australia and china in regional economic...

CHAPTER7Australia and china in regional economic diplomacy

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Key messAges

AustraliaandChinafacenewchallengesinAsiaandthePacificasaresultofthechangingstructureofregionalandglobaleconomicpower.TheeconomicandpoliticalriseofChinaischangingtheregionalaswellastheglobalorder.Regionaleconomicinterdependencenowincludesawidergroupofeconomies,includingIndia,andawiderrangeofissueareas.TheestablishedregionalinstitutionsandarrangementsinEastAsiaandacrossthePacificdonotencompassalleconomiesandwerenotsetuptodealwiththeinteractionbetweeneconomicandpolitical-securityaffairs,andtherearegapsincoveragewithinthearchitectureforeconomicandpolitical-securitycooperation.ThesechallengesrequireAustraliaandChinatoplayanactiveroleinforginganewconsensusaroundtheprinciplesthatwillguidefutureregionalcooperation.Overthepastthreedecades,Australia’sandChina’seconomicintegrationintotheregionalandglobaleconomyhasoccurredwithinaframeworkthathasbeeninclusive,hasavoidedarrangementsthatweakentheglobalsystemandhasledpoliticalcooperation.Thetwocountriescannowdirecttheirbilateralrelationshiptowardthesecommonregionalandglobalobjectives.

AustraliaandChinashouldworkwithotherpartnersinAsiaandthePacificto:

• Connectandextendexistingregionalarrangements,suchasAPECandtheEAS,sotheycanprovideaplatformtoaddressthenewprioritiesinregionalcooperation.

• Initiatehigh-levelpoliticaldialogueoncross-cuttingissuesthatrequireclosecooperation,includingtheenvironment,energytransformationandregionalinfrastructureinvestment.

• MobiliseacoalitiontodefinethepathforwardinforgingtheTPPandRCEPintoaFreeTradeAreaoftheAsiaPacific(FTAAP)thatstrengthenstheWTOandtheglobaleconomicsystem.ConsolidationoftheTPPandRCEPmaynotbeapracticalobjectiveinthemediumtermbutfindingwaystomakeboththeTPPandRCEPinclusiveandcomplementaryis.

• Seektoestablishacommonframeworkforinfrastructureinvestmentandfundingintheregion.Currentlymanyplayersareactingindependentlyandatcross-purposes.Ministersandseniorofficialscanmeettodiscusspriorities,strategiesandmutualinterestsininfrastructuredeliverytofurtherregionalconnectivity.SucharegionalforummightinvolvetheAIIB,ADB,WorldBank,country-specificinstitutionsandrecipientregionalgroupingssuchasASEAN.

• Useambitiousbilateralinitiativestoprogressregionalandglobalarrangements.ChinacouldusetheinvestmentchapterinChAFTAtopushforahigherqualityinvestmentchapterinRCEPandsetthebenchmarkforotherbilateralinvestmenttreaties.AustraliaandChinacanpioneerservicessectoropening,capitalisingonAustralia’spotentialroleasatestinggroundforwiderdomesticandregionalliberalisation.

• Initiateadialogueonthearticulationofacommon,plurilateralsetofprinciplestogovernforeigninvestment—bothforfacilitatinginvestmentbeforeitismadeandthetreatmentofinvestmentonceithasbeenimplemented.

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PartnershiP for Change

• Leveragethebilateralrelationshiptobuildcooperationinthirdcountriesinareassuchasaidanddevelopmentandinfrastructureandconnectivity.

• Furtherenhancebilateralsecuritytiesasanimportantstepincreatingeffectiveworkingrelationshipsonsecurityissuesamongallcountriesintheregion,therebystrengtheningthefoundationforpoliticalconfidenceandregionaleconomicprosperity.

ChinaandAustraliaarebothintegratedintotheregionalandglobaleconomy,andtheirbilateralrelationshipisnestedinahighlyintegratedEastAsianregion.Chinaisthecentreofregionalsupplychainsanditstradeandinvestmentexpansionhavebeenthedrivingforcesofitsrapiddevelopmentandindustrialisation.Goingforward,regionaltradeandinvestmentliberalisationandintegrationwillcontinuetobekeydriversofChina’sfutureeconomicdevelopmentandreform.TheshareofEastAsiainAustralia’stradeisoneofthehighestofanycountryintheworld,with66percentofAustralia’stradetakingplacewithinEastAsia(Figure7.1).Moreover,AustraliaisastableandsecuresupplierofenergyandrawmaterialstoChinaandtherestofNortheastAsia.

EastAsiaisoneofthemosteconomicallyintegratedregionsintheworld—onparwithEuropebyanumberofimportantmeasures.Economiccooperationhasledpoliticalcooperation,andregionaleconomicintegrationhasbeenmarket-ledratherthaninstitution-led.AsAsianeconomieshaveliberalisedandopeneduptoregionalandglobaltrade,institutionshavebeencreatedtohelpmanageandsecurethesethickeninganddeepeningeconomicrelationships.AsiancountriesopenedtheireconomiestointernationalcompetitionwithintheglobalinstitutionalframeworksanddidsobecausetheyhadgrowingconfidenceintheglobaltradingsystemandtheglobaleconomicordercreatedafterWorldWarIIaroundtheBrettonWoodsinstitutions.

AustraliaandChinahavealsoactivelyengagedinregionalcooperationandinstitution-buildingasawaytopromoteeconomicdevelopmentandreformathome,andtofostercloserpoliticalcooperationinthewiderAsianregion.TherelationshipbetweenAustraliaandChinahasdevelopedinthecontextofdeepeningregionaleconomicintegration,andstrengtheningthebilateralrelationshipservestofosterbroaderregionalcooperation.Forbothcountries,economiccooperationhasunderpinnedregionaleconomicdiplomacyandinstitution-buildingprocessesinAsia.Regionalpoliticalandsecuritycooperation,ontheotherhand,hasbeenpiecemealandlesscomprehensive,butincludesnotableachievements,suchascooperativeeffortsontheCambodianpeacesettlementandtheUnitedNationsTransitionalAdministrationinEastTimor.

ThediversitywithintheAsiaPacificregion—withcountrieshavingdifferenteconomicandpoliticalsystems,andbeingatdifferentstagesofdevelopment—demandsacollaborativeapproachtoregionalism.Regionalcooperationhasoccurredonavoluntarybasiswhereagreementswerebasedonforgingconsensusandorderedaroundpositive-sumeconomicinterests.Importantly,thepoliticalandsecurityrelationshipshavebeenunderpinnedbytheUSallianceframeworkcreatedafterWorldWarII,andUSrapprochementwithChinasince1972.

TheinstitutionsthathavefurtheredregionalcooperationinAsiaandthePacific,includingAPEC,ASEANanditsPlusThreeandPlusSixprocesses(includingthesubsidiaryChiangMaiInitiative),havedonesolargelyonthebasisofnon-bindingcommitmentsandwithoutthecessionofsovereigntytoanysupranationalregionalauthority.Theestablishmentof

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CHAPtER 7: Australia and China in regional economic diplomacy

theseinstitutionswascharacterisedbyevolution,flexibility,consensusandvoluntaryparticipation,becauseofthedifferencesinpoliticalandinstitutionalsystemsintheeconomiesaroundwhichtheyhavebeenbuilt.Theyhaveservedtobuildpoliticaltrustandcooperationamongcountriesacrossaregioninwhichpreviouslytherehadbeenasubstantialdeficitinmechanismsthroughwhichthatcouldbedone.Thismodelofcooperationconstitutesanimportantinstitutionalinnovationthathasprovedvaluableinothertheatres,suchasintheglobalG20forum,whichhasasimilarmodusoperandi.

Asianregionalismhasthereforenotproceededattheexpenseof,orinamannerthatundermines,globalinstitutions.Onthecontrary,ithassoughttocomplementandreinforceglobalinstitutions.ThatremainsanoverarchingobjectiveforbothAustraliaandChinaintheirapproachtoregionalcooperation.Theprincipleofopenregionalism—thatis,regionalcooperationandintegrationthatisopentotherestoftheworldandwhichreducesbarrierstoallstatesinanon-discriminatoryfashion—onwhichAsiaPacificeconomiccooperationwasbuilt,hasensuredthatregionalcooperationhasstrengthened,ratherthandetractedfrom,globalcooperation.

Butthingsarechanging.TherapidpaceofeconomicgrowthandintegrationinAsiaisbringingaboutamorecomplexandmultipolarorder,andthrowingupneweconomicandpolitical-securitychallenges.AnewregionalconsensusisneededtoensurethattheprinciplesuponwhichAsia’seconomiccooperationwasbuilt—openregionalism,consensus-drivencooperationandstablerelationsbetweenthegreatpowers—arenoteroded.AustraliaandChinaarewellplacedtoworktogethertoforgethisnewconsensusbecausetheyhavesuccessfullyworkedtogetherinthepasttofosterregionaleconomiccooperationonthesesameprinciples.

ThischapterdescribesAustraliaandChina’sjointinterestsinregionaleconomicdiplomacyandsomeoftheprinciplesthathaveservedtheirpastcooperationwell.ItreviewsthechangestothestructureoftheregionalandglobaleconomythathavealreadyoccurredasaconsequenceoftheriseofChinaandtherestofAsia,andoutlinessomefuturetrends.Thechapterthenexamineswhethercurrentinstitutionalarrangementsareadequateundercircumstancesinwhichthestructureofregionalandglobaleconomicweighthaschangedsignificantly,anddiscussestheareasthataremostinneedofchange.ThechapterconcludesbyidentifyingcommoninterestsandgoalsforChinaandAustraliainregionaleconomicdiplomacy.

Australia and China’s joint interests in regional economic diplomacy

AustraliaandChinashareanumberofcommoninterestsintheirpursuitofregionaleconomicdiplomacy:

• usingregionaleconomicframeworkstostrengthenandreformtheirdomesticeconomies;

• promotinganopentradingenvironmentinAsiathatsupportstheglobaleconomicorder;and

• usingregionaleconomicinstitutionstobuildstrongerframeworksforpoliticalandsecuritycooperationinAsia.

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TheseinterestshaveunderpinnedAustralia’sandChina’sapproachtoregionaleconomicdiplomacyoverthepastthreedecades.AustraliaandChinahaveasuccessfulrecordofworkingtogetherinbuildingthefoundationsforAsia’sregionaleconomiccooperation.

FollowingWorldWarII,AustraliabuiltsteadilyitsengagementwithAsiaandreduceditseconomicdependenceonBritain.Australia’sMenziesgovernmentsignedamomentousbilateraltradeagreementwithJapanin1957,andrenegotiateditstraditionalpreferentialtieswiththeUnitedKingdomastheformationoftheEuropeanCommonMarketloomed.Thissteadydiplomaticshiftwasacceleratedwiththereformsofthe1980s,whichreorientedAustralia’seconomicandforeigndiplomacytowardsAsia.Australiasoughttocapitaliseonthelarge-scaleeconomicgrowthandstructuralchangestakingplaceinAsiaandtheirpotentialeconomicbenefitstoAustralia.TherewasrecognitionthatunlessAustraliaremoveditsprotectionisttradebarriersandundertookmajordomesticeconomicreform,itwouldnotenjoythebenefitsofAsia’seconomicascendancyandriskedbeingleftbehindbyrisingAsianpowers.TradeliberalisationthusbecameakeypolicystrategyandwasviewednotonlyasawaytounleashAustralia’sdomesticeconomicpotential,butalsoasawaytounderpinAustralia’sengagementwithAsia.

