Geopolitical Tension and ASEAN: How to Keep the World Economy Vigorous? Free

The policy discussions in Tokyo in the past five years, particularly on policies related to global supply chains (GSCs), has been dominated by national security rhetoric. Trade policies are primarily regarded as policy measures for economic statecraft, where the importance of strategic autonomy and strategic indispensability is emphasized, and along this line, generous industrial policies are promoted. Policies are justified as contributing to national security, and objective economic evaluation of policies is barely conducted. International trade rules are regarded as obsolete, and the World Trade Organization (WTO) is often neglected in policy discussions in Tokyo; economists are not necessarily called for important meetings in Kasumigaseki.

However, the world economy is still moving. Although a part of the economy being regulated by national security-related policies has expanded, the rest of the economy, certainly more than 90 percent of the world economy, including the ASEAN member states (AMS), are actively engaged in economic activities. While trade rules are getting loosened, some respect for the WTO is still retained. From the viewpoint of Western allies such as Japan, the importance of national security discussion may not be denied, but can we neglect the rest of the economy? Can the rules-based trading regime keep its value? The author believes that a more balanced policy discussion for both the national security argument and the economy is required in Japan and other middle powers.

President Trump just returned to the White House on 20 January 2025. The vector of policy discussion in Tokyo may change because the United States is likely to start, in addition to applying tougher policies against China, introducing tariffs and other policies for “deals” with possibly all other countries including U.S. allies. Arguments on economics and international commercial policies may regain their position in policy discussion, at least partially.

The economic effects of the U.S.–China confrontation on the third countries in a three-country model have not been all negative. With the U.S.–China tariff war and high-tech export control, some of the third countries have captured gains from the restructuring of GSCs and have canceled out a part of the economic distortion in the world economy. The third countries such as AMS have proactively maintained tight economic links with both the United States or the West and China and have kept GSCs continuously vigorous.¹ One of the necessary conditions for such economic activities has been the rules-based trading regime. I would like to claim that middle powers should work with newly developed and developing countries such as AMS to retain the rules-based trading regime.

The paper is structured as follows: The next section briefly discusses the economic taxonomy of national security-related policies to assess such policies in economic terms. In the third section, the economic effects of the tariff war and high-tech export control on the third countries are reviewed. The fourth section discusses a few major concerns that the third countries face and proposes some policies to deal with them. The last section presents a view of the way forward and the role of ASEAN.

Policy measures introduced in the context of the U.S.–China confrontation have been multifaceted. From the U.S. side, the explicit confrontation started as a tariff war in 2018. In 2020, the tightening of high-tech export control became significant. In 2022, an import ban on forced labor products was introduced. Then from 2024, increased tariffs on imports from China (electric vehicles [EVs], semiconductors, medical products, iron and steel, etc.) were about to be implemented. In addition, a series of industrial policies, particularly for semiconductors and EVs, were initiated. More will come under the second Trump administration. The Chinese side has also implemented various countermeasures, though the details have been less known, particularly on the implementation stage.

The third is “protectionism and industrial policy,” which tries to protect or strengthen domestic industries. Such policies have a long history, and economics has brushed up analytical tools to conduct economic assessments for these policies. Tariffs imposed by the United States are often justified by the logic of correcting trade imbalance and protecting domestic industries; in this sense, such policies carry a strong character of protectionism. However, as advocated by the Trump administration, when tariffs are used as economic statecraft for “deals” with other countries, they may have an element of offensive measures. Various forms of subsidies to promote the semiconductor industry in the United States, Japan, and the EU are a part of industrial policy, which may have some elements of defensive measures to secure the supply of semiconductors and offensive measures to develop real high-end semiconductors.

All are called “defensive” in the argument of national security, but economists must bear in mind that these are economically different policies in terms of the motivation as well as the economic consequences. Economists must assess the positive and negative economic effects of these policies to contribute to a constructive policy argument, rather than allowing the national security argument to monopolize policy decision-making. It is also important to make a proper evaluation of these policies in terms of the conformity to existing trade rules including the WTO rules and commitments under regional trade agreements and others.

