US efforts to encourage Indo-Pacific nations to diversify their trade away from China confront a well-established trend towards deeper regional integration, according to a report by the US-based Peterson Institute for International Economics.
The Indo-Pacific Economic Framework for Prosperity (IPEF), launched by US President Joe Biden last year, was intended to help 14 Indo-Pacific nations pursue ‘friend-shoring’ and ‘near-shoring’ of their supply lines.
While there have tentative signs of a shift in Australia’s imports away from China in recent months, the trend over the past decade for both Australia and the Asian region has been for far deeper integration with China.
The Peterson Institute study found that of the 14 nations targeted by the IPEF, all except for Japan and the United States had deepened their dependence on imported Chinese manufactured goods over the past decade.
Australia and Thailand were the only countries to lessen their dependence on China for their exports of manufactured goods. In the case of Australia, manufactured goods exports to China are swamped by imports, which are almost 20 times larger.
‘Despite efforts by the Biden administration to strengthen ties with its IPEF partners and wean them away from Beijing, these countries are increasingly reliant on economic ties with China,’ the report says.
‘China is the top import source for all IPEF countries except Brunei as well as the top export destination for half: on average IPEF countries received more than 30 percent of their imports from China and sent almost 20 percent of their exports to China in 2021. These numbers reflect average increases in the China share of over 40 percent for imports and almost 45 percent for exports since 2010.’
Australia has a greater dependence on China as a market than any other IPEF economy, selling 36.3% of its merchandise exports there in the six months to August. That’s a rise of nearly 10 percentage points from a low of 27.5% in the six months to September last year, when Australian exports were feeling the full effect of China’s discriminatory trade bans.
China’s share of Australian exports is still below the record 42.5% hit in the six months to October 2020. However, its share is likely to rise further with increased purchases of Australian coal, barley and beef and the prospect of resumed sales of wine and lobster once the remaining trade bans are fully removed.
There’s tentative evidence that Australian companies are shifting at least some of their purchases to non-Chinese suppliers. China’s share of Australia’s imports in the six months to August was 24.3%, the lowest since July 2019, and down from the peak of 30.5% reached in September 2020.
China’s share of the Australian import market has gone to other Asian suppliers, led by Korea, Malaysia, Japan, Singapore, Taiwan, and India.
However, International Monetary Fund research on US trade, which has exhibited a similar decline in import dependence on China, has found that the industries in countries that are gaining US market share at China’s apparent expense are all closely tied to China for their supplies. ‘Countries that were more deeply engaged in Chinese supply chains experienced the most rapid export growth to the US.’
While China’s economic growth may be slowing, the momentum of the Chinese manufactured goods sector is still driving trade across the region. The Asian Development Bank’s annual report on regional integration shows that China’s share of Asian merchandise trade has risen from 10.3% to 16.7% over the past 20 years, with that gain coming at the expense of the US, whose share has fallen from 20.7% to 13.2%. Intra-regional trade, including China, now accounts for 58.2% of trade in Asia.
The hallmark characteristic of globalization—the distribution of manufactured production of goods among several countries—is continuing to rise both in Asia and around the world, with the growth of exports of goods that are produced in more than one country outstripping the rise of exports produced in a single country. This is continuing to power intra-regional trade.
It’s too soon for assessments of the impact of the huge intra-regional trade agreement, the Regional and Comprehensive Economic Partnership (RCEP), which was signed in early 2020 and entered full force, with the Philippines being the last to ratify, in June this year. However, it’s to be expected that it will further accelerate regional integration.
The agreement—which covers China, Japan, South Korea, Australia, New Zealand and all the ASEAN economies—includes both tariff cuts and standard and relatively simple rules of origin, which mean that products benefit from tariff cuts if they are predominantly made from goods produced in member economies.
The US has marginalized itself from this process of regional integration by the decisions of both the Trump and Biden administrations to abandon trade liberalization in the Asian region, declining to enter new trade agreements. The IPEF proposal doesn’t include any improved access for Asian exporters to US markets.
A recent report in the South China Morning Post said that successive Australian governments had commissioned reports into the prospects for diversifying Australia’s trade away from China and all had concluded it was impossible.
The report, by the SCMP’s Kandy Wong, said the first study, conducted jointly by the Department of the Treasury and the Department of Foreign Affairs and Trade, was commissioned by the Abbott government in 2015 to follow US concern that Australia’s economic dependence on China was making it vulnerable to Chinese pressure. The Morrison government called for a follow-up study, in 2020, and there was apparently a third study conducted by the Albanese government.
The paper cited unnamed sources saying the studies concluded that ‘no other markets could replace China as a market for Australian commodity exports’. They also reportedly said the studies had made it clear that Australia ‘cannot successfully diversify trade away from China. Diversification to Southeast Asia is really China plus.’
They are conclusions that will inform the Albanese government’s decision on whether to approve the start of negotiations with China over its accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. This trade agreement, which includes 12 nations, was originally designed by the Obama administration as a means to advance US integration with the Asian region while locking China out. However, with both the Trump and Biden administrations deciding not to participate, China has seen an opportunity to advance its regional integration further, at the US’s expense.
The CPTPP goes further than RCEP, offering tariff reductions of 99% compared with RCEP’s 90% and including chapters on financial services, telecommunications, state-owned enterprises, labour relations, competition policy, transparency and anti-corruption. Many suggest that the demands written into CPTPP are too tough for China to meet; however, Vietnam managed, partly due to some leeway granted, and China would be hoping for the same.
All existing members have the ability to veto a new applicant. Australia couldn’t approve the start of negotiations while China still had discriminatory—and illegal under World Trade Organization rules—trade measures imposed on Australia, and while it was refusing to talk to the Australian government.
With those barriers being removed, the government may at some point decide Australia has nothing to lose by commencing a process that could result in further integration of China into the regional economy. However, it could do so with no greater confidence that, once it was admitted, China would stick to the CPTPP trade rules than it did the rules of the 2015 China–Australia Free Trade Agreement when it decided to teach the Morrison government a lesson.
Source: The Maritime Executive
