Asia-Pacific Small States: Political Economies of Resilience 9781685859497

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ASIA-PACIFIC SMALL STATES

ASIA-PACIFIC SMALL STATES Political Economies of Resilience edited by

Stephen Noakes and Alexander C. Tan

Published in the United States of America in 2023 by Lynne Rienner Publishers, Inc. 1800 30th Street, Suite 314, Boulder, Colorado 80301 www.rienner.com and in the United Kingdom by Lynne Rienner Publishers, Inc. Gray’s Inn House, 127 Clerkenwell Road, London EC1 5DB www.eurospanbookstore.com/rienner © 2023 by Lynne Rienner Publishers, Inc. All rights reserved Library of Congress Cataloging-in-Publication Data A Cataloging-in-Publication record for this book is available from the Library of Congress. ISBN 978-1-955055-97-0 (hc) British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. Printed and bound in the United States of America The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1992. 5 4 3 2 1

To the memory of Katrina Margaret Finch

Contents

Acknowledgments

1

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Small States in Asia Pacific: Challenges Amid Great Power Competition Stephen Noakes and Alexander C. Tan

PART 1

1

NATIONAL EXPERIENCES

2

Singapore: Relearning, Recovery, and Resilience Benjamin Ho Tze Ern

19

3

Aotearoa/New Zealand: Contentious Trade Relations with the PRC Jason Young

35

4

The Pacific Island States: Social and Solidarity-Based Economies Steven Ratuva

53

5

Taiwan: State and Private-Sector Cooperation Frank Siedlok, Natasha Hamilton-Hart, and Hsiao-Chen Shen

69

PART 2 6

PROSPECTS

FOR

RECOVERY

East Asia’s Green Economic Recovery: A Path Out of the Coronacession Sung-Young Kim

vii

97

viii

Contents

7

Reforming the Global Supply Chain: A Taiwanese Perspective Roy Lee

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8

Multilateralism and US Engagement: Generating New Pressures and Incentives Charles Finny with Neel Vanvari

149

9

Digital Regional Economic Integration: New Trade Agreements and Opportunities Stephanie Honey

171

PART 3 10

CONCLUSION

Together, Alone: Economic Cooperation After the Pandemic Stephen Noakes and Alexander C. Tan

Bibliography The Contributors Index About the Book

193

201 229 231 245

Acknowledgments

THE BOOK IS THE OUTGROWTH OF A WORKSHOP HELD IN AUCKLAND,

Aotearoa/New Zealand, in November 2021, with the generous support of a grant awarded to Alexander Tan by the Taipei Economic and Cultural Office–NZ and the Department of Political Science and International Relations at the University of Canterbury and hosted by the New Zealand Asia Institute’s China Studies Centre at the University of Auckland. The event brought together distinguished speakers from the worlds of academia, public policy, and trade to examine the economic impacts of the Covid-19 pandemic on small states in Asia Pacific and their recovery efforts as they navigate the pressures of increasing competition between the United States and the People’s Republic of China. We would like to thank all the contributors for agreeing to present their papers at our online conference, revising their chapters based on our comments and suggestions, and, more important, meeting our deadlines with patience and no complaints. It has been a pleasure working with this team. Thank you also to the team at Lynne Rienner Publishers—Marie-Claire Antoine and Moorea Corrigan—for supporting this project from the get-go.

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1 Small States in Asia Pacific: Challenges Amid Great Power Competition Stephen Noakes and Alexander C. Tan

We can’t afford to seal our borders off. For Singapore, you need food, you need fuel, you need people moving in and out . . . to the extent that you can while keeping ourselves safe. —Singapore PM Lee Hsien Loong, 2021 As we prepare for the postpandemic era, we need to continue to strengthen the partnership between government and business. —Aotearoa/New Zealand PM Jacinda Ardern, APEC Summit, 2021 As we battle Covid-19, I’ve had productive talks with @ScottMorrisonMP, President Xi, PM Suga, @jacindaardern, and my fellow Pacific leaders in support of Fiji’s mission to save lives, sustain livelihoods, and spur an economic recovery alongside the rest of the world—not after. —Fijian PM Vorque “Frank” Bainamarama, Twitter, 2021 We are focused on saving lives and saving livelihoods, and this new support package will provide much-needed care and help to so many Australians facing hardship at no fault of their own. —Australian PM Scott Morrison, 2020 We have compiled these measures to maintain employment, sustain business, and restore the economy and open a way to achieve new growth in green and digital areas, so as to protect people’s lives and livelihoods. —Japanese PM Yoshihide Suga, 2020 1

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THE WORLD IS STILL IN THE EARLY STAGES OF RECOVERING FROM THE

Covid-19 pandemic. Since first surfacing in late 2019 in Wuhan, capital of the Chinese province of Hubei, the virus has gone global many times over, with successive mutations causing more than 6.7 million deaths and a total case count of approximately 650 million by the end of 2022.1 Just as the Delta and Omicron waves appear to have crested and case numbers have begun to fall, health experts have warned that the pandemic is not over and that new variants may yet emerge with the potential to spread faster or lead to greater illness. As Ashley Bloomfield, Aotearoa/New Zealand’s Director-General of Health, remarked: “Globally, it’s likely there will continue to be further waves of Omicron, and likewise there will be new variants of concern, with unknown severity. And we will face those as other countries will. . . . All of this shows that while our current Omicron wave is receding, we clearly need to keep our wits about us.”2 Disruptions caused by the pandemic extend well beyond the field of public health, however. All of the countries considered in this volume have experienced broader political concatenations, some of them severe, over issues such as mask mandates, whether immunization ought to be required to go out in public or in certain professions, the question of which vaccine ought to be used, the allocation of resources to fighting Covid-19 at the expense of illnesses with higher mortality rates, and the cancelation of major events (including in some cases the temporary postponement of national elections). Then there are the economic effects. These include major disruptions in national and international supply chains, damage to industries and sectors due to international border closures and falling revenue, and, for individuals and households, a spike in living costs resulting from steeply rising inflation. This book examines these and other economic impacts of the stillunfolding Covid-19 pandemic in various national contexts across the AsiaPacific region. It is motivated by three core questions: How have Asia-Pacific economies been affected by the pandemic, what were their coping strategies, and what are the prospects and problems confronting economic recovery and cooperation across the region? Our aim is to highlight consistencies and points of variation within and among small states of Asia Pacific, as well as to explore the potential for deepening post-pandemic integration. We propose that Covid-19 has introduced fresh complications to economic recovery and cooperation in Asia Pacific in a variety of ways. Most important, the pandemic has stirred debate within states across the region as to what that recovery ought to look like, and what the most viable or desirable pathway to recovery might be. A key factor contributing to those debates is that while Covid-19 has brought economic hardship nearly everywhere, it has not been experienced the same way or to the same degree, within or among Asia-Pacific states. Nor did all states and peoples

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within the region first encounter the pandemic on equitable economic footing. As a consequence, plans for recovery vary widely and are contested nearly everywhere, as the chapters of this volume show well. These debates over post-pandemic recovery plans are occurring against the backdrop of a significant shift in regional geopolitics, namely the rise of China as a preeminent economic and strategic player and competitor with the United States. As the contributions included here demonstrate, great power competition generates pressures for small states and middle powers that fuel political discussions about recovery and shape the menu of policy options available. In some cases, the choices resulting from these debates have implications for national identity, with ripple effects that may have far-reaching diplomatic consequences. In other words, state-level conversations over resilience, recovery, and cooperation after Covid-19 are in essence domestic debates about international politics. Almost by default, this book is an examination of the interplay between the two. We understand the contribution here as one small part of a wider debate over the nature and direction of globalization, one that is still far from resolved. Both Covid-19 and United States–China rivalry could be taken as signs that globalization is now in retreat. A still-fresh but growing body of scholarship has emerged on the issue of whether the pandemic, with all its disruptions to the free flow of people and goods across borders, may mean the end of economic globalization as we know it.3 Likewise, United States–China rivalry may for some signal the end of the unipolar order in place since the fall of the Soviet Union, and the reemergence of a bipolarity reminiscent of its preglobalization counterpart. In the past, major geopolitical shifts—such as the fall of the Berlin Wall or Deng Xiaoping’s initial reform and opening up of China—were accelerants to globalization. Might new developments in geopolitics (i.e., the ascendance of China to global power status), combined with conditions created by the pandemic, bring about its end, or at least slow it down, thus limiting near-term prospects for deepening Asia-Pacific cooperation? One notable current of thought is that Covid-19 has been a catalyst for advancing trends already under way in the global economy.4 Much of this work specifically notes China’s growing economic importance and rivalry with the United States as a key long-term trend. Some also draw comparisons to the 2008 global financial crisis and speculate that Covid-19 is likely to have similarly delegitimizing effects on global capitalism.5 In this formulation, the pandemic, which arose relatively quickly and unexpectedly, meaningfully shapes and constrains post-pandemic recovery trajectories, but does not undo coincidental trends already in motion. It is an intervening variable, rather than a turning point. We too see the pandemic as a critical juncture in the evolution of Asia-Pacific economies, but one that

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adds complexity to the preexisting pressures of United States–China strategic competition in the region, was already driving the calculus of small states, and would likely have done so whether the pandemic happened or not. Put another way, the pandemic is a moment of causal importance, though not a uniquely sufficient condition for many of the state behaviors and outcomes documented in the chapters that follow to have eventuated. The experiences of countries captured in this book have the potential to inform discussion about the future of economic integration and the future of globalization more broadly. In particular, the ways in which smaller states navigate United States–China strategic competition have implications for how we think about regional order and deepening multilateral cooperation.6 The economic effects of the pandemic, combined with strategic pressures induced by bipolarity, have encouraged a view of recovery aligned more with local or national priorities than something to be affected through concerted pan-regional multilateral action. International supply-route disruptions, tightened border security, the imposition of travel “bubbles,” and commodity scarcity are all contributing factors. The upshot is a wedge driven between would-be collaborative partners, and the encouragement of more self-interested state-level behavior that has the potential to undermine hopes for cooperation.7 This is an issue that has long plagued multilateralism in Asia Pacific. As John Ravenhill remarked in his 2001 landmark study of the Asia Pacific Economic Cooperation (APEC) forum, “trade continues to be a mixed motive game, one that contains powerful incentives to defect.”8 Indeed, this may be part of the reason multilateral institutions have emerged somewhat more slowly in Asia Pacific than in some other parts of the world, as many scholars have noted.9 Beyond multilateral cooperation, there is also the question of more serious consequences, such as the bifurcation of Asia Pacific into factions resembling a new Cold War, the potential for which has been noted in other parts of the world.10 This possibility, though seemingly remote at present, stems from the theoretically uncertain relationship of economics to security concerns. As Ravenhill elsewhere explains, any issue can become “securitized” when deemed to be contrary to national interests. “For instance, matters that were once considered primarily non-controversial issues of international trade may become ‘securitized’ if the global balance of power changes or one or more states take action that has the potential to disrupt access to and/or engineer a substantial increase in the price of commodities perceived as significant for national security.”11 In principle, therefore, the reconfiguration of regional power politics and promotion of self-serving/ inward-looking economic policies could do much more than disrupt trade cooperation. It may cause a spillover of difficulties into other areas of multilateral engagement in Asia Pacific.

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Our approach is driven by the underappreciated role of small states in regional geopolitics, and the domestic processes that animate them. Precisely how individual countries walk the line between the superpowers, amid the economic turmoil of the pandemic, is a key focus of this book. While we acknowledge the importance of regional economic powerhouses such as Japan, India, and Australia, we also show that the region’s smaller economies are sites of significant strategic competition between the United States and China, and thus are vital to the future of the post-Covid economic order of Asia Pacific. Included among our chapters are case studies of Singapore, New Zealand, Taiwan, Korea, and several Pacific Island countries (PICs). By examining how states like these learned from the pandemic and crafted plans for economic reopening, we gain an appreciation of their geostrategic value, and a more nuanced, variegated picture of national interests and economic thinking in a vast and diverse region of the world. However, we also come to more fully appreciate the challenges of forging economic cooperation—or indeed, pan-regional institutions in general— when the strategic designs of more dominant powers incentivize smaller ones to align themselves with one over the other. While we do not dispute the magnitude of United States–China rivalry or the importance of their allies and treaty partners, our focus on smaller states distinguishes the book among works that give greater weight to bipolar competition at the expense of middle and marginal state perspectives. Timeliness is another important aspect of the book’s central objective. We contend that details of economic resilience and recovery in Asia Pacific are available yet fresh—rich enough after nearly two years to furnish a meaty, well-detailed account of Covid-19’s impacts, but not yet fully set upon by analysts and scholars.

Covid-19 Economics in Regional Perspective The World Health Organization (WHO) reported that by January 2023 there were more than 111 million confirmed cases and 300,000 deaths resulting from Covid-19 in the Western Pacific. For Southeast Asia, the figures were approximately 61 million cases and 800,000 deaths.12 While these figures pale in comparison to the harder-hit parts of the world, such as Europe or North America, they far surpass those seen in Africa or the Eastern Mediterranean and translate to enormous human and economic cost. They also fail to do justice to different experiences of hardship resulting from the pandemic within and across countries and regions. Covid-19 has brought increased material hardship nearly everywhere, but it has also exposed disparities and structural inequalities in the ability of some countries to respond as effectively as others, something bound to exercise deep influence on economic

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resilience and leading to a scattershot picture of recovery plans. This is also why many analysts argue that post-pandemic recovery constitutes a human security concern under the definition offered by the United Nations (UN), which extends to development issues and the provision of basic human needs, including medicines and access to quality healthcare.13 As the UN Framework for the Immediate Socio-Economic Response to Covid-19 states: “The COVID-19 pandemic is far more than a health crisis: it is affecting societies and economies at their core. . . . Without urgent socioeconomic responses, global suffering will escalate, jeopardizing lives and livelihoods for years to come.”14 While variation in national and subnational effects remain at top-ofmind, it is worth pointing out some larger economic trends. As indicated in Figure 1.1, gross domestic product (GDP) across the region took a pronounced dip in early 2020 with the onset and spread of the original Covid19 strain before recovering in 2021. The effects of the Delta and Omicron variants then prompted a second decline, with outputs projected to settle near pre-pandemic levels in 2023. Figure 1.2 contrasts the GDP trend in Asia with the world, showing a more pronounced downturn in 2021 but signs of recovery in 2022. Table 1.1 provides a breakdown of the economic damage in selected countries, with across-the-broad declines (nearly, China is the one exception) in 2020, with upticks of varied magnitude following in 2021–2022.

Figure 1.1

GDP Growth per Capita, Asia Pacific, 2017–2027 (percentages)

Source: International Monetary Fund, Asia and the Pacific Economic Outlook, https://data.imf.org/?sk=abff6c02-73a8-475c-89cc-ad515033e662.

Small States in Asia Pacific Figure 1.2

7

GDP Trends, Regional Comparison, 2021 vs. 2022

Source: IMF Regional Economic Outlook, Asia and the Pacific, October 2021.

Prior studies have noted the particular effects of Covid-19 on foreign direct investment (FDI) flows and point out that manufacturing and service sectors have been particularly hard-hit.15 In many small states of Asia Pacific, tourism plays a key role in the overall economic outlook, and experienced high levels of growth in the pre-pandemic years. This trend was driven in no small part by outbound tourists from mainland China, which dried up after March 2020. The knock-on effects of these occurrences are reflected in Figure 1.3, which details unemployment figures in APEC countries for the period 2019–2020. These are up virtually across the board, and sharply up in some cases. Yet the grimness of these graphics belies resilience in many AsiaPacific economies. Indeed, Figure 1.1 suggests that GDP decline in 2020 is a trough—albeit a fairly pronounced one—with output returning to pre-Covid

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Stephen Noakes and Alexander C. Tan

Table 1.1

GDP Growth Projections, Selected Countries, 2020–2022

Region/Country

2020

2021

2022

Aotearoa/New Zealand ASEAN Asia Asia AEs Asia EMDEs Australia China India Japan Korea PICs

–2.1 –3.3 –1.3 –2.7 –0.7 –2.4 2.3 –7.3 –4.6 –0.9 –8.5

5.1 2.6 6.5 3.7 7.2 3.5 8 9 2.4 4.3 2

3.3 5.5 5.7 3.4 6.3 4.1 5.6 8.5 3.2 3.3 5.5

Source: IMF World Economic Outlook, https://www.imf.org/en/Publications /REO/APAC/Issues/2021/10/15/regional-economic-outlook-for-asia-and-pacific -october-2021.

levels within twenty-four months in most countries. Likewise, the Asian Development Bank (ADB) is now discussing the post-pandemic recovery of the tourist sector. “In many respects, COVID-19 has presented destinations in the region with a ‘reset moment’ that they can and should use to address long-standing challenges and seize new opportunities, such as putting tourism on a more sustainable trajectory, enhancing digitalization, and stepping-up community engagement and inclusion,” reads an ADB industry report from early 2022.16 Unemployment has shown signs of abating too, though this has been met with a corresponding rise in inflation, including in places that were largely spared that problem in earlier stages of the pandemic. According to APEC, the Asia-Pacific region recorded an inflation rate of 2.6 percent in the first nine months of 2021, compared to an average of 1.5 percent in 2020, something that “points out the risk of an upward trend in inflation to economic recovery if left unaddressed.”17

Defining “Asia Pacific” This discussion of regional trends raises a logically and analytically prior question—what exactly is Asia Pacific? What are its boundaries? Settling this issue is important not just for understanding the scope of our enterprise, but because there seems to be little consensus on precisely which states can reasonably claim to be a part of the Asia-Pacific region, or indeed whether this is the best term by which we might refer to such a vast portion

Figure 1.3

Unemployment in APEC Countries, 2019–2020

14% 12% 10% 8% 6% 5.0% 4%

3.8%

2%

Unemployment Rate 2019

Unemployment Rate 2020

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Source: APEC in Charts, 2021, https://www.apec.org/docs/default-source/publications/2021/11/apec-in-charts-2021/221_psu_apec-in-charts -2021.pdf?sfvrsn=50537c36_2.

9

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Stephen Noakes and Alexander C. Tan

the planet.18 Some have used the term “Pacific Rim” or “Pacific Basin” to capture roughly the same bit of territory. Such a term could incorporate places as distant from one another as Russia and New Zealand, and feasibly include every country of the Americas having a Pacific coast. However, it also comes with the liability of heavily discounting South Asian countries’ role in regional economics and geopolitics. That problem is rectified by the term “Indo-Pacific,” which gained traction in the era of the Trump presidency, but in fact has a usage that extends back much further.19 It was not Trump but Japanese prime minister Shinzo Abe who in 2007 used the words “free and open Indo-Pacific” to refer to a cooperative network of economically and politically aligned states that would counter the influence of ascendant nondemocracies, namely China.20 The central tenets of Abe’s ideas later became part of official US parlance, notably the Biden administration’s Indo-Pacific Strategy. “We envision an Indo-Pacific that is open, connected, prosperous, resilient, and secure—and we are ready to work together with each of you to achieve it,” the president told the East Asia Summit in October 2021.21 This assemblage of different terms to refer—with a high degree of imprecision—to the same part of the world raises another issue: that the choice of one’s preferred terminology is largely a matter of location, political persuasion, and national interests. Indeed, the conceptualization of geographic theatres themselves are prone to shift over time and with changes in the nature of great power dominance and rivalry, and crucially, with accompanying trends in political economy.22 In the current context, this obviously encourages us to think about the weight of Chinese and US relationships within the region, though it does not necessarily help to elevate the perspectives or interests of smaller, more marginal voices. In this book, we adopt the perspective that Asia Pacific is an “amoeba” region, with “a nucleus and a surrounding body in constant motion.”23 Traditionally, the nucleus comprises states in northeastern Asia (China, Japan, South Korea), and southeastern Asia (Association of Southeast Asian Nations [ASEAN] member states). To this, we add Oceanic states like Australia, New Zealand, and Pacific Island countries such as Fiji, Tonga, and Samoa, as well as some consideration of other players exercising influence in regional economics and geopolitics not historically grouped alongside Asia-Pacific countries, like India. While we concede that there are many other states that might qualify for inclusion based on the definition of the region offered, we do not include them here, and indeed, only a select few “nucleus” countries are the focus of individual chapters. Three main considerations drove the selection of particular cases for this volume. First, states under discussion had to qualify as “small,” a detailed conceptualization of which can be found below. While many interpretations

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exist, we understand small states to be more than “non-superpowers,” a category that might well leave us with a universe of cases that includes every state in the region save for China, the United States, and perhaps India. Second, we have restricted the geographic scope of inquiry to small states in East and Southeast Asia, and the south Pacific. As the forgoing note regarding definitions of the region suggests, the full universe of cases could potentially be much larger, especially if one considers South American states with a Pacific coastline or Canada.

Small Economies Between Two Giants As noted, one of our main case selection criteria is “small state” status. Our objective is to see how small states negotiate economic recovery from the Covid-19 pandemic amid increasing pressure from the United States and China. But what exactly is a small state? The most important point to note here is that smallness is a relative term—small states are distinguished by their relative capabilities, rather than their population size or geographic location.24 This trait carries two further implications. First, small states are typically very limited in their ability to exercise influence over great powers. Much more often, it is great powers who influence them, something that leaves small states vulnerable to tectonic shifts in great power politics.25 Second, small states are also distinguished from each other in terms of their capabilities. By definition, small states may have lesser capabilities than superpowers, but they do not necessarily have capabilities equal to those of other small states—it is a designation that suggests a great deal of intra-category variation. Thus our understanding of small states enables us to consider and compare post-pandemic resilience and recovery in places as distinct as Singapore and Fiji, New Zealand, and Taiwan, all within a single volume. There are two main pathways taken by small states attempting to navigate relationships with superpowers. One of these is to “bandwagon” with one superpower or the other, something that when practiced broadly is expected to deepen regional competition between “camps” of countries, in this instance aligned with either China, or with the United States, and its treaty partners and allies.26 Assuming these pressures are a relatively fixed feature of the regional order, there is also significant potential for this situation to hobble efforts at multilateral cooperation in the long run rather than encourage it. In part, this is due to the autonomy/influence dilemma, in which small states seek to maximize their systemic influence, leading to deeper levels of institutionalization but results in a loss of autonomy and a corresponding spike in incentives to abandon cooperation and pursue more self-serving

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policies aligned with one or the other superpower.27 Alternatively, however, some states may be able to pursue some type of independent, nonaligned policy strategy. For example, Peter Katzenstein has shown how some small western European states facing economic vulnerabilities similar to those of their Asia-Pacific contemporaries managed to retain the integrity of the political institutions and their affluence by pursuing “democratic corporatism”—effectively charting a third pathway that helped them to ameliorate some of the bandwagoning pressures of superpower competition after World War II.28 As the cases here attest, it is difficult to deny the predicament small states of Asia Pacific currently find themselves in. China looms increasingly large in economic fortunes, but many have long-standing cultural and security ties to the United States and its allies. Stuck between a rock and a hard place, the impetus to pick sides is strong, and in some cases may even prompt extremely contentious decisions to prioritize political or security concerns over economics, or vice versa. Moreover, even if small Asia-Pacific states were able to resist the pull of one or the other superpower and adopt some nonaligned “third way,” there seems little to suggest they would do so in a harmonized or concerted way, since international bargaining is likely to be hamstrung by complex domestic political wrangling among competing interests and groups in highly varied structural domestic settings.29

Outline of the Book The book is organized into two main parts. Part 1 examines economic impacts and experiences of Covid-19 in a range of small states in Asia Pacific, while Part 2 focuses on possible strategies for post-pandemic recovery and reemergence, including multilateral engagement. Part 1 opens with Benjamin Ho Tze Ern’s exploration of resilience and recovery in the Singaporean context. Ho argues in Chapter 2 that the debate over Singapore’s Covid-19 response cuts to the heart of core national identity issues, and in particular the gulf between two social groups—“cosmopolitan elite” and “heartland supporters.” Through an examination of public debate on issues such as border closures, vaccine choices, and social gathering restrictions, Ho shows that Singapore’s Covid-19 policy walks a fine line between domestic and foreign policy imperatives and reveals subtle but important fissures in Singaporean politics. In Chapter 3, Jason Young examines New Zealand’s trade relationship with the People’s Republic of China (PRC), and in particular the reemergence of debate over the question of dependence and diversification in New Zealand’s economic and foreign policy. One important stream of this debate focuses on China’s human rights record and the stability of bilateral rela-

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tions overall, with some expressing worries of economic retaliation if that relationship were to sour as it has with other Asia-Pacific states traditionally aligned with the United States and its allies, such as Australia. Steven Ratuva explains in Chapter 4 how Covid-19 had a particularly acute impact in Pacific Island countries, calling attention to the human security dimension of the pandemic and related international responses. Ratuva explores how “social solidarity economies” took shape in several PICs as a result of the pandemic, with local/national ingenuity becoming an important means of addressing people’s needs, while the benefits of foreign aid failed to trickle down to the local level. Frank Siedlok, Natasha Hamilton-Hart, and Hsiao-Chen Shen explore Taiwan’s Covid-19 response in Chapter 5. They employ the case of Taiwan’s face mask production policy to examine the collaboration of government and private industry in rapidly increasing mask production to facilitate a relatively successful pandemic response. This, they contend, is something that differentiates the Taiwanese experience from that of other places, such as the United Kingdom, where involvement by the “regulatory state” shaped the pandemic response for the worse. Part 2 of the book shifts from national experiences to explore recovery prospects in greater detail. In Chapter 6, Sung-Young Kim explores the prospects for “green growth” as a possible path out of the pandemic for Korea, Taiwan, and Singapore. In contrast to scholars who posit that the pandemic has brought into question the appetite for continuing such initiatives, Kim argues that green growth not only forms a key part of each states’ economic recovery plan, but that these have been accelerated amid Covid-19 rather than delayed or sidelined, in large part due to the effects of a United States–China technological rivalry that predates the pandemic. In Chapter 7, Roy Lee examines how public- and private-sector actors in Taiwan have attempted to mitigate disruption in the global supply chain in electronic contract manufacturing resulting from the Covid-19 pandemic. Lee argues that while supply chain “autonomy” has been touted as a means to safeguard economic security for Taiwan and is promoted by the United States and European Union to hedge against a rising China, global supply chain disruptions caused by the pandemic have fueled the rising importance of autonomy as an economic policy. Charles Finny and Neel Vanvari argue in Chapter 8 that the protectionist economic stance of the Trump administration in the United States has produced a vacuum in the regional economic architecture of Asia Pacific, creating a range of uncertainties for multilateral economic cooperation. Stephanie Honey calls attention in Chapter 9 to the special role of small Asia-Pacific states in establishing digital trade agreements. Covid-19 catalyzed an acceleration of digitalization of trade around the world. While Asia Pacific contains some of the most open digital markets (i.e., New Zealand,

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Singapore), it also has some of the most closed-off (China, Vietnam). Honey makes the case that the region’s small and open digital markets hold a growing hope for the development of stronger digital trade rules in the future. Finally, Chapter 10 concludes the book with a summative comment on the overall impact of the pandemic and the nature of regional economic reemergence, taking the opportunity to identify some key trends raised collectively by the other chapters.

Notes 1. See https://covid19.who.int. 2. Michael Daly, “Omicron Wave Receding, but Ashley Bloomfield Warns New Zealand to Expect Ongoing Waves of Covid,” March 22, 2022, https://www .stuff.co.nz/national/health/coronavirus/128135143/omicron-wave-receding-but -ashley-bloomfield-warns-new-zealand-to-expect-ongoing-waves-of-covid. Accessed 22 April 2022. 3. For an overview of this claim and a poignant rebuttal, see Benedict Atkinson, Jacob Wood, and Haejin Jang, “Does Covid-19 Spark the End of Globalisation?” in Community Empowerment, Sustainable Cities, and Transformative Economies, edited by T. Chaiechi, and J. Wood (Singapore: Springer, 2022). 4. For example, see Shahar Hamieri, “Covid-19: Is This the End of Globalization?” International Journal 76, no. 1 (2021). 5. Zhaohui Wang and Zhiqiang Sun, “From Globalization to Regionalization: The United States, China, and the Post-Covid-19 World Economic Order,” Journal of Chinese Political Science 26 (2021). 6. Here, we understand multilateralism in John Ruggie’s terms as “relationships involv[ing] three or more states coming together to tackle a specific issue or set of issues on the basis of specific generalized principles of conduct.” See “Multilateralism: The Anatomy of an Institution,” International Organization 46, no. 3 (Summer 1992): 567. 7. G. John Ikenberry and Jitsuo Tsuchiyama, “Between Balance of Power and Community: The Future of Multilateral Security Cooperation in the Asia-Pacific,” International Relations of the Asia-Pacific 2, no. 1 (2002). 8. John Ravenhill, APEC and the Construction of Pacific Rim Regionalism (New York: Cambridge University Press, 2001), p. 185. 9. Andrew Mack and John Ravenhill, eds., Pacific Cooperation: Building Economic and Security Regimes in the Asia Pacific Region (London: Routledge, 2019); Richard E. Feinberg, ed., APEC as an Institution: Multilateral Governance in the Asia-Pacific (Singapore: Institute of Southeast Asian Studies, 2003); Amitav Acharya, “Ideas, Identity, and Institution-Building: From the ‘ASEAN-Way’ to the ‘Asia-Pacific Way’?” Pacific Review 10, no. 3 (1997): 319, 346. 10. Avery Goldstein, “US-China Rivalry in the Twenty-First Century: Déjà Vu and Cold War II,” China International Strategy Review 2 (June 2020); Minghao Zhao, “Is a New Cold War Inevitable? Chinese Perspectives on US-China Strategic Competition,” Chinese Journal of International Politics 12, no. 3 (Autumn 2019); Yuen Foong Khong, “The US, China, and the Cold War Analogy,” China International Strategy Review 1 (2019): 223–237.

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11. John Ravenhill, “Economics and Security in the Asia-Pacific Region,” Pacific Review 26, no. 1 (2013). 12. The WHO does not track cases in the “Asia Pacific” but breaks this wider category down by subregions. See https://covid19.who.int. 13. General Assembly Resolution 66/290 states that “human security is an approach to assist member states in identifying and addressing widespread and cross-cutting challenges to the survival, livelihood and dignity of their people.” On the pandemic’s impact’s specifically, see Edward Newman, “Covid-19: A Human Security Analysis,” Global Society, December 29, 2021. 14. United Nations, Framework for the Immediate Socio-Economic Response to Covid-19, April 2020, https://unsdg.un.org/sites/default/files/2020–04/UN-frame work-for-the-immediate-socio-economic-response-to-COVID-19.pdf. 15. See Kazunobu Hayakawa, Hyun-Hoon Lee, and Cyn-Young Park, “The Effect of Covid-19 on Foreign Direct Investment,” Economics Working Paper no. 653 (Manila: Asian Development Bank, March 2022). 16. Asian Development Bank and World Tourism Association, “Covid-19 and the Future of Tourism in Asia and the Pacific” (Manila and Madrid: March 2022), p. vi. 17. “APEC Region’s Economy to Grow by 6% in 2021,” November 8, 2021, https://www.apec.org/press/news-releases/2021/apec-region-s-economy-to-grow-by -6-in-2021-report. 18. Brian Job, “Grappling with an Elusive Concept,” in Security Politics in the Asia-Pacific, edited by W. Tow (Cambridge: Cambridge University Press, 2009). 19. Hansong Li, “The “Indo-Pacific”: Intellectual Origins and International Visions in Global Contexts,” Modern Intellectual History 19, no. 3 (2022). 20. Ministry of Foreign Affairs of Japan, “Speech by His Excellency Mr. Shinzo Abe, Prime Minister of Japan, at the Parliament of the Republic of India: ‘Confluence of the Two Seas,’” New Delhi, August 22, 2007, https://www.mofa.go.jp /region/asia-paci/pmv0708/speech-2.html. 21. See https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/02 /11/fact-sheet-indo-pacific-strategy-of-the-united-states. 22 See Sanjay Pulipaka and Mohit Musadi, “In Defence of the Indo-Pacific Concept,” September 2021, https://www.orfonline.org/research/in-defence-of-the -indo-pacific-concept. 23. J. S. Eades and Malcolm J. M. Cooper, “Introduction: The Asia Pacific World—A Summary and Agenda,” Asia Pacific World 1, no. 1 (Spring 2010): 3. 24. Paul Sutton, “The Concept of Small States in the International Political Economy,” Roundtable 100, no. 413 (April 2011): 141; Mathias Maass, “The Elusive Definition of the Small State,” International Politics 46 (2009); Miriam Fendius Elman, “The Foreign Policies of Small States: Challenging Neorealism in Its Own Backyard,” British Journal of Political Science 25, no. 2 (April 1995): 171. 25. Andrew F. Cooper and Timothy M. Shaw, eds., The Diplomacies of Small States: Between Vulnerability and Resilience (Basingstoke: Palgrave, 2013); Harvey W. Armstrong and Robert Read, “The Phantom of Liberty? Economic Growth and the Vulnerability of Small States,” Journal of International Development 14, no. 4 (2002). 26. Eric J. Labs, “Do Weak States Bandwagon?” Security Studies 1, no. 3 (1992): 409; Jack S. Levy, War in the Modern Great Power System, 1495–1975 (Lexington: University of Kentucky Press, 1983), p. 9–10; Robert O. Keohane, “Lilliputians’ Dilemmas: Small States in International Politics,” International Organization 23, no. 2 (Spring 1969).

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27. See Anders Wivel, “The Security Challenge of Small EU Member States: Interests Identity and the Development of the EU as a Security Actor,” Journal of Common Market Studies 43, no. 2 (2005). 28. Peter Katzenstein, Small States in World Markets: Industrial Policy in Europe (Ithaca: Cornell University Press, 1985). 29. Robert D. Putnam, “Diplomacy and Domestic Politics: The Logic of TwoLevel Games,” International Organization 42, no. 3 (1988).

Part 1 National Experiences

2 Singapore: Relearning, Recovery, and Resilience Benjamin Ho Tze Ern

“NO PLAN SURVIVES THE FIRST CONTACT WITH THE ENEMY.” THESE

words, which are frequently used by military commanders to highlight the unpredictable character of war and the limitations of battle plans—no matter how well-drawn—can be used to summarize Singapore’s encounter with the coronavirus. As of February 2023, there had been more than 2.2 million cases of the coronavirus in Singapore (about 40 percent of the population) with almost 1,700 fatalities. While these numbers certainly pale in comparison to the case numbers in many other countries (both developed and developing), the pandemic has taken its toll on the nation, physically, mentally, and emotionally. For a nation that prides itself on meticulous policy planning, the coronavirus pandemic has highlighted many key challenges within the government apparatus, not least of it in the manner in which policies have been adjusted in ways sometimes viewed as confusing and lacking in consistency, even by its pro-establishment writers.1 Why is this the case? While a straightforward answer would suggest—following John Maynard Keynes saying, “When the facts change, I change my mind, what would you do?”— that making policy changes is part and parcel of governance, I argue that a deeper issue for Singapore is not so much the modalities of policymaking per se, but a broader debate about the nature and composition of Singapore’s society, one that is divided between what I would term as the “cosmopolitan elite” and the “heartland supporters.” While government leaders have taken the line that Singapore policymaking would be informed by “science” and the overall health conditions, a deeper analysis of the available discourse suggests that the Singapore government is trying its best to balance the voices of both the cosmopolitan elite and the heartland supporters. I argue 19

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the government—in its pandemic policies—has sought to position itself in a way that allows it to find a middle ground between both heartland supporters and cosmopolitan elite positions, believing that this is reflective of the majority’s demands. In this chapter, I study Singapore’s responses to the coronavirus pandemic and specifically focus on three themes that have emerged that are relevant to the debate between the cosmopolitan elite and heartland supporters, namely the opening up and closing down of borders, vaccine choices, and restrictions of social gathering. In each of these three areas, one is able to identify lines of convergence and divergence in the population responses to government policies, thus highlighting a deeper and more fundamental issue at stake—that is, the makeup of the ideological composition of its population, and what this means for the nation’s self-perceived identity and its place in the world. Given the highly interconnected nature of both domestic and international objectives, any attempt to make sense of Singapore’s response requires a closer scrutiny of its foreign policy objectives, in which the country seeks to project its domestic image externally, and in which subsequent discussion of the cosmopolitan elite/heartland supporter dynamic is tied to. As a country whose trade to gross domestic product (GDP) ratio is the highest in the world (at 338.31 percent), Singapore closely intertwines its foreign policy and economic posture in a way that is open and accessible to the outside world so as to “sustain Singapore’s relevance internationally” and to “expand Singapore’s political and economic space.”2 Indeed, a substantial component of Singapore’s response to the pandemic has been to ensure that the city-state retains its image as a cosmopolitan city (which its foreign policy is very much tethered to) while at the same time attempting to protect its heartlands (in which it is accountable to in the arena of domestic politics).

The Fundamentals of Singapore’s Foreign Policy Among various studies of Singapore’s foreign policy, Michael Leifer’s characterization of the nation-state’s relation to its external environment as one of “living with vulnerability” best describes the manner in which Singapore’s leaders and policymakers look at the world.3 Indeed, the notion that Singapore’s geographical location and the circumstances leading up to its independence renders it extremely vulnerable and therefore “obliged to fend for [itself] in an ungoverned and hostile world” is a core assumption undergirding the country’s foreign policy.4 Indeed, its founding prime minister Lee Kuan Yew’s reading of Singapore’s place in the world belied a highly realist persuasion of how international politics operate and what the country had to do in order to survive, let alone thrive in the world. In a

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1966 speech, Lee described international relations as a case of “big fish eat small fish; small fish eat shrimps.” By comparing Singapore to a “poisoned shrimp,” Lee affirmed that while Singapore’s small size meant it was inherently vulnerable to being “eaten up” by bigger countries, those that attempted to do so would nonetheless have to pay a high cost.5 Notwithstanding this realist streak, a closer examination of Singapore’s foreign policy suggests a more nuanced and complex picture to what is offered by a conventional realist analysis. As observed by Acharya, Singapore’s economic and security policies were also deeply influenced by liberal market economics dictated by the framework of globalization rather than the mercantilist notion of self-reliance and autarky. By overstating the balance of power approach to regional order in its foreign policy, it downplays the regional and multilateralist approach in safeguarding Singapore’s vital interests and to which its foreign policy and security interests remained tethered to.6 In other words, great power competition, and the pressure it invariably imposes on smaller countries to take sides, is not the only way to make sense of Singapore’s foreign policy. Instead, the practices of Singapore diplomacy evince a more subtle and nuanced approach in which the nation seeks to actively embed its relevance onto the global arena, and not just being passive recipients of great power competition. In this respect, the conception of Singapore as a “global city” by its first foreign minister, S. Rajaratnam, suggests that Singapore’s inherent vulnerability can be overcome by linking it to the wider world, thus transcending the limitations of its regional geography, or having to take explicit sides in great power competition. For Rajaratnam, when Singapore is imagined as a global city, then its smallness, absence of a hinterland and raw materials, and large domestic market are major handicaps. In his words: “It would explain why, since independence, we have been successful economically and, consequently, have ensured political and social stability.”7 Thus it can be surmised that Singapore’s success is built on a foreign policy that—at its core—seeks to establish a deep and interwoven network of relationships with the outside world so as to proffer the country with sufficient space to grow and prosper, and not to be limited by either internal constraints or external pressures. As noted by its founding prime minister, Lee Kuan Yew, in his memoirs: “I concluded an island city-state in Southeast Asia could not be ordinary if it was to survive. We had to be different. . . . Since our neighbors were out to reduce their ties with us, we had to link up with the developed world—America, Europe and Japan— and attract their manufacturers to produce in Singapore and export their products to the developed countries.”8 It is this vision that has informed the basic tenets of Singapore’s foreign policy—since its independence in 1965—and consequently has also shaded the way this is being played out in Singapore’s domestic life. By

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positioning Singapore as a “First World oasis in a Third World region,” the city-state was envisaged to be a safe haven for the outside world (particularly Westerners) to be invested in (literally). Consequently, Singaporeans would also be schooled to achieve “First World standards” and to change their “Third World habits” so as to likewise better situate themselves to meet the challenges and opportunities of the twenty-first century.9 In this respect, the need to be cosmopolitan in thinking represents one such objective the Singapore government attempted to achieve. While such an objective up till the turn of the century has not been overly questioned by Singaporean citizens, the past two decades or so have witnessed sporadic debate regarding the direction of the country’s future and also what its domestic identity ought to be like.10 Unsurprisingly, some of these hitherto unresolved tensions would come to the forefront in the course of the coronavirus pandemic.

Cosmopolitanism in Singapore and the Discontents of the Heartland The notion of Singapore as a cosmopolitan city, or a “cosmopolis,” gained traction in the late 1990s as a way of signaling the nation-state’s encounter with the twenty-first century. As observed by Yeoh, the insistence on “cosmopolizing” Singapore—both the city as a place and its people—is driven primarily by the belief that this is an essential strategy if the city-state is to succeed in its globalizing aspirations. In the words of its founding prime minister, Lee Kuan Yew: “To succeed, Singapore must be a cosmopolitan center, able to attract, retain and absorb talent from all over the world. . . . Now in a globalized economy, we are in competition against other cities in the First World. Hence we have to become a cosmopolitan city that attracts and welcomes talent in business, academia, or in the performing arts. They will add to Singapore’s vibrancy and secure our place in a global network of cities of excellence.”11 As a predominantly state-driven, state-engineered, neoliberal globalization project, two key strategies of Singapore stand out. One, to “re-engineer Singapore as a place for cosmopolitans, an idea which is interpreted to mean globalization, urbanization, industrialization, modernity, efficiency, accessibility, advanced technology and high-speed connections to all parts of the globe.” Second, to develop the “institutional and social infrastructure” in the city so as to “facilitate and support the cosmopolitan Singaporean.”12 While it is difficult to pinpoint with exact precision what a cosmopolitan Singaporean might look like, former prime minister Goh Chok Tong, in his 1999 National Day rally speech, gave some hints as to what the Singapore government had in mind. These include the ability to “speak English, are international in outlook, skilled in banking, information technology, engi-

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neering, science and technology, and able to navigate comfortably anywhere in the world.”13 In contrast, to be identified as a heartlander is to be associated with what is known as the Singaporean core, and to play a major role in the preservation of what is uniquely Singaporean. As observed, the term “heartlander” draws its popular reference from Singapore’s public housing heartland,14 and is broadly synonymous with attributes of “authenticity, political centrality, and a particular notion of the local.”15 As then–minister for information and the arts George Yeo put it in 1991, the heartlanders—in Yeo’s mind—consist of “Chinese-educated” residents of public housing to include income and political allegiance to the People’s Action Party (PAP) as other distinguishing features.16 Subsequently, as Goh put it in his National Day speech, the heartlanders were Singaporeans whose “orientation and interests are local rather than international. Their skills are not marketable beyond Singapore. They speak Singlish.17 They include taxi-drivers, stallholders, provision shop owners, production workers and contractors. . . . If they emigrate to America, they will probably settle in Chinatown, open a Chinese restaurant and call it an ‘eating house.’”18 Not surprisingly, Goh’s speech stirred up considerable public angst as some feared that the terms suggested a growing polarization among Singaporeans based on economic status, values, and outlook, or could themselves create an imagined barrier that would eventually lead to a real divide.19 The Singapore government, cognizant of these fomenting sentiments, took pains to emphasize the value of both groups to the fabric of Singapore society, though it remained steadfast in promoting its vision of a cosmopolitan Singapore as the future, as the Singapore 21 report makes clear: “The Singaporean of the 21st century is a cosmopolitan Singaporean, one who is familiar with global trends and lifestyles and feels comfortable working and living in Singapore as well as overseas.”20 Over the years, this cosmopolitan/heartland divide has continued to exist and has not only generated academic debate21 but also manifested in well-publicized concerns over the influx of foreign talent into Singapore, which have led to greater competition for jobs, rising costs of housing, and the abilities of foreigners to integrate themselves into Singapore society.22 Given that more than two decades have passed since the government’s proclamation of Singapore’s cosmopolitan project, it would seem that the problems that had existed back then have yet to be satisfactorily resolved, suggesting that policies have yet to bear fruit. As Yeoh presciently observed, “Meaningful cosmopolitanism must involve an emancipatory political project which gets under the skin of society, not just rhetorical gestures and visionary pronouncements which fail to relate to everyday life and places in the city.”23 Notwithstanding the fact that the cosmopolitan vision has arguably been the preferred and prevailing narrative, the challenge of the

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heartlands and its associated discontents would not go away. While the vision of the former makes it a natural ally to the tenets and objectives of Singapore’s diplomatic and foreign policy practices, the challenge posed by the latter necessitated domestic popular sentiments to be taken seriously in the course of policy formulation. Indeed, these tensions between the cosmopolitan/heartlands would return to haunt Singapore during the coronavirus pandemic. Closing Up and Opening Up of Singapore Given that Singapore was one of the first countries in the world to close its international borders upon the discovery of the coronavirus back in late January 2020, the move was viewed as being essentially one of caution— borne out of existential necessity—given the many unknowns and uncertainties concerning the virulency of the disease. Incidentally, the first country Singapore closed its borders to was China on January 31, 2020—a highly significant move—given that China was the most lucrative source of tourism for Singapore, with Chinese tourists contributing more than S4.1 billion of tourism receipts in 2019, almost one-fifth of all tourist expenditure in Singapore that year.24 For a country whose economic interests are closely related to China, the move suggested that Singapore was prepared to put aside economic well-being in order to preserve its domestic health, even if it meant angering Beijing diplomatically.25 Indeed, this closing up/opening up dynamic would be one key characteristic underlining Singapore’s coronavirus response. Given the decimation of Singapore’s tourism industry in 2020 as a result of closed borders, the need to open international borders was only a matter of time, but that was nonetheless highly debatable. Cognizant of the need to preserve its domestic health and also to maintain its links with the outside world, the Singapore government embarked on a series of creative proposals such as reciprocal green lane arrangements, proposed travel bubbles, and vaccinated travel lanes to ensure that travel could be restored in a measured and calibrated manner. As pointed out by its health minister Ong Ye Kung, “We know the extreme solutions are easy to understand, a freedom day [on one end] where all restrictions are removed, or locked down where everything is disallowed.”26 While the need for Singapore to open up in general remained undisputed, the issue of timing and manner remained a highly contentious one. This was especially so since by the end of 2020, even before the country embarked on a nationwide vaccine exercise, Singapore had more or less kept the disease at bay through strict quarantine measures and highly extensive contact-tracing efforts. Indeed between October and December 2020, daily cases averaged at a single digit and many social restrictions were relaxed (with the exception of mask-wearing). In 2020, the domestic econ-

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omy contracted 4.1 percent, and the country’s national carrier Singapore Airlines lost S2.51 billion in the financial year 2020–2021, with more than 90 percent in terms of passenger-carriage. Visitor arrivals in 2020 fell by 85.7 percent in 2020 while tourism receipts declined by 78.4 percent in the first three quarters of 2020.27 While the Singapore government remained guarded in its political posturing regarding opening up the country further, the cosmopolitan elite pushed for greater opening-up given that Singapore’s status hub was at risk. One such example was Singaporean businessman and former nominated member of parliament Calvin Cheng, who was highly vocal about the need for Singapore to open its borders liberally while keeping domestic safeguards in place (which was exactly contrary to the views of the heartland supporters). In a Facebook post on April 30, 2021 (just shortly before the Delta variant hit Singapore), Cheng called on the Singapore government to “restrict more domestic activities but leave borders open. It’s more important to keep us economically alive than for Singaporeans to have more social activities.”28 Six weeks later, Cheng would repeat his call for the government to loosen its measures toward the outside world, while keeping domestic restrictions intact. In another Facebook post, Cheng highlighted the following: “We should be very careful about relaxing eating out activities. Singapore’s existence is founded on us being a trading hub where people come and go freely. It wasn’t founded as a hub for eating out. . . . Singapore will die if we turn hermit . . . open borders quick. We don’t want Singapore to become a village full of villagers.”29 Likewise, Devadas Krishnadas, who is the chief executive of the FutureMoves consultancy, also noted the economic stakes for Singapore if it continued to delay opening its borders: “Singapore’s reputation as a pragmatic nation will be bolstered by a safe and well thought out reopening. . . . The rest of the world not only looks upon Singapore with envy, and for lessons learned, but as an example of what good government can achieve. Yet the unforgiving truth is that while Singapore survives based on its relevance to the global economy, the global economy can thrive without Singapore.”30 Thus it can be seen that the cosmopolitan elite view Singapore’s external relations, and the need to connect with the outside world, as fundamental to Singapore’s global identity. This fits well with the cosmopolitan worldview in which one frequently perceives the need to connect “to the earth but not to a particular place on it.”31 On this count, open international borders—which facilitate connection—are seen as more important than to be fixated on a dogmatic commitment to preserving domestic well-being. In contrast to the exhortations made by the cosmopolitan elite to open up Singapore, the heartlanders would emphasize the need to focus on the well-being within Singapore and are less enamored on the need to quickly open up Singapore’s borders. They would prefer to take a more cautious

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approach and view the government’s anxiety to open borders as unnecessarily reckless. Among them would be members of the opposition who have utilized a spike in coronavirus cases to challenge the government. For instance, the secretary-general of the Singapore Democratic Party, Chee Soon Juan, highlighted the inconsistency and changing rhetoric of the government in its coronavirus response in May 2021 when Singapore was experiencing the Delta spike: “Now that the number of cases has spiked again, [Prime Minister] Lee warns Singaporeans not to ‘let our guard down.’ He ignores the sacrifices that Singaporeans have made and the fact that we have been nervously watching how the government continues to allow foreigners into the country. . . . No one has ever called for our borders to be closed permanently. All Singaporeans are saying is that the government needs to be extra-cautious when it comes to letting in foreigners, especially from jurisdictions that experience high rates of Covid infection . . . was the risk warranted? The answer is an obvious no given the current spike. And why do Singaporeans always have to bear the consequences of these risks and the ministers none? Why are such risks always balanced on the people’s backs?”32 Acknowledging the political context of the comments (made by a member of the opposition party), the implications reflect a broader popular uneasiness toward the government’s stand toward opening up in which the presence of foreigners, particularly from the West (given that many Western countries had experienced high outbreaks), were viewed as threats to Singapore’s solidarity, security, and overall well-being. Interestingly, Chee has a reputation of pushing for Western-style human rights standards in Singapore; hence, his political diatribe against the government for opening up in a cavalier manner suggests the presence of a ready-made audience in which his comments find traction and among whom reside a more conservative mindset. To this group, domestic well-being (defined as keeping the disease at bay and having one’s way of life being interrupted as little as possible) is more important than whatever broader commitments to globalization or the benefits that being a cosmopolis would confer. Vaccine Choices A second—but no less salient—theme that emerged in the course of the pandemic is the debate over vaccine choices, particularly between Western messenger ribonucleic acid (mRNA) vaccines and vaccines that use an inactivated virus to stimulate the body’s response. The former constitute the Pfizer and Moderna vaccines developed by Western companies,33 while the latter constitutes the CoronaVac vaccine that was being developed by Sinovac Biotech, a Chinese biopharmaceutical company. All three vaccines have been made available under the national vaccination program, with the Pfizer vaccine being the first to be rolled out, in December 2020, followed

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by the Moderna vaccine in March 2021 and the CoronaVac in June 2021. Given the Singapore government’s strong push for its citizens to be vaccinated with the mRNA vaccines, the take-up rate in the first six months was somewhat surprising—only about 38 percent of the population were fully vaccinated. However, between July and the end of September, the vaccination take-up rates doubled to 78 percent before tapering off. What could be the reason? Given that the Singapore government does not provide a breakdown of vaccinations by vaccine types, one possible reason is that a sizeable population in Singapore were waiting for the CoronaVac vaccine, believing it to be safer than the mRNA doses.34 To be certain, the Singapore government in its original vaccine strategy hedged its bets by placing advanced purchase agreements with Pfizer, Moderna, and Sinovac, even before their vaccines obtained official approval.35 Even while it did so, there were already comments arguing for and against the vaccine choices. To this end, I argue that the cosmopolitan elite (many of whom are Westerneducated and influenced by Western choices) prefer the mRNA vaccines, while the heartlanders have a stronger disposition toward traditional vaccines such as the CoronaVac. In the case of the latter, this could also include many mainland Chinese citizens who are in Singapore for work and who view being vaccinated with a Chinese vaccine more convenient for them if they were to travel home.36 Calvin Cheng, who represents the cosmopolitan camp, puts it as such: “Any approved vaccine is better than no vaccine. But some vaccines are better than others. . . . Singapore however only wants the most efficacious in our national vaccine programme. . . . We cannot be a hermit nation. Our existence depends on us being open.”37 Singapore’s former top diplomat Bilahari Kausikan was also quoted as saying that he “would not take any Chinese vaccine, because there’s insufficient data” and that he would consider it only with a “proper report.”38 Conversely, detractors of mRNA vaccines and those who support Chinese vaccines believe them to be more trustworthy as they are based on traditional inactivated-virus vaccines. One infectious disease specialist in Singapore was reported as saying that many locals who signed up at his clinic to be vaccinated were in their sixties and echoed such concerns regarding the safety of mRNA vaccines.39 On the Reddit messaging forum, it was mentioned that “some senior citizens are saying that [we] should take China vaccine [sic] [because] we are Asians (or because they trust China), while the younger people prefer to get Pfizer/Moderna (and [they] do not trust China).”40 While the Singapore government has since approved the Sinovac vaccine as part of the national vaccination program, the debate over vaccine choices reflects existing tensions over the issue of trust toward the United States or China, and the extent to which Singapore—as an ethnicChinese majority nation—ought to position itself in the broader geopolitical competition between China and the United States in its policy choices.

