As the US and China battle for global supremacy, many countries in Southeast Asia are feeling the heat. They’re faced with the need to manage expectations of both global powers, while looking out for their best interests. Can countries in the region remain fence-sitters, and if so for how long? And how will their actions impact their trade policies? We speak with Stephen Olson, senior research fellow at the Hinrich Foundation, to understand how countries in the region are navigating this unusual and unpredictable trade landscape.
Unravel: In this era of trade that is being shaped by trade restrictions and increasing government intervention—particularly by the US and China—what are the implications for other emerging economies?
Stephen Olson: The worst-case scenario for emerging economies would be if the large and wealthier countries became engaged in a race—either to the top or the bottom, depending on your perspective—to pursue industrial policies and provide massive subsidisation to favour domestic production and workers. Emerging economies lack the resources to compete in such a race, and the likely result would be diminished export opportunities and decreased FDI into their home markets. The largely open global trade environment that has existed for decades and has spurred economic development in numerous less developed countries is becoming more closed. The export-led development model is becoming decreasingly viable.
Unravel: How are Southeast Asian economies navigating this changing landscape?
Mr Olson: Southeast Asian economies are playing the cards they’ve been dealt as well as possible. As a practical matter, that means walking a tightrope between the US and China, without tilting too decisively in one direction or the other. That permits them to benefit from both. As trade restrictions and interventionist policies increase, at least some ASEAN members are turning towards trade agreements to hopefully provide insulation. Seven out of the ten ASEAN members are on board for the US-driven Indo-Pacific Economic Framework, four are members of the CPTPP, and of course all of them are a party to the China-centred RCEP agreement. The biggest challenge will be to remain sitting on the fence between the US and China without being pushed off in one direction or the other.
Unravel: Are they doing it successfully, in your view?
Mr Olson: Singapore has elevated its ability to play off the US and China against each other to an art form. As a result, it benefits from robust economic ties with both. Indonesia is also demonstrating an ability to skilfully navigate the terrain between the US and China. Joko Widodo’s deft diplomatic handling of the Bali G-20 meeting including Russia, the US, and China won rave reviews that are deserved. The region has also shown leadership potential on digital trade governance, and could become a key player in the various multilateral and regional efforts that are underway.
Unravel: For a long time, the EU and the US were joined at the hip when it came to global trade policy, and particularly in dealing with other parties (most recently, China). But that seems to have changed in the past half-decade or so. Why has this happened, and do you see this “divide” continue?
Mr Olson: This is the $64,000 question. If EU policies align more closely with the US’ restrictive policies towards China, the impact of those measures would be substantially heightened. Should the EU hold back, China will be much better positioned to weather the storm. This has not been lost on Beijing, hence the efforts to court EU favour (such as the lavish welcome bestowed on French President Macron during his recent China visit.)
Although, broadly speaking, the EU shares many of the same concerns about China that the US has, it is less inclined to see things through the existential, “clash between democracy and autocracy” lens that the US favours. The EU seems to be opting for a policy of “de-risking”—minimising dependence on China in key strategic areas—rather than the partial decoupling suggested by US policy. The EU believes that it can maintain the robust and immensely beneficial economic relationship it has with China, while still being able to push back when and where necessary. It remains to be seen if this is possible.
There are various reasons for this divide. On a most basic level, it appears the EU has simply arrived at a different strategic assessment on China than that of the US. China’s rise is also viewed differently by the US as the sole remaining superpower and the fact that the US is a pacific facing nation. It’s also possible that the presidency of Donald Trump—and the prospects for Trump to once again be elected—could have shaken the EU’s faith in the reliability of the US and made it somewhat more reluctant to align too closely.
One of the challenges will be discerning a coherent and consistent EU point of view. There is a wide divergence of opinion within the EU on how to handle China. French President Macron is the leading voice in opposition to following the US’ more confrontational stance. EC President von der Leyen has used much tougher language that appears more in line with the US view.
It’s anyone’s guess as to whether the divide will narrow or expand.
Unravel: What, in your view, is China’s worldview like, when it comes to globalisation? In what direction do you think China is pulling (or wants to pull)?
Mr Olson: Deng made the bold strategic decision to open China and integrate into the global economy because he concluded it was the only way China could ever close the substantial gap with the West. But there have always been underlying concerns that integration could also bring unwanted Western influence or generate dependencies that would leave China vulnerable. Now that China has become a global technology leader and the first or second largest economy in the world, China appears to be readjusting its stance towards globalisation. The Dual Circulation strategy suggests that China will continue to engage in global markets to the extent it can benefit, but it intends to rely far more heavily on domestic sources of growth. China is trying to limit its exposure to forces beyond its border.
Unravel: Are you optimistic about the future of global trade?
Mr Olson: I remain confident in the beneficial aspects of trade, but I’m not optimistic that we can navigate the current period of turmoil without significant disruptions and distortions. The next several years, and perhaps a decade or longer, will be highly volatile as the post-War, rules-based global trade system continues to unravel. Ultimately though, if we are fortunate enough to enjoy enlightened leadership, a new and more sustainable approach to trade could emerge. We have to recognise however that our previous, overly-idealised notions of how the trade system could operate were simply not realistic. A recalibration is overdue.
Stephen Olson is a research fellow at the Hinrich Foundation. He began his career in Washington DC as a US trade negotiator, serving as a member of the US negotiating team during NAFTA. Over the course of his more than 30-year international career, Olson has lived and worked in Asia, the Middle East, and the United States, holding senior executive positions in the private sector, international organisations, government and academia.