In1989,theAustraliangovernmentproposedanewmechanism—APEC—topromoteregionalobjectivesintheGATTUruguayRoundandtofosterlongruneconomicdevelopmentcooperation.APECwasdesignedtofostertradeliberalisationandeconomicreforminAsiaandtobolstertheglobaltradeliberalisationagendaoftheUruguayRound.But,importantly,APECalsoservedAustralia’sgoalofpullingtogetherthetwohalvesofAsiaandthePacific—EastAsiaandNorthAmerica—inacooperativeendeavour.ThisgoalwasdrivenbythealignmentofAustralianandEastAsianinterestsinimprovingaccessforlabour-intensiveandothermanufacturesinNorthAmericanandotherinternationalmarkets,andimprovingAustralia’sowndirectengagementwiththeEastAsianeconomies.APECwasthereforeexplicitlydesignedtolinkthecountriesoftheWesternPacific(includingAustraliaandNewZealand)andEastAsiawiththoseofNorthAmerica,viacommonmultilateraleconomicopeningstrategies.

Crucially,thisperiodofreformcoincidedwithChina’sowneffortstoreformandopenitseconomyandtodeepenitseconomicanddiplomaticengagementwithAsia.Afterthreedecadesoflimitedtradeandothereconomicinterdependence,theintroductionofDengXiaoping’s‘reformandopening’policiesin1978pavedthewayforgreaterChineseengagementwithregionaleconomies.AustraliasoughttoharnessthesechangestakingplaceinChinabyinvolvingtheChineseleadershipinthedevelopmentofideasaboutAsiaPacificeconomiccooperation.EconomistandformersecretaryoftheAustralianDepartmentofTrade,SirJohnCrawford,ledamissiontoChinain1980totalkaboutChina’sparticipationininformalprocessesofregionalcooperation.In1986,China,ChineseTaipeiandHongKongwere,atAustralia’sinitiative,invitedtojointhetripartitePacificEconomicCooperationCouncil(atitsVancouvermeetingofthatyear).AustraliaalsoattemptedtoengageChinainthefirstforeignandeconomicministers’meetinginCanberrain1989,althoughtheTiananmenIncidentearlierthatyearmadethispoliticallyimpossible.In1991,ChinajoinedtheAPECmeetinginSeoul,andin1993,China’sthenpresidentJiangZeminattendedthefirstAPECLeaders’SummitinSeattle.

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APECprovidesChinawithanimportantchannelforparticipatingintheprocessofinternationaleconomicgovernanceandregionaleconomicintegration,aswellaspromotingitsowndomesticpolicyagenda(ChinaAPECDevelopmentCouncil2009).LikeAustraliabeforeit,theChinesegovernmentusedparticipationinAPECandtheregionaltradeliberalisationagendatopushpoliticallysensitivetariffreductionandeconomicreformsathome.AtAPEC’sOsakasummitin1995,Chinaannouncedreductionsintariffson4900items,andwithinayearthesimpleaveragetariffratewasreducedfrom36percentto23percent.ByOctober1997,Chinahadreduceditssimpleaveragetariffrateevenfurther,to17percent.APEC’sagendacloselycoincidedwiththeglobalagenda,anditwasinthiscontextthatChinaundertooktheliberalisationandeconomicreformsnecessaryforitsaccessiontotheGATT/WTO.ButChina’sunilateraltradeliberalisationeffortsandactiveparticipationalsohelpedtobringmomentumtoAPEC,andbroughteconomicgainstoChinaanditstradingpartners,suchasAustralia.

Afterlayingthefoundationsforregionaleconomiccooperationinthe1980s,the1997–1998Asianfinancialcrisisrevealedthebenefitsbutalsothelimitationsofexistingregionaleconomicframeworks.Australia’seconomicsystemandinstitutionsallowedittobenefitfromeconomicintegrationwithAsiawhileprotectingagainstmuchofthepotentialfinancialvolatility.Thefloatingexchangerate,forexample,waskeytoAustraliaavoidingrecessionoranyseveredownturnduringtheAsianfinancialcrisis.Theexchangerateactedasashockabsorberasexchangeratemovementsprotectedagainstvolatilityinthedomesticeconomy.InChina’scase,theAsianfinancialcrisisdeepeneditsunderstandingofthebenefitsofregionaleconomiccooperation.Thecontagion-likespreadofthefinancialcrisisaroundtheregiondemonstratedthatregionaleconomieswerenowdeeplyinterconnected,andthatinthiseraofglobalisation,statescouldnotactaloneintryingtoprotectagainsteconomicvulnerability.Chinareceivedinternationalaccoladesforresistingpressuretodevalueitscurrency—thusavoidingbeggar-thy-neighbourexchangeratecompetition—andforprovidingaidpackagesandlow-interestloanstoitscrisis-affectedneighbours.TheAsianfinancialcrisisincreasedChina’sconfidenceinitsabilitytoplayaconstructiveleadershiproleintheregion,butalsodemonstratedthelimitationsofexistingregionalandglobaleconomicmechanismssuchasAPEC,theWorldBankandtheIMF.

TheAsianfinancialcrisisthereforespurredgreaterregionaleffortstodevelopnewEastAsianeconomicarrangements,suchasASEANPlusThree(includingChina,JapanandSouthKorea)andtheChiangMaiInitiative(CMI).Atatimewhenglobalfinancialarrangementswereperceivedtohavefailedtheregion,thesenewEastAsianarrangementssoughttostrengthenanddeepenEastAsianregionaleconomicandfinancialcooperationaswellasregionalregulatorycapacity.BolsteredbyitsleadershiproleduringtheAsianfinancialcrisis,Chinaplayedanimportantroleinthisregionalcooperationprocess,joiningtheASEANPlusThreegroupandsubsequentEastAsianeconomicarrangementswithenthusiasm.Chinaunilaterallyliberalisedmanyofitskeysectors,includingagriculture,therebyopeningitsmarketstoSoutheastAsianexports.In2002,ChinainitiatedaframeworkagreementfortheChina–ASEANFreeTradeAgreement.China’scommitmenttofurtheropeningup,anditswillingnesstosignuptotherulesandnormsoftheglobaltradingsystemthroughaccessiontotheWTOin2001,gavetradingpartnersconfidenceinthedirectionofChinesereforms.UnilateraltradeliberalisationalsocreatedsignificantgoodwillbetweenChinaanditssmallerSoutheastAsianneighbours.EveninNortheastAsia,wherepoliticalandsecurityrelationshipswaxedandwaned,tradeandeconomicexchangegrewrapidly.

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Beyondeconomicbenefits,AustraliaandChinahavealsoviewedregionaleconomicdiplomacyasawayofbuildingstrongerpoliticalandsecuritycooperationinAsia.Thelegacyofcolonialism,ColdWardivision,andunresolvedhistoricaltensionsbetweenJapananditsneighbourshadstymiedinstitution-buildingprocessesinAsiasincetheendofWorldWarII.AlthoughASEANhadbeenestablishedinSoutheastAsiain1967,thewiderAsiaPacificregionremainedinstitutionallyunderdeveloped.Theregionwascomprisedofstateswithverydifferentpoliticalsystems,aswellasmanynewlyindependentstatesthatwerefiercelyprotectiveofanyperceivedthreatstotheirsovereignty.Indeed,thesefactorshadledASEAN,theregion’smostsignificantexistinginstitution,todevelopparticularpracticesofconsensus,flexibility,non-interferenceininternalaffairsandnon-bindingresolutions,asawayofreassuringpostcolonialstates’anxietiesaboutinternationalinstitution-building.

Giventheseobstacles,theAustralianandChinesegovernmentshavebothobservedthevalueofeconomiccooperationasanon-threateningwayforregionalstatestodevelophabitsofdialogueandcooperation,andtheASEANapproachtoinstitution-buildingasawaytofostertrustandultimatelypoliticalcooperationintheregion.Inaddition,participatinginAPECprovidedavaluablewayforBeijingtoreassureregionalneighboursofitspeacefulrise,andtohelpbuildastableregionalenvironmentthatwouldbeconducivetoChina’sfutureeconomicgrowth(Zhang2014;Zhongetal2014).ChinawasencouragedbythewayinwhichAustralia,JapanandtheSoutheastAsianstatesusedregionaleconomicinstitutionsasawaytoenmeshChinaintoaregionalwebofrelationships,andtodemonstratethebenefitsofregionalcooperation.Chinapubliclyacknowledgedthesebenefitsin1997whenits15thPartyCongressofficiallydeclaredthat‘multilateralism’wasaguidingChinesepolicyprinciple(Harris2000).

Asia’s economic integration

China,AustraliaandthewiderAsiaPacificregionhavebenefitedgreatlyfromthestunninglevelsofregionaleconomicintegrationthathavebeenachievedsincethelate1980s.Despitethecomparativelylowerdensityofitsmultilateraleconomicinstitutions,ascomparedwithEuropeforexample,Asianowenjoyshighlevelsoftradeinterdependenceinresourcesandintermediategoods,andhighlevelsofexportsoffinalgoods.Bymanymeasures,EastAsiaisthemosteconomicallyintegratedregionintheworld,ledbyitsextensiveproductionnetworks(ArmstrongandDrysdale2011).

TheongoingsuccessofAsia’seconomicintegrationiscriticallyimportanttoAustraliaandChina’sprosperity.TradewithEastAsiaaccountsfor66percentofAustralia’stotaltrade(Figure7.1).ThismakesAustraliathemostEastAsian-orientedtradingnationintheworld.Justunder46percentofAustralia’stradeiswithNortheastAsia(ASEAN’s‘PlusThree’countries),higherthananyothermajorEastAsiancountry.AustraliaalsohasthehighesttradedependencewithASEAN,at15percent,oftheothernon-ASEANeconomiesintheASEANPlusSixarrangement(NewZealand,India,China,JapanandSouthKorea).IndonesiaandMalaysiaalsohaveover60percentoftheirtotaltradewithintheASEANPlusSixgrouping,withoveraquarteroftheirtradewithintheASEANgrouping.InChina’scase,justunder27percentofChina’stradeiswiththerestofEastAsia.TheChina–ASEANfreetradeareaisnowtheworld’slargestfreetradeareacomprisedsolelyofdevelopingcountries,withtradeofUS$480billionin2014andtotalmutualinvestmentreachingmorethanUS$150billion.By2020,China–ASEANtradeisexpectedtoreachUS$1trillion(Zhong2015).

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Figure 7.1: Asia Pacific economies’ share of trade with east Asia, 2014

0

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40

50

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%

China

Japan

South K

orea

Austra

lia

New Zealand

India

US

Canada

Russia

Indonesia

Malays

ia

Thailand

Vietnam

Singapore

ASEAN+6 ASEAN+3 ASEAN

Source:UNComtradeandauthors’calculations.