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Interestingly, 200,000 doses of the CoronaVac vaccines were being delivered to Singapore in February 2021 despite the country not having officially approved the vaccines for use. Unlike the arrival of the Pfizer vaccines two months earlier, which was met with widespread media publicity and the enthusiasm of Singapore’s political leaders, the delivery of the CoronaVac was a much muted experience, raising questions as to whether there was any external coercion involved.41 One infectious disease specialist noted it was “unusual” that the vaccines had arrived before authorization was given, and that “it’s almost like they are begging Singapore to use them.”42 The same report also quoted another Singapore observer saying that given Singapore’s reputation for standards, its authorization of the Sinovac vaccine would be seen as “a seal of approval for all China-developed vaccines.”43 In an online post, Singapore’s former top diplomat Bilahari Kausikan explained that “one reason . . . why these projects are useful to Beijing is that the Singapore government [represents] a ‘reference investor’ and [Singapore’s] participation is the ‘good house-keeping seal of approval,’ assuring others of the integrity of the project. . . . If we approve the vaccine, it will do much to calm the doubts of others.”44 Related to our discussion between the cosmopolitan elite and heartlanders and how this is played out in Singapore’s vaccine choices, one could argue that the cosmopolitan elite would prefer the mRNA vaccines as they are viewed as being inherently superior to the inactivated vaccines. Indeed, large-scale studies have shown that both the Pfizer and Moderna vaccines have been found to be highly efficacious against Covid-19 hospitalization, with 88 percent for the Pfizer-BioNTech and 93 percent for the Moderna.45 In contrast, studies show that CoronaVac vaccines had an efficacy rate of 51 percent at preventing symptomatic disease while another Chinese vaccine, Sinopharm, was 79 percent effective.46 As Yeoh observed, cosmopolitanism is conceived as a “quality of the mind which allows Singaporeans to navigate successfully in a globalizing world.”47 From this, we might surmise that a cosmopolitan mindset is likely to view the mRNA vaccines with greater enthusiasm while heartlanders would prefer to lean on traditional vaccines given their more conservative disposition. Restrictions on Social Gathering Given Singapore’s overall success in its national vaccination program, the issue of loosening social-gathering restrictions has become a central focus of the government’s approach to a post-coronavirus society. This was unequivocally demonstrated in an article cowritten by the three government ministers of the multiministry task force responsible for the country’s pandemic response. Exhorting citizens on the need to transit to a “new normal”

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and learning to live with the virus, the ministers also called on citizens to respond in a “very different” way as the country sought to treat the virus as endemic.48 As of February 2023, life in Singapore has generally gone back to pre-Covid-19 days, with social restrictions completely removed and maskwearing made compulsory only in specific instances (e.g., public transport, healthcare institutions). In the first half of 2022, however, the country experienced substantial duress due to a surge in the Omicron variant. This has resulted in a considerable social angst as the government was perceived to be overly cautious and that its actions had not matched the political rhetoric in wanting the country to move to a truly endemic stage. Why is this so? I argue that underlining the government’s general wariness toward relaxing social gathering restrictions is an ongoing divide between those who are calling for Western-style social openings and those who prefer to continue to maintain a more cautious posture. This cautious posture stems primarily from the need of Singapore to maintain a low death rate so as to preserve its reputation as a health hub, particularly in Asia, in which Hong Kong represents a peer competitor. Given Hong Kong’s zero-Covid approach, any attempt by Singapore to loosen domestic restrictions in a significant way could possibly result in a surge in domestic infections and death rates, thus resulting in Hong Kong being viewed more favorably by expats and multinational companies in the region.49 While the Chinese government crackdown on domestic dissent in Hong Kong has no doubt affected the reputation of the city, it would seem that closed borders—more than political persecution—is a bigger sway factor when it comes to deciding whether to stay or to leave.50 Put simply, Hong Kong’s loss is Singapore’s gain. Interestingly, it would seem that both the cosmopolitan elite and heartland supporters agree on the need to keep death rates low, though they disagree on how this should be achieved. In the minds of the cosmopolitan elite, vaccination is the key to overcoming the Covid-19 pandemic, whereas heartland supporters prefer to adopt a more inward-looking approach (including having tighter social restrictions) to keep the virus at bay. Representing the cosmopolitan elite camp, Calvin Cheng, in a response to the Omicron surge in Europe, wrote on Facebook in November 2021 that “a pandemic of the unvaccinated is again starting to put stress on hospitals. . . . Countries all over the world have to put more pressure on the unvaccinated.” Cheng went on to call upon governments to “make life very difficult for them,” adding that “in Singapore, our challenge is these unvaccinated seniors. We want to be kind. We don’t want to trap them at home, as it will cause them all sorts of mental problems. But society cannot be held hostage by them. Persuasion doesn’t seem to move the needle by much.” As such, “it is time to mandate vaccination for seniors, with criminal penalties for those who refuse. For younger

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people, even stricter social restrictions may work, including threatening their jobs. If not, criminal sanctions for them too . . . punish and ostracize the unvaccinated. The rest of us need to live.”51 On the other hand, the heartland supporters would emphasize greater caution and to understand the reasons behind those who chose not to get vaccinated. Below are some typical responses to Cheng’s comments. As Jimmy Chan put it: “Before coming out so strongly as to criminalize the unvaccinated seniors, has Calvin ever bothered to find out where, how [and] by whom these seniors got infected? Since their movements were restricted for more than a month, Covid cases continue to remain over 3000 per day. And since they have been home-bound, is it not likely that they were infected by their own vaccinated family members who are living freely [and bringing] home the virus?” As Philly Weng put it: “Since the vaccinated are the ones catching Covid-19 and spreading the disease because they are the ones going everywhere with mild symptoms, how about penalizing the vaccinated instead?” As Petra Clarke commented: “Let’s finally stop blaming the elderly. Many of them have health issues, vaccine [sic] would only harm them. They chose not to vaccinate, knowing the risks. . . . We were promised ‘back to normal’ by 80 percent [vaccination] rate. I am still waiting.”52 From these snapshots, it would seem that what is at stake is a deep and fundamental chasm between those who view vaccination as the primary solution and those who perceive the individual and social vigilance as an ongoing necessity, particular if seniors and very young children (who are unable to be vaccinated) are involved. As noted earlier, the government task force had taken a middle ground choosing not to adopt a Western-style opening up and dropping all restrictions while also eschewing the kinds of measures taken by China. This approach however seems to be highly unpopular. The cosmopolitan elite continue to express dismay at the slow pace of opening up while heartland supporters see the need to protect the vulnerable in society as a fundamental duty of the Singapore government. From this, we might say that, one the one hand, cosmopolitan elite tend to view Singapore’s vulnerability as one that is very much linked to its external condition and thus the need to conform its internal conditions to the outside world. On the other hand, heartland supporters perceive Singapore’s vulnerability as one that stems primarily from its internal condition and consequently the need to safeguard itself from external threats posed from within.

Conclusion The Covid-19 pandemic—and Singapore’s shifting responses—have shown the challenges in arriving at a clear consensus in policy formulation. Given

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Singapore’s vulnerability as a small city-state, the country’s vitality and economic well-being is predicated on being connected with the outside world, which the pandemic had substantially affected. The need to balance both domestic and international priorities also means that Singapore has had to adapt its policies to rapidly changing health conditions, many of which are beyond its control. Geopolitical sensitivities have also led Singapore to carefully calibrate its coronavirus measures to ensure that its internal policies do not send the wrong signals externally. These include the need to assure countries, including many Western ones, that Singapore was indeed opening up and that it continued to remain an attractive place for economic investment.53 However, part of the difficulty in policymaking also lies in the need to satisfy both the cosmopolitan and heartland constituents within Singapore society and to find mutually agreeable positions. This is easier said than done for reasons that are very much linked to Singapore’s national identity. The question of “Who (or what) is a Singaporean?” has yet to be satisfactorily answered, and it is one which successive generations of political leaders and citizens would have to wrestle with moving forward. The Covid-19 pandemic has accentuated some of these tensions and struggles, and these are likely to remain flash points even as the country attempts to transit into a post-Covid world.

Notes 1. Salma Khalik, “A Confused Population Cannot Pull Together to Fight the Covid-19 Pandemic,” Straits Times, October 6, 2021. 2. Singapore Ministry of Foreign Affairs, https://www.mfa.gov.sg/About-MFA /Vision-Mission-and-Values. 3. Michale Leifer, Singapore’s Foreign Policy: Living with Vulnerability (New York: Routledge, 1999). 4. Ibid., p. 9. 5. Tanya Ong, “S’pore Must Be a ‘Poisonous Shrimp’ to Survive in a World of ‘Big Fish,’ LKY Said in 1966,” June 18, 2018, https://mothership.sg/2018/06 /singapore-poisonous-shrimp-lee-kuan-yew-foreign-policy. 6. Amitav Acharya, Singapore’s Foreign Policy: The Search for Regional Order (Singapore: World Scientific, 2008), pp. 4–7. 7. Cited in Heng Chee Chan and Obaid Ul Haq, S Rajaratnam: The Prophetic and Political (Singapore: ISEAS, 1987), pp. 213–221. 8. Kuan Yew Lee, From Third World to First: Memoirs of Lee Kuan Yew (Singapore: Straits Times Press, 2000), pp. 24, 75. 9. Ibid., p. 76. 10. Grace Yeoh, “Concerns of All Communities Should Be Addressed, but Politics Cannot Be Based Exclusively on Identities or Tribalism: Lawrence Wong,” November 23, 2021, https://www.channelnewsasia.com/singapore/identity-politics -singapore-racial-harmony-lawrence-wong-2332081.

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11. Cited in Brenda S. A. Yeoh, “Cosmopolitanism and Its Exclusions in Singapore,” Urban Studies 41, no. 12 (2004): 2435. 12. Ibid., 2436. Emphasis in original. 13. C. T. Goh, “National Day Rally Speech: First-World Economy, World-Class Home,” press release (Singapore: MITA, August 22, 1999). 14. Eighty-five percent of the Singaporean population live in public housing estates built by the nation’s Housing and Development Board. These estates with their blocks of high-rise flats, food centers, and neighborhood malls are hence synonymous with the notion of the heartland. 15. Angelia Poon, “Common Ground, Multiple Claims: Representing and Constructing Singapore’s ‘Heartland,’” Asian Studies Review 37, no. 4 (2013): 561. 16. Ibid., 562. 17. “Singlish” refers to a Singaporean form of pidgin English interspersed with Chinese, Malay, and Tamil words. 18. Cited in Goh, “National Day Rally Speech.” 19. Yeoh, “Cosmopolitanism and Its Exclusions in Singapore,” p. 2435. 20. See http://www.singapore21.org/sg. Emphasis added. 21. See, for instance, Poon, “Common Ground, Multiple Claims”; Tian Yun Hu, Authenticity and the Commodification of Heartlands in Singapore (Singapore: Nanyang Technological University, 2011); Michael R. Glass and Anna E. Salvador, “Remaking Singapore’s Heartland: Sustaining Public Housing Through Home and Neighbourhood Upgrade Programmes,” International Journal of Housing Policy 18, no. 3 (2018). 22. This was most vividly illustrated in a 2021 parliamentary debate between the PAP and an opposition party. See Hairianto Diman, “The Big Story: S’pore MPs Debate Job Security, Foreign Talent Policy in Parliament,” Straits Times, September 14, 2021. 23. Yeoh, “Cosmopolitanism and Its Exclusions in Singapore,” p. 2442. 24. Singapore Tourism Board, Tourism Sector Performance: Q4 2019 Report. 25. Kayla Wong, “China Slams Countries That Ban Chinese Travellers, Says Travel Restrictions an ‘Overreaction,’” February 2, 2020, https://mothership.sg /2020/02/china-travel-restrictions-overreaction. 26. Wallace Woon, “Three ‘Brakes’ Needed to Control Spread of Covid-19 in Singapore: Ong Ye Kung,” Straits Times, October 23, 2021. 27. See https://www.stb.gov.sg/content/stb/en/media-centre/media-releases /Singapore-Tourism-Sector-Emerges-From-2020-With-Greater-Resilience-and -Reinvention.html. 28. Calvin Cheng, Facebook post, April 30, 2021, https://www.facebook.com /TheStraitsTimes/photos/singapore-has-announced-new-measures-to-curb-the -spread-of-covid-19-following-a-/10157868753072115/. Throughout the pandemic, Cheng has maintained a consistent position regarding the need to open up to the outside world and to keep domestic restrictions, although his position circa end 2021 is for the Singapore government to abolish most domestic restrictions as well given Singapore’s high vaccination rate. 29. Calvin Cheng, Facebook Post, June 11, 2021. https://www.facebook.com /calvinchengnmp/posts/4226840240699353. 30. Davedas Krishnadas, “Why Singapore’s Sometimes Messy Reopening Matters—to the City, and the World,” Fortune, October 28, 2021. 31. Yeoh, “Cosmopolitanism and Its Exclusion in Singapore,” p. 2431. 32. Soon Juan Chee, Facebook post, May 5, 2021. https://www.facebook.com /photo.php?fbid=306219170874361&set=a.252934326202846&type=3.

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33. The Pfizer-BioNTech vaccine (sold under the brand name Comirnaty) was being developed by the German company BioNTech together with the US company Pfizer, while the Moderna vaccine is produced by Moderna Inc., a US pharmaceutical and biotechnology company. 34. It should be noted that this period also coincided with the Delta spike, hence possibly contributing to the increase in vaccination rates. 35. Jalelah Abu Baker, “Singapore Made Advance Purchases for Covid-19 Vaccines, Including Sinovac,” March 24, 2021, https://www.channelnewsasia.com /singapore/covid-19-vaccines-singapore-sinovac-advance-purchases-277091. 36. Based on existing Chinese travel policy (as of March 12, 2022), those who are vaccinated with non-Chinese vaccines have to do a serology test, in addition to any other predeparture tests in order to travel to China. However, those who are vaccinated with a Chinese vaccine do not have to do a serology test. See https:// www.mfa.gov.cn/ce/cesg/eng/lsfw/t1893114.htm. 37. Calvin Cheng, “Vaccinations and Exiting Covid-19 Restrictions,” Facebook Post, June 18, 2021, https://www.facebook.com/permalink.php?story_fbid=424740 4515309592&id=492779724105442. 38. Sui-Lee Wee, “China Wanted to Show Off Its Vaccines; It’s Backfiring,” New York Times, January 25, 2021. 39. Chen Lin and Aradhana Aravindan, “Sinovac’s Vaccine Find Supporters in Singapore Despite Effectiveness Questions Elsewhere,” Reuters, July 16, 2021. 40. “China’s Sinovac Vaccine Arrives in Singapore, but Not Yet Approved for Use,” February 24, 2022. https://www.reddit.com/r/singapore/comments/lrdomp /chinas_sinovac_vaccine_arrives_in_singapore_but. 41. The official response from the Ministry of Health’s director of medical services, Kenneth Mak, was that there was no “coercion” or “influence by other bodies.” See Cassandra Wong, “Singapore Received 200,000 Sinovac Doses: No ‘Coercion’ or ‘External Influence’ Involved,” March 24, 2021, https://sg.news.yahoo.com /singapore-200000-sinovac-doses-no-coercion-involved-153901856.html. 42. Dewey Sim, “Is Sinovac’s Early Shipment to Singapore ‘Unusual’ or Just Part of China’s Vaccine Diplomacy?” South China Morning Post, February 25, 2021. 43. Ibid. 44. “Will PAP Stand Up Against CCP to Not Approve Sinovac?” February 28, 2021, https://forums.hardwarezone.com.sg/threads/will-pap-stand-up-against-ccp -to-not-approve-sinovac.6473950. 45. “Comparative Effectiveness of Moderna, Pfizer-BioNTech, and Janssen (Johnson & Johnson) Vaccines in Preventing COVID-19 Hospitalizations Among Adults Without Immunocompromising Conditions, United States, March–August 2021, https://www.cdc.gov/mmwr/volumes/70/wr/mm7038e1.htm. 46. Smriti Mallapaty, “China’s Covid Vaccines Have Been Crucial—Now Immunity Is Waning,” Nature, October 14, 2021. 47. Yeoh, “Cosmopolitanism and Its Exclusions in Singapore,” p. 6. 48. Kim Yong Gan, Lawrence Wong, and Ong Ye Kung, “Living Normally with Covid-19: Task Force Ministers on How S’pore Is Drawing Road Map for New Normal,” Straits Times, June 24, 2021. 49. As of February 2023, Hong Kong had 2.88 million Covid-19 cases, with more than 13,000 deaths. 50. Monica Buchanan, “Thousands of People Are Leaving Hong Kong—and Now It’s Clear Where They’re Going,” May 27, 2022, https://www.cnbc.com /2022/05/27/people-are-leaving-hong-kong-and-here-is-where-they-are-going.html.

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51. Calvin Cheng, “Facebook Post,” November 5, 2021, https://www.facebook .com/calvinchengnmp/posts/446055166879129. 52. Ibid. 53. See Kit Tang, “Singapore Attracted S$17.2 billion in Investments Last Year, Exceeding Forecast Despite Pandemic,” January 20, 2021, https://www.channel newsasia.com/singapore/singapore-investments-2020-performance-covid-19-edb -420376.

3 Aotearoa/New Zealand: Contentious Trade Relations with the PRC Jason Young

WHEN THE COVID-19 VIRUS WAS FIRST DISCOVERED IN THE PEOPLE’S

Republic of China (PRC) in late 2019, few in New Zealand guessed the ramifications for a small, ocean-locked economy over 10,000 kilometers away. Over the next two years the outbreak developed into an international crisis of half a billion cases, 6 million deaths, and untold social upheaval.1 Supply chains were severely disrupted as countries were forced to introduce border restrictions and periodic lockdowns, and to shell out wage subsidies for impacted businesses. The PRC’s strict elimination strategy (the zeroCovid policy) helped the economy rebound better than most, especially in late 2020 and throughout 2021.2 Covid may have begun in the PRC, but the negative economic impact of those years was felt more keenly elsewhere. As a result, the PRC share of global trade grew even larger during the pandemic years,3 much as it had done in the years immediately following the 2008 global financial crisis. Over the same period, concern with PRC politics and international affairs deepened in liberal democracies, and unease at reliance on the Chinese economy set in. This unease centers on concerns that with economic linkages comes political leverage, that economic engagement can undermine liberal values and the promotion of universal human rights, and that economic engagement supports economic growth that increases the military power of an authoritarian state thereby decreasing security in the region. Diplomatic disputes that spill over into economic relations, such as that with Australia, add impetus to this unease and raise the question of how liberal democracies should manage economic relations with the PRC. This chapter explores the PRC economic dependency and trade diversification debate for New Zealand, a small, trade-dependent liberal economy 35

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in the South Pacific and a country that has responded to the challenges brought on by the Covid-19 pandemic with a renewed focus on economic and social resilience.4 New Zealand trade with the PRC has exploded since the global financial crisis (2007–2008). The PRC is now New Zealand’s top export destination and an important source of machinery, electrical goods, and other manufactured goods. Before Covid-19, the PRC was also an important source of investment, tourists, and international students. Its share of New Zealand goods exports grew even during the pandemic, taking nearly a third of the total in 2021, with some industries and entities more exposed than others. Questions are now routinely asked around the stability of the political relationship due to political challenges and the deteriorating geopolitical environment. Foreign Minister Nanaia Mahuta has argued that “the long term resilience for New Zealand businesses and traders and exporters is to look to the diversity of relationships” and said that reliance on “any one market puts us in a very difficult position.”5 Prime Minister Jacinda Ardern has warned that managing the relationship “is not always going to be easy and there can be no guarantees,”6 implying concern of trade retaliation if the political relationship deteriorates. Many in New Zealand are now asking, “How much is too much?” and considering how best to manage the economic relationship.

A Rules-Based Global Trading Order? Political and security changes in the Indo-Pacific intersect with countries’ external trade and economic engagement. This “economics-security nexus,” as Robert Ayson argues, is more challenging than the oft-cited “all-or-nothing choice between security interests with the US and economic interests with China.”7 Instead, the economics-security nexus forces consideration of the political and security implications of trade and economic engagement with all great powers, including the PRC. International political economy studies “the interaction of the market and such powerful actors as states, multinational firms, and international organizations.”8 The field examines the nexus between economics and security and economics and diplomacy present in bilateral relations and in the structure of the global economy. This nexus has become problematic in relations between liberal democracies and the PRC as PRC politics have hardened around the people’s republic model and as the geostrategic environment has deteriorated. This forces policymakers to consider more carefully how economic relations interact with their security and diplomacy. Most New Zealand policymakers, businesses, and politicians have promoted a position on international trade that is broadly consistent with economic liberalism. This position “is not only an analytic tool based on the

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theories and assumptions of neoclassical economics, but it is also a normative commitment to a market or capitalist economy.”9 New Zealand policymakers have exhibited a strong preference for a ‘rules-based international order’ and are acutely aware of the growing challenges to this order. The emergence of the PRC as a great power, and the US response to this, have brought on a new period of intensified strategic competition with the United States. This means that “New Zealand faces a substantially more challenging and complex strategic environment than it has for decades.”10 Moreover, the failure of the World Trade Organization (WTO) to renew itself when faced with the new dynamics of twenty-first century trade or to manage the PRC’s “socialist market economy” and in particular the role of the state within it,11 as well as the growing disagreement between the PRC and liberal democracies about what is legitimate economic practice in the twenty-first century, mean the rules-based trading order has come under considerable strain. To explain these challenges, scholars of international political economy (IPE) have looked to the role of the state in nurturing the national economy and managing trade policy. As Gilpin and Gilpin argue: “The state-centric interpretation of international political economy (IPE) rejects a belief popular among many scholars, public officials, and commentators that economic and technological forces have eclipsed the nation-state and are creating a global world economy in which political boundaries and national governments are no longer important.”12 This approach instead gives primacy to the role of the state in the global economy. As Friedrich List argued over a hundred years ago, in cases where individual interest and national interest conflict, the principle of “nurturing the nation’s productive forces” prevails.13 Albert Hirschman’s study National Power and the Structure of Foreign Trade illustrates how states pursue political ends through trade, seeking power through asymmetrical relations and achieving dependency through an “influence effect” over smaller states with concern over losing market access.14 Even Robert Keohane and Joseph Nye acknowledge that asymmetries in trade relations provide influence for larger states.15 Moreover, Farrell and Newman demonstrate that “institutions designed to generate market efficiencies and reduce transaction costs can be deployed for coercive ends” and that “some states are able to leverage interdependent relations to coerce others.”16 Economic links create dependency for nationstates thereby changing the cost-benefit analysis of strategic and political action and making them vulnerable to retaliation for positions unpopular with their trading partners. Trade is viewed as a state interest and is therefore part of the calculations political leaders make, including those related to politics and security where the economic implications of policy must be weighed. This approach sits uncomfortably with the focus in New Zealand on the benefits of free trade and a rules-based trading order, and it presents a starkly different interpretation of the evolution of the global trading order.

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In the postwar years, the United States and its allies in Europe and Asia provided the system of security that was the foundation of the international economy for countries like New Zealand. As the Cold War came to an end, the Soviet Union collapsed and the PRC significantly improved relations with the United States and its allies, thereby permitting growth of trade and economic links that crossed the Cold War divide. The PRC did not outwardly challenge US primacy in the region, instead seeking to maintain a benign environment as it opened to the international economy. Security tensions decreased and the United States–led postwar economy transformed into a global economy. As Aaron Friedberg argues, however, the PRC pursued a strategy to develop its trade relations in a way that enmeshed countries in the PRC economy, thereby improving their political influence and strategic position within the global trading system.17 The PRC did not liberalise politically, and US-PRC security issues were never resolved. The PRC came to dominate production and supply chains, becoming the world’s largest trader and a significant source of consumption and global capital flows. As it grew its national productive power it emerged as a peer competitor to the United States and so as a security and political challenge to the very order that had been the foundation of its growth. The economic emergence of the PRC therefore challenges both the liberal norms of the global trading order and the United States–led security it is founded on. This suggests that as New Zealand’s security environment deteriorates, these concerns will increasingly take precedence over commercial goals because “national security is and always will be the principal concern of states.”18 Moreover, as the liberal foundation of the global trading system is eroded, New Zealand policymakers will be forced to consider anew how best to uphold it. The following section overviews New Zealand trade policy to demonstrate the challenge that geostrategic competition presents New Zealand as well as discussing the evolution of New Zealand’s trading relationship with the PRC.

New Zealand Trade Policy in a Changing World Aotearoa New Zealand is a small liberal democracy of 5 million people located in the South Pacific. It was first settled by Polynesian explorers in the fourteenth century. Following an uptick in British migration and commercial activity in the eighteenth and nineteenth centuries, indigenous Māori iwi entered into a treaty partnership with the British Crown (Te Tiriti o Waitangi [The Treaty of Waitangi] of 1840) that promised a bicultural foundation for the new nation. This partnership suffered under colonialism, war, and discrimination and remains the basis of Aotearoa/New Zealand’s increasingly multicultural society and unique outlook on the world. New

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Zealand has a small economy that has historically focused on agricultural trade. It is a long-standing liberal democracy of the Pacific with an internationalist outlook. New Zealand foreign and trade policy has been strongly shaped by changes in the global economy. As Malcolm McKinnon argues, at the heart of New Zealand foreign policy has been the struggle for independence.19 This independence is framed and constrained by an inescapable dependency on external markets and geopolitics. New Zealand trade authorities confronted the harsh realities of being an independent state in a competitive global world from the 1960s as the United Kingdom turned to the European Economic Community and markets around the world remained closed and protected. Efforts to fill the loss of the special trade relationship with the United Kingdom developed in New Zealand policymakers a keen focus on free trade and on signing preferential trade agreements. New Zealand signed an early trade agreement with Australia (1966) and then a comprehensive preferential trade agreement in 1983 (Closer Economic Relations). Shortly after, and facing a major economic crisis at home, the fourth Labour Government (1984–1990) unilaterally liberalized the economy, drastically reducing the role of the state in the domestic economy and in international trade. A view that less government interference in the market and opening to international capital and trade would regenerate economic growth and postwar prosperity prevailed. The international focus turned to those parts of the world that could open their markets to New Zealand goods and that shared trade complementarity, most importantly the highly populated and developing markets of Asia. Since the 1990s, the New Zealand Ministry of Foreign Affairs and Trade (MFAT) has consistently argued in favour of free trade and open and inclusive regionalism. MFAT states that as “a trade dependent economy, geographically distant from export markets, New Zealand is a firm supporter of free and open trade . . . [and] a strong advocate for free trade and the regional and international institutions that support it.” Trade is seen as critical for the New Zealand economy and “a logical response to the nature of [the New Zealand] economy,” namely its scale and the size of the market. MFAT stresses the benefits of free trade to exporters and importers and points out that other countries’ trade agreements could disadvantage New Zealand exporters.20 New Zealand officials have pursued trade liberalization through a fourlevel strategy. New Zealand has supported the institutionalization of global trading rules through the long-standing support of the World Trade Organization. New Zealand has entered plurilateral agreements with like-minded countries, such as in the Association of Southeast Asian Nations (ASEAN), Australia and New Zealand Free Trade Agreement (AANZFTA), and the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), to promote trade liberalization in the region and to push forward WTO reform.

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New Zealand has signed bilateral preferential trade agreements, such as the New Zealand–China Free Trade Agreement, to reduce entry barriers to markets and to stimulate trade and economic relations in Asia. New Zealand has unilaterally liberalized the economy to create a highly competitive economy that can increase New Zealand productivity and prosperity. This four-level strategy has, by most New Zealand accounts, served most New Zealand businesses well in the post–Cold War era. As a leading proponent of open, inclusive, and rules-based trade liberalization, New Zealand has secured a front row ticket to the liberalization of trade in Asia, just as demand from these economies has exploded. New Zealand’s position remains grounded in the normative belief that markets should be unimpeded to produce the best overall outcome and to promote New Zealand interest and prosperity. This position promotes the institutionalization of international trade and business through international rules and dispute mechanisms, a central feature of the “rules-based international order.”21 Much of New Zealand foreign policy is directed at actualizing a world where trade and economic transactions are governed by impartial and jointly agreed and accepted liberal rules. This position is premised on the belief that with the fair application of liberal rules across the global trading system, small states like New Zealand can ameliorate asymmetries of power in their trading relations. New Zealand businesses and consumers have benefited from a global trading regime that has been more inclusive, open, and rules-based than at any point in history. This is the logic behind New Zealand support for PRC accession to the WTO and the 2008 New Zealand–China Free Trade Agreement and subsequent upgrade.22 Enmeshing the PRC, and all countries New Zealand trades with, within this rules-based international order is believed to provide the best opportunities for New Zealand businesses and consumers. Trade with the PRC has been the big-ticket winner in this strategy. After the 2008 free trade agreement came into force, two-way trade with the PRC grew rapidly. The removal of tariffs was accompanied by strong business and government promotion of the opportunities of trading with the PRC,23 and stable bilateral relations supported this growth. In only a decade, goods exports to the PRC grew sixfold from $2 billion in 2008 to $12 billion in 2018, while exports to Australia, Japan, the United States, and Korea remained relatively flat. Investment from the PRC and Hong Kong also picked up, but trailed well behind investment stock from Australia, the United States, and the United Kingdom. PRC visitor numbers grew steadily to become the second biggest national source of arrivals, and PRC students came to dominate the international fee-paying student market.24 This trend intensified for goods trade during the Covid pandemic, even as the services trade (tourism and international students in particular) dropped dramatically due to border closures. In the year to September

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201925 (the year prior to Covid restrictions), New Zealand exported $15.88 billion to the PRC, or 26.8 percent of total exports. By the year to September 2021, just two years later, New Zealand exports to the PRC reached $19.43 billion, or 31.6 percent of total exports. This is phenomenal growth ($3.55 billion) during a pandemic, made more significant by the fact that over the same period total New Zealand exports only grew by $2.36 billion, from $59.15 billion to $61.51 billion, meaning non-PRC exports contracted. In just two years, the share of total exports going to the PRC exploded from just over a quarter to nearly a third. A large part of the story of that growth is increases in dairy, wood, and meat exports, the three largest sectorial exports, to the PRC. In the year to September 2019 dairy exports were $4.77 billion (30 percent of total exports to the PRC). By the year to September 2021, they had grown to $6.83 billion (35 percent of total exports to the PRC). Over the same period, wood exports in the year to September grew from $3.06 billion (19 percent) to $3.60 billion (18.5 percent) and meat exports grew from $2.92 billion (18 percent) to $3.60 billion (18.5 percent). Combined, these three export categories now account for 72 percent of all exports to the PRC, and these categories of exports to the PRC alone account for 23 percent of total New Zealand goods exports to any market. Put differently, in 2021, 41 percent of all New Zealand dairy exports went to the PRC, compared to 31 percent in 2019. For wood, the share was 65 percent in 2019 and 59 percent in 2021. For meat, the share was 38 percent in 2019 and 43 percent in 2021. Other sectors may be less dominant in New Zealand’s overall share of exports but are nonetheless highly reliant on the PRC market. This was illustrated by Farah Hancock’s investigation “Who’s Eating New Zealand?”26 which outlined exports in 2020 that were highly reliant on the PRC market (45 percent of water exports in 2020 and 73 percent in 2019, 42 percent of sheep, 39 percent of seafood, 33 percent of beef). Those companies and entities primarily involved in commodity exports, especially agricultural products, are more highly exposed than other industries. Together, these agricultural commodity exports make up the bulk of New Zealand exports to the PRC. For example, in 2020 almost 50 percent of exports from Māori authorities,27 who have a high concentration of agricultural exports, were destined for the PRC market. This growth means New Zealand enjoys a large trade surplus with the PRC. This surplus grew from $3.32 billion in 2019 to $5.03 billion in 2021 (year to September) even as overall New Zealand imports remained stable at around $62 billion (dipping to $56 billion in 2020). While the focus has primarily been on dependency on exports to the PRC market, it is worth noting that certain industries also have a keen reliance on imports from the PRC. In the year to September 2019, $12.56 billion of New Zealand imports came from the PRC, 20 percent of total imports.

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This number increased to $14.4 billion in the year to September 2021 accounting for 23 percent of total New Zealand imports. Over the two years of the pandemic as New Zealand imports dropped and then recovered to pre-2020 levels, imports from the PRC grew by $2 billion, taking a larger share of the total. Certain New Zealand importers are more exposed than others. Of the big two imports in the year to September 2021, electrical machinery and equipment ($2.89 billion), and machinery ($2.66 billion), 50 percent and 30 percent of all imports in this category came from the PRC. Other exposed industries include furniture (67 percent from the PRC), apparel (64 percent), iron and steel including articles (39 percent), and toys and games (63 percent). When services are also included, the PRC is now not only New Zealand’s largest goods and services export market, but also its largest source of goods and services. Total New Zealand trade dropped from $171 billion in 2019 to $155 billion in 2021. Total goods and service trade with Australia dropped from $27.6 billion (16 percent of total) to $22.3 billion (14 percent of total) while total goods and service trade with the PRC grew from $32.71 billion (19 percent of total) to $35.93 billion (23 percent of total), for the years 2019 and 2021 to September. This is a significant consolidation of the PRC as New Zealand’s largest trading partner during the pandemic years. Originally part of a broader strategy of diversification due to ongoing market access problems with Europe and North America, the stunning success of New Zealand trade policy with the PRC has ignited a debate around overdependency on that market. This debate is driven by unease with having so much trade with a market that is governed by a government that New Zealand has a growing list of challenges with. Unease is evident in comments from New Zealand officials and politicians, most notably Foreign Minister Nanaia Mahuta, who reminded New Zealand companies in April 2021 that it is “prudent not to put all eggs into a single basket.”28

The State, Security, and Dependency The challenges in New Zealand’s relationship with the PRC are well documented and have grown over the past few years.29 The list includes issues that are bilateral in nature, such as attribution of cyber attacks, official responses to New Zealand criticism of PRC human rights, concerns around foreign interference and the funding of political parties, as well as strong PRC responses to New Zealand statements around Taiwan regaining observer status in the World Health Assembly. There are issues that New Zealand shares with many countries, such as criticism of PRC policy in the South China Sea at the United Nations,30 concerns over illiberalism in the PRC

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and especially in Xinjiang and Hong Kong,31 and a growing concern around the activities and influence of China in the Pacific.32 In March 2022, for example, Prime Minister Jacinda Ardern described the police and security deal between the Solomon Islands and the PRC as “gravely concerning.”33 These issues play out within a tense geopolitical environment where geostrategic competition with the PRC in the Indo-Pacific has become a key organizing principle for New Zealand’s closest partners in the region. New Zealand now faces two major changes in the international trade and business environment brought on by the deteriorating geostrategic environment. First, there is a growing body of evidence pointing to the prevalence of state direction of economic actors in the PRC economy. This has raised the question of linkages between economic activity and the strategic goals of the party-state,34 and whether businesses pursue state objectives and thereby present a security risk.35 This includes the assertion that the PRC is using economic coercion against states, such as Australia, New Zealand’s ally and close partner.36 This impacts New Zealand business confidence in the PRC market and raises the possibility of trade retaliation for New Zealand. It forces New Zealand to stand against PRC positions to defend the principles of the rules-based trading system, such as joining as a third party Australia’s WTO case against China’s imposition of an 80 percent tax on barley from Australia.37 Second, the response of the United States, the European Union, and other parts of the world to PRC trade practices and to their own relative economic decline (such as their share of global trade and gross domestic product [GDP]) has been to take a more cautious approach and to decouple from certain deeper forms of economic engagement with the PRC. This is particularly acute in areas of strategic importance, especially high-tech industries that could be dual-use,38 raising complex assessments for some New Zealand industries. These changes are exacerbated by the Covid-19 pandemic, which has disrupted supply chains and exposed countries to what they perceive as strategic vulnerabilities as well as preventing much international travel. This has allowed a “siege mentality” to set in in many parts of the world, especially in the PRC, where the zero-Covid policy prevents much international engagement,39 and where the response to the trade war with the United States has been to focus on strengthening the domestic economy and insulating public opinion from international criticism through even stricter information control. PRC media and officials have engaged in debates around nationalism, protectionism, and self-reliance as well as pursued policies of decoupling through the dual-circulation strategy. New Zealand enjoys strong relations with the United States, Australia, and other Western nations that have shifted to a policy of strategic competition with the PRC.40 As part of this competition, these nations are setting out a series of red lines in their economic

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relations with the PRC, especially in areas of leading dual-use technologies, and imploring allies, partners, and like-minded countries to join them.41 As Singaporean minister for foreign affairs Vivian Balakrishnan noted when commenting on sanctions on Russia following the invasion of Ukraine and the PRC position on these: “We are facing an uncertain bifurcation,” and if we “get the deepening of the bifurcation of the global economy, of supply chains, of technology, this will be a very, very different world.”42 These strategic concerns change the international environment for New Zealand trade policy with the PRC. The deterioration of Australia’s China relationship demonstrates the dangers of overdependency on the PRC market and raises the question of New Zealand vulnerability to economic coercion and trade retaliation.43 Human rights issues in the PRC raise questions around trading with companies in, for example, Xinjiang.44 These issues have forced a reassessment of the intersection of political liberalism and economic liberalism, and how New Zealand trade policy with the PRC intersects with New Zealand security, diplomacy, and the promotion of human rights. These considerations have always existed but have in recent years become more acute. The impact on New Zealand policy is evident across the following three areas. The first is a growing concern about economic coercion and weaponized interdependence. New Zealand apprehension over trade retaliation and economic coercion emerged as an issue in 2017 as the New Zealand government took a series of positions criticized by the PRC government and media. At first, opposition parties, commentators, and business lobbyists spoke strongly against government management of these issues and feared they would damage the economic relationship.45 At the same time, criticism from media commentators in Australia, the United States, and the United Kingdom condemned the New Zealand government for not speaking out strongly enough on PRC issues and for not joining these countries to criticise Beijing.46 After the Covid-19 pandemic hit and the second Labour-led coalition took office in October 2020, public and opposition criticism faded and the debate shifted. There is now a quiet acceptance of New Zealand policy toward the PRC. The breakdown of the Australia-PRC relationship demonstrated to a business sector that had been very bullish on China how critical positions could lead to a deterioration of the economic relationship. It demonstrated that access to markets could be compromised over political disagreements, or by negative media coverage leading to changing sentiment by Chinese consumers, and that this risk is largely out of their control. The second is renewed caution around dual-use technology and the types of trade, investment, and academic engagements that could support the development of military capabilities in the PRC. The global economy has bifurcated in these areas due to geopolitical competition. Competing

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great powers do not accept third parties trading sensitive goods with rival powers. The response of the New Zealand government has been to tidy up policy and regulations across several areas, including export controls,47 investment screening and applications (adding national security and public order considerations),48 and across university research collaborations.49 There is caution in PRC engagements and a renewed focus on further developing areas of high-tech cooperation with traditional partners, in particular the United States. The focus on trade with the PRC is increasingly on commodity exports, while the focus on trade with the United States promotes high-tech collaboration.50 New Zealand has responded to the bifurcation of global tech by working to ensure it does not lose access to US, European, and Australian partnerships. The third, as the international response to Russia’s invasion of Ukraine shows, is that there is no guarantee for New Zealand businesses that the New Zealand government will not find itself in a similar situation with the PRC and be forced to severely curtail economic engagement. The sanctions on Russia highlight concerns over supply chains and vulnerabilities around strategically significant imports from authoritarian countries. New Zealand’s response to the Russian invasion has been to move away from a long-standing policy of introducing sanctions through the United Nations (UN). Russia is a permanent member of the UN Security Council (as is the PRC) and could therefore veto any UN initiative. New Zealand instead introduced a new bill to parliament that severely curtailed New Zealand’s economic relations with Russia.51 This set an important precedent that PRC authorities will be watching closely. The wording of the bill left open the possibility of extending these measures to others who support the invasion, in particular Belarus, and potentially the PRC if it were to provide Russia with military support. This demonstrates the risks around supply chains with the PRC that could, in this extreme scenario, be cut off from New Zealand due to the countermeasures countries take. A whole range of companies would need to scramble to ensure companies in their supply chains are not in breach of the sanctions. To date, PRC officials have sort of achieved foreign policy objectives, including over territorial disputes, through means that fall short of the actions taken by Russia in its invasion of Ukraine. There are, however, worrying trends that leaders and scholars in the PRC, like their Russian colleagues, view themselves in a struggle against the liberal international order and the US and European role in that order. This crisis demonstrates what is possible in terms of a globally coordinated response to aggressive policy from an authoritarian state. If such policies were directed toward the PRC, the level of New Zealand trade dependency demonstrated above would lead, in the short term at least, to severe disruption for the New Zealand economy.

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Human Rights and Trade with the PRC The emergence of the PRC as a great power has emboldened the leadership to push back on liberal framing of international order and human rights norms, leading to a growing concern that trade can aid the PRC to undermine human rights. This plays out in the regulatory framework to ensure slavery and other human rights abuses are not present in the supply chains that companies and consumers engage with. These frameworks exist in many liberal democracies, including the Global Magnitsky Human Rights Accountability Act (2016), which creates a mechanism whereby the US government can sanction foreign government officials over human rights abuses. In New Zealand, a new plan of action to protect the integrity of supply chains from slavery52 has been introduced and there are growing calls to add human rights (as well as cyber security) to the potential introduction of a New Zealand–style Magnitsky act.53 While this has yet to happen, the trend toward more openly calling out human rights abuses in Hong Kong and Xinjiang, and comments from the foreign minister and prime minister, suggest this type of legislation is under active consideration. Such legislation could have considerable implications for New Zealand trade with authoritarian regimes like the PRC. New Zealand pushback on human rights concerns in the PRC has already strained the relationship and reignited debates around whether New Zealand is overly dependent on the PRC market, whether New Zealand is vulnerable to economic retaliation for these positions, and whether New Zealand needs a trade diversification strategy. New Zealand has been warned against speaking out on human rights, such as in May 2021, when a spokesperson for the PRC Embassy in New Zealand responded to the New Zealand Parliament passing a motion on Xinjiang by calling for New Zealand to “immediately stop this mistaken course of action” lest it negatively impacts the relationship.54 Even so, New Zealand exporters continue to trade extensively into China even as Prime Minister Jacinda Ardern states, “Managing the relationship is not always going to be easy and there can be no guarantees.”55 New Zealand government positions on human rights are broadly supported by the public and unlikely to change. For example, one survey by the Pew Research Center found 80 percent of New Zealanders support trying to “promote human rights in China, even if it harms economic relations.”56 The question then is whether human rights concerns will impact the trading relationship, through a deterioration of political relations, through sanctions on trade or economic retaliation, or through changed consumer preferences in the PRC (due to negative reactions to New Zealand criticism) or in New Zealand (due to coverage of human rights abuses). It is,

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however, questionable how New Zealand would use any Magnitsky-style legislation in the area of human rights and what actions by the PRC would meet the threshold to sanction PRC officials. While there was widespread support for the actions against Russia over its invasion of Ukraine, it is unclear what the trigger point would be for sanctions on the PRC in this area, or even whether such a strategy would be a productive means of shaping or deterring PRC behavior. The level of tolerance the PRC would have for such a policy is likely very low.

Conclusion New Zealand trade policy toward the PRC has shifted over the Covid-19 pandemic. As the country emerges from Covid-19 lockdowns and disruption, a more cautious approach to trade with the PRC has emerged with a focus on diversification and economic resilience. This is evident across several regulatory areas and in the shift in public discourse around the PRC as well as in the many political statements suggesting New Zealand businesses focus not only on opportunities but also adequately assess the risks. These changes are centered on the objective to create a more resilient New Zealand economy that eschews risk, and that develops appropriate economic relations with partners in the current geopolitical environment. For firms and specific entities and industries, there are clear limitations on what they trade with the PRC. New Zealand companies are legally obliged to comply with export controls in high-tech areas and those that do not are punished.57 For human rights, there is as yet no Magnitsky-style legislation, but there is a growing consensus that there should be.58 As public opinion on China shifts, we should expect a similar shift in consumer behavior in both New Zealand and the PRC. The New Zealand government has provided clear messages that overreliance on one market is poor risk planning for firms. For the state, the question is more complex. The PRC economy is New Zealand’s largest goods export market and imports from the PRC are significant. Given the challenges in the relationship and the potential for disruption, overreliance on trade with the PRC presents a risk of disruption to the national economy. Debates around self-reliance and security of supply chains are challenging for a small economy like New Zealand that will, until the population grows substantially at least, remain heavily reliant on the global economy. A focus on promoting a functioning rules-based order to protect access to trade is therefore warranted and will likely remain an objective, including in engagement with the PRC. As a New Zealand China Council report argues: “There is no obvious right or wrong answer to the question of how much New Zealand should export to or import from China,

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or any other market for that matter, either at the aggregate level or product level; just as there is no obvious right or wrong answer to how much risk we should bear.”59 The report states that businesses, not countries, trade with each other and therefore businesses must assess the risk, suggesting that rather than seeking diversification to manage the risk, the government should seek to maintain accessibility. This is an important consideration and no doubt the New Zealand government will seek to do just that by continuing to manage the relationship with the PRC through respect and good faith, as signaled by the foreign minister, Nanaia Mahuta.60 This may, however, not be enough to prevent trade disruption because certain issues are important for both countries and PRC foreign policy and geopolitics are largely out of New Zealand’s control. The complexity of what to do comes about because as a liberal market economy there are clear constraints on the power of government to direct commercial activity. The New Zealand government limits national exposure by signaling risk and through regulatory controls on dual-use tech and potentially around human rights concerns, but it does not direct firm-level decisions. New Zealand has responded to growing geostrategic contestation by clearly ring-fencing certain types of business activity lest they impact New Zealand relations with strategic partners, by identifying trade that could contravene a commitment to human rights, and by considering mechanisms to manage overdependency such as through trade diversification.61 New Zealand policymakers continue to work to maintain accessibility through the rules-based trading order and to seek a mature relationship with the PRC where political differences can be managed. New Zealand officials have also taken the first steps toward softening the blow of potential disruption to trade with the PRC by limiting New Zealand dependency on that market, though New Zealand businesses, especially agricultural exporters, continue to chase top dollars for their products in the PRC market. If the strategic environment deteriorates further, as currently appears likely, we should see further measures taken and an even more cautious approach to trade relations with the PRC.

Notes 1. See “WHO Coronavirus (COVID-19) Dashboard,” https://covid19.who.int. 2. Widespread Omicron outbreaks in 2022 overwhelmed the dynamic zero Covid-19 policy as testing failed to prevent its spread. Opposition to the strict measures increased, and economic activity suffered, ultimately leading to a policy reversal in late 2022. The PRC’s strict elimination strategy (the dynamic zero-Covid policy) initially helped the economy rebound better than most, especially in late 2020 and throughout 2021.

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3. Alessandro Nicita and Carlos Razo, “China: The Rise of a Trade Titan,” April 27, 2021, https://unctad.org/news/china-rise-trade-titan. 4. See, for example, Grant Robertson, “NZ Economy’s Resilience Shown Despite COVID Impacts,” December 16, 2021, https://www.beehive.govt.nz /release/nz-economy’s-resilience-shown-despite-covid-impacts. 5. See Anna Whyte, “Nanaia Mahuta Looking to Diversify NZ’s Trade Away From Reliance on China,” April 19, 2021, https://www.1news.co.nz/2021/04/19 /nanaia-mahuta-looking-to-diversify-nzs-trade-away-from-reliance-on-china. 6. See Anna Whyte, “‘There Can Be no Guarantees’ in New Zealand’s Relationship with China—Ardern,” May 3, 2021, https://www.1news.co.nz/2021/05/02 /there-can-be-no-guarantees-in-new-zealands-relationship-with-china-ardern. 7. Robert Ayson, “The Economics-Security Nexus Under Trump and Xi: Policy Implications for Asia-Pacific Countries,” 2017, p. 2, https://sdsc.bellschool.anu.edu .au/sites/default/files/publications/attachments/2017–09/cog_35_web.pdf. 8. Robert Gilpin and Jean M. Gilpin, Global Political Economy: Understanding the International Economic Order (Princeton: Princeton University Press, 2001), pp. 17–18. 9. Ibid., p. 14. 10. “Defence Assessment 2021: He Moana Pukepuke e Ekengia e te Waka” [A Rough Sea Can Still Be Navigated, December 8, 2021, https://www.defence .govt.nz/publications/publication/defence-assessment-2021. 11. Phil Levy, “What’s Wrong with the World Trade Organization?” Forbes, October 30, 2018. 12. Gilpin and Gilpin, Global Political Economy, p. 21. 13. For a discussion of Friedrich List’s concept of national productive power, see David Levi-Faur, “Friedrich List and the Political Economy of the NationState,” Review of International Political Economy 4, no. 1 (1997): 154–178. 14. Albert O. Hirschman, National Power and the Structure of Foreign Trade (London: University of California Press, 1945). 15. Robert Keohane and Joseph S. Nye, “Power and Interdependence”, Survival 15, no. 4 (1973): 158–165. 16. Henry Farrell and Abraham L. Newman, “Weaponized Interdependence: How Global Economic Networks Shape State Coercion,” International Security 44, no. 1 (2019): 45–47. 17. Aaron L. Friedberg, “Globalisation and Chinese Grand Strategy,” Survival 60, no. 1 (2018). 18. Gilpin and Gilpin, Global Political Economy, p. 18. 19. Malcolm McKinnon, Independence and Foreign Policy: New Zealand in the World Since 1935 (Auckland: Auckland University Press, 1993). 20. “NZ Trade Policy,” https://www.mfat.govt.nz/br/trade/nz-trade-policy. 21. See, for example, G. John Ikenberry, “Why the Liberal World Order Will Survive,” Ethics & International Affairs 32, no. 1 (2018). 22. Damien O’Connor, “China FTA Upgrade Enters into Force in April,” February 15, 2022, https://www.beehive.govt.nz/release/china-fta-upgrade-enters-force-april. 23. Antje Fiedler, Benjamin Fath, and D. Hugh Whittaker, “The Dominant Narrative of the New Zealand–China Free Trade Agreement: Peripheral Evidence, Presumptive Tilt, and Business Realities,” New Political Economy 26, no. 3 (2021). See also “Opening Doors to China: New Zealand’s 2015 Vision,” 2012, https://www .mfat.govt.nz/assets/Trade-General/NZ-Inc-strategy/NZ-Inc-China/NZInc-Strategy -China.pdf.

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24. See “Statistics,” https://nzchinacouncil.org.nz/statistics. 25. Because year-to-December data was not yet available for 2021 at the time of this writing, the annual trade data statistics used in this section are all for year to the end of September. All data are presented in New Zealand dollars. “New Zealand International Trade,” https://statisticsnz.shinyapps.io/trade_dashboard. 26. Farah Hancock, “Who’s Eating New Zealand?” Radio New Zealand, July 7, 2021, https://www.rnz.co.nz/news/in-depth/446357/who-s-eating-new-zealand. 27. “Māori Authorities Exports Rose by 1.8 Percent to $755m in 2020—Stats NZ,” August 26, 2021, https://www.rnz.co.nz/news/te-manu-korihi/450092/maori -authorities-exports-rose-by-1-point-8-percent-to-755m-in-2020-stats-nz. 28. Nanaia Mahuta, “He Taniwha He Tipua, He Tipua He Taniwha: The Dragon and the Taniwha,” April 19, 2021, https://www.beehive.govt.nz/speech/“he-taniwha -he-tipua-he-tipua-he-taniwha-dragon-and-taniwha. 29. See, for example, Anne-Marie Brady, “New Zealand’s Relationship with China Is at a Tipping Point,” The Guardian, July 31, 2020. 30. See, for example, “Note Number 08/21/02,” August 3, 2021, https://www .mfat.govt.nz/assets/Environment/Oceans-and-fisheries/20210803NzNote.pdf. 31. See, for example, Nanaia Mahuta, “Joint Statement on Electoral Changes in Hong Kong,” March 13, 2021, https://www.beehive.govt.nz/release/joint-statement -electoral-changes-hong-kong; US Mission Geneva, “Joint Statement on the Human Rights Situation in Xinjiang Delivered by Leslie E. Norton, Ambassador and Permanent Representative of Canada to the United Nations in Geneva on Behalf of 44 Countries Including the United States,” June 22, 2021, https://geneva.usmission .gov/2021/06/22/joint-statement-on-the-human-rights-situation-in-xinjiang. 32. See, for example, “Defence Assessment 2021.” 33. “PM Says Solomon Islands Developing Relationship with China ‘Gravely Concerning,’” Radio New Zealand, March 28, 2022, https://www.rnz.co.nz/news /political/464109/pm-says-solomon-islands-developing-relationship-with-china -gravely-concerning. 34. Aaron L. Friedberg, “Globalisation and Chinese Grand Strategy,” Survival 60, no. 1 (2018). 35. See, for example, Doowan Lee and Shannon Brandao, “Huawei Is Bad for Business,” Foreign Policy, April 30, 2021. 36. See, for example, the Australian case outlined in Roland Rajah, “The Big Bark but Small Bite of China’s Trade Coercion,” April 8, 2021, https://www.lowyinstitute .org/the-interpreter/big-bark-small-bite-china-s-trade-coercion. 37. Luke Malpass, “New Zealand Joins As Third Party to Australia–China Barley Trade Dispute Ahead of Scott Morrison’s Arrival,” May 30, 2021, https://www.stuff .co.nz/national/politics/125288810/new-zealand-joins-as-third-party-to-australiachina -barley-trade-dispute-ahead-of-scott-morrisons-arrival. 38. David Capie, Natasha Hamilton-Hart, and Jason Young, “The EconomicsSecurity Nexus in the US-China Trade Conflict: Decoupling Dilemmas,” Policy Quarterly 16, no. 4 (November 2020). 39. See, for example, “Offshore Beijing: China-Watchers Are Fleeing the Country for Other Asian Hubs,” The Economist, March 5, 2022. 40. For the United States, see US Senate, “A Bill to Address Issues Involving the People’s Republic of China,” 117th Congress, 1st session, May 2021, https:// www.foreign.senate.gov/imo/media/doc/DAV21598%20-%20Strategic%20 Competition%20Act%20of%202021.pdf. For Australia, see Rebecca Strating and Joanne Wallis, “Strategic Competition in Oceania,” January 11, 2022, https://www .nbr.org/publication/strategic-competition-in-oceania.

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41. See, for example, reference to an “Indo-Pacific economic framework” and “allies and partners” in “Indo-Pacific Strategy of the United States,” February 2022, https://www.whitehouse.gov/wp-content/uploads/2022/02/U.S.-Indo-Pacific -Strategy.pdf. 42. “Transcript of Minister for Foreign Affairs Dr Vivian Balakrishnan’s Interview with Bloomberg for Its 7th ASEAN Business Summit at the Bloomberg Studio,” March 15, 2022, https://www.mfa.gov.sg/Newsroom/Press-Statements -Transcripts-and-Photos/2022/03/20220316-Bloomberg-interview. 43. See, for example, Tess McClure, “‘A Matter of Time’: New Zealand’s Foreign Minister Warns China ‘Storm’ Could Be Coming,” The Guardian, May 14, 2021. 44. See, for example, Tom Hunt, “Are Wellington’s New Buses Being Made by Forced Uyghur Labour? An Investigation Is Under Way,” May 1, 2021, https:// www.stuff.co.nz/national/124991671/are-wellingtons-new-buses-being-made-by -forced-uyghur-labour-an-investigation-is-under-way. 45. See, for example, Liam Dann, “NZ/China Relationship: ‘We Have a Big Problem,’” New Zealand Herald, February 13, 2019; Andrea Fox, “Primary Exporter Heavyweights Urge PM Not to Let China Relationship Worsen,” New Zealand Herald, May 14, 2020; Audrey Young, “Jacinda Ardern Responds to National Claims That Five Ministers Are Awaiting Permission to Go to China,” New Zealand Herald, February 13, 2019. 46. See, for example, Dan Satherley, “NZ Labelled ‘Soft Underbelly’ of Five Eyes Spy Network in Canadian report,” May 21, 2018, https://www.newshub .co.nz/home/politics/2018/05/nz-labelled-soft-underbelly-of-five-eyes-spy-network -in-canadian-report.html. 47. “Customs and Excise Act,” 2018, https://www.legislation.govt.nz/act/public /2018/0004/latest/whole.html. 48. “Changes to the Overseas Investment Legislation,” November 14, 2021, https://www.linz.govt.nz/overseas-investment/latest/changes-overseas-investment -legislation. 49. “Trusted Research: Guidance for Institutions and Researchers,” https://www .protectivesecurity.govt.nz/assets/Campaigns/PSR-ResearchGuidancespreads-17 Mar21.pdf. See also Anne-Marie Brady, Jichang Lulu, and Sam Pheloung, “Holding a Pen in One Hand, Gripping a Gun in the Other,” July 2020, https://www.wilsoncenter .org/publication/holding-pen-one-hand-gripping-gun-other. 50. See, for example, Damien O’Connor, “Exports to the USA Show Success of New Zealand’s Emerging High-Tech Sector,” March 16, 2022, https://www.beehive .govt.nz/release/exports-usa-show-success-new-zealand’s-emerging-high-tech-sector. 51. “Russia Sanctions Bill,” March 11, 2022, https://www.parliament.nz/en/pb /bills-and-laws/bills-proposed-laws/document/BILL_120010/russia-sanctions-bill. 52. “Combatting Modern Forms of Slavery: Draft Plan of Action Against Forced Labour, People Trafficking, and Slavery,” September 2020, https://www.mbie.govt .nz/dmsdocument/11888-draft-plan-of-action-against-forced-labour-people-trafficking -and-slavery. 53. See Eva Corlett, “New Zealand to Ramp Up Russia Sanctions with ‘First of Its Kind’ Law,” The Guardian, March 7, 2022. 54. “Spokesperson of the PRC Embassy in New Zealand Comments on New Zealand Parliament Passing a Motion Interfering in Xinjiang,” May 5, 2021, http:// www.chinaembassy.org.nz/chn/zxgx/t1873450.htm. 55. Jacinda Ardern, “Speech to China Business Summit,” May 3, 2021, https:// www.beehive.govt.nz/speech/speech-china-business-summit.

