China’s well-known story of spectacular growth, at around 10% annually for 40 years, is coming to an end because of both domestic and global factors. In analyzing China’s prospects for the next several decades, three particular challenges are striking: the shift from a labor-surplus to a labor-scarce society; the shift from investment to innovation as the primary source of growth; and the shift in China’s global position from a rising power to an established power.

Rapid aging is probably China’s biggest domestic challenge. The population over 65 will increase from 200 million today to 400 million by 2049, while the overall population will decline slightly. Within this group, the most rapid rise will be in the population 85 and older: from fewer than 50 million today to over 150 million in 2049. The challenge of taking care of the elderly is compounded by China’s rural-urban divides.

Most of the elderly live in the countryside, though often their working-age children have moved to cities as migrant workers. Since rural health systems are weaker than urban ones, taking care of the elderly will require more permanent migration to cities plus strengthened rural service delivery. China needs to scrap the hukou household registration system that limits permanent migration and to unify rural and urban pensions, health insurance, and educational systems. This will be good both for social objectives and the efficient use of labor.

Dealing with aging is first and foremost a quality-of-life issue, but it also has economic implications. China’s labor force will shrink, but by how much and with what impact remains to be seen. As China’s workforce shrinks, the 55-64 year-old cohort will increase dramatically. Keeping this group and the “young olds” (65-85) healthy and active is China’s best hope for staving off a dramatic labor force decline. Improving rural education is also critical because about half the workers of the future are attending school in the countryside. Deficiencies in their education will affect China’s growth for years to come.

China is counting on robots and automation to fill the gaps in the labor force, but it is impossible to make the pace of automation match declines in particular types of jobs. The social safety net and retraining programs will be increasingly important to help people shift as the job picture shifts.

A second domestic weakness that China needs to address is its overreliance on investment and underperformance on innovation. The financial system adequately channeled resources to investment during China’s rapid growth phase, but the state-dominated system is inefficient. Now that China has reached middle-income it will need to depend less on investment and more on innovation and productivity growth.

But the bank-dominated financial system favors lending to state enterprises, which are less productive and innovative than the private sector. One piece of evidence that the old investment-heavy growth model is running out of steam is that the debt-to-GDP ratio has been rising inexorably since the global financial crisis. If lending is financing productive investment and growth, then this ratio should be stable or slowly rising.

As diminishing returns to investment set in, successful countries naturally rely more on innovation as a source of growth. China has impressive inputs into innovation, with a large share of GDP devoted to research and development (R&D) and the world’s largest technical labor force. But the outputs, in terms of successful companies, high-value patents and productivity growth, are less impressive.

The “Made in China 2025” industrial policy is trying to direct innovation in 10 key industries. This approach is unlikely to succeed and has caused great consternation among trading partners. China should focus on the foundations of innovation: intellectual property rights (IPR) protection, venture capital, universities, free trade and general subsidies to R&D rather than ones targeted at particular technologies. A strong innovation foundation combined with ambitious targets to reduce carbon and improve the environment should make China a leader in new technologies to address climate change.

China’s ability to meet its social and economic goals will also depend on the international environment and economic architecture. China has benefited enormously from globalization, but aspects of the global order are outdated and need reform.

The World Trade Organization is not equipped to deal with modern trade issues like IPR protection, investment restrictions, cross-border data flows and subsidies. The major economies of the world cannot agree on expanding the resources of the International Monetary Fund because the United States does not want to increase the weight of China and other emerging markets in decision-making, though this is what their growing role in the world economy dictates. China and Western donors have separate and competing programs to finance infrastructure in the developing world.

A strengthening of these economic institutions that provide critical global public goods is required for the world economy to function smoothly. This will require practical compromises between China and the United States, and more generally between developing and advanced countries. China will need to take on more responsibilities commensurate with its great power status.

Right now, it seems like a joke to talk about practical compromises between China and the United States. Even with a new Biden administration that will act more cooperatively, U.S.-China relations are likely to remain difficult. But we should not take it for granted that China and the United States will become enemies. Both countries have an interest in international cooperation on public goods. For China, domestic reforms that address its main challenges will also be the right foundation for improved relations with the United States and other advanced economies.