In the context of the U.S.–China confrontation, the tariff war and high-tech export control have been major policies so far. This section reviews the economic effects of these policies, particularly from the viewpoint of the third countries including ASEAN and discusses what would happen with the second Trump administration.

The U.S.–China tariff war 1.0 started with the U.S. imposition of tariffs on imports from China in July 2018; four waves of tit-for-tat tariff imposition followed between the two countries, covering almost all bilateral traded goods at the end. The level of tariffs was 5–25 percent, and a large portion of these tariffs are still imposed as of the end of 2024. The bilateral trade structure was highly asymmetric; imports from China by the United States were US$ 510 billion, while those from the United States by China were US$ 130 billion in 2017. The original reasoning for tariff imposition on the U.S. side had a strong flavor of international commercial policies regarding trade imbalance, technology stealing, and unfair trading practices rather than national security-based arguments. The impact of the U.S.–China tariff war 1.0 has been large enough to trigger certain readjustments of GSCs as discussed in the following.

What we observed in the U.S.–China tariff war 1.0 was very close to the theoretical prediction. Statistical data clearly show that the U.S.–China bilateral trade has substantially declined, though the criticism against the tariff war within the United States has not become strong due to the huge size of the domestic economy in the United States as well as substantial trade diversion from China to the third countries.² To assess the economic effects on the third countries, a major focus is placed on the trade diversion from China's exports to the United States to the third countries’ exports to the United States because of the asymmetry of bilateral trade patterns. A series of empirical studies confirm that some of the third countries, namely, Taiwan, Mexico, the EU, and Vietnam, have notably increased exports to the United States.³ Whether a country can capture such positive trade diversion effects depends on its business environment and its position in GSCs.

Kumagai et al. (2023) conducted a simulation analysis with the Geographical Simulation Model and show that the East–West decoupling with imposed high bilateral tariffs may generate positive trade diversion effects on some neutral countries such as AMS. The welfare gains of AMS will stay positive even if the East–West bilateral tariffs become the equivalent to 100 percent. An important assumption here is that neutral countries can continue normal trade with both the East and the West.

In the second Trump administration, more tariffs are likely to be introduced against China. While the plan by the Biden administration was to impose additional tariffs on items for which the United States is losing international competitiveness, President Trump is advocating the introduction of higher tariffs on almost all items from China. He also claims that the United States may impose tariffs on imported goods from third countries. In any case, as far as tariff gaps between those against China and others against third countries exist, a dominant strategy for the third countries may be to try to exploit positive trade diversion effects.

Additional U.S. tariffs on imports from third countries may be imposed not only on the usual rules-of-origin basis but also basis of a firm's nationality or based on an intermediate used in its production. The United States does care about “circumvention.” Obvious circumvention may be detected relatively easily with the existing rules of origin. However, a case can be a delicate one if, for example, a third country imports intermediate goods from China and exports final goods to the United States, particularly when the production in the third country is done by Chinese affiliates. Or, the United States may care about the usage of made-in-China semiconductors, for example, as intermediate inputs for products exported to the United States, just as it was used to restrict Xinjiang Uyghur inputs based on the “forced labor” argument. Such complicated usages of tariffs may substantially raise compliance costs.

Another rising concern in the third countries is the possibility of imports flooding due to the imposition of high tariffs on Chinese products by the United States and other developed countries, which is sometimes called a “domino effect.” For example, since Thailand has a substantial production basis for the automobile industry, the sudden influx of Chinese EVs may trigger a harsh political debate on what to do. The “excessive production” issue will be discussed more in section 4.

The U.S. strengthening of high-tech export controls from the perspective of national security started in August 2018. It is intended to prevent the leakage of dual-use high technologies to China and carries strong characteristics of “offensive measures.” Export controls have expanded their scope progressively. Two policy measures were notable. The first was the strengthening control on exports of items used for the production or development of 5G-level telecom systems, equipment, and devices by Huawei and its affiliates in May and August 2020. The second was export controls of items in terms of the end-use for the development, production, or others of supercomputers or high-end semiconductors in China in October 2022. Some part of the policy is applied not only to U.S. exports to China but also to the third countries’ exports to China, that is, a sort of extraterritoriality was partially imposed. Measures by the United States extended some restrictions on FDI in China, the movement of people, and others. As for some specific semiconductor manufacturing equipment, the United States asked the Netherlands and Japan to restrict exports to China, together with the United States.