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56. Laura Silver, Kat Devlin, and Christine Huang, Large Majorities Say China Does Not Respect the Personal Freedoms of Its People, June 30, 2021, https:// www.pewresearch.org/global/2021/06/30/large-majorities-say-china-does-not -respect-the-personal-freedoms-of-its-people. 57. See, for example, “NZ Plane Company Fined for N Korea Export,” Sydney Morning Herald, June 7, 2018. 58. See, for example, Sam Sachdeva, “NZ Encouraged to Move on ‘Magnitsky Law’ Sanctions,” July 6, 2021, https://www.newsroom.co.nz/nz-encouraged-to-move -on-magnitsky-law-sanctions. 59. “How Many Eggs, in How Many Baskets? An Update on NZ-China Trade Patterns,” August 2020, https://nzchinacouncil.org.nz/wp-content/uploads/2020/08 /How-many-eggs-in-how-many-baskets.-An-update-on-NZ-China-trade-patterns.pdf. 60. Mahuta, “He Taniwha He Tipua, He Tipua He Taniwha.” 61. Recent examples include “New Zealand—United Kingdom Free Trade Agreement,” https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements -concluded-but-not-in-force/new-zealand-united-kingdom-free-trade-agreement; and “European Union (EU)–New Zealand Free Trade Agreement,” https://www .mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-under-negotiation /european-union-eu-new-zealand-free-trade-agreement.

4 The Pacific Island States: Social and Solidarity-Based Economies Steven Ratuva

PACIFIC ISLAND COUNTRIES (PICS) WERE BADLY AFFECTED BY THE

Covid-19 pandemic and the consequences of the calamity were widespread and included deep economic and social scission as a result of border closures leading to the demise of tourism, reduction in imports due to disruptions in the global supply chains, rise in unemployment, and dramatic reduction in the capacity of states to provide social protection.1 These significantly affected human security throughout the region. Human security is defined here as the protection of people’s lives, livelihood, and dignity and is inseparably linked to their socioeconomic, political, health, personal, food, environmental, and community well-being and dignity.2 The pandemic has forced people to think more critically about the resilience and sustainability of the mainstream market system in the face of dramatic external pressures and the need to seek alternative systems that are more durable.3 Among Pacific communities, the responses to this unprecedented calamity were multipronged and reflected both the resilience of the local population and the generosity of international donors, especially neighbors Australia and New Zealand. Many local communities resorted to alternative social solidarity economies as a way of surviving the global economic crisis.4 This worked in tandem with external aid intervention. The question that arises relates to the extent to which partnership between external and local actors can create partnerships to promote economic empowerment to address human security in a fast-changing region. As this chapter shows, understanding both the local and external ways of addressing the human security aspects of the pandemic as part of the recovery effort is important to keep in perspective the diversity of strategies available.

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In response to the pandemic, countries such as Australia, New Zealand, and China provided Covid-19-specific aid as part of their humanitarian gesture. However, underpinning these were strategic and geopolitical issues that are often associated with aid. In subtle ways, the humanitarian aid sits on top of the hegemonic interests of global powers and ongoing competition for territorial influence in the Pacific manifested by the competing strategic narratives of China’s Belt and Road Initiative on one hand and the “Western” strategic interests on the other, represented by Australia and the Indo-Pacific alliance. The intersection between humanitarian aid and strategic interests has deeper implications on how human security is framed and addressed as well as how this shapes long-term geopolitical relationships. The humanitarian gestures conveniently conceal the neocolonial and hegemonic interests of donors in subtle ways. At the local level, Pacific communities have taken the initiative to build up their resilience through reinvention of their social and solidarity economy to adapt to the fast-changing socioeconomic crisis and to build up resilience at a time when the national market economy had been paralyzed and the governments had limited social protection means to provide for people’s human security. The pandemic budgetary aid provided by donors was focused largely on paying for civil servants and for serving national debt and did not trickle down to the grassroots level, so people had to fend for themselves in creative ways. The social and solidarity economy was an alternative socioeconomic means of adapting to the pandemic-induced crisis and for sustaining fractured communities. The importance of understanding and connecting both the external and local mechanisms of responses is important to give us a fuller picture of the multilayered nature of the pandemic rehabilitation process.

Impact of Covid-19 on Human Security in the Pacific The global impact of the pandemic on people’s well-being is staggering. For instance, it is estimated that about 80 million people were pushed into extreme poverty in the Asian region in 2020, and this poses a threat to the target of achieving Sustainable Development Goals (SDGs) by 2030. The Asian Development Bank estimated that prior to Covid, the rate of decline in extreme poverty (proportion of people living on less than $1.90 a day) would have fallen to 2.6 percent, but as a result of Covid the number would have increased by 2 percent.5 In the Pacific, it is estimated that poverty would have increased by 40 percent over pre-Covid-19 levels, and this is bound to increase as the effect of the pandemic draws out longer.6 Many of those who were just living above the poverty line ($1.90 a day)7 fell through the cracks and many of those already below the line sunk deeper into poverty. This for-

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tunately has been mitigated by people’s reliance on social and solidarity economies, which have absorbed the shock in a socially sustainable way. Although the Covid-19 infection rate in the PICs was uneven—with some having relatively high infection rates and some without any infection at all—the impact on human security in such areas as poverty, unemployment, lack of income, and state and other services has been deep and overwhelming, and no PIC has been spared. World Health Organization (WHO) data of August 26, 2020, show that the number of confirmed Covid-19 cases in the PICs had reached 1,946.8 Of these, Guam had the most, with 984 confirmed cases and nine deaths, Papua New Guinea had 460 cases and five deaths, French Polynesia had 397 cases and zero deaths, Fiji had 28 confirmed cases and two deaths, and New Caledonia had 23 confirmed cases and zero deaths.9 Table 4.1 shows the updated cumulative figures as of March 14, 2022. It shows that only Nauru, Tuvalu, the Federated States of Micronesia, and Pitcairn Island have not been infected by the novel coronavirus. When the pandemic started, a total of thirteen countries in the Pacific declared a state of emergency—American Samoa, the Federated States of Micronesia, Guam, Nauru, the Commonwealth of the Northern Mariana Islands, Palau, Papua New Guinea, the Republic of the Marshall Islands,

Table 4.1 Cumulative Figures for Covid-9 Infection in the Pacific, March 14, 2022 Pacific Country American Samoa Cook Islands Fiji French Polynesia Guam Kiribati Marshal Islands New Caledonia Niue Northern Mariana Islands Palau Papua New Guinea Samoa Solomon Islands Tonga Vanuatu Wallis and Futuna Total Source: Secretariat of the Pacific Community.

Total Cases 555 379 64,081 71,074 46,411 3,033 4 59,625 1 10,472 3,899 41,533 48 9,124 1,875 343 454 312,911

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Samoa, the Solomon Islands, Tonga, Tuvalu, and Vanuatu.10 Six countries had a combination of partial and full lockdowns and curfews—Guam, Fiji, French Polynesia, New Caledonia, Tonga, and Vanuatu. Schools were closed in almost all the countries with some later reopened.11 As in other countries around the world, the lockdown in the Pacific was accompanied by challenges in information dissemination, misinformation on Covid-19, anxiety, psychosocial stress, and stigma against those infected, many of whom became targets of online abuse and threats. Another associated challenge was physical distancing—especially as it is common for many in the Pacific community to live together communally, a practice common among many indigenous communities.12 Numerous initiatives were started—such as the Vanuatu WASH project—to teach students at school to hand-wash and cough into their elbows. One of the challenges was that some schools did not have handwashing and toilet facilities. In countries where infection rates were high, there was significant pressure on the struggling health systems, which were not ready for the sudden increase in hospitalization. At the height of the pandemic, the figures ranged from around 4,000 in Fiji13 to about 4 in Kiribati.14 The recovery rate has also been high as shown by the two examples of Kiribati (2,914 recoveries out of 3,000 cases) and Fiji (51,223 recoveries out of 53,332 cases).15 The impact on the health system also had ramifications on the economy as resources were diverted from various budgeted economic programs to extensive public health activities such as vaccination, treatment, and care.16 Some countries like Fiji had a relatively more robust health system, but the high hospitalization rate still stretched the government resources and capacity to the limit.17 Since the Pacific Island leaders declared during their Nauru meeting in 2018 that climate change remained the “single greatest threat to the livelihood, security and wellbeing of the peoples of the Pacific,”18 Covid-19 had overtaken the climate issue in terms of priority and changed the global and indeed regional security narratives in unprecedented ways. The sudden impact of Covid-19 has forced people into rethinking about security and new ways of reframing development in the region. The pandemic starkly exposed the fragility and lack of resilience of the much-touted neoliberal economic system—which had to be bailed out through direct state subsidies and other forms of economic nationalization.19 Many in the Pacific who relied on the market system for most of their lives had to resort to the social solidarity economy when they lost their jobs. The situation was worsened by the lack of state social protection resources and reliance on the formal economy. More than in any other period in history, a pandemic became the dominant security threat in the region and the world, even displacing climate change and geopolitics from daily headlines.

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Covid-19 is unique as a human security threat because the virus has a domino effect on other social conditions such as unemployment, poverty, psychological depression, collective trauma, sociopolitical unrest and instability, social risks, and hazards to well-being.20 Social protection resources and mechanisms by the state are limited, especially for poor states and communities, which means that innovative alternatives have to be sought.21 For many Pacific peoples, this would entail falling back on the social and solidarity economy—which has been part of their lives for centuries— despite dramatic social transformation resulting from globalization and deepening incorporation into the international market economy.22 The impact of Covid-19 is expected to be long-term and will continue to linger for decades to come. The slow recovery from the shock will mean that industries like tourism may take up to a decade to return to the preCovid-19 level as travel may slowly pick up over a number of years. Trade may remain lethargic for some time, and internal production and distribution of goods and services will become normalized in piecemeal fashion over a period of a few years. Reliance on aid for budgetary purposes may continue to increase. According to the Asian Development Bank, the Pacific economies were predicted to contract by 0.6 percent in 2021, but to grow at an average of 3.9 percent in 2022 and 5.45 in 2023.23 While the upward pace of growth may be reassuring, it will still be within the “negative,” relative to the pre-Covid-19 period, for some time because many PIC economies went through turbulent freefall and would need to find a resilient base on which to bounce back to pre-pandemic level.

External Responses to Covid-19: The Indo-Pacific Power Play? The external responses to Covid-19 have been a mixture of humanitarian and, to a more subtle degree, geopolitical maneuvering. In many ways, the responses in the form of aid mirror the pattern of aid geopolitics. Australia, which still has the neocolonial perception that the Pacific is its “backyard,”24 was quick to respond to the pandemic in the Pacific through various forms of aid. New Zealand, which is often less politically explicit in its aid in comparison to its neighbor Australia, also provided vaccines to some PICs. To a limited extent, this was also the case with the United States. However, China also responded but in a limited way, partly as a result of the bigger vaccine war which has seen the West sidelining and even demonizing Sinovac, the Chinese-made vaccine. New Zealand has donated about 1.2 million doses of Pfizer and AstraZeneca and has helped eleven Pacific countries via the COVAX program.25 Apart from bilateral

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vaccine aid, Australia provided up to 20 million vaccines to partner countries in the Asia-Pacific region.26 The pandemic gave Australia an opportunity to rebrand itself as a humane and concerned member of the wider Pacific community, especially given its controversial and unpopular stand on the climate crisis, which has won it the label “climate pariah state,” alongside Brazil, India, Saudi Arabia, Russia, and China. As a member of the Pacific Islands Forum, Australia’s reluctance to accept the Pacific consensus on the climate issue has proved to be politically irritating as well as embarrassing to many Pacific leaders.27 Australia’s vaccine aid came at a time of desperate need because many Pacific states could not afford or could not join the global vax queue for logistical and political reasons. Australia’s prime minister, Scott Morrison, seized the opportunity to assume the savior role by saying: “Our Pacific island family must be a focus of international support. There has never been a more important time for Australia’s Pacific Step-up as we all face these massive challenges.”28 This was reinforced by the minister of foreign affairs, Marise Payne, and the minister of international development and the Pacific, Alex Hawke: “Australia’s response will build on our existing Pacific Step-up, which has strengthened our co-operation in helping to grow economies, build resilience, and enhance regional stability. . . . We have never faced a challenge of the scale of COVID-19, but we will combat it together as a Pacific family.”29 Australia’s “Step-Up” policy was a reengagement policy with the Pacific in response to the Belt and Road Initiative in the region and the perceived threat that Chinese aid, with its diplomatic, political, military, and soft-power approach in the region, would pose a challenge to Australia’s regional interests, reflected in the Indo-Pacific concept.30 Australia’s response has been wide-ranging and included vaccines, testing kits, personal protective equipment (PPE), critical-care equipment, and other medical supplies, including Australian medical assistance team specialists sent to Fiji and Papua New Guinea. In addition, Australia also provided direct economic aid to help prop up the ailing economies of some Pacific states. East Timor was allocated $304.7 million to address the economic and social costs of the pandemic. This was part of a broader “humanitarian corridor” that Australia created to consolidate its pandemic aid in Oceania and since its opening on March 24, 2020, Australia has been able to deliver forty tons of humanitarian supplies to thirty PICs and TimorLeste, and accessed over 300 flights to deliver these essential supplies and allowed over 750 Australians and 1,500 Pacific Island and Timorese nationals to return home.31 In addition to this was the commencement of the Pacific Labour Scheme (PLS) and Seasonal Workers Programme (SWP), which primarily was meant to alleviate persistent labor shortage in Australia but that was also framed

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as part of Australia’s economic recovery strategy for the region.32 Behind the veneer of this humanitarian gesture, there have, in the past, been controversies surrounding allegations of Pacific worker exploitation that have painted a rather murky picture of Australia’s PLS and SWP.33 New Zealand, which has a relatively independent foreign policy (compared to Australia, which seems to have a close foreign policy alliance with some US major strategic interests), has redefined its engagement with the Pacific region with the shift of its Pacific engagement strategy from “reset,” which had an anti-China focus, to “resilience,” which attempts to reconfigure the foreign policy lenses toward people to people and “mana-to-mana” between Aotearoa New Zealand and the Pacific.34 In some ways, this was a philosophical and strategic switch from state-to-state diplomacy to cultural connections. This new resilience narrative was tested for the first time in its response to Covid-19 when New Zealand provided up to $120 million in official development assistance to support Pacific economies, which were hit hard by the pandemic.35 It also donated vaccines to countries such as Fiji. In justifying this, the minister of foreign affairs, Nanaia Mahuta, stated: “By working closely with our Pacific neighbours, and other partners, we can provide a further line of defence for our entire region—better protecting us all against the impact of the pandemic which continues to rage across the world.”36 China’s responses to the pandemic in the Pacific can be categorized into three different but connected approaches. The first was the provision of supplies totaling $1.9 million to PICs to fund medical supplies such as facial masks, protective clothing, thermometers, and gloves. China provided direct cash grants to Papua New Guinea ($300,000), Samoa ($200,000), and Vanuatu ($100,000).37 The second approach was through sharing of information, particularly by China’s National Health Commission, with health officials from PICs recognized by China. Third, China has been using the media strategically as part of its public relations campaign to project an image of humanitarian concern for PICs. This was done through People’s Daily in China as well as local media outlets in various PICs. China’s fourth strategy was to mobilize local Chinese communities and medical teams to contribute to the local efforts to combat Covid-19.38 The PICs were not supplied with Sinovac, the Chinese vaccine, unlike some Asian countries, because of a number of factors including Australia’s and New Zealand’s quick response to supply the AstraZeneca and other vaccines perhaps in anticipation of China’s attempt to offer Sinovac, which has been recognized by countries such as Fiji. The Sinophobic perception drummed up by the racialized geopolitical narratives of the United States and Australia also fed into the distrust of Chinese science and vaccines.39 The responses to the pandemic by the big powers followed the pattern of normal aid but were packaged under the humanitarian rubric and brand.

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As such, it becomes a powerful diplomatic leverage to keep the PICs within the hegemonic orbit of Australia and New Zealand. Given their limited financial and technical resources, PICs continue to rely on their more resourceful bigger neighbors and, interestingly, the pandemic has deepened this dependency relationship further. Another important factor to note is that the external aid was targeted largely at the health sector and the government’s budgetary programs, and beyond these, in the communities, people had to look after themselves to survive. All across the Pacific, they had to rely on the social and solidarity economy, in some cases, to revive their indigenous innovation as a way of responding to the economic calamities caused by the pandemic.

Local Covid-19 Responses: Social Solidarity Economy and Rehabilitation Much of the PICs’ livelihood is generated from the semi-subsistence sector, which is based on collective ownership of land, small-scale production, and direct consumption of produce by the nuclear and extended family. A core component of this is the kinship system, which acts as the social safety net as well as a mechanism for sociopolitical security, socioeconomic reciprocity, and a sociocultural unit for distribution and redistribution. The loss of jobs and income forced many to rely on the social and solidarity system of production to support their human security needs. The social solidarity economy pertains to norms and practices for maintenance of collective social life as well as a way of survival in times of crisis.40 One of the consequences of colonization was the creation of a syncretic configuration in the form of market economy and social solidarity economy, and in the contemporary era they form the basis of Pacific economic production. This is relied upon in times of crisis, such as cyclones, as people try to rehabilitate their lives. This is the story of survival as a response to Covid-19 where a threat to human security has led to strengthening of the social solidarity economy in response to the deepening crisis of the market economy. Studies on social solidarity economies show that they have a long history in many countries of the world, especially in the communities of the Global South.41 The International Labour Organization (ILO) frames the social solidarity economy as a “concept designating enterprises and organizations, in particular cooperatives, mutual benefit societies, associations, foundations and social enterprises, which have the specific feature of producing goods, services and knowledge while pursuing both economic and social aims and fostering solidarity” for “re-balancing economic, social and environmental objectives.”42 It has been suggested that the popularity of the social solidarity economy in the Global South has been associated with worsening

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living conditions and poverty; resistance to privatization and trivialization of people as commodities to be traded in the market as part of the market imperative; and predatory commercial behaviour causing global environmental degradation and climate emergency.43 Local communities have been at the forefront of the social solidarity economy, and they generate inspiration from their indigenous cultures that incorporates economic, social, environmental, political, communal, and psychological dimensions.44 The ethical and moral dimensions to the social solidarity economy, which include equity, diversity, inclusion, democratized distribution of power, and collective participation, have the critical role of protecting the most vulnerable.45 The social solidarity economy has been the cultural standard bearer for the poorer and less powerful against the power of money and politics,46 and since the Rio+20 Summit it has been a central tenet of the United Nations Development Programme (UNDP) and ILO in their approach to community rehabilitation and social empowerment. In fact, the United Nations Inter-Agency Task Force on the Social and Solidarity Economy (UNTFSSE) referred directly to the social solidarity economy as organizations pursuing explicitly social or environmental objectives and “guided by the principles and practices of cooperation, solidarity, ethics and democratic self-management, among others, and can take the form of cooperatives, social enterprises, self-help groups or community associations, among others.”47 Meanwhile, discussions and contestation over the long-term viability of social solidarity economy continue, driven partly by growing disasters in poor countries.48 The pandemic impacted on the Pacific economies severely, and the recovery process posed a huge challenge.49 While more resourceful countries such as Fiji were able to provide social protection measures such as wage subsidy, most could not, and this deepened the social impact. Emergencies were declared, airports were closed, and there was a strict watch on gatherings. Policing these was a challenge especially when the police and military personnel were also susceptible to being infected.50 Both Fiji and Vanuatu were also devastated by Cyclone Harold in 2020 and this added another layer to the economic and social distress. The risk of the pandemic was heightened by the high rate of obesity and diabetes in the PICs. For instance, ten countries in the Pacific have the highest obesity rates in the world. There is also a case of triple affliction involving malnutrition, a condition where undernutrition, micronutrient deficiencies, and obesity coexist.51 In many PICs, the leading cause of death is noncommunicable diseases—a result of a dramatic change in diet from fresh traditional food from the sea and land to carbohydrate-heavy foods, high in fat, salt, and processed sugar. The pandemic and the closure of ports would have affected the inflow of processed food from overseas, and this would have helped minimize the potential for increased diabetic conditions.

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Meanwhile, the opportunity to use their social solidarity economy creatively and innovatively became a new challenge for Pacific communities. One of these is the use of the digital barter system (DBS), an initiative that started in Fiji under the brand “Barter for Better Fiji” and that spread to Tonga, Samoa, Vanuatu, New Zealand, and other PICs.52 The barter system experienced a resurgence across the Pacific region and took roots in places such as Tonga, Samoa, and Vanuatu.53 The DBS involves an online-based exchange of good and services. People will advertise what they wish to exchange and what they prefer in return. Negotiations and business deals are done online and agreements digitally agreed followed by the actual delivery of good or services. The faceto-face barter system has been part of the traditional system of reciprocity in most Pacific communities for millennia, and under Covid-19 conditions this was digitized to ensure safety as well as take advantage of the high level of digital connections through smart phones and all the advantages and conveniences it brings. Some examples of the digital reciprocity system in Fiji included exchanging a kayak, a taxi fare in exchange for fresh produce, hot cross buns for online tutoring, an old carpet for a professional photography session, vegetable seedlings for homemade pies, and offers to have backyards cleaned for prayers.54 There are a number of advantages of the DBS. The first is that it is intercultural and can be used by other ethnic groups, not just Pacific peoples. Second, it complements the digital cash economy well. Many Pacific families received remittances digitally, and the cyber skills used in one form of transaction can also be used in the other. Third, the connections made between people and the “contract” are made quickly in real time across distant geographical boundaries. The fourth is that the direct financial investment is minimal; in fact in many cases, there is none, which augurs well for traditional subsistence-based communities such as those in the Pacific. Fifth, the DBS provides space for inclusive and equitable relationships in terms of the power of the traders, gender, and socioeconomic status. The role of the DBS will continue to be critical in the economic rebuilding process as it provides the necessary cushion for any future economic shocks. Another important aspect of the social solidarity economy is communally owned land, and this has helped to sustain families and communities in times of Covid-19. People have resorted to home gardening and have fully utilized empty plots of land to farm vegetables and root crops for daily sustenance. While some land has been privatized or leased out for commercial purposes, the majority are still in the hands of local tribes, and this acts as a safety net against hunger and absolute poverty especially in times of disasters or a similar pandemic to Covid-19.

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Challenges in Rebuilding the PIC Economies Rebuilding the shattered post-pandemic economies in the Pacific will be challenging and will take some time to take effect. In some economies such as Fiji and Cook Islands, tourism from selected markets such as New Zealand and Australia has opened up. Vanuatu, the other major tourism market, is still cautious about opening up, and the other PICs, such as Samoa, Tonga, Kiribati, Tuvalu, and the Micronesian states in the North Pacific, still have a long way to go before they open their borders. This means that the economic rehabilitation process across the Pacific will be long and arduous, especially for a region that is at the forefront of the climate crisis in the form of frequent extreme cyclones, sea level rise, erosion, drought, coral bleaching, saltwater contamination of agricultural land and water holes, and extreme loss and damage as a result of all these. The multilayered sets of challenges will need to be addressed using multipronged strategies in relation to rebuilding the market economy and consolidating the social solidarity economy and how the two work together strategically and amicably. Central to this relationship is the role of the human agency in terms of how communities can creatively pull together strands from both to configure a socioeconomic structure and production system that is sustainable and resilient. Simply rebuilding the economy on its own along the lines of donors’ interests such as the World Bank, International Monetary Fund (IMF), and foreign states is not enough. The rebuilding process must address a complex set of issues and expectations including addressing the issues of inequality, poverty, equitable growth, and sustainable resource development. In addition to these is the need to build up more resilience especially to the threat of climate crisis, which the leaders of PICs including New Zealand and Australia have declared in the Boe Declaration in 2018 as the “single greatest threat to the livelihoods, security and wellbeing of the peoples of the Pacific.”55 Another major challenge surrounds the heavy dependency of the PICs on aid. Aid is a major distortionary factor in economic sustainability because it creates conditions for perpetual dependency and, in turn, it guarantees external control of the economic trajectory, philosophies, and outcomes by foreign donors. Furthermore, the recipient countries hardly see any money entering the local banking system because most of the aid contractors are from the donor countries. For instance, a study carried out in 2019 found that more than 90 percent of the New Zealand aid remains in the country.56 This is also the case with Australia, which has a bad reputation for converting its “boomerang aid” as an opportunity to employ its consultants. At the geopolitical level, aid has become a leverage for regional contestation between the big powers, such as China and Australia. China’s

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incursions into the region through its Belt and Road Initiative have seen significant increase in Chinese aid to the PICs. For instance, there was a surge of almost 25 percent to $2.9 billion in 2018 over a few years, although there was a decrease of 15 percent in 2019.57 One of the major criticisms with Chinese aid is that most of it is in the form of soft loans, and this has directly led to the high level of debt incurred by recipient Pacific states.58 This has raised issues of long-term security and sovereignty, especially in terms of future scenarios where the PICs may not be able to repay the debts and may be forced to hand over control of aid-based infrastructures to China, as seen in the case of Sri Lanka. Besides aid, China has also increased diplomatic and military relationships in recent years, and this has caused a wave of Sinophobic fearmongering among the Western powers, such as Australia and the United States.59 To counter Chinese expansion in the region, Australia devised its “Step-Up” policy as a way of keeping the PICs within its sphere of influence. In 2019–2020 alone, Australia allocated $1.3 billion worth of aid to the Pacific countries.60 By and large, Pacific countries see themselves as pawns in the middle of big-power contestation and the result could be implied in the African saying: “When two elephants fight, the grass suffers.” Perhaps the way forward for PICs as part of their post-Covid-19 rehabilitation is to seriously rethink about their development models. The pandemic has shown that overreliance on tourism and foreign-based products, technology, and services can be unreliable, pose a high risk, and are unsustainable, especially in times of disasters. A more self-reliant, local innovation-based, sustainable, and resilient economic base has to be a priority. Furthermore, it has to have a critical link with the social solidarity economy to ensure that people, as agencies of transformation, have a direct intellectual and resources input and meaningful participation in the new economic process and rehabilitation. Already Pacific communities have been navigating their way through the treacherous reefs of geopolitics between China and the West by engaging with both sides in a “nonaligned” way while generating economic benefits for themselves. They have also been strategic in engaging with both the capitalist market system and the indigenous social and solidarity economy. This syncretic and hybrid approach can be used strategically as a basis for consolidating and sustaining their sense of independence, resilience, and empowerment for the future.

Conclusion The process of post-Covid-19 rehabilitation and rebuilding will take decades. This is because of the deep and extensive damage the pandemic has inflicted on global economies. For the PICs, the existence of the social solidarity

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economy provided the cushion for economic collapse and extreme poverty. The small size of the population and the fact that people have direct access to communally owned land has been a major factor in building up resilience. The rebuilding process will be multidimensional in nature and will include rebuilding the economy using a harmonious blending of both market and social solidarity economy approaches in a creative way, addressing the collective psychological trauma inflicted by the pandemic, rebuilding social cohesion lost as a result of separation, and strengthening the resource base to ensure long-term sustainability and resilience to calamities. The role of multiple players are needed here, especially the national state, regional organizations, and local communities, as well as some foreign players who are ready to complement the local aspirations, expectations, and needs rather than those bent on merely satisfying their strategic, political, and ideological agenda, which seems to be the case now. Part of the economic rebuilding process should be the diversification of the economy, away from overreliance on tourism. Development of primary industries such as agriculture and fisheries have their own challenges. As Pacific communities have learned, the use of the digital economy is a way forward. While digital barter exchange was at a local level, this can be expanded into the introduction of high-level digital technological innovations that are environmentally friendly, accessible, and monetarily rewarding. A critical lesson from the pandemic is that Pacific communities have learned to recognize their own strengths, utilize existing communal capital, and develop community-based resilience in response to threats to their human security. The fact that Covid-19 destroyed the core of the market economy meant that people were forced to think outside the box and look for alternative systems of exchange, production, and means of livelihood. Something negative has spurred the advent of something good. This is indeed a blessing in disguise.

Notes 1. United Nations Development Programme, “UNDP Responses by Country,” 2022, https://www.pacific.undp.org/content/pacific/en/home/covid-19-pandemic -response/undp-response-by-country.html. 2. International Labour Organization, “Social Protection Responses to the COVID-19 Pandemic in Developing Countries,” 2020, https://www.ilo.org/wcmsp5 /groups/public/-ed_protect/-soc_sec/documents/publication/wcms_744612.pdf. See also R. Jolly and D. Ray, The Human Security Framework and National Human Development Reports: A Review of Experiences and Current Debates, 2006, http:// hdr.undp.org/en/media/ NHDR_Human_Security_GN.pdf. 3. S. Ratuva et al., COVID-19 and Social Protection: A Study in Human Resilience and Social Solidarity (Singapore: Palgrave Macmillan, 2021). 4. Ibid.

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5. Asian Development Bank, “Key Indicators for Asia and Pacific,” 2021, https://www.adb.org/publications/key-indicators-asia-and-pacific-2021. 6. C. Hoy, “Poverty and the Pandemic in the Pacific,” 2020, https://devpolicy .org/poverty-and-teh-pandemic-in-the-pacific-20200615-2. 7. The international poverty line is $1.90 with purchasing power parity. 8. World Bank, “World Bank Commits to Papua New Guinea’s Fight Against COVID-19,” April 14, 2020, https://www.worldbank.org/en/news/press-release /2020/04/14/world-bank-commits-to-papua-new-guineas-fight-against-covid-19. 9. Ibid. 10. UNESCAP, “Addressing the Impacts of Covid-19 on the Pacific Island Countries: Rapid Policy Appraisal,” 2020, https://www.unescap.org/sites/default /d8files/event-documents/Session%201a%20%28UNDP%29%20-%20Rapid %20Policy%20Appraisal.pdf. 11. Ibid. 12. H. Lindsay, “What Will COVID-19 Mean for the Pacific?” 2020, https:// www.unicef.org.nz/stories/what-will-covid-19-mean-for-the-pacific. 13. S. Ruggiero, “Hospitals in Chaos As Fiji Battles COVID-19 Hell,” 2021, https://www.aljazeera.com/news/2021/7/30/patients-turned-away-as-fiji-battles -covid-19-hell. 14. See https://www.rnz.co.nz/international/pacific-news/462476/covid-19-in -the-pacific. 15. Fiji Ministry of Health, “Covid-19 Update,” 2021, https://www.health .gov.fj/29-12-2021. 16. UN Office for the Coordination of Humanitarian Affairs, “Pacific Aftershocks: Unmasking the Impact of Covid-19 on Lives and Livelihoods in the Pacific and Timor-Leste,” 2021, https://reliefweb.int/report/papua-new-guinea/pacific-after shocks-unmasking-impact-covid-19-lives-and-livelihoods-pacific. 17. UNESCAP, “Addressing the Impacts of Covid-19.” 18. Pacific Islands Forum Secretariat, Boe Declaration, 2018, https://www .forumsec.org/2018/09/05/boe-declaration-on-regional-security. 19. Organisation for Economic Co-operation and Development, “The COVID19 Crisis and State Ownership in the Economy: Issues and Policy Considerations,” June 25, 2020, https://www.oecd.org/coronavirus/policy-responses/the-covid-19 -crisis-and-state-ownership-in-the-economy-issues-and-policy-considerations -ce417c46. 20. United Nations Development Programme, The Social and Economic Impact of COVID-19. 21. International Labor Organization, “Impacts of Covid-19 on Labour Mobility in the Pacific Region,” 2020, https://apmigration.ilo.org/resources/impacts-of -covid-19-on-labour-mobility-in-the-pacific-region. 22. S. Ratuva et al., COVID-19 and Social Protection. 23. Asian Development Bank, “Pacific Returns to Positive Growth As Vaccinations, Border Reopenings Strengthen Economies,” 2022, https://www.adb.org /news/pacific-returns-positive-growth-vaccinations-border-reopenings-strengthen -economies-2022-adb. 24. S. Round, “Australian PM Heads Out to Pacific ‘Backyard,’” Radio New Zealand, January 16, 2019, https://www.rnz.co.nz/international/pacific-news/380194 /australian-pm-heads-out-to-pacific-backyard. 25. See https://www.rnz.co.nz/international/pacific-news/461389/aid-groups-want -vaccine-equity-in-the-pacific. 26. See https://www.unicef.org/pacificislands/press-releases/australia-unicefs -covid-19-vaccine-support-nauru.

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27. P. Johnson, “Australia Labelled Untrustworthy, a Climate ‘Pariah,’” ABC News, November 5, 2021. 28. See https://www.dfat.gov.au/geo/pacific/development-assistance/overview -of-australias-aid-program-to-the-pacific. 29. Ibid. 30. J. Wallis, “Contradictions in Australia’s Pacific Islands Discourse,” Australian Journal of International Affairs 75, no. 5 (2021). 31. See https://www.dfat.gov.au/geo/pacific/development-assistance/overview -of-australias-aid-program-to-the-pacific. 32. D. Doan and K. Petrou, “Labor Mobility and Remittances in the Pacific During Covid-19,” 2022, https://blogs.worldbank.org/eastasiapacific/labor-mobility-and -remittances-pacific-during-covid-19. 33. APHEDA, “Spotlight on Exploitation of Seasonal Workers in Australia,” 2020, https://www.apheda.org.au/exploitation-of-seasonal-workers-in-australia. 34. New Zealand Cabinet, “New Zealand’s Pacific Engagement: From Reset to Resilience,” 2021, https://www.mfat.govt.nz/assets/OIA/Cab-Paper-NZ-Pacific -Engagement-From-Reset-to-Resilience.pdf. 35. MFAT, “Further COVID-19 Vaccine and Economic Support for the Pacific,” 2021, https://www.beehive.govt.nz/release/further-covid-19-vaccine-and-economic -support-pacific. 36. Ibid. 37. Denghua Zang, “China’s Coronavirus ‘COVID-19 Diplomacy’ in the Pacific,” 2020, https://dpa.bellschool.anu.edu.au/sites/default/files/publications/attachments /2020-04/ib_2020_10_zhang_final_0.pdf. 38. Ibid. 39. S. Ratuva, “The Politics of Imagery: Understanding the Historical Genesis of Sinophobia in Pacific Geopolitics,” East Asia 39 (2021). 40. S. Ratuva, “Failed States or Resilient Subaltern Communities: Pacific Indigenous Social Protection System in a Neoliberal World,” Pacific Journalism Review 20, no. 2 (2014). 41. P. Rafaelli, “Social and Solidarity Economy in a Neoliberal Context: Transformative or Palliative? The Case of an Argentinean Worker Cooperative,” Journal of Entrepreneurial and Organizational Diversity 5 (2017). 42. International Labour Organization, “Social and Solidarity Economy,” 2009, https://www.ilo.org/empent/areas/WCMS_546299/lang-en/index.htm. 43. Rafaelli, “Social and Solidarity Economy in a Neoliberal Context.” 44. N. Peterson and J. Taylor, “The Modernising of the Indigenous Domestic Moral Economy,” Asia Pacific Journal of Anthropology 4, nos. 1–2 (2003). 45. J. Carrier, “Moral Economy: What’s in a Name?” Anthropological Theory 8, no. 1 (2018). 46. J.-L. Laville, “The Solidarity Economy: An International Movement,” RCCS Annual Review 2 (2020). 47. UNTFSSE, “Social and Solidarity Economy as a Means to Implement the SDGs: Partnerships to Bridge the Financing Gap,” 2017, https://www.un.org /esa/ffd/wp-content/uploads/2017/03/UN-Inter-Agency-Task-Force-on-Social-and -Solidarity-Economy-submission_May2017.pdf. 48. S. C. Martinez, A. M. Pachon, J. Martin, and V. Moreno, “Solidarity Economy, Social Enterprise, and Innovation Discourses: Understanding Hybrid Forms in Postcolonial Colombia,” Social Science 8 (2019): 205. 49. International Labour Organization and Asian Development Bank, “Tackling the COVID-19 Youth Employment Crisis in Asia and the Pacific,” 2020, https:// www.ilo.org/asia/publications/WCMS_753369/lang-en/index.htm.

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50. “Coronavirus in the Pacific: Weekly Briefing,” The Guardian, April 22, 2020. 51. Food and Agriculture Organization, “Addressing COVID-19’s Impacts and Structural Crisis in the Pacific,” 2020, http://www.fao.org/news/story/en/item /1279154/icode. 52. L. Williams, “Facebook Barter Page Grows Cash-Free Trade in Fiji and Beyond,” May 2, 2020, https://www.rnz.co.nz/international/pacific-news/415644 /facebook-barter-page-grows-cash-free-trade-in-fiji-and-beyond. 53. T. Tora, “Two Piglets for a Kayak: Fiji Returns to Barter System as Covid19 Hits Economy,” The Guardian, May 8, 2020. 54. Ibid. 55. Pacific Islands Forum Secretariat, Boe Declaration. 56. S. Ratuva, “New Zealand Development Aid to the Pacific Islands,” in Small States and the Changing Global Order, edited by A.-M. Brady (London: Springer, 2019). 57. J. Pyke and A. Dayant, “China’s Declining Pacific Presence,” 2021, https:// www.lowyinstitute.org/the-interpreter/china-s-declining-pacific-aid-presence. 58. See https://www.lowyinstitute.org/publications/ocean-debt-belt-and-road -and-debt-diplomacy-pacific. 59. Ratuva, “The Politics of Imagery.” 60. See https://www.dfat.gov.au/geo/pacific/development-assistance/overview -of-australias-aid-program-to-the-pacific.

5 Taiwan: State and Private-Sector Cooperation Frank Siedlok, Natasha Hamilton-Hart, and Hsiao-Chen Shen

THE COVID-19 PANDEMIC HAS HIGHLIGHTED THE NEED FOR COORDI-

nation and collective action among public and private actors.1 Discussions around the challenges of collective action focused initially on the early race to supply ventilators;2 this was followed by tensions around the production of vaccines3 and, more recently, acute shortages of oxygen supplies.4 One of the earliest challenges, however, was ensuring sufficient supply of medical face masks. Acute shortages of this unassuming, lowcomplexity product left healthcare workers and patients exposed and policymakers scrambling to purchase or develop sufficient manufacturing capacity.5 In early 2020, medical face masks became one of the most coveted commodities worldwide.6 The rapid upscaling of face mask production and distribution in Taiwan required effective state and private-sector cooperation to overcome a range of coordination challenges and formed an important part of Taiwan’s relatively successful response to the Covid-19 pandemic. Overall, cases in Taiwan remained very low throughout 2020 and, despite an outbreak in late April 2021, Taiwan escaped a full lockdown, avoiding major disruption to economic activity, social life, and education.7 By September 2021, total deaths attributed to the disease in Taiwan stood at 835—around 35 deaths per million inhabitants, well below fatalities in the United States (1,914 per million) and much of Europe.8 The shortfall in Taiwan’s pandemic response has been slow procurement of vaccines, which the Taiwanese government blamed on Chinese obstruction.9 Resolving this problem also called for state and private-sector cooperation, as access to the German BioNTech vaccine was eventually arranged by two large technology companies (Taiwan Semiconductor Manufacturing and Foxconn) and a Buddhist charity.10 69

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In this chapter, we focus on Taiwan’s face mask policy of 2020, as a showcase of capacities for coordinated action by state and business actors.11 As early as January 2020, Taiwan’s authorities recognized the potential risk of shortages of medical face masks and undertook to rapidly increase production and manage distribution. The challenge was greater than might be assumed. The difficulties faced by countries across the world in securing supplies of this critical product demonstrate that soaring demand did not automatically lead to sufficient market supply.12 Although face masks are seen as a relatively low-technology product, the production machinery and process are complex and demand access to specialist, often tacit, knowledge to achieve production at scale.13 Consequently, governments and industry players quickly came to realize that they faced a series of challenges related to rapidly scaling-up production. Chaotic market conditions in the United States showed that uncoordinated attempts to procure increased supplies were doomed to fail.14 Left to market forces alone, the private sector was unlikely to have invested in increasing mask production capacity in ways that channeled large volumes of masks, at affordable prices, to those that needed them. The Taiwanese face mask policy therefore required an actively coordinated response. This was in many ways state-led, as suggested by accounts of Taiwan’s pandemic response that emphasize the enduring importance of Taiwan’s “developmental” state institutions.15 Just as the United Kingdom’s response to the pandemic was shaped—for the worse—by the institutions of its “regulatory” state,16 so Taiwan’s developmental state institutions influenced the course of its pandemic response. The institutions of the developmental state, however, do not reside only in a centralized, authoritative state.17 Taiwan’s ability to rapidly increase mask production required government and industry to overcome a series of cooperation challenges in three domains: the state sector, business-government cooperation, and cooperation among private firms. Such concerted action is difficult. The capacity to achieve coordinated action within and across state and private sectors depends on specific attributes of formal and informal institutions that structure action by both state and private-sector players. Together, these form an “institutional ecology” in which institutions are interdependent.18 In the case of the Taiwanese state, the relevant attributes include centralized authority, ambition, and organizational capacity. Scope for business-government cooperation rests on institutionalized relationships between public- and private-sector actors19 while, in the case of private-sector cooperation, business associations and other interfirm connections underpin collective action.20 The argument that specific institutional characteristics enable certain economic outcomes is consonant with major streams of thought in the litera-

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ture on economic development and industrialization in East Asia, including Taiwan. Here, we differentiate the cooperation challenges Taiwanese actors in public and private sectors needed to overcome in order to deliver on the policy aim of rapidly scaling-up mask production. We differentiate the dynamics attached to coordination, commitment, and collective action challenges, highlighting the different range of institutional capacities involved.21 Although this analysis is limited to the requirements of increasing production and managing distribution in a mature industry, the analytic lens of identifying specific cooperation challenges relating to a developmental task22 provides an alternative perspective on debates over whether state or private-sector actors drive development. Rather than seeing these as zerosum spheres of action, we show that what is most critical is whether the overall institutional mix can supply the coordination required for a particular developmental task. Finally, the escalation of mask production illustrates the dynamics of successful state-led intervention in a mature industry, identifying capacities for reviving “old” industries that may have largely moved offshore. Mature industries remain important as providers of employment and supply chain resilience, as suggested by recent calls for reshoring of industrial capacity.23 Thus, understanding the dynamics of industry coordination in this area complements the recent works on state-led development and industry coordination in high-tech or frontier industries.24 Our account of cooperation within and across government and industry recognizes the importance of other factors. The 2003 SARS (severe acute respiratory syndrome) epidemic, for example, can be seen both as an exogenous factor that prompted “learning” on the part of key officials and as a pivotal juncture that prompted the creation of a legal and administrative infrastructure for centralized, authoritative state action that was brought into play in 2020.25 The legacy of the earlier SARS experience does not, however, fully explain the successful response to the Covid-19 pandemic in 2020. As we show below, the legacy of SARS was in fact perverse when it came to scaling-up mask production, creating additional challenges to securing private-sector investment. Taiwan’s diplomatic isolation and the domestic politics of increasing Chinese pressure against manifestations of Taiwanese nationalism, evident in the lead-up to Taiwan’s presidential and legislative elections of January 2020, also formed the backdrop for the pandemic response.26 It appears to have been a key factor in Taiwan’s very rapid response to the first news of a novel virus in China, which in part was informed by mistrust of early Chinese assurances.27 Heightened concerns about the threat represented by China over the course of the pandemic may also have reinforced the long-standing role of security motives underpinning developmental state institutions.28

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Institutions and Collective Action in Taiwan’s Development Seminal studies of Taiwan’s rapid economic development have focused on the array of policy interventions by state actors. 29 State institutional capacity—in the form of coherent, disciplined state organizations with prestige, expertise, and authority—was a critical prerequisite for successful intervention, which would otherwise have fostered unproductive rent seeking. This capacity was deliberately created in the early decades of Kuomintang (KMT) rule by investments in key bureaucratic organizations. Centralized coordination, strong organizational independence from the legislature and societal interests, and an elite recruitment system were important characteristics.30 As Taiwan’s economy matured and its political system democratized, the state’s economic role and underlying institutional attributes shifted. While the success of the developmental state “sowed the seeds of its own degeneration,” it simultaneously “created the imperatives for its continual adaptation.”31 Some accounts emphasize the retreat of the state, as Taiwanese firms became enmeshed in global production networks.32 Nonetheless, the state remained active in solving coordination problems, such as the diffusion of technology from public research institutions and reducing the cost of risky research and development (R&D).33 State intervention continues to demonstrate its ambition in several frontier industries and in steering the internationalization of the Taiwanese economy.34 Meanwhile, the institutional characteristics of the state sector also evolved. Although democratization put pressure on state autonomy and administrative discretion,35 a close-range study by Bernstein has shown that civil service organizations retained a strong institutional ethos and understood accountability to include a leading role for proposing legislation and policy formation.36 Officials “do not present the relationship as one of unilateral command by the legislature, nor of mechanical implementation by the agency.”37 Bernstein concludes that “Taiwan’s bureaucracy has built on, rather than simply rejected, its role in the country’s dictatorial developmental-state period. Retaining its centrality in a modified way, the bureaucracy has presented itself as a key site for public participation in creating the common good.”38 Early revisions to the developmental state thesis called into question a sole focus on the state sector institutions that underpinned authoritative intervention. Cooperation between business and government was in fact central to East Asian developmentalism.39 The institutional preconditions for productive cooperation are demanding. Relationships need to be close and trusting enough to ensure adequate information flows and willingness to cooperate. Yet close and friendly relationships can easily pave the way for capture, rent seeking, and corruption. Treading the fine line between these outcomes calls for an institutionalized relationship that provides for

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cooperative but disciplined interaction, described as “embedded autonomy”40 or “governed interdependence.”41 The developmental state gains high “capacity” from such institutional arrangements.42 Rather than attributing accelerated industrial transformation to an all-powerful autonomous state, the developmental state model “rested on coordination and communication with private actors and complex bureaucratic capabilities in policy implementation and monitoring.”43 A focus on the business-government relationship calls for greater attention to the mediating institutions that prescribe de facto rules for interaction between public and private sectors.44 Characteristics of state institutions (for example, the degree of effective hierarchical discipline) incentivize different types of interaction with private actors (personalized and informal, for example, or collective and formalized), with predictable consequences for the discipline and consistency of policy implementation.45 The organization of private-sector actors also matters: the readiness of firms to organize through business associations or interfirm group ties varies widely, affecting the firms’ ability to provide common-good functions independently and enabling collective interactions with government actors.46 These lines of enquiry offer different paths to understanding the role of institutions. While who is driving action varies, both state-led and privatesector-led accounts describe a variety of developmental or industrializationrelated “tasks” of varying difficulty, which call for specific institutional characteristics to resolve them, depending on the nature of the underlying cooperation dilemma.47 Building on this insight, we make explicit the different types of cooperation problems involved in increasing mask production in Taiwan: coordination problems, commitment problems, and collective action dilemmas. There are situations in which actors gain from implementing a common standard or other coordination measure and, crucially, face no incentives to renege once a line of action or standard is agreed to. This dynamic characterizes governance standards from which all actors in an industry benefit because they reduce market “friction” (the costs of producing to multiple different standards) across a range of issues, from technical compatibility standards to mutual recognition of pharmaceutical safety and efficacy rules.48 However, such mutually beneficial coordination can fail to occur, leading to coordination problems. The transaction costs involved in reaching agreement among a large number of actors may impede coordination. Distributional conflicts may also prevent agreement, for instance when the choice of a particular standard benefits those actors most able to meet it. Nonetheless, nonhierarchical coordination often occurs when institutions such as industry associations, international organizations, or private governance systems lower the transaction costs involved in voluntary negotiation and exchange of information.49

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Commitment problems describe situations in which all parties would gain from coordination, but incentives for compliance depend on each actor’s assessment of whether the other actors will make good on their promises. Lacking credible assurances of the others’ cooperation, each actor will rationally prioritize the smaller, but more certain, reward associated with noncooperation.50 The need to ensure the credibility of commitments affects many initiatives to upgrade production or pursue economic development.51 This dynamic is frequently diagnosed as a reason for noncompliance with government industrial policy—that is, firms do not trust the government and thus withhold investment. Asset specificity can also create commitment problems among private firms, if assurances for longterm commitments (in technological development, skills, or upgrading) are lacking. Studies of commitment problems have shown that they can be overcome through specific institutional designs or reassurance strategies. Social structures or norms that heighten the “shadow of the future” (increase the salience of future events) and make commitments more credible enhance prospects for cooperation.52 Firms can reassure partners who are asked to make specific, long-term commitments through mechanisms such as joint venture structures that provide mutual reassurance.53 A government which needs to offer private investors sufficient reassurance that it will not expropriate or overtax private investment returns may introduce “self-binding” restraints or engage in co-investment strategies.54 Collective action dilemmas are characterized by the presence of ongoing incentives to defect even when the cooperation of other parties is guaranteed. Potential gains from free riding mean that these dilemmas cannot be resolved by reassurance alone. Thus, cooperation requires “contingent commitments” to cooperate if the other parties cooperate, but also to punish or exclude those who do not cooperate.55 While often resolved through hierarchical solutions, nonhierarchical institutions that lower the transaction costs of monitoring and sanctioning noncompliance can also perform these functions and thereby ease collective action dilemmas.56 Coordination, commitment, and collective action dilemmas can be viewed as types of incomplete contracting in the tradition of transaction cost economics: situations in which mutually beneficial action by two parties may fail to occur due to what Williamson referred to as “hazards” arising from bounded rationality and opportunism.57 In this tradition, the transaction costs of resolving such hazards through developing different types of “safeguards” vary according to both the macroinstitutional environment (features such as the legal and political system) and three conditions relating to the transaction itself: the expected frequency or recurrence of future transactions involving the parties; uncertainty or problems of measurability; and asset specificity. The appropriate “mechanism of governance” (market, hierarchy, or network, in Williamson’s schema) for organizing transactions thus varies, with hierarchical control becoming more efficient as transaction costs rise.