ChinaisatthecentreofregionalsupplychainsandhasbeenahubforEastAsiantradewiththerestoftheworld.InthepastitplayedamajorroleintheassemblyofmanufacturedgoodsthatwouldbeexportedtoNorthAmericaandEurope,butthevalue-addedinChinaduringtheproductionprocesshasalreadystartedtoincreaserapidlyandChinaisbecomingamuchlargerconsumerofthosefinalgoods(seeChapter2).ChinaisnowfocusedonfurtherliberalisingregionaltradeandinvestmentaswellasstrengtheningregionalconnectivityandintegrationasawaytoenhancetheinternationalcompetitivenessoftheChineseeconomy,andtograduallybuildaglobal,high-standardsfreetradearea.ChinaisalsothelargesttradingnationgloballyanditsvasttraderelationshipswithNorthAmerica,Europeandtherestoftheworldmeanthatitisakeyglobaltrader.

shared principles

ThesuccessofAsia’sregionaleconomicdiplomacyandtheachievementofdeepeconomicintegrationhasbeenunderpinnedbythreecoreprinciples:openregionalisminsupportofglobalframeworks;consensus-drivencooperation;andstablerelationsbetweenAsia’sgreatpowers.

Open regionalism in support of global frameworks

Regionaleconomicintegrationhasbeenopenandhasdevelopedinsupportofglobalframeworks.Asia’seconomicsuccessesoutlinedabovehavebeenachievedbecauseAsia’seconomicarrangementshavegenerallybeenoutward-lookingratherthaninward-looking.Thatis,theyhaveworkedtostrengthenratherthansubstituteglobaleconomicarrangementssuchastheGATTandWTO.Astradingnations,AsiaPacificregionaleconomieshavelearnedthattheirowneconomicprosperityreliesonopenengagementwithNorthAmerica,Europeandotherpartsoftheglobe.

Openregionalism—regionaleconomicintegrationthatisnotattheexpenseofeconomiesoutsideoftheregionandissupportiveoftheglobaltradingsystem—canbeseenmostprominentlyinAPECandASEAN.AttheAPECsummitinBogor,Indonesiain1994member

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economiesagreedtothe‘Bogorgoals’.ThesewereasetofambitioustargetsthataimedtoachievefreeandopentradeandinvestmentintheAsiaPacific,by2010forindustrialisedeconomiesandby2020fordevelopingeconomies.TheBogorgoalsencouragedmembereconomiestoundertakeunilateralliberalisation—thatis,notpreferentialorbetweenmembersonly—andthereforepromotedfreeandopentradewiththerestoftheworld,ratherthanjustamongAPECmembers.

MuchofAsia’sregionalcooperation—economicallyandgeopolitically—isorderedaroundtheASEANgrouping,whichhasalsopursuedopenregionalism.ThisisbecausemostofASEAN’smajoreconomicpartnershavealwaysbeenoutsideofSoutheastAsia—includingChina,Japan,Australia,theUnitedStatesandtheEuropeanUnion.ForASEANtohavepursuedinward-lookingarrangements—thatis,liberalisationattheexpenseofthesemajoreconomicpartners—wouldnothavebeenpoliticallyoreconomicallysensible.ThisapproachisrecognisedinthedesignoftheASEANFreeTradeArea(AFTA),whichwaslaunchedin1992.AFTAinitiallypursuedpreferentialliberalisationbyonlyremovingborderbarrierstogoodstradedwithintheASEANzone.However,fromtheoutsettherewasanagreementthatthesepreferenceswouldbeextendedtoallexternaltradingpartnersaswell,andthusmultilateralised,whenitbecamepoliticallyfeasibletodosoineachdomesticpolity.

MorerecentlytheASEANregionhasbeenpursuinganambitiousASEANEconomicCommunity(AEC),whichwasestablishedinNovember2015.TheaimoftheAECisto‘transformASEANintoasinglemarketandproductionbase,ahighlycompetitiveeconomicregion,aregionofequitableeconomicdevelopment,andaregionfullyintegratedintotheglobaleconomy’by2020(ASEAN2008).TheAECwouldallowthefreeflowofgoods,services,investmentandskilledlabour,andthefreermovementofcapitalacrosstheregion.BecauseintegrationintotheglobaleconomyisoneofthefourpillarsoftheAEC,integrationintheASEANregionwillnotdiverttradeorcommerceawayfromnon-memberstowardstheASEANgrouping.ThegoalisambitiousbutwouldhelpmoveASEANtowardsasinglemarketandproductionbasethatfurtherstheopportunitiesandeconomicengagementofChina,AustraliaandotherneighboursintheAsiaPacific.

consensus-driven cooperation

ConsensualprocesseshavedrivenAsia’seconomicintegration.Consensushasbeencriticalforachievingcooperationamongagroupofstateswithdiversepoliticalsystemsandlevelsofeconomicdevelopment.ConsensushasalsoencouragedthecooperationofAsia’smanypostcolonialstates,whichhadlittleornopriorexperienceofmultilateralismbeforeWorldWarII,andwhichhavethereforealwaysbeenstronglyattachedtotheprotectionofstatesovereignty.Butthisapproachtoregionalandinternationaldiplomacyhasenduringvalue.Consensus-formingstrategiesreassuresmallpowersthatlargepowerswilltaketheirviewsintoconsiderationinadoptingpolicypositionsandthattheywillnotdominateinstitutions;theyalsoreassurelargepowersthatsmallercountrieswillnotbandtogetheragainstthem.Thisconsensus-buildingapproachhasencouragedAsia’sdiversemixofstatestoparticipateinregionalinstitutions,evenattimeswhentheyhavebeenuncomfortablewiththemembership,structure,approachesortheissue-focusofaparticularinstitution.

Thoughoftencriticisedforbeingprocess-driven(ratherthanoutcome-driven)‘talkshops’,theTrack1.5andTrack2dialogues,meetingsandotherprocessesthathaveaccompaniedthecreationofinstitutionssuchasAPECandtheASEANPlusprocesseshavebeencrucialinshapingsharedregionalunderstandingsabouttheimportanceoftradeandinvestment

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liberalisation,economicreformandmultilateraleconomiccooperation.Inparticular,Asia’sregionalinstitutionshaveactedasforumsforbuildingcriticalconsensusonthreeissues:first,thatopeninguptotradeandinvestmentbenefitsone’sowneconomy;second,thatthesebenefitsarecompoundedifopeningupoccursinconcertwithothercountries;andthird,thatopeningupwithoutdiscriminatingbetweentradingpartnersisthebestmodeofstrengtheningeconomicrelationships.AchievingconsensusontheseissuesunderpinnedAsia’srapidexpansionintradeandinvestmentinthe1990s,liftedtheincomesofAsiaPacificeconomies,andensuredthateconomicrelationshipsdeepenedevenintheabsenceofstrongpoliticalrelationships.ThatAsiahasbeenabletoachievetheselevelsofregionalcooperationandeconomicintegrationisbecauseinstitutionalarrangementshaveevolvedthroughconsensualprocesses,haveprotectedstatesovereignty,havebeenvoluntaryandhaveallowedadiversegroupofstatestomakenon-bindingcommitmentsthatareappropriatetotheirlevelsofeconomicdevelopment.

BOx 7.1: AsiA PACiFiC RegiOnAL iniTiATives AnD THe gLOBAL sysTem

WhenAPECwascreatedin1989,disadvantagetonon-membereconomieswouldhavebeeninconsistentwiththeimportanceofeconomiclinksbetweenmembereconomiesandthoseoutsidethegrouping.APECcooperationwasfoundedontheprincipleofaligningAsiaPacifictradestandardswithglobalstandards,andresultedinextendingandstrengtheningtheglobalGATTprocess.APEChastakeninitiativestothegloballevel.

In1996,APECinitiatednegotiationsonanInformationTechnologyAgreement(ITA)intheWTO,andtheagreementwasconcludedinDecemberthatyear.TheITApreventedcountriesfromintroducingtradebarriersforwhatwerethenrelativelynewformsoftradeininformationandcommunicationstechnology(ICT)goodsandservices.ByrequiringcountriestoapplyzerotariffsandotherbarrierstonewlyemergingICTgoodsandservices,theITAencouragedrapidexpansioninthetradeofthesenewtechnologies.Thisinturnmadepossibletheproliferationofsupplychainsintheelectronicsindustry,whichhavefundamentallychangedthewayinwhichcountries’internationalbusinessisintegrated,andwhichhavedeepenedeconomicinterdependenceacrossAsia.Supplychainsrelyonlogisticsdrivenbyrapidcommunicationsandtechnology,andtheproliferationofsupplychainshasbeencriticalintransformingChinaintothe‘factoryoftheworld’.WithouttheITA’sagreementonzerotariffsfornewlyemergingICTtrade,supplychainswouldnothavedevelopedsoreadilyastheydid.

Morerecently,theITA‘model’hasbeenemulatedfortradeinenvironmentalgoods.In2012,APECnegotiatedtheEnvironmentalGoodsAgreement(EGA),whichremovestariffsontradeongoodssuchasequipmentforairpollutioncontrolandwastewatermanagement.TheglobalmarketforthesenewenvironmentalgoodsandtechnologiesisexpectedtoexpandtoaroundUS$3trillionby2020(DFAT2015a).BuildingonAPEC’sregionalagreement,negotiationsonanEGAweresubsequentlylaunchedonaplurilateralbasis(thatis,withmanybutnotallmembersparticipating)intheWTOin2014.

TheCMI,whichwascreatedin2000inthewakeoftheAsianfinancialcrisis,representsanothercaseinwhichregionalcooperationhassoughttostrengthen—notdivertfrom—globalfinancialarrangementssuchastheIMF.TheCMIendorsesglobal,market-basedprinciplesoffinancialcooperation,andonlypermitsasmallpercentageofitsfundstobereleasedtoailingeconomieswithoutIMFapproval.

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Notallregionalarrangements,processesorinstitutionalinnovationshavebeentheproductofconsensus,butthosethathavehadsuccess,buy-inandownershipbycountriesintheregionhavedonesothroughaprocessofbuildingconsensus.Forexample,theformationofAPECwasaninitiativetakenbyAustraliaandJapan,buttheideaofAPECrequiredmuchsocialisationamongotherAsiaPacificeconomiesbeforeitcouldbeintroducedandaccepted.APEChassubsequentlyevolvedandhasbeenshapedovertimebyitsmembers.TheADB(Box7.2)isanotherexampleofthewayinwhichconsensushasunderpinnedAsia’sapproachtoregionaleconomiccooperationandinstitution-building.Ultimately,exampleslikeAPECandtheADBdemonstratethateconomicinstitutionsandotherregionalarrangementshavehadtoevolveanddevelopthroughconsensualprocesses.Itisoftenassumedthatastatic‘rules-basedorder’wascreatedin1945andhasremainedunchangedsincethattime.Thatisnotthecase.Asneweconomicissuesanddemandshavearisenintheregion,newinstitutions,norms,rulesandregionalarrangementshaveevolvedthroughprocessesofconsensus,communicationandsocialisation.

