Exploring Regional Trade and the Challenges of the Post-COVID-19 Economy

February 23, 2021 (US) | February 24, 2021 (Asia)

Session 1 of the “Adapting to COVID-19: Indonesia, the United States, and the Indo-Pacific”
Virtual Forum Series

Event Recording (English):

Beradaptasi dengan COVID-19: Indonesia, Amerika Serikat, dan Wilayah Indo-Pasifik

24 Februari 2021, 9:00 – 11:00 (Jakarta)

Sesi 1: Mengeksplorasi Jual Beli Regional dan Tantangan-tantangan Ekonomi Pasca-COVID19

Bahasa Indonesia:

Key Findings

On February 23, 2021, with support from the US Embassy in Jakarta and in cooperation with the Centre for Strategic and International Studies (CSIS) Indonesia and Universitas Pembangunan Nasional (UPN) “Veteran” Jakarta, the Pacific Forum hosted the session “Exploring Regional Trade & the Challenges of the Post-Covid-19 Economy,” with 141 participants from government, private sector, academia, and other non-governmental organizations. This was the inaugural session of the virtual forum series “Adapting to COVID-19: Indonesia, the United States, and the Indo-Pacific.”

Dr. Bradley Jensen Murg, Associate Professor of Political Science and Dean of the Faculty of Economics and Administrative Sciences, Paragon International University; Mr. Rocky Intan, Researcher, Department of International Relations, CSIS; and Dr. Shanti Darmastuti, Senior Lecturer in International Relations, UPN Veteran Jakarta, examined regional trade and the economic challenges brought about by Covid-19 through the lens of the US and Indonesia and the role of multilateral free trade agreements (FTAs).

Key findings from this meeting are described below.

Regional Trade in the Time of Covid-19

Covid-19 has led to a sharp decline in trade of non-medical goods and services at the global level. To tackle these challenges, ASEAN member states have adopted a number of steps, both in the form of restrictions on exports – to ensure a stable supply of domestically-produced goods – and relaxation of imports – to increase access to needed goods that are produced outside their countries. Indonesia has adopted a more liberal approach than other member states in the region with regard to international trade and foreign investment. In addition, ASEAN has strengthened cooperation within the bloc and with external partners such as Japan, South Korea, the US, and China. It has also strengthened the role of the private sector.

Moving forward, it is critical for ASEAN to facilitate changes in the regional value chain to support economic recovery. To achieve short-term recovery, ASEAN member states should adopt transparent and low tariffs across the bloc through FTAs. Governments should also give more attention to Covid-19 health policies, maximizing testing, tracing, and treatment.

RCEP and CPTPP

In the Indo-Pacific, the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) provide a platform that could enable post Covid-19 economic recovery through market liberalization, rule-making, reduction of uncertainty, and formation of trade coalitions.

The main feature of RCEP is the centrality and convening power of ASEAN. RCEP is an amalgamation of ASEAN’s past FTAs, and it constitutes the first FTA between China, Japan, and South Korea. Another important feature of RCEP is the harmonization of rules of origin. In this regard, RCEP has adopted a very liberal approach, requiring that only 40% of traded goods be produced within RCEP members to qualify for zero tariff and no quota. This approach leads to an enhanced regional value chain and greater trade gains.

Meanwhile, CPTPP has been hailed as a 21^st century trade agreement. It contains detailed, stringent provisions on intellectual property protection, state-owned enterprises, environmental protection, and investor-state dispute settlement. CPTPP is preceded by the Transpacific Partnership (TPP) which the US and Japan advanced during the Obama era as part of Obama’s “Pivot to Asia” policy. However, shortly after President Donald Trump took office, the US left the agreement. This left Japan with the arduous task of resuscitating the TPP to forge the CPTPP.

Both RCEP and CPTPP are expected to play a major contribution to world income and trade by 2030, especially if the US and India are involved in the coming years. In this regard, there are four main options for the Biden Administration should it decide to join CPTPP: 1) accede to TPP, suspending the current CPTPP provisions; 2) accede to CPTPP as is right now; 3) renegotiate CPTPP; 4) pursue sectoral agreements. The most plausible way forward for the US seems to be the third option, given its large influence on international trade. Indonesia has not shown strong interest in joining CPTPP as it stands, but these calculations may change if other ASEAN member states and the US decide to join. In the event that Indonesia decides to join the agreement, it will also have to accede CPTPP as is or try to renegotiate it. In any case, the US and Indonesia should aim to expand their engagement with one another, potentially through FTA-based mechanisms.

Finally, RCEP and CPTPP are contrasting visions of economic integration but act as complements, not substitutes. Both FTAs will also need to expand and deepen their scope and framework in the future.

The Geopolitical Implications of RCEP

The impact of multilateral trade agreements, such as RCEP, should be analyzed in light of different factors. These include the role of China and the US, the trajectory of post-Covid recovery, as well as cooperation and integration among ASEAN member states.

RCEP is likely to increase private investments in regional supply chains. By 2030, RCEP could add US$200 billion to world income and US$500 billion to world trade. However, RCEP is not a game-changer for multilateral trade in the region for several reasons. It is a weaker agreement than the CPTPP and fails to address key questions such as the protection of labor rights, the role of state-owned enterprises, and setting equitable environmental standards. Due to its structure, RCEP’s initial winners are likely to be China, Japan, South Korea, Australia and, on agriculture, New Zealand. Certain ASEAN member states, such as Malaysia, Thailand, Vietnam, and the Philippines will also be key beneficiaries of RCEP.