Rigorous empirical studies on high-tech export control have been thin. It is certainly difficult to detect the flow of technologies or assess their consequences in innovation activities in China. It is not easy even to measure the reduction in exports of restricted items to China. Detailed information on how far trade is suspended is not disclosed due to national security reasons. However, a series of empirical studies based on international trade statistics conducted by colleagues reveal that the trade effects of export control are so far limited within the detailed product level, that is, below the HS (Harmonized System) 6- or 9- to 10-digit level.⁴ The trade effects have not reached the industry- or macro-level yet. Some exports are obviously self-restricted or suspended, but the trade in neighboring products within a narrow trade commodity classification may increase or decrease. Research and development activities and investment related to semiconductors and others in China have been rather accelerated together with active imports of related items for legacy semiconductors.

A real problem generated by high-tech export controls may be policy uncertainties. From the viewpoint of the private sector, particularly in third countries, the scope of the policy is often obscure; the borderline of the restriction is not necessarily shown clearly. In addition, how far export controls will be strengthened from now on is also uncertain. Therefore, chilling effects due to policy uncertainties in the short and middle run may become serious. Inward FDI by the balance of payment statistics in China announced in February 2024 (although it is a preliminary figure), dropped by 81.7 percent from the previous year in 2023. Since an economic slowdown in China after the latter half of 2022 was also evident, this figure must be carefully interpreted. However, at least we can say that fresh investment from abroad into China seems to have thinned out and deserves careful monitoring.

From the viewpoint of ASEAN, the direct effects of the U.S. export control do not seem to be visible so far. Perhaps production plants located in AMS are not involved in high-end semiconductor-related production. In the political turmoil between the giants, some AMS, notably Vietnam, Malaysia, and Singapore, have begun attracting new investments in the semiconductor industry and data centers and are trying to upgrade their position in GSCs. Once they have stepped into real high-tech, AMS may need to make their political stance clearer.

There are a couple of concerns: unclear “fence-sitting” and the weakening of the rules-based trading regime. How can the third countries, including Japan and AMS, implement at least partial remedies?

The U.S.–China or the East–West confrontation seems to get harsher. However, even among Western countries, not all countries try to completely decouple from the Chinese economy, and thus substantial economic links between the West and China are likely to survive even if more geopolitical tension-related policies are implemented. If neither the United States nor China is strong enough to force all AMS to choose a side, AMS may be allowed to keep a neutral position. The decoupling of China will then be “partial.”

To retain a vigorous economy, the “fence” between the restricted economy and free trade must be clearly shown to reduce policy uncertainties. However, it does not seem easy due to a strong national security logic claiming that various technologies may be of dual use, namely, they may be utilized for both economic and military purposes, and “we must be prepared for the worst scenario.” Jake Sullivan, the U.S. National Security Advisor, said in April 2023 that export controls must be implemented as a “small yard, high fence,” to seek a political equilibrium between the national security camp and the economy, but the “fence” has not been clearly shown yet. An unclear “fence” may be costly, particularly for the U.S.-allied middle powers such as Japan and Korea. AMS may also need to watch carefully once they step into sensitive high-tech areas in global value chains in the future.

Some of the recently introduced trade/industrial policies in the G7 and China are likely to be inconsistent with their commitments under the WTO or conventional trade norms, and these moves are weakening the rules-based trading regime. Some countries in the global South also started introducing policies that seem to violate trade norms.

