A New Blueprint For Economic Architecture In The Asia-Pacific

The US needs a strategy for constructive engagement that leads to an inclusive and rules based order that fosters prosperity and cooperation in Asia. Neither US withdrawal nor aggressive containment are desirable. Where are we to look for a balanced strategy?  My friend and colleague Olin Wethington recently released a report for the Atlantic Council that points towards a way forward.

US-China Relations
Secretary of State John Kerry and President Xi Jinping at the Sixth Strategic and Economic Dialogue between the two countries last July.

Olin and his co-author Robert Manning maintain that the ideal scenario is one in which we preserve a broadly inclusive rules based order that adapts to new economic realities.  This entails some changes in institutional governance structures, and increased commitment of resources and capacity from the United States and our partners.  The report, titled “Shaping the Asia-Pacific Future: Strengthening the Institutional Architecture for an Open, Rules-Based Economic Order” provides a detailed analysis of the emerging dynamics in the region, the logic for supporting an inclusive and rule-based economic architecture, and a thorough outline of steps needed to achieve this outcome.  While I would encourage everyone with an interest in US global leadership, economics, and geopolitics to read the entire report (a brisk 40 pages), there are some highlights below.

  • Regional economic dynamism, and a rising China necessitate a rethink in US engagement strategy.  Asia includes the second and third largest global economies (China and Japan), and the ASEAN economies, which will drive future global growth. China, in particular, has experienced astronomical growth— today, its economy is roughly 50 times larger than it was in 1980. New China led economic initiatives like “One Belt, One Road” and the AIIB, along with more aggressive security policies, have caught the attention of global policy makers.
  • The US has capacity to maintain leadership in the Asia-Pacific, but we need to focus on building coalitions. The US maintains a series of national strengths that sum to provide unparalleled global influence.  Economic might, technological dominance driven by entrepreneurialism and innovation, appealing social and political culture, and military strength coalesce to form the totality of US power. These assets should be paired with a brand of adroit statecraft that facilitates coalitions of likeminded partners to achieve positive regional outcomes.
  • Monetary architecture, which has been driven by US led Bretton Woods institutions, is under pressure and needs to adapt. Our current global monetary institutions and structures no longer reflect modern economic realities, and must adapt, and to some extent, accommodate and incorporate new institutions into the global architecture. For starters, the US should pass IMF quota reform.  Our failure to do so is a source of ongoing frustration for emerging economies, and serves to legitimize the formation of alternate economic structures.  Additionally, we should be prepared to include the Renminbi in the IMF SDR basket of currencies if it meets the IMF standards of free float.
  • Development and infrastructure financing are in high demand, but there is increased competition in this space. The need for infrastructure financing in the Asia-Pacific region is massive.  The ADB famously estimated that regional infrastructure demand from 2012-2020 exceeded current financing capability by approximately $8 trillion, which is far more than any single donor can provide. The AIIB emerged, in great part, to help close this deficit in available financing, and existing institutions should stand ready to partner with the AIIB while also ensuring that standards and best practices are maintained. The US should look to strengthen the institutions it leads in the region as part of a broader development strategy for the Asia-Pacific that leverages private sector investment in cooperation with newly founded initiatives.
  • Trade remains a critical area for economic engagement, and the US should pursue a bold trade agenda to maintain leadership in authoring the economic rules of the road.  This is in our national interest, and can help facilitate regional prosperity. The growth of global trade has been one of the most prominent features of the new “globalized” economic system.  Passing Trade Promotion Authority (TPA) is a positive step, but the US must continue to prioritize the Trans-Pacific Partnership (TPP) to ensure an open and rules based system of trade in the Asia-Pacific. We should also be ready to expand the agreement beyond the original 12 countries; critical to this expansion, is openness to including China.  We should also be prepared to conclude a bilateral investment treaty with China.

The report recommends that the U.S. further our engagement in Asia, but that we also stand ready to adjust our existing institutions in the context of an evolving region, and build closer cooperation with key allies, including Japan, South Korea, and Australia.  Some of these issues, including TPP, will take sustained Presidential leadership.  The rules based system we’ve erected over the last 70 years, and the institutions that undergird it, have fostered unprecedented growth in the Asia-Pacific.  We don’t need to throw out the playbook, but we do need to adapt it to new realities. This flexibility and openness to change has helped the US maintain its position of global leadership since WWII. The report points all of this out, and suggests a constructive path forward.

Article Published in Forbes.com on July 9, 2015.

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