RCEP will also yield potential challenges, especially with regard to China. We are likely to see a large increase in flows of exports from China and a relatively limited increase of exports from ASEAN member states. RCEP does not include India, leaving China as the largest economies among RCEP signatories.

It remains to be seen whether China will use its position to pressure less influential RCEP member states or if it will behave responsibly. Upon joining RCEP, China has claimed that it is not a revisionist country, but one that effectively preserves and safeguards the status quo through its engagement in multilateral trade. Overall, RCEP serves two elements of China’s economic policy, the “Made in China 2025” initiative and China’s “14^th Five-Year Plan.” The rise of an East Asian bloc without US or Indian participation would put China in a much stronger position to outweigh smaller states in the region.

Moving forward, even if the US decides to join CPTPP, its influence will be moderate compared to past years, due to the changed economic and political reality in the region. Still, the US will still be able to have influence in the security sphere based on its rebuilding of the Quadrilateral Security Dialogue (Quad), an informal strategic dialogue between the United States, Japan, Australia, and India, established in response to increased Chinese economic and military power. Security in the Indo-Pacific is a top priority for the Biden administration, which has reiterated the important role of American allies and partners in facing global threats.

This document was prepared by Eugenio Benincasa and Mark Manantan. For more information, please contact Dr. Crystal Pryor ([email protected]), Director of Nonproliferation, Technology, and Fellowships at Pacific Forum. These preliminary findings provide a general summary of the discussion. This is not a consensus document. The views expressed are those of the speakers and do not necessarily reflect the views of all participants. The speakers have approved this summation of their presentation.

Featuring

Mr. Rocky Intan
Researcher
Department of International Relations, Centre for Strategic and International Studies Indonesia

Dr. Bradley Jensen Murg
Associate Professor of Political Science and Dean of the Faculty of Economics and Administrative Sciences
Paragon International University

Dr. Shanti Darmastuti
M.Si
UPN Veteran Jakarta

About this Series

The U.S.-Indonesia bilateral relationship is one of substantial depth and has evolved over time to reflect the changing priorities of each country. The U.S. and Indonesia entered into a Comprehensive Partnership in 2010 that initiated consistent high-level engagement on various issues spanning democracy and civil society, education, security, resilience, and mitigation. The relationship was further upgraded in 2015 with the signing of the US-Indonesia Strategic Partnership, which expanded the cooperation into various issues that have regional and global significance.

At the turn of a new decade, our countries are both at a crossroads: confronting a highly volatile political, economic, and security environment in the midst of an international health crisis.

To this end, Pacific Forum is proud to launch the virtual series “Adapting to COVID-19: Indonesia, the United States and the Indo-Pacific,” with support from the US Embassy in Jakarta. Pacific Forum will collaborate with the Centre for Strategic and International Studies Indonesia (CSIS Indonesia) throughout this series.

The nine-part virtual series will address broad, cross-cutting issues that impact both countries: emerging security issues, COVID-19, regional and bilateral trade and investment, and democracy and civil society. It will feature American and Indonesian experts with diverse yet complementary backgrounds to examine the trajectory of US-Indonesia relations in the new normal.

Latar Belakang

Hubungan bilateral AS-Indonesia adalah hubungan yang mendalam dan telah berevolusi seiring waktu untuk merefleksikan perubahan prioritas masing-masing negara. AS dan Indonesia memasuki Kemitraan Komprehensif (Comprehensive Partnership) pada tahun 2010 yang memulai kerja sama tingkat tinggi secara konsisten di berbagai isu yang mencakup demokrasi dan masyarakat sipil, pendidikan, keamanan, ketahanan, dan mitigasi. Hubungan ini ditingkatkan lebih lanjut pada tahun 2015 melalui penandatanganan Kerja Sama Strategis (Strategic Partnership) AS-Indonesia, yang memperluas kerja sama ini ke berbagai isu yang memiliki signifikansi regional dan global.

Memasuki dekade baru ini, kedua negara kita ada di persimpangan jalan, menghadapi lingkungan politik, ekonomi, dan keamanan yang tidak stabil di tengah-tengah sebuah krisis kesehatan internasional.

Maka dari itu, Pacific Forum dengan bangga meluncurkan seri virtual “Beradaptasi dengan COVID-19: Indonesia, Amerika Serikat, dan Wilayah Indo-Pasifik”, dengan dukungan dari Kedutaan Besar AS di Jakarta. Pacific Forum akan bekerja sama dengan Centre for Strategic and International Studies (CSIS) sepanjang seri virtual ini.

Seri virtual sembilan-bagian ini akan menjawab isu-isu yang luas yang berdampak ke kedua negara: isu-isu keamanan yang muncul, COVID-19, perdagangan dan investasi regional dan bilateral, serta demokrasi dan masyarakat sipil. Seri ini akan melibatkan pakar-pakar Amerika dan Indonesia dengan latar belakang yang beragam namun saling melengkapi untuk mengupas alur hubungan AS-Indonesia di dalam new normal.