As background, the dysfunction of the WTO Appellate Body (AB), the second tier of the WTO dispute settlement system, affects the policy discipline. The U.S. blockage of a new appointment or reappointment of AB members stops the AB from operating. The number of AB members is usually seven, and to resolve a case, three members are required. The number of members was reduced to one in 2019 and ended up with zero in 2020. The WTO members have tried to make the necessary reform to resume the AB but have not yet been successful. Some WTO dispute settlement cases have become an “appeal into void”—that is, after the panel (first tier) decision, one of the countries concerned appeals to the dysfunctional AB to freeze the case. Such cases haven amounted to 25 cases by the end of 2024. India's tariffs on information and communication technology products (DS584) and Indonesia's export ban on nickel (DS592) are such examples. A further concern is the reduction in the number of cases brought to the WTO for dispute settlement.⁵

The rules-based trading regime must remain in force at least for the “rest” of the economy outside the restricted part due to geopolitical tensions. The rules-based trading regime is particularly important for sophisticated IPNs; connectivity for IPNs must be achieved at low monetary/time costs as well as reliability and predictability. ASEAN is one of the regions that participated in machinery IPNs at the earliest time, and the commitment to IPNs by AMS is deep. Tables 1 and 2 are drawn from Ando, Kimura, and Yamanouchi (2022), where bilateral machinery trade values (HS84-92; actual trade values, predicted values by a gravity equation, and the ratios) in 2019 are presented in the format of trade matrices where exporters are in rows, and importers are in columns. As is shown in Table 1, ASEAN as a whole has machinery trade intensity much higher than the “world standard” calculated by the gravity equation; after controlling the economic size of exports and importers as well as geographical distance and others, ASEAN's exports to and imports from the world are 2.47 times and 1.82 times as large, respectively, as the world standard, and ASEAN's exports to ASEAN itself are 2.71 times as large as the world standard. As shown in Table 2, commitment levels to machinery IPNs differ across AMS. Singapore, Malaysia, Thailand, the Philippines, and Vietnam present high levels of commitment whereas Indonesia and latecomers Laos, Cambodia, and Myanmar show low ratios. However, even for those four countries, machinery trade picks up the pace of growth within ASEAN. Hence, there should be a good reason why AMS must work to retain the rules-based trading regime.

There are many things that AMS can do. The most important thing is to continuously engage themselves in vigorous economic activities in IPNs. In addition, in terms of trade policies, first, AMS must support the WTO. The voice for the WTO is substantially weakened in the United States. However, some respect for it still exists in the rest of the world. Middle powers and AMS must be proactive to reconfirm the WTO's value.

One big issue is to revive the WTO dispute settlement mechanism. The AB issue must be taken care of, with many like-minded countries in the world. In addition, if it does not work quickly, the expansion of the membership of the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) must be promoted in Asia. MPIA was initiated by the EU initiative and works as a temporary substitute for the WTO AB when both parties are MPIA participants. The current members in extended East Asia are Japan (March 2023–), China, Hong Kong, Macao, and the Philippines (May 2024–), and Singapore, Australia, and New Zealand.⁶ There are already two cases of finalized MPIA disputes, three cases of ongoing disputes, and eight cases of finalized without MPIA appeal, withdrawn, lapsed, or settled disputes. It works very well to preserve the WTO AB framework, and the expansion of the membership is hoped for.

Another is to revive the WTO as a rule-maker. The WTO can return to being the central figure of the rules-based trading regime only when it catches up with globalization in the real world. Since its establishment in 1995, the WTO has struggled with new rulemaking, establishing just a limited number of new rules. After a virtual stoppage of the Doha Development Agenda, we hope to promote Joint Statement Initiatives (JSIs), in which a group of like-minded members initiates rule construction and puts it back into the multinational framework. Now a JSI on e-commerce is approaching the final stage; 91 members joined the JSI to write up the text, and 71 members submitted a joint proposal to the General Council of the WTO. Although some disagreements still exist (e.g., on the rule of no tariff imposition on electric transmission), we hope that a consensus will be formed soon.

Second, the promotion of regional initiatives may also support the rules-based trading regime. Various international fora can be utilized. For AMS, the most important thing is to strengthen the link among AMS. Then the Regional Comprehensive Economic Partnership (RCEP) can work to support the rules-based trading regime and reduce policy uncertainties for the private sector. Particularly, China is a member of RCEP so the institutional setting of RCEP including an annual ministerial meeting, a joint committee, four specialized committees, and a secretariat, could provide workable channels of conversation for reducing policy uncertainties. The second pillar of the Indo-Pacific Economic Framework for Prosperity (IPEF), the Supply Chain Agreement, which was signed by 14 countries in June 2024 and came into effect for 10 countries by October 2024, can be effective in enhancing supply chain resilience with ex-ante preparation and ex-post response mechanism against a sudden supply disruption of important items. It would at least partially mitigate our concern about economic coercion and other policy uncertainties. We hope that it can survive even under the second Trump administration.

