Trustee Chair in Chinese Business and Economics
> Trustee China Hand
President Biden’s trip to South Korea and Japan, which begins on Friday, is coming at a fortuitous time when the stars are aligned to deliver a successful outcome on multiple fronts. The United States and Europe have led a global coalition to push back against Russia’s aggression in Ukraine. China is clearly on the defensive at home and abroad due to its support for Putin’s war, the economic and political fallout from its zero-Covid strategy, and growing frictions with an expanding list of countries. South Korea has a new government that has signaled strong support for the United States and the alliance. Japanese Prime Minister Fumio Kishida has amazingly high approval ratings and has continued a foreign policy focused on defending the liberal international order and pushing back against Beijing. Lastly, the just concluded U.S.-ASEAN summit in Washington was productive in deepening ties on several fronts.
That said, the Biden administration should not count their chickens before they hatch. I have been on a listening tour over the last five weeks in East Asia, spending an extended time in Taipei, Seoul and Tokyo. I originally set out on an extended trip to China, but it’ll surprise no one that the difficult and unpredictable situation in Shanghai and Beijing made that a risky proposition at best. And so, I pivoted to a new itinerary and have re-scheduled a second effort to visit China in late August.
Being on the ground and meeting with officials, business executives, and scholars have left me with two big impressions. The first is that these are three impressive societies that have weathered the pandemic amazingly well and deserve admiration. The second is that although the United States and its friends in Northeast Asia are broadly aligned on numerous fronts, there are also significant differences of substance and style, which if not bridged could derail progress in both the short- and long-term. These potential tensions cover the range of security, political and economic fronts, but given my expertise, here I will only touch upon the final category.
Interlocutors have repeatedly raised three issues, all linked by an underlying anxiety about American credibility over the depth of its commitment to its friends in the context of strategic competition with China.
1. There is wider sentiment in Washington in favor of some form of decoupling – full or partial – than in the places I’ve visited.
There is an acute awareness across the board that interacting with China creates a range of serious risks and vulnerabilities, and these problems must be ameliorated, in many instances with greater protections that reduce connectivity. Yet, I heard at least three kinds of pushback. Some questioned how the United States and the rest of the world would tackle climate change without finding a way to work with China. But more prominent was the recognition that they are so deeply engaged with China that outright decoupling isn’t feasible and would harm their economies. Despite its New Southbound Policy aimed at diversifying its economic ties, over 42% of Taiwan’s exports went to China in 2021; the comparable figures for South Korea and Japan are 31% and 26%, respectively (and only 8.6% for the United States). In their view, there is no combination of export or investment destinations that could entirely replace the Chinese market. Thus, outright withdrawal is not in the cards. And third, connectivity has the benefit of making China dependent on the West’s technology, markets and financial system. Hence, as important as it is to reduce our own vulnerabilities, it is equally critical to simultaneously utilize and expand China’s vulnerabilities.
2. East Asians and Americans all stress the need for supply-chain resilience, but they have different definitions of the term.
All agree that over-reliance on China for critical minerals, essential goods needed during emergencies (such as personal protective equipment), and its market needed to be attenuated; yet there is no consensus about how to precisely restructure the supply chain on high-tech goods, particularly the manufacturing link in the chain. Take semiconductors, for instance. In Taiwan, strengthening semiconductor supply chain resilience means diversifying the location of fabrication facilities (fabs) across multiple cities over the island, creating more electrical engineers, investing in more electricity, and securing supplies of water and other production components. In short, expanding capacity to manufacture in
Taiwan. The American definition of supply-chain resilience for the semiconductor industry is, simply put, “Move some of the capacity in Asia to the United States.” Although TSMC has invested in Arizona and Kyushu, Japan, there is little likelihood that there will be a large wave of such investments resulting in a broader shifting of supply chains to America. That is not only because Taiwan and the United States may have competing commercial interests. Taiwan believes keeping substantial production on the island also benefits its national security, while the United States, by contrast, believes the national security logic means some of the island’s capacity needs to be moved far away from China.
3. I have not met a single individual in the region who is enthusiastic about the Indo-Pacific Economic Framework (IPEF).