BOx 7.2: COnsensus AnD THe CReATiOn OF THe AsiAn DeveLOPmenT BAnK

TheprincipleofconsensushasbeenacriticalelementunderpinningtheevolutionofrulesandnormsinAsia.OnekeyexampleistheADB,whichwascreatedin1966.TheADBwascreatedonthebackofJapan’srisingeconomicpower.JapanwasdissatisfiedwithitslackofrepresentationinglobalinstitutionssuchastheWorldBankandInternationalBankforReconstructionandDevelopment(IBRD),whichweredominatedbytheinterestsofcountriesinEuropeandNorthAmerica.JapanalsoviewedtheADBasawayofachievinggreaterinternationalpoliticalpower,andofmaintainingitsexport-ledeconomicgrowthstrategy.ThoughfellowAsianstatessupportedJapan’sdevelopmentalagenda,theywerealsofearfulthattheADBwouldbecomeaplatformforJapaneseregionaldominance.Atthesametime,theUnitedStateswaswaryofJapan’sdevelopment-stateapproachtoeconomicdevelopment.

Thus,althoughJapanhasalwayscontributedthelargestshareofcapitaltotheADB,andholdsthelargestnumberofofficialpositions—includingthatofBankpresident—JapanhasnotdominatedtheADB.Instead,sincethe1980sinparticular,thealmostequalvotingsharesheldbytheUnitedStatesandEuropehavebalancedJapan’svotingshare.Thishasrequiredmemberstatestoengageinaconsensus-buildingprocesstodeterminetheBank’sprinciplesonprocurement,lendingpracticesandissuefocus.Forexample,theUnitedStates’preferenceforprivatecapitalandmarket-basedeconomicdevelopmenthasalwaysbeenbalancedbyJapaneseandEastAsianpreferencesformorestate-activistapproachestoeconomicdevelopment.Sinceitscreation,theADBhascontinuedtoevolveasamultilateraldevelopmentfinancinginstitution.

stable relations between Asia’s great powers

TheachievementofdeepeconomicintegrationinAsiahasbeenunderpinnedbystable,peacefulrelationsamongAsia’sgreatpowers.ThemostimportantoftheserelationshipsisthatbetweentheUnitedStatesandChina.US–Chinarapprochementin1972transformedtherelationshipbetweenthesetwocountriesinwaysthatwereofgreatbenefitnotonlytotheUnitedStatesandChinabutalsotothewiderregion.Since1972,ChinaandtheUnited

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Stateshavedevelopeddeepdiplomatictiesandhighlevelsofeconomicengagement,andhaverecognisedthatstablebilateralrelationsaretheonlywaytoensureapeacefulAsianregion.Moreover,theleadershiproleplayedbytheUnitedStateshasbeenofgreatvaluetobothAustraliaandChina.TheUnitedStateshasplayedaleadingroleincreatingandunderwritingtheglobaleconomicandfinancialsystem,andhasstronglyencouragedChina’sintegrationwithinthatsystem.TheUnitedStates’diplomaticandmilitarypresenceinAsiahasalsoservedasanimportant‘backstop’,whichhasencouragedregionalstates—manyofwhomhaveadversarialpoliticalandsecurityrelationships—tofeelsecureenoughtopursueeconomiccooperationandinstitution-building.ThesearrangementshavebeenhelpfulinanumberofwaystoAsiannationsinthepast,includingthosethatarenotUnitedStatesalliancepartners,suchasChina.

Alongsidebilateralcooperationbetweentheregion’sgreatpowers,Asia’seconomicandotherinstitutionshavealsoservedasimportantvenuesfortrust-building,dialogueandsocialisationaroundregionalnormsofbehaviour.Thisisdue,inpart,tothe‘ASEAN-way’principlesofconsensus,non-intervention,sovereigntyandnon-bindingresolutionsonwhichtheyarebuilt.TheseprincipleshavebeencriticallyimportantinenmeshinggreatpowerssuchastheUnitedStatesandChinaintoregionalmultilateralprocesses.Theseinstitutionshaveneverreplacedtheneedfordirectnegotiationsbetweenthegreatpowersthemselves.Buttheseinstitutionshaveprovidedimportantoccasionsforbringingthegreatpowerstogetherinframeworksrespectfulofwiderinterests.Theyhavealsoprovidedopportunitiesforgreatpowerstoholdoff-the-record,informalmeetingsonthesidelinesofpublicsummits,andhaveimpelledthegreatpowerstolistentotheconcernsofsmallerstatesintheregion.

Changing structure of regional and global economic power

Forthepastthreedecades,Asiahasbeenaremarkablypeacefulandprosperousregion.Asia’speaceandeconomicvibrancyhasbeenunderpinnedby:theUnitedStates-ledeconomic,politicalandsecurityordercreatedattheendofWorldWarII,China’sacceptanceofthatordersince1972,andbytheeffortsofChina,Australiaandotherstofosterregionaleconomiccooperationsincethe1980s.Butthisexistingorderisnowunderstrain—partlybecauseofitssuccessandthedramaticeconomicriseofChinaandotherregionalstates.

Thelatterhalfofthe20thcenturysawtherapidindustrialisationandriseoftheJapaneseeconomyinthe1960sthroughtothe1980s,withthenewlyindustrialisedeconomies(NIEs)ofSingapore,SouthKorea,TaiwanandHongKongfollowinginthe1980sand1990s.ThemajorforceofgrowthintheglobaleconomysincetheturnofthecenturyhasbeenChina,withanaveragegrowthrateof10percentperyearoverthe30yearssincereformandopeningin1978(Figure7.2).ThegrowthratesoftheeconomiesofJapan,ChinaandtheNIEshaveslowedastheyhavebecomelargerandmorematureeconomieswithhigherpercapitaincomes.India’seconomicdevelopmentandtheriseofotherSoutheastAsianeconomiessuchasVietnam,MyanmarandIndonesiaarealreadyshowingpromiseasthenextdrivingforceofgrowthinAsiaandtheglobaleconomy.

China’seconomyhasalreadygrowntobeaslargeasthatoftheUnitedStatesinpurchasingpowerparity(PPP)terms(seeChapter1,Figure1.6).ForwardprojectionsoncurrenttrendswithconservativeassumptionswillseeChinaovertaketheUnitedStatesasthelargesteconomyintheworldinnominalmarketexchangeratetermsbytheendofthe2020s,withmanyprojectingthistohappenearlierinthatdecade.

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ThegrowthofChina’simportanceintheworldeconomyhasoccurredveryrapidly.ThisswiftchangeiscreatingsomeuncertaintyabouthowtomanagethenewresponsibilitiesandchallengesposedbytheriseofChinaandotherregionaleconomies(Zhang2015).ThereisariskthatsomeoftheresponsestothesequickchangescouldunravelthesharedprinciplesthathaveunderpinnedAsia’seconomicachievementstodate.

threats to open regionalism

First,therearegrowingchallengestomaintainingtheprimacyofopenregionalisminAsia.Inthepast,Asia’sdeepeconomicintegrationwasbuiltonthebasisoftheMostFavouredNation(MFN)principle,whichextendstradeandothereconomicbenefitstoallstates,regardlessofwhethertheyaremembersoftheagreementornot.Now,wearewitnessingtheproliferationofexclusive,preferentialtradeagreements(PTAs)inAsia,whichserveonlytodeepeneconomictiesbetweenPTAmembercountries.Someoftheproposedmultinationalpreferentialagreements—suchastheTrans-PacificPartnership(TPP)agreementandRegionalComprehensiveEconomicPartnership(RCEP)—areparticularlylargeandcomprehensive.Whiletheselargeandcomprehensivepreferentialagreementsoffermorebenefitstotheirmembersthannarrowerbilateralagreements,theyalsohavethepotentialtoimposemoreadverseeffectsonnon-membereconomies.Thiscanbeavoided.Agreementsandarrangementsthatarepreferentialandexclusivecanbemademoreinclusiveovertime,justastheAFTAwas,andcreativewayscanbefoundtoextendbenefitstonon-members.HowtonegatesomeoftheadverseconsequencesofnewregionalagreementssuchastheTPPandRCEPisdiscussedlaterinthechapter.

Figure 7.2: Waves of regional and global economic growth

0

2

4

6

8

10

North A

meric

a

& Europe

Australi

a

Japan

South K

orea

Taiw

an

Singapore

(a)

Malays

ia(a)

Thailan

d

Indonesia

China

India

1950–73 1973–97 1997–2010

Waves 1 & 2 Wave 3

%

Source:AustraliaintheAsianCenturyWhitePaper2012andauthors’calculations.

threats to consensus-driven cooperation

Second,therearegrowingthreatstoAsia’sconsensus-basedapproachtoregionalcooperation.Ascross-bordereconomicissueshavebecomeincreasinglycomplex,andhavebeguntoaffectawiderrangeofinterestsandcountries,ithasbecomemoreandmoredifficulttoachieveconsensus-basedregionalcooperationamonglargergroupsof

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countries.Attimes,theprincipleofconsensushasalsobeenusedandabusedasawayforcountriestoavoidmakingprogressonreform.Inthesecircumstances,smaller‘coalitionsofthewilling’havebeenformedtoachievefasterprogressonissuesincludingtradeandinvestmentliberalisation.Forexample,withtheDohaRoundoftradeliberalisationstalled,somecountrieshaveresortedtobilateralorplurilateralagreementsinordertoopenupmarketaccess.Similarly,inareassuchasinvestmentliberalisation,wherethereisnoexistingglobalorregionalregime,smallgroupsofcountrieshavebegunworkingtogethertoprogressbilateraldealsorregionalagreements.Thereisnothinginherentlywrongwithsmallergroupsofcountriesworkingtogethertointroducenewarrangements.Indeed,thepresenceofcoalitionsofthewillingisawell-establishedpracticeinAsia.APEC,forexample,hashistoricallyusedtheapproachof‘pathfinderinitiatives’toachieveprogress;theseallowsomemembereconomiestoworktogetherinestablishingnewcooperativearrangements,whicharethencommunicatedtootherAPECmemberswhoareencouragedtoparticipatewhentheyareready.Inorderfortheseinitiativestosucceedingainingacceptancebynon-participants,however,itisimportantthattheybecommunicatedtransparentlytoothercountriessoastoavoidsurprises,andtobedevelopedinamannerthatdoesnotdisadvantageothercountries.

threats to stable relations between the great powers

Finally,theexistingeconomic,politicalandsecurityorderinAsiaisunderstrainbecauseoftheeconomicriseofChinaandothersintheregion.Thetransitiontoamoremultipolarorderisinevitable,butthechallengefacingtheregionishowtomanagethatordertransitionpeacefully.China’svasttrade,financial,demographic,environmentalandmilitaryfootprintgivesitagrowingandlegitimateinterestinplayingalargerregionalandglobalrole.Atthesametime,whilemajorshiftsintheregionaldistributionofwealthandpowermakecomparableshiftsintheregionalstrategicorderinevitable,AustraliaandotherregionalstatesverymuchpreferthattheUnitedStatesretainsastrongandstabilisingroleinwhateverneworderemerges.ThegoalmustbetoreconfigureanewregionalorderthatenablesaleadingroleforboththeUnitedStatesandChina.ThisnewregionalordermustalsoallowspaceforotherestablishedpowerssuchasJapan,andforrisingpowerssuchasIndiaandIndonesia.Anynewregionalordermustensurethatsmallerandmiddlepowers,suchasAustralia,SouthKoreaandSoutheastAsiancountries,continuetofeelsecureandabletoparticipatewithindependentvoices.