       

President-elect Biden and his team soon will confront a raging pandemic, a severe economic crisis, demands for progress in addressing racial injustices, intensifying climate-induced crises, and strained relations with allies and partners in many parts of the world. They will be oriented to view China as America’s greatest geostrategic challenge, but not the most immediate threat to the health and prosperity of the American people. Amidst this daunting inheritance, U.S.-Taiwan relations will stand out as a bright spot, an example of progress that should be sustained.

There are strong reasons for optimism about the continued development of U.S.-Taiwan relations in the coming years. Given my vantage from Washington, D.C., I will focus on the American perspective.

First, there is deeply rooted bipartisan support in the United States for Taiwan. President Tsai Ing-wen (蔡英文) and her administration have nurtured this support through persistent engagement with leaders and leading thinkers on both sides of the political aisle, including the president-elect. Tsai’s prudent, moderate, predictable approach to cross-Strait issues has earned the confidence of Washington. Biden publicly congratulated Tsai on her re-election in January and later praised Taiwan’s response to COVID-19. Tsai was among the first world leaders to congratulate Biden following his victory.

Second, the Biden team will understand the importance of Taiwan’s success for America’s strategy in Asia. Biden has written that the United States will “stand with friends and allies” in Asia, including by “deepening our ties with Taiwan, a leading democracy, major economy, technology powerhouse — and a shining example of how an open society can effectively contain COVID-19.”

The incoming team recognizes that Beijing’s objective is to incorporate Taiwan within the PRC system under the one-country, two-systems model. They understand the need for vigilance following Beijing’s actions toward Hong Kong. Michèle Flournoy, a leading contender to become Biden’s secretary of defense, has written about the need to strengthen deterrence against Beijing, either by “denying the PLA’s ability to achieve its aims or by imposing costs so great that Chinese leaders ultimately decide that the act is not in their interest.” Flournoy has directly connected her thinking to Taiwan’s security.

Third, the incoming team understands longstanding objectives that have guided America’s approach toward Taiwan. I have worked with many of the people expected to be responsible for Taiwan policy and can vouch for their grasp of the issues. Taiwan will be viewed as a partner to be valued, not a card to be played in competition with China. U.S. policy will be focused on helping Taiwan gain confidence in its security, control of its economic destiny, and dignity and respect on the world stage. Specific decisions will flow from these objectives.

Fourth, there will be a strong convergence of interests and values. Biden has told foreign leaders that the United States will return to its traditional leadership role in galvanizing action to address global challenges. Such an affirmative policy agenda will open space for greater U.S.-Taiwan coordination. Just as Taiwan previously joined the Ebola response and the counter-ISIL campaign, there likely will be similar future opportunities for Taiwan to participate in coalitions addressing transnational threats.

It is easy to imagine, for example, Washington and Taipei broadening the Global Cooperation and Training Framework to every corner of the world. This would provide a platform for Taiwan to help build partner capacity on issues where Taiwan has unique strengths, such as pandemic preparedness and response, women’s rights, green energy, and media literacy.

Biden’s prioritization on democracy promotion also should create opportunities for U.S.-Taiwan collaboration. Biden has pledged to convene a Summit for Democracy in his first year that will work to spur progress in fighting corruption, defending against authoritarianism, and advancing human rights. Taiwan would have much to offer in these discussions.

Fifth, Biden and his team will recognize the connection between economic security and national security. At a minimum, there likely will be resumption of Trade and Investment Framework Agreement (TIFA) talks, which have been dormant since 2016. More ambitiously, I could envision efforts to forge a common approach on trade in services, digital trade, and joint efforts to strengthen America’s and Taiwan’s edge in semiconductor manufacturing.

Will all aspects of the Trump administration’s approach carry over into a Biden administration? Probably not. The frequency of arms sales might slow down, not as a function of reticence from Washington, but rather as a result of the high volume of recent arms sales, which will take some time to absorb into Taiwan’s military force structure. Even so, arms sales will continue.