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Viewed from this perspective, studies that emphasize the role of both large business groups and close ties among small firms in Taiwan attest to a highly developed set of institutional safeguards supporting cooperation in the private sector. From early in the postwar period, firms were incentivized to form business group structures58 and pursue cooperative, iterated relationships linking independent firms.59 Although evolving as market and political conditions have changed,60 those Taiwanese firms that have developed the capacity for collective action through the formation of networklike ties continue to benefit from reduced transaction costs of exchange, access to capital, and sharing of information.61 While much of the literature refers to these networks as creating “trust,” they can equally be seen as creating credible solutions to problems of uncertainty and asset specificity, by providing institutional mechanisms for monitoring, reputational sanctions, and expectations of future interaction.62

Taiwan’s Mask Policy: Cooperation Challenges Taiwan’s face mask policy aimed to rapidly increase mask production and ensure availability at reasonable cost. We break down the tasks involved into roughly sequential steps: increasing production capacity, managing production output, and ensuring smooth distribution of masks. In each of these areas, we see the capacities of an authoritative state sector with the ambition, legal mandate, and centralized coordinating capacities typical of the developmental state, as recognized in another account of Taiwan’s successful pandemic response.63 But, equally, we show that these state sector capacities worked in tandem with the private sector, both in terms of the cooperation between government and business actors, and the degree of independent private-sector coordination. The Production Capacity Challenge: Taiwan Face Mask Team Taiwanese officials recognized a potential shortfall in mask supply fairly early in the pandemic. In 2009, the Ministry of Economic Affairs (MOEA) had estimated the country’s stockpile to be 40–45 million masks.64 With 90 percent of masks being imported,65 concerns arose that supplies might be disrupted, leading to a public panic, as had occurred during the SARS outbreak.66 Once the first Covid-19 case was confirmed in Taiwan, demand rapidly started outstripping supplies.67 The first information requirement was to ascertain the extent of the shortfall in production capacities. This called on the established bureaucratic monitoring capacities of the Taiwanese state sector. As early as January 24, Vice Premier Chen Chi-mai discussed with Shen Jong-chin, minister of economic affairs, the current stock of personal protective equipment (PPE) and

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the supply that was needed. Hong Hui-song, head of the Industrial Development Bureau of the MOEA, was already compiling a list of manufacturers of epidemic prevention materials, including masks, to ensure that the National Health Command Center of the Department of Disease Control had access to necessary information.68 MOEA finally listed sixty-six mask manufacturers of medical or surgical masks,69 with a total production capacity of 1.88 million face masks a day, well short of the forecast potential demand of 10 million face masks per day.70 Chen Chi-mai recognized the problem: “I told Minister Shen [the minister of economic affairs], we need to add more lines. We will need to produce these ourselves.”71 Taking action required the strong legal mandate and specific organizational structures of the state sector, created in part as a result of the legacy of the SARS experience of 2003.72 For example, Hong Hui-song and Huang Po-hsiung—the director of products within Taiwan Textile Research Institute, a government-funded research institute, and a chief-in-command for PPE textile production during Covid-19—both noted that the SARS experience taught them the importance of understanding the existing supply capacity.73 Chen Chien-jen, a health minister during SARS and a vice president during the Covid-19 outbreak, remembered the SARS experience as “really chaotic,” marked by panic buying of masks, mistrust, and “people jumping out of windows.”74 In the following years, he was instrumental in implementing a series of reforms aimed at improving coordination between different organizations.75 A raft of new regulations and laws centralized control in order to improve communication and coordination. As Chou Jihhaw, director-general of Department of Disease Control, explained: “We knew that during SARS opinions within the government varied widely, creating problems for the chain of command. So after SARS we made a lot of reforms. After we established CECC [Central Epidemic Command Center] the entire country’s chain of command came under direct line and everyone acted as one.”76 The is a division of the National Health Command Center, to be activated when necessary. The Communicable Disease Control Act (formulated in 1944 and amended in 2019) grants the CECC extra powers to supervise and coordinate responses across government organizations, state enterprises, and civic groups. The CECC thus acts as a unified command center, with the authority to provide recommendations and coordinate works across government departments, to enlist additional personnel, and to establish additional taskforces. Its structure includes surveillance, response, and logistics divisions. The 1944 act was supplemented in 2004 by the Implementation Regulations Governing Materials for Communicable Disease Control and Establishment of Resources Act, regulating the management of medical resources supplies, including PPE.77 This allows government authorities to requisition production equipment, facilities, and materials

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during emergencies, with appropriate compensation. Finally, Department of Disease Control’s Strategy and Execution Plan for PPE during pandemic outbreak specifies responsibilities and procedures across several ministries for monitoring stockpiles and demand, coordinating supply, and overseeing fair trade and pricing of PPE during an outbreak.78 The CECC was activated on January 20, 2020. While the procedures and regulations outlined above enabled officials to quickly assess existing stockpiles and production capacity, the task of increasing production remained unaddressed. The government set the goal of developing sixty production lines in forty-five days, with an additional thirty-two production lines being added later, in recognition of the fact that existing production capacity was insufficient.79 The target was ambitious: in normal circumstances setting up one production line takes up to six months.80 Only two manufacturers of mask-making machines were left in Taiwan, both of which lacked resources to expand capacity. For one of the machine manufacturers, a government delegation deemed that “at most two mask machines can be made a month,” with the second manufacturer having even more limited capacity.81 As it became clear that these companies were unable—and, as we elaborate later, unwilling—to deliver the government order, on February 4, MOEA contacted three public research institutes, Industrial Technology Research Institute, Metal Industries Research & Development Center, and Precision Machinery Research and Development Center, requesting them to help the two remaining face mask machine manufacturers. Zhuang reports: “After understanding the actual needs and conditions of mask machine manufacturers on February 5, they knew that they were not good at the ‘assembly technology’ needed at this stage, so they decided to seek support from others in industry.”82 At this stage the team had no clear plan of how to address the issue. On February 6, Lai Yung-hsiang, general manager of the Precision Machinery Research and Development Center, received a phone call from Yen Jui-hsiung, chairman of Taiwan Machine Tool and Accessory Builders Association, offering help from the tooling and machinery manufacturing industry. Meanwhile, Hsu Wen-hsien, director of the association’s board, sent a message to Minister of Economic Affairs Shen Jong-chin, also offering help. The gravity of the task was confirmed by Yen Jui-hsiung after he visited one of the face mask machine manufacturers; he noted: “That’s almost mission impossible for such a small company to take such big orders. I shook my head and knew I would have to send a crew who not only know machines but who are very adaptive to all kinds of emergencies.”83 The next day, MOEA, the Industrial Technology Research Institute, the Metal Industries Research and Development Center, the Precision Machinery Research and Development Center, and Taiwan Machine Tool and Accessory Builders Association met and decided to set up an empty warehouse as a

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manufacturing space in Taipei, as neither of the existing face mask machine manufacturers had sufficient workshop space. The state’s centralized capacities for command were evident: MOEA ordered state-run power and telecom companies to set up basic infrastructure, while the Industrial Development Bureau arranged for the installation of base stations to provide mobile coverage.84 Without any state compulsion, machine tool companies volunteered their top engineers and equipment. This hastily assembled group became known as Taiwan Face Mask Team.85 Meanwhile Hsu lobbied more companies to send staff to join the team.86 The next challenge was getting access to technical information, which posed both commitment and collective action challenges. Despite sending their top engineers, none of the member companies of the Taiwan Machine Tool and Accessory Builders Association had experience in making maskmanufacturing equipment. Xu Haodong, the deputy manager of Takisawa Taiwan (a member of the association), recalled: “We have never touched the mask machine before, all from scratch. It is very difficult and [we feel] helpless to be responsible for this work.”87 Codified information was almost nonexistent, and the two requisitioned mask machine manufacturers were reluctant to share their know-how and actively assist the Taiwan Face Mask Team and the government.88 Their memory of how the industry was left to collapse after the SARS outbreak made them reluctant to engage; at the same time, they were worried that the tooling companies would enter the small domestic market. Initially, two factions formed within the Taiwan Face Mask Team: one pushed for a reverse-engineering approach, while the other was wary of further diminishing trust within the sector. Some team members noted that reverse engineering might not reveal the crucial 5 percent of tacit knowledge. Dai Yunjin, manager from Takisawa Taiwan who after a meeting between the Taiwan Machine Tool and Accessory Builders Association and MOEA was selected as the site commander, advocated approaching the mask machine manufacturers to involve them in the team. He reassured the company owners, saying, “We won’t come to grab your business. If there are future orders, we will pass these to you. We can be good strategic partners to cooperate in the future.”89 The commitment was finally achieved, after three days of persuasion, with an additional verbal assurance from Hsu Wen-hsien, who recalled: “We were afraid that Hsiao [owner of one of the remaining mask machinery manufacturers] thought we were going to copy their machines, and he was reluctant to participate. Therefore, I swore in front of him, saying, ‘I promise you—we [Taiwan Machine Tool and Accessory Builders Association members] will not become face mask machinery manufacturers,’ because Machines and Tools industry has its own markets, which is very different from manufacturing face mask machines.”90

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Such verbal reassurances were sufficient to overcome the reluctance to cooperate, arguably demonstrating the level of social cohesion and value of social capital among Taiwanese firms, linked together in formal and informal networks.91 While similar cohesion enabled collective action in Germany,92 unwillingness to share intellectual property (IP) and lack of government reassurance stalled production scale-up in the United States.93 Internally, the Taiwan Face Mask Team faced tensions related to managing the partnership and motivating those involved. However, transparency about project progress and workloads, combined with publicity, instigated healthy competition, while at the same time ensuring commitment: under peer pressure, the companies sent their best employees who were willing to work overtime, and none of the Taiwan Face Mask Team member companies left before completion of the task.94 The team delivered the initial sixty production lines in twenty-five days, with a second government order increasing the number to ninety-two in forty-five days. Simultaneously, MOEA coordinated with fabric suppliers to prioritize domestic demand while also allowing them to continue exporting. The Taiwan Textile Research Institute collaborated with Formosa Plastic to develop high-performance fabric, which had previously been imported, embedding the whole supply chain in Taiwan.95 As summed up by Chen Chi-mai: “In one fell swoop we gathered the raw materials, and integrated machine tool companies into the supply chain, and formed National Mask Team.”96 This was a remarkable level of success, given that initially government officials were worried that the small enterprises involved might not have the capacity, or the necessary experience of working together, to meet the challenge.97 Furthermore, the Taiwan Machine Tool and Accessory Builders Association and member companies bore significant cost of salaries, extra overtime fees, meals, transportation, and accommodation—in total estimated at over $700,000.98 As noted by Hong Hui-song: “They did this voluntarily without charging the government a penny. They even paid their own hotels when staying in Taipei, brought their own lunch/dinner boxes, and their own toolboxes.”99 Managing Production Output: Negotiation and Incentives Instead of Enforcement Requisitioning production facilities required the principals of the requisitioned facilities to maximize their production capacity, whether through increased commitment (such as extra shifts) or investment. The initial measures taken to invest in creating the necessary mask production lines needed to be extended to the mask producers themselves and maintained over time. Indeed, spike in demand for masks did not automatically create sufficient incentives to increase supply, as demonstrated by the severe

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shortages of medical masks experienced in the US months into the pandemic, where manufacturers were wary of bearing the big investment needed to increase production.100 Similar reluctance was evident in Taiwan. When Minister of Economic Affairs Shen Jong-chin called face mask companies and textile manufacturers on January 26, asking them to increase production capacity, he received a cool response: “I was so keen and politely asking, and tried to communicate with you [the industry], but why were you cold and not responding? It’s like hitting ice-cold water.”101 This episode underscored the perverse legacy of the SARS experience: private-sector suppliers who helped increase the production of PPE had been left with over-capacity, sunk costs, and diminishing demand.102 Their losses were compounded by a government shift to a “lowest price” purchase policy, favoring Chinese suppliers.103 Thus, SARS had damaged the legitimacy of the government in the eyes of the industry players and created an additional reassurance problem that the government needed to resolve. During the early Covid-19 consultations, Shen Jong-chin acknowledged these issues and apologized to the suppliers: “After SARS, their machines were left in the warehouse and subsequently their workers were facing layoff at the time. That is our bad management in the past, very bad. . . . So I immediately knew the point and apologized to them: ‘Sorry, I know that you are not happy because in the past, the government used up and then threw you away after SARS.’ . . . Once I mentioned this, they immediately felt better. To have compassion together with the industry is so important.”104 Shen Jong-chin subsequently provided a verbal assurance that in the future, government purchases of medical masks will prioritize “Made in Taiwan.” This verbal reassurance was backed up by government support: to alleviate the cost of investment, the additional production lines were paid for by the government and given to twenty-nine face masks manufacturers,105 who were assessed by MOEA as having sufficient capacity (e.g., human resource, space) to scale up their production,106 free of charge, under the condition that the companies commit to producing 5 million face masks per machine, 1.2 million being free of charge. The government then paid $0.1, slightly over the market price, per mask to further incentivize the manufacturers.107 To reach these production outputs, the government assessed and set a quota for each requisitioned company, with bonus payments for meeting targets. Some companies complained that the targets were unreasonable. After the MOEA had failed to obtain a firm assessment of production capacity in each company, the Taiwan Textile Research Institute sent some thirty people to count every factory building, production line, shifts per day, and proportion of experienced and novice workers, to calculate the maximum production capacity for each factory. This was overseen by Huang Po-hsiung from the research institute. An additional bonus of $0.01 was offered for each mask over the target.

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Despite these efforts, initial output remained significantly lower than the 4 million masks a day target: by mid-February only five or six companies reached their targets. Companies were still fulfilling prior foreign orders or simply did not have sufficient staff to maximize output. This led the authorities to amend the bonus payment system to reward the fulfilment of domestic commitments first, to increase payment for overtime or working over holidays, and to mobilize the army to assist companies.108 However, the challenges did not end there. Increased supply at the height of the pandemic raised the prospect of oversupply post-pandemic. As one of the owners of a mask factory asked: “If the epidemic suddenly ends like SARS, what should we do with the excess capacity in our factory?”109 After apologizing for its past mistakes, the government developed a coordinated strategy for the mask sector consisting of three key measures110: prioritize the purchase of “Made-in-Taiwan” face masks to meet public, medical, official, and military demand; promote local development of all parts of the industry, including raw materials, technology, and services; and export mask technology rather than just machinery. The first measure was focused on creating an internal market and avoiding the same collapse in demand that followed the SARS outbreak. The remaining two measures focus on the future, with the government assisting in areas of technological upgrading to meet the standards required in foreign markets and assistance in obtaining necessary certifications, as well as facilitating collaboration among companies and promoting export of technology and services.111 There are reports that individual organizations are already making further investments to increase production and investment in R&D.112 Distribution and Sales Monitoring: The Common Good In the context of a crisis, and without a coordinated distribution system, users may hoard supplies and compete to outbid each other, creating sharp price spikes and bottlenecks in distribution, as seen in the United States, where hospitals and local governments engaged in competitive bidding for PPE.113 The Taiwanese government, utilizing its centralized regulatory authority, took full control of production, distribution, and price regulation of medical masks, both for medical and public use. To prevent price gouging, the government requisitioned masks and production facilities and introduced a name-based rationing system to ensure the public had access to sufficient masks at a set price,114 while MOEA introduced daily targets and monitoring of outputs for manufacturers,115 releasing daily updates to the public. Distribution of masks was achieved thorough collaboration with the Taiwan Pharmacy Association, Chunghwa Post (the official postal service),116 and civil society.117

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Although this centralized capacity rested on a legal mandate, the government also needed to elicit consensual compliance. Hence, a policy adjustment meant that, once they had met their output commitments, manufacturers were free to sell excess production on the free market, initially in Taiwan and later through export. Similarly, non-woven-fabric producers were allowed to export, and charge significantly higher prices, after they committed to supplying the local market first.118 While the government assisted in technology development and transfer, there was no investment in production facilities in this sector as there was in mask-making. This suggests that the Taiwan government took a flexible approach to address potential commitment and collective action issues, mixing assurance strategies, centralized distribution and price setting, and monitoring of activities. Monitoring was necessary as a safeguard against opportunism. In Taiwan, some firms and individuals have been caught attempting to illegally export masks during the export ban while others were found illegally importing industrial masks from China that were labelled as medical masks, claiming to be “Made in Taiwan.”119 These attempts were initially reported by one of the pharmacies, with the local government later tasking pharmacies to watch out for counterfeits. The government introduced additional measures to control and monitor all imports and exports of masks, medical and industrial, and introduced a requirement that all masks made by the Taiwan Face Mask Team needed to be appropriately embossed. As well as paying fines and facing negative media coverage, offenders run the risk of losing their license to import medical masks. Such increased visibility and exposure of offensive behaviors creates social pressure which serves to limit the risk of cheating—another institutionalized mechanism that sustains collective action by threatening to punish opportunistic behavior.

Institutional Capacities and Overcoming Cooperation Challenges Building on the finding that different developmental tasks call upon specific institutional capacities,120 we have identified three tasks that were involved in Taiwan’s face mask policy: increasing production capacity; managing production output; and distribution and sales monitoring. Implementing these tasks required state and private-sector actors to overcome coordination, commitment, and collective action problems. Resolving these challenges called on specific institutional capacities across state and private sectors. Faced with coordination problems at the start of the pandemic, the state was able to use preexisting associations between state and private sectors to lower the transaction costs involved in identifying the relevant actors, supplying information on their production capacities and shortfalls, and bringing

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together key actors. These prior links were established in part through the creation of organizational mechanisms described above in the wake of SARS, but they were supported by a continuity of personnel in the form of a cadre of bureaucrats with strong links to industry. In particular, public research institutes have constantly adapted their strategies and structures to retain their relevance to and influence over the industry.121 Furthermore, nonsystematic sampling shows regular contacts between government agencies and business associations in meetings, and through cases of interlocking directorships and committee roles, in which directors of business associations also serve on advisory committees or boards of research institutes, and vice versa. In trying to elicit private-sector investment in building capacity, the government faced a serious commitment problem: it needed to assure private actors that it would not withdraw market support and that it would protect the future interests of the industry players who were expected to bear the cost. In Taiwan, the industry had learned from the SARS outbreak the risks and cost of responding to calls for increased capacity and the vacuum that is often left once the crisis is over.122 For the government facing this dilemma, the SARS experience was thus a hindrance, as it undermined the government’s credibility and necessitated additional assurances, formal acknowledgment of the mistake and an apology. Nevertheless, government credibility was aided by the established links between the government and the industry—a manifestation of the “embeddedness” of the developmental state.123 The unexpected phone call from the Taiwan Machine Tool and Accessory Builders Association suggests the existence of an informal communication channel between the industry and MOEA. Prior research shows that such relationships have evolved over years, resulting in a buildup of trust, which can help to ensure commitment and develop a more collaborative approach to solving research-related issues.124 Indeed, not only did the association offer to help, but it also proactively encouraged member companies to join in and coordinated the work of the Taiwan Face Mask Team. We see in this case that while sufficient government centralization to deliver on its promises was necessary, the ongoing ability of state sector players to coordinate developmental outcomes also rested on a foundation of prior associative ties and norms, allowing state actors to leverage long-standing industrial networks.125 Collective action problems also arose, in that private actors needed to share technical information and resources but were aware that doing so exposed them to the risk of opportunistic behavior by others. In the case of development of polymerase chain reaction (PCR) tests in Germany, “strong professional ethos persuaded actors to deviate from the individually rational strategy.”126 In Taiwan, we can see a similar functional safeguard provided by high levels of social capital and preexisting interfirm cooperation among at least parts of the private sector.127 Such ties have been described as providing institutional frameworks “within which firms find it to be in their interests

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to collaborate on specific projects, while remaining fierce competitors.”128 So far, the Taiwan Machine Tool and Accessory Builders Association member companies have kept to the promise of not entering the face mask machinery market, duly forwarding incoming inquiries (thirty a week on average) to the two mask machinery manufacturers.129 Although we lack direct evidence, it seems likely that this restraint can be attributed to an effective monitoring and informal sanctioning system created both by institutions and the business sector, which enabled collective action and appear to have deterred free riding. Such institutions work through a combination of inducement (gains from cooperation) and the selective withdrawal of such benefits for those that fail to cooperate.130 Selective benefits in this case include additional payments for meeting production quotas; assistance in achieving certification for export of technology or masks; and gains in reputation and exposure for participating companies due to high visibility of the project. The price for noncooperation, besides the loss of such benefits, also included the potential withdrawal of import quotas for those that did not comply. Despite its temporary nature, members of the Taiwan Face Mask Team felt compelled to put their best people on the team to demonstrate that they were contributing their share to the collective effort. The difficulty of these challenges can be further assessed in terms of the four moderating factors delineated by Ricks and Doner: number of actors involved, duration of implementation, visibility, and information required.131 A few additional points are worth noting. First, the short time for implementation in the context of a very public crisis made the first task (increasing production capacity) highly visible. This visibility increased public pressure on actors to engage and deliver, as did daily reporting on the Taiwan Face Mask Team’s progress and official visits. Enveloping the contribution of the team in high-profile “mask diplomacy”132 added further pressure. Subsequent breaches of trust were widely publicized. By making commitments very public and bringing considerable media attention to the initiative, opportunities for free riding or defection were reduced, particularly in the case of the initial production capacity challenge. Ongoing commitments to mask production and distribution were inherently more difficult to monitor, but the efforts of a wide array of actors ensured that defectors did face scrutiny and punishment. The information requirements for each task were moderately challenging, particularly for the production capacity task, where proprietary information, tacit knowledge as well as more codified information were all needed. The institutions and institutional capacities required thus included a range of private and governmental bodies linked through prior associative ties. Together they were able to reduce the transaction costs of forming initial agreements, generating commitments, and adding credibility to assurances through both internal hierarchical control mechanisms (in the state sector) and dispersed monitoring capacities.

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Our findings reinforce the overall conclusion of other recent studies that Taiwan’s state institutions have not retreated,133 but have evolved and reconfigured themselves to take on new tasks and modes of interaction with private-sector actors.134 As in other scenarios, the division of labor between the private and public sector135 is central to this case. While the government stimulated investment by assuming part of the cost and credibly guaranteeing local demand for the future, it fell largely to industry actors to resolve technological challenges. Thus, our study supports the perspective that businessgovernment cooperation and private-sector coordination are complementary and interdependent,136 forming efficient institutional ecologies.137

Conclusion Taiwan’s face mask policy was a critical part of its Covid-19 pandemic response, with a focus on the actions and capacities that led to an increase in the production of face masks from below 2 million to over 10 million a day. We challenge the view that Taiwan’s successful Covid-19 response was a direct outcome of its earlier SARS experience.138 The SARS experience did prompt both learning and consequential state-sector institutional reform, but it also generated a negative legacy for mask production, creating additional obstacles to scaling-up production and managing distribution. Our approach confirms the importance of capacities for coordination and collective action if developmental challenges are to be met, and it builds on work that attempts to specify the cooperation challenges involved in such developmental tasks.139 Institutions underpinning collective action were critical in both state and private spheres of action and in enabling cooperation between government and business. Although we have focused on institutions directly related to the tasks necessary for increasing production and managing distribution, the broader social context also matters. Proactive state intervention was combined with high levels of social mobilization and public participation, which relies on—and simultaneously promotes— trust in government institutions. This is more effective in eliciting cooperation than confrontational attempts at imposing government policy.140 While the previous incorporation of citizens into the structure and ethos of state power and national development projects helped to generate “social capital,”141 our analysis highlights the dynamic nature of the relationship, at a time when social capital needed to be rapidly deployed. Although increasing production and ensuring smooth distribution of face masks do not involve advanced technology, the cooperation challenges involved called upon institutional capacities that have been noticeably lacking in several countries.142 As shown in a hard-hitting study of the United Kingdom’s pandemic response, the mistakes, delays, cost overruns, and

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overall ineffectiveness of policy can be traced to specific attributes of the country’s neoliberal “regulatory” state institutions.143 Taiwan’s developmental state institutions are the obverse of those of a regulatory state. Its policy effectiveness, however, does not lie in state-sector organizations alone, nor rest solely on capacities for authoritative state interventions. Taiwan’s pandemic response equally called upon preexisting capacities for cooperation within the private sector and institutions that facilitated cooperation between business and government.

Notes 1. Fabian Hattke and Helge Martin, “Collective Action During the Covid-19 Pandemic: The Case of Germany’s Fragmented Authority,” Administrative Theory & Praxis 42, no. 2 (2020). 2. Ziad Elsahn and Frank Siedlok, “‘Can We Build It? Yes, We Can!’ Complexities of Resource Re-Deployment to Fight Pandemic,” Industrial Marketing Management 93 (2021). 3. Eric Beardsley, “EU, UK Tensions Increase over Cuts to COVID-19 Vaccine Supplies,” March 25, 2021, http://www.npr.org/2021/03/25/981088573/eu-u-k-tensions -increase-over-cuts-to-covid-19-vaccine-supplies. 4. Clair Parker, “Dozens of Coronavirus Patients Die in Indonesian Hospital amid Oxygen Shortages,” Washington Post, July 5, 2021. 5. Jessica Contrera, “N95 Masks Save Lives, So Why Are They Still Hard to Get This Far into a Pandemic?” Washington Post, September 21, 2020. 6. Samanth Subramanian, “How the Face Mask Became the World’s Most Coveted Commodity,” The Guardian, April 28, 2020. 7. See, for example, “Tiger Balm: Covid-19 Has Ravaged Economies All over the World—but Not Taiwan’s,” The Economist, December 3, 2020. See also ChunChien Kuo, “Covid-19 in Taiwan: Economic Impacts and Lessons Learned,” Asian Economic Papers 20, no. 2 (2021). 8. Based on public data from John Hopkins University, https://coronavirus .jhu.edu; and Taiwan Centres for Disease Control, http://www.cdc.gov.tw/en. 9. Jamie S. Davidson, Indonesia’s Changing Political Economy: Governing the Roads (Cambridge: Cambridge University Press, 2015). 10 See, for example, Lawrence Chung, “Taiwan at Zero Covid-19 Cases After Worst Outbreak but Controls to Remain,” South China Morning Post, August 25, 2021. See also Kathrine Hille, “TSMC and Foxconn Join Forces to Secure Vaccines for Taiwan,” Financial Times, July 12, 2021. 11. This chapter was originally published as “Taiwan’s COVID-19 Response: The Interdependence of State and Private Sector Institutions,” Development and Change 53, no. 1 (2022). 12. Mark P. Dallas, Rory Horner, and Lantian Lid, “The Mutual Constraints of States and Global Value Chains During COVID-19: The Case of Personal Protective Equipment,” World Development 139 (2021): 105324. 13. Elsahn and Siedlok, “‘Can We Build It? Yes, We Can!’” 14. Contrera, “N95 Masks Save Lives.” 15. Wei-Ting Yen, “Taiwan’s COVID-19 Management: Developmental State, Digital Governance, and State-Society Synergy,” Asian Politics & Policy 13, no. 3 (2020).

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16. Lee Jones and Shahar Hameiri, “COVID-19 and the Failure of the Neoliberal Regulatory State,” Review of International Political Economy 29, no. 4 (2020). 17. See, for example, Stephan Haggard, Developmental States (Cambridge: Cambridge University Press, 2018). See also Fabian Hattke and Helge Martin, “Collective Action During the Covid-19 Pandemic: The Case of Germany’s Fragmented Authority,” Administrative Theory & Praxis 42, no. 4 (2020). 18. Richard F. Doner, Gregory W. Noble, and John Ravenhill, The Political Economy of Automotive Industrialization in East Asia (Oxford: Oxford University Press, 2021). 19. Robert H. Wade, “Debate—The Developmental State: Dead or Alive?” Development and Change 49, no. 2 (2018). 20. See, for example, Chi-nien Chung, “Markets, Culture, and Institutions: The Emergence of Large Business Groups in Taiwan, 1950s–1970s,” Journal of Management Studies 38, no. 5 (2001). See also G. G. Hamilton, “Markets, Culture, and Institutions: The Emergence of Large Business Groups in Taiwan, 1950s–1970s,” in The Economic Organization of East Asian Capitalism, edited by M. Orru, N. W. Biggart, and G. G. Hamilton (Thousand Oaks: Sage, 1997). See also Gregory W. Noble, “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,” Journal of Economic History 49, no. 4 (1989). 21. Jacob Ricks and Richard F. Doner, “Getting Institutions Right: Matching Institutional Capacities to Developmental Tasks,” World Development 139 (2021): 105334. 22. Ibid. 23. Mark P. Dallas, Rory Horner, and Lantian Lid, “The Mutual Constraints of States and Global Value Chains During COVID-19: The Case of Personal Protective Equipment,” World Development 139 (2021): 105324. 24. Yin-Wah Chu, “Democratization, Globalization, and Institutional Adaptation: The Developmental States of South Korea and Taiwan,” Review of International Political Economy 28, no. 1 (2021); Sung-Young Kim, “National Competitive Advantage and Energy Transitions in Korea and Taiwan,” New Political Economy 26, no. 3 (2020); Joseph Wong, Betting on Biotech: Innovation and the Limits of Asia’s Developmental State (Ithaca: Cornell University Press, 2011). 25. Yen, “Taiwan’s COVID-19 Management.” 26. Ching-Hsin Yu, “Taiwan in 2020: Beyond the Pandemic,” Asian Survey 61, no. 1 (2021). 27. Rebecca Armitage and Lucia Stein, “‘Did Taiwan’s Mistrust of China Save It from a Potential Coronavirus Disaster?” ABC News, May 29, 2020, https://www .abc.net.au/news/2020-05-30/taiwans-coronavirus-strategy-healthcare-and-location -data/12296948. 28. Tianbiao Zhu, “Developmental States and Threat Perceptions in Northeast Asia,” Conflict, Security & Development 20, no. 1 (2002): 20. 29. Robert H. Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton: Princeton University Press, 1990). See also “Review Essay: ‘Market Versus State’ or ‘Market with State’: How to Impart Directional Thrust,” Development and Change 45, no. 3 (2014). 30. Tun-Jen Cheng, Stephan Haggard, and David Kang, “Institutions and Growth in Korea and Taiwan: The Bureaucracy,” Journal of Development Studies 34, no. 6 (1998). 31. Joseph Wong, “The Adaptive Developmental State in East Asia,” Journal of East Asian Studies 4, no. 3 (2004).

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32. Henry W. Yeung, “State-Led Development Reconsidered: The Political Economy of State Transformation in East Asia Since the 1990s,” Cambridge Journal of Regions, Economy, and Society 10, no. 1 (2017). 33. Dan Breznitz, “Development, Flexibility, and R&D Performance in the Taiwanese IT Industry: Capability Creation and the Effects of State–Industry Coevolution,” Industrial and Corporate Change 14, no. 1 (2007). 34. See, for example, Jian-Hung Chen and Yijen Chen, “The Evolution of Public Industry R&D Institute: The Case of ITRI,” R&D Management 46, no. 1 (2016). See also Chu, “Democratization, Globalization, and Institutional Adaptation”; SungYoung Kim, “‘National Competitive Advantage and Energy Transitions in Korea and Taiwan,” New Political Economy 26, no. 3 (2020); Joseph Wong, “Technovation in Taiwan: Implications for Industrial Governance,” Governance 19, no. 4 (2006). 35. Wade, “Debate: The Developmental State.” 36. Anya Bernstein, “Porous Bureaucracy: Legitimating the Administrative State in Taiwan,” Law & Social Inquiry 45, no. 1 (2020). 37. Ibid. 38. Ibid. 39. Richard F. Doner, “Limits of State Strength: Toward an Institutionalist View of Economic Development,” World Politics 44, no. 3 (1992). 40. Peter B. Evans, Embedded Autonomy: States and Industrial Transformation (Princeton: Princeton University Press, 1995). 41. Linda Weiss, “Governed Interdependence: Rethinking the GovernmentBusiness Relationship in East Asia,” Pacific Review 8, no. 4 (1995). 42. Wade, “Debate: The Developmental State.” 43. Haggard, Developmental States, pp. 31–32. 44. Richard F. Doner, The Politics of Uneven Development: Thailand’s Economic Growth in Comparative Perspective (Cambridge: Cambridge University Press, 2009). 45. See, for example, Jamie S. Davidson, Indonesia’s Changing Political Economy: Governing the Roads (Cambridge: Cambridge University Press, 2015). See also Natasha Hamilton-Hart and Blair Palmer, “Co-Investment and Clientelism as Informal Institutions: Beyond ‘Good Enough’ Property Rights Protection,” Studies in Comparative International Development 52, no. 4 (2017). 46. See, for example, Richard F. Doner and Ben R. Schneider, “Business Associations and Economic Development: Why Some Associations Contribute More Than Others,” Business and Politics 2, no. 3 (2000); Gregory Noble, Collective Action in East Asia: How Ruling Parties Shape Industrial Policy (Ithaca: Cornell University Press, 1998); Wade, “Debate: The Developmental State.” 47. See, for example, Richard F. Doner and Ben R. Schneider, “The MiddleIncome Trap: More Politics Than Economics,” World Politics 68, no. 4 (2016); Doner and Noble, The Political Economy of Automotive Industrialization in East Asia; Ricks and Doner, “Getting Institutions Right.” 48. David Bach and Abraham L. Newman, “Governing Lipitor and Lipstick: Capacity, Sequencing, and Power in International Pharmaceutical and Cosmetics Regulation,” Review of International Political Economy 17, no. 4 (2010). 49. Tim Büthe, “Global Private Politics: A Research Agenda,” Business and Politics 12, no. 3 (2010). 50. Brian Skyrms, The Stag Hunt and the Evolution of Social Structure (Cambridge: Cambridge University Press, 2014). 51. Ricks and Doner, “Getting Institutions Right.” 52. Skyrms, The Stag Hunt and the Evolution of Social Structure.

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53. Toshio Yamagishi and Midori Yamagishi, “Trust and Commitment in the United States and Japan,” Motivation and Emotion 18, no. 2 (1994). 54. See, for example, Hamilton-Hart and Palmer, “Co-Investment and Clientelism as Informal Institutions.” See also North and Weingast, “Constitutions and Commitment.” 55. Robert Axelrod and Robert O. Keohane, “Achieving Cooperation Under Anarchy: Strategies and Institutions,” World Politics 38, no. 1 (1985). 56. See, for example, Jennifer Bair, “Analysing Global Economic Organization: Embedded Networks and Global Chains Compared,” Economy and Society 37, no. 3 (2008). See also Oliver E. Williamson, The Mechanisms of Governance (Oxford: Oxford University Press, 1996). 57. See, for example, Oliver E. Williamson, “The Economics of Organization: The Transaction Cost Approach,” American Journal of Sociology 87, no. 3 (1981); Williamson, The Mechanisms of Governance. 58. Chung, “Markets, Culture, and Institutions.” 59. See, for example, Hamilton, “Markets, Culture, and Institutions.” See also C. J. Lee, “The Industrial Networks of Taiwan’s Small and Medium-Sized Enterprises,” Journal of Industry Studies 2, no. 2 (1995). 60. Chi-nien Chung, “Beyond Guanxi: Network Contingencies in Taiwanese Business Groups,” Organization Studies 27, no. 4 (2006). 61. See, for example, Tsun-Jui Hsieh, Ryh-Song Yeh, and Yu-Ju Chen, “Business Group Characteristics and Affiliated Firm Innovation: The Case of Taiwan,” Industrial Marketing Management 39, no. 4 (2010). See also Feng-Jyh Lin and Yi-Hsin Lin, “The Effect of Network Relationship on the Performance of SMEs,” Journal of Business Research 69, no. 5 (2016); C.-L. Liu, Naomi Sinkovics, and Rudolf Sinkovics, “Achieving Relational Governance Effectiveness: An Examination of B2B Management Practices in Taiwan,” Industrial Marketing Management 90 (2020). 62. Williamson, The Mechanisms of Governance. 63. Yen, “Taiwan’s COVID-19 Management.” 64. China Ministry of Economic Affairs, “Kou Zhao Sheng Chan Chang Shang Li Yong Ben Bu Fu Tiao Jian Zeng Yu Ji Tai Sheng Chan Kou Zhao Lin Xuan Jie Guo” [Masks Are Requisitioned in Batches According to the Quantity and Scale, and the Current Number of Requisitioners Reaches Sixty-six], February 13, 2020, https://www.moea.gov.tw/Mns/populace/news/News.aspx?kind=1&menu_id=40& news_id=88683. 65. “A Bravery Story: A Taiwan National Machine Tool Team for Surgical Mask Production Born to Fight Against Covid-19 Outbreak,” April 9, 2020. 66. Wenting Yan, “(Kou Zhao Guo Jia Dui De Tiao Zhan) 3 Ge Yue Chan Neng Zeng 8.5 Bei Mu Hou Mi Xin: Tai Wan Ze Me Zuo Dao? Chan Ye Sheng Ji Ke Neng Ma?” [(Challenge of the National Mask Team) The Secret Behind the 3Month Increase in Production Capacity by 8.5 Times: How Does Taiwan Do It? Is Industrial Upgrading Possible?], April 27, 2020, http://www.twreporter.org/a/covid -19-mask-national-team-taiwan-can-help. 67. “Tai Wan Fang Yi Quan Ji Lu (Yi)” [Complete Records of Taiwan Epidemic Prevention (1)], Formosa TV, May 5, 2020. 68. Yichen Zhuang, “Tai Wan Kou Zhao Chan Liang Yue Sheng Shi Jie Di Er Wo Men Yao Gan Xie ‘Gong Ju Ji Guo Jia Dui’” [Taiwan’s Mask Production Jumped to the Second Place in the World: We Want to Thank the “Machine Tool National Team”], April 30, 2020. 69. Initially media reported different numbers due to differences in counting methodologies. By counting all mask manufacturers who obtained medical equipment licences, the Ministry of Health and Welfare put the number at eighty. After

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removing duplicate licensees and entities without manufacturing registration, the ministry adjusted the number to sixty-six. Out of these, twenty-nine had reasonably big operations and the remaining thirty-seven were small. Some estimates put the number of remaining manufacturers at fifty-two, which was based on the number of manufacturers who later were licensed by the Ministry of Health and Welfare to double imprint masks with the letters “MD” alongside the Made in Taiwan mark, to clearly distinguish them from imported products. 70. Ministry of Health and Welfare, “Crucial Policies for Combating COVID19: Provide a Steady Supply of Disease Prevention Supplies to Reassure Society and the People,” May 14, 2020, https://covid19.mohw.gov.tw/en/cp-4785-53788 -206.html. 71. Executive Yuan, “Xian Gei Fang Yi Tai Wan Dui Ep. 1: Fang Yi Ji Lu Pian” [Dedicated to the Taiwan Epidemic Prevention Team Ep. 1: Epidemic Prevention Documentary], 2020, http://www.youtube.com/watch?v=dOjMNtXpyqc&feature =youtu.be. 72. Yen, “Taiwan’s COVID-19 Management.” 73. Ibid. 74. Javier C. Hernández and Chris Horton, “Taiwan’s Weapon Against Coronavirus: An Epidemiologist as Vice President,” New York Times, May 9, 2020. 75. “As Coronavirus Hot Spots Grow, Taiwan Beating the Odds Against COVID-19,” Japan Times, March 11, 2020. 76. Executive Yuan, “Xian Gei Fang Yi Tai Wan Dui.” 77. Ministry of Health and Welfare, “Implementation Regulations Governing Materials for Communicable Disease Control and Establishment of Resources,” April 1, 2016, https://law.moj.gov.tw/ENG/LawClass/LawAll.aspx?pcode=L0050010. 78. “Yin Ying Liu Gan Da Liu Xing Zhi Xing Ce Lüe Ji Hua” [Influenza Pandemic Implementation Strategy Plan], 3rd ed., 2011, http://www.cdc.gov.tw/File/Get /T7TYhbHOkfRt5oxP1Wdmmw. 79. “Zi Ji De Kou Zhao Zi Ji Zuo Kou Zhao 45 Ri Jue Ce Mu Hou” [Make Your Own Masks: Behind the Scenes After the 45th Day on Mask Discussions], March 8, 2020, http://www.youtube.com/watch?v=PG5bI8Z7ifc. 80. “A Bravery Story.” 81. Zhuang, “Tai Wan Kou Zhao Chan.” 82. Ibid. 83. Ting-Fang Cheng and Lauly Li, “Taiwan’s ‘Hidden Champions’ Help Coronavirus Fightback,” April 24, 2020, https://asia.nikkei.com/Business/Business-Spotlight /Taiwan-s-hidden-champions-help-coronavirus-fightback. 84. Zhuang, “Tai Wan Kou Zhao Chan.” 85. Different names have been used in media and writing in reference to the team. Initially, with focus being on the development of the production lines, the team referred to the ITRI, MIRDC, PMC, TMBA, and the two face mask machine manufacturers (NCM and Chang Hong). Some accounts also include TTRI as part of the team. As the production lines were completed and the focus switched to maximizing output, the twenty-nine mask manufacturers who were given the machines were included. In some cases the term was used to refer to all requisitioned mask manufacturers (sixty-six in total), and later to the fifty-two mask manufacturers who obtained the licence for double-embossing (Zhuang, “Tai Wan Kou Zhao Chan”). Changes to the composition of the team were also reflected, to some extent, in the name of the team, which include: “machine tool national team,” “national mask team,” “mask national team,” “mask team,” “national team,” or “Taiwan Face Mask Team.” There were also references to other teams that helped during the pandemic

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(e.g., Hidden Mask National Team denoting the team behind the name-based distribution system). We adopted the last as most precise of the terms. 86. Executive Yuan, “Xian Gei Fang Yi Tai Wan Dui.” 87. Zhuang, “Tai Wan Kou Zhao Chan.” 88. “Zi Ji De Kou Zhao.” 89. W. Lin, “‘Zhe Shi Shang Di Gei De Ren Wu!’ Sars Xing Cun Zhe Bian Kou Zhao Ji Dui Chang: Jing Xuan Wen Zhang” [“This Is a Task Given by God!” SARS Survivors Turned Into Mask Captains], March 25, 2020, http://www.businessweekly .com.tw/Archive/Article?StrId=7001356. 90. “Zi Ji De Kou Zhao.” 91. See, for example, Hsieh, Yeh, and Chen, “Business Group Characteristics.” See also Liu, Sinkovics, and Sinkovics, “Achieving Relational Governance Effectiveness.” 92. Hattke and Martin, “Collective Action During the Covid-19 Pandemic.” 93. Contrera, “N95 Masks Save Lives.” 94. Lin, “‘Zhe Shi Shang Di Gei De Ren Wu!’” 95. Yan “(Kou Zhao Guo Jia Dui De Tiao Zhan).” 96. Executive Yuan, “Xian Gei Fang Yi Tai Wan Dui.” 97. Ibid. 98. “A Bravery Story.” 99. Zhuang, “Tai Wan Kou Zhao Chan.” 100. See, for example, Contrera, “N95 Masks Save Lives.” See also Dallas, Horner, and Lid, “The Mutual Constraints of States and Global Value Chains.” 101. “Zi Ji De Kou Zhao.” 102. See, for example, Yan, “(Kou Zhao Guo Jia Dui De Tiao Zhan).” See also Zongxian Li, “Tai Wan Kou Zhao Zhi Zhan: Zong Ren Kou 2300 Wan Ri Chan Liang Tiao Zhan 1000 Wan” [Taiwan’s 2020 Mask Battle: A Daily Output of 10 Million Masks Batting Against a Total Population of 23 Million], BBC News China, March 5, 2020. 103. Yixin Dang, “Zi Chan Kou Zhao Xing Zheng Yuan Nong Li Nian Jian Jiu Jue Ding! Chen Qi Mai: Kao Zi Ji Shi Wo Men Xue Dao De Gong Ke” [Executive Yuan Decided to Produce Masks During the Lunar New Year! Chen Qi-Mai: “SelfReliance” Is the Lesson We Have Learned], March 8, 2020, http://www.fountmedia .io/article/51254. 104. “Zi Ji De Kou Zhao.” 105. These are the larger of the sixty-six mask manufacturers as explained earlier. 106. Ministry of Economic Affairs, “An Liang Neng Gui Mo Fen Pi Zheng Yong Kou Zhao Mu Qian Zheng Yong Jia Shu Da 66 Jia” [Mask Manufacturers Use of Conditional Gift of Machines to Produce Masks], May 3, 2020, http://www.moea .gov.tw/MNS/populace/news/News.aspx?kind=2&menu_id=41&news_id=88910. 107. Li, “Tai Wan Kou Zhao Zhi Zhan.” 108. Yan, “(Kou Zhao Guo Jia Dui De Tiao Zhan).” 109. Ibid. 110. Ibid. 111. B. Wu and W. Chen, “Ye Zhe Sun Shi Zen Jiu? Jing Ji Bu: Qi Dong Fu Dao Bu Chang Wei Zui Zhong Fang Shi” [How to Save the Loss of the Industry? Ministry of Economic Affairs: Start Counselling Compensation as the Final Way], July 21, 2020, http://www.cna.com.tw/news/afe/202007210317.aspx. 112. See, for example, Ziyu Pan et al. “Fang Yi Chan Ye Lian/Kou Zhao Ge Li Yi Fang Yi Wu Zi Dan Ta Xiao Ying Wei Ji Lai Xi?” [Epidemic Prevention Supply Chain/Mask, Protective Clothing, and Other Epidemic Prevention Material at Risk of a Portuguese Egg Tart Effect], September 27, 2020, http://www.cna.com.tw/news

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/afe/202009270100.aspx. See also J. Zheng, “Jian Li Tai Wan Fang Yi Zhan Lüe Gong Ying Lian Ju Yang Fang Hu Yi 2.0 Nian Di Tou Chan: Ju Yang Dong Shi Zhang Du Jia Zhuan Fang” [Establishing a Strategic Supply Chain for Taiwan’s Epidemic Prevention: Juyang Protective Clothing Will Be Put into Production as Version 2.0: Exclusive Interview with Juyang Chairman], July 21, 2020, http:// www.cna.com.tw/news/afe/202007210315.aspx. 113. Contrera, “N95 Masks Save Lives.” 114. Joseph Wong, “Combating COVID-19 in Democratic Taiwan and South Korea,” Current History 119, no. 818 (2020). 115. Executive Yuan, “Xian Gei Fang Yi Tai Wan Dui.” 116. Irving Yi-Feng Huang, “Fighting COVID-19 Through Government Initiatives and Collaborative Governance: The Taiwan Experience,” Public Administration Review 80, no. 4 (2020) 80(4). 117. Megan Molteni, “Taiwan’s Digital Minister Knows How to Crush Covid-19: Trust,” Wired, September 30, 2020. 118. Yan, “(Kou Zhao Guo Jia Dui De Tiao Zhan).” 119. Angelica Oung, “Ministry Cracks Down on Mask Imports,” Taipei Times, September 11, 2020. At least one case of mask-stealing by employees was reported. The factory management alerted police after realizing lower than expected output and the offenders were prosecuted. See Y. Yang, “Tai Nan Kou Zhao Guo Jia Dui Chuan Nei Zei 5 Zhi Yuan She Tou Kou Zhao 8850 Pian — She Hui” [‘Tainan Member of the Taiwan Facemask Team Rumoured that 5 Staff Stole 8850 Masks’], Liberty Times Net 3 August 2020. news.ltn.com.tw/news/society/breakingnews /3248051 (accessed 2 November 2021). 120. Ricks and Doner, “Getting Institutions Right,” 121. Jian-Hung Chen and Yijen Chen, “The Evolution of Public Industry R&D Institute: The Case of ITRI,” R&D Management 46, no. 1 (2016). 122. Pan et al., “Fang Yi Chan Ye Lian/Kou.” 123. Evans, Embedded Autonomy. 124. Chen and Chen, “The Evolution of Public Industry R&D Institute.” 125. See, for example, Breznitz, “Development, Flexibility, and R&D Performance.” See Noble, Collective Action in East Asia. 126. Hattke and Martin, “Collective Action During the Covid-19 Pandemic.” 127. See, for example, Lin and Lin, “The Effect of Network Relationship.” See also Liu, Sinkovics, and Sinkovics, “Achieving Relational Governance Effectiveness.” 128. John Mathews, “The Origins and Dynamics of Taiwan’s R&D Consortia,” Research Policy 31, no. 4 (2002). 129. Email communication with TMBA, November 2020. 130. See, for example, Doner and Schneider, “Business Associations and Economic Development.” See also Simon Ville, “Rent Seeking or Market Strengthening? Industry Associations in New Zealand Wool Broking,” Business History Review 81, no. 2 (2007). 131. Ricks and Doner, “Getting Institutions Right.” 132. Both mask and vaccine donations became a diplomatic tool during the pandemic. On April 1, 2020, Taiwan donated “10 million masks to countries most affected by the pandemic, including America and Europe and to nations with full diplomatic relations with Taiwan.” This was followed by subsequent donations on April 9 and May 5 (over 13 million masks in total) to European Union member states, severely affected states in the United States, partner countries under Taiwan’s New Southbound Policy, medics working with Syrian refugees, and “other friendly nations.” See T. Alton, “Taiwan’s COVID-19 Response & “Mask Diplomacy.”’

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Alberta: University of Alberta China Institute, 2020. In 2021 some of the recipients (e.g., Japan, Lithuania, Slovakia, Lithuania) donated vaccines to Taiwan in return. 133. Wade, “Debate: The Developmental State.” 134. Chen and Chen, “The Evolution of Public Industry R&D Institute.” See also Y. Chu, “Democratization, Globalization, and Institutional Adaptation: The Developmental States of South Korea and Taiwan,” Review of International Political Economy 28, no. 1 (2021): 59– 80, and S-Y. Kim, “National Competitive Advantage and Energy Transitions in Korea and Taiwan,” New Political Economy 26, no. 3 (2021): 359–375. 135. June Park and Eunbin Chung, “Learning from Past Pandemic Governance: Early Response and Public-Private Partnerships in Testing of COVID-19 in South Korea,” World Development 137 (2020): 105198. 136. Wade, “Review Essay.” 137. Doner and Schneider, “The Middle-Income Trap.”; Doner and Noble, The Political Economy of Automotive Industrialization in East Asia. 138. Jennifer Summers et al., “Potential Lessons from the Taiwan and New Zealand Health Responses to the COVID-19 Pandemic,” The Lancet: Regional Health Western Pacific 4 (2020): 100044. 139. See, for example, Doner and Schneider, “The Middle-Income Trap.”; Doner and Noble, The Political Economy of Automotive Industrialization in East Asia. See also Ricks and Doner, “Getting Institutions Right.” 140. Park and Chung, “Learning from Past Pandemic Governance.” See also Wan-Ying Yang and Chia-hung Tsa, “Democratic Values, Collective Security, and Privacy: Taiwan People’s Response to COVID-19,” Asian Journal for Public Opinion Research 8, no. 3 (2020). 141. Wade, “Debate: The Developmental State.” 142. See, for example, Dallas, Horner, and Lid, “The Mutual Constraints of States and Global Value Chains.” See also Elsahn and Siedlok, “‘Can We Build It? Yes, We Can!’” 143. Lee Jones and Shahar Hameiri, “COVID-19 and the Failure of the Neoliberal Regulatory State,” 2021, https://www.tandfonline.com/doi/abs/10.1080/09692290 .2021.1892798.

Part 2 Prospects for Recovery

6 East Asia’s Green Economic Recovery: A Path Out of the Coronacession Sung-Young Kim

SINCE THE ONSET OF THE GLOBAL PANDEMIC IN EARLY 2020, THERE

has been much focus on the larger economies of the Indo-Pacific, namely China and the United States, in the period leading up to and after the onset of Covid-19.1 I chart a different path, focusing on the smaller states of the region including Korea, Taiwan, and Singapore.2 These countries are sites where great power competition between China and the United States is being played out albeit in different ways. Korea remains “sandwiched” between its staunch military ally and second largest trade partner (13.5 percent of total volume in 2019), the United States, and to China, which is both its largest trading partner (25 percent of total volume as of 2019) and an unlikely bedfellow in diffusing geopolitical tensions with North Korea.3 Singapore finds itself in a similar situation whereby its largest trade partner is China and its fourth largest trade partner is the United States, at 13 percent and 8.8 percent of total trade volumes (as of 2019) respectively. While Singapore remains a “nonallied” partner of the United States, the two countries share dense security ties.4 Singaporeans with Chinese ancestry (the majority of the population) may have a relatively positive view of China, but at the same time, policymakers are keen to keep an arm’s-length distance from Beijing in security and geopolitical matters. In Taiwan, the threat of China looms large especially since 2018 as tensions have escalated. Yet as of 2020, China is still Taiwan’s largest trading partner and the United States is Taiwan’s second largest trading partner, accounting for 26 percent and 13 percent of total trade respectively.5

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The three countries have also pioneered “green growth” or “green economy” initiatives since the late 2000s, which has caught the attention of governments, corporations, and international organizations alike. The term “green growth” was first coined by Korean policymakers involved in former President Lee Myung-bak’s administration (2008–2013) and placed at the top of the national agenda. According to the former chairman of the Presidential Committee on Green Growth, Soogil Young, green growth refers to a “new development paradigm by harnessing green technologies and clean energies to create new growth engines and jobs.”6 Their aim is to depart from a “carbon dependent economic paradigm and to preempt the world market in green technology and industry,” in the words of the key architect behind green growth, Sang-Hyup Kim, who was the presidential secretary for National Future and Vision in the Lee government.7 Korea’s green growth initiative is currently in its third phase under the Third FiveYear Plan for Green Growth (2019–2023). Since the early 2010s, policymakers in Taiwan have also coordinated “green economy” initiatives, which have now become a core pillar of the nation’s industrial development initiatives after President Tsai Ing-wen came to power in 2016. Coming somewhat later to the party, since the mid-2010s Singapore too has invested heavily in low-carbon and green technology development programs as part of the Urban Solutions and Sustainability component of the National Research Foundation. The onset of the Covid-19 pandemic at the start of 2020 has brought into question the region’s continuing appetite for the pursuit of green growth. Indeed, in an article published in Foreign Affairs, the pandemic has been fruitfully described as the “great unequalizer” by Mohamed el-Erian and Michael Spence.8 These writers argue that the pandemic has exacerbated (rather than diminished as many expected) inequalities in income, wealth, and opportunity. The region was not spared from the unprecedented challenge of coping with sudden mass unemployment (as a result of mandated or unmandated lockdowns), the prospect of significant falls in asset prices, supply chain disruptions, and the urgent need to achieve vaccination targets. In light of the economic challenges brought about by the pandemic, it is reasonable to expect a sidelining, if not a momentary pause, of greening objectives. An interesting question thus arises: What has been the impact of the Covid-19 pandemic on the East Asian countries’ green growth ambitions? Has the pandemic dampened, somehow diluted, or perhaps even strengthened commitments to greening? The aim of this chapter is to compare the economic recovery strategies of Korea, Taiwan, and Singapore under Covid-19 and to probe why their coping strategies have taken on a strong green flavor. I argue that, somewhat surprisingly, Covid-19 and the escalation of geopolitical tensions between China and the United States have not so much hindered but rather

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accelerated Korea, Taiwan, and Singapore’s greening objectives. As I will show, the onset of the pandemic and the new technological rivalry between the United States and China 9 have increased the pace of a “global green shift,” 10 which was already under way. The increasingly competitive environment has compelled strategically oriented governments and national corporations to catch up, keep up, or stay ahead—or risk being left behind—of their large country competitors, namely China and the United States, and other countries in the new economic battleground in the green economy. Of course, these conditions provide no guarantee that all states will take advantage of the enormous opportunities which lie waiting in the green economy. I argue that Korea, Taiwan, and Singapore’s efforts to double down on the pursuit of greening objectives stems from their developmentalist state orientations and by extension their developmental-environmental character.11 They have instituted new, hybridized forms of cooperation with the private sector focused on building national clusters of all companies in the innovation value chain, which I call hybridized industrial ecosystems.12 Overall, the geopolitical competition between the United States and China since the onset of Covid-19 has opened a window of opportunity for these developmental states to reclaim or cement their existing techno-economic competitiveness in the new (green) growth industries of the future.

A Domestic Institutions Approach In order to understand how and why the three countries have coped with the new geopolitics of the Covid era, I draw upon a domestic institutions approach which has a well-established lineage of research in political science.13 For proponents of this approach, the state’s ability to cope with external pressures brought about by the increasing pace and scope of global economic integration was highly dependent on the nature and quality of the domestic institutional context. In the cases of Korea, Taiwan, and Singapore, a large body of scholarship has demonstrated the pivotal role of so-called developmental states in shaping their domestic institutional environments.14 Coined by the late Chalmers Johnson15 in his seminal study of Japan and developed further through applications beyond that country, the term developmental state has three core ingredients.16 The first is the existence of insulated economic “pilot agencies” committed to long-term focused national industry development objectives. The second is the institutionalized avenues for public and private cooperation, and the third is the wellorganized private-sector bodies, which can work as effective partners in the execution of a developmental project. These features are seen as useful to the extent that they enable a cooperative relationship between the

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state and industrial actors. Peter Evans17 referred to the type of interdependent relationship between public and private actors exemplified in East Asia as “embedded autonomy.” For Linda Weiss,18 it was a question of “governed interdependence.” Often treated separately from the definition, but nevertheless of critical importance, is the existence of a political environment, which provides sufficient space for economic technocrats to coordinate techno-industrial upgrading.19 Developmental states then are not simply states that are pro-development, but countries committed to the execution of strategic industry policy as the source of their economic security.20 Policymakers in the Northeast Asian countries of Japan, Korea, Taiwan, and Singapore (and now arguably China) facilitated rapid industrialization through identifying promising “sunrise industries,” or new growth areas, allocating resources, sharing risks faced by firms, scouring the world for core technologies especially from foreign competitors and later through developing indigenous capabilities, and securing markets for companies. While the initial focus may have been on more simple, lowertech industries such as textiles, they very quickly climbed the technology ladder to become leaders in heavy industries such as automobiles and more knowledge-intensive industries like semiconductors. For these countries, the creation of new green industries such as solar photovoltaic (PV), wind power, smart electricity grids, and electric vehicles represents their latest efforts to secure higher-tech manufacturing capabilities. Their embrace of green growth or green economy therefore reflects an extension of the developmental state architecture to the pursuit of this new industrial field. As I have argued in the case of Korea, developmental environmentalism emerged as a direct response to increasing volatility over global fossil fuel supplies and prices and the need to address the increasingly high levels of economic inequality and the attainment of long-held goals over technological autonomy.21 The most important institutional mechanisms that have helped countries such as Korea and Taiwan realize their green growth ambitions has been through the creation of quasi-governmental hybrid structures of governance. I have argued that East Asian hybridized industrial ecosystems (HIEs), sharing parallels with their US counterparts,22 fuse public and private features in networks involving all the major players of an innovation value chain.23 These state-coordinated organizational entities have helped drive the development of national ecosystems of allied companies (and state agencies) and to compete against leading companies from Europe, Japan, and the United States that all command their own networks of partners and suppliers. The best example of an HIE is the Korea Micro Energy Grid (K-MEG) Association.24 This entity was established by the Korean Ministry of Trade, Industry, and Energy, launched with both public and pri-

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vate funds, and involved twelve large conglomerates and networks of small and medium enterprises (SMEs) and government research institutes. The KMEG Association was critical in propelling Korean companies into a new force in the global smart grid industry. In more recent years, East Asia’s developmental state traditions have taken on even greater significance as the world experiences a “global green shift” in resources and materials toward a renewable energy future and circular economy foundations.25 The increasing pace of a global green shift has unleashed a new international competitive environment in clean technologies involving governments and firms. There are two main questions we now face in a world dominated by the global pandemic and in the context of the escalating rivalry between the United States and China since 2020. What impact has the pandemic had on the global green shift? What role, if any, has the developmental state traditions of the East Asian countries, in particular hybridized industrial ecosystems, had on green growth efforts in the Covid-19 era?