Managingthisordertransitionwillnotbeeasy.Anditwilllargelybeajobforthegreatpowersthemselves.Nevertheless,Asia’smiddlepowersstillhaveavitalroletoplay.TheyshouldcontinuetouseAsiaPacificinstitutionstohelpmanagetheorderlytransition,playingapositiveroleinpromotingcooperativeregionalinitiativesandmoderatinggreatpowerrivalry.Thereisaneedtoensurethatcurrentregionalinstitutionsandarrangementsaresuitableformanagingeconomicintegration,structuralchangeandpoliticalcooperationasAsia’sorderchanges.FrequentdialoguebetweentheUnitedStatesandChinaiscriticallyimportant,anditisimperativethatthisdialoguetakesplaceroutinelyandwithinframeworksthatinvolveinterestsandissuesbeyondtheUS–Chinabilateralrelationship.TherearetworegularmeetingsayearbetweenthepresidentofChinaandthepresidentoftheUnitedStateswithinaframeworkthatincludesothercountries:theAPECsummitandtheG20summit.Whilethereareotheroccasionsforbilateralmeetings,includingstatevisitsandmeetingsoftheUNGeneralAssembly,forexample,theAPECandG20summitsallowforUS–Chinacooperationinthecontextofbroaderregionalandglobalcooperation.Thoseoccasionsshouldbemadeasproductiveaspossibleforbuildingconsensustowardseffectinggradualandpeacefulordertransition.

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AustraliaandChinashouldseektoenhancetheirbilateralsecuritytiesasanimportantelementthatcontributestobuildingeffectiveworkingrelationshipsonsecurityissuesamongallcountriesintheregion.Closerbilateralsecuritytieswillhelptostrengthenthefoundationsofpoliticalconfidenceonwhichregionaleconomicprosperitycancontinuetogrow.AustraliaiscommittedtoitslongstandingalliancewiththeUnitedStates,butthisdoesnotprecludesecuritycooperationwithChina.Thedevelopmentofcloserbilateralsecuritycooperationonarangeoftraditionalandnon-traditionalsecurityissueswillbeanimportantelementinelevatingtheAustralia–ChinarelationshiptoaComprehensiveStrategicPartnershipforChangeandindeepeningstrategictrustbetweenthetwocountries.ThechangingregionalordermakesitincreasinglyimportantforChinaandAustraliatoclearlyunderstandeachother’sapproachtoregionalpoliticalandsecurityaffairs.AparticularareainwhichthereisscopeforexpandingdialoguethatwillcontributetothisunderstandingisrelatedtoChina’sevolvingthinkingaboutitsmaritimeeconomy,inwhichbothcountrieshavedirectmutualinterests.

moving forward with common interests

TheeconomicandpoliticalriseofChinaandotherregionaleconomiesischangingtheAsianorderandbringingaboutneweconomicandpolitical-securitychallenges.Basedontheirsuccessfulhistoryinjointlybuildingregionaleconomiccooperation,AustraliaandChinaarewellplacedtoworktogethertoforgeanewconsensusaroundtheprinciplesthatwillguidefutureregionalcooperation.

AustraliaandChinacandirecttheirbilateralrelationshiptowardcommonregionalinterestsinanumberofpracticalways.Jointcooperationwiththirdcountriescanbenefitfromcomplementarycomparativeadvantagesandcanadvancebroaderregionalcooperation.Thereisscopeforworkingtogether—givenAustralia’sexpertise,regionalinterestsandconnectionstotheUnitedStates—onChineseglobalgovernanceinitiativessuchastheAIIB.Therearealreadyareas,suchasindevelopmentcooperationinthePacific,whereAustraliaandChinaactivelyworktogether.Thesecooperativeendeavoursshouldbeextendedsothatprogressindevelopmentcooperation,infrastructureinvestmentandotherinitiativescanhelptodeepenprogressattheregionallevel.

AsChina’seconomyundertakesitshugestructuraltransformation,manyopportunitieswillbeopenedupinlabour-intensivemanufacturingandthesectorsthatChinatransitionsoutof.India,therestofSouthAsiaandmuchofSoutheastAsiacanemulateChinaandNortheastAsia’seconomicsuccess,realisetheircomparativeadvantageandtransitionintolow-costmanufacturing.RealisingtheseopportunitiesinSouthandSoutheastAsiawillassistinChina’sowntransition.AndChina’sregionalinfrastructureandconnectivityinitiativescanplayamajorrolealongsideexportingChina’sover-capacity,surplussavingsandexpertise.

ThelargestopportunityliesinIndia.Indiacanrealiseits‘MakeinIndia’economicreformagendathroughliberalisinglabourlaws,improvinginfrastructureinvestmentandfinancing,openingtoforeigninvestment,andpursuingregionaleconomicintegration.RegionalcooperationthatfacilitatesamoreopenanddynamicexternalenvironmentwillhelpIndiaandothereconomiesundertakesuchdifficultreforms.SuccessfulreformsinIndiawillleverageitsabundantandgrowinglow-costlabourresourcestoexploitacomparativeadvantageinlabour-intensivemanufacturesandservices.AustraliaandChinahaveastronginterest,andcanplayanactiverole,insupportingIndia’seconomicgrowthambitions.

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strengthening and connecting existing institutions

Asiaisnowhometoacomplexweb,or‘variablegeometry’,ofregionaleconomic,politicalandsecurityinstitutionswithdiversemembershipsandfunctions.EconomicinterdependenceinAsiaandacrossthePacificincludesawidergroupofeconomies,suchasIndia.Inrealitythereisnosingleregionalinstitutionthatcurrentlyaddressesalloftheregion’seconomic,politicalandsecurityissues.

Theestablishedregionalinstitutions,arrangementsandgroupingsinEastAsiaandacrossthePacificdonotencompassalleconomiesandwerenotsetuptodealwiththeinteractionbetweeneconomicandpoliticalaffairs,andtherearegapsincoveragewithinthearchitectureforeconomicandpoliticalcooperation(Figure7.3).

APECremainstheregion’sprimaryvenuefordiscussionofeconomicissues,andhasaparticularfocusontradeandinvestmentliberalisation.ItistheprimaryinstitutionforUSengagementonregionaleconomicaffairs,andtheAPECSummithasprovedtobeanimportantvenueforleaderstodiscusswin-wineconomicissuesandpromoteeconomiccooperationinitiatives.TheroutineworkdoneamongcountriesattheofficiallevelofAPEChasalsoservedtobridgeunderstandingbetweenmembers,todeepencooperationandtoleadtooutcomesthathavebenefitedmembersandnon-membersalike(Box7.1).Thenetworkofofficials,theworkprogram,andtheleaders’meetinghasmeantthatmembereconomiesfeelownershipoftheprocessandtheinstitution.YettherearemajorgapsinAPEC’smembership.AsFigure7.3shows,whileAPEC’smembershipisbroad,thereareanumberofregionaleconomies—includingIndia,Cambodia,LaosandMyanmar—whoarenotAPECmembers.APEC’sdiversemembershipofeconomies,ratherthanstates,makesitaninappropriateplatformfordiscussingEastAsia’spoliticalandsecuritychallenges.WhileinformalmeetingsonpoliticalandsecurityissuestakeplacebetweenleadersonthesidelinesofAPEC,theseissuesarenotonthemainagenda.

Figure 7.3: AseAn, APeC, eAs and ARF membership compared

ARF

EAS

ASEAN+6

ASEAN+3

ASEAN Brunei

Papua New Guinea

New Zealand Australia

India

South Korea

China Japan

Myanmar Laos

Cambodia Thailand

Philippines Indonesia Vietnam

Singapore

Malaysia

Pakistan

North Korea Mongolia

European Union

Bangladesh Canada

Russia United States

Hong Kong Chinese Taipei

Peru Mexico

Chile

Sri Lanka

Timor-Leste

APEC

Source:Authors’schema.

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TheASEANRegionalForum(ARF),createdin1994,hasfocusedmoreonregionalsecurityissues.Itisalargeanddiverseorganisation,involving27participants,includingtheEU.Thoughithasbeenausefulplatformforregionalstatestogettoknowoneanother,andtoparticipateinconfidence-buildingmeasures,theARF’ssizeandthediversecharacterofitsparticipantshasmadeitverydifficulttoachievesubstantialprogressonregionalsecuritydisputes.

TheEastAsiaSummit(EAS)wascreatedin2005andisanotherASEAN-ledinstitution.TheEASemergedoutofproposals,intheearly1990s,tocreateanEastAsianEconomicCaucus.TheAsianfinancialcrisisthenpromptedASEANcountriestoworkwiththeir‘PlusThree’NortheastAsianneighbours—China,JapanandSouthKorea—tobuildanEastAsianeconomiccommunity.WithJapaneagertobroadenitsmembership,India,AustraliaandNewZealandsubsequentlybecamefoundingmembersoftheEASin2005.In2011,membershipoftheEASwasfurtherexpandedtoincludeRussiaandtheUnitedStates.ThisexpansioninmembershiphasalsochangedthecharacteroftheEASfrombeinganorganisationpredominantlyfocusedoneconomicissues,toonewherepoliticalandsecurityissueshavecometodominatetheagenda.IncomparisonwithAPEC,theEAShasneverenjoyedthesamedensenetworkofinstitutionalisedofficialactivityamongitsmembers.Givenitsshiftawayfromeconomicissuesinrecentyears,thereisariskthatmuchoftheEASagendawillbecomedominatedbycountries’politicaldeclarationsratherthaninstitutionalisedcooperation.EAS’mainassetisthatitsagendadoesencompasssecurityissues,andthatitsmembershipincludesallofthemajorpowersinAsiaandthePacific,includingIndia.

Theseinstitutionsandarrangementshaveservedtheregionwelltothispoint,butinquitedifferentways.AsrelativeeconomicandpoliticalpowershiftsintheAsiaPacificandglobally,thereisapressingneedtoconnectandextendexistingregionalarrangementssothatthereisareadyplatformtoaddressnewprioritiesinregionalcooperation.Regionalcooperationhastobuildonandmovebeyondthecoreeconomicagenda.Thewebofeconomic,politicalandsecurityinstitutionsinAsiamustnowbebetterlinkedtoaddressthegapsinmembershipandfunction.TheflexibilityofAsianregionalarrangementsallowsopportunitiestoconnectexistingarrangementsinwaysthatallowthemtoaddressthesenewchallengesandopportunities.

Attheregionallevel,oneoptionwouldbetostrengthentheconnectionbetweentheannualAPECEconomicLeaders’MeetingandtheEastAsiaSummit.Thesetwomeetingsarenowheldback-to-backinNovemberinordertoallowtheUSpresidenttotraveltoAsiaonceayear.Currently,leadersmovefromonehostcountrytotheotheranddiscussdifferentagendaswithdifferentmemberships.ThismeansthatthereisadistinctcontrastinthenatureofthediscussionsatAPECandtheEAS.TheChineseheadofstatedoesnotcurrentlyattendEASmeetings.TheAPEChostandASEANChair(whichhoststheEAS)couldworktogethertoensurethatAPEC’seconomiccooperationagendafeedsintotheEAS’politicalandsecurityagenda,withoutdilutingtheissuefocusofeach.ThiscouldbefacilitatedviajointmeetingsbetweentheAPECandEAS‘troikas’(thatis,theprevious,currentandfutureAPEChostsandASEANChairs)inadvanceoftheannualLeaders’MeetingandSummit.

