Pursuing Indo-Pacific Growth and Development Amid Superpower Rivalry

The world order is currently in flux. America’s unipolar moment, beginning after the fall of the Soviet Union, has come to an end with the rise of China, giving way to what looks to be a new era of superpower rivalry. Indo-Pacific countries—especially the fast-growing emerging economies of Southeast and South Asia as well as China—were arguably among the most significant beneficiaries of the previous global order and the hyper-globalization that accompanied it. The Indo-Pacific thus appears to have the most to lose as a new Cold War of superpower rivalry prospectively dawns. 

Indo-Pacific emerging and developing economies (EMDEs) have achieved spectacular rates of economic progress taking advantage of deep international export markets and the spread of global capital, technology, and ideas to catch up significantly with the rich world—in the process lifting over a billion people out of extreme poverty, creating large new consumer markets, and increasingly contributing themselves to the global technological frontier through their own research, innovation, and entrepreneurial talent. Meanwhile, Indo-Pacific high-income countries (HICs), such as Australia, Japan, South Korea, and Taiwan, prospered significantly through their economic linkages with these large and dynamic emerging economies and could, until recently, look forward to continuing to benefit as the center of global economic activity increasingly shifted eastwards (and increasingly centered around China).  

Today, that vision looks substantially imperilled.

"The Indo-Pacific appears to have the most to lose as a new Cold War of superpower rivalry prospectively dawns."

A chief concern is that globalization has not only stalled but might increasingly fragment—overridden by not only intensifying national security imperatives but also disagreements over economic systems, accusations of unfair economic practices, worries about supply chain resilience, and a desire especially among major economies to reshore employment, particularly in manufacturing. In the extreme, the fear is a world economy that could splinter along geopolitical lines, with each of the two superpowers explicitly or implicitly forcing third countries to choose between them in terms of trade, investment, supply chains, and, especially, technology. Such a world would greatly limit the ability of Indo-Pacific EMDEs to navigate their own development paths, putting their future growth and stability at risk. This, in turn, threatens significant negative implications for Indo-Pacific HICs whose national interests lie in a prosperous and stable region.  

Globalization is not yet about to unravel. That would require far more powerful policy interventions than what we have seen to date. Still, there are worrying signs. Global merchandise trade volumes continue to expand, but since the 2008-09 crisis have no longer kept pace with world output, implying a modest reduction in the trade intensity of the world economy. Meanwhile, although the rhetoric around reshoring so far greatly exceeds any real-world changes, trade economist Richard Baldwin has shown that there is indeed evidence that at the global macro level the process of unbundling and offshoring has come to an end and that some unwinding of global supply chains may have indeed begun. 

For Indo-Pacific EMDEs, the implications are less straightforward. A world of less rather than more globalization is negative for the region’s growth and development prospects. On the other hand, many Indo-Pacific EMDEs are well placed to benefit from what for now remains the principal “deglobalizing” focus of Western governments and firms thus far: the desire to reduce their dependence on China. Indo-Pacific EMDEs should also continue to benefit from a rising Asia in general, as an increasingly important source of final export demand, inward direct investment, and technology. So far, the data picture looks more positive for Indo-Pacific EMDEs than the global one. Manufacturing exports and two-way trade remain steady relative to GDP, while there appears to be continued regionalization of both supply chains and final demand. Inward foreign direct investment (FDI) has also remained strong across Indo-Pacific EMDEs, except for in Thailand and Bangladesh.

There is also greater optimism about trade in services—specifically cross-border trade in intermediate business services enabled by digital technology. The ratio of services trade to world output continues to increase rapidly, and growth in Asia remains the most rapid. Digitally enabled trade in services could provide a new avenue for growth and development in the Indo-Pacific. India and the Philippines are already powerhouses in this regard. On the other hand, the fact that US-China rivalry increasingly centers on the future of digital technology and ecosystems suggests the path towards services-led growth might not be so straightforward.

The economic and developmental risks from escalating US-China tensions for Indo-Pacific EMDEs also extends significantly beyond the undermining of an open world economy. Notably, superpower rivalry risks the international cooperation required to ensure adequate provision of critical global public goods (GPGs)—broadly speaking, outcomes for which benefits flow to all countries irrespective of specific individual contributions and without diminishing the benefit to any other country. Indeed, international peace and an open rules-based global economy can be viewed as GPGs now directly at risk due to escalating superpower rivalry. Others include limiting dangerous global warming, containing future pandemic risks, preventing international financial crises, and the creation, diffusion, and balanced regulation of new technologies that can underpin long-term improvements in the human condition.

Indo-Pacific countries again have the most at stake when it comes to many GPGs. On climate change, in particular, Indo-Pacific countries are among the most at risk. Over the last two decades, the Indo-Pacific has suffered more from weather-related disasters than any other region. Seven Indo-Pacific countries are ranked among the top 10 countries in terms of natural disaster risks. Indo-Pacific countries are also highly vulnerable to rising sea levels, with large populations and important food producing regions in low-lying areas exposed to flooding and land erosion. Indo-Pacific EMDEs—many with weak public health systems, limited social safety nets, and densely populated urban areas—have also suffered the most in terms of the human and poverty impacts of the COVID-19 pandemic.

So how can Indo-Pacific countries continue to prosper and pursue their growth and development in a new era of superpower rivalry? Especially the Indo-Pacific EMDEs, which constitute most of the region and whose future prosperity and stability will have critical implications for HICs in the region?