The United States–China Rivalry China’s reputation as the “factory of the world” has drawn much attention not least because of the country’s enormous appetite for fossil fuels, especially coal. As mentioned in an article I authored with a group of collaborators, China’s generating capacity from coal increased by approximately 18 percent between 2015 to 2019 and as of 2021 had the largest coal generating system on the planet (greater than 1,000 gigawatts of capacity).26 Unsurprisingly, China’s carbon emissions increased every year over the past decade, although the rates of increases are declining as Mathews and Huang27 note. In 2010, emissions of carbon dioxide in billion tonnes per year (GtCO2/year) were 10.9 GtCO2/year. By 2020, that figure was 13.5 GtCO2/year. By comparison, emissions in the United States were substantively lower than China’s, ranging between 6.5 and 7 GtCO2/year during the same period. However, it is important to acknowledge that China’s per capita emissions were 8.2 tons in 2010 and 9.6 tons in 2020—representing less than 50 percent of US levels. In any case, there is no question that China’s dependence on fossil fuels and its contribution to carbon emissions are excessively high. Green Behemoth China Yet there is another image of China, one that stands in stark contrast to its black skies. Described by US analysts such as Amy Myers Jaffe, since 2012 under the leadership of President Xi Jinping, China has experienced a “green

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big bang.”28 The country is at the forefront of global efforts to commercialize electric vehicles (EVs), manufacture and deploy large-scale solar photovoltaic and wind turbines, and create energy-independent micro energy grid communities. China is also creating new financing mechanisms to fund ambitious green energy initiatives especially for its visionary Belt and Road Initiative. Clean technologies will also feature in Chinese-developed autonomous weapons, drones, and artificial intelligence networks—dualpurpose fields the Chinese are eager to dominate. Energy security concerns and the need to address environmental degradation matter, but above all it is national security that drives China’s thirst to establish itself as a green superpower. According to Mathews and Huang,29 the country has been at the forefront of global greening efforts. As of 2019, China had created the world’s largest renewable energy system with installed capacity of 41 percent and actual generation of 27 percent. By comparison, the United States generates 17 percent from renewables, 19 percent in Japan, and 34 percent for the combined twenty-eight countries of the European Union. Based on the authors’ calculations, China’s power system would be more green (using renewables) than black (using fossil fuels) by 2026. This expectation seems even more likely given China’s waning appetite for the blackest of energy sources: coal.30 Driven by various concerns including air pollution and also efforts to develop higher-value-added industrial activities, local governments have cancelled or shelved 710 gigawatts of plans (announced in 2010) to build coal power capacity, and 97 gigawatts of coal power plants have been retired since 2006. At the same time, as mentioned earlier, its overall coal-generating capacity has continued to grow—although at a declining rate. With President Xi Jinping’s surprising announcement in 2020 of committing the country to net-zero emissions by 2060, it is clear that China intends to sustain its global leadership status. Importantly, China has also emerged as one of the great centers of manufacturing in green industries. In the supply of EV batteries, Chinese companies such as CATL have the largest market share worldwide at 32.5 percent (followed closely by the Korean company LG Energy Solution at 21.5 percent).31 In solar PV technologies, China dominates all segments of the supply chain. Chinese companies hold 97 percent global market share for silicon wafers, 79 percent for PV cells, and 67 percent share for polysilicon.32 There are many other industries such as EVs and power grid technologies in which Chinese companies are exhibiting world leadership.33 The key factors behind China’s success in the renewables sector is the subject of a burgeoning debate. For some writers, China’s authoritarian governance system and immense economic size provide the state with the unparalleled ability to urgently address environmental degradation.34 Other

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writers (including myself)35 play down the effectiveness of the country’s authoritarian credentials, instead pointing to the institutional capacity of the state to induce input from the private sector over the formulation and implementation of public policies.36 It is beyond the scope of this chapter to elaborate further. What is important is that the Chinese state has promoted the development of the domestic renewables sector to address real or selfperceived imminent threats posed by a hostile world. And as I will explain, the United States has taken notice. America’s Awakening and Catching-Up to China China’s big bet on green industries and use of renewables has led influential US analysts such as Jaffe (as mentioned), who is the director of the Program on Energy Security and Climate Change at the Council on Foreign Relations, to describe China as a “renewable energy superpower.’37 Jeffrey Ball from the Brookings Institution38 describes China’s rapid rise in the green economy as Green China Inc. These writers clearly had their sights on US policymakers—for good reason. In key technology industries such as solar PV in which US companies such as Solyndra once held a competitive lead, Chinese companies have outcompeted their counterparts.39 By 2021, approximately 80 percent of the solar panels used in the United States were from China—unsurprising given that eight of the top ten solar PV firms in the world are from China. The one remaining US company on that list is First Solar. Yet most of that company’s manufacturing is undertaken in Malaysia and Vietnam. Indeed, according to another report, only 1 percent of solar PV manufacturing occured in the United States as of 2021, which reflects a significant reduction from 22 percent in the early 2000s.40 The seventy-five factories manufacturing solar components in the United States have almost all been closed. However, various governmentled initiatives such as the Inflation Reduction Act (August 2022) may help the American solar industry stage a comeback. The reasons for the loss of the competitive edge of the United States in green technologies and its slow embrace of renewables (although with exceptions such as California) are numerous. While it is beyond the scope of this chapter to provide a detailed analysis, suffice to note that there has been a history of inconsistent and piecemeal approaches since the Obama administration (2009–2017). Some writers point to the challenge of “carbon lock-in,”41 especially for large fossil fuel producing countries such as the United States. This refers to a situation in which large fossil fuel assets in an energy-intensive system create political-economic barriers to transitioning to the wider uptake of renewables. More recently, the former Trump administration’s (2017–2021) short-term-focused policies have

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caught the attention of analysts. Fixated on imposing tariffs on green technologies like solar panels from China as part of anti-dumping measures and controls on digital technology exports (to protect US advantages in green infrastructure), such policies have barely helped achieve their stated aims.42 President Trump’s seriousness behind these policies was also questionable considering that his administration’s energy policy was squarely focused on expanding, not transitioning away from, oil and gas through new fracking techniques—with enormous repercussions for the global energy industry.43 However, for all its drawbacks, the Trump administration brought to light long-held concerns over China’s efforts to develop indigenous technological capabilities.44 This was especially true for general-purpose technologies such as information and communication technologies (e.g., artificial intelligence, semiconductors), which have applications to energy industries. The US government became preoccupied with China’s alleged violations of the intellectual property rights of US companies, cyberhacking, and forced technology transfers. In face of such hostilities, China’s leaders did not stand idly by. The Trump administration’s overtures have cemented its self-perception that the United States seeks to contain China’s rightful place in the world, limiting its geographical expansion and national development. US concerns over China’s growing technological competitiveness especially in green technologies remain strong even under the current Biden administration. In an April 2021 speech, Secretary of State Antony Blinken made the case for the need of the United States to catch up with China in the green energy race as one of ensuring national security. “Right now, we’re falling behind,” he stated. “If we don’t catch up, America will miss the chance to shape the world’s climate future in a way that reflects our interests and values, and we’ll lose out on countless jobs for the American people.”45 In November 2021, President Biden successfully passed the Bipartisan Infrastructure Deal in Congress.46 In this $1.2 trillion plan, approximately $295 billion is targeted at investing into upgrading, developing, and innovating new green technologies such as EVs and the power grid. These actions are seen as necessary to help drive high-quality employment and new sources of economic growth, and to meet President Biden’s emissions reduction targets of 50–52 percent (from 2005 levels) by 2030, a 100 percent carbon-pollution-free power sector by 2035, and the commitment to a net-carbon-zero economy by 2050. I now turn to the impact of the growing competition between the United States and China over clean technologies, which has coincided with the onset of the Covid-19 pandemic, on the smaller states of East Asia.

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Green Economic Recovery Strategies in the Smaller East Asian States The Korean Green New Deal Covid-19 plunged Korea, like other countries, into a severe economic recession. The crisis exacerbated the ongoing challenges faced by the most vulnerable members of society while also highlighting the need to quicken structural changes in the national economy. These conditions provided the impetus for President Moon Jae-in to launch a Green New Deal as part of a larger Korean New Deal in July 2020. The Korean New Deal involves a total budget of KRW160 trillion ($135 billion) with the aim of creating 1.9 million new jobs.47 The Green New Deal component—and the largest part of the Korean New Deal— involves investments into the development and commercialization of smart and green factories, EVs, and green buildings, among other planned projects.48 The government planned for a total of KRW73.4 trillion ($61.9 billion) for green investments and the creation of 659,000 jobs by 2025. 49 The Green New Deal has three key focus areas, whose implementation will be monitored by Moon himself through the creation of a monthly Strategy Meeting on the Korean New Deal chaired by the president himself.50 The first focus area is the expansion of new green infrastructure such as installing solar panels in public buildings to enable a clean energy transition.51 These efforts are part of a wider initiative aimed at creating “smart cities” based on cutting-edge information technology (IT) innovations in artificial intelligence, big data, and the country’s world-leading 5G network. These initiatives are part of the Green Remodeling project. The second focus area is on deepening the country’s shift to low-carbon and decentralized energy.52 Of central importance will be the advancement of research and development (R&D) and deployment of smart grid technologies. This includes technologically upgrading power grids through installing advanced metering infrastructure (which digitalizes the buying and selling of energy) in residential homes. It also involves the creation of energy-independent microgrid communities utilizing offshore wind power or solar coupled with energy storage systems in regional and islanddense areas.53 The third focus area is on emboldening R&D support for green energy and “circular economy” initiatives. The plan is for the creation of five green clusters specializing in clean air, biomaterials, hydrothermal energy, future waste resources, and recycling of resources and energy throughout the country. For instance, to drive the expansion of smart and green factories, the government has focused on increasing renewable energy use, reusing

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wasted heat and other industrial wastes as energy, and establishing networks of factories for recycled energy.54 Interestingly, we have seen the growth of HIEs as the main organizational vehicles for the promotion of green growth projects. One of the most prominent examples is the Hydrogen Convergence Alliance (H2 Korea), which was established by the Ministry of Trade, Industry, and Energy in 2017. Involving the major conglomerates such as POSCO and Hyundai and networks of SMEs, H2 Korea’s mission is to coordinate the creation of an industrial ecosystem of domestic companies, international partnerships with hydrogen producers such as Australia and the United Arab Emirates (UAE), and the commercialization and export of hydrogen technologies.55 Overall, these initiatives accelerate the realization of the targets already set out in the government’s existing green growth strategy including the scaling down of nuclear energy, Renewable Energy 3020 Roadmap, the current and Third Five-Year Plan for Green Growth (2019–2023), and the Hydrogen Economy 2040 Roadmap.56 The government’s 2020 announcement to a 2050 net-zero carbon target will add to the urgency driving these plans. In fact, in light of the announcement, local governments such as Chungcheongnam-do, Gangwon-do, and Daegu City have all committed to ending coal generation power plants in the country. Korea’s economic recovery under Covid has taken on a distinct green flavor propelled by the increase of international competitive pressures associated with the strategic competition between China and the United States. The new international order has clearly exacerbated, not allayed, Korea’s long-standing concerns over ensuring its technological autonomy and now in the green economy57—emanating from a history of being subjected to imperial conquests and being sandwiched between two large powers. Thus, we see Korea’s developmental state architecture taking on renewed importance especially through the growth of hybrid structures of governance. Taiwan’s Green Economy Programs The 2016 election of President Tsai Ing-wen ushered in important changes in the nation’s energy strategy and by extension the strategic significance of green industries. She began her tenure by committing to a nuclear-free homeland by 2025 as part of a new energy policy that also set out her plans to increase the share of renewables to 20 percent by 2025.58 In April 2017, the government established the 5+2 Innovative Industries Program, which prioritized green energy industries such as solar PV system integration as a new source of economic growth.59 Then in September 2017, the government announced the inclusion of green industries in the Forward-Looking Infrastructure Development Program.60 This plan set aside a total of NT27.2 billion ($963.1 million) for investments into R&D and technology demon-

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stration projects from 2017 to 2022. Four main green technologies are being targeted in this program. The first is smart energy conservation, which involves expanding the installation of smart meters across Taiwan to a total of 3 million units by 2024. The second is solar energy and the aim is to install 20 gigawatts of capacity by 2025. The third technology type is wind power with the major focus being on installing offshore wind power amounting to 6.7 gigawatts of capacity by 2025. The fourth is the creation of the Shalun Smart Green Energy Science City to serve as a test-bed for cutting-edge green technologies developed by domestic companies and public organizations prior to engaging in an export offensive. President Tsai’s government responded to the challenges of Covid-19 and especially the escalation of the United States–China rivalry by reaffirming the government’s commitment to the green economy. This became clear in the lead-up to the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) conferences, from which Taiwan continues to be excluded as a negotiating member country. In April 2021—seven months prior to the 2021 twenty-sixth COP, held in Glasgow—President Tsai Ing-wen announced her commitment to achieving net-zero carbon emissions by 2050. She made the government’s core goal behind this announcement explicitly clear—to meet the challenge of a net-zero carbon economy by unleashing new industrial development capacities for the nation and securing Taiwan’s position in global supply chains. In President Tsai’s words: In the Indo-Pacific region, Japan, Korea, and China have all come out since last year to propose target dates for reaching net zero emissions. Our key partner, the United States, is also following suit. . . . Whoever can take the lead in developing new technologies and creating new economic models will cement their status in a new global order. . . . I firmly believe that many of our friends in industry see the transformation to net zero as an opportunity. . . . We would consult widely to identify the future sustainable development methods most appropriate for Taiwan, while turning the challenges of carbon reduction into new opportunities for industrial development and job creation.61

For President Tsai, the challenge of greening—highlighted by the competitive strategies employed by both the United States and China after the onset of Covid-19—would drive the government toward “an all-out effort to develop green energy and a circular economy.” This would involve sustaining the long-term focused investment and commercialization targets of earlier green industry development initiatives set out in the 2017 Forward-Looking Infrastructure Development Program and the 5+2 Innovative Industries Program.

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The effect of Covid-19 then has been to strengthen, not weaken, Taiwan’s commitment to developmental environmentalism. Importantly, the Taiwan state has pursued green economy projects by fusing public and private resources in HIEs, thereby helping to create an ecosystem of domestic companies into world leaders in green technologies. One such HIE is the Taiwan Offshore Wind Industry Association (TOWIA), established in 2019 by the Ministry of Economic Affairs (MOEA) to facilitate the creation of a domestic supply chain of Taiwanese companies in this industry.62 TOWIA involves public agencies and leading foreign wind power developers such as Danish Utility, Ørsted, and the German company WPD Taiwan Energy. The establishment of TOWIA is part of MOEA’s longer-term efforts under the Wind Power Promotion Plan (2017–2021) to accelerate the development of the offshore wind power industry.63 The president’s net-zero commitment will undoubtedly help domestic companies by securing an initial market for manufacturers before launching their products into international markets. There is no doubt that Taiwan’s steadfast commitment to the green economy under Covid-19 stems from long-held strategic considerations of reducing the country’s vulnerability to imports of fossil fuels and to cope with the growing competitiveness of its mainland rival in this new industry.64 Let us now turn to developments in Singapore. Singapore’s Green Plans The Singaporean government’s green industrial development objectives have been one of the core areas of focus under the five-year national technology plans, which began in 1991. Under the fifth five-year plan and called the Research, Innovation, and Enterprise 2015 Plan, the National Research Foundation (a division within the prime minister’s office) explicitly targeted “cleantech” as one of five national research priorities.65 The government budgeted SG$350 million for investments into green buildings, energy, and water.66 From 2011 to 2015, the government launched various green energy initiatives under the Research, Innovation, and Enterprise 2015 Plan such as developing and testing building-based microgrid solutions and nurturing the development of solar technology developers. In the Research, Innovation, and Enterprise 2020 Plan (2016–2020), a focus on green energy technologies continued under the Smart and Sustainable Urban Solutions field. A year after Covid-19 hit the Singaporean economy, in February 2021, the Singaporean government announced the launch of its latest version of the Green Plan (first launched in 1992), which retains the focus on green technology development programs discussed above. However, in light of the economic impacts of Covid-19 on Singapore (e.g., significant job

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losses) through the disruption of supply chains and international trade more broadly, Green Plan 2030 conveys a sense of urgency perhaps less noticeable in previous efforts. Green Plan 2030 positions sustainability as a new economic growth engine to help create new job opportunities for the citystate.67 The plan also set out measures to implement its emission reduction targets of halving 2030 peak greenhouse gas emissions by 2050 and to achieve net-zero emissions “as soon as viable.”68 In characteristic form, the government’s aim has been to turn Singapore into a hub for green finance, carbon trading, and corporate sustainability consulting services. The current Green Plan also seeks to induce multinational companies to undertake R&D for new sustainability focused R&D solutions while building HIEs composed of government research institutes, leading foreign firms, large domestic companies, and local startups and SMEs. One example is a SGD10 million cofunding arrangement between the Singaporean Energy Market Authority (EMA) and a large domestic conglomerate, Keppel Offshore and Marine. In 2020, the EMA and Keppel jointly funded a consortium to undertake research, development, and demonstration (RD&D), led by one of the world’s leading digital energy solutions companies, Envision Digital, to install Singapore’s first floating energy storage system (ESS) on Keppel’s Floating Living Lab (FLL).69 In a related project, in 2021 the EMA (and a related government agency, Enterprise Singapore) and Envision Digital agreed to contribute a total of SGD4 million to fund the Net-Zero Startup Challenge.70 This initiative is targeted at nurturing startups and SMEs, using Envision’s core technologies in artificial intelligence and the “internet of things” and related digital capabilities, and to provide a test-bed via Keppel’s own infrastructure sites. The EMA’s aim is to create export opportunities for small Singaporean companies and to develop longer-term partnerships with promising domestic firms. In essence, the Green Plan 2030 emulates the enormously successful postwar strategy of establishing Singapore as a global trading hub in services and core high-technology components but now in the green economy. The Green Plan 2030 reveals the deep sense of vulnerability of Singaporean policymakers amid the increasing tensions between the United States and China in the Covid-19 era. In a now famously titled essay “The Endangered Asian Century” by Prime Minister Lee Hsien Loong in Foreign Affairs, Singapore’s unenviable position was laid bare: “Asia-Pacific countries do not wish to be forced to choose between the United States and China. They want to cultivate good relations with both. They cannot afford to alienate China [but] those Asian countries regard the United States as a resident power with vital interests in the region.”71 Prime Minister Lee’s concerns arise from Singapore’s high dependence on the United States as the guarantor of its security and investments

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from United States–based multinational companies while at the same time being deeply enmeshed with China as a market for Singaporean exports and technology development partnerships. The Green Plan 2030 can be seen as an attempt to leverage (as it has done time and time again) Singapore’s strategic presence in the region and in global productions networks in a world in which the United States and China compete for global technology dominance and market share in the green economy. Although the rationales and approaches of Singaporean officials involved in Green Plan 2030 may differ from Korea and Taiwan, its developmental state institutions and hybridized industrial ecosystems have been key to Singapore’s green-led economic recovery.

Conclusion The existing rivalry between the United States and China has helped position green technologies as a key economic battleground between the two superpowers. Their big bets on the clean energy sector—especially those of the United States, which is now playing catch-up with China—has heightened international competitive pressures in the green economy. The region’s smaller states of Korea, Taiwan, and Singapore have not stood by idly. Their developmental state traditions have helped these countries seize new opportunities in the green economy. In Korea, the Ministry of Trade, Industry, and Energy has led new hybridized structures of governance involving the creation of public and private industrial ecosystems such as H2Korea in the hydrogen industry. In Taiwan, the Ministry of Economic Affairs has coordinated the creation of a Taiwanese offshore wind power industry through establishing an HIE in the form of TOWIA, which involves the participation of government research institutes and domestic firms. We see similar developments in Singapore whereby officials in the Energy Markey Authority have been key to establishing HIEs led by large domestic conglomerates such as Keppel, among other companies. My argument implies that policymakers in East Asia’s developmental states continue to play important guiding roles in the economy. This conclusion stands at odds with the increasingly popular view that the growing power of global corporations has led to the shrinking role of the state in East Asia. Writers in this camp point to the unprecedented influence of large domestic companies in public life,72 or the increasing importance of global production and innovation networks, not national networks, in the fortunes of East Asian firms.73 My findings show that the uncertainties brought about by the global pandemic and the geopolitical rivalry between the United States and China have exposed the vulnerabilities of corporations operating in such a business environment. True to form, the develop-

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mentally oriented governments of East Asia have sought to lessen the risks faced by the private sector and to simultaneously create sources of national techno-economic competitiveness through the green economy. Therefore, my arguments affirm the views of writers who emphasize the ways in which the developmental project in East Asia has been repurposed and adapted in response to deepening integration into the world economy.74 While my focus has been on the similarities in national responses to new external challenges, future studies would do well to focus on the national differences in the specific content and sequencing of national greening strategies. This calls for a deeper exploration of the domestic political imperatives and unique institutional complexities driving state action, as studies on the emergence of HIEs in Korea75 and China76 have shown.

Notes 1. S. S. Roach, “The Sino-American Innovation Dilemma: A Conflict with Deep Roots and Tough Solutions,” Asia-Pacific Journal: Japan Focus 16, no. 20 (2018). 2. See also H. Tan, E. Thurbon, J. A. Mathews, and S. Kim, “The US and China Must Find a Way to Cooperate at COP26 and Beyond; Otherwise, Global Climate Action Is Impossible,” October 25, 2021, https://theconversation.com/the-us-and -china-must-find-a-way-to-cooperate-at-cop26-and-beyond-otherwise-global-climate -action-is-impossible-170094. 3. See S. Yoon, “This Country Is ‘Sandwiched’ Between America and China,” April 14, 2015, https://nationalinterest.org/blog/the-buzz/country-sandwiched-between -america-china-12628. Figures from World Bank, https://wits.worldbank.org/Country Snapshot/en/KOR. 4. W. Choong, “Chinese-U.S. Split Is Forcing Singapore to Choose Sides,” Foreign Policy, July 14, 2021; F. C. Deyo, ed., The Political Economy of the New Asian Industrialism (Ithaca: Cornell University Press, 1987). 5. See https://www.trade.gov/country-commercial-guides/taiwan-market-overview #:~:text=China%20is%20Taiwan’s%20largest%20trading,Hong%20Kong%20(7.9 %20percent). 6. S. Kim and E. Thurbon, “Developmental Environmentalism: Explaining South Korea’s Ambitious Pursuit of Green Growth,” Politics & Society 43, no. 2 (2015). 7. S. Kim and H. Choi, Green Growth for a Greater Korea: White Book on Korean Green Growth Policy, 2008–2012 (Seoul: Korea Environment Institute, 2013). 8. Mohamed A. el-Erian and Michael Spence, “The Great Unequalizer: The Pandemic Is Compounding Disparities in Income, Wealth, and Opportunity,” Foreign Affairs, June 1, 2020. 9. Roach, “The Sino-American Innovation Dilemma.” 10. J. A. Mathews, Global Green Shift: When CERES Meets Gaia (London: Anthem, 2017). 11. Kim and Thurbon, “Developmental Environmentalism”; S. Kim, “National Competitive Advantage and Energy Transitions in Korea and Taiwan,” New Political Economy 26, no. 3 (2021). 12. S. Kim, “Hybridized Industrial Ecosystems and the Makings of a New Developmental Infrastructure in East Asia’s Green Energy Sector,” Review of International Political Economy 26, no. 1 (2019).

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13. For example, see P. J. Katzenstein, Small States in World Markets: Industrial Policy in Europe (Ithaca, NY: Cornell University Press, 1985), S. K. Vogel, Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries, (Ithaca, NY: Cornell University Press, 1996), P.A. Hall and D. Soskice (eds.), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford: Oxford University Press, 2001), L. Weiss (ed.), States in the Global Economy: Bringing Domestic Insttutions Back In (Cambridge: Cambridge University Press, 2003). 14. There is a long-running debate over the continuing existence and utility of developmental states in a globalizing economy. 15. C. Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 (Stanford: Stanford University Press, 1982). 16. See studies on Korea, Taiwan, and Singapore (and sometimes Malaysia). A. H. Amsden, Asia’s Next Giant: South Korea and Late Industrialization, (Oxford: Oxford University Press, 1989), F. C. Deyo (ed.), The Political Economy of the New Asian Industrialism (Ithaca, NY: Cornell University Press, 1987), P. Evans, Embedded Autonomy: States in Industrial Transformation (Princeton, NJ: Princeton University Press, 1995), J. A. Matthews and D. Cho, Tiger Technology: The Creation of A Semiconductor Industry in East Asia (Cambridge: Cambridge University Press, 2000), R.H. Wade Governing the Market: Economic Theory and the role of Government in East Asian Industrialization (Princeton, NJ: Princeton University Press, 1990/2004, L. Weiss, The Myth of the Powerless State: Governing the Economy in a Global Era (Ithaca, NY: Cornell University Press, 1998. 17. P. Evans, Embedded Autonomy: States and Industrial Transformation (Princeton: Princeton University Press, 1995). 18. L. Weiss, The Myth of the Powerless State: Governing the Economy in a Global Era (Ithaca: Cornell University Press, 1998). 19. For example, see T. J. Pempel and M. Muramatsu, “The Japanese Bureaucracy and Economic Development: Structuring a Proactive Civil Service,” in H. Kim, M. Muramatsu, T. J. Pempel, and K. Yamamura (eds.), The Japanese Civil Service and Economic Development: Catalysts of Change (Oxford: Clarendon Press, 1995), and M. Woo-Cumings, “Developmental Bureaucracy in Comparative Perspective: The Evolution of the Korean Civil Service,” in H. Kim, M. Muramatsu, T. J. Pempel, and K. Yamamura (eds.), The Japanese Civil Service and Economic Development: Catalysts of Change (Oxford: Clarendon Press, 1995). 20. R. H. Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton: Princeton University Press, 2004). 21. Kim and Thurbon, “Developmental Environmentalism.” 22. See E. B. Bonvillian, “Power Play, The DARPA Model and U.S. Energy Policy,” American Interest 2, no. 2 (November–December 2006). 23. Kim, “Hybridized Industrial Ecosystems.” 24. Ibid. 25. Mathews, Global Green Shift. 26. H. Tan, E. Thurbon, E., J. A. Mathews, and S. Kim, “Forget About the Trade Spat—Coal Is Passé in Much of China, and That’s a Bigger Problem for Australia,” January 20, 2021, https://theconversation.com/forget-about-the-trade-spat-coal-is -passe-in-much-of-china-and-thats-a-bigger-problem-for-australia-153300. 27. J. A. Mathews and C. X. Huang, “The Global Green Shift in Electric Power: China in Comparative Perspective,” Asia-Pacific Journal: Japan Focus 19, no. 8 (2021): 8. 28. A. M. Jaffe, “Green Giant: Renewable Energy and Chinese Power,” Foreign Affairs 97, no. 2 (2018).

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29. Mathews and Huang, “The Global Green Shift in Electric Power.” 30. H. Tan, E. Thurbon, S. Kim, and J. A. Mathews, “Overcoming Incumbent Resistance to the Clean Energy Shift: How Local Governments Act As Change Agents in Coal Power Station Closures in China,” Energy Policy 149 (2021): 9. 31. “Ranked: The Top 10 EV Battery Manufacturers,” September 25, 2021, https://elements.visualcapitalist.com/ranked-top-10-ev-battery-makers. 32. “China’s Solar Photovoltaics Market: How It Leads the Global Clean Energy Race?” August 19, 2021, https://lynk.global/insights/chinas-solar-photovoltaic-market -how-it-leads-the-global-clean-energy-race. 33. This is the subject of a larger project I am pursuing with a group of collaborators comparing China and Korea’s competitive strategies. For further information, see https://www.dev-env.org. 34. See M. Beeson, “Coming to Terms with the Authoritarian Alternative: The Implications and Motivations of China’s Environmental Policies,” Asia & the Pacific Policy Studies 5, no. 1 (2017); P. Drahos, Survival Governance: Energy and Climate in the Chinese Century (Oxford: Oxford University Press, 2020). 35. See S. Kim, E. Thurbon, H. Tan, and J. Mathews, “China Succeeds in Greening Its Economy Not Because, but in Spite of, Its Authoritarian Government,” May 28, 2019, https://theconversation.com/china-succeeds-in-greening-its-economy-not -because-but-in-spite-of-its-authoritarian-government-115568. 36. See, for example, G. C. Chen and C. Lees, “Political Recentralisation and the Diffusion of Solar Energy in China,” Europe-Asia Studies 71, no. 7 (2019). 37. Jaffe, “Green Giant,” p. 84. 38. J. Ball, “Grow Green China Inc.: How China’s Epic Push for Cleaner Energy Creates Economic Opportunity for the West,” May 2019 (Washington, DC: Brookings Institution). 39. “How China’s Solar Industry Is Set Up to Be the New Green OPEC,” Forbes, March 14, 2021. 40. “How China Beat the U.S. to Become World’s Undisputed Solar Champion,” June 4, 2021, https://www.bloomberg.com/news/articles/2021–06–04/solar-jobs-2021 -how-china-beat-u-s-to-become-world-s-solar-champion. 41. G. Unruh, “Understanding Carbon Lock-In,” Energy Policy 28, no. 12 (2000). 42. Jaffe, “Green Giant,” p. 91. 43. F. Guliyev, “Trump’s ‘America First’ Energy Policy, Contingency, and the Reconfiguration of the Global Energy Order,” Energy Policy 140 (2020). 44. Roach, “The Sino-American Innovation Dilemma.” 45. “Biden Administration: US Must Catch Up to China on Renewable Energy to Create Jobs,” USA Today, April 19, 2021. 46. “The Bipartisan Infrastructure Deal Boosts Clean Energy Jobs, Strengthens Resilience, and Advances Environmental Justice,” November 8, 2021, https://www .whitehouse.gov/briefing-room/statements-releases/2021/11/08/fact-sheet-the -bipartisan-infrastructure-deal-boosts-clean-energy-jobs-strengthens-resilience-and -advances-environmental-justice. 47. Ministry of Economy and Finance, National Strategy for a Great Transformation: Korean New Deal (Sejong, 2020), pp. 14–15. 48. Ibid., p. 46. 49. Ibid., p. 15. 50. Ibid., p. 43. 51. Ibid., p. 26. 52. Ibid., pp. 28–29.

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53. See Kim, “Hybridized Industrial Ecosystems”; Kim and Mathews, “Korea’s Greening Strategy.” 54. Ministry of Economy and Finance, National Strategy for a Great Transformation, p. 55. 55. See H2 Korea website, http://eng.h2korea.or.kr/sub/sub01_01.php. 56. S. Kim, E. Thurbon, J. A. Mathews, and H. Tan, “South Korea’s Green New Deal Shows the World What a Smart Economic Recovery Looks Like,” September 9, 2020, https://theconversation.com/south-koreas-green-new-deal-shows-the-world -what-a-smart-economic-recovery-looks-like-145032. 57. S. Kim, “National Competitive Advantage and Energy Transitions in Korea and Taiwan,” New Political Economy 26, no. 3 (2021): 370. 58. S. Kim and J. A. Mathews, “A Greener Grid for East Asia,” August 11, 2017, https://www.project-syndicate.org/commentary/south-korea-taiwan-end-nuclear -power-by-sung-young-kim-and-john-a-mathews-2017–08?barrier=accesspaylog. 59. Executive Yuan, “‘Five Plus Two’ Innovative Industries Plan,” March 30, 2018, https://english.ey.gov.tw/News3/9E5540D592A5FECD/c9e63678-1c18-4674 -b35f-298f9ba7a2bd. 60. Executive Yuan, “Forward-Looking Infrastructure Development Program: Green Energy,” March 11, 2021, https://english.ey.gov.tw/News3/9E5540D592A5 FECD/9c3a795e-3a4b-4c28-8e1f-838960716e06. 61. “President Tsai Attends Forum on Environmental Sustainability,” April 22, 2022, https://english.president.gov.tw/News/6122. 62. See Taiwanese Bureau of Foreign Trade, Ministry of Economic Affairs, https://www.trade.gov.tw/English/Pages/Detail.aspx?nodeID=855&pid=716832. 63. K. Chien, “Pacing for Renewable Energy Development: The Developmental State in Taiwan’s Offshore Wind Power,” Annals of the American Association of Geographers 110, no. 3 (2020). 64. M. Hu and J. A. Mathews, “Taiwan’s Green Shift: Prospects and Challenges,” Asia-Pacific Journal: Japan Focus 14, no. 19 (2016): 1–2; Kim, “National Competitive Advantage and Energy Transitions,” p. 370. 65. Ministry of Trade and Industry, Research, Innovation and Enterprise (RIE) 2015 (Singapore, 2011), p. 21. The four other research priorities were electronics, biomedical sciences, infocomms and media, and engineering. 66. “Singapore’s 10-Year Journey in Urban Solar,” October 11, 2017, https://www .eco-business.com/news/singapores-10-year-journey-in-urban-solar. 67. “Green Recovery,” Bangkok Post, June 21, 2021. 68. “Singapore to Review Its Climate Change Target As World Leaders Agree COP26 Deal,” November 14, 2021, https://www.channelnewsasia.com/singapore /cop26-singapore-climate-change-target-grace-fu-2312456. 69. Energy Market Authority, “Singapore’s First Floating Energy Storage System,” October 26, 2020, https://www.ema.gov.sg/media_release.aspx?news_sid= 20201026UiyBHcBySRr8. 70. Energy Market Authority, “S$4 Million Partnership Between EMA and Envision Digital to Grow Local Energy Companies’ Digital Expertise,” October 25, 2021, https://www.ema.gov.sg/media_release.aspx?news_sid=20211023Pe2IUYixcwaj. 71. H. Lee, “The Endangered Asian Century,” Foreign Affairs 99, no. 4 (2020). 72. T. Kalinowski, “The Politics of Climate Change in a Neo-Developmental State: The Case of South Korea,” International Political Science Review 42, no. 1 (2021); J. You, “The Changing Dynamics of State-Business Relations and the Politics of Reform and Capture in South Korea,” Review of International Political Economy 28, no. 1 (2021).

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73. H. W. Yeung, Strategic Coupling: East Asian Industrial Transformation in the New Global Economy (Ithaca, NY: Cornell University Press, 2016). 74. See K. Kim and H. Kwon, “The State’s Role in Globalization: Korea’s Experience from a Comparative Perspective,” Politics & Society 45, no. 4 (2017); J. T. Miao and N. A. Phelps, “The Intrapreneurial State: Singapore’s Emergence in the Smart and Sustainable Urban Solutions Field,” Territory, Politics, Governance 7, no. 3 (2019); K. Chien, “Pacing for Renewable Energy Development: The Developmental State in Taiwan’s Offshore Wind Power,” Annals of the American Association of Geographers 110, no. 3 (2020). 75. Kim, “Hybridized Industrial Ecosystems.” 76. J. Ding, “Promoting Nationally, Acting Locally: China’s Next-Generation AI Approach,” in H. Elliot (ed.), The AI Powered State: China’s Approach to Public Sector Innovation (London: Nesta, 2020), pp. 11–16.

7 Reforming the Global Supply Chain: A Taiwanese Perspective Roy Lee

IN THE BROADEST TERMS, THE GLOBAL SUPPLY CHAIN (GSC) CAN BE

defined as a production network between a company and its suppliers located in different countries to produce a product or services. According to the Organisation for Economic Co-operation and Development’s (OECD) Trade in Value-Added (TiVA) database, Taiwan is one of the most GSCdependent countries in the world measured in terms of its participation level as a share of total exports.1 GSCs are organized in different formats with distinctive outsourcing arrangements between the provider of the final goods (the outsourcing company) and its suppliers. In some cases, suppliers play a minor secondary role as vendors of raw materials and parts and components. In other cases, suppliers take a more comprehensive function as providers of turnkey solutions for major parts of the business processes, often with significant delegations (e.g., design, procurements, and distribution) from the outsourcing company.2 The best example in the latter case is the Electronic Contract Manufacturing (ECM) model Taiwan has developed and refined in the past three decades.3 The ECM model allows the outsourcing company to focus on their core business competencies in product designing, branding, and marketing, while enjoying the benefits of manufacturing efficiency.4 In the past three decades, Taiwan has been able to continue elevating the level of innovation and efficiency in contract manufacturing to a degree that not only sustains its leadership in the area but also enables Taiwan to escape from the socalled middle-income trap.5 Taiwan’s ECM business model started with a series of public-private efforts in the 1980s, and currently the core elements include the manufacturing and assembling of information communication technology (ICT) final products, such as servers, personal computers and 117

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smart phones, and key components like semiconductors. Another feature of Taiwan’s ECM model is the high level of offshore manufacturing and assembling activities, with China as the primary production hub to date; at the highest point in 2015, over 90 percent of Taiwanese ECM companies delivered their contract in China.6 The contribution of the ECM model is significant—semiconductor contract manufacturing alone accounted for 37 percent of Taiwan’s total export in 2021, and its output, including spillover effect to other economic activities, accounted for around 7–8 percent of Taiwan’s gross domestic product (GDP).7 This implies that the reform agenda of the GSC will have direct implications for Taiwan’s economic performance and growth. Unfortunately, the pressure and challenge to reform the current structure have been growing at an unprecedented speed, and the implications are more prominent for Taiwan because of the distinct structure under which a deep supply network is formed across Taiwan and China, with the latter as the primary hinterland for final assembling.8 The first wave of pressure comes from a more economic reason: the soaring production cost in China and rise of Chinese supply chain competitions in the past decade generates the pressure for Taiwan ECM companies located in China to readjust and reduce their presence through a “China+1” approach by moving part of the production and supply chains outside China.9 The massive and multiple Covid-19 lockdowns and electricity outages that took place in China since 2020 have rendered companies to both accelerate and broaden the China+1 policy to a new level. The second restructuring gravity comes from the ongoing United States– China economic and technology rivalry that started with the 2018 tariff war. The latest challenge derives from the policy to promote critical supply chain “autonomy” pursued by the United States, the European Union, and other major countries participating in the GSC. While supply chain autonomy is part of a broader policy in addressing economic security concerns in the context of the strategic competition from the United States (and European Union) against China, its importance and priority have risen significantly in light of the GSC disruptions created by the Covid-19 pandemic. Not only do countries with a higher degree of import dependency on healthcare products tend to face more serious shortage problems, lockdowns, and other restrictions, they also severely impact the operation of the GSC.10 In this regard, the Covid-19 pandemic at minimum also served as the accelerator of the pursuance of economic autonomy policy. Russia’s invasion of Ukraine in 2022 is likely to be another factor to further cement the determination in pursuing economic autonomy. The historical coincidence of the co-occurrence of the United States– China rivalry and the pandemic will continue to bring fundamental changes to the global economic order. In the case of the GSC, as the pandemic

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already played both “push” (China’s lockdowns) and “pull” (US strategic autonomy) roles in the reforming process, the GSC structure will be notably different post-pandemic. Against this background, this chapter discusses the responses that have been undertaken by both the private and public sectors in Taiwan to mitigate the challenges of the GSC reform and restructuring agenda and future tests Taiwan needs to be prepared for.

Taiwan’s GSC Participation: The Case of ECM The level of GSC participation can be captured by measurement reflecting different dimensions. The Trade in Value-Added and Global Value Chains Country Profiles index established by the World Trade Organization (WTO), which gives an overview of the key participation indicators for a selected group of WTO members based on the OECD’s value-added trade statistics, shows that Taiwan has one of the highest rates of global value chain participation in the world. As demonstrated in Table 7.1, Taiwan’s total participation rate stands at 60.8 percent of gross export, composed of 20.9 percent of forward participation rate (value added by Taiwan’s export to the importing countries) and 39.8 percent of backward participation (value being added by imports into Taiwan) in 2018. All three indexes are significantly higher than the regional average for all global regions, and the relatively high level of backward participation vis-à-vis other parts of the world is a strong indication of Taiwan’s linkage with the GSC. For comparison, South Korea’s total participation rate is 53.5 percent (21.5 percent forward and 32 percent backward), while Japan and China have even lower connection with the GSC.

Table 7.1 Taiwan’s Global Value Chain Participation Index, 2018 (percentage shares of total gross exports) Participation Rate

Total Forward   participation Backward   participation

Regional Average

Taiwan

South Korea

Japan

China

Asia

Europe

North South America America

20.9

21.5

25.5

19.3

44.4 20

48.8 21.2

37.8 22

36.5 23.5

39.8

32

17.2

17.2

24.4

27.6

15.8

13

Source: WTO, “Trade in Value-Added and Global Value Chains: Statistical Profiles,” https://www.wto.org/english/res_e/statis_e/miwi_e/countryprofiles_e.htm, accessed September 13, 2022.

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Currently China is both the largest recipient of Taiwan’s GVC contribution and provider of Taiwan’s GVC imports. This is associated with Taiwan’s expansion of manufacturing activities to China in the past two decades. Considering the importance of the ECM model, it is not surprising to note that computer and electronic production industry is both the top GVC-contributing sector (i.e., adds value to third countries’ export through forward participation), as well as the GVC-utilizing sector (i.e., imports intermediates to produce exports through backward participation) in Taiwan, with the former accounting for 33.9 percent of computer and electronic products export, and the latter 41.3 percent of computer and electronic imports into Taiwan. Taiwan’s interconnectivity with the GSC has been a progressive process. In 1995, the first year the OECD and WTO started to collect GVC index data, Taiwan’s GVC participation rate under the TiVA database was only 47 percent (32.9 percent and 14.1 percent for backward and forward participations), far below its current level.11 The 2018 index reflects not only the deepening of Taiwan’s GSC participation in the past twenty-five years but also the changing nature of Taiwan’s role in the GSC. The fact that the increase in forward participation rate (48 percentage points) is significantly higher than that of backward participation increase (20 percentage points) indicates Taiwan has transferred into a value-added member of the GSC. Taiwan’s export portfolio also shifted in the same period. As depicted in Figure 7.1, the ratio of final/consumption goods in Taiwan’s export portfolio declined rapidly between 2001 and 2016, falling from 18.94 percent of total export in 2001 to just over 8 percent in 2021. Contrarily, the contribution of intermediate inputs and capital goods increased from 81 percent in 2001 to over 92 percent of export. The change of export portfolio over time reveals the specialization process Taiwan has undertaken to focus on supply chain participation. Taiwan’s GSC participation is not limited to ECM, yet it is the sector that has the most notable GSC involvement. The recent Critical Supply Chain Review published by the US government reports that Taiwan currently dominates the global semiconductor contract manufacturing (pureplay foundries) market with 63 percent global market share in terms of output, and 92 percent in leading-edge (under 10 nanometer) logic chip manufacturing capacities.12 For ICT products, among the top 10 ECM companies, seven of these companies are headquartered in Taiwan, with a combined global ECM market share of around 80 percent (see Table 7.2). The world’s largest ECM company—Hon Hai Precision Industry (known as Foxconn in China)—enjoys a global market share exceeding 40 percent.13 Two unique approaches Taiwan ECM companies have undertaken attract much attention and discussion. The first is, despite their manufacturing capacity, technology know-how, and most important, the benefits of

Figure 7.1

Changes in Taiwan’s Export Portfolios, 2001–2021

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Source: Based on Bureau of Foreign Trade, Ministry of Economic Affairs, Taiwan, Key Features of Taiwan’s Electronic Contract Manufacturing Model.

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Table 7.2

Global Top Ten ECM Companies by Revenue

ECM Company Hon Hai Precision Pegatron Corp Quanta Computer Flextronics   International Compal Electronics Jabil Circuit Winstron Inventec Samina Lite-on Technology Total share

Global Market Share in ECM

Headquarters Location

2017

2018

2019

2020

Taiwan Taiwan Taiwan United States

39.6 10.0 8.6 6.5

40.8 10.3 7.9 6.1

41.1 10.5 7.9 5.7

40.9 10.7 8.3 5.4

Taiwan United States Taiwan Taiwan United States Taiwan

7.5 4.9 7.0 3.9 1.8 1.8 91.6

7.5 5.1 6.9 3.9 1.7 1.6 91.8

7.5 6.0 6.8 3.9 2.0 1.4 92.8

8.0 6.1 6.4 3.9 1.6 1.2 92.5

Source: US Department of Commerce and Department of Homeland Security, Assessment of the Critical Supply Chains Supporting the U.S. Information and Communications Technology Industry, February 27, 2022.

scale economics, Taiwan ECM providers did not (or failed to) extend their business models into upstream branding and marketing.14 While the low profit margins of the ECM model were a major reason behind Taiwan’s economic stagnation in the 1990s to 2000s, the persistence to focus on contract manufacturing provides not only the foundation of economic resiliency during the Covid-19 pandemic but also the ability to escape from the middle-income trap (see Figure 7.2). One of the key factors is that Taiwan has successfully and significantly increased the competitiveness and value/profit margin of contract manufacturing through continued technology and organizational innovations.15 The second salient feature of Taiwan’s ECM model is the large-scale migration of production to China since the 1990s. After China introduced the “reform and open-up” policy in 1981, Taiwanese contract manufacturers began to explore opportunities to include China as part of the contract manufacturing network. The speed of supply chain migration accelerated after China formally became a WTO member in 2001. By way of demonstration, the approved investment value from Taiwan to China in 1991 was only $174 million, but in 2003 the value jumped to $6.72 billion before reaching its peak of $146.18 billion in 2010.16 The majority of manufacturing activity migration from Taiwan to China is in the ECM sector. The migration started around the 1990s for Taiwan’s ECM companies to seek arbitrage in both lower production cost and incentives provided by China to attract foreign investment.17 China remains

Reforming the Global Supply Chain Figure 7.2

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Taiwan’s per Capita GDP Growth, 1990–2020

Source: DGBAS, National Statistics Taiwan, https://eng.stat.gov.tw/point.asp?index=1.

a popular destination of offshore production to date. In 2021, for instance. Taiwanese investments to China in electronic parts and components manufacturing (34.9 percent) and computers and optical products manufacturing (13.8 percent) accounted for almost half (48.7 percent) of Taiwan’s total investment value in 2021.18 Further data collected by the Taiwanese government through the Annual Survey of Offshore Manufacturing Activities for Taiwan Export Orders that starts to investigate the level of offshore production in 2010 further show the level of the ECM sector’s economic integration with China. In 2010, 22.9 percent (583) of Taiwan companies reported having their manufacturing activities outside Taiwan, out of a total of 2,543 surveyed. As of 2020, the offshoring ratio increased to 28.3 percent (784).19 As reflected in Table 7.3, China became the core manufacturing hub for those Taiwanese companies that opted to move their production outside Taiwan in the last two decades. On average around 44 percent of Taiwan companies’ export orders were manufactured in China. The ratio continued to increase and by 2016 it reached 49.8 percent, effectively replacing Taiwan as the largest production base for Taiwanese companies. Of note is that over 80 percent majority of Taiwanese companies perform their offshore production activities in China through subsidiaries or affiliated facilities, and this explains the distribution of investment in China. Therefore, the majority of Taiwan ECM companies in China adopts a vertical integration structure that combines research and development (R&D), manufacturing, and sale activities. 20 Furthermore, affiliated Taiwanese manufacturing

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facilities in China import an average of 22 percent of their parts and components from either headquarters or suppliers located in Taiwan,21 which underpins a major portion of the investment-led exports to China.22 Among all sectors with China production lines, ECM companies producing ICT products have the highest level of offshore production ratio. In 2017 for instance, 72 percent of ECM companies delivered their export orders outside Taiwan in overseas facilities, and most ECM companies (89.2 percent) carried out their overseas production in China. In comparison, the second highest level of offshore production sector is electrical machinery, with just 40.8 percent of electrical machinery companies delivering their export orders outside Taiwan (70.2 percent of which is in China). The partnership between Taiwan’s ECM companies and China’s suppliers has been denoted as a “win-win” model along the evolving global value chain with mutual benefits. For Taiwan, it allows ECM companies to ensure their competitiveness in the global contract manufacturing market; for China the partnership brings job and export creation effects.23 However, as also demonstrated in Table 7.3, Taiwan ECM companies began to significantly scale back their manufacturing level in China in 2019 as the result of the United States–China trade war.

The Rise of the China+1 Approach The China+1 approach can be defined as a strategy whereby foreign companies investing in China are coupling this with a second investment in a nearby location. The chief motivations for adopting the China+1 approach include rising costs in China, risk alleviation associated with China’s political, economic and social changes, inconsistency in government policy toward foreign business, and diversification to eschew overdependence on China.24 For Taiwan’s ECM companies, the pursuance of cost efficiency and favorable policy treatments, as well as the convenience of similar language/cultural background, are the key reasons in explaining the large-scale offshoring undertakings from Taiwan to China four decades ago. The costsaving benefits come from two primary sources: lower labor and other production costs, and policy incentives provided by especially Chinese local governments. Nonetheless, labor cost, which has been the main factor of China’s cost advantage in manufacturing, has increased significantly in the past two decades. China’s tenth five-year plan (2001–2005) requires governments to establish a sound minimum wage system and adjustment mechanism that are “commensurate to the level of economic development,” and to gradually increase the wages of public institutions and enterprises. As part of the efforts to implement the decrees, China started to require a biannual review of the minimum wages by provincial governments in 2004, and substantially increased nominal minimum wages, with an average 11 percent increase per

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Table 7.3 Results of the Annual Survey of Offshore Manufacturing Activities for Taiwan Export Orders, 2010–2020 (percentages of exporting companies)

2010 2016 2017 2018 2019 2020

Level of Production in Taiwan for All Sectors

Level of Offshore Production in China for All Sectors

Level of Offshore Production for ICT Products

49.2 45.4 46.5 47.6 47.4 46.0

44.1 49.8 48.2 46.9 44.8 45.4

84.7 66.7 72.0 69.7 67.9 73.8

Level of Level of Offshore Offshore Production and Production in in China for China for Electrical ICT Products Machinerya 76.5 90.1 89.2 89.7 80.7 79.4

56.2 68.5 70.2 72.1 72.8 71.7

(58.6) (44.2) (40.8) (39.4) (38.3) (40.9)

Source: Department of Statistics, Annual Survey of Offshore Manufacturing Activities for Export Orders, Ministry of Economic Affairs, Taiwan. Note: a. Parentheticals indicate percentage of which in China.

year during the eleventh and twelfth five-year plans (2006–2015).25 A separate survey also found that a continued annual real wage increase between 9 and 11 percent was recorded in four traditional manufacturing sectors (including home appliances and footwear) for the nine years between 2005 and 2014.26 On the other hand, investments and know-how/technology transfers through subcontracting local suppliers also facilitated in creating a competitive network of Chinese suppliers that are now competing with and replacing their Taiwanese partners in recent years.27 Strategic industry policies in China also altered their direction to focus on attracting high-tech, high-quality foreign investments while at the same time increase the pressure for traditional manufacturing through the socalled emptying the cage, changing the birds policy.28 Furthermore, “Made in China 2025” and other economic autonomy policies that aimed to “leverage the power of the state to alter competitive dynamics in global markets in industries core to economic competitiveness” also provide supports that favor domestic competitors over Taiwanese, and other foreign firms further increase the uncertainty and long-term pressure to operate in China.29 Still, the cluster effect of supply network established in the last two decades, the growing Chinese domestic demand, and policy commitment in future reforms are the key factors that enable China to maintain its attractiveness for Taiwan investment before the United States–China rivalry.30 According to the 2021 UNCTAD World Investment Report, China remained the largest recipient of foreign investment in the world in 2019 and 2020, with no significant change in the level of inflow investment.31 Nonetheless, investment from Taiwan to China clearly shows signs of weakening. Investment to

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China accounted for over 80 percent of Taiwan’s total outbound investment in 2010. Since 2016 it was overtaken by investment to other destinations other than China. In 2020, new investment value to China was only 40 percent that of 2010 (see Figure 7.3),32 indicating that the China+1 adjustment was already taking place before the United States–China trade war. In addition to the rising labor cost, the phasing-out of policy incentives for foreign investment (Taiwan in this instance is considered foreign) is also a key factor for pursuing China+1. One good example is the enterprise income tax reform in 2008. Before the reform, the nominal enterprise income tax rate for both domestic and foreign firms was the same at 33 percent. However, various tax incentives, in the form of waiver, deduction, and exemptions, were provided to only foreign firms investing in designated regions, in designated manufacturing sectors and in export-oriented activities, rendering the effective tax rate to be just 11 percent for most foreign companies. For domestic Chinese companies, the effective rate stands at 22 percent.33 Under the Unified Enterprise Income Tax Act of 2008, the nominal tax rate is lowered to 25 percent for all enterprises, and all extranational treatments for foreign investment were replaced with unified national treatment incentives for investment in priority sectors. The biggest impact for foreign investment was the removal of the “2-Year Free and 3-Year Half” tax incentive.34 Under this incentive scheme, income tax will be exempted for the first and second years when taxable profit was generated for foreign investment in the manufacturing sector with an operating license of more than ten years, and tax rate will be halved for the third to fifth years. The Unified Enterprise Income Tax Act offers a five-year phase-in period for foreign firms; therefore, the impact starts to kick in only after 2012. This provides partial yet strong evidence in understanding why the year 2013 appears to be a key turning point with regard of the decline of Taiwan’s outbound investment to China. Yet as reflected in Figure 7.3, insofar as Taiwan’s ECM companies are concerned, China’s comparative advantage still prevails as the preferred location for manufacturing. To date China remains a key manufacturing hub for ECM companies measured in terms of the number of ECM companies involved in China-based manufacturing; therefore the significant decrease in investment suggests a gradual downsizing approach has been adopted as the exit strategy by ECM companies.

The United States–China Rivalry as the China+1 Accelerator The ongoing United States–China economic and technology rivalry that expands from tariff war to export control and investment restrictions creates the first major source of pressure for ECM supply chain reconfiguration.

Figure 7.3

Taiwanese Investment in China, 2010–2020

Source: Investment Commission, Ministry of Economic Affairs, Taiwan.

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Started in 2018 during the Trump government, the United States–China trade war shows no sign of ending under the Biden administration, and sanctions and retaliatory tariffs imposed by both sides have covered most bilateral trade between the United States and China. From the US perspective, the trade war is justified on the ground of unfair practices relating to forced technology transfer, lack of intellectual property protection and state-backed innovation policy that unfairly discriminated against US products, services, and technologies.35 China disagreed with all of the US allegations,36 and rebutted the United States by introducing retaliatory tariffs and filing of a WTO dispute case against the United States. Although the United States and China reached a first-phase trade deal in 2020, most of the tariffs have remained in place to date under the Biden administration. Furthermore, there is no sign of de-escalation of US technology restrictions and export controls against China as well. The continuation and broadening of the United States–China economic and technology rivalry indicates that it is now beyond disputes regarding technical issues of unfair economic practices. In fact, as reflected in its first Interim National Security Strategic Guidance, the Biden administration has formally maintained the “strategic competition” with China.37 Elements of the strategic competition are relatively vague in substance, but it is not a new concept; the European Commission already defined the strategic relationship with China in 2019 as “a cooperation partner with whom the EU has closely aligned objectives, a negotiating partner with whom the EU needs to find a balance of interests, an economic competitor in the pursuit of technological leadership, and a systemic rival promoting alternative models of governance.”38 Regarding the supply chain reform agenda, a draft Strategic Competition Act passed by the US Senate’s Foreign Relations Committee in April 2021, and later integrated as part of the US Innovation and Competition Act in June 2021 (still under congressional consideration as of April 2022), demonstrates how the concept of strategic competition would be applied to supply chain architecture. The draft Strategic Competition Act includes tangible measures to assist United States–based supply chains to reduce their presence in China, such as by requesting that US overseas missions accompany US firms embedded in global supply chains to relocate outside of China, and by identifying new sources of supply outside China.39 Through what is often referred to as the “friend-shoring” or “de-coupling” policy, Taiwanese ECM companies that have been utilizing the economic benefits of a GSC with both the United States and China as the key participants are now inevitably involved in this rivalry of strategic competition. Although the trade war only applies directly to products originating in the United States or China, Taiwan’s high dependence on offshore manufacturing in China indicates that the impact on Taiwan’s economy is equally significant. Taiwan’s ECM firms, which have been the primary sector of

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offshoring their production activities to China, are the most significant first-mover group to downsize their capacities in China since 2018. As discussed, the overall ratio of Taiwan companies having offshore production in China dropped from 49.8 percent in 2016 to 45.2 percent in 2020 for all sectors. In particular, the ratio of ICT products manufactured by Taiwanese ECM companies in China relative to total Taiwanese ICT export orders fell by 9 percentage points in 2019 at the height of United States–China trade tensions. In 2020 they were down 11 points relative to their height in 2016 (see Table 7.2). Table 7.4 further offers a snapshot of the situation regarding the magnitude and direction of supply chain reform for Taiwanese ECM companies due to the United States–China rivalry. For ECM companies involving ICT products manufacturing that have undertaken supply chain adjustments in 2020, over 95 percent made the decision in response to the United States–China rivalry. All the companies surveyed report a complete withdrawal or partial reduction of production lines in China, and the most popular practice of adjustment is the expansion of existing supply capacities in Taiwan (70.6 percent).

Table 7.4 Orientation of Taiwan’s ECM-Related Supply Chain Adjustments, 2020 Countries Number of companies   with supply chain   adjustments in 2020 Due to United States–   China rivalry Expansion of existing   capacity in

New investments in

Complete or   partial removal

Taiwan China ASEAN United States Others Taiwan China ASEAN United States Others Taiwan China ASEAN United States Others

ICT Products

Electronics

21

16

20 (95.2%)

8 (50%)

70.6% — 29.4% 5.9% — 20% — 60% — 20% (India) — 100% — — —

50% 35.7% 21.4% 5.9% — no data no data no data no data no data 33.3% 50% 8.3% — 8.3%

Source: Department of Statistics, 2020 Annual Survey of Offshore Manufacturing Activities for Export Orders, Ministry of Economic Affairs, Taiwan.

