. The Secretary of State can make as many visits, and the U.S. government can participate in as many regional forums, as the federal government’s budget can support. At modest cost, the U.S. government can initiate as many new capacity-building programs as the region can absorb. It cannot compel American business participation or even effectively lead it. 

On the economic side of policy, what the government does best is create opportunity for business through trade negotiations and otherwise promoting a positive business environment. The TPP is the big bang of America’s current economic commitment to Asia. When complete, it will encompass 40 percent of global GDP. However, it must truly be the “comprehensive, high standard” agreement promised in order to be a game-changer and garner the necessary support of real free-traders in Washington.

America’s commitment to Asia can both protect its political and security interests vis-à-vis China, and encompass a broader economic element. In order to do that, it must consistently articulate and advocate its vision for, not just transpacific, but global, free trade. If it does this effectively—particularly if it successfully concludes the TPP—all the other pieces of America’s economic statecraft in the region will fall into place, and the other elements of the rebalance, both political and military, will assume their proper perspective in the strategy.

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Members of The Heritage Foundation staff testify as individuals discussing their own independent research. The views expressed are their own and do not reflect an institutional position for The Heritage Foundation or its board of trustees.

Show references in this report

[1] Derek Scissors, “What a Good Trans-Pacific Partnership Looks Like,” Heritage Foundation Backgrounder No. 2772, March 8, 2013, http://www.heritage.org/research/reports/2013/03/what-a-good-trans-pacific-partnership-looks-like (accessed November 17, 2013).

[2] Derek Scissors, “Why the Trans-Pacific Partnership Must Enhance Competitive Neutrality,: Heritage Foundation Backgrounder No. 2809, June 6, 2013, http://www.heritage.org/research/reports/2013/06/why-the-trans-pacific-partnership-must-enhance-competitive-neutrality (accessed November 17, 2013).

[3] APEC, “Pathways to FTAAP,” November 14, 2010, http://www.apec.org/Meeting-Papers/Leaders-Declarations/2010/2010_aelm/pathways-to-ftaap.aspx (accessed November 17, 2013).

[4] ASEAN, “ASEAN Vision 2020,” December 15, 1997, http://www.asean.org/news/item/asean-vision-2020 (accessed November 17, 2013).

[5] Asian Development Bank, “Asian Economic Integration Monitor,” October 2013, http://www.adb.org/sites/default/files/pub/2013/aeim-oct-2013.pdf (accessed November 17, 2013).

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