AnotherwayofstrengtheningtheconnectionbetweenregionalinstitutionalarrangementsmightbetoreachouttoinviteIndiaandotherASEANstatestojointheAPECprocess—notnecessarilyasformalmembersinitiallybutratherasparticipants.TheAPEChosthastherighttoinvitegovernmentleadersfromnon-APECmembereconomiestoattendtheannualLeaders’Meeting.BuildingontheinitiativetakenbyChinawhenithostedAPECin2014,futureAPEChostscouldinviteIndia,Cambodia,LaosandMyanmar—thatis,thosecountrieswhoaremembersoftheEASbutnotAPEC—toattendtheAPECLeaders’Meeting.TheAPEC

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EconomicLeaders’MeetingwillnextbeheldinEastAsiain2017whenVietnamhostsAPEC.In2017,therefore,thereisanimportantopportunityforVietnamtoinviteIndia,Cambodia,LaosandMyanmartoattendAPEC.LeaderscouldthentraveltothePhilippines(whichwillbetheASEANChairin2017)fortheEastAsiaSummit.FindingcreativesolutionstohaveallASEANmembersjoinAPECmeetingswillmakeiteasiertomoreeffectivelyconnecttheseregionalprocesses.EastAsiaandthetrans-PacificrelationshipshavebenefitedgreatlyfromASEANcentralityandthereisgoodreasontopreserveandstrengthenASEANasthefulcrumofregionalcooperation.Australia,ChinaandtherestoftheregionhaveastakeinthesuccessoftheASEANEconomicCommunityandaunifiedandintegratedASEANmakesbroaderAsiancooperationeasier.

Important,cross-cuttingissuesthatrequireclosecooperationsuchasenergyandenvironmentaltransformationshouldbethefocusofhigh-levelpolicydialogueledbyacoalitionofinterestedpowersintheregionandcarriedacrossdifferentforums.Theseissuescutacrossenergysecurity,climatechange,andpoliticalandeconomiccooperation.Theseareissuesthataffectallstatesintheregion,andcanbeadvancedbyleader-levelagreementamongallofthemajorregionalplayers.Theenergytransitionfromfossilfuelstorenewableswillbringnewopportunitiesandchallengesthathavelargetransnationalspillovers.Focusingonanissuesuchasenergytransformationcouldliftthelevelofcooperationbetweencountries,giveregionalarrangementsnewimpetusandprovideaframeworkforcloserpoliticalcooperation.ThisisanissuethataffectsChinaandAustraliaacutely,butalsoaffectsJapan,theUnitedStates,India,Indonesiaandeveryothercountryintheregion,whethertheyareenergyproducers,consumersorboth.Thereiscurrentlynoregionalforumortheatreinwhichenergyissuesareprominentlyontheagenda,butasmallcoalitionofcountriesincludingAustraliaandChinacouldinitiateadialogueinoneormoreoftheestablishedregionalplatformsandcarrypolicydevelopmentforwardacrossalltheseforums.

Atthegloballevel,AustraliaandChinahaveasharedinterestinfeedingregionalinterestsandinitiativesintoglobalarrangements.TheAsianmembersoftheG20—Australia,China,Japan,India,IndonesiaandSouthKorea—andthePacificmembersoftheG20—Canada,MexicoandtheUnitedStates—areallleadersinthevariousAsiaPacificregionalforums.AbetterconnectionbetweentheregionalforumsandtheG20atthegloballevelwillhelptoshapetheG20agenda,toimplementG20outcomesthroughregionalinstitutionsandtobuildconfidenceamongcountriesthatarenotmembersoftheG20initsinclusivenessandcredibility.TheAsianG20membersarethemostimportanteconomiesintheregion,andindividuallyandcollectivelytheyrepresentimportantvoicesinglobalaffairs.Theyalreadyexerciseameasureofinfluenceglobally,andcanrepresenttheinterestsandviewsthatareexpressedinregionalforumsthatoperatethroughaprocessofconsensus.

RegionalinstitutionssuchastheChiangMaiInitiativeMulilateralization(CMIM)andtheASEANPlusThreeMacroeconomicResearchOffice(AMRO)surveillanceunitcanacttostrengthenandreinforcetheglobalfinancialsafetynetandglobalsurveillance.AlthoughthecurrencyswapsinCMIMhaveyettobedrawnon—evenduringtheglobalfinancialcrisis—CMIMandAMROcanbuildtrustandcapacityandplayanimportantroleaspartofthebroaderglobalfinancialsafetynetintheeventofafuturefinancialcrisis(seeChapter8).ThesenewAsianarrangementsmarkasignificantstepforwardinAsianfinancialandmonetarycooperation.Tobetrulyeffective,theyneedtobecoordinatedwiththeIMF.Asia,lefttoitsowndevices,wouldfinditdifficulttomobilisetheresourcesorimposetheconditionsonneighbouringcountriesneededtomanagefinancialcrises.AstrengthenedAMROthat

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coordinateswiththeIMFwillhelpregionalfinancialsurveillance.AustraliaisnotpartytoCMIMorAMRObecausetheyemergedfromASEANPlusThree,butAustraliahasaninterestinhelpingtobuildAMRO’scapacityandplayingasupportingrolewithinCMIM.Morebroadly,theAustralia–Chinabilateralrelationshipshouldincludedialogueandcooperationonissuesthatcanfeedintoandshapethoseregionalforumsandarrangementsinwhichonlyonecountryisamember,suchasCMIM.ThereshouldbecreativewaystohaveAustraliabecomeadefactopartnerinAMRO.ItisinAustralia’sinteresttohelpstrengthenthecoordinationbetweentheIMFandregionalfinancialarrangements(seeChapter8).

TheinstitutionsandarrangementsthathaveservedChina,AustraliaandAsiawellinthepastmustevolvetoreflectnewregionalrealitiesandinterests.Thereislittleappetiteintheregiontocreateentirelynewinstitutions,butexistinginstitutionscouldbere-energisedandtheirconnectionsstrengthened.Andregionaleffortsshouldbeconcentratedonimportantcross-cuttingissuessuchasenergytransformation.AustraliaandChinacanworktogetherwithregionalpartnerstoreformandstrengthentheseexistinginstitutionsandarrangements.

moving towards inclusive regional agreements

TheAsiaPacificregionhasseenaplethoraofbilateralandregionaltradeagreementssignedsincetheearly2000s.ButnoneoftheregionalorplurilateralagreementssignedtodatehavebeenasconsequentialorlargeinmembershipastheTPP,RCEPortheTransatlanticTradeandInvestmentPartnership(TTIP).Theseregionaleconomicagreementsaimtomakemajorprogressontradeandinvestmentliberalisationwheretheglobalsystemhasstalled,andtofurthercross-bordercommerceandexchangeinnewareasofimportancetobusiness,insomecasesbycreatingnewinternationalrules.

RegionalagreementscandeepenregionalandglobaleconomicintegrationandmakeprogresswheretheWTOhasbeenunableto,andintheprocessstrengthenprospectsforprogressatthegloballevel.Yettherearerisksthattheseagreementscanharmnon-members,andthatdifferentagreementswithdifferentmembershipscanbecomeavenuesforcompetitiverule-making,thusfragmentingregionalandglobaleconomicintegration.Thereisstronginterestinavoidingoramelioratingtheseadverseconsequencesinordertobuildaninclusive,globaleconomicsystem.

The12-memberTPPincludesAustralia,theUnitedStates,Japan,Canada,Mexico,Vietnam,Brunei,Singapore,Malaysia,NewZealand,ChileandPeru.LargeAsianeconomiessuchasChina,IndonesiaandIndiaareyettojoin.GiventhestandardsthattheTPPappliesandthefactthatnewmemberswillberequiredtonegotiatebilateralagreementswithallothermembersandberatifiedbyUSCongress,itisunlikelythatChinawillbeabletojointheTPPinthenearfuture.However,theTPPdoesprovidesomecountry-specificcarve-outsandspecialanddifferentialtreatmentfordevelopingmembersregardingtheirtransitionperiods.

ComparedtotheTPP,RCEPcoversabroaderrangeofcountrieswithmorevariedlevelsofeconomicdevelopment.ASEAN’saimisforRCEPtoconsolidateandharmonisetheexistingASEANPlusOneFTAswithChina,SouthKorea,Japan,IndiaandAustralia–NewZealand.TheseFTAsvaryconsiderablyintermsoftheirscope,comprehensivenessandmarketaccesscommitments.RCEPisexpectedtobecharacterisedbyasetofcommonrules,butwithflexibilityfordevelopingcountriestocommittocertainstandardsinreasonabletimeframes,andmarketaccesscommitmentsbyindividualcountriesthattakeaccountoftheirlevelofeconomicdevelopment.

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Figure 7.4: AseAn, RCeP, TPP and possible FTAAP membership

FTAAP

Papua New Guinea Russia

Hong Kong Chinese Taipei

TPP

RCEP

ASEAN Brunei

New Zealand Australia

India

Japan

Myanmar Laos

Cambodia Thailand

Philippines Indonesia

Vietnam

Singapore Malaysia

South Korea China

Canada United States

Peru Mexico

Chile

Source:Authors’schema.

AustraliaispartytoboththeTPPandRCEPandhasaroletoplaywithotherpartners,suchasJapan,indialogue,capacitybuildingandexperiencesharingtobridgethegapbetweenmembersandnon-members.Thisbridge-buildingroleisvitalbecauseAustralia,JapanandothershaveanumberofimportanttradingpartnersthatarenotmembersofboththeTPPandRCEP.TheTPPandRCEPagreementsshouldbeusedtodeepenmarket-basedeconomicinterdependenceandanybarriersagainstnon-membersshouldbewatereddown.Theagreementsneedtobe‘living’agreementsthatchangewithcircumstancesandgiveallmembersavoice.Thecriteriaforaccessiontotheseagreementswillalsobeparticularlyimportantifthebenefitsoftheseagreementsaretobeexpandedbeyondtheoriginalsignatories.

TheTPPandRCEPshouldnotbecomecompetingblocsbutinsteadneedtobemadecomplementary.RCEPdoesnotincludetheUnitedStatesandtheTPPdoesnotincludeChina.ThesearrangementsshouldbedirectedtoenhanceeconomicintegrationinAsiawithoutfragmentingeconomiclinkageswithintheregionorbetweentheregionandtherestoftheworld.

TheTPPandRCEPwillservetheirpurposeonlyiftheyareusedtofosterdomesticeconomicreformagendas.ChinahasbeenhighlysuccessfulinitsstrategyofusingmembershipofexternalorganisationsliketheWTOtoleverageandentrenchmajordomesticreforms.Chinanowhasanopportunitytopursueanewroundofreformsviaexternalengagement,includingfinancialsectorandinvestmentreform,reformofSOEs,lockinginimprovedenvironmentalandlabourstandards,andfurthermodernisingitseconomy.ButtheprospectofachievinganyofthesereformsviatheTPPwillbelongtermratherthanshortterm,particularlybecauseChinaisnotamemberoftheTPPandtherewillbemanyhurdlesfornewmemberstojoiningtheTPP,anditisnotclearwhenaccessionmightbecomepossibleforChina.Moreimportantly,thosereformsandcommitmentsthatChinawillhavetomakeinordertojointheTPPwillhavetobestructuredinawaythatisconsistentwithChina’sdomesticreformgoals.ThemajorchallengeforChina,butmorebroadlyfortheTPP,willbewhethertheTPPisabletocreateanexternalenvironmentforChinaandothernon-membersthatisconducivetotheir

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pursuitofdomesticreforms.Anexclusivesetofarrangementsintheregionthatmakestheexternalenvironmentmoredifficultforfurtheropeningupofeconomiesandimplementingofdomesticeconomicreformsneedstobeavoided.