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This is a plausible outcome since many ECM companies, despite their huge production presence in China, still maintain some degree of capacities at home. Consequently, expansion of existing production facilities becomes the quick response to the new situation on GSC. For investment in new production capacities, the Association of Southeast Asian Nations (ASEAN) is evidently the hotspot, with 60 percent of the companies choosing the region as their preferred locations for their next-generation production base, followed by Taiwan and India (both 20 percent). For electronics, only half of the companies have adjusted their production layout in response to the United States–China rivalry, and 25 percent made the decision because of the Covid19 pandemic. Different from ICT-based ECM companies, only half of the electronic ECM companies completely or partially suspended their production lines in China, with 36 percent of companies even undertaking expansion in China. There is also an interesting 33.3 percent of electronic companies to completely or partially reduce their production in Taiwan.

Covid-19 Disruptions During the first sixteen months of the Covid-19 pandemic, Taiwan experienced one of the lowest human casualties globally with no physical lockdowns imposed. As such, the economic impact has been limited. In fact, Taiwan’s economy has enjoyed growth rates that are among the highest in recent years, in 2020 and 2021, with a twenty-five-month continuous expansion of Taiwan’s export as of July 2022.40 As for the Taiwanese ECM companies in China, the severe yet short Covid-19 lockdowns in 2020 appeared to produce relatively limited impact on their operations as well. According to the special survey undertaken by the Chinese (Taiwan) National Association of Industries to its members on the impact of business operation in China in 2020, over 90 percent of companies in non-electronic sectors (e.g., textiles, petrochemicals) reported a decline in business due to the pandemic, while only 68 percent in the electronics manufacturing sector reflected the loss of business impact. Furthermore, the impact appears to be reversely commensurate with the size of investment in China: 61.8 percent of companies with an investment value of below $1 million indicated the impact has been severe, and the ratio for companies with investment size of over $20 million is just 15 percent.41 Since scale economy is the main economic feature of the ECM business model, the majority of ECM related investments tend to be large. In 2021, for example, the average investment value from Taiwan to China in “computers, electronics and optical manufacturing” and “electronic parts and components manufacturing” were $101.2 million and $33 million respectively,42 therefore suggesting the impact due to Covid-19 pandemic was less significant in the first two years of the pandemic.

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However, the disruptions and uncertainties associated with the continuation of China’s zero-Covid policy are fully reflected in the 2022 Covid19 related lockdowns in Shanghai and adjacent Jiangsu areas. There are five major clusters of Taiwanese electronic manufacturing firms in China, with the Yangtze River Delta (represented by Shanghai and Jiangsu) and the Pearl River Delta (represented by Guangdong) having the highest level of agglomerations.43 This is confirmed by the distribution of the membership of the Taiwan Electrical and Electronic Manufacturers Association (TEEM) in China, which shows that Guangdong (mainly Dongguan and Shenzhen) and the Greater Shanghai area (including Suzhou and Kunshan in Jiangsu) account for 89 percent of total TEEM members operating in China.44 In particular, major ECM companies, including the Taiwan Semiconductor Manufacturing Company (TSMC), and leading ECM companies listed in Table 7.2, all have facilities located in the greater Shanghai area. The impact of the zero-Covid policy on supply chain is noticeable. At the macroeconomic level, China’s GDP growth for the second quarter of 2022 declined from 4.8 percent in the first quarter to 0.4 percent, the lowest since the first quarter of 2020. Overall increase of manufacturing sector output was negative 2.9 percent for the same time period. For Taiwanese companies, the impact is equally evident. Growth for export orders to China (most of which are intermediate goods) dropped from positive 9.1 percent in March 2022 to negative 16.9 percent in April, and negative 13.4 percent and 14.5 percent respectively for May and June 2022. By way of comparison, global export orders increased by 9.5 percent in June 2022. The impact is also reflected in the significant impediments faced by Taiwanese manufacturers operating in China to deliver their contracts.45 For instance, for companies with offshore production base in China, export order growth was negative 10.2 percent, 0.3 percent, and 5 percent for April, May, and June 2022, vis-à-vis an 8.9 percent, 10.1 percent, and 14.3 percent increase enjoyed by companies without production outlets in China (see Table 7.5). The American Chamber of Commerce in Shanghai’s (AmCham Shanghai) “June Covid Impact Survey” offers further understanding on the likely consequences of these impacts on supply chain reform strategies.46 The survey shows that 31 percent of the companies from the manufacturing sector surveyed are planning to delay their future investment, and 20 percent are reducing their investment plans. Specifically, 22 percent of the responding companies are adopting the China+1 strategy by moving some factories and suppliers to other Asian countries. The survey also captures a more subtle approach of “In China, for China” diversification strategy, as 26 percent of the companies investigated indicate the acceleration of supply chain localization in China (i.e., to supply the local Chinese market), while moving the production of global products outside of China. This result provides a good snapshot of the possible China+1 approach Taiwan

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Table 7.5 Impact of the 2022 Chinese Covid Lockdown on Taiwanese Firms’ Export Order Growth (percentages)

Overall export   order growth Global export   order growth

From China From outside China Firms with China base Firms without China base

April

May

June

–16.9 –5.5 –10.2 8.9

–13.4 6.0 0.3 10.1

–14.5 9.5 5.0 14.3

Source: Department of Statistics, Special Analysis on the Impact of Export Orders Due to Recent Chinese Lock-Down Measures (in Chinese), Ministry of Economic Affairs, Taiwan, July 2022.

ECM companies operating in China are going to adopt post the 2022 lockdowns out of the concerns that there will be additional similar disruptions so long as China maintains its zero-Covid policy.

The Plus-One: The Relocation of the ECM Network ASEAN countries, especially Vietnam, Singapore, Indonesia, and Thailand, appear to be popular offshore production alternatives. Figure 7.4 denotes the British Caribbeans as the largest recipient of Taiwanese investment between 2018 and 2020, followed by the United States, the European Union, Vietnam, Singapore, Japan, and Indonesia. This is consistent with the survey result discussed earlier. The United States receives the second largest investment from Taiwan, possibly due to the first batch of the $12 billion investment commitment made by TSMC and its suppliers, to start the construction of a production facility in the United States in 2021.47 Calculated on a per-country basis, Vietnam would be the number-three place for attracting investment from Taiwan. The sectoral distribution of Taiwan’s investments reveals the pattern of supply chain reform as well (see Figure 7.5). Using 2020 as the example, over 70 percent of Taiwan’s investment to the United States went to the services sector (especially the financial sector), with electronic component manufacturing (including semiconductor) and chemical material sector (which is closely associated with semiconductor manufacturing) receiving just 12 percent and 6 percent respectively of the total investment. This suggests that while economic relationship with the United States is rising, relocation of ECM and other manufacturing supply chain components is limited and partial. Investment to Vietnam is relatively balanced between manufacturing and services. ICT products manufacturing and electronic component manufacturing are the key investment areas from Taiwan to Vietnam, accounting for 26

Figure 7.4

Top Ten Countries/Regions Receiving Taiwan’s Investment, 2018–2020

9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0

Source: Investment Commission, Ministry of Economic Affairs, Taiwan.

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134 Figure 7.5 Major Sectors Receiving Taiwan Investments in the United States and Vietnam, 2020

Chemical 6%

Metal 1%

Electronic Components (percentage) ICT 1%

Machinery 4% Auto and Parts (percentage) Other Manufacturing 3% A. Major Sectors Receiving Taiwan Investment in the United States

Textile 8%

Paper 3%

Basic Metal 1% Metal Products 3% Electronic Components (percentage) ICT 17% Power System (percentage)

Other Manufacturing 2%

Machinery 2% Auto and Parts 3%

B. Major Sectors Receiving Taiwan Investment in Vietnam Source: Investment Commission, Ministry of Economic Affairs, Taiwan.

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percent of total investment in 2020. This apparently reveals the position of Vietnam as the new destination for Taiwan ECM. It is interesting to note that the reason for British Caribbeans to become the largest investment destination is regulatory rather than economic. First British Caribbeans attract foreign investment through its low or zero corporate tax regimes for foreign companies, a practice often referred to as “tax haven.”48 The second reason is unique to Taiwan. To date there is an ex-ante approval requirement in Taiwan for all outbound investment exceeding budgetary thresholds. Currently the threshold is $1 million for investment bound for China, and around $50 million (NTD1.5 billion) for all other destinations. This divergence provides incentives for regulatory circumvention for investments intended for China, even though applicants are required to disclose the final investment destinations. As reflected in Table 7.3, Taiwan is the most popular destination of manufacturing relocation for ECM companies itself by way of expansion of existing capacities. According to data from the Ministry of Economic Affairs, a minimum of $37.5 billion of “returned investment” in the manufacturing sector between 2019 and 2021 utilized the government’s facilitation scheme.49 Among all qualified returned investments, ECM-related investment projects accounted for over 70 percent as of mid-2021.50 It is important to note that there are two categories of “returned investment” with different supporting documents required. The first category is investments that are coming back from China, and the second category is investments that are “stayed”—that is, investments that are originally planned to go outbound (not limited to China). Although the application procedure requires companies to identify the original outbound investment plan, it is difficult to verify the level of investments that are genuinely “stayed” against the original plan from investments that are created to take advantage of the facilitation scheme. The magnitude of returned investment in ECM and other manufacturers contributes to a trade diversion effect. Taiwan’s direct exports to the United States increased by 21 percent in 2018 compared to the previous year, and by 19 percent and 10 percent in 2019 and 2020 respectively. In 2018, the United States surpassed ASEAN to become Taiwan’s second largest trading partner after China.51 The effect of ECM being the main sector returning to Taiwan is also reflected in the growth of electronic and ICT related products to the major markets. In 2020, the annual growth rate for electronic and ICT products exports were significantly higher than overall exports to all major markets (see Figure 7.6). Overall export to Japan, for example, increased by just 2 percent, while export of ICT and electronics increased by 17 percent comparing with 2019. With the return of ECM and other contract manufacturers on the rise in recent years, Taiwan’s government introduced a three-year (2019–2021)

Growth Rates for Total Export and Electronic Products, 2020

Source: Department of Statistics, Ministry of Economic Affairs, Taiwan.

136

Figure 7.6

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“Action Plan for Welcoming Overseas Taiwanese Businesses to Return to Invest in Taiwan.” The action plan applies to both “returned” investment and “stayed” investment (i.e., investments that are originally planned to go outbound). The goal of the action plan is to facilitate the relocation process and enhance supply chain resilience by encouraging Taiwanese firms to return and invest in Taiwan. At the center of the action plan is an integrated single-window service to address the need for industrial land acquisition, energy, manpower, taxation, and capital. A “match-making” program is also part of the package to connect returned investments with local suppliers. Finally, there is a new facility for assisting firms to access financial resources. As the trend of supply chain readjusting and relocation continues to expand, the government decided in late 2021 to extend the action plan for another three years.52 Interestingly, at the inception stage of the implementation of the action plan, complaints were voiced by companies who have never moved their production facilities outside Taiwan, as the scheme provides favorable treatments only to qualified “returned” investment projects.53 Consequently, two additional programs, namely the “Action Plan for Accelerated Investment by Domestic Corporations” and the “Action Plan for Accelerated Investment by SMEs” (small and medium enterprises), were introduced in late 2019 as a package of the original scheme.

The Strategic Autonomy Policy The shortage of essential medical supplies during the Covid-19 pandemic and the development of Washington’s strategic competition approach toward China underpins the emergence of policies in pursuance of “strategic autonomy.”54 Although still promoting open and free trade, this approach aims at reducing dependence on imports/competitors for critical sectors on one hand, and at elevating domestic production capabilities on the other. The first element of the strategic autonomy policy is to achieve “strategic independence” by reducing reliance on imports for critical sectors and to reestablish domestic substitution capacity.55 The United States and European Union both have two common priorities: reorganization and diversification of all supply chains to elevate the level of resiliency, and rebuilding domestic manufacturing capacities for a selected group of so-called critical sectors, such as semiconductors and medical devices. The United States initiated a review of ten critical supply chains (semiconductors, advanced batteries, public health, information and communications, energy, transportation, defense, etc.) in February 2021, and proposed its first-stage recommendations in June 2021.56 It is no surprise that four critical sectors, namely semiconductors, advanced batteries, key minerals and materials,

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and pharmaceutical products and active pharmaceutical ingredients, have been identified as suffering from different levels of vulnerabilities due to overreliance on imports and insufficient local production capacity. The report further identifies that China, Taiwan, Korea, and India are the main sources of imports in these areas. Interestingly, the European Union also published its “Industrial Policy Update” in May 2021, pointing out that there exist import dependency problems in the supply chains of many key products that are likely sources of economic vulnerability. Specifically, the European Commission identified 137 highly dependent products (around half of the products are currently supplied by China), thirty-four of which are most vulnerable due to low potential for further diversification and substitution with European Union production.57 As such, the report notes that it is necessary to improve European “strategic autonomy” in six key strategic areas: raw materials, batteries, active pharmaceutical ingredients, hydrogen, semiconductors, and cloud and edge technologies. These new strategies and approaches reflect not only changes in mindset but also forces that are likely to push for more supply chain reforms. The current structure of China serving as the “world’s factory,” which is traditionally considered a model of efficiency optimization, is increasingly becoming a major source of “risk maximization” and needs to be adjusted. To this end, the Covid-19 pandemic further underscores the issue of import dependency and the lack of resilience, which reinforces the justification and support of diversification and “re-shoring” policies that involve a major restructuring of the global supply chain. It is of note, ironically, that China is in fact the pioneer and predecessor of the strategic autonomy policy. China regards its independence in key technologies as an important and strategic national goal. The “Made in China 2025” policy that has attracted much attention in recent years is the latest version of this thinking, and the latest five-year plan, the fourteenth, directs China to utilize the new generation of the “Whole-of-Country” approach to accelerate breakthroughs in key technical areas to achieve the goal of selfsufficiency, ensuring China’s strategic autonomy.58 The development of a domestic semiconductor sector, for instance, is considered by Chinese authorities as a vital step for both economic development and national security. A major undertaking introduced in China to achieve the objective of import substitution is the “Guideline for the Promotion of the Development of the National Integrated Circuit Industry” in 2014. As part of the effort, the Chinese government has since established the “IC Industry Investment Fund” with initial funding of RMB140 billion and another RMB200 billion ($31.6 billion) in 2018.59 The short-term objective of the guideline and the fund is to double the sales value of the domestic Chinese integrated circuit (IC) sector and to achieve 40 percent market

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share by 2020. China failed to meet the benchmark in 2020, with a selfsufficiency rate of just 16.5 percent due to technology bottlenecks and export controls initiated by the US government.60 Still, with sufficient state-backed funding and a whole-of-country competition from China, the pressure for Taiwan and other semiconductor manufacturers is mounting.

Long-Term Implications for Taiwan’s GSC Participation Taiwan faces a mixture of challenges and opportunities in light of the global supply chain reform developments. As discussed, the reform agenda pursued by the United States and the European Union to address economic security concerns and to elevate the level of resilience involves at least two dimensions. The first dimension is to address economic security risks associated with “geographical concentration” of critical products—that is, supply vulnerability derived from the fact that there is a high degree of import dependency and foreign supply sources are limited and concentrated in specific geographical locations. The best example of critical products with “geographical concentration” risk is semiconductors. The US “100-Day Reviews” report finds that 92 percent of US demand for logic chips depends on imports from a single location, namely Taiwan, and Taiwan is subject to potential disruptions due to multiple environmental and geopolitical reasons. The lack of domestic capacity in the United States to alleviate the recent chip shortage issue further underscores the risks of geographical concentration.61 The report recommends that the US government accelerate the process of rebuilding its domestic semiconductor manufacturing as well as research and development capabilities. Among the policy tools available, reshoring of semiconductor manufacturing facilities by Taiwanese suppliers (e.g., TSMC) is a top option recommended.62 Semiconductor manufacturing is not the only sector with the issue of “geographical concentration,” and the ICT supply chain, which is currently still supplied by Taiwanese and Chinese contract manufacturers located in China, is likely to be the next target. The second dimension is economic security risks related to “supplier concentration,” in particular when major supply sources are dominated by countries considered as strategic competitors and strategic rivals. The US “100Day Reviews” report identifies advanced batteries, critical minerals, and critical medical supplies as the key sectors facing the “supplier concentration” problem with a high level of Chinese suppliers. The report thus suggests the creation of a new alliance with suppliers from like-minded partners as the key solution to mitigate the risk. For Taiwan, the findings of the US review represent both long-term challenges and opportunities; the former stems mainly from the “geographical

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concentration” concerns, and the latter is underpinned by solutions intending to address the “supplier concentration” issue. The most direct challenge associated with the “geographical concentration” issue is plausibly the reshoring pressure to diversify, at least partially, manufacturing facilities outside Taiwan. The impacts of relocation are not limited to the increase of production costs but also uncertainties associated with the lack of qualified suppliers and workers. More important, both the European Union and Japan are pursuing similar reshoring programs as well.63 There are several key implications of this situation for Taiwan contract manufacturers. First, pressure to diversify supply chains will likely increase for those companies that are currently located in China with a majority of US clients. In the long run, both investment and investment-led trade between Taiwan and China will likely decline. Taiwan may be able to leverage this situation to secure its position in the new supply chain. Second, as all major economies are pursuing similar “import substitution” policies on semiconductors, Taiwan’s semiconductor-led exports to China and elsewhere will likely decline as well. Contract manufacturers such as TSMC can mitigate these challenges by diversifying production facilities to the United States, the European Union, and Japan, but the impact on Taiwan’s trade surplus and GDP growth will be significant. This suggests that it will be a critical policy assignment for Taiwan to define strategies and solutions to address these structural changes that are unfolding rapidly (see Figure 7.7). In summary, Taiwan needs to recognize the fact that the economic costs of supply chain reform will be immense, especially considering the following long-term risks and uncertainties. The first and foremost uncertainty is an international economic environment that is increasingly dominated by economic security and strategic autonomy policies. Being a major supply source for semiconductor, electronic, and ICT products, Taiwan is already the target in most of the economic autonomy reviews discussed above. The pressure for Taiwanese contract manufacturers to cooperate and facilitate the rebuilding of domestic manufacturing capacity programs pursued by a growing number of national governments is mounting. The latest example is the Australian government’s announcement of seven categories of products—including semiconductors and telecom equipment—that are important to national interest and should be the focus on manufacturing domestically.64 Supply chain architectures that are established based on cost advantage, efficiency, work force quality, and technology know-how are now subject to distortions to satisfy the localization and import substitution policies of the importing countries. At the business level, Taiwanese contract manufacturers face tremendous challenges, both financially and managerially, to readjust under new and unfavorable terms. The second risk is associated with issue of “supply chain nationalism,” which is defined here as the issue of advocacy for preferential treatment for

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Figure 7.7 The Framework of Critical Supply Chain Vulnerabilities and Solutions

Source: Author’s drawing based on White House, “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth: 100Day Reviews Under Executive Order 14017.” Notes: Examples of geographical concentration include semiconductors and ICT. Examples of competitor concentration include advanced batteries, new energy, and new materials.

domestic suppliers based on the nationality of the supplier. Currently most countries measure self-reliance and autonomy as the refined level of local production capacity within its territory; nationality of the suppliers has yet to become a qualification of supply chain participation. As such, TSMC’s investments in the United States or European Union should be subject to the same set of facilitations provided under the “CHIPS Act” that both the United States and European Union are formulating. Yet there are now calls for national companies to receive preferential treatment. A recent high-profile example is Intel CEO Pat Gelsinger’s open advocacy for the US government to invest more in US semiconductor companies such as Intel over Asian competitors. Gelsinger argued that while the United States should welcome and support investment from TSMC and Korea’s Samsung in the country, it also faces the risks of R&D results and intellectual properties “going back to Asia.”65 Putting aside the validity of the argument, the spread of supply chain nationalism is unquestionably creating an additional challenge to Taiwan’s manufacturers considering relocating. The next uncertainty is the risk of supply distortion for products currently considered critical. Semiconductor and ICT products, for instance, are now on the critical/essential product list for almost all countries that are reviewing their economic security and autonomy status. And the solution to mitigate the risk is also similar: secure supply and increase the level of

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domestic production. Besides the United States and European Union, Japan has announced its plan to triple semiconductor revenue by 2030,66 and India approved a $10 billion plan to boost domestic semiconductor manufacturing capacity.67 The Australian government also announced its intention to increase domestic semiconductor manufacturing. All these security-based rather than market-based initiatives not only increase competition for Taiwan manufacturers but also potentially lead to oversupply of chips in the long run. Finally, the risk of decoupling between China on one hand and United States–led democratic countries on the other is on the rise. In the broadest sense, decoupling denotes the process of reducing reliance on each other’s supply chain, yet increasingly it is also taking place in the form of mandatory measures and antimeasures implemented by the United States and China. Since 2018, Taiwan contract manufacturers have already been cooperating with the export control regime of the United States against China over an expanding list of dual-use (i.e., commercial and military) products and “listed entities.” In response, China enacted its Export Control Law in December 2020 as well to introduce an export licensing regime for “controlled items” that affect national security. It was followed by the enactment of the Anti–Foreign Sanctions Act in June 2021, which authorizes retaliatory measures against foreign governments, individuals, and organizations that “discriminate against Chinese citizens, violate China’s sovereignty, or interfere in China’s internal affairs” in carrying out sanctions by foreign governments.68 Taiwanese companies, which are now caught in the crossfire of US sanctions and Chinese retaliatory legislations, will find it increasingly difficult to sustain the existing United States–Taiwan–China supply chain network and the growing pressure to take a side. While this might be a positive development insofar as economic security and autonomy threat with China are concerned, there will be enormous economic costs that require careful calculation and recovery planning.

Conclusion Participation in GSC has been a central pillar of the Taiwan’s economic development. Over the past four decades, the mode of participation has evolved from labor-intensive assembling to ECM providers of ICT products, semiconductors, and other high-tech products. Many Taiwan ECM companies are now world leaders, especially in the areas of semiconductor and ICT contract manufacturing, with substantial global market share across many product lines. This achievement reflects not only the competitiveness of these companies but more importantly the level of involvement in the GSC. One unique element behind Taiwan’s success in GSC partici-

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pation is the rise of China and the robust ECM production networks that were established across the Taiwan Strait. Before the Covid-19 pandemic, China+1 had already become a popular strategy at business level to address challenges such as rising cost and changing policy environment. As a rule of thumb, the global economic recovery from the Covid-19 pandemic will be overshadowed by the uncertainties associated with the supply chain reform agenda. The uncertainties come from both the potential disruptions created by China’s zero-Covid policy and the reform pressure under the economic security and autonomy policies. Some of these policy developments facilitate economic recovery through job creation, new investments in R&D, and talent training; still many of them are likely to create inefficiency and distortions by deviating from market-based decisions. Redundancy and overbuild in sectors considered as critical supported by government incentives face the risk of global oversupply issues in the long run. As a major stakeholder of the GSC, the unprecedented and growing pressure of GSC reform is creating significant and direct impact in Taiwan. Until now Taiwan has demonstrated its ability to mitigate the global supply chain reform pressure with agility and flexibility. Economically, the impact of the reform agenda seems to be limited. Amid the Covid-19 pandemic, export has continued to expand, and a positive 6.45 percent GDP growth was recorded for 2021. The development also provides the opportunity and impetus for Taiwan to improve its economic security concerns against China. That said, the pursuance of economic strategic autonomy by major powers that focuses on elevating national manufacturing capacity, reducing reliance on China, and forging new trusted alliance to increase resilience and security is creating structural uncertainty and challenges for Taiwan and beyond. Both the structure and operation of the GSC are likely to deviate from economic rationales to accommodate security as well as geopolitical considerations. Taiwan and all participants in the GSC need to be prepared for a global economy that is less globalized and replaced by a fragmented alliance between like-minded partners: a world of a trusted supply chain.

Notes 1. TiVA measures both the level of foreign value-added in an economy’s export and the level of value added by the export to importing economies. See Stephen Ezell, “The Evolution of Taiwan’s Trade Linkages with the U.S. and Global Economies,” October 25, 2021, https://itif.org/publications/2021/10/25/evolution -taiwan-trade-linkages-us-and-global-economies. 2. Y. L. Wang et al., “The Comparison of Two Vertical Outsourcing Structures under Push and Pull Contracts,” Production and Operations Management 23, no. 4 (May 2013).

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3. For a review of the development of Taiwan’s supply chain-oriented approach between 1960 to 1990, see J. Hauge, “Industrial Policy in the Era of Global Value Chains: Towards a Developmentalist Framework Drawing on the Industrialisation Experiences of South Korea and Taiwan,” World Economy 43, no. 8 (August 2020). 4. B. Arruñda and X. H. Vázquez, “When Your Contract Manufacturer Becomes Your Competitor,” Harvard Business Review 84, no. 9 (September 2006): 135–137. 5. T. Chen, Escaping the Middle-Income Trap: Taiwan’s Economic Development Between 1990–2020 (in Chinese) (Taipei: Book Zone, February 2022). 6. Investment Commission, Ministry of Economic Affairs, outbound investment statistics, https://www.moeaic.gov.tw/english/news_bsAn.jsp. 7. P. J. Liu, “Strengthening the Competitiveness of Taiwan’s Semiconductor Sector,” Industrial Magazine, September 2020, p. 16. 8. C. Tung and H. Wan, “Chinese Electronics Export; Taiwanese Contract Manufacturing: The Win-Win Outcome Along the Evolving Global Value Chain,” World Economy 36, no. 7 (January 2013). 9. E. Peter, “A ‘China-Plus-One’ Strategy: The Best of Both Worlds?” Human Systems Management 30, no.1 (January 2011). 10. For an early comprehensive simulation analysis on the impact on global supply with a particular focus on China, see D. Guan et al., “Global Supply-Chain Effects of COVID-19 Control Measures,” Nature and Human Behaviors, February 4, 2021, pp. 577–587. 11. TiVA database, https://stats.oecd.org/Index.aspx?DataSetCode=TIVA_2021_C1. 12. White House, “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth: 100-Day Reviews Under Executive Order 14017,” June 2021, p. 35. 13. Hon Hai Precision Industry, 2020 Annual Report, August 2021, https://www .foxconn.com/s3/reports/shareholders-meetings/2021/Annual%20Report.pdf. 14. H. Yu and W. Shih, “Taiwan’s PC Industry, 1976–2010: The Evolution of Organizational Capabilities,” Business History Review 88, no. 2 (2014). 15. Chen, Escaping the Middle-Income Trap, pp. 15–17. 16. L. S Hsia, “The Situation of Taiwan Businesspeople Invest in Mainland China and Its Impact to Taiwan’s Economy” (in Chinese), Prospect & Exploration 2, no. 4 (April 2004). 17. For a comprehensive discussion on the migration Taiwanese firms to China, their interactions with local suppliers and officials, as well as the contributions to China’s economic development, see J. M. Wu, Rent-Seeking Developmental State in China: Taishang, Guangdong Model, and Global Capitalism (Taipei: NTU Press, March 2019). 18. See https://www.moeaic.gov.tw/business_category.view?lang=ch&seq=3. 19. Department of Statistics, The Annual Survey of Offshore Manufacturing Activities for Export Orders (in Chinese) (Taiwan: Ministry of Economic Affairs, 2021). 20. S. Y. Chen et al., “Value Chain Organization Models of Taiwanese Electronic Information Enterprises in Mainland China and Their Spatiotemporal Evolution Processes,” PLoS One 16, no. 7 (2021): e0254402. 21. It is worthwhile to note that the last year that this question was included in the annual survey was 2018. 22. Department of Statistics, The Annual Survey of Offshore Manufacturing Activities for Export Orders. 23. Tung and Wan, “Chinese Electronics Export.”

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24. E. Peter, “A ‘China-Plus-One’ Strategy: The Best of Both Worlds?” Human Systems Management 30 (January 2011). 25. Y. Du and P. Jia, “Minimum Wages in China: Standard and Implementation,” in Minimum Wages in China, edited by S. Li and C. Lin (Singapore: Palgrave Macmillan, May 2020). 26. J. J. Xu et al., Adjusting to Rising Costs in Chinese Light Manufacturing: What Opportunities for Developing Countries? December 2017, https://set.odi.org /wp-content/uploads/2017/12/SET_Survey-report_Chinese-manufacturing _Final.pdf? 27. Wu, Rent-Seeking Developmental State in China. 28. K. F. Lim, “‘Emptying the Cage, Changing the Birds’: State Rescaling, Path-Dependency, and the Politics of Economic Restructuring in Post-Crisis Guangdong,” New Political Economy 21, no. 4 (March 2016). 29. US Chamber of Commerce, “Made in China 2025: Global Ambitions Build on Local Protections,” 2017, https://www.uschamber.com/assets/archived/images /final_made_in_china_2025_report_full. 30. H. T. Shih, “Cross-countries supply chain adjustments and the reflections and implications for Taiwan,” Economic Outlook Bimonthly, no. 193 (in Chinese, January 2021). 31. UNCTAD, World Investment Report 2021, pp. 11–12, https://unctad.org/system /files/official-document/wir2021_overview_en.pdf. 32. Investment Commission, Ministry of Economic Affairs, outbound investment statistics, http://www.moeaic.gov.tw. 33. T. F. Wu, “Unified Enterprise Income Tax Law in Mainland China: Impact on Taiwan Businesses,” Prospect and Exploration 5, no. 7: 89–95 (July 2009). 34. Ibid. 35. US Trade Representative, “Findings of the Investigation Into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation Under Section 301 of the Trade Act of 1974,” March 22, 2018, pp. iii–xiv. 36. “The State Council Information Office (SCIO) of the People’s Republic of China, China’s Position on the China-U.S. Economic and Trade Consultations,” June 2019, http://english.www.gov.cn/r/Pub/GOV/ReceivedContent/Other/2019-06 -02/190602fulltext.doc. 37. White House, Interim National Security Strategic Guidance, March 2021, https://www.whitehouse.gov/wp-content/uploads/2021/03/NSC-1v2.pdf. 38. European Commission and HR/VP, “EU-China: A Strategic Outlook,” March 12, 2019. 39. US Congress, S.1169, Strategic Competition Act of 2021, Title I: “Investing in a Competitive Future,” Subtitle A: “Science and Technology,” sec. 101: “Authorization to Assist United States Companies with Global Supply Chain Diversification and Management.” 40. B. Blanchard, “Taiwan July Exports Jump, but Uncertainty Ahead,” Reuters, August 8, 2022. 41. S. Y. Cheng, “Summary of the Special Survey on the Impact of Covid-19 Pandemic on Business Operation in China” (in Chinese), Industry Magazine, November 2020. 42. Taiwan Investment Commission, Monthly Report of Investment Status, December 2021, https://www.moeaic.gov.tw/news.view?do=data&id=1596&lang =en&type=business_ann. 43. S. Y. Chen et al., “Value Chain Organization Models,” p. e0254402.

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44. See http://www.teemab2b.com.tw/OverSeaFntPage.aspx?Culture=zh-TW& AreaClass=01. 45. Department of Statistics, “Special Analysis on the Impact of Export Orders Due to Recent Chinese Lock-Down Measures” (in Chinese) (Taiwan: Ministry of Economic Affairs, July 2022). 46. AmCham Shanghai, “June Covid Impact Survey,” https://www.amcham -shanghai.org/en/article/amcham-shanghai-june-covid-impact-survey. 47. N. Aspinwall, “Taiwan Chipmaker Announces U.S. Factory As Apple Pledges to Expand Taiwan Investment,” The Diplomat, May 15, 2020. 48. C. Jones and Y. Temouri, “The Determinants of Tax Haven FDI,” Journal of World Business 51, no. 2 (February 2016). 49. Taiwan National Development Council, Action Plan for Welcoming Overseas Taiwanese Businesses to Return to Invest in Taiwan: Three-Year Extension, December 2021, https://www.ndc.gov.tw/en/Content_List.aspx?n=286FD0E985C0EA44. 50. P. C. Liang, “Three Sectors Dominate the Invest in Taiwan Program” (in Chinese), June 2021, https://www.cna.com.tw/news/firstnews/202106270024.aspx. 51. Taiwan Bureau of Foreign Trade, Ministry of Economic Affairs, Import and Export Database, http://cuswebo.trade.gov.tw. 52. Taiwan National Development Council, Action Plan for Welcoming Overseas Taiwanese Businesses. 53. S. H. Chang, “Government Considering to Provide Equal Treatment to the Domestic Companies in Two Weeks” (in Chinese), May 29, 2019, https://www.rti .org.tw/news/view/id/2022298. 54. A snapshot of the European Union’s Open Strategic Autonomy is at https:// trade.ec.europa.eu/doclib/docs/2021/february/tradoc_159434.pdf. 55. For a comprehensive overview of those elements and the recommended actions, see White House, “Building Resilient Supply Chains”; European Union Commission, “Updating the 2020 New Industrial Strategy: Building a Stronger Single Market for Europe’s Recovery,” May 2021. 56. White House, “Building Resilient Supply Chains.” 57. European Union Commission, “Updating the 2020 New Industrial Strategy,” pp. 10–12. 58. For a review of China’s strategic autonomy development, see Tanjin Chen, The U.S. China Trade War: The Rise of a Superpower and the Competition of Systems (in Chinese) (Taipei: Reading Times, 2021). 59. “China Is Raising up to $31.5 Billion to Fuel Chip Vision,” March 1, 2018, https://www.bloomberg.com/news/articles/2018-03-01/china-is-said-raising-up-to -31-5-billion-to-fuel-chip-vision. 60. S. Tabeta, “‘Made in China’ Chip Drive Falls Far Short of 70% Self-Sufficiency,” October 13, 2021, https://asia.nikkei.com/Business/Tech/Semiconductors/Made-in -China-chip-drive-falls-far-short-of-70-self-sufficiency. 61. White House, “Building Resilient Supply Chains,” pp. 39–40. 62. Ibid., pp. 75–76. 63. For an overview of the European Union’s semiconductor autonomy strategy, see T. Breton, “How a European Chips Act Will Put Europe Back in the Tech Race,” September 2021, https://ec.europa.eu/commission/commissioners/2019-2024/breton /blog/how-european-chips-act-will-put-europe-back-tech-race_en. 64. A. Gleeson, “Scott Morrison Reveals Seven Goods That Need to Be Manufactured Domestically in the ‘National Interest,’” March 7, 2022, https://www.news .com.au/finance/economy/australian-economy/scott-morrison-reveals-seven-goods -that-need-to-be-manufactured-domestically-in-the-national-interest/news-story /a6c40cbbef845fd328dd2c3e5ef070bc.

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65. Y. F. Yu, “U.S. Priority Should Be American Chipmakers, not TSMC: Intel Chief,” December 2, 2022, https://asia.nikkei.com/Business/Tech/Semiconductors /U.S.-priority-should-be-American-chipmakers-not-TSMC-Intel-chief. 66. T. Mochizuki, “Japan Sets Goal of Tripling Domestic Chip Revenue by 2030,” November 15, 2021, https://www.bloomberg.com/news/articles/2021–11 –15/japan-sets-goal-of-tripling-domestic-chip-revenue-by-2030?sref=HFaHEoGx. 67. A. Kumar, “Cabinet Approves Rs 76,000-cr PLI Scheme for Semiconductors,” Fortune India, December 15, 2021. 68. T. Toshiya, “Three Things to Know About China’s Economic Security,” March 2022, https://www.nippon.com/en/in-depth/a07902.

8 Multilateralism and US Engagement: Generating New Pressures and Incentives Charles Finny with Neel Vanvari

SINCE 2021, THE RAPID SPREAD OF THE OMICRON VARIANT OF THE

Covid-19 virus has led several economies in the Asia-Pacific region to review their border restrictions. In effect, this has caused a breakdown of most zero-Covid or Covid-19 elimination strategies. Australia and New Zealand are reopening to the world much quicker that originally envisaged. Although China appears to be adhering to its Covid-19 elimination strategy, as recent lockdowns in Beijing and Shanghai have demonstrated, it is difficult to see how China can resist Omicron’s inevitable spread and carry on with its Covid-19 elimination strategy without significant economic costs. In Europe, Russia’s invasion of Ukraine and the ongoing conflict affecting the rest of the continent has had an immediate and substantial impact on Asia Pacific. It is too early to conclude what the consequences of the global response to Russia’s invasion of Ukraine will be, but the move has sent a geopolitical shockwave throughout the region. For instance, China’s position and actions in relation to Russia’s invasion of Ukraine has brought the South China Sea, Taiwan, and the Korean Peninsula into immediate focus. The failure of the Indian government to criticize Russia’s actions in Ukraine has put pressure on the Quad and Australia-India relations. A reevaluation of security relationships and levels of defense expenditure is taking place in the wider Asia Pacific as a result of Russia’s invasion of Ukraine. These geopolitical events have taken place in the backdrop of lesser US engagement in Asia Pacific in recent years. The Obama administration’s “Pivot to Asia” policy platform signified renewed interest in Asia Pacific with the aim of addressing China’s increasing engagement in the region as

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well as attempting to rebalance US commitments and preoccupation with the Middle East during the George W. Bush years.1 Despite the renewed US push to engage with the region under the Obama administration, the United States began to look inward under President Trump. Economic nationalism, a reluctance to lead global institutions, and perceiving multilateralism as anathema became the hallmark of Trump’s “America First” approach, resulting in lesser US engagement with the region. The economies of the region were then faced with the economic fallout of the pandemic and the consequences of Russia invading Ukraine. Despite the election of Joe Biden as president, the United States has not fully demonstrated its commitment to overturn its diminished involvement in the regional economic architecture, and a “business as usual” approach has so far been adopted by the Biden administration through the continuation of certain Trump-era economic and trade measures. In light of these developments, the following questions are examined in this chapter:2 How has the regional economic architecture of Asia Pacific been impacted by the economic policies of the Trump administration along with the fallout of the Covid-19 pandemic, and how have the regional economies of the region, including small states, responded to these changes? We argue that the Trump administration’s economic protectionism and inward-looking economic policies have led to a vacuum in the regional economic architecture of Asia Pacific. This is further exacerbated by the economic consequences of Covid-19 and United States–China geostrategic competition. In the post–Covid-19 world, this vacuum is likely to result in several uncertainties regarding the future of regional trade agreements due to an absent United States, and the difficult choices faced by regional economies, particularly small states, due to increasing great power competition. Numerous small states in the Asia-Pacific region have substantive relations with both the United States and China. Many of these countries have traditionally partnered with the United States on matters of trade and security, but in recent years this US primacy has been replaced by China’s increasingly visible footprint across Asia Pacific. Increasing intensity of the United States–China rivalry and the prevalence of uncertainty in the regional economic architecture is hence resulting in small states reviewing and adjusting their own policy positions.

Multilateralism and US Engagement Pre-Pandemic The liberal international order that emerged after World War II did not only benefit the United States—the United States was also a leader and a producer of this international order.3 According to Ikenberry: “The United States is situated at the center of this complex liberal order—but it is an

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order built around the American provision of security and economic public goods, mutually agreeable rules and institutions, and interactive political processes that give states a voice in the running of the system.”4 This international order was underpinned by measures such as a network of security partnerships, the establishment of international institutions such as the General Agreement on Tariffs and Trade (GATT), and the Breton Woods system, providing funds for rebuilding Europe after the war and linking trade and foreign policy in order to foster international cooperation through commercial agreements.5 As a result, “the United States propelled itself toward the position of leader, exerting geopolitical dominance abroad and enjoying economic prosperity at home, presenting a model that appeared attractive to other countries.”6 Cohen, Paul, and Blecker observe that, through these measures of providing extensive financial assistance, creating international institutions, and fostering international cooperation, the United States emerged as a global hegemon in the international economic order during the 1950s and 1960s.7 The end of the Cold War signaled a move away from a bipolar world, symbolized by the rivalry between US capitalism and Soviet communism, to a unipolar world where US hegemony was now evident not only in the economic sphere but also in the security sphere.8 Parsi argues that in the decade after the end of the Cold War, the international system has been transformed and “hegemonic peace” (pace egemonica) has replaced “peace of equilibrium” (pace d’equilibrio), leading to the United States further entrenching its position as the global hegemon in the post–Cold War environment.9 Furthermore, the United States championed multilateralism in the post– Cold War era by being a founding member and supporting the establishment of the World Trade Organization (WTO) and actively pursuing free trade agreements (FTAs) and regional trade agreements.10 There was a noticeable shift in US foreign and trade policy under President Trump. The Trump administration embraced the idea of “America First,” which signified a break from the policies of the past and a renewed emphasis on economic nationalism, and a shunning of multilateralism while simultaneously pursuing nonconventional trade and foreign policies that were highly divisive in what the administration termed “the Indo-Pacific region.” Trade and political tensions were particularly marked with China though not just confined to China. Even the miniscule flow of steel and aluminum from New Zealand to the United States was deemed a threat to US national security and became subject to higher tariffs.11 Perhaps most significant, the United States withdrew from the Trans-Pacific Partnership (TPP) on the third day of President Trump’s administration, signaling the preference of the United States for bilateral dealings with other countries.12 This is a marked difference from previous administrations and the longstanding US support for multilateralism. For instance, President Obama

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was in favor of the TPP and stated: “The TPP means that America will write the rules of the road in the 21st century. When it comes to Asia . . . the rulebook is up for grabs. And if we don’t pass this agreement—if America doesn’t write those rules—then countries like China will. And that would only threaten American jobs and workers and undermine American leadership around the world.”13 Following this, the Trump administration renegotiated the North American Free Trade Agreement (NAFTA) with Canada and Mexico, renegotiated the FTA with South Korea, and negotiated a bilateral deal with Japan. Trade in a number of key commodities became “managed trade.” China was forced to enter into commitments to import set quantities of US goods to avoid increased tariffs into the United States—commitments that it never fully delivered on. The policies were supposedly introduced to try and reduce the US trade deficit and bring improvements for US workers. It is probably too early to determine success with regard to workers, but the trade deficit continued to grow throughout the Trump presidency.14 Under President Trump, the United States also turned away from other multilateral institutions such as the WTO. The Trump administration blocked the appointment of judges to the WTO’s dispute settlement mechanism, which was a further blow to multilateralism.15 Numerous small trading countries like New Zealand rely on the WTO’s dispute settlement mechanism to resolve and arbitrate trade disputes, and the ambivalence showed by the United States to multilateral organizations such as the WTO adversely affects these small states. Perhaps the most consequential pillar of Trump’s “America First” approach was the trade war with China. On March 8, 2018, President Trump signed an executive order levying tariffs on Chinese aluminium and steel imports to safeguard “national security.”16 A second round of tariffs was further imposed in areas such as aerospace and machinery imported from China.17 China retaliated with tariffs of its own and in 2019 imposed more tariffs on more than $75 billion worth of US goods.18 The effect of this trade war has been detrimental to the Asia-Pacific region. Not only have the United States and China incurred losses due to these tariffs, but other regional economies, particularly those part of the global production chain, have also begun to feel the effects of the tariffs.19 Certain sectors of the economy, such as the automobile sector, have been hit hard by the sanctions. The economic impact on the regional economies of Asia Pacific as a result of the first round of tariffs alone is estimated to be at least $43 billion.20 It is vital to note that in the security sphere, President Trump did not withdraw from the region quite so obviously as he did in the trade space. Threats were made about troop levels in Korea and Japan, but forces were not withdrawn. The Trump administration saw the relaunch and bolstering of the Quadrilateral Security Dialogue (QUAD)—involving the United

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States, Japan, Australia, and India—which had lain dormant as an organization since it was first created in the aftermath of the 2004 tsunami disaster in Asia, and QUAD was given renewed emphasis and now is an important part of US Indo-Pacific strategy.21 It is also vital to note that it is not the first time that the United States has adopted a protectionist economic and trade policy, nor has support for US economic hegemony and multilateralism been a constant feature in US policymaking in the pre-Trump years. For instance, the United States imposed voluntary export restrictions on Japan, and even President Clinton campaigned on the promise to renegotiate NAFTA. One important difference, however, is that in the pre-Trump years US hegemonic power was predictable and reliable and US economic and military power did not destabilize the world order.22 As a result, despite expressing discontent with certain aspects of the global trading structure such as competition with the newly industrialized countries (NICs), “the United States took on the leadership role of the multilateral trading system, claiming the leadership of the global economic order, while signing onto preferential trade agreements as it saw fit. The rest of the world just followed the US lead.”23 The United States, despite its concerns, such as competition from Japan and Western Europe, was still working within the system that it helped to create by adopting measures like creating the WTO and its dispute resolution mechanism which it used frequently to resolve trade disputes.24 During the Trump administration, partly as a result of the changing institutional structure both within the United States and globally, the United States as a hegemon became unpredictable, and due to the erosion of institutional authority, the credible commitment and credible restraint previously associated with US hegemonic power also began to erode. Hence, under President Trump, the United States was more willing to challenge the same international order that it had helped birth and led in the past. There is another aspect of hegemony in relation to stability that needs to be examined here. In international political economy, hegemonic stability theory is the notion that stability is attained when the hegemon, in order to benefit both itself and its allies, bears the cost of keeping international markets functional at its own expense. 25 Put simply, being the global hegemon and maintaining the status quo has a cost which the hegemon has to bear, and this cost can be prohibitive, especially if the hegemon has other priorities. President Trump’s attacks on North Atlantic Treaty Organization (NATO) allies of the United States in relation to their defense spending, and the US withdrawal from foreign conflicts such as Afghanistan, suggest that the Trump administration was unwilling to bear the cost of the United States being the policeman of the world. 26 Similarly, criticizing multilateral trade agreements and international organizations and perceiving these agreements to be “unfair” to US economic

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interests further highlight that under President Trump, the United States was unwilling to be the global economic hegemon. 27 As a result of the unpredictability and the instability of US hegemony during the Trump administration, exemplified by moves such as leaving the TPP, a vacuum was created in the regional economic architecture of Asia Pacific even before the arrival of Covid-19.

Impact of Covid-19 During the first two years of the Covid pandemic, many regional economies implemented substantial controls at the border with a view to curb the spread of the virus. These border controls have had a major negative impact on the services economy where tourism, international education, and those services dependent upon cross-border travel for delivery have been severely affected. At the time of this writing, Australia has reopened its borders to tourists. New Zealand has reopened the border to citizens and permanent residents and has announced plans to bring forward the date for an opening of tourist, immigrant, and international student arrivals. This is being welcomed by the service sector, but questions remain about how much damage has been done to the sector and how long it will take to reestablish sizable flows of tourists and students. Fortunately, Covid has not had the same impact on trade flows of goods.28 Trade in goods has been disrupted by factory and port closures, but overall, it has grown to such an extent that international shipping has found it difficult to meet demand. Shipping services have been delayed and freight prices have increased substantially. Numerous experts fail to see much improvement in the challenging logistics environment until at least 2023 when new capacity begins to come online.29 As economies emerge from their lockdowns, government stimulation packages might cease and forced savings may end. This may also help correct the current demand/supply imbalance that is contributing to global shipping difficulties. Vaccination levels in some economies give one cause for some optimism that Covid will be less of a factor in our futures, but resurgence in infection levels and serious illness is again apparent globally as new variants of the virus emerge. It would probably be premature to be claiming a victory by science and public health controls over the virus. But one has the sense that governments and their citizens globally are accepting that Covid is becoming endemic and that the world will have to return to some new kind of normal. The economic impact of Covid-19 has not been uniform across the sectors. While trade in services has been severely hampered, trade in goods has improved since countries started opening up their factories and bringing

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back the work force. It is also important to note that what is curtailing further growth in the trade of goods is the shortage of shipping capacity. Problems such as the frequent Covid outbreaks causing port workers to isolate is resulting in shortages at ports across the globe. This is causing a delay in unloading containers from ships and creating congestion at ports.30 The effect of this is particularly detrimental to the Asia-Pacific region. Pre-pandemic, it was normal for ships containing empty containers to return to Asia from North America and these empty containers would then be reused. However, as a result of Covid-19 and the delays in emptying these containers at ports, ships are returning with only half the containers compared to pre-pandemic levels.31 In New Zealand, this is resulting in record low levels of shipping reliability as companies look to cut services due to sky-high costs as a result of the shipping container shortage.32 This is then having a domino effect of further reducing the export capabilities at key New Zealand ports, further hampering economic recovery. Maersk estimates that the shipping container capacity will be highly constrained well beyond the first quarter of 2022, and supply chain problems in Asia Pacific are further being hampered by other geopolitical developments such as the economic crisis in Sri Lanka adversely affecting the operational capacity of Colombo Port.33 Certain areas of the economy that were already suffering as a result of the United States–China trade war and the vacuum created by lower US engagement in Asia Pacific received a further blow due to the economic consequences of the Covid-19 pandemic. The automobile industry is a case in point. Already adversely impacted as a result of the tariffs resulting from the trade war, the industry is now faced with a semiconductor shortage impacting automobile production in the aftermath of Covid-19. It is estimated that automobile production will continue to be negatively impacted due to the semiconductor shortage at least until the first quarter of 2023.34

US Engagement and Multilateralism in Asia Pacific Post-Pandemic Perhaps the most significant political development during the first year of the pandemic was that the Trump administration was voted out by the American people and replaced by one led by President Joe Biden. Symbolically, this signified the return to a more conventional form of politics after the tumultuous uncertainties of the Trump presidency. While trade policy did not form a big part of the US presidential election, preliminary observations suggest that the Biden administration has not taken measures to completely fill the vacuum created during the Trump years. While the Biden administration has appeared different in tone so far, this has not

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been accompanied by substantive action and policies. Initial assessment of the Biden administration’s policies show it has adopted a “business as usual” approach and little substantive change has taken place. Moreover, unlike what some observers hoped, Biden has not broken away or reversed some of the Trump administration’s decisions in relation to international trade. The United States is still not a part of key regional economic organizations such as the Comprehensive and Progressive Agreement for TransPacific Partnership (CPTPP) and has not signaled a desire to join the CPTPP. Some aspects of Trump’s trade policy, such as managed trade, still seem the preferred modus operandi, and US trade policy is still being described as worker-centric.35 Although the Biden administration has declared that the United States will return to Asia Pacific, it has stated that this will not be through the CPTPP but through a framework that goes beyond the CPTPP.36 For instance, perhaps in response to criticism about lack of policy, the United States has for some months been signaling plans to develop an Indo-Pacific Economic Framework (IPEF).37 Details remain sparse, though it was given some emphasis in President Biden’s February 2022 Indo-Pacific Strategy38 and in the US trade representative’s 2022 Presidential Trade Policy Agenda and 2021 annual report, released on March 1, 2022.39 Unfortunately, these two references add little to comments made when the concept was first announced: “It will define our shared objectives around trade facilitation standards for the digital economy and technology, supply chain resiliency, decarbonization and clean energy, infrastructure, worker standards and other areas of shared interest.”40 Indeed, the concept appears little developed from when it was first announced. This suggests that no dramatic changes are likely in the short term. It is interesting that the term “arrangement” has been used as opposed to “agreement,” which suggests that something less than a treaty-level commitment is being contemplated. By extension, this also means that any outcome or outcomes would not be legally binding. The legal status of what appears to be in prospect is interesting as it suggests that the Biden administration has no confidence in its ability to secure a negotiating authority or to achieve ratification of any outcome. Arrangements can be turned into agreements in due course.41 They also have the advantage of speed. However, they have the disadvantage of not being legally binding. It means that they tend to be political declarations of intent rather than outcomes that fundamentally change and bind policy into the long term. It also suggests that discriminatory market liberalization for goods, services, and investment is not being contemplated by the United States. This would require a treaty level agreement and ratification by Congress in the United States. In other words, the bread and butter of a standard FTA is off the table. It also means that in the short term the United States does not appear to be contemplating a resumption of membership in the CPTPP.

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Interestingly, much of the scope of what the United States appears to be contemplating either exists within the CPTPP or could be added reasonably easily into a renegotiated CPTPP. The CPTPP has chapters on labor commitments, environment, regulatory coherence, competition policy, transparency, and anticorruption, and plenty on trade facilitation.42 The CPTPP does have a chapter on electronic commerce but not on the digital economy. This has led to a number of digital trade agreement negotiations and discussions within the region such as the Digital Economy Partnership Agreement (DEPA) negotiated between New Zealand, Singapore, and Chile in June 2020. Canada became part of the process in December 2020 and South Korea agreed to commence negotiations to formally join DEPA in October 2021.43 Lobby groups inside the United States are watching the development of the much-trumpeted IPEF as closely as governments in the region. The US Chamber of Commerce published a series of recommendations on the framework on February 25, 2022. Interestingly, the chamber began the paper by regretting that the United States had abandoned the TPP and had dismissed “the opportunity to strengthen and join its successor agreement, the CPTPP.” The chamber suggests that these decisions had “created a vacuum of US economic and strategic leadership in the Indo-Pacific.”44 The chamber continued that “while not a perfect agreement, the American business community supported the TPP and is, first and foremost, in favor of seeking to strengthen and re-join it.”45 On the Indo-Pacific Economic Framework the chamber commented that it “lacks precision, specificity, economic impact and enforceability. . . . However, in the absence of a return to the TPP, important elements in the Administration’s Indo-Pacific Strategy could be achieved through the IPEF.”46 The chamber goes on to make recommendations on what the IPEF could address in the areas of digital trade, customs administration and trade facilitation, government procurement, energy transition, and climate change mitigation.47 In early 2022, the Centre for Strategic and International Studies (CSIS) published a somewhat more sympathetic paper that also contained recommendations for the IPEF. The paper notes that “US economic and strategic interests would best be served by membership in a comprehensive, high standard regional trade agreement in the Indo-Pacific. This could be achieved by returning to a revised TPP or applying to join its successor agreement CPTPP.”48 The CSIS report states that the Biden administration is not yet ready to rejoin the TPP and prefers to develop the IPEF into a credible format for US regional engagement. According to the report, the IPEF plan has potential but will need to be carefully shepherded and managed if it is to be seen as a vehicle for the advancement of US interests and evidence of a durable US commitment to the Indo-Pacific.49 The paper goes on to make recommendations about the scope of the IPEF and suggests this

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include trade facilitation, standards for digital economy and technology, supply chain resiliency, decarbonization and clean energy, infrastructure, and worker standards.50 The Biden administration’s record in terms of addressing the uncertainties caused by diminished US multilateral presence in Asia Pacific appears to be mixed at best. In the absence of the United States returning to the CPTPP and any new alternative proposals announced so far appearing to be slim in detail, the Trump administration’s policy of a diminished multilateral US presence in Asia Pacific and the uncertainties resulting from an inward-looking US trade policy appear to have continued under President Biden. The Biden administration appears to have carried on with the overarching trade policy of the Trump administration in relation to the CPTPP and trade multilateralism. Just like in the United States, political and economic change has also taken place in China. It is probably too early to determine the extent to which political and economic change in China was a response to the Trump presidency. However, President Xi has become even more nationalistic and there is more economic control evident from the center. The state-owned enterprise (SOE) sector has benefited, and the private sector has had controls put in place that have not been seen for many years. Chinese diplomacy has also become much more forceful, and there are clear signs of coercion being employed as a tactic. Military incursions into Japanese and Taiwanese air space became more common, and the Association of Southeast Asian Nations (ASEAN) countries have seen China become more assertive in the South China sea. This coercion has extended into the trade arena. Australia has been the most obvious target, but Taiwan has also been impacted. The other regional trade initiative, the Regional Comprehensive Economic Partnership (RCEP), also progressed during the Trump presidency and was signed in November 2020. On the positive side of the ledger, the RCEP is the first FTA linking the three large North Asian economies— China, South Korea, and Japan. On the negative side India was not part of the final agreement. For several participants, the only real value added by the RCEP was Indian participation. A ministerial declaration on November 11, 2020, makes it clear that the door is very much open to Indian accession in the future. Meanwhile India is allowed to attend meetings of RCEP members as an observer.51 The conclusion and implementation of the RCEP agreement was seen a positive development for China, as when RCEP negotiations were concluded, China was neither a part nor had applied to join the CPTPP. The RCEP was China’s vehicle through which it could become an integral part of the regional economic architecture. Along with China’s increased military presence and assertive diplomacy in the region, its increased economic presence was further demonstrated by its declaration of interest in and application to join DEPA and

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application to join the CPTPP.52 This application was followed a few days later by Taiwan’s application to join the CPTPP. Ecuador has also applied for membership and there is constant speculation that South Korea might soon also formally apply for membership. Views in the region are mixed as to why China chose this moment to apply for CPTPP membership. The optimists would suggest that this is a good sign.53 It signals an intention to continue with reform and opening up and signals a commitment by China to eventually meet the standards required by both agreements. There are some in New Zealand who are of this view (at least in public). At a government level, Malaysia and Singapore appear to concur. There are others who question whether China is actually signaling a commitment to further reform by this action. They point to the fact that in terms of actual domestic policy implementation China is heading in a completely different direction than that required by DEPA and the CPTPP. This outlook offers two possible reasons for China’s applications.54 The first group argues that Beijing was noticing that the United States was beginning to show interest in reengaging with the regional economic architecture and the application was designed to disrupt this process. Another group believes Beijing had become convinced that Taiwan was about to apply for membership and wanted to get in ahead of this. Again, the goal was seen to be disruption. It should be noted that these explanations are not mutually exclusive. A final group sees China’s application to join the CPTPP as a reaction to the announcement of the Australia–United Kingdom–United States (AUKUS) trilateral security pact. Certainly, the Chinese application letter was delivered (in Beijing, not Wellington, as had been the convention) relatively soon after AUKUS become known. We may never know the real reason for the applications by China. While a link to AUKUS is difficult to rule out, the intent of disrupting and potentially controlling future applications to the CPTPP is more likely as the explanation. Initial observations suggest that the United States was more likely the target than Taiwan. The giveaway was the interest being expressed in DEPA—which predated the AUKUS announcement by a few days. On the New Zealand side, officials and ministers were well aware of growing pressure from within the Biden administration to signal US reengagement, and digital agreements were seen as the most politically realistic option. The choice was to do something new on a bilateral or regional level. If it was to be regional, New Zealand was suggesting that the best vehicle would be to join DEPA, which was growing anyway with South Korea’s membership. There was no secret about digital agreements with the United States being a stepping stone to bigger agreements—such as the United States rejoining what we now call the CPTPP. It is well known that Taiwan has been extremely interested in CPTPP membership for some years. Taiwan has two high standard FTAs with two

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CPTPP members—New Zealand and Singapore. Japan and Australia appear interested in FTAs with Taiwan when politics allow. Taiwan would have little difficulty being able to demonstrate an ability to meet the CPTPP standard on accession. But there were no signs that a Taiwanese application was imminent. One perspective argues that Taiwan was best to await the conclusion of the United Kingdom’s CPTPP process and apply at the same time as Thailand or South Korea or both. Both have long been rumored to be interested in CPTPP accession. Initial signs are that, if China’s intention was to disrupt or discourage a US application, this has failed. Instead, it has ignited a debate in Washington, DC, that was being delayed until after the midterm elections. Pressure for the United States to reengage and potentially rejoin the TPP appeared to be growing.55 At the same time, China’s application left Taiwan no option but to apply to join the CPTPP as well. By forcing Taiwan’s hand, China has also forced decisions on how to handle a Taiwanese application. Moreover, Chinese protestations about previous processes involving Taiwan being no precedent for the CPTPP have fallen on largely deaf ears. What is clear is that many believe China cannot be allowed to join the CPTPP ahead of Taiwan, as current posturing would indicate that a veto may be possible. As the United Kingdom’s CPTPP accession application has shown, nothing moves fast when seeking to accede to the CPTPP. This precedent is probably a good thing. It gives existing members the excuse of seeking to delay a decision on the new applications for some time. It could be, for example, that members decide that the United Kingdom’s process should be completed before considering the new applications. If this was considered too indecisive then working parties could be established to consider whether China and Taiwan met or could possibly meet the standard necessary for CPTPP membership. Separate working parties do present the possibility of a good alternative approach. In the meantime, members are being encouraged to continue bilateral dialogue with the new applicants. It would be surprising if a veto was employed at this point. Relations between Australia (and some other members) and China are poor at present, but to veto China’s application would just add unnecessary extra tension to the relationship. A veto of Taiwan by a Chinese-friendly member would likewise result in a matching veto of China from a less friendly member. This would not suit the purposes of the overall membership. Chinese and Taiwanese membership in the CPTPP would be, in the longer term, beneficial, and this was envisaged when the agreement was first negotiated. Why else was the language “separate customs territories” used in the agreement? In addition, Taiwan, despite facing a unique predicament in terms of its international standing in the global arena, is a member of the WTO and is a separate customs territory from China. It is this provision which has allowed Taiwan to conclude and implement FTAs with Singapore, and New Zealand in the past.