Similarly, I could imagine that the decibel level of public support from Washington for the U.S.-Taiwan relationship may go down. The Trump administration has set a high-water mark in its public pronouncements of enthusiasm for Taiwan that will be tough for future administrations to match. Given that Taiwan bore the brunt of Beijing’s anger over Washington’s visible efforts to elevate ties in recent years (e.g., seven diplomatic allies poached, increasingly aggressive military signaling, etc.), a businesslike U.S. focus on substance may work to Taiwan’s benefit.

Taken as a whole, the U.S.-Taiwan relationship is strong. Under Biden, the overall trajectory of strengthening ties will continue.

       

This week, 15 countries in Asia and the Pacific joined the Regional Comprehensive Economic Partnership (RCEP), which is arguably the largest free trade agreement in history. To explain the origins of the agreement and how it will affect economic integration across Asia, David Dollar is joined by Peter Petri, a nonresident senior fellow at Brookings and professor of International Finance at the Brandeis International Business School.

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RCEP: A new trade agreement that will shape global economics and politics

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DOLLAR: Hi, I’m David Dollar, host of the Brookings trade podcast, Dollar & Sense. This week, 15 Asia-Pacific nations signed the Regional Comprehensive Economic Partnership, arguably the largest trade agreement in history. So, we’ve added a special edition of our podcast to talk about this development. I have with me Peter Petri, a leading trade economist at the Brandeis Business School and also a nonresident senior fellow in our China Center at Brookings. So welcome to the show, Peter.

PETRI: Thank you, David.

DOLLAR: So, RCEP was originally an ASEAN initiative. ASEAN is the Association of Southeast Asian Nations with 10 members. Peter, tell us a little bit of the history of how this agreement came about and who else is involved beyond the ASEAN group?

PETRI: David, yes, the context is interesting and important. For a long time, probably going back at least 20 years, it has been recognized that East Asia has a lot of important economic relations within it and some kind of trade agreement that offered a framework for these relationships would have to happen sooner or later. But China and Japan, long uncomfortable with each other politically, and the rest of the region uncomfortable with either of them taking the lead, were not the right candidates for leading this initiative. So, the outcome was that ASEAN, this group of 10 countries that make up Southeast Asian nations, brokered a deal. They included not just themselves and China and Japan and Korea in the agreement, but also three other countries, Australia, New Zealand, and India, to be part of it, kind of leavening the potential conflict between China and Japan. So, that was the beginning, and ASEAN also took the lead in negotiating the agreement. That worked out very well. It was slow. It was very consensual. But, in the end, we did get the agreement that that countries expected.

Looking back on ASEAN, ASEAN was formed in 1961, mainly among three Southeast Asian countries and mainly to fight communism, which was then, as you recall, very much an issue for the region. Vietnam, Cambodia, and so on. Since then, the organization has changed dramatically. It has 10 countries now. Its main focus is economics. There’s a big free trade agreement within the 10 ASEAN countries, and they also have had trade agreements with each of these critical partners: China, Japan, Korea, and three others, and India. This group, ASEAN plus its six dialog partners, were the initial negotiators in RCEP. India dropped out very close to the end, but the other 15 concluded the agreement.

What is important about this is that ASEAN is a kind of slow-moving but very, very deliberate organization. It has been very successful. It has deepened its own economic understandings. It has built stronger agreements. So, this is just the beginning – this agreement among the 15 is really just the beginning of a process that is likely to see better trade agreements and increasingly closer relations among these 15 countries.

DOLLAR: So not too long ago, we had another partnership start up in the Asia-Pacific region originally called the Trans-Pacific Partnership and then after the U.S. dropped out renamed the Comprehensive—

PETRI: The Comprehensive and Progressive Trans-Pacific Partnership.

DOLLAR: Thank you.

PETRI: The Comprehensive and Progressive Agreement for Trans-Pacific Partnership. It’s a very, very long title. Very few people actually are able to get it out all at once.

DOLLAR: Right, and obviously, I was not one of the people who could get it out all at once. But my question for you, Peter, is how did this new RCEP partnership, how does that differ from the Trans-Pacific Partnership? Many of the same countries are involved, so what’s the difference?