The lack of any market access benefits has left many disappointed. Although there is an awareness of IPEF’s four pillars – trade facilitation, supply-chain resilience, infrastructure and decarbonization, and taxes and anti-corruption – interlocutors had a hard time explaining the components beyond vague generalities; they are unsure if it will ever come to fruition, and if so, whether it will be durable. No companies I interviewed in any of the three economies could identify a specific tangible benefit they could derive from the arrangement. This skepticism was often tinged with resentment because IPEF is viewed as in some ways a competitor to the Comprehensive and Progressive Trans-Pacific Partnership (CP-TPP), an agreement the United States helped create but then abandoned, and which would have collapsed had Japan not stepped into the breach to provide critical leadership. Countries have grudgingly expressed a willingness to join IPEF, but most people I met said they are only doing so because they want to keep the United States involved in the region’s economic architecture in the hope that it comes back to CP-TPP once it is more politically feasible to do so. (In Taiwan, there was substantial disappointment among various circles that the island apparently was not going to be invited to join IPEF because such a step would be unacceptable to other potential members wary of alienating Beijing.)
These differences are not about minor details; they are major points of contention that could potentially scupper the cooperation necessary among America and its allies to successfully prosecute strategic competition against China. Hence, it will be necessary for the Biden administration to discuss these issues with their counterparts – over the coming days and beyond – to identify ways to potentially narrow the gap in their perspectives. They could consider exploring a variety of potential avenues on each of these topics.
On the question of decoupling, one possibility is to investigate more concretely with like-minded countries how to be both highly connected with China and
(as opposed to “or”) simultaneously institute a more comprehensive set of protections regarding high-tech exports, inward and outward investment screening, finance, intellectual property rights and R&D collaboration, and travel. Diversification and lowering over-dependence is a more palatable sounding logic to those in the neighborhood than one of eliminating ties altogether. Moreover, countries in the Indo-Pacific would likely appreciate greater attention being paid to the side of the interdependence equation involving China’s dependence on the United States and others. East Asian friends have good ideas about how to protect chokepoint technologies and raise what one observer called their “indispensability” to China’s economy.
Addressing the issue of supply-chain resilience in manufacturing will require difficult conversations about not only the weaknesses of long supply chains but also some of their potential advantages. In addition, Washington would receive praise if it set realistic goals for re-shoring to America based on what would actually be feasible. And rather than set specific numerical targets (such as X% of global production), it may be more practical to focus on what specific commercial and national security needs could best be met by having more manufacturing in the United States. At the same time, the administration and Congress will need to reassure their friends in the region that their investments in the United States will be eligible to receive the kind of support from federal and local authorities necessary to make them successful and sustainable over the long term. Finally, in some sectors, such as semiconductors, there are reports of new investment plans by multiple countries, which if all moved forward, could potentially result in overcapacity down the road. Hence, the United States and market democracies in the region and beyond may want to discuss the pros and cons of developing mechanisms to coordinate those investments.
Finally, although the most urgent concerns were expressed about IPEF, expectations are so low that the Biden administration has the chance to surprise on the upside. If the United States and others can find creative ways to create genuine commercial benefits outside of the traditional market-access lane, for example through investment and infrastructure development plans, that would raise the incentives to participate. Such progress could increase the number of economies that join at the outset and later sign on. Moreover, the United States should signal a willingness to seek progress and early agreement on whatever component possible to build interest and momentum. It would also be helpful for the United States to reassure Japan and others that IPEF will not overshadow CP-TPP and that even if the United States cannot return to CP-TPP in the near term, it will still support others within and beyond the Indo-Pacific region who meet CP-TPP’s high standards to join as soon as possible.
Ongoing regional dynamics offer the opportunity for the President’s trip to establish an impressive high-water mark in America’s relationship with friends in the Indo-Pacific. Doing so, though, will require sensitivity to regional perspectives on a range of issues. Such a posture may not be flashy, but careful persistence and a willingness to listen is what is most needed now. If done well, the administration will draw plaudits and gain further respect from its partners. And it will simultaneously send an unmistakable signal to China that the United States and other like-minded countries are building a formidable coalition which will complicate its own ambitions for years to come.
Scott Kennedy is Senior Adviser and Trustee Chair in Chinese Business & Economics at the Center for Strategic and International Studies.
Related Trustee Chair Activity
Press Briefing: “Previewing Biden's Trip to Asia
,” May 17, 2022.
Commentary: Scott Kennedy and Matthew P. Goodman, “Decoupling Kabuki: Japan’s Effort to Reset, Not End Its Relationship with China
,” July 28, 2020.
Blog Post: Scott Kennedy and Shining Tan, “Decoupling Between Washington and Western Industry
,” June 10, 2020.