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In the post-Covid-19 environment, the regional economic architecture in Asia Pacific is one wherein the world’s largest economy and the traditional leader of the postwar order, the United States, has currently left a vacuum due to its inward-looking economic policies which were put in place by President Trump; this vacuum is yet to be fully filled by the Biden administration. This is accompanied by a second development wherein the world’s second largest economy, China, is increasingly active militarily and economically in Asia Pacific. By spearheading agreements like the RCEP and then applying to join the CPTPP and DEPA, China is not only creating multilateral arrangements in which it has significant influence in rulemaking, but also attempting to be a part of multilateral organizations that it was not previously a member of but is trying to join these arrangements and influence decisionmaking structures. Enveloping this dynamic of a diminishing US presence and an increasingly visible and assertive Chinese presence is the fact that the United States and China are increasingly in competition with each other. This is signified not just by the United States–China trade war, but also by US efforts to address increasing Chinese presence in the international sphere. As a result of these developments and increasing great power competition, other regional economies are beginning to adjust their own responses to the prevalent regional economic architecture in Asia Pacific. So, what has been the response of the regional economies of Asia Pacific, including small states, to these changes? There have been numerous developments in the context of the regional economic architecture in relation to regional economies in the post–Covid-19 phase. First, Australia achieved something of a breakthrough in its FTA negotiation with the United Kingdom. An agreement in principle was achieved that was much broader in ambition than many had been anticipating. In due course, this led to a similar outcome in the near parallel New Zealand–United Kingdom negotiation. Many in New Zealand are still disbelieving that the United Kingdom’s market will be fully open to meat and dairy exports in fifteen years’ time. New Zealand and the United Kingdom signed their FTA on February 28, 2022, in London, and the agreement is due to come into force in 2023.56 These bilateral developments in turn have greatly increased the chances of a fairly rapid conclusion to the United Kingdom’s negotiation to achieve membership in the CPTPP after the United Kingdom applied to join the trading bloc. At the most recent meeting of CPTPP senior officials it was announced that the United Kingdom’s application would move into a new phase and that market access negotiations between the United Kingdom and CPTPP members would commence.57 As of March 2022, substantial progress has been made in FTA negotiations between Australia and India. An initial outcome from these negotiations could occur within weeks. Over time this bilateral outcome may increase

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the chances of India resuming interest in RCEP membership.58 Another regional economy, Japan, played a leading role in getting the CPTPP negotiated and signed by member countries, and its leadership role, especially after Trump withdrew from the agreement, was pivotal in ensuring that the TPP was transformed into the CPTPP and was eventually implemented. Unlike the United States, the rest of the region does not seem to have turned inward but instead regional economies continue to engage multilaterally with each other in the post–Covid-19 environment. The outlook for regional economies does not appear to be promising in the short term, despite these countries engaging in extensive multilateralism in the post–Covid-19 phase. For regional economies of Asia Pacific, United States–China relations are now defined more by competition rather than cooperation.59 Many regional economies of Asia Pacific have to consider how to deal with both the United States and China because for many of these countries, the United States has been the traditional security, political, and economic partner, but in recent years China has become the largest trading partner.60 Hence, for many regional economies, the conundrum is to find a fine balance between the United States and China and their competing interests in the region.61 United States–China and Australia-China tensions appear to be carrying on for some time to come. Encouraging an easing of these tensions—both military and economic—would appear wise. It is clear to many (but not all) that the China we are dealing with in 2022 is not the China we were dealing with under Deng Xiaoping and his immediate successors, leading many countries in the region to review their policy settings. This is not necessarily leading to a binary solution—choosing the United States or China—but it might mean that positions of principles do need to be taken on specific issues. As a result of this increasing geostrategic competition, regional economies of Asia Pacific are now making decisions and altering their policy positions in an uncertain environment where a vacuum left by the United States was followed by United States–China competition. Consequently, this puts more pressure on the smaller regional economies, such as New Zealand. The Russian invasion of Ukraine has, if anything, reinforced the need for smaller nations to take a stand in support of principles that they hold dear. Recent developments in the Pacific demonstrate how important small states in Asia Pacific remain to both the United States and China in this environment of a great power rivalry. In May 2022, China proposed a multilateral proposal for partnering with Pacific Island states on economic and security issues ranging from a free trade area to cyber security and police training.62 Although China’s multilateral “Common Development Vision” proposal did not receive the unanimous backing of all PICs, it was followed by the United States stepping up its own commitments to the region. At the Pacific Islands Forum (PIF) in June 2022, US vice pres-

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ident Kamala Harris announced measures to enhance US presence in the Pacific such as a threefold increase in funding for economic development and ocean resilience, opening of new embassies in Kiribati and Tonga, and the development of a US national strategy for the Pacific.63 The United States also announced the creation of the “Partners in the Blue Pacific,” an informal group that aims to work with New Zealand, Australia, Japan, and the United Kingdom to better coordinate and deliver on issues such as climate change in the Pacific.64 As a result of increasing United States–China contestation in Asia Pacific and the need to carefully incorporate the positions of the United States and China in the policymaking calculus, smaller states like New Zealand that follow an independent foreign policy are compelled to define their policy goals more clearly, and this forces them to move away from their preferred policy stance of strategic ambiguity, thereby challenging the country’s ability to maintain an independent foreign policy platform.65 Increasing great power competition adds an additional layer of complexity for small states as making a binary choice between the United States or China has significant costs which need to be weighed against the benefits. While it far too early to fully conclude how small states have adjusted to this new reality of the United States and China competing in the region, we are beginning to get some indication of how they are attempting to adopt to this new reality. The Biden administration has increasingly been framing the competition of the United States with China as an ideological struggle between democracy and autocracy.66 In numerous speeches and statements, Biden and members of his administration have talked about countries that are democracies coming together to defend shared values against nondemocratic states that are competing with the United States and are deemed to be opposed to the rules-based order such as China.67 Preliminary indications are that small states of Asia Pacific are reluctant to preview United States–China competition through this lens of democracy versus autocracy. Recent statements from Singapore’s defense and home affairs ministers demonstrate this reluctance to accept the narrative of democracy against autocracy as being the lens through which United States–China competition should be viewed by regional economies of Asia Pacific.68 Singapore’s defense minister stated: “It is not an ideological struggle between autocracies and democracies. Characterizations and labels aside, Asian countries are too diverse and pluralistic and there would be few takers for a battle royal to ensue on that basis.”69 Similarly, in a recent foreign policy speech, New Zealand’s prime minister rejected the “black and white” characterization of the issue and instead stated New Zealand’s desire to work with China as well as building on shared interests with traditional partners such as the United States.70

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Similar statements have also been made by other small states in Asia Pacific. Numerous ASEAN members, when discussing joining the IPEF, stated that joining the IPEF did not imply that they would stop working with China or be pushed closer to making a binary choice between the United States and China. 71 The challenge for these small states is to weigh the costs against the potential benefits of such actions. While small states, such as New Zealand, will be constrained by the existence of substantial economic relations with China, the benefits being offered by US initiatives like the IPEF seem limited in their scope at present. 72 Initial signs suggest that increasing United States–China rivalry is leading to regional economies, including small states, to adjust their own policy responses. However, countries are not solely basing their decisions on value-laden narratives of democracies against autocracies, but are also considering the potential costs and benefits and using this calculus to determine their response. Prospects for multilateralism thus remain bleak. The WTO remains largely ineffective as a negotiating body and the dispute settlement function remains damaged by the lack of an appellate body. A ministerial meeting originally planned for late November 2021 has been postponed until mid-2022. No doubt triumph will be declared on several issues, but the reality remains somewhat different. This makes the CPTPP all the more important as it, in theory anyway, has a fully functioning dispute resolution function. Existing members of the CPTPP might usefully focus on the recent history of intimidation by the United States under Trump and by China vis-à-vis Australia and others and determine whether rules are sufficiently strong to ensure that members of the agreement cannot engage in such practices in the future. Rapid conclusion of the United Kingdom’s accession to the CPTPP is important as it will add useful heft to the grouping. Setting up a process to review the Chinese, Taiwanese, and Ecuadorean applications for the CPTPP will be important. No one should expect a rapid conclusion to these processes. And completing the ratification of the CPTPP by those members who have signed and not yet ratified remains important. Conclusion of the European Union–Australia and European Union–New Zealand FTAs as rapidly as possible would also be useful. Clearly at least one big election looms in the European Union, and there are some tensions between France and Australia to resolve. But longer term, in the absence of a fully functional WTO some form of cooperation between the European Union and the CPTPP might be what is needed to ensure that continuing functioning of the rules-based international order. Outreach to India—either on a bilateral basis or through encouragement to join the RCEP—might also be prudent. We have just seen at the Glasgow UN Climate Change Convention how important it is to have India engaged and part of the process.

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Conclusion The regional economic architecture of Asia Pacific was impacted by the nontraditional policies of the Trump administration along with the Covid19 pandemic, and regional economies, including small states, have responded to this. Trump’s “America First” rally cry was a break from tradition wherein the United States was the global economic and military hegemon. It played an active role in the formation of the postwar economic order, and it was the leader of that order. Trump’s arrival markedly changed that, and during the Trump administration, the United States stepped back from multilateralism. Consequentially, US hegemony was no longer viewed as being reliable, cooperative, and a force which helped to create the existing order instead of being a destabilizing force. Instead, US hegemony was no longer providing stability, and this unpredictability, coupled with an increasingly adversarial United States–China relationship, led to a vacuum existing in the regional economic architecture in Asia Pacific. The tensions arising from an absent America following an inward-looking economic policy were furthered exacerbated and made more acute due to the economic consequences of the Covid-19 pandemic. Furthermore, the vacuum arising from the Trump presidency has still not been fully filled by the Biden administration. The United States is still not part of key regional economic organizations, and the Biden administration has not reversed the principal Trump-era trade policies. On the contrary, there appears to be a “business as usual” approach that has been undertaken by the Biden administration. Thus, this existing US vacuum, coupled with an aggressive and an increasingly active China in the region, is being replaced by increasing United States–China competition in the region. The impact of this on regional economies is that regional economies are having to review their own policy responses and consider the policy positions of both the United States and China, thereby operating in an environment of uncertainty in the aftermath of Covid-19. However, regional economies, including small states, have so far been reluctant to base their policy choices simply on the narrative of democracy versus autocracy. Instead, regional economies are also weighing the costs against the tangible benefits.

Notes 1. Peter Birgbauer, “The US Pivot to Asia Was Dead on Arrival,” The Diplomat, March 31, 2022; Kenneth Lieberthal, “The American Pivot to Asia,” December 21, 2011, https://www.brookings.edu/articles/the-american-pivot-to-asia. 2. This chapter is based on a keynote speech given at the November 2021 Auckland conference by Charles Finny, and adapted by Neel Vanvari.

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3. G. John Ikenberry, “Power and Liberal Order: America’s Postwar World Order in Transition,” International Relations of the Asia-Pacific 5, no. 2 (2005): 133. 4. Ibid., p. 137. 5. Ibid., pp. 137–138; Douglas A. Irwin, “The Smoot-Hawley Tariff: A Quantitative Assessment,” Review of Economics and Statistics 80, no. 2 (1998). 6. Jake Sullivan, “The World After Trump: How the System Can Endure,” Foreign Affairs, March–April 2018; June Park and Troy Stangarone, “Trump’s America First Policy in Global and Historical Perspectives: Implications for US-East Asian Trade,” Asian Perspective 43, no. 1 (2019): 5. 7. Stephen D., Cohen, Joel R. Paul, and Robert A. Blocker, Fundamentals of U.S. Foreign Trade Policy: Economics, Politics, Laws, and Issues (Boulder: Westview, 1996). 8. David P. Rapkin, William R. Thompson, and Jon A. Christopherson, “Bipolarity and Bipolarization in the Cold War Era: Conceptualization, Measurement, and Validation,” Journal of Conflict Resolution 23, no. 2 (1979). 9. Vittorio Emanuele Parsi, The Inevitable Alliance: Europe and the United States Beyond Iraq (New York: Palgrave Macmillan, 2006). 10. Park and Stangarone, “Trump’s America First Policy in Global and Historical Perspectives,” p. 7. 11. Susan Edmunds, “US Tariff Move Could Hit New Zealand Exports,” March 6, 2018, https://www.stuff.co.nz/business/102011916/us-tariff-move-could-hit-new -zealand-exports. 12. White House, “Presidential Memorandum Regarding Withdrawal of the United States from the Trans-Pacific Partnership Negotiations and Agreement,” January 23, 2017, https://trumpwhitehouse.archives.gov/presidential-actions/presidential -memorandum-regarding-withdrawal-united-states-trans-pacific-partnership -negotiations-agreement. 13. Shailailah Medhora, “Andrew Robb Defends TPP After Full Release of Trade Deal Document,” The Guardian, November 5, 2015. 14. Doug Palmer, “America’s Trade Gap Soared Under Trump, Final Figures Show,” February 5, 2021, https://www.politico.com/news/2021/02/05/2020-trade -figures-trump-failure-deficit-466116. 15. Tom Miles, “U.S. Blocks WTO Judge Reappointment as Dispute Settlement Crisis Looms,” Reuters, August 28, 2018. 16. Badri Narayan Gopalakrsihnan and Lekshmi Nayar, “Global Economic Impact of US-China Trade Tensions,” in The China-US Trade War and South Asian Economies, edited by Rahul Nath Choudhury (New York: Routledge, 2021). 17. Ibid. 18. Yun Li, “China Will Retaliate with Tariffs on $75 Billion More of US Goods and Resume Auto Tariffs,” August 23, 2019, https://www.cnbc.com/2019/08/23 /china-to-retaliate-with-new-tariffs-on-another-75-billion-worth-of-us-goods.html. 19. Gopalakrsihnan and Nayar. “Global Economic Impact of US-China Trade Tensions,” p. 15. 20. Ibid. 21. Ashok Rai, “Quadrilateral Security Dialogue 2 (Quad 2.0): A Credible Strategic Construct or Mere ‘Foam in the Ocean’?” Maritime Affairs (New Delhi) 14, no. 2 (2018). 22. Ikenberry, “Power and Liberal Order,” p. 139; T. Risse-Kappen, Cooperation Among Democracies: The European Influence on U.S. Foreign Policy (Princeton: Princeton University Press, 1995). 23. Park and Stangarone, “Trump’s America First Policy in Global and Historical Perspectives,” p. 6.

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24. Ikenberry, “Power and Liberal Order,” p. 140; Park and Stangarone, “Trump’s America First Policy in Global and Historical Perspectives.” 25. Maria Gavris, “Revisiting the Fallacies in Hegemonic Stability Theory in Light of the 2007–2008 Crisis: The Theory’s Hollow Conceptualization of Hegemony,” Review of International Political Economy 28, no. 3 (2019). 26. Dalia Dassa Kaye, “America’s Role in a Post-American Middle East,” Washington Quarterly 45, no. 1 (2022). 27. June and Stangarone, “Trump’s America First Policy in Global and Historical Perspectives,” p. 11. 28. “Global Trade Rebound Beats Expectations but Marked by Regional Divergences,” October 4, 2021, https://www.wto.org/english/news_e/pres21_e/pr889 _e.htm. 29. Martin Farrar, “Global Supply Chain Crisis Could Last Another Two Years, Warn Experts,” The Guardian, September 18, 2021. 30. Marcelo Duhalde and Siqi Ji, “World Shipping-Container Crisis Explained,” South China Morning Post, February 15, 2022. 31. Ibid. 32. Dileepa Fonseka, “Shipping Schedule Reliability Worst It Has Ever Been,” June 27, 2021, https://www.stuff.co.nz/business/125567726/shipping-schedule -reliability-worst-it-has-ever-been. 33. “Maersk Asia-Pacific Market Update,” March 30, 2022, https://www .maersk.com/news/articles/2022/03/25/asia-pacific-market-update-march; Dinhesh Kallungal, “Cochin Port Benefits As Shipping Lines Skip Colombo,” The Hindu, April 12, 2022. 34. Vikram Chaudhary, “Production Woes for Auto Firms to Persist: No End to Semiconductor Crisis,” April 10, 2022, https://www.financialexpress.com/auto /industry/production-woes-for-auto-firms-to-persist-no-end-to-semiconductor-crisis /2487143. 35. “Ambassador Tai Outlined Biden’s Goal of Worker-Focused Trade Policy,” New York Times, June 10, 2021. 36. Yoichi Takita, “U.S. Won’t Join CPTPP but Will Seek New Framework: Raimondo,” November 16, 2021, https://asia.nikkei.com/Economy/Trade/U.S.-won-t -join-CPTPP-but-will-seek-new-framework-Raimondo. 37. “US to Develop ‘Indo-Pacific Economic Framework,’” October 27, 2021, https://www.voanews.com/a/us-east-asia-leaders-convene-to-discuss-threats -challenges-in-region-/6287538.html. 38. White House, “Indo-Pacific Strategy of the United States,” February 2022, https://www.whitehouse.gov/wp-content/uploads/2022/02/U.S.-Indo-Pacific -Strategy.pdf. 39. US Trade Representative, “2022 Trade Policy Agenda & 2021 Annual Report of the President of the United States on the Trade Agreements Program,” March 1, 2022, https://ustr.gov/sites/default/files/2022%20Trade%20Policy%20 Agenda%20and%202021%20Annual%20Report%20(1).pdf. 40. “US to Develop ‘Indo-Pacific Economic Framework.’” 41. Arrangements have been regularly negotiated with Taiwan by a range of jurisdictions so as to avoid opposition from the People’s Republic of China. The FTA between Taiwan and New Zealand (ANZTEC) incorporated a number of these bilateral arrangements, updated them as necessary, and upgraded them to treaty level and legally binding commitments. 42. Ministry of Foreign Affairs and Trade, “Impacts of the Comprehensive and Progressive Agreement for Trans Pacific Partnership on the New Zealand Economy,”

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March 7, 2018, https://www.mfat.govt.nz/assets/trade-agreements/cptpp/final-report -cptpp.pdf. 43. Ministry of Foreign Affairs and Trade, “The Digital Economy Partnership Agreement Is a New Initiative with Chile and Singapore,” https://www.mfat.govt.nz /en/trade/free-trade-agreements/free-trade-agreements-in-force/digital-economy -partnership-agreement-depa/overview/. 44. US Chamber of Commerce, “Indo-Pacific Economic Framework: Business Recommendations,” February 23, 2022, https://www.uschamber.com/assets/documents /US-Chamber-of-Commerce-IPEF-Business-Recommendations.pdf. 45. Ibid. 46. Ibid. 47. Ibid. 48. Centre for Strategic and International Studies, “Filling In the Indo-Pacific Economic Framework,” January 26, 2022, https://www.csis.org/analysis/filling-indo -pacific-economic-framework. 49. Ibid. 50. Ibid. 51. “Joint Leaders’ Statement on the Regional Comprehensive Economic Partnership (RCEP),” November 11, 2019, https://rcepsec.org/wp-content/uploads /2020/11/RCEP-Summit-4-Joint-Leaders-Statement-Min-Dec-on-India-2.pdf. 52. Asia Trade Centre, “China Applies to Join DEPA,” November 4, 2021, http://asiantradecentre.org/talkingtrade/china-applies-to-join-depa. 53. Peter Burke, “Countries Race to Join CPTPP,” October 6, 2021, https://www .ruralnewsgroup.co.nz/rural-news/rural-general-news/countries-race-to-join-cptpp. 54. Charles Finny, “Could China Join the CPTPP?” July 26, 2020, https://www .asiamediacentre.org.nz/opinion-and-analysis/could-china-join-the-cptpp. 55. Tim Groser, “The U.S. Has a Way Back on Pacific Trade,” Wall Street Journal, September 29, 2021. 56. Philip Inman, “UK and New Zealand Sign Free Trade Deal,” The Guardian, February 28, 2022. 57. Department for International Trade, “Trade Secretary Secures Major Trade Bloc Milestone Ahead of Asia Visit,” February 18, 2022, https://www.gov.uk /government/news/trade-secretary-secures-major-trade-bloc-milestone-ahead-of -asia-visit. 58. Karunjit Singh, “Explained: India-Australia Interim Trade Agreement and FTA,” February 15, 2022, https://indianexpress.com/article/explained/explained -India-australia-interim-trade-agreement-and-fta-7772210. 59. Alexander C. Tan and Jason Young, “Falling In and Falling Out: IndoPacific in the Midst of US-China Tensions in the Post-COVID World,” Political Science 73, no. 1 (2021): 2. 60. Ibid. 61. Alexander C. Tan, “China and Its Neighbors: Too Close for Comfort?” in Beyond Great Powers and Hegemons: Why Secondary States Support, Follow, or Challenge, edited by Kristen P. Williams, Steven E. Lobell, and Neal G. Jesse (Stanford: Stanford University Press, 2012). 62. “China Seeks Multilateral Deal with Pacific Leaders,” May 30, 2020, https://www.rnz.co.nz/international/pacific-news/468150/china-seeks-multilateral -deal-with-pacific-leaders. 63. “Harris Announces New US Commitments, Including Embassies, in Pacific,” July 12, 2022, https://www.rnz.co.nz/news/pacific/470815/harris-announces-new -us-commitments-including-embassies-in-pacific.

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64. “New Zealand Joins New Pacific Partnership Group with US, UK,” June 25, 2022, https://www.rnz.co.nz/news/world/469760/new-zealand-joins-new-pacific -partnership-group-with-us-uk. 65. Jason Young, “US-China Competition and Small Liberal Democracies: New Zealand and the Limits of Hegemony,” Political Science 73, no. 1 (2021). 66. Philip Bump, “The Newly Important American Political Axis: Democracy vs. Autocracy,” Washington Post, March 18, 2023. 67. Sam Roggeveen, “Democracy vs Autocracy: Biden’s ‘Inflection Point,’” February 23, 2021, https://www.lowyinstitute.org/the-interpreter/democracy-vs -autocracy-biden-inflection-point. 68. Justin Ong, “Asia Must Learn Right Lessons from Ukraine at This Dangerous Point in History: Ng Eng Hen,” Straits Times, June 12, 2022; “K. Shanmugam: Will Singapore Have to Choose Between the US and China?” BBC News, June 29, 2022. 69. Ong, “Asia Must Learn Right Lessons.” 70. Herve Lemahieu, “An Address by New Zealand Prime Minister Jacinda Ardern,” July 7, 2022, https://www.lowyinstitute.org/publications/address-new -zealand-prime-minister-jacinda-ardern. 71. Premesha Saha, “The Indo-Pacific Economic Framework (IPEF): An ASEAN Perspective,” June 25, 2022, https://www.orfonline.org/research/the-indo-pacific -economic-framework. 72. Nicholas Khoo, “New Zealand Will Not Join the US Coalition Against China Anytime Soon,” The Diplomat, July 6, 2022.

9 Digital Regional Economic Integration: New Trade Agreements and Opportunities Stephanie Honey

SMALL STATES ARE NOT NORMALLY SEEN AS DRIVING GLOBAL NORMS

for trade policy, but when it comes to digital trade policymaking, a handful of small, open, and trade-oriented economies in the Asia-Pacific region, led by Singapore, New Zealand, and Chile, are playing an increasingly influential role. These small states are driving the development of a novel type of digital trade agreement, premised on collaboration and a holistic approach to “trade in the digital economy.” This small-state model of digital economy agreements is gaining momentum, including in partnership with middle powers such as Australia and Japan, even though two of the world’s influential tech giants, the United States and China, are also part of the region. This matters. On the one hand, digital technologies are increasingly central to trade, and on the other hand, digital trade rules are highly fragmented. As I argue in this chapter, pursuing more coherent models of digital trade governance, where regulatory approaches are developed through greater collaboration, can address the fragmentation of trade rules. In doing so, digital trade opportunities would be more predictable and secure for business, thereby contributing to economic recovery from the pandemic. Importantly, more consistent digital trade rules would also enable greater engagement in trade by small businesses and women entrepreneurs: digital technologies can help overcome long-standing structural barriers to participation, but only if the regulatory environment is supportive. This has become increasingly urgent as the disruptions of the Covid-19 pandemic have prompted significant acceleration in the digitalization of business models, work, and consumer behavior. How much critical mass can ultimately be achieved by this small state-led new model for digital trade governance remains an open question, with a risk 171

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of fragmentation even among these digital economy agreements. It nevertheless has the potential to influence others’ approaches to digital trade rules, even as larger economies in the region seek to develop their own frameworks.

Digital Technologies Transforming Trade Digital technologies are transforming trade in myriad ways, from what is bought and sold, to the channels through which trade takes place, to the way that production, value chains, and transactions are conducted—all underpinned by cross-border flows of data. Digitalization has fundamentally altered the scale, scope, and speed of trade. As long ago as 2014, the value of cross-border data flows, which can serve as a proxy for digital trade, was estimated to have superseded the value of trade in goods; no recent comparison has been calculated, but global internet protocol traffic in 2022 is expected to exceed all such traffic that has gone before in the period up to 2016.1 Different types of digital trade are continuing to evolve. In addition to inherently “digital” offerings such as software or cloud computing, many services that once depended on physical proximity, from professional and business services to education to healthcare, can be supplied digitally across borders, with nearly two-thirds of all services exports now estimated to be digitally delivered.2 In Asia, total digitally delivered services trade increased three and a half times between 2005 and 2019, outpacing growth in its nondigital services trade counterpart.3 Trade in “digital products”—products formerly consumed only in physical form, but now delivered electronically, such as e-books or music or movie streaming—is also growing strongly.4 Digital transformation has also enabled more efficient and secure new models and tools in trade, such as digital payments, along with trade tech, the “set of technologies and innovations to enable global trade to become more efficient, inclusive and sustainable,” such as electronic signatures and digital identities, blockchain and “paperless trade” (that is, the use of electronic versions of trade administration documents).5 A new wave of technologies, including artificial intelligence and the “internet of things” (where interconnected sensors and computing devices are embedded in everyday objects), are likely to transform traditional trade models even further. Technology has also unlocked greater disaggregation of value chains, with backbone services and other inputs increasingly supplied digitally.6 Imports of digital services can benefit even solely domestically oriented businesses by providing low-cost access to back-office services to enhance productivity and support the increasing value-adding of services into manufacturing, so-called servicification.7

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Last, platform-based e-commerce, entailing the sale of physical goods as well as services via digital platforms such as Amazon or Alibaba, was worth $27 trillion globally in 2019, mostly in business-to-business transactions, but with an increasing spend in many business-to-consumer categories.8 While cross-border e-commerce accounts for a relatively modest share of that total, this is growing rapidly too, increasing by 9 percent in 2019 relative to the year before, and boosted further through the pandemic.9 As the discussion above shows, the scope of “digital trade” is potentially wide, albeit that there is no universally accepted definition of the term. The Organisation for Economic Co-operation and Development (OECD), supported by the World Trade Organization (WTO) and International Monetary Fund, has developed a definition that focuses less on the what, and more on how such trade is ordered and supplied: digitally enabled transactions of trade in goods and services that can either be digitally or physically delivered, and in which participants may be consumers, firms, and governments.10 This broad definition points to a more expansive approach to digital trade rules than had been common in trade agreements until relatively recently, with the advent of the digital economy agreements.

The Role of Digital Trade in the Pandemic and Its Aftermath The Covid-19 pandemic has served to accelerate the digitalization of business and trade around the world. According to one estimate, the share of partially or fully digitalized offerings by businesses in Asia Pacific grew by more than a decade’s equivalent in the first few months of the pandemic.11 Firms have shifted their focus toward more digitalized products, tools, and channels in the face of lockdowns, social distancing, and supply chain disruption. Evidence from around the region shows that businesses that were more “digital” prior to the pandemic (or were able to pivot more quickly) have tended to be more resilient.12 This points to the need to ensure that the environment for digital trade is as enabling as possible to support the resilience of the business community overall. The pandemic has also helped to demonstrate the resilience of trade in digitally delivered services. In the decade prior to the pandemic, trade in services enjoyed robust growth, but this was dramatically reversed by the pandemic, with a contraction of 21 percent year-on-year from 2019 to 2020. Non-digitally deliverable services (including travel, transport, and others) fell by 39 percent globally, and by 38 percent in Asia and the Pacific. By contrast, digitally deliverable services experienced only a 3 percent yearon-year contraction in that period, and in fact a small expansion of 1 percent in 2020 in Asia and the Pacific.13

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The pandemic has also seen an increased deployment of digital technologies to enable goods trade. For example, a survey of digital trade facilitation measures such as paperless trade found that the use of these tools increased by approximately 6 percentage points from 2019 to 2021, with rates now above 80 percent in East and Northeast Asia, over 70 percent in North and Central Asia and Southeast Asia, and close to 100 percent in New Zealand and Australia.14 According to a World Economic Forum business survey, the adoption of trade tech—the set of technologies that enables global trade to become more efficient, inclusive, and sustainable—has helped to ease supply chain bottlenecks across different industries through the pandemic period.15 The acceleration in digital transformation through the pandemic may represent a lasting shift. Consumer behavior in embracing digitally delivered services and platform-based e-commerce so far seems relatively sticky. As for digital trade facilitation, there are some signs that some countries may be tempted to shift back to traditional models, although in the Asia Pacific Economic Cooperation (APEC) forum, under New Zealand’s leadership in 2021, the member economies agreed to try to lock in and build on those shifts to digital models at the border.16 Overall, the importance of digital ways of working, doing business, and trading across borders through this period highlights the need to ensure that the trade rules and domestic regulation of the digital economy are as enabling as possible.

The Case for Digital Trade Rules The expansion of digital trade over the last two decades has gone hand in hand with a rise in digital protectionism. Some of this may be the result of poor regulatory design, or in other cases the product of a deliberate effort to favor domestic digital firms; but in both cases, as with more traditional forms of protectionism, digital trade barriers reduce efficiency, distort markets, and inhibit innovation, often imposing significant costs on domestic businesses in other sectors, and consumers.17 The Asia-Pacific region includes some of the most open digital markets (including New Zealand, Singapore, and Chile) as well as some of the most heavily restricted (including China, Russia, Indonesia, and Vietnam).18 In particular, regulations that restrict the flow of data are increasingly widespread and can be costly for businesses and economies.19 Requirements often relate to restricting where the processing or storage of data takes place (“forced data localization”). Such restrictions commonly aim to address legitimate goals relating to privacy, cyber security, law enforcement, or consumer protection, but while the goal may be legitimate, the obligation to store data locally is not necessarily an effective way to achieve

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this, and may come along with additional, potentially sizeable, economic costs on both the affected businesses (in terms of compliance costs and reduced competitiveness) and the imposing country (in terms of overall welfare losses arising from inefficiency and reduced innovation).20 The impacts can be particularly punitive for small businesses, less able than larger firms to absorb the fixed trade costs involved. Other digital trade barriers can include regulatory restrictions on the use of electronic payments, content restrictions, requirements for a local presence in the market and equity limits on investments, proprietary technical standards, and many others.21 Barriers can also include limitations on market access for digitally delivered services, and other restrictions on the cross-border supply of digital services. A Digital Services Trade Restrictiveness Index developed by the OECD shows that restrictions on digital services trade in Asia have been increasing since 2015.22 A lack of interoperability across markets may also inhibit digital trade. Different countries have developed different regulatory systems and standards for digital trade, as well as different policy settings.23 This may mean that the potential for cross-border digital activity cannot be fully realized without adding considerable cost to business activities through compliance with multiple different requirements. Such regulatory heterogeneity is particularly challenging for small and medium-sized businesses, which make up the majority of the business community around the region, representing over 97 percent of businesses and employing 69 percent of the work force in Asia alone.24 Additionally, while for small businesses e-commerce platforms offer significant potential to access customers in a more streamlined way than traditional exporting, there can also be challenges for small firms in engaging with the platforms in terms of asymmetric market power. New digital trade rules can potentially address the range of impediments discussed here, by reducing regulatory and other barriers. Even where markets are already relatively open, however, simply locking in the current regulatory settings through a binding trade agreement has a value, by creating a more secure and predictable business environment which gives firms the confidence to plan, invest, and trade. Analysis by the OECD indicates that a 10 percent increase in digital connectivity between countries raises goods trade by nearly 2 percent and services trade by over 3 percent.25 There is accordingly a case for establishing more responsive and trade-friendly rules to support trade. There is also a case for well-designed digital trade rules from the perspective of enhancing overall economic performance, including growth that provides greater opportunities for small businesses and other groups with unrealized economic potential, such as women entrepreneurs. By creating a more enabling regulatory environment in which small businesses have

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greater confidence and opportunities to participate in digital trade, they will be more inclined to export. OECD research suggests that small businesses with a digital footprint such as a website are more likely to become exporters than their counterparts without a web presence.26

Models of Digital Trade Governance When it comes to digital trade rules, the global landscape is highly fragmented. In the WTO, the core rulebook largely predates the advent of the internet and digital trade, although several fundamental elements of those existing rules do apply to digital trade, primarily because the WTO agreements are technology-agnostic. (In other words, existing commitments apply equally to goods and services that are digitally ordered or delivered, or ordered or delivered through other means, unless explicitly carved out.27) However, there is a widely shared view that a more comprehensive and targeted set of rules is needed in the WTO. A joint negotiation on e-commerce was first announced in 2017 and negotiations launched in 2019. The joint initiative involves a group of eighty-six WTO members—a subset of the full WTO membership—who account for over 90 percent of global trade and broadly represent the range of geographical regions and levels of development across the WTO.28 A small number of important economies are not participating in the Joint Initiative, notably India and South Africa. These countries argue that the plurilateral format cannot be legally reconciled with fundamental WTO principles relating to treating all countries even-handedly through the principle of nondiscrimination, and that the Joint Initiative members must seek consensus across the full membership.29 India has a large and flourishing digital economy and is a large digital services exporter, and is concerned about “data sovereignty” (the right to govern the data generated by its own citizens), at least partly driven by its interest in realizing the full economic value of its data-driven economy.30 The WTO plurilateral negotiations are considering a range of topics, including digital trade facilitation, data flows, nondiscrimination in the treatment of digital goods, how to ensure trust in electronic commerce (including issues around consumer protection and privacy), transparency, cyber security, telecommunications services, market access for digital services, access to online platforms, and competition. The group is hoping to secure convergence on many issues by the end of 2022, but some of the most contentious issues, especially around data flows, will not be easy to resolve.31 Other relevant aspects of digital trade, including regulatory design, standards, and measurement, are being discussed in a range of other international fora, including the OECD, bodies such as the International Standards Organization and more specialized technology and telecommunications

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forums, various United Nations institutions, and even private-sector settings such as the International Chamber of Commerce. However, these separate approaches do not, either singly or collectively, cover the full potential spectrum of digital trade standards, regulations, or policy settings.32 Instead, the main vehicle for the development of cross-border digital trade rules has been bilateral or plurilateral free trade agreements (FTAs).33 Between 2000 and 2020, over half of all FTAs (188 out of a total of 353 concluded agreements) included at least some provisions relating to digital trade, and 83 with dedicated e-commerce chapters. Over the past decade or so, over 60 percent of the concluded trade agreements included digital provisions. Two-thirds of WTO members are now party to a trade agreement with e-commerce provisions.34 As will be explained further below, however, a simple tally belies a significant diversity in coverage and levels of ambition.

Asia-Pacific Digital Trade Rules More than twenty Asia-Pacific economies are participating in the WTO e-commerce plurilateral negotiations described here, and in fact, three— Singapore, Australia, and Japan—are the co-convenors of the joint initiative. Not surprisingly, there is significant overlap in the approaches and specific drafting that those individual WTO members and others from the region, such as New Zealand, have agreed in FTAs and proposed in the WTO negotiations, for example on e-invoicing, paperless trading, or consumer protection.35 It is in the region’s own trade agreements that Asia Pacific is most noteworthy, however. A handful of Asia-Pacific economies, including Australia, Singapore, the United States, Japan, New Zealand, and Korea, have been active in including e-commerce provisions in their bilateral FTAs since the early 2000s. Examples include Australian and New Zealand FTAs with individual Association of Southeast Asian Nations (ASEAN) members such as Singapore and Thailand; the FTA between the ten members of ASEAN, Australia, and New Zealand; the United States–Korea FTA; and Japan’s FTA with the European Union. Japan has also led the development in the Group of Seven (G7) and Group of 20 (G20) on a model of digital trade governance titled “Data Free Flow with Trust.”36 Commentators often point to three major global data regulation “realms” that can be identified. Two come from economies in Asia Pacific: the United States and China37 (the third is the European Union). This is not particularly surprising: the United States and China both stand out in terms of the size and dynamism of their digital economies. Together, they account for about 90 percent of the market capitalization of the world’s largest digital platforms, half of the world’s hyperscale data centers, and some of the highest rates of technological innovation in the world, including in robotics and artificial intelligence.38

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The respective US and Chinese approaches can be seen to have influenced the design of the e-commerce chapters in the two “mega-regional” FTAs in the region: the United States in relation to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and China regarding the Regional Comprehensive Economic Partnership (RCEP). The CPTPP Model: US Influence The CPTPP membership comprises eleven small and middle powers from around the Pacific Rim, many of which are active in digital trade policymaking, including New Zealand, Singapore, Chile, Australia, Canada, Japan, Mexico, and others. The United States withdrew from the CPTPP’s predecessor agreement, the 2016 Trans-Pacific Partnership (TPP), but it is widely seen has having driven the design of the TPP/CPTPP e-commerce chapter—at least in respect of the language on data flows. This language was built on the approach used in the earliest FTA to have a specific provision aimed at ensuring the free flow of data, the 2007 United Kingdom– Korea FTA.39 The CPTPP provides for free flow of data (information), when this is for the conduct of business, but gives the parties the ability to enact measures to regulate data flows for a “legitimate public policy objective.” However, the agreement also specifies that such measures must not constitute a “means of arbitrary or unjustifiable discrimination or a disguised restriction on trade” and must not impose restrictions on transfers of information “greater than are required to achieve the objective.” There is also a prohibition on forced data localization, with an exception clause along the same lines as the exception for data flows.40 Other core rules in the CPTPP include a prohibition on the imposition of customs duties on electronic transmissions; nondiscriminatory treatment for digital goods; and a number of other measures to facilitate digital trade and increase trust. These span paperless trade rules; protection of personal information; online consumer protection; frameworks to minimize spam; a prohibition on forced transfer of source code as a condition for market access; and cooperation on cyber security.41 Not surprisingly given the overlapping membership, a number of subsequent FTAs in the region are modelled on the CPTPP template, including the Chile-Uruguay FTA (2018), the Chile-Argentina FTA (2019), United States–Mexico–Canada Agreement (USMCA) (2019),42 the Australia-Peru FTA (2020), and the United States–Japan Digital Trade Agreement (2020).43 Of particular note, the USMCA and United States–Japan Digital Trade Agreement to a large extent mirror CPTPP provisions, but are even stronger on free data flows (specifically, providing for the inclusion of financial services in the coverage of the prohibition on forced data localization).

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They also introduce a prohibition on forced transfer of algorithms (in addition to source code) and internet intermediary liability protections.44 In short, the US-driven model of data flow governance can be seen to have had a significant impact in shaping FTA rules on digital trade across Asia Pacific, from Latin America through to Southeast Asia. The RCEP Model: China’s Influence By contrast, China could be argued to have had a significant influence in shaping the approach to data flow governance in the other mega-regional FTA, the RCEP. The agreement includes seven signatories to the CPTPP (Australia, Brunei, Japan, Malaysia, New Zealand, Singapore, and Vietnam)—but also China, Korea, and other non-CPTPP ASEAN economies. The legacy of the (US-driven) CPTPP approach is clear to see: on its face, the e-commerce chapter appears rather similar to that of CPTPP. However, the provisions on data flows and forced data localization include considerably more flexible exceptions than their predecessor. Where CPTPP specified that the public policy objectives justifying data-flow restrictions must be “legitimate” (without further qualification), the RCEP specifies that each party is entitled to form its own judgment about the legitimacy of its exceptions. Similarly, the parties are able to impose restrictions on data flows or require data localization on grounds of their own self-determined “essential security” interests. This potentially provides considerably more policy space for RCEP signatories than is found in the CPTPP. There are also other relevant differences between the RCEP and the CPTPP. The RCEP e-commerce chapter is excluded from the FTA’s dispute settlement mechanism (unlike the CPTPP chapter); the RCEP does not include CPTPP-style provisions on source code (a core negotiating interest for a large exporter of digital intellectual property, such as the United States); nor does it include language on nondiscrimination in the treatment of digital goods (China and others are not significant producers of these types of goods, unlike the United States) and it gives less-developed countries a longer period in which to comply with data rules.45 While the RCEP’s relative newness means that there are not—so far— any more recent FTAs that mirror its approach, the sheer heft of the agreement means that it has an outsized impact on the region’s digital trade governance models: it is estimated to encompass around 30 percent of global gross domestic product (GDP).46 What Underpins These Differences? Many of these differences could be attributed to differences in the economic interests and domestic regulatory models of China and the United

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States (and by extension, to the overlapping members of both the RCEP and the CPTPP). The United States is a highly competitive global exporter of digital services and knowledge-intensive products and business models. This can be seen to shape its approach to data flows, whereby it seeks to provide strong protections for firms’ interests. Restrictions on cross-border data flows and forced data localization would add costs to businesses seeking to operate in other markets, and perhaps even close off export opportunities altogether; likewise, producers of source code and other digital intellectual property will want to see strong protections in other markets.47 By contrast, China is a large producer, consumer, and exporter of platform-based physical goods trade, meaning that it has typically prioritized other elements of digital trade chapters, such as the digital trade facilitation provisions. It has also tended to be conservative on data flow regulation. In fact, China’s approach has gradually evolved over some twenty-five years, but one expert commentator has noted that, on the back of a recent raft of restrictive domestic digital economy regulation, for China “the key to data regulation is data security, which has now been elevated to the level of national security and national sovereignty.”48 Separate to digital trade rules, there are also significant ongoing tensions between the United States and China over access to intellectual property (and allegations of forced technology transfer), technological decoupling, and frictions over the control of personal data.49 In short, it would seem hard to reconcile the different approaches of these two digital giants on data flows and other key issues. Leaving aside geostrategic questions, the net effect is that the regional digital economy can be a heavily contested space, and one in which business and investment decisions, and the pursuit of the economic interests of small states, can be fraught.

Small-State Digital Trade Governance: The DEPA Given this contested landscape, a new style of digital economy agreement is increasingly coming to the fore thanks to several small states in the region. While these agreements largely draw on the core disciplines on data flows from the US template (rather than the more flexible Chinese-style RCEP language), they also introduce a range of rules, frameworks, and mandates for cooperation on a far wider range of topics than the CPTPP. Foremost among these new agreements is the Digital Economy Partnership Agreement, signed by New Zealand, Singapore, and Chile in mid2020. This new approach has as its starting point the CPTPP model; this is not surprising considering that all three of the original DEPA signatories were also founder-members of the CPTPP. However, the innovation that the

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DEPA offers is to bring in a far wider range of issues that reflect the more complex and multifaceted realities of end-to-end digital trade. In fact, Article 1 of the DEPA characterizes this as “trade in the digital economy” (rather than “digital trade” per se).50 OECD analysis of the digital economy supports such a conceptualization, making the point that digital trade is not just about a single cross-border transaction but the whole value chain, including elements such as logistics or e-payments. In other words, what is needed is “approaching market openness more holistically, thinking about measures affecting goods, services, and digital connectivity more jointly, and about measures affecting the full value chain, including the enablers of digital trade, and tackling all these through greater international cooperation.”51 The DEPA’s provisions, which are divided into twelve subject-specific “modules” and some additional administrative and institutional sections, can be loosely grouped into four categories. The first category comprises the core disciplines around data, including data flows, data localization and a prohibition on the imposition of customs duties on electronic transmissions, which reaffirm the existing CPTPP commitments in that regard.52 The second group of issues contains provisions to support the facilitation of end-to-end digital trade transactions and build business and consumer trust. These include gold-standard rules that go beyond the CPTPP’s existing rules on paperless trade and personal information protection, including the use of trust marks, as well as a host of new issues such as electronic invoicing, electronic payments, online consumer protection and transparency. Other CPTPP-style provisions, on spam and cyber security cooperation, are also included.53 In addition, the DEPA has a third group of issues that set up cooperative processes and frameworks on emerging technologies and key enabling trade tech, including artificial intelligence, digital identities, fintech, data innovation, open government data, and a rich public domain, as well as undertakings for future cooperation on competition policy, logistics, and government procurement. In most of these rapidly developing areas, progress is on a bestendeavors basis, rather than binding commitments—appropriately reflecting the nascent stage of collective understanding on the economic, legal, regulatory, and societal implications of these technologies for trade.54 Fourth is a group of issues that reflect the broader societal context of the agreement. There are modules that seek to foster greater inclusion in digital trade for small and medium enterprises (SMEs) (including through greater access to information, knowledge-sharing on best practices, and the establishment of an SME dialogue), as well as an inclusion module that seeks to support the participation of women, Indigenous communities, and other groups with untapped potential. There is also a brief best-endeavors nod to the growing importance of a safe online environment.55

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An important thread running through the DEPA is its strong focus on interoperability. This is a critical concept when seeking to design rules that can apply across a range of jurisdictions that potentially have very different systems and even regulatory philosophies in operation—as indeed, the DEPA explicitly recognizes in different modules, for example in relation to personal information protection or digital identities.56 The DEPA encourages the use of various interoperability mechanisms such as autonomous or mutual recognition of regulatory approaches, along with a strong emphasis on the use of application programming interfaces (APIs) and international standards to support the same goal. For example, in respect of electronic payments, the parties “agree to support the development of efficient, safe and secure cross border electronic payments by fostering the adoption and use of internationally accepted standards, promoting interoperability and the interlinking of payment infrastructures.”57 In sum, the DEPA is essentially a vehicle that allows the parties to deepen their shared understanding and good policy design through collaboration and cooperation, including with the business community—for example, mandating close engagement with SMEs and the fintech sector on certain areas—and through the establishment of a joint committee to drive DEPA’s implementation and continuing evolution.58 The DEPA is also intended as a “living” agreement to which new issues can be added.59 This enables a more agile approach to developing digital trade policy than many previous FTA models, which have often required multiyear negotiating processes and sometimes a decade or more before they are upgraded to respond to emerging issues. The DEPA was also explicitly characterized as creating a building block for broader coherence across the region and globally. The New Zealand Ministry of Foreign Affairs and Trade website expresses the “hope that this new agreement will generate new ideas and approaches that can be used by members in the WTO negotiations, and by other countries negotiating free trade agreements or engaging in international digital economy or digital trade work.” 60 Its three originators are small, open, and tradedependent states, all of which have a strong interest in seeing a more seamless and coherent digital market for their exporters—many of which in turn are small businesses. The DEPA is an “open plurilateral,” with a formal accession process.61 The DEPA parties have publicly encouraged other countries to join, provided that they can meet the high standards of the agreement. In October 2021, at a meeting of DEPA ministers, Singapore’s minister for trade and industry, Gan Kim Yong, commented that the DEPA “aims to provide a benchmark for international trade rules and foster interoperability across systems to support businesses in their digitalization and internationalization efforts. We hope more businesses can benefit from agreements such as the

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DEPA, against the backdrop of COVID-19, which has accelerated digital transformation.”62 Korea is currently in the process of accession,63 and China and Canada are also seeking to accede.64

Other Digital Economy Agreements The DEPA is unique as an open plurilateral model. However, several very similar bilateral digital economy agreements (DEAs) are being negotiated in the region, which share the DEPA’s broad topic coverage. Singapore has been at the forefront of driving this model. New agreements include the Singapore-Australia DEA (SADEA), which entered into force in December 2020;65 the United Kingdom–Singapore DEA (UKSDEA, signed in February 2022);66 and a digital partnership agreement between Singapore and Korea, for which negotiations substantially concluded in December 2021, although final signature has not yet taken place.67 SADEA and UKSDEA are both closely linked to comprehensive bilateral FTAs: SADEA in fact is an upgrade to the 2003 Singapore-Australia FTA, designed to replace its e-commerce chapter; while UKSDEA builds on the comprehensive FTA between the United Kingdom and Singapore, which entered into force in February 2021. The digital trade chapter of the New Zealand–United Kingdom FTA, signed in March 2022, also follows a similar pattern.68 Both SADEA and UKSDEA are also accompanied by detailed memorandums of understanding and side letters which set out detailed work programs on topics including, variously, personal data protection, digital identities, artificial intelligence, data innovation, electronic certification of agricultural commodities, digital trade facilitation, e-invoicing, cyber security cooperation, digital trade facilitation, financial tech, and customs cooperation. A further DEA-style agreement in the region is the e-commerce agreement of the Association of Southeast Asian Nations. The agreement entered into force in December 2021. As with other DEAs, it is largely based on cooperation and best endeavors, and designed as a pathfinder toward a “regionally integrated digital economy.”69 It contains commitments on transparency and regulations governing electronic transactions. It also includes provisions on accessing and moving data across borders, subject to certain safeguards including relatively weak language about “working towards eliminating or minimizing barriers to the flow of information across borders.” The ASEAN agreement also has provisions on personal information protection, online consumer protection, paperless trading, electronic signatures, electronic payments, and a commitment to endeavor to lower the cost of logistics, along with a list of areas for future cooperation including on information communication technology (ICT) infrastructure, digital skills

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development, competition policy, and cyber security, among others, and the establishment of an institutional structure to drive progress.70 Overall, however, the balance of the provisions is toward best-endeavors rather than binding commitments.71 There are numerous additional initiatives at an earlier stage in the negotiating process. These include Singapore’s negotiations for a DEA with Vietnam,72 informal talks with the European Union launched in December 2021,73 and a new partnership on digital and green economy cooperation signed with France in March 2022.74 Both the DEPA and DEAs have been able to go further than the CPTPP and RCEP. The coverage is not identical, however, and in some cases the later bilateral DEAs have included even more topics than DEPA, such as digital standards, submarine cables, stakeholder engagement, regional capacity building, law tech cooperation, and cooperation on electronic contracts. In some respects, the DEAs have been able to achieve a higher level of ambition than in the DEPA, including binding commitments in some places, and in others, a greater detail on areas of future cooperation. Of particular note, both SADEA and UKSDEA include financial services in the coverage of the provisions on free flows of data and the prohibition on forced data localization—this is significant given the central role of electronic payment services in online transactions. This higher level of ambition is not surprising: on the one hand, the DEAs are part of a bilateral FTA between like-minded trading partners, and so it would be expected that they include deeper commitments than an open agreement. The DEPA needs to appeal not only to like-minded partners, but also eventually to others who may have a different starting point.