Any other move to promote the rules-based trading regime must proceed. For example, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a high-level FTA for pro-trade middle powers, and the expansion of the membership may show a strong sign of supporting the rules-based trading regime. The United Kingdom became a member of CPTPP in December 2024, which made the agreement effective for 12 countries. An important move was the submission of a formal request for accession by Indonesia in September 2024. Indonesia has not recently been the best student in the WTO, as it has introduced a series of trade policies seemingly inconsistent with the WTO commitments such as import restrictions on a wide range of products, export bans on mineral products, and local content requirements for domestic production. At the same time, however, policymakers have a strong aspiration for Indonesia to become a respected developed country by 2045. Whether Indonesia can clear the high standard required for trade liberalization and international rules is at question, but this may be a good opportunity for Indonesia to learn the importance of the rules-based trading regime.⁷

Indonesia also started accession negotiations with the OECD, and Thailand followed suit in 2024. OECD is not an organization for international trade but can be a good basis for overall policy reform toward fully developed economies in a less binding setting. This is also an important move for AMS to strengthen its commitments to the rules-based trading regime.⁸

In the long run, if the accommodation of China in the rules-based regime is to become an ultimate goal of the West, some important additions to the current set of international rules must be prepared. Key issues include state-owned enterprises, the digital economy, national security exceptions, and subsidy-excess production issues. The latter two require a convincing logical basis for which international lawyers and economists should cooperate to create the necessary policy design.

How to set the boundary of national security exceptions is a crucial issue in bridging different political regimes in Western countries and China. A conventionally dominant interpretation of GATT Article XXI has been “self-judging”; a country can decide by itself whether national security matters or not. However, in the context of international commercial policies, some have started thinking of setting a limitation of national security exceptions.⁹ One notable example is a WTO panel decision on the case related to Section 232 of the U.S. 1962 Trade Expansion Act (DS544 and others) where the applicability of GATT Article XXI is judged, that is, “self-judging” is denied. Contexts may differ across policy modes, but whether the boundary of national security exceptions can be set or not is also an important issue, for example, on data governance.

As for subsidy-excess production issues, the current debate on iron and steel, aluminum, solar panels, and EVs has focused on the subsidy discipline. The United States imposed additional tariffs on imports from China (100 percent on EVs and 25 percent on steel and aluminum) based on Section 301 while the EU decided to impose countervailing duties on battery EVs from China (about 35 percent at maximum). These moves reflect the third countries’ concern about the sudden increase in imports, particularly of steel and EVs, from China at unduly low prices. However, the current rules on subsidy, particularly the framework of countervailing duties, are documented in a static setting so that the subsidy margins based on variable costs matter. Is it logical for China's to cite some subsidy used 15–20 years ago to trigger industrial grow with Marshallian externalities in present day circumstances? More theoretical arguments in economics may be needed to design economically meaningful remedies.

Once the second Trump administration starts moving, many things could happen. But so far, as a dominant strategy, it is important for ASEAN and AMS to maintain the neutral stance in the U.S.–China confrontation not only for its own sake but also for the sake of the world order. Probably, neither the United States nor China has a power to force AMS to choose a side. To keep a vigorous economy with free trade and investment as wide as possible, ASEAN and AMS must maintain proactive neutrality.

In the tariff war between the two giants, AMS are privileged to take advantage of positive trade diversion as a better investment destination than other parts of the world. It will be helpful for the world and even for U.S. consumers to partially cancel out market distortion caused by bad policies. So, the AMS should seek to attract inward FDI as well as various economic activities from both sides with a good balance. But certainly, they need to carefully watch the situation of the U.S.–China confrontation.

Together with other pro-trade middle powers, AMS must play an important role in reducing policy uncertainties and retaining the rules-based trading regime as widely as possible. AMS have for long enjoyed the stable international norms for their sustained economic growth and now should become proactive in defending a rules-based regime. Pro-trade middle powers will surely be willing to work together.