TheRCEPprocess,ontheotherhand,showsmuchmoreimmediatepromisethroughChina’sparticipationinnegotiatingtheopeningupofborderstotradeandinvestment.China’sWTOaccessionexperiencedemonstrateshowinterestscanaligntocreatewin–wincommitmentsvianegotiation.Itishardertonegotiatedomesticreformexternally.Reformismoresustainableifitisimplementedwithexternalsupportintheformofagreeingtomutuallybeneficialgoals,capacitybuildingandexperiencesharing,andbygivingcountriesspacetofindthebestreformpathfortheirowncircumstancesandinstitutions.Soratherthanexternallymandatingreforms,internationalagreementscanworktoprovideexternalimpetusforongoingdomesticeconomicandregulatoryreformprocesses.

TheRCEPagreementhasthepotentialtocreateanenvironmentforbothmembersandnon-membersthatisconducivetoopeningupofmarketsandtheprosecutionofdomesticreforms.ThereistheopportunitytocreateanagreementthatextendstheprinciplesandmodesofcooperationofASEAN,especiallytheAEC,toabroadergroupingthatincludesmajor-economyneighbourssuchasChina,JapanandIndia,aswellasadvanced-economyneighbourssuchasAustralia,SouthKoreaandNewZealand.ByRCEP’ssettingbindinggoalsandallowingsomecountriestoreachthosegoalsinthemostsuitablewayforthemovertime,withcapacitybuildingandexperiencesharingalongtheway,thebroaderEastAsianregionwillmoveclosertoasinglemarketandproductionbase.

MuchbroaderanddeeperintegrationwouldoccurwiththeEastAsianeconomiesthroughRCEPadoptingthefourpillarsoftheAEC—asinglemarketandproductionbase,acompetitiveeconomicregion,equitableeconomicdevelopmentandintegrationintotheglobaleconomy—andcommittingtomajorliberalisation.Thiswillinvolvecommitmentstocomprehensivefreeingoftradeingoods,servicesandinvestmentandwithaframeworkforeconomiccooperation.Recognisingthatasuccessfulagreementwillrequireanongoingprocess,membersshouldcommittoambitiousbindinggoalsfordeliveryby2025,withbuilt-ininstitutionssuchasworkinggroupsforongoingimplementation.

RCEPhasrealpotentialtoavoidoverlyprescriptiveoutcomes,byprovidingcountry-specificmarketaccesscommitmentsandsettingsomeagreedrulesanddirectionsforfuturework.AswiththeexperienceofASEAN,multilateralisingpreferences—sothatbenefitsareextendedtonon-members—overtimewillbeimportanttoavoidanexclusivemembershipthattruncateseconomicintegrationacrossthePacificorwiththerestoftheworld.WhetherRCEPultimatelyresultsinopenregionalismdependsonthemodeofcooperation,theendgoalsandhowthosearepursued.

RCEPcountriesalreadyaccountforalargershareoftheglobaleconomythandotheTPPcountriesanditsmembersalsoincludeafastergrowinggroupofcountries,ledbyIndiaandChina.RCEPisdiverse,withsomeoftheleastdevelopedcountriesintheregionsuchasCambodia,LaosandMyanmar,whicharenotAPECorTPPmembers.TheGDPoftheRCEPgrouping—onconservativeprojections—couldbeclosetodoubletheTPP’ssizein15years(Figure7.5).

PursuinganambitiousRCEPagreementalongsidetheTPPwillbeimportantforfurtheringeconomicintegration,andAustraliaandChinahavearoletoplayinsettinghighstandardsinthisprocess.Indoingso,AustraliaandChinacanusethebestfeaturesofChAFTA—

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includingtheliberalisationofservicesandinvestmentaccess—tosetthebenchmarksforRCEP.StronginitialliberalisationandcommitmentsforphasedliberalisationininvestmentbyChinaandotherswouldhelptodevelopcompetitiveliberalisationbetweenRCEPandtheTPP.ItwouldalsoensurethatafutureUS–ChinaBITcouldincorporatethebestfeaturesofboththeTPPandRCEP,takingaccountoftheinterestsofthewholeregionratherthanjustbilateralinterests.Thisapproachwouldhelptoachieveconvergencebetweenthetworegionalagreements,therebyaddressingthebiggestproblemtheycurrentlyface:namely,thattheUnitedStatesandChinaarenotpartytobothagreements.

EarlyconsolidationoftheTPPandRCEPisanunrealisticobjective.Thetrackrecordofconsolidatingsmallerbilateralagreementshasnotbeengoodandhastendedtoleadtothecreationofadditionallayersratherthanconsolidation.Thelonger-termconvergenceoftheTPPandRCEP,however,canbepursued.Apracticalwayforwardwouldbetomobiliseacoalitionofthewillingtoworktogetherindefiningthepathforwardinlinkingthesetworegionalagreements.Australia,asamemberofbothagreements,hasacrucialroletoplay,butChinaandothersthatarepartyonlytooneagreementarealsoimportantforfindingcreativewaystobridgethegapsbetweentheTPPandRCEP.

Figure 7.5: gDP projections of RCeP and TPP groups, 1980–2050, at purchasing power parity

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Note:IMFprojectionsto2020followedbyprojectionsbasedonanestimateofpotentiallabourproductivityforcountriescurrentlyintransitiongiveninstitutionalqualitymeasuredbytheWorldEconomicForum’sGlobalCompetitivenessIndex.Source:HubbardandSharma2016.

ArelatedinitiativeistheefforttodeveloptheFreeTradeAreaoftheAsiaPacific(FTAAP),whichwasputbackontheregionalagendain2014whenChinahostedAPEC(APEC2014a).TheFTAAPbuildsontheongoingregionalundertakingsoftheASEANPlusThree,TPPandRCEPandaimstofurtherAPEC’sregionaleconomicintegrationagenda.Consistentwiththeprinciplesofeconomiccooperationthathaveservedtheregionsowelluntilnow,APECleadershaveagreedthattheFTAAPshouldsupportandcomplementthemultilateraltradingsystem,worktohelpachievetheBogorgoals,andbepursuedwithastep-by-step,consensus-basedapproach.Itwouldalsoneedtobeahigh-quality,‘nextgeneration’agreementandruninparallelto—notaspartof—theAPECprocesssothatnon-bindingvoluntarycooperationcanbepreservedinAPEC.

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TheprinciplesthathaveservedEastAsiaanditstrans-PacificcooperationsowellinthepastshouldguidetheformationandarchitectureoftheFTAAPsothatitstrengthenstheWTOandtheglobaleconomicsystem.RecognitionoftheimportanceofASEANcentralityandextendingthebestfeaturesoftheAECwillbeimportantinachievingahigh-qualityagreementthatmovestheregiontowardsasinglemarketintheAsiaPacific.BuildingonthesharedprinciplesthathaveunderpinnedAsia’seconomicintegrationtodate,itisalsoimportanttoensurewherepossiblethatregionalagreementsdonotunderminetheglobalmultilateralsystembyadverselyaffectingnon-members.

BOx 7.3: BuiLDing A muLTiLATeRAL Regime FOR gOveRning FOReign DiReCT invesTmenT

TheglobaltradingsystemhasbeenintegralforChina’sintegrationintotheglobaleconomyandregionalarrangementssuchasAPEChavehelpedinthis.Asinvestmentflowshavebecomemoreimportantintheregion,thelackofaregionalorglobalinvestmentregimeisemergingasasignificantgapinthemultilateralarchitecture.Chineseoutwarddirectinvestmentisalreadylargeandwillonlybecomemoreimportantregionallyandglobally.AustraliaisamajorrecipientofChineseinvestment,andbothcountrieshavearoletoplayindevelopingarrangementsattheregionalandgloballevelsthathelpwiththemanagementofforeigninvestmentandfurtherregionaleconomicintegration.

Currently,thelackofaregionalorglobalregimeforinvestmenthasledtoamixofbothunilateralpolicies(mostlyonthepartofrecipientcountries)andbilateralpolicies,usinginvestmenttreatiesandeconomicagreementsthathavevaryingprovisionsandprotections.AustraliaandChinahaveaninterestininitiatingdialoguearoundthearticulationofacommonsetofprinciplestogovernforeigninvestment—bothforfacilitatingpre-establishmentforeigninvestment(beforeitentersacountry)andthenationaltreatmentofpost-establishmentforeigninvestment.ThismightbeginwiththeimplementationofChAFTA(seeChapter4).AustraliaandChinacanalsocarrytheirworkonaninvestmentagreementundertheaegisofChAFTAintotheRCEPnegotiations.Withoutregionalguidingprinciples,thereisariskthatagreementsbetweenlargecountries—suchastheUnitedStates–ChinaBilateralInvestmentTreaty(BIT)—willbecomethedefaulttemplateforthosebetweenallstatesintheregion.Itisimportantthattheinterestsofsmallercountriesarerepresentedinthesediscussionssothatoutcomesareintheinterestsofallinvestorsandrecipients.

Promoting infrastructure investment as multilateral regional goods

PromotinginfrastructurefundingandinvestmentisaparticularpriorityinAsiaandthePacific.TheWorldBankhasestimatedthateachadditional10percentofglobalinvestmentininfrastructureincreasesglobalGDPgrowthbyonepercentagepoint.Giventhemodestandunevengrowthintheglobaleconomy,increasinginfrastructureinvestmentisimportantformanycountries.Inparticular,thereisgreatdemandforinfrastructureinvestmentwithintheregion.TheADBhasestimatedthatAsiawillneedUS$8trillioninnationalinfrastructureandUS$290billionininfrastructureconnectingeconomiesby2020(ADB2009).MeetingthatUS$8trilliondeficitinregionalinfrastructuredemandby2020iscriticaltothecontinuing

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growthanddevelopmentofregionaleconomies.Yet,asiswidelyrecognised,therearecurrentlyanumberofconstraintsoninfrastructureinvestment.ThescaleoffundingthroughthemultilateraldevelopmentbankssuchastheWorldBankandtheADB,whicharesmallrelativetothesizeofdemand,hasshrunkinrecentyears.Indeed,sincethe1990s,someoftheexistingmultilateralbanks,suchastheWorldBank,haveincreasinglyfocusedonfunding‘social’projectsinareassuchaseducation,health,environmentandurbandevelopment,ratherthanfundinginvestmentinroads,railways,portsandotherinfrastructureprojects.Moreover,theAPECConnectivityBlueprint(2015–2025)releasedatthe2014APECSummitrecognisesthatthequalityanddistributionofinfrastructureintheregionremainsuneven,andthatmanycountrieslackfinancialsupportforinfrastructurefunding.ThereisclearscopeforintermediatingAsiansavingsandfacilitatinggreaterprivatesectorfinancingtocopewiththehugeshortfallinregionalinfrastructureinvestment.