PETRI: The CPTPP has 11 members after the United States left, and 7 of those are also members of RCEP. The two agreements are very different because unlike this kind of gradual, improving, strengthening model that I’ve described in the case of ASEAN, the CPTPP is a kind of rigorous, Western-style agreement. It’s very specific, very detailed, and it’s very, very hard to negotiate. So, it is what it is. It will stay that way except under very serious, difficult negotiations. The CPTPP is an agreement among very outward-looking, stronger, more advanced economies than RCEP is. RCEP is very diverse. I mean, you have huge countries like China and very small ones like Brunei—Brunei is only about a few hundred thousand people. Very rich countries like Japan, very poor ones like Laos. So, it has to span a wide range of countries, and its provisions accommodate these huge differences. The CPTPP didn’t have to do quite as much, although it itself was very difficult to negotiate. Maybe it is best to begin by what the really big elements of RCEP are and then compare some of them to the big headlines of the CPTPP.

So, what is important about RCEP? First of all, it is the first major agreement that connects China, Japan, and Korea in a single free trade grouping. This is for the same political reasons that we talked about a few seconds ago. It is indeed very difficult to think of how this agreement among these three could have been done except for the ASEAN leadership of this larger bloc. So now that that’s in place, in fact, both Japan and China have indicated that they are moving ahead with a China-Japan-Korea free trade agreement. That will probably take time to negotiate as well, but it is kind of beginning to unleash other relationships that would have been very difficult to do politically without this framework. So that’s one accomplishment.

Another is that tariffs will be lowered. Now, the tariffs will not be lowered as much as in the CPTPP. It will be probably around 90 percent on average. I am told, I have not seen the agreement, but I am told that there are something like 5,000 pages worth of tariff lines alone to analyze. It will take time for us to see exactly what those are. But fewer and slower tariff reductions will be made in this larger group than in the CPTPP group. So that’s a second point.

The third point— and this is probably the most interesting feature of the agreement— is its rules of origin section. Now, rules of origin, your listeners may not be familiar with this kind of nitty-gritty technology of trade agreements, but rules of origin specify what, for example, Malaysia has to do in order to be able to use the tariff preferences of the agreement to sell products to Japan. In other words, how do you produce a product in Malaysia to make sure that the agreement’s tariff preferences can be used to sell it in Japan? And the answer is you can’t use too much products from, say, the United States that comes in from far away, because then really it ought to be the U.S. tariff that applies rather than the intra-regional RCEP tariff. So, that’s rules of origin; it tells you what you have to do in order to get that preference.

In the case of RCEP, the terms are probably the most lenient I’ve ever seen in a major trade agreement. That means that basically you have to have at least 40 percent of the product produced not just in Malaysia, but anywhere in the RCEP region. So, 60 percent could still come from the United States, but 40 percent, at least, should be produced in Malaysia or China or Japan or any one of the 15 countries. That’s a very low threshold. And that’s not even the final point on it because it turns out that companies can use other ways of calculating origin in order to satisfy the origin rule.

The third point is that there is a single certificate of origin that all countries will be able to use to sell to anybody in the region. So, for a firm that does business in this region, it is very easy to do it, it is very easy to produce it, and all of this is due to the terms of the rules of origin chapter in the agreement. So, we may come back to that later because that means supply chains that operate within the region have a very strong incentive.

There are other chapters also. One interesting feature of the agreement is that it will have a secretariat so that there will be a group of people meeting regularly in order to encourage further improvements in the agreement.

If you compare all of this to CPTPP, that has much stronger rules on intellectual property, on investment, and it has a very detailed e-commerce section. All of these are in RCEP but are much weaker and less rigorous. And finally, RCEP has no rules at all on labor, environment, state-owned enterprises – issues that were very important to the U.S. and were included in the CPTPP.

DOLLAR: Thank you, Peter. I want to follow up on this value chain issue because most global value chains are deeply embedded in Asia, with China at the heart. The Trump administration has talked about getting value chains to move out of China, perhaps to reshore to the United States. So, can you say a little bit more about how the RCEP agreement affects value chains and this objective of the current U.S. administration?