Conclusion It is too soon to assess the impact of these new approaches to digital rules. Some early examination of trade data suggests that there has not been a substantially greater increase in digitally delivered services exports within CPTPP economies than to the rest of the world, except for Japan, Singapore, New Zealand, and Malaysia—but meaningful data is not yet really available.75 Likewise SADEA has only been in effect since December 2020 and the DEPA has only been fully in force (that is, for all three members) since November 2021, so the impact in terms of trade flows largely remains to be seen. Simply put, insufficient time has elapsed since these digital agreements entered into force to judge their impact. In any case, global trade patterns have been significantly disrupted by the pandemic. However, any early data almost certainly underestimates the long-term value of the rules and frameworks that the CPTPP and the new DEPA/DEA

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model encourages. The real benefit is likely to come over time, as responsive trade policy settings, including for new technologies, are developed, and provide greater security and certainty for businesses in the trade environment. Equally, as these models serve to deepen the parties’ shared understanding of the best approaches to regulate emerging issues, it may be that their influence extends even to nonparties: for most provisions, relevant regulatory approaches are de facto most-favored-nation in their application— in other words, end up applying to all trading partners, not just those signatories to a specific trade agreement.76 Reconciling the positions of large economies (not just the United States and China, but also the European Union and others) will ultimately be needed to achieve “global” outcomes. That will not be a simple or quick fix, as the discussion above in relation to the United States and China illustrates. However, these new models offer important platforms for countries both large and small to engage in creative thinking and perhaps even a little friendly regulatory competition, as stepping stones on the way to eventual broader, binding rules. In this way, they demonstrate the role and influence of small states amid great power competition. How can this influence be brought to bear in a practical sense? In the most straightforward scenario, additional countries could join the open plurilateral model of the DEPA. In fact, such a strategy was deployed successfully by this central core group of countries already, in the early stages of what started as the “P3” and eventually became the CPTPP through an accretionary process of bringing on board additional members over a decade. Equally, other countries could integrate topics or even subject-specific “modules” of the DEPA into their own agreements. An early candidate for this approach would be the CPTPP: the parties announced in September 2021 that they would establish a committee on electronic commerce in order to “enhance each Party’s implementation” and “enhance cooperation on electronic commerce matters.”77 Potentially this offers a path to integrate the new DEPA (or DEA) thinking into the original agreement. CPTPP ministers noted in making the announcement that they were “committed to the enhancement of digitalization in the Asia-Pacific region” and that the new committee would explore how to “position the CPTPP to play a central role in global rule-making in this field.”78 Another good candidate would be the ASEAN– Australia–New Zealand FTA, which is currently undergoing an upgrade negotiation which will focus, among other things, on e-commerce.79 On the other hand, there is a risk that the DEPA (or the DEA model per se) may struggle to build sufficient critical mass to achieve greater coherence overall. The number of separate initiatives is increasing across the region. These DEAs, although broadly similar and frequently involving the same pool of participants in variable geometries, contain nuances in both specific approaches and in overall topic coverage. This may ultimately create more

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regulatory heterogeneity, which can in turn make it challenging for small businesses to operate a regional or global trade model. There is also room for confusion about how these individual models will interact with existing or future agreements, including in respect of contentious elements such as data flows.80 Given that context, it is noteworthy that the United States has recently announced its intention to develop a new Indo-Pacific Economic Framework (IPEF). Initial IPEF participants include many of the small states and middle powers discussed above, including Australia, Japan, Korea, New Zealand, and Singapore.81 Digital trade is included in one of the four pillars of the framework. The United States is aiming to “govern our digital economies and cross-border data flows according to open principles, including through a new digital economy framework.”82 Rather than creating a new framework, the United States could of course simply seek to join the existing vehicle of the DEPA. This would not only enable it to benefit from the areas where the DEPA already contains higher levels of ambition than in the existing agreements of the United States, for example in respect of paperless trade and e-invoicing, but the United States could also seek to use the DEPA platform to develop rules on new issues of interest. In fact, such a strategy would parallel the evolutionary path of the CPTPP. For now, the IPEF announcement makes clear that the US prefers to build from its own starting point—and clearly from one situated in the context of the overall IPEF rationale, including its geostrategic considerations. Even in such a scenario, however, there is a strong case for the United States to draw heavily on the creative thinking and nascent common ground coming out of the DEPA and other DEAs, including by creating a more responsive, collaborative, coherent, and holistic model for the development of digital trade rules in the region. In turn, a more coherent Asia-Pacific digital governance framework could help to shape common ground in the WTO e-commerce negotiation—ultimately the most desirable outcome overall for global growth and inclusion.

Notes 1. J. Manyika et al., “Digital Globalisation: The New Era of Digital Flows,” (London: McKinsey Global Institute, 2016), p. 1; UNCTAD, Digital Economy Report 2021. 2. UNCTAD, Policy Brief no. 92, January 2022. 3. Asian Development Bank, AIER, 2020, pp. 191–193. 4. We Are Social, “Digital 2020: April Global Statashot,” April 2020. 5. World Trade Organization and World Economic Forum, “The Promise of Trade Tech: Policy Approaches to Harness Trade Digitalization,” 2022.

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6. Richard Baldwin, The Globotics Upheaval (New York: Oxford University Press, 2019), pp. 61–66. 7. J. López González and J. Ferencz, “Digital Trade and Market Openness,” OECD Trade Policy Paper, no. 217 (Paris: OECD Publishing, 2018). 8. UNCTAD, Policy Brief no. 92; We Are Social, “Digital 2022.” 9. UNCTAD, “Global E-Commerce Jumps to $26.7 Trillion, COVID-19 Boosts Online Retail Sales,” press release, May 3, 2021. 10. OECD, WTO, and IMF, Handbook on Measuring Digital Trade, ver. 1, (2020), pp. 10–11. https://www.oecd.org/sdd/its/handbook-on-measuring-digital -trade.htm. Retrieved March 20, 2022. 11. “How COVID-19 Has Pushed Companies over the Technology Tipping Point—and Transformed Business Forever,” October 5, 2020, https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/how-covid-19-has -pushed-companies-over-the-technology-tipping-point-and-transformed-business -forever. 12. Xavier Cirera et al., “Technology and Resilience,” CEPR Discussion Paper no. 16885, January 2022; CPA Australia, Asia-Pacific Small Business Survey 2020–21. 13. Asian Development Bank, Economic Integration Report 2022: Advancing Digital Services Trade in Asia and the Pacific (Manila, 2022). 14. United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), Digital and Sustainable Trade Facilitation in Asia and the Pacific 2021. 15. World Economic Forum and World Trade Organisation, The Promise of TradeTech: Policy Approaches to Harness Trade Digitalization (Geneva, 2022) 16. APEC, “Leaders’ Declaration,” November 12, 2021. 17. Nigel Cory and Luke Dascoli, “How Barriers to Cross-Border Data Flows Are Spreading Globally, What They Cost, and How to Address Them,” ITIF, July 2021 18. M. Ferracane, Hosuk Lee-Makiyama, and Erik van der Marel, “Digital Trade Restrictiveness Index” (Brussels: European Centre for International Political Economy, 2018). 19. Cory and Dascoli, “How Barriers to Cross-Border Data Flows Are Spreading Globally.” 20. J. Meltzer and Peter Lovelock, “Regulating for a Digital Economy: Understanding the Importance of Cross-Border Data Flows in Asia,” Brookings Working Paper no. 113, 2018; Erik van der Marel, Hosuk Lee-Makiyama, and Matthias Bauer, “The Costs of Data Localisation: A Friendly Fire on Economic Recovery” (Brussels: European Centre for International Political Economy, May 2014). 21. Stephanie Honey, “Asia-Pacific Digital Trade Policy Innovation,” in Addressing Impediments to Digital Trade, by Ingo Borchert and L. Alan Winters, April 27, 2021. 22. OECD, Digital Services Trade Restrictiveness Index. https://qdd.oecd.org /subject.aspx?Subject=STRI_DIGITAL#:~:text=The%20Digital%20Services%20 Trade%20Restrictiveness,Electronic%20transactions. 23. T. Nemoto and J. López González, “Digital Trade Inventory: Rules, Standards, and Principles,” OECD Trade Policy Paper no. 251 (Paris: OECD Publishing, 2021). 24. Asian Development Bank, Asia Small and Medium-Sized Enterprise Monitor 2020, p. 1. 25. J. López González and J. Ferencz, “Digital Trade and Market Openness,” OECD Trade Policy Paper no. 217 (Paris: OECD Publishing, 2018).

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26. A. Andrenelli and J. López González, “Electronic Transmissions and International Trade: Shedding New Light on the Moratorium Debate,” OECD Trade Policy Paper no. 233 (Paris: OECD Publishing, 2019). 27. M. F. Ferracane and M. Li, “What Kinds of Rules Are Needed to Support Digital Trade?” in Rebooting Multilateral Trade Cooperation: Perspectives from China and Europe, edited by B Hoekman, X Tu, and D Wang (London: CEPR Press, 2021), pp. 155–156. 28. WTO, “E-Commerce Co-Convenors Welcome Substantial Progress in Negotiations,” December 14, 2021. 29. “The Legal Status of ‘Joint Statement Initiatives’ and Their Negotiated Outcomes,” February 19, 2021. 30. A. Basu, “Can the WTO Build Consensus on Digital Trade?” October 5, 2021. 31. WTO, “E-Commerce Negotiators Seek to Find Common Ground, Revisit Text Proposals,” February 21, 2022. 32. Nemoto and González, “Digital Trade Inventory,” 33. Note that the terminology for these types of agreements varies according to context. For the purposes of this chapter, we primarily use “free trade agreement,” but in the WTO the term “regional trade agreement” is used, and elsewhere the term “preferential trade agreement” is used, including in the dataset quoted in this paragraph. 34. M. Burri and Rodrigo Polanco, “Digital Trade Provisions in Preferential Trade Agreements: Introducing a New Dataset,” Journal of International Economic Law 23, no. 1, (March 2020): 7. 35. “Proposed Texts: E-Invoicing,” October 9, 2019; “Text Proposal,” April 30, 2019; “Possible Consumer Protection Text,” April 26, 2019. 36. World Economic Forum, “Data Free Flow with Trust (DFFT): Paths Towards Free and Trusted Data Flows,” white paper, June 10, 2020. 37. Henry S. Gao, “Data Sovereignty and Trade Agreements: Three Digital Kingdoms,” October 11, 2021. 38. UNCTAD, Digital Economy Report 2021, p. 2. 39. Mark Wu, “Digital Trade-Related Provisions in Regional Trade Agreements: Existing Models and Lessons for the Multilateral Trade System” (Geneva: International Centre for Trade and Sustainable Development and Inter-American Development Bank, 2017), p. 22. 40. Comprehensive and Progressive Agreement on Trans-Pacific Partnership, art. 14. 41. CPTPP, art. 14 (quoted text from art. 14.1). 42. USTR, USMCA, Chapter 19: “Digital Trade.” 43. USTR, US-Japan Digital Trade Agreement. 44. USTR, USMCA, Chapter 17: “Financial Services.” 45. Regional Comprehensive Economic Partnership Agreement, chap. 12. 46. See https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade -agreements-in-force/regional-comprehensive-economic-partnership-rcep/rcep -overview. 47. Gao, “Data Sovereignty and Trade Agreements.” 48. Ibid. 49. Ryan Hass, Patricia M. Kim, and Emilie Kimball, “U.S.-China Technology Competition” (Washington, DC: Brookings Institution, December 2021). 50. Digital Economy Partnership Agreement, mod. 1, art. 1.1.1. 51. López González and Ferencz, “Digital Trade and Market Openness.” 52. DEPA, mods. 3–4.

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53. Ibid., mods. 2, 4–6. 54. Ibid., mods. 7–9. 55. Ibid., mods. 5, 10–11. 56. Ibid., mods. 4, 7. 57. Ibid., mod. 2, art. 2.7. 58. Ibid., mod. 12, art 10.4. 59. Ibid., art. 12.2. 60. See https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade -agreements-in-force/digital-economy-partnership-agreement/overview. 61. DEPA, art. 16.4. 62. Singapore Ministry of Trade and Industry, “Minister Gan Kim Yong Participates in a Meeting on the Digital Economy Partnership Agreement,” October 5, 2021, https://www.mti.gov.sg/Improving-Trade/Digital-Economy-Agreements/The -Digital-Economy-Partnership-Agreement. 63. Hon Damien O’Connor, “New Zealand Welcomes the Republic of Korea’s Formal Request to Join the Digital Economy Partnership Agremeent,” October 6, 2021. 64. For China: Ministry of Commerce People’s Republic of China, “China Has Submitted an Official Application to Join the Digital Economy Partnership Agreement,” November 3, 2021; for Canada: Global Affairs Canada, “Minister Ng Announces Canada’s Request to Join the Digital Economy Partnership Agreement,” May 22, 2022. 65. Singapore-Australia Digital Economy Agreement, December 2020. 66. UK-Singapore Digital Economy Agreement, February 2022. 67. Korea-Singapore Digital Partnership Agreement, December 2021. 68. New Zealand–United Kingdom Free Trade Agreement, chap. 15. 69. ASEAN, “ASEAN Agreement on Electronic Commerce Official Enters into Force,” December 3, 2021. 70. ASEAN Agreement on E-Commerce. 71. Tham Siew Yean, “Digital Commitments in ASEAN’s Free Trade Agreements,” Perspective no. 163 (2021): p. 4. 72. “Singapore, Vietnam to Work on Digital Economy Agreements,” Straits Times, June 22, 2021. 73. “Singapore, EU in Talks on Strengthening Bilateral Digital Trade, Forming Partnership,” Straits Times, December 8, 2021. 74. Ministry of Trade and Industry, Singapore, “Singapore and France Sign Partnership on Digital and Green Economy Cooperation,” March 14, 2022. 75. Kati Suominen, “The CPTPP’s Impacts on Digital Trade and the Path Forward,” October 2021, p. 10. 76. Wu, “Digital Trade-Related Provisions in Regional Trade Agreements,” p. 28. 77. “Decision by the Commission of the CPTPP Regarding Establishment of a Committee on Electronic Commerce,” September 1, 2021. 78. “CPTPP Joint Ministerial Statement on the Occasion of the Fifth Commission Meeting,” September 1, 2021. https://www.dfat.gov.au/trade/agreements/in-force/cptpp /news/cptpp-joint-ministerial-statement-occasion-fifth-commission-meeting. 79. See https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade -agreements-in-force/asean-australia-new-zealand-free-trade-agreement-aanzfta /upgrading-aanzfta. 80. For example, for the seven countries that are party to both the CPTPP and the RCEP, the exceptions clause for data flows and data localization is more flexible in the latter than the former. While Article 20 of the RCEP provides that if a party

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considers a provision of the agreement to be inconsistent with another agreement, the relevant parties will consult with a view to reaching a mutually satisfactory solution, such processes could be challenging to resolve. 81. Other IPEF partners are Brunei, Fiji, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam; White House, “Fact Sheet: In Asia, President Biden and a Dozen Indo-Pacific Partners Launch the Indo-Pacific Economic Framework for Prosperity,” May 23, 2022. 82. White House, “Indo-Pacific Strategy of the United States,” February 2022.

Part 3 Conclusion

10 Together, Alone: Economic Cooperation After the Pandemic Stephen Noakes and Alexander C. Tan

WE COMMENCED THIS BOOK WITH A DESIRE TO MORE FULLY UNDER-

stand how the Covid-19 pandemic has affected small states within the AsiaPacific region. Our inquiry was driven at the outset by three interrelated questions. First, what were the economic consequences for individual states? Second, how did those states respond as they did? What do their recovery strategies look like, and what motivated these? How have they varied across the region, and why? Third, what is the potential for deepening economic cooperation as the region’s states continue to emerge from Covid-19 conditions? Are the economic pressures of the pandemic likely to help or hinder efforts at trade-based multilateral institutionalization? The pandemic is one of two coincident events at the heart of our approach to these questions. While its economic effects are undeniable, we have understood the pandemic as a critical juncture—albeit a very important one—situated on a timeline already defined by ongoing structural conditions, namely the rise of China and strategic competition with the United States. Covid-19 and its associated economic fallout are therefore best understood in the context of what was already happening when it struck. It is a factor that adds complexity to the calculus of the region’s small states, but was not sufficient or, in many cases, necessary to observe the small state behavior documented in the forgoing chapters. Indeed, much of what is recorded here could be expected to have happened whether there ever was a pandemic, albeit perhaps at a more gradual pace. With this final, summative chapter, we identify a range of responses and themes that emerge from among the previous chapters. Five in particular stand out: (1) that the pandemic acted as an accelerant that gave further momentum to preexisting pressures and trends; (2) that it gave impetus for 193

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experimentation and innovation in national and international responses to the pandemic’s economic consequences; (3) that preexisting conditions and statelevel politics drove diversity in small state recovery strategies; (4) that the combination of varied domestic needs and polarizing pressures beyond the state ultimately restrict the possibilities for multilateral cooperation; and (5) that economic globalization as we know it is not ending, but its scope is likely to be shaped by ongoing geostrategic competition for some time to come.

An Accelerant to Existing Pressures In many of the countries examined here, Covid-19 sped up economic plans already in the making. Jason Young recounts how, in New Zealand, debate has been brewing for more than a decade on the issue of economic reliance on China. Aligned in the cultural and security spheres with the United States and its allies (including fellow “Five Eyes” partners the United Kingdom, Canada, and Australia), New Zealand has been increasingly reliant on China as an export market for dairy, timber, wool, and many other primary products, particularly since a free trade deal was concluded in 2008. The trade relationship with China is viewed as problematic for a number of reasons, ranging from China’s reputation as an authoritarian human rights violator to the rationale that it is dangerous for any economy—not to mention one as small and geographically isolated as New Zealand’s—to be too dependent on any one foreign partner. Thus, New Zealand’s foreign minister, Nanaia Mahuta, has spoken publicly of an urgent need to diversify and “not have all [New Zealand’s] eggs in one basket.” Taiwan provides another interesting case in which existing economic policies were accelerated, as several chapters attest. Sung-Young Kim argued in his chapter that Taiwan, like Singapore and South Korea, has pursued a “green growth” strategy since the late 2000s, with green initiatives becoming an even more pronounced feature of the country’s economic profile since Tsai Ing-wen came to office in 2016. However, technological competition in green industries between the United States and China pushed Taiwan and others to keep pace with larger competitors or risk being left behind. Covid-19 only fueled that push, Kim contends. Likewise, Roy Lee calls attention to the way “push” and “pull” factors, notably China’s Covid19 lockdowns and the turn of the United States to strategic autonomy, have increased pressures on Taiwan to adapt to changes in the global supply chain in order to ensure its post-pandemic prosperity. Taiwan’s economy was always reliant on global supply chains, but the pandemic made proactive adjustments for the sake of the superconductor industry a real priority. Covid-19 may serve as an accelerant to international level trends as well. Charles Finny argues that economic protectionism by the United

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States under the Trump administration, combined with a more general disengagement from the region, left a vacuum in what he calls the “regional architecture” of Asia Pacific. In turn, this bred new uncertainties for the region’s small states, many of which have substantive ties to both the US and its main geostrategic rival, China. The economic consequences of the pandemic have lent a further sense of urgency to the situation.

A Source of Innovation The pandemic was also the driver of significant ingenuity, providing impetus for experimentation with new forms of economic activity and, in some cases, even social and political organization. Siedlok, Hamilton-Hart and Shen add to an already sizable literature dealing with the connection between institutional forms and economic outcomes in East Asia. Specifically, they show how government coordination with the private sector provided the right environment for a scaling-up of mask production during Covid-19. In the Taiwanese case they explore, state–private sector collaboration in a mature industry helped to facilitate its rejuvenation, providing a measure of added economic stability when it was sorely needed. Steven Ratuva’s chapter similarly shows how pandemic conditions prompted a turn toward social and solidarity-based economies in order to meet human needs in badly hit Pacific Island states. Ratuva describes how, instead of relying strictly on humanitarian assistance from donor states in the regions, such as Australia and New Zealand, Pacific communities undertook a reinvention of long-established barter systems for the distribution of goods and to shore up human security at a time when it appeared conventional markets could not provide either one. Thus, Ratuva casts social and solidarity-based economies as an alternative to participation in global capitalism and a homegrown source of resilience for Pacific Islanders in the face of Covid-19’s economic effects. Stephanie Honey outlines the trends and possibilities for innovation beyond the state level. The disruptions caused by the pandemic, such as facility closures and stay-at-home orders, have driven major changes to the way business is done across the region, and increased the push for adoption of digital technologies in many areas. However, there exists no single model of digitalization, nor have any rules of digital trade been broadly agreed. Honey argues that while the regional governance of digital trade is still nascent, small states of Asia Pacific can play an expanded role in creation of digital trade rules agreements. Development of a more orderly regulatory system, she argues, would come with several benefits. Most significant, it would enable greater predictability and security for business in Asia Pacific, and thereby assist with post-Covid economic recovery

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across the region and in constituent countries. Assuming the rules are robust, a functional digital trade regime may also help to remove existing structural barriers for women-owned and small businesses, alleviating some of the additional inequities left behind by Covid-19. A key challenge in creating digital trade agreements, however, arises from the fragmented nature of the present regulatory landscape. In Asia Pacific, efforts to generate such a system are divided at present between a US-influenced Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) model on the one hand, and a China-brokered Regional Comprehensive Economic Partnership (RCEP) on the other. The Digital Economy Partnership Agreement (DEPA), signed by New Zealand, Singapore, and Chile in mid-2020, therefore stands out as an important attempt by small states in the region to bypass polarizing pressures and collaborate for common benefit.

The Diversity of National Responses Covid-19’s economic effects were a major economic setback virtually everywhere but were experienced differently and unevenly across small states of Asia Pacific. Not all of the states examined here began the pandemic on equal economic footing, a fact that shaped state-level responses. Ratuva draws a direct connection to human security frameworks, noting how the responses of Pacific societies were driven in part by a level of economic deprivation not found in some of the other countries considered (indeed, Ratuva notes that social solidarity economies operated alongside in-bound humanitarian aid, serving as an alternative yet complimentary means of support). Yet Ratuva’s discussion of the Pacific Islands’ responses speaks to a broader truth about the how the pandemic was experienced, and how we as researchers ought to think about its empirical import: Covid-19’s economic impacts and the responses taken by individual states are filtered by the domestic contexts from which they arose. This is what explains the diversity of national recovery strategies revealed in our chapters, which are mediated by domestic political debates, and to some degree, by the institutions, processes, and individual actors that animate those debates. Often the debate was about the positionality of a given small state toward one or both superpowers, or its view of itself in the wider world. At times, such debates struck close to the heart of differing views about national identity. Benjamin Ho Tze Ern describes Singapore’s Covid-19 response as the product of a debate between two demographics—“cosmopolitan elite” who understand Singapore as an open and globally connected city whose way of life is dependent on fluid cross-border commerce, and “heartland supporters” who did not as readily support the reopening of

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borders for the sake of gross domestic product. Dependent on support from both camps and needing to demonstrate it represented most citizens’ wishes, the ruling People’s Action Party (PAP) was forced to tread a fine line between these two positions. Thus, Ho contends that Singapore’s Covid-19 response has been a debate over the very nature and composition of society, one complicated by a blend of competing self-images. In the New Zealand case discussed by Young, the debate was not as explicitly oriented toward national identity, but nonetheless comes infused with a sense of competing priorities, and even values. Indeed, New Zealand faces a “double jeopardy” scenario in this regard, being sandwiched between China, on whom it depends for trade, and the Anglo-American sphere with which it shares security arrangements and culture, as well as political ideology and institutions. This tension is mirrored at the domestic level, where the debate is often depicted as a trade-off between pragmatic economic engagement on the one hand, and principled politics on the other. While there has been increased friction with China over political issues in recent years, especially human rights, some worry this may cost the country its largest and most lucrative trade partner, with potentially catastrophic consequences for New Zealand business at a time when many are still reeling from the effects of Covid-19. True, the government recently signaled moves toward greater trade diversification, but a viable commercial alternative to China has yet to be found. Thus, to ask “how much is too much” dependence is really to inquire about the available options and the extent to which New Zealanders are willing to put political differences with China aside to safeguard post-pandemic prosperity.

The Incentives for Coordinated Multilateral Responses Some of the authors whose work is incorporated here strike a markedly optimistic tone about what the pandemic might ultimately portend for regional governance, or at least view Covid-19 and its economic fallout as a chance to reimagine shared futures. Yet on balance, we maintain a belief in the need to be realistic about what those futures will look like and about the prospects for multilateral economic cooperation. As noted above, the chapters here point out that Covid-19 has primarily served to speed up or intensify the competitive pressures small states feel. This has a highly limiting effect on the prospects for concerted multilateral agreements to emerge in the aftermath of the pandemic, or for the region’s small states to address their common challenges together. Those pressures come from internal and external sources. Most of the chapters here suggest that United States–China competition appears likely

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to continue and to deepen, increasing the impetus for small states to bandwagon. The previous section highlights how the pandemic has also flamed a great deal of domestic debate about government responses to Covid-19 and the direction of economic recovery, including how soon borders ought to reopen (if they should at all), or whether a given recovery plan is too reliant on support from one or the other superpower. Several chapters also point out that economic decisionmaking frequently has far-reaching security implications. Considered in tandem with the diversity and complexity of domestic circumstances—including institutional configurations and attitudes at play across the region—these pressures further limit the alreadylow probability for an Asia-Pacific trade regime to emerge anytime soon, let alone as a vehicle for immediate post-pandemic recovery. Of course, small states are more than just pawns in a geopolitical game. It is not correct to claim that they have no agency or influence over their economic recovery plans. Indeed, this book has highlighted the range of choices before them. However, agency simply means an ability to choose the preferred path to realizing national interests—it is hardly a guarantee that those interests will converge or that or paths will cross. Even if they did, the incentives to work for common solutions appear weak at present. Hence, while economic recovery is something the region’s small states face together, they are likely to go it alone when it comes to pursuing these in the near to medium term at least.

The Future of Globalization Finally, we return to the question of what Covid-19 means for economic globalization. On the face of it, both the pandemic, with its many port closures, lockdowns, and supply chain disruptions, might seemingly signal the end of the borderless free flow of capital, both human and financial. Many of Asia-Pacific’s small states have been forced to pursue more inwardlooking economic recovery strategies, often as a concession to public opinion divided over the way forward. In some instances, the pandemic pushed along alternative economic models based on community, barter, and selfreliance, as noted in some Pacific Island states. Still others have had to rethink the pre-pandemic configuration of key trade partnerships, or encourage new industries, or reinvigorate well-established ones. Similarly, United States–China rivalry has been interpreted as a possible portent of globalization’s decline, or at least a retreat from the unipolar world that came about at the Cold War’s end, with its triumphalist rhetoric about the victory of global capitalism. If economic globalization came about because of major changes in geopolitics, couldn’t its decline be caused by another such change?

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Our analysis suggests we ought not jump to conclusions about globalization’s future for several reasons, but not because it hasn’t experienced disruptions since the pandemic began. Certainly it has, and this book began with an acknowledgment of these and their uneven effects cross-nationally. Rather, we conclude that economic globalization in Asia Pacific is more likely to be about diversification than harmonization in economic policy after the pandemic. Small state behaviors are likely to be informed by a mix of domestic politics and the alignment of interests derived from domestic sources with the designs of one superpower or the other, instead of expressed through some new regional multilateral forum with its rules agreed by all. Moreover, we suggest that, even if globalization were declining, it would be illogical to attribute that decline to either the rise of United States–China rivalry or the pandemic directly. Indeed, China’s presence as a force in regional geopolitics predates both Covid-19 and the current economic situation of the region by a decade or more. Yet there was little talk of the implications for globalization until very recently. This implies that China’s rise and strategic competition in the region is not sufficient in its own right to cause globalization’s outright end, were such a momentous process underway. Finally, we have argued that Covid-19 has been a driver of economic changes already underway in many countries and which would proceed whether Covid-19 had arisen, albeit probably more slowly. Thus, while the pandemic has provided an important push for change in the economic policies of small states and has confounded globalization temporarily, it is unlikely to shake capitalism to its core.

Conclusion Since the end of World War II, small states of Asia Pacific have witnessed and lived through superpower rivalry during the Cold War, numerous rounds of international economic shocks like the oil crisis of the 1970s, debt crises of the 1980s, Asian financial crisis of 1997–1998, and the global financial crisis of 2007–2008. They are, most definitely, no strangers to international economic and political volatility. Throughout it all, they have managed not only to find ways to weather these political and economic storms, but also somehow have managed to adjust, adopt, adapt, but more importantly to thrive to deliver stability, growth, and security for their citizens. The challenges brought about by the Covid-19 pandemic and the heightened strategic rivalry of the United States and China may be different from those of the past, but they are ultimately still very familiar to the small states of Asia Pacific. The authors of this volume have all pointed to the diverse approaches undertaken by these states to manage the challenges and uncertainties in the post-Covid world. They bring our attention to the fact

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that these small states anticipate these challenges, develop innovative and ingenious policies, adapt, and innovate to not only survive but to thrive. If contemporary history of the small states of Asia Pacific is a good guide to the future, then despite the enormous challenges of the post-Covid-19 pandemic world, we can be cautiously and quietly confident that these small states will manage to do relatively well.

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The Contributors

Charles Finny served as New Zealand’s deputy head of mission in Beijing,

head of mission in Taipei, and first secretary to the New Zealand High Commission in Singapore. He was responsible for launching the China– New Zealand Free Trade Agreement, for which he was New Zealand’s lead negotiator. Natasha Hamilton-Hart is professor in the Department of Management and

Inter-national Business at the University of Auckland, New Zealand. Benjamin Ho Tze Ern is assistant professor at the China Programme, S. Rajaratnam School of International Studies, in Singapore, and deputy coordinator of the MSc (International Relations) program. Stephanie Honey is deputy executive director of the APEC Business Advi-

sory Council, associate director of the New Zealand International Business Forum, and cofounder of Global Trade Insights, a business offering executive education in trade policy. Sung-Young Kim is senior lecturer in politics and international relations in

the School of Social Sciences at Macquarie University, Australia. Roy Lee is senior deputy executive director of the Taiwan WTO and RTA Center, Chung-Hua Institute for Economic Research, in Taipei. He previously served as a member of the Advisory Committee of Trade Negotiation, Executive Yuan, Taipei.

229

230

The Contributors

Stephen Noakes is senior lecturer in politics and international relations

and director of the China Studies Centre at the University of Auckland, New Zealand. Steven Ratuva is director of the Macmillan Brown Centre for Pacific Studies at the University of Canterbury. He is the first Pacific Islander and foreign national to win two esteemed awards, the 2020 Metge Medal by the Royal Society of New Zealand–Te Apārangi and the 2019 University of Canterbury research medal. Hsiao-Chen Shen holds a master of legal studies in corporate and commer-

cial law from the University of Auckland, New Zealand. Frank Siedlok is associate professor in strategy and enterprise at HeriotWatt University, Edinburgh, United Kingdom. Alexander C. Tan is professor of political science and international relations

at the University of Canterbury, New Zealand. He is also honorary professor at the New Zealand Defence Force Command and Staff College and associate director of the NZ Contemporary China Research Centre in Wellington, fellow at the John Goodwin Tower Centre for Political Studies in Dallas, Texas, adjunct university chair professor of political science at National Chengchi University, Taiwan, and a member of the Public Advisory Committee on Disarmament and Arms Control. Neel Vanvari is a PhD candidate in the Department of Political Science and International Relations at the University of Canterbury, New Zealand. Jason Young is director of the New Zealand Contemporary China Research

Centre and associate professor of political science and international relations at Victoria University of Wellington, New Zealand.

Index

Abe, Shinzo, 10 agricultural commodity exports: New Zealand-China trade growth during the pandemic, 41 agriculture: New Zealand’s economic base, 39 aid intervention in PIC economies, 53, 57, 63–64 America First concept, 150–152, 165 American Chamber of Commerce, 131 American Samoa: Covid-19 cases in the PICs, 55, 55(table) Aotearoa/New Zealand. See New Zealand Ardern, Jacinda, 36, 43 Asia Pacific: defining, 8–11 Asia Pacific Economic Cooperation (APEC), 4, 7–8, 9(fig.), 174 Asian Development Bank (ADB), 8, 54 Association of Southeast Asian nations (ASEAN): China’s military incursions, 158; defining Asia Pacific, 10; digital economy agreement, 183– 184; digital trade regulation, 177–178; effect of US-China competition, 164; GDP growth projections, 2020-2022, 8(table); growth rates for total export and electronic products, 2020, 136(fig.); Taiwan’s offshore production options, 132–137; US-China trade rivalry, 130

AstraZeneca: donations to PICs, 57–58 Australia: APEC countries, 2019–2020, 9(fig.); digital trade during and after the pandemic, 174; economic intervention in Pacific communities, 53; effect of the Omicron variant on border closings, 149; external responses to Covid-19 in PICs, 57– 58; FTA negotiations with India, 161–162; GDP growth projections, 2020-2022, 8(table); New Zealand’s trade agreement, 39; overdependency on PRC market, 44; rebuilding the PIC economies, 63; semiconductor manufacturing, 142; Step-Up policy in the PICs, 58, 64; Taiwan’s free trade agreements, 159–160 Australia–United Kingdom–United States (AUKUS) trilateral security pact, 159 backward participation in the GSC, 119– 120 Balakrishnan, Vivian, 44 balance of power: Singapore’s foreign policy, 21 bandwagon behavior of small states, 11– 12, 197–198 banking: Singapore’s Green Plans, 109 barter: digital barter system, 62 Belt and Road Initiative (China), 54, 58

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232

Index

Biden administration: Indo-Pacific Strategy, 10, 156–157; potential return to multilateralism, 155–157; US strategic competition with China, 128; US-China competition over green technologies, 104 bifurcation of the global economy, 44–45 big-power contestation: PICs’ economic rehabilitation, 64 bilateral preferential trade agreements: New Zealand, 40 BioNTech vaccine, 69–70 Bipartisan Infrastructure Deal (US), 104 bipolar world: post-Cold War shift from, 151; US-China competition, 3–4 Bloomfield, Ashley, 2 border closures: effect of the Omicron variant, 149; evolution of digital technologies, 172–183; impact on services, trade, and tourism, 40–41, 154; Pacific Island countries, 53, 63; pressures to reopen, 149; rebuilding the PIC economies, 63; Singapore, 24–26, 29 boundaries: defining Asia Pacific, 8–11 British Caribbeans: Taiwan’s investment, 2018-2020, 132, 133(fig.), 135 business sector: economic-political intersection of New Zealand’s trade with China, 47–48 business-state sector cooperation. See mask production (Taiwan) capabilities: defining small states, 11–12 carbon emissions: China, 101 carbon lock-in, 103–104 carbon trading: Singapore’s Green Plans, 109 Central Epidemic Command Center (CECC; Taiwan), 76–77 Centre for Strategic and International Studies (CSIS) report, 157–158 Chan, Jimmy, 30 Chee Soon Juan, 26 Chen Chien-jen, 76 Chen Chi-mai, 75–76, 79 Cheng, Calvin, 25, 27, 29–30, 32(n28) Chile: DEPA, 180–181 China, People’s Republic of, 7–8; aid to PIC economies, 63–64; digital trade regulation, 177–180; East Asia’s trade partners, 97; economic impact

of Covid-19 on Taiwan, 130–132; economic rebound, 35; effect of political and economic change on multilateralism, 158; effect of Taiwan’s isolation on the pandemic response, 71–72; export controls, 142; external responses to Covid-19 in PICs, 57, 59; fossil fuel use, 101; GDP growth projections, 2020-2022, 8(table); Global Value Chain Participation Index, 119–120; green energy shift, 101–103; growth rates for total export and electronic products, 2020, 136(fig.); humanitarian support of Pacific communities, 54; illegal mask imports to Taiwan, 82; New Zealand’s economic reliance on, 194–195; New Zealand’s export and import sectors, 40–42; New Zealand’s human rights and dependency concerns, 46–47; New Zealand’s rules-based international order, 36–38, 40–41; New Zealand’s security and dependency concerns, 42–45; Obama’s “Pivot to Asia” policy, 149–150; onset of the pandemic, 2; post-Cold War trade relations strategy, 38; Singapore’s heartlanders’ connection to, 23; Sinovac vaccine, 26–28, 57–58; Taiwanese investment, 2010-2020, 127(fig.); Taiwan’s ECM business model, 118; Taiwan’s ECM-related supply chain adjustments, 2020, 129(table); Taiwan’s GSC participation, 139–142; Taiwan’s migration of production to, 122–124; Taiwan’s vaccine procurement, 69– 70; unemployment in APEC countries, 2019–2020, 9(fig.); US and European strategic autonomy policies, 137–139; US competition for green technology, 103–104; US policy under Trump, 152; vaccines, 33(n36); Western criticism of New Zealand’s China policy, 44. See also United States-China competition China+1 approach, 118, 124–132, 143 CHIP Act, 141 Chunghwa Post, 81 circular economy initiatives, 105

Index civil service organizations: Taiwan’s economic and political development, 72–73 civil society organizations: Taiwan’s mask distribution and sales monitoring, 81–82 climate crisis, 56; Australia’s pariah states, 58 coercion: China’s aggressive diplomacy, 158; concerns over PRC economic coercion against small states, 43–44; leveraging interdependent relationships for political ends, 37– 38; Singapore’s vaccine options, 28–29, 33(n41) Cold War, end of: changes in US-China relations, 38 collective action: Taiwan’s mask production, 69–75, 78–79, 82–85 colonialism: creation of the social solidarity economy, 60; New Zealand’s trade policy history, 38–39 commitment problems: Taiwan’s mask production, 73–75, 78, 83 Common Development Vision proposal (China), 162–163 common good: Taiwan’s medical mask production, 81–82 Communicable Disease Control Act (Taiwan), 76–77 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP): China’s RCEP model, 179–180; data flow protection, 189–190(n80); DEPA and RCEP coverage, 184; DEPA model, 180– 181; digital trade governance, 196; impact of digital governance, 184– 186; New Zealand’s strategy, 39–40; rules and members, 178–179; US post-pandemic engagement in Asia Pacific, 155–164 Cook Islands: Covid-19 cases in the PICs, 55(table); rebuilding the PIC economies, 63 coordinated multilateral responses, 197– 198 coordination problems: Taiwan’s mask production, 73–74 CoronaVac vaccine, 26–28 corruption: Taiwan’s businessgovernment cooperation, 72–73

233

cosmopolitan elites, Singapore’s: building an island city-state, 22–24; policy balancing heartland supporters and, 19–20; vaccine options, 27, 29 COVAX program, 57–58 Covid-19 pandemic: China’s zero-Covid policy, 48(n2); digital trade during and after, 173–174; diversity in national economic responses, 196– 197; driving economic ingenuity and innovation, 195–196; economic impact, 130–132; effect on trade flows of goods, 154–155; incentivizing coordinated multilateral responses, 197–198; New ZealandChina trade growth, 40–41; pre-pandemic economic context, 193– 194; Taiwan’s casualties, 130; Taiwan’s state- and private-sector cooperation, 69–70 Critical Supply Chain Review report, 120 critical supply chains, 141(fig.) Dai Yunjin, 78 dairy exports: New Zealand-China trade growth during the pandemic, 41 data flows, 189–190(n80); CPTPP governing, 178–179; DEPA provisions, 180–181; digital economy agreements, 183–184; digital technologies transforming trade, 172– 173; digital trade regulation, 174–175, 177–178; IPEF framework, 186; RCEP governance model, 179; US-China competition and governance approaches, 179–180 deaths, Covid-19: cases in PICs, 55; global figures, 2; Singapore, 19, 29 debt, national: China’s aid to PICs, 64 Delta variant of Covid-19, 2, 6, 25–26, 33(n34) democratic corporatism: defining small states, 12 democratization: Taiwan’s economic development, 72–73 developmental environmentalism, 100 developmental states, 86, 110; East Asia’s green economic initiatives, 99; effect of the US-China competition on Korea, Taiwan, and Singapore, 106, 110; ingredients of, 99–101; Taiwan’s pandemic response, 70–71;

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Taiwan’s state-private cooperation, 72–73, 75, 83 diabetes: PICs, 61 digital barter system (DBS), 62 digital economy agreements (DEAs), 183–184 Digital Economy Partnership Agreement (DEPA), 157–159, 180–181, 184– 186, 196 digital products, 172 digital technologies and trade: advocating regulation, 174–176; Asia Pacific rules, 177–180; bilateral digital economy agreements, 183– 184; governance models, 171–172, 176–177; impact of digital governance, 184–186; small-state governance, 180–183, 195–196; transforming trade, 172–173 diplomatic relations: China’s approach in the PICs, 58–60, 64; China’s increasing coercion, 158; effect of Taiwan’s isolation on the pandemic response, 71–72; managing economic relations with China, 35–37, 44; mask and vaccine donations, 92–93(n132); Singapore’s closing/opening dynamic, 24, 27; Singapore’s nuanced foreign policy, 21–22 diversification, economic: China+1 approach, 124–125, 131–132; economic rebuilding in the PICs, 64– 65; evolution of New Zealand’s trade relations with China, 42, 46–48; New Zealand’s economic response to the pandemic, 197; Taiwan’s GSC participation, 140; US strategic autonomy policy, 137–138 domestic institutions and policies, 101; Hong Kong dissent over Covid measures, 29; Singapore’s foreign policy, 21–22; Singapore’s heartland population, 25–26 domestic well-being, Singapore’s, 26 dual-use technologies, 43–45 East Asia. See Korea; Singapore; Taiwan e-commerce, 173 economic crisis, New Zealand, 39 economic growth: China’s zero-Covid policy, 48(n2); economic trends resulting from Covid, 6–8; GDP

growth projections, 2020-2022, 8(table); GDP trends, regional comparison, 2021 vs. 2022, 7(fig.); impact of China’s zero-Covid policy on Taiwan, 130–132, 132(table); regulating digital trade, 175–176; Taiwan’s mask production, 70–71; Taiwan’s per capita GDP growth, 1990-2020, 123(fig.); Taiwan’s policy interventions, 72–75 economic liberalism: New Zealand trade policy, 36–37 economic policy: Singapore’s objectives and fundamentals, 21 economic trends, 6–7 economics-security nexus: New Zealand’s trade relations with China, 36–37 electric vehicles (EVs): China’s commercialization, 102 electrical machinery and equipment: New Zealand-China trade, 42 Electronic Contract Manufacturing (ECM) model, 117–124; China+1 approach, 124–126; economic impact of Covid-19 on Taiwan, 131–132; effects of the US-China trade war, 128–129; offshore production relocation options, 132–137; Taiwan as investment destination, 135 electronics industry: ECM companies’ capacity, 130; global top ten ECM companies, 122(table); growth rates for total export and, 136(fig.); impact of Covid-19 on Japan’s exports, 135; Taiwan’s ECM-related supply chain adjustments, 129(table), 130; Taiwan’s manufacturing in China, 120, 122–124 embedded autonomy, 72–73; East Asia’s public–private sector cooperation, 100 empowerment: social solidarity economy, 60–62 energy, green. See green economy initiatives; green energy technology Energy Market Authority (EMA; Singapore), 109 enterprise income tax reform: China+1, 126 environmentalism, developmental, 100 Envision Digital, 109

Index European Union (EU), 185; digital trade rules, 177; free-trade agreements, 164, 184; global greening efforts, 102; growth rates for total export and electronic products, 2020, 136(fig.); PRC trade practices, 43; strategic autonomy trade policy, 137–138; supply chain autonomy, 118, 139, 141; Taiwanese investment destinations, 132, 140; Taiwan’s investment, 2018-2020, 133(fig.); Taiwan’s mask and vaccine donations, 92–93(n132) export controls, 142; concerns over New Zealand’s dual-use technology exports, 44–45 export growth: New Zealand-China trade growth during the pandemic, 41 export portfolio: changes in Taiwan’s 2001-2021, 121(fig.); growth rates for total export and electronic products, 2020, 136(fig.); Taiwan’s GSC participation, 120 factionalization of Asia Pacific, 4 Fiji: Australia’s medical assistance, 58; Covid-19 cases, 55, 55(table), 56; Cyclone Harold, 61; digital barter system, 62; rebuilding the PIC economies, 63; social protections measures, 61 floating energy storage system (ESS), 109 forced data localization, 174–175 foreign direct investment (FDI) flows, 7 foreign investment: in the British Caribbeans, 135; China+1 approach, 124–126; China-New Zealand trade, 36, 40, 45; Covid-19 disruptions, 130–132; digital barter system, 62; moving Taiwan’s manufacturing to China, 122–124; Singapore’s opening, 31; Taiwanese investment in China, 2010-2020, 127(fig.); Taiwan’s ECM supply chain adjustments, 129(table); Taiwan’s offshore production relocation options, 132–137; US investment in Singapore, 109–110; variations in flows, 7. See also Electronic Contract Manufacturing model foreign policy: effect of US-China competition on small states, 163;

235

independence framing New Zealand’s, 39; shift in US policy under Trump, 151–152; Singapore’s objectives and fundamentals, 20–22 Formosa Plastic, 79 forward participation in the GSC, 119– 120 fossil fuel use, 101, 103–104 free trade agreements (FTAs), 151, 188(n33); Biden’s economic and trade policies, 156; CPTPP governing digital trade, 178–179; digital governance, 185; digital trade governance, 177; New Zealand-China relations, 40–41; Taiwan’s, 159–160; terminology, 188(n33); UK and New Zealand, 161 French Polynesia: Covid-19 cases, 55, 55(table) Friedberg, Aaron, 38 Gan Kim Yong, 182–183 Gelsinger, Pat, 141 geographical concentration of critical products, 139–140, 141(fig.) geography: effect on Singapore’s foreign policy, 20–21 geopolitical issues: decline of US engagement in the Asia Pacific, 149– 150; external responses to Covid-19 in PICs, 57–60; humanitarian aid to Pacific communities, 53–54; rebuilding the PIC economies, 63–64; US engagement before the pandemic, 150–154 Germany: PCR test development, 83 global city, Singapore as, 21 global economy and globalization: domestic institutions of developmental states, 99–101; the impact of Covid-19 on globalization, 3, 198–199; pandemic conditions shifting economic policies, 195–196; Singapore’s policy objectives and fundamentals, 21; Taiwan’s economic development history, 72 global financial crisis (2007–2008): New Zealand’s expanding trade with China, 36 global supply chain (GSC): China+1 approach, 124–126; China-US rivalry and, 118–119; defining, 117;

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framework of critical vulnerabilities and solutions, 141(fig.); impact of China’s zero-Covid policy, 131; implications for Taiwan’s participation, 139–142; security and interdependence concerns with New Zealand-China trade policy, 45; siege mentality preventing international engagement, 43–44; Singapore’s Green Plans, 109; strategic autonomy policy, 137–139; supply chain nationalism, 140–141; Taiwan’s ECM and offshore production, 119–124; Taiwan’s ECM-related supply chain adjustments, 2020, 129(table); Taiwan’s green development programs, 107; Taiwan’s mask production, 70–71; Taiwan’s offshore investment options, 132– 133; US strategic competition with China, 128 global value chain (GVC): Taiwan’s participation index, 119–120, 119(table), 120, 124 Goh Chok Tong, 22–23 governed interdependence, 72–73; East Asia’s public–private sector cooperation, 100 great power competition. See United States-China competition great powers: defining small states, 11–12 green economy initiatives: Covid pandemic effects on, 98–99; hybridized industrial ecosystems, 100–101; Korean Green New Deal, 105–106; origins and elements of, 98; the pandemic accelerating, 194; Singapore’s Green Plans, 108–110; Taiwan’s Green Economy Programs, 106–108 Green Economy Program (Taiwan), 106– 108 green energy technology: America’s competition with China, 103–104; China’s shift to, 101–103 green finance: Singapore’s Green Plans, 109 green industries: high-tech manufacturing, 100 Green Plans (Singapore), 108–110 Guam: Covid-19 cases, 55, 55(table)

handwashing: Covid-19 infection in the PICs, 56 Harris, Kamala, 162–163 Hawke, Alex, 58 health systems: Covid-19 infection in the PICs, 56 heartland supporters, Singapore’s: policy balancing cosmopolitan elites and, 19–20; public housing, 32(n14); Singapore’s cosmopolitan vision, 22–25; vaccine options, 27, 29–30 hegemonic peace replacing the peace of equilibrium, 151 hegemonic stability theory, 153–154 hegemony: global power shifts after the Cold War, 151; humanitarian aid, 54, 60; Trump’s shift away from multilateralism, 150–154; US creation of an economic vacuum in Asia Pacific, 165; US hegemony and global stability, 153–154 high-tech industries: China’s strategic industry policies, 125; New Zealand’s concerns over dual-use technologies, 43 Hirschman, Albert, 37 Hon Hai Precision Industry, 120 Hong Hui-song, 76 Hong Kong, China: Covid-19 cases and deaths, 33(n49); New Zealand’s human rights concerns, 46; New Zealand’s security concerns, 42–43; Singapore’s domestic Covid restrictions, 29; unemployment in APEC countries, 9(fig.) Hsu Wen-hsien, 77–78 Huang Po-hsiung, 80 human rights abuses: effect on New Zealand-China trade, 46–47 human security, 196–197; Covid-19 in the PICs, 57; economic and social effects of the pandemic, 53–54; impact of Covid-19 on Pacific communities, 54–57; needs of recovery plans, 6 humanitarian aid to PICs, 53–54, 57–60 humanitarian corridor, Australia’s, 58 hybridized industrial ecosystems (HIEs), 100–101, 105–106, 108, 110–111 Hydrogen Convergence Alliance (H2 Korea), 106

Index IC Industry Investment Fund (China), 138–139 identity, national: Singapore, 31 independence: framing New Zealand’s foreign policy, 39 India: engagement in the international order, 164; FTA negotiations with Australia, 161–162; GDP growth projections, 2020-2022, 8(table); Taiwan’s investment, 2018-2020, 133(fig.) indigenous peoples: New Zealand’s trade policy history, 38–39 Indo-Pacific, defining, 10 Indo-Pacific Economic Framework (IPEF), 156–158, 164, 186, 190(n81) Indo-Pacific Strategy, Biden’s, 10, 156– 157 Industrial Technology Research Institute, Taiwan, 77–78 industrialization: Korean Green New Deal projects, 106; sunrise industries of Northeast Asia, 100; US and China’s greening efforts, 101–103 information communication technology (ICT): Annual Survey of Offshore Manufacturing for Taiwan Export Orders, 125(table); digital economy agreements, 183–184; effects of the US-China trade war on Taiwan, 129; geographical concentration issues, 139–140; Taiwan’s ECM business model, 117–118; Taiwan’s GSC participation, 120; Taiwan’s offshore production, 122–124, 132, 134 infrastructure construction: Korean Green New Deal, 105; Singapore’s cosmopolitan vision, 22–23 Innovation and Competition Act (US; 2021), 128 innovative organization and policymaking, 195–196 intellectual property: businessgovernment coordination in Taiwan’s mask production, 79 interdependence, concerns about the weaponization of, 44 international institutions, establishment of, 151 International Labour Organization (ILO): social solidarity economy, 60–61

237

International Monetary Fund (IMF), 63, 173 international political economy (IPE): economics-security nexus, 36–37; effect on Singapore’s foreign policy, 20–21; hegemonic stability theory, 153–154; the role of the state in the global economy, 37–38 interoperability: DEPA provision, 182 island city-state, Singapore as, 21 Japan: GDP growth projections, 20202022, 8(table); Global Value Chain Participation Index, 119; growth rates for total export and electronic products, 2020, 136(fig.); ingredients of developmental states, 99–100; semiconductor revenue, 142; Taiwan’s free trade agreements, 159– 160; Taiwan’s investment, 2018-2020, 133(fig.); Trump bolstering US security presence in Asia, 152; unemployment in APEC countries, 2019–2020, 9(fig.) Johnson, Chalmers, 99 Kausikan, Bilahari, 27–28 Keohane, Robert, 37 Keppel Offshore and Marine, 109 Kiribati: Covid-19 cases, 55(table), 56 Korea: developmental environmentalism, 100; GDP growth projections, 20202022, 8(table); Global Value Chain Participation Index, 119; Green New Deal, 105–106; hybridized industrial ecosystems, 100–101; origins of green economy initiatives, 98; trading partners, 97; Trump’s bolstering of US security presence in Asia, 152; Trump’s FTA renegotiation, 152; unemployment in APEC countries, 2019–2020, 9(fig.) Korea Micro Energy Grid (K-MEG) Association, 100–101 Krishnadas, Devadas, 25 Kuomintang (KMT) rule in Taiwan, 72 labor force: China+1 approach, 124–126; Singapore’s heartlanders, 23 labor shortages: Australia’s economic recovery strategy for PICs, 58–59 Lai Yung-hsiang, 77

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land, communally owned: social solidarity economy, 62 Lee Hsien Loong, 109–110 Lee Kuan Yew, 20–22 Lee Myung-bak administration, 98 liberal democracies. See New Zealand liberal international order, US engagement in, 45, 150–151 List, Friedrich, 37 lockdown during Covid-19: China’s zero-Covid policy, 131–132, 132(table), 149; global supply chain reforms, 118–119, 194; the growth of digital trade, 173–174; New Zealand, 35, 47; in the PICs, 55–56; Taiwan’s lack of, 69, 130 Made in China 2025 policy, 125, 138 Mahuta, Nanaia, 36, 42, 48 managed trade, 152 manufactured goods: China’s and the US’s greening efforts, 102–103; digital technologies changing trade, 172–173; economic impact of Covid19, 154–155; Electronic Contract Manufacturing model, 117–118; FDI flows, 7; geographical concentration issues, 139–140; Korean Green New Deal, 105–106; New Zealand’s expanding trade with China, 36; sunrise industries, 100; Taiwan as investment destination, 135; Taiwan’s investment in the US, 2018-2020, 134(fig.); Taiwan’s migration of production to China, 122–124. See also global supply chain Marshal Islands: Covid-19 cases, 55(table) mask donations, 92–93(n132) mask policy, 29; Taiwan’s state and business coordination, 70 mask production (Taiwan), 70–71; coordination problems, commitment problems, and collective action dilemmas, 73–75; distribution and sales monitoring, 81–82; institutional capacities and cooperation challenges, 82–85; managing production output, 79–81; manufacturing licenses, 89– 90(n69); mask stealing by employees, 92(n119); production capacity challenge, 75–79; Taiwan Face Mask Team, 75–79, 84, 90–91(n85)

mature industries: Taiwan’s mask production, 70–71 McKinnon, Malcolm, 39 meat exports: New Zealand-China trade growth during the pandemic, 41 media leverage: China’s provision of Covid relief in the PICs, 59 messenger ribonucleic acid (mRNA) vaccines, 26–28 Metal Industries Research and Development Center (Taiwan), 77–78 Micronesia Federated States of: Covid19 cases in the PICs, 55 military presence: China’s increasing aggression, 158–159 Ministry of Economic Affairs (MOEA; Taiwan), 75–81, 83, 89–90(n69), 108 Ministry of Foreign Affairs and Trade (MFAT; New Zealand), 39 Moderna vaccine, 26–28, 33(n33) Moon Jae-in, 105 Morrison, Scott, 58 multilateralism, 4; Biden’s economic and trade policies, 155–157; Covid-19 as incentive for, 197–198; pessimistic outlook for, 164–165; small states adjusting to US policies, 149–150; Trump’s “America First” approach, 150; US engagement after the pandemic, 155–164; US engagement prior to the pandemic, 150–154; US shift under Trump, 150–154 National Power and the Structure of Foreign Trade (Hirschman), 37 National Security Strategic Guidance (US), 128 nationalism: China’s political and economic change, 158; supply chain nationalism, 140–141; US economic nationalism under Trump, 150 Nauru: Covid-19 cases in the PICs, 55– 56 New Caledonia: Covid-19 cases, 55, 55(table) New Zealand: competing priorities in the economic policy response, 197; concerns over China’s human rights violations, 46–47; DEPA, 180–182; digital barter system, 62; digital trade during and after the pandemic, 174; economic intervention in Pacific

Index communities, 53; effect of the Omicron variant on border closings, 149; effect of US-China competition, 163–164; expanding trade with China, 36; external responses to Covid-19 in PICs, 57–59; FTA negotiation with the UK, 161; GDP growth projections, 2020-2022, 8(table); impact of Covid-19 on shipping capacity, 155; pre-pandemic economic reliance on China, 194– 195; rebuilding the PIC economies, 63; rules-based international trade order, 36–38; security and dependency concerns over China’s trade relations, 42–45; security concerns over dual-use technology, 44–45; Taiwan’s free trade agreements, 159–160; trade policy history, 38–42; unemployment in APEC countries, 2019–2020, 9(fig.); Western criticism of New Zealand’s China policy, 44 newly industrialized countries (NICs), 153 Niue: Covid-19 