China’slaunchoftheAIIBisanimportantmomentintheemergenceofChinaasacontributortoregionalandglobalpublicgoods(Lin2015).ChinaalreadyhasanumberofexistingavenuesthroughwhichitfinancesinfrastructureprojectsinAsia,includingtheChinaDevelopmentBank,itsnewOBORinitiative,theSilkRoadFundandtraditionalbilateralfinancing.Throughtheseavenues,ChinaseekstostrengthenAsianconnectivityandeconomicintegrationthroughinvestmentinroad,rail,shipping,aviation,telecommunications,powerandenergypipelineinfrastructure.ButtheAIIBrepresentssomethingnew.IndevelopingtheAIIB,Chinahasvoluntarilycommitteditsresourcestoamultilateralbodywithformalgovernancestructuresandwithexternaloversight.WhilethismultilateralapproachnecessarilylimitsChina’sfreedomofaction,itoffersmanyadvantagestoChinaandthewiderregion.

First,multilateralisingfinancingdecisionscaninsulateChinafrombilateralpoliticaltensions.Withcompetitionamongrecipientsforlargeinfrastructureinvestmentprojects,investmentdeployedthroughmultilateralprocessesarelesslikelytobecomepoliticised.Whencommercialdecisionstakeplaceonaunilateralorbilateralbasis,theyruntheriskofbeingsecond-guessed,orbeingviewedasconnectedtounrelateddisputesordisagreements.

Second,itisinChina’sdirectinteresttoensurethattheAIIBmeetsallthestandardsofamultilateralinstitution.TheAIIBisunderintensescrutinyandtheinternationaltoleranceformisstepswillbelow.WhileChinaoriginallyformedtheconceptoftheAIIB,itsgovernancearrangementshavebeenshapedbyitsmanyfoundingmembers,andshouldensurethattheAIIBmeetsalltheaccountabilityandtransparencystandardsofothermultilateraldevelopmentbanksandhasanappropriatelyskilledinternationalworkforce.ThedownsideofbuildinginthoseprocessesandproceduresisthatitmaytakelongerthanChinaandrecipientcountriesmaywishfortheAIIBtobecomeasignificantplayerintheregion.ButChinawillbenefitsignificantlybecausethereisnoquestionthattheAIIBtrulyisamultilateralinstitutionandnotonecontrolledbyChina.ThisdoesnotmeanthattheAIIBneedstomirroralloftheproceduresoftheexistingmultilateraldevelopmentbanks.Onthecontrary,theAIIBshouldseektobemoreeffectiveandefficientthantheothermultilateraldevelopmentbanks.Indoingso,thisdemonstratesthatChinacanmakeaneffectivecontributiontoprovidingglobalpublicgoodsandactivelyleadamultilateralorganisation.Moreover,theareasoftheAIIB’soperationswheretimeandcareshouldbetaken—suchasrigorouscreditassessments,carefulprojectselection,carefulattentiontoenvironmentalandsocialissuesandstrongaccountingandtransparencyarrangements—areoneswhereChinacanlearnfromtheexperienceofothers.Assuch,thereareanumberofindirectbenefitsthatChinacangainfromthecarefulestablishmentoftheAIIB.

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TheOBORinitiativeaimstoconnectAsia,theMiddleEast,EuropeandAfrica.ItisaboldplanbyChinathatcouldgreatlyfacilitateinfrastructureconnectivityandeconomicintegrationwithinandacrossregionsandsub-regions(StateCouncilofthePeople’sRepublicofChina2015).China’ssurplussavingsandinfrastructuredevelopmentexpertisecanbemobilisedforthebenefitofthedevelopmentofothercountriesthatlackcapitalandinfrastructuredevelopmentexpertise.ItcanalsoeasesomeoftheovercapacityissuesinChinawhileexpandingtradeandcommerceforChineseandothercompanies.AsthesuccessofthisChineseinitiativerequiresactiveinvolvementofothercountriesbasedontheirowninterests,theOBORinitiativecanalsoprovideaplatformforcooperationbetweendevelopedanddevelopingeconomies(Zhang2016b).AustraliaisactivelydevelopingtheNorthernAustraliaregionandhasstronginterestinbeingpartoftheOBORinitiative.BeyondthebilateralinterestinAIIBandOBOR,bothAustraliaandChinahaveaninterestinregionalinfrastructurebuildingandconnectivitythatwouldbemademoreeffectivethroughbilateralandregionalcooperation.

Ultimately,China’scontributionsviatheAIIBandOBORformanimportantplankinAsia’swiderconnectivityagenda.China’sneighbourhoodinSoutheastAsiahasawell-developedASEANMasterPlanforConnectivity(AMPC).TheAMPCisaregionalplanfortransportandinstitutionalconnectivitydesignedtobringcountriesclosertooneanother,andtofacilitatebetteraccesstotrade,investment,tourismandpeople-to-peopleexchanges.TheAIIBandtheAMPCsharesimilargoals.China’scapitalandexpertiseinbuildinginfrastructureisalreadyhighlysoughtafterinSoutheastAsiaandelsewhere—Chinese-developedports,high-speedrailandmajorinfrastructureprojectssuchastheTrans-AsianRailwayNetworkandAsianHighwayNetworkhaveearnedChinaanimpressivereputation.WorkingalongsidetheAMPCwillhelpChinatoprioritiseinvestmentandembedcooperationamongrecipientcountries.Forinstance,roadsandrailnetworkswillconnectcountrieswithsharedborders,whileasystemofshortseashippingwilllinkmaritimeSoutheastAsiawithportsforroll-onroll-offvessels.

TheAIIBrepresentsanimportantstepinChina’sprovisionofregionalandglobalpublicgoods.AsuccessfulAIIBwillmeanChinesefunds,expertiseandleadershipcanbeleveragedtosupportdemandforinfrastructureinvestmentinAsiaandbeyond.ItisintheinterestsofAustraliaandthewiderregiontoseetheAIIBsucceed.

ButtheAIIBisnottheonlyimportantinfrastructureinvestmentinstitutionoperatinginAsia.TheADB,WorldBank,andunilaterallendersanddonorsareallimportantforinfrastructuredevelopmentinAsia.Apositivedevelopmentisthatinitsinitialoperations,theAIIBisfocusingonco-financingarrangementswiththeADBandtheWorldBank.However,thereisadangerthatsomeoftheplayersmayactindependentlyandattimesatcross-purposes.Itwouldbeproductivetoensureacommonunderstandingandcoherencetotheinfrastructureinvestmentnetworkintheregion.Therewouldbevalueinministersandseniorofficialsfromthecountriesintheregionregularlydiscussingpriorities,strategiesandmutualinterestsininfrastructuredeliverytofurtherregionalconnectivity.Regionalinfrastructurefundingandinvestmentisclearlyacross-cuttingissuethatwouldbebestservedbyhigh-levelpoliticaldialogue.WhileASEANhastheAMPCforadvancingconnectivityamongitsmembers,AustraliaandChinacouldinitiateabroaderdialogueinvolvingregionalcountries,regionalandmultilateraldevelopmentbanks,internationalfinancialinstitutionsandrecipientregionalgroupingssuchasASEAN.Movingtowardsestablishingacommonframeworkforinfrastructureinvestmentandfundingintheregionwouldbeamajorcontribution.Existingarrangementsshouldbeusedcreativelyandnon-exclusivelytofosteranimportantdialogueofthiskind.

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Australia, China and the next decade of regional cooperation

AustraliaandChinahaveenjoyedgrowingprosperityasadirectresultofthedomesticeconomicreformsandregionaleconomicintegrationinitiativestheyhavejointlypursuedoverthepastthreedecades.ButlargechangesarenowunderwayinAsiaduetothechangingstructureofregionalandglobaleconomicpower.Closecooperationandcommunicationisrequiredinordertoavoidmisunderstandingsanddisputes,tonarrowdifferences,andtomaintainandbuildtrustamongcountriesintheregion.Theshifttowardsamorecomplexandmultipolarorderhasalreadycreatednewtensionsandhasbeguntoerodesomeoftheregion’ssharedprinciples.ThemajorchallengesnowfacingAsia’sregionaleconomyrequireinnovativesolutions.

AustraliaandChinashareacommoninterestinforginganewconsensusonthesharedprinciplesofcooperationthatcanbringfurthereconomicinterdependence,buildpoliticalcooperationandmaintainstablerelationsbetweentheregion’sgreatpowers.

Theregionalandglobaleconomicsystemsarechangedasaresultofwhatlargeeconomiesdobythemselvestomanagetheirinteractionswithothereconomiesandpolities.Butifwearetoachieveapeacefultransitiontoamoremultipolarworld,thesechangesmusttakeplacethroughcollectiveconsensusamongallthecountriesthatareaffected.ThischapterhasidentifiedanumberofareasinwhichcollaborationbetweenChina,Australiaandtheirpartnersinregionaleconomicdiplomacywillbeofspecialimportanceinthecomingdecades.

Practicalprogresscanbemadeinstrengthening,extendingandbetterconnectingtheestablishedregionaleconomiccooperationarrangements,suchasAPEC,theASEANPlusframeworksandtheEAS,andinsecuringaframeworkforpoliticalconfidenceandsecuritywithinwhicheconomicprosperitycanbeattained.AstartingpointwillbetobetterconnectthecooperationanddialogueoneconomicissuesthattakesplaceinAPECandtheASEANPlusprocesseswiththecooperationanddialogueonpolitical-securityissuesdiscussedwithintheEAS.Important,cross-cuttingissuesthatrequireclosecooperation,suchasenergyandenvironmentaltransformationaswellasregionalinfrastructurefundingandinvestment,shouldbethefocusofdialogueledbythemajorpowersintheregionandcarriedacrossdifferentforums.

AustraliaandChinahaveastrong,sharedinterestinmobilisingacoalitionfordefiningthepathforwardinforgingtheTTPandRCEPtogethertowardsaFTAAPthatstrengthenstheWTOandtheglobaleconomicsystem.TheChAFTAagreementcansetbenchmarksthatwillhelpwithambitiousandhigh-qualityoutcomesintheRCEPagreement,especiallyintheinvestmentchapter.AustraliaandChinacanpioneerservicessectoropening,capitalisingonAustralia’spotentialroleasagoodtestinggroundforliberalisation.ChinacanuseChAFTAasatestinggroundforahighqualityUS–ChinaBIT.

Asia’sfutureeconomicgrowthandintegrationisincreasinglydependentoninvestmentincriticalinfrastructure.AustraliaandChinawillbothbenefitiftheregionisbetterconnectedthroughsea,roadandrailnetworksandotherconnectivityprojects.TheAIIBisanimportantnewchanneltofundingAsia’sinfrastructureneeds.Startingahigh-leveldialogueamongalltheactorsintheregion—bothfundersandrecipients—aimedtowardsestablishingacommonframeworkforinfrastructurefundingandinvestmentwouldreducecosts,bringbetterunderstandingandhelpimproveconnectivity.

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This text is taken from Partnership for Change: Australia–China Joint Economic Report, by East Asian Bureau of Economic Research and China

Center for International Economic Exchanges, published 2016 by ANU Press, The Australian National University, Canberra, Australia.

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