The starting point is recognizing that Indo-Pacific EMDEs possess considerable agency and bargaining power in navigating a potential future of superpower rivalry. During the Cold War, most of these states were weak and in desperate need of outside development support. When the Association of Southeast Asian Nations (ASEAN) was formed in 1967, its collective GDP at official exchange rates was just 3-5 percent that of America’s. India’s was about 6 percent. Today, ASEAN and India are each about 14 percent of US GDP. By 2035, the figures will likely be around 25 percent and 35 percent, respectively. Relative to China, ASEAN and India have lost ground over recent decades but are likely to see significant gains in the decades ahead as China’s economy is likely to continue to experience a significant structural growth slowdown.

The growing economic heft of Indo-Pacific EMDEs, other than China, also means these countries will be increasingly important to the superpowers themselves – both as markets for exports and investment, and in their role with respect to many GPGs, including the evolution of international trade rules, avoiding future pandemics, and reducing global carbon emissions. For Western governments and firms looking to diversify supply chains away from China, Indo-Pacific EMDEs are the natural alternative.

Given these basic realities, a first-order priority for Indo-Pacific EMDEs should be to push forward with critical domestic reforms that will, in turn, ensure they possess the internal economic and social resilience to navigate the wide range of pressures likely to flow from the superpowers. Although the external economic environment will clearly have a strong bearing on future growth prospects, there are plenty of priority domestic reforms that are needed for the region to continue achieving relatively fast economic growth, while also making this more environmentally sustainable and socially inclusive. In general, the requirement is faster progress on an array of difficult policy and institutional reforms required to keep moving up the developmental ladder. The long list includes improving governance, strengthening legal and regulatory institutions, mobilizing greater tax revenues, delivering better public services (especially in health, education, and climate-resilient infrastructure), and putting in place stronger social safety nets.

As part of this, Indo-Pacific EMDEs should double down on economic openness. As the global zeitgeist has shifted away from globalization and open markets, long-standing protectionist currents in many countries have been emboldened. Globalization and economic openness, however, still have much to offer Indo-Pacific EMDEs. The key will be distinguishing between the potential value of strategic and targeted industrial policies and the costly economic effects of non-strategic and untargeted protectionism. In some areas, there seems scope for more activist industrial policies than previously accepted in the mainstream view. To be beneficial, however, these need to be carefully designed and managed to achieve specific policy objectives, such as industrial learning, strengthening economic security and resilience in sensitive areas, encouraging faster innovation and technological progress, and accelerating the transition to net zero carbon emissions. More active use of industrial policies also needs to be closely coordinated with external partners to avoid exacerbating economic tensions between countries.

Notwithstanding the scope for greater use of strategic industrial policy to meet targeted policy objectives, there remains an important reform agenda to reduce non-strategic untargeted protectionism and continue deepening broad trade and investment integration. This agenda includes reducing restrictions on foreign investment, barriers to services trade, tariffs, and non-tariff measures that lack a well-founded policy rationale. Such barriers in particular harm the ability of many Indo-Pacific EMDEs to fully take advantage of participation in international production networks and move up the value-added ladder—for instance by denying themselves access to the best inputs (including services) critical to their own competitiveness. The policy agenda should also include expanding and deepening regional trade agreements, such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). India should sign onto RCEP as a means of deepening integration with ASEAN in particular, and more Indo-Pacific EMDEs should look to join the CPTPP, albeit with some flexibilities.

Indo-Pacific HICs, for their part, should look to provide various kinds of support in facilitating reforms and policies that would forward the growth and development of their regional EMDE counterparts. This should include sharing policy lessons and providing technical assistance—while acknowledging differences in national economic, social, and political circumstances that necessitate alternative approaches. Indo-Pacific HICs should also look to better reflect the developmental interests and perspectives of regional EMDEs in international rule-setting forums, including through greater flexibility in trade deals such as the CPTPP and at the World Trade Organization (WTO).

Indo-Pacific EMDEs and their HIC counterparts should also double-down on multilateralism, both regional and global. Deepening regional integration by expanding membership of RCEP and CPTPP are two good examples, as are strengthening institutions aimed at delivering important regional public goods, such as the Chiang Mai Initiative Multilateralisation (CMIM), aimed at preventing financial crises, and the recently established ASEAN Centre for Public Health Emergencies and Emerging Diseases (ACPHEED). At the global level, although the WTO remains embattled, Indo-Pacific countries should prioritize engaging constructively on reforms to modernize the organization and its rulebook. Indo-Pacific countries can look to use plurilateral agreements as a mechanism for progress. More Indo-Pacific EMDEs should also join the Multiparty Interim Appeal Arbitration Arrangement, established to resolve WTO disputes in the absence of a functioning WTO Appellate Body.

When it comes to engaging the two superpowers, while easier said than done, Indo-Pacific countries should encourage both the US and China to compete productively in a race to the top rather than to the bottom. For instance, the US and China can compete productively by offering more for GPGs, for example in emissions reduction targets and through increased development and climate finance. The recent agreement of Just Energy Transition Partnerships with G7 countries for Indonesia and Vietnam—involving billions in targeted financing—are an important example. Indo-Pacific countries should also continue to engage with both superpowers on economic integration—for example RCEP with regard to China, the Indo-Pacific Economic Framework with regard to the US, and the CPTPP with regard to both. Both the US and China can also be encouraged to provide more support for key regional public goods, including through the CMIM and ACPHEED. Indo-Pacific HICs should also play a supportive role, encouraging the superpowers to engage in productive competition and contributing appropriately themselves to the achievement of global and regional public goods.