PETRI: Let me essentially repeat the argument that I was making before, which is that RCEP will very strongly encourage value chains to develop within the region. That is connecting, for example, an automobile made in Japan with parts from Korea, electronics from China, engine or breaks from Thailand. So, it will encourage production from the places where the strongest and most efficiently made products can be bought. That means that the product as a whole will be cheaper. So that will make RCEP, in fact, a very efficient competitor with China— obviously important within its value chains. And then the question is, will the United States be ready to buy those products, or will it say, you know, those are Chinese components that you’re using; therefore, they ought to have to meet a higher tariff? We don’t know about that. But RCEP will be a stronger competitor.

David, you have done a lot of work on value chains and particularly China’s role in it. How do you think we should think about RCEP in the larger world given these new policy developments?

DOLLAR: Well, you have just put an interesting thought into my head because I’ve been arguing that China has moved into the middle of a lot of value chains already. It started out doing the labor-intensive assembly, which tends to come at the end. But now, China produces more technologically sophisticated components and machinery. So, as a result of this U.S. trade war, we have definitely seen some final assembly shift to some of the Southeast Asian countries we are talking about like Vietnam and Indonesia. I would have thought RCEP would accelerate that trend in a way, and may not be the main driver but one implication is that it does an end run around the U.S. tariffs aimed at China. Now, you just put the thought into my head, the U.S. could try to change that. But my sense is that is going to be administratively very, very complicated. Plus, a lot of these countries in RCEP are allies of the United States. Are we going to stop products coming in from Korea because they’ve got a certain amount of Chinese content? I just think administratively it would be a nightmare. It suggests to me just one more reason why this U.S. trade war aimed at China is not working out and is not likely to work out and should be rethought.

PETRI: I think you’re right, and it will be interesting to follow up on this. One other thought is that India, which left the negotiations very, very late— it actually left them last November just on the eve of their conclusion— so India was involved in negotiations all the way but in the end left them. India will be very seriously harmed, I think, by that decision because these East Asian value chains, especially with China as a core member of them, are going to be very powerful, especially in world manufacturing. Those are areas where India ideally would have had a larger role.

DOLLAR: Well, it is definitely hard to keep geopolitics out of these discussions. You and I are economists, but I want to ask, is there a relationship between this RCEP agreement and China’s Belt and Road Initiative, which is its big diplomatic initiative building infrastructure all over the developing world? The ASEAN countries, many of them are participating very actively, so is there a relationship?

PETRI: Yes. There is a large overlap indeed. As you mentioned, of the 1.4 trillion which people have mentioned as a possible ultimate value of BRI investments, about half have already been committed to ASEAN countries. There is now a list of about $700 billion worth of projects that could be potentially built— not all are yet underway, but could be potentially built in the ASEAN countries. BRI, the Belt and Road Initiative, is fundamentally about connectivity, rail, ports, logistics, energy— a corridor that essentially connects in East Asia countries all the way down from China to Singapore and beyond.

It was interesting, I was visiting Nanjing University in China. They have a beautiful new ASEAN study center where ASEAN students come and where professors specialize in research on ASEAN. They were telling us that they would be the northern head of this railway which goes all the way down to Singapore. So, this was a BRI project in the making. There is a very natural synergy between regional economic integration through trade agreements like those we have been discussing, RCEP and CPTPP, and connectivity. And then if you add to that investments financed in part through the BRI, you have a very powerful network of better rules for trade, better connections among trading countries, and greater investments in each of those countries to make this larger regional network possible.

David, I’m going to bounce this back to you because you also know a lot about BRI and the AIIB, the Chinese investment bank. Does it sound like this is a kind of entity that will enjoy a lot of these synergies in the future?

DOLLAR: Well, I definitely agree with your basic point, Peter. I worked for the World Bank for a long time. In fact, you and I met, if I remember correctly, on a World Bank study on Vietnam starting in 1989. Looking at developing countries integrating with the world economy, which I still think is a very good strategy, I often thought of infrastructure as the hardware of connectivity and then trade agreements, trade facilitation, all of that is the software of connectivity. And oftentimes, the software is more important. Developing countries would like someone to come in and finance their infrastructure, but if they have high tariffs or inefficient customs or corruption rampant in the system, then frankly the infrastructure is not going to have a very high rate of return. So, I think it is…the combination of BRI and RCEP is pretty powerful as far as spurring growth and progress in Southeast Asia.

Peter, you kind of naturally put the question into my mind: there’s some debate in the U.S., or at least talk, about whether China is going to be writing the rules of 21st century trade or is the United States going to be writing the rules of 21st century trade. You emphasize some important differences between RCEP on the one hand and TPP in which the U.S. had a leading role until it dropped out before implementation. So, is this an example of China writing the rules for the 21st century?

PETRI: It is Asia writing some rules, and China is obviously a very important part of Asia, so China has had a hand in it. But I think the process I tried to describe is really not just China. There is a much broader regional agreement on some of these directions. And I suspect the point is that the rules for the 21st century will not be written either by the United States or by China or by Asia, but they will have to somehow triangulate the differences among these two types of economies and visions of the future trading system. I don’t think we fully appreciate this yet. These rules will have to be, if they are to bridge both Asia and the United States, they will have to be different from the ones that we have so far developed.

So in some areas I think we’ll be able to see agreement between these two groups and you will probably have relatively easy ways to negotiate. For example, on tariffs: we want them low. On investments: we want them protected and to generally have access to the same kind of markets as domestic companies might. Intellectual property: I think even in China there is increased appreciation for the importance of intellectual property. But on other areas, I think we are going to have to do a lot of thinking. The one that comes to mind most quickly is state-owned enterprises. All Asian economies have important state-owned enterprises. This is true, obviously, for Vietnam and China, but it is also true for Singapore, for Japan, for essentially both Western-style and other large regional economies.

Even in the United States, on issues like industrial policy, we will have strong “Buy America” programs. We will have subsidies possibly for national champions and for companies and technologies that we think are especially important. We worry a lot about national security, and we want to protect sectors of the economy that have technologies that we value. We worry a lot about data. These are not just kind of international trade points; these are also points very much in the national dialog. So, on all of these areas, I think we will need to rethink what the policies are. Those new ideas may well begin to bridge the gap which we now see between Western and Asian trade agreements.

DOLLAR: I think that’s really an excellent insight, Peter. The world consists of more than just the U.S. and China. There are other big, important economies involved. They have agency. They have views. So, you have just changed my thinking about this a little bit. What you are seeing is China has had to adapt to a pretty large number of countries that are part of this agreement and probably in the same way the U.S. would have to adapt if it wants to be part of large agreements. It’s not China and it’s not the U.S. that’s going to set the rules. It’s going to end up being negotiated.

So last question, Peter: What should the Biden administration be doing, and not just about RCEP, but more generally about trade in the Asia-Pacific region? We now have these two big agreements and in both cases the U.S. is absent. So, what should the United States be doing under the Biden administration?

PETRI: David, that is a good point and very much in line with the last point we were discussing. The United States has fallen pretty far out of the mainstream, not just in Asia, not just on trade, but on the World Trade Organization, with its conflicts with various countries around the world, various regions like Europe. So, I think that the really big, important first thing that the Biden administration has to do is to rethink all of this. To try to kind of conceptualize what America’s interests are in trade and looking ahead to relationships with different parts of the world.

We have not had a clear Asian strategy over the Trump years. There is the Free and Open Indo-Pacific vision, which the Trump administration rolled out. And scholars who have looked at it kind of like the words because they look like a free and open region, peaceful region across the Indo-Pacific. They are very much consistent historically with U.S. policies in the past, but the implementation has been very narrow gauged— kind of one-sided. Essentially, envisioning China as an existential threat and then using all kinds of policies to try to contain what the planners saw as this threat. In the process, they more or less ignored the economic pillar. So very little in the way of new agreements or new financial support or new engagements were initiated during the last four years.

Meanwhile, Southeast Asia is becoming more and more closely tied to China in its trade relations. So, countries have been complaining that they have had to choose between lining up with the United States under its preferred security umbrella—they very much welcome U.S. presence in the region—on the one hand and the close economic ties that they are developing with China on the other hand. So, repairing all of this is not going to be easy. There is a huge deficit of trust. The deficit of trust frankly goes in all directions. We don’t trust China much, nor do many Southeast Asian countries trust China, particularly given its political moves in the South China Sea. And China doesn’t trust us much, and indeed China is not alone because of the way that we have backed away from very longstanding commitments on international trade and leadership of international trade.

So I think all of this requires, on the part of the Biden administration, a lot of thinking, and a very clear policy, building alliances, and generally approaching very carefully how to repair the damage of the last four years. In fact, they will have a lot of time to think because as we know the domestic problems that the Biden administration faces are immense, so that there is a lot of work to be done. Unfortunately, this part of repairing global partnerships is just one important part of those.

DOLLAR: I’m David Dollar, and you’ve been listening to the Dollar & Sense podcast, I’ve been very fortunate to have my friend Peter Petri here to explain to us this new Regional Comprehensive Economic Partnership involving 15 Asia-Pacific nations, what it means for the Asian economies, and what are some of the implications for the U.S. So, thank you very much for joining us, Peter.

PETRI: Thank you, David.

       

In recent years, U.S.-China relations have grown increasingly rivalrous. The incoming administration will inherit a bilateral relationship in which areas of confrontation have intensified, areas of cooperation have shrunk, and the capacity of both countries to solve problems or manage competing interests has atrophied.

To address these challenges, the incoming administration will need to develop new thinking on how most effectively to address the myriad challenges and opportunities of the U.S.-China relationship. Whether for strengthening coordination with allies on China, addressing security challenges, or advancing American interests in the areas of economics, technology, and rule of law, fresh ideas will be needed to adapt American policy to meet the competitive and complex nature of U.S.-China relations.

The Paul Tsai China Center at Yale Law School, directed by Paul Gewirtz, and the John L. Thornton China Center at Brookings, directed by Cheng Li, have drawn upon the expertise and experiences of their scholars and other outside experts to compile a monograph geared toward providing policy recommendations for the next administration. Edited by Ryan Hass, Ryan McElveen, and Robert D. Williams, the monograph offers array of affirmative and pragmatic proposals for how the United States should adapt its policy toward China to respond to current realities in a manner that best protects and promotes America’s security, prosperity, interests, and values.

       

On November 15, 2020, 15 countries — members of the Association of Southeast Asian Nations (ASEAN) and five regional partners — signed the Regional Comprehensive Economic Partnership (RCEP), arguably the largest free trade agreement in history. RCEP and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which concluded in 2018 and is also dominated by East Asian members, are the only major multilateral free trade agreements signed in the Trump era.

India and the United States were to be members of RCEP and the CPTPP, respectively, but withdrew under the Modi and Trump governments. As the agreements are now configured (see Figure 1), they forcefully stimulate intra-East Asian integration around China and Japan. This is partly the result of U.S. policies. The United States needs to rebalance its economic and security strategies to advance not only its economic interests, but also its security goals.

Figure 1: Members of RCEP and CPTPP
(Numbers present 2018 GDP in trillions of U.S. dollars)

Source: Authors.    

RCEP’s economic significance

RCEP will connect about 30% of the world’s people and output and, in the right political context, will generate significant gains. According to computer simulations we recently published, RCEP could add $209 billion annually to world incomes, and $500 billion to world trade by 2030.

We also estimate that RCEP and CPTPP together will offset global losses from the U.S.-China trade war, although not for China and the United States. The new agreements will make the economies of North and Southeast Asia more efficient, linking their strengths in technology, manufacturing, agriculture, and natural resources.

The effects of RCEP are impressive even though the agreement is not as rigorous as the CPTPP. It incentivizes supply chains across the region but also caters to political sensitivities. Its intellectual property rules add little to what many members have in place, and the agreement says nothing at all about labor, the environment, or state-owned enterprises — all key chapters in the CPTPP. However, ASEAN-centered trade agreements tend to improve over time.

Southeast Asia will benefit significantly from RCEP ($19 billion annually by 2030) but less so than Northeast Asia because it already has free trade agreements with RCEP partners. But RCEP could improve access to Chinese Belt and Road Initiative (BRI) funds, enhancing gains from market access by strengthening transport, energy, and communications links. RCEP’s favorable rules of origin will also attract foreign investment.

RCEP’s geopolitical significance

RCEP, often labelled inaccurately as “China-led,” is a triumph of ASEAN’s middle-power diplomacy. The value of a large, East Asian trade agreement has long been recognized, but neither China nor Japan, the region’s largest economies, were politically acceptable as architects for the project. The stalemate was resolved in 2012 by an ASEAN-brokered deal that included India, Australia, and New Zealand as members, and put ASEAN in charge of negotiating the agreement. Without such “ASEAN centrality,” RCEP might never have been launched.

Without such “ASEAN centrality,” RCEP might never have been launched.

To be sure, RCEP will help China strengthen its relations with neighbors, rewarding eight years of patient negotiations in the “ASEAN way,” which participants typically describe, with varying degrees of affection, as unusually slow, consensual, and flexible.

RCEP will also accelerate Northeast Asian economic integration. A spokesman for Japan’s Ministry of Foreign Affairs noted last year that negotiations on the trilateral China-South Korea-Japan free trade agreement, which has been stuck for many years, will become active “as soon as they are able to conclude the negotiation on RCEP.” As if on cue, in a high-profile speech in early November President Xi Jinping promised to “speed up negotiations on a China-EU investment treaty and a China-Japan-ROK [South Korea] free trade agreement.”

Finally, RCEP and the CPTPP are powerful counterexamples to the global decline in rules-based trade. If RCEP spurs mutually beneficial growth, its members, including China, will gain influence across the world.

America’s options

U.S. policies in Asia need to adjust to the changing realities of East Asia, recognizing the increased role of China, maturing ASEAN integration, and America’s diminished relative economic influence.

Looking back, the Trump administration’s Asia policies focused on a new Free and Open Indo-Pacific (FOIP) vision. As experts have noted, the principles of FOIP — an open, inclusive, peaceful region — were consistent with established U.S. policy. But the administration’s tactics then emphasized isolating China from regional economic networks and prioritized security arrangements centered on the Quad (Australia, India, Japan, and the United States).

Meanwhile, FOIP’s economic dimensions remained secondary, ranging from modest investments and a plan to exclude China from supply chains to rating infrastructure projects often funded by China. The U.S. approach antagonized ASEAN and other East Asian friends, forcing countries into unnecessary and risky political choices.

Looking ahead, one U.S. option is to continue FOIP in current form with greater multilateral support. The Trump approach — minus inflammatory rhetoric — has support in Congress and even in some ASEAN countries like Vietnam. Yet the approach risks sidelining the United States while economic arrangements like RCEP, CPTPP, and BRI continue to grow. Without an economic pillar, FOIP will still push countries to choose between economic and security interests.

A second U.S. option is to reengage fully in regional economic networks alongside an active security role. For example, the United States could join the CPTPP and advocate its rapid enlargement to Indonesia, the Philippines, South Korea, Thailand, and the United Kingdom. U.S. markets and technology make such arrangements attractive and, in the long run, might persuade China to join (we estimate big gains if it does). But current U.S. politics appears to offer little support for this approach.

A third U.S. option is to emphasize intensified soft-power engagement combined with narrow but firm security commitments. This approach would build on U.S. strengths and buy time for more ambitious initiatives. It would emphasize vigorous participation in regional forums, people-to-people exchanges, principled advocacy of rules-based trade, and a clearly articulated military presence. It would benefit from supportive U.S.-China understandings, no mean feat in the current context.

       

The U.S. election was watched closely around the world, with foreign leaders acutely aware that in some ways, the result of the presidential campaign could have major impacts on their future relations with the United States.

As Joe Biden prepares to enter the White House in January, what questions or concerns is he likely to hear from his counterparts in Asia, the Middle East, Europe, and Latin America, as well as officials from international institutions? Below, Brookings Foreign Policy experts channel the priorities — and in many cases anxieties — of foreign capitals as Washington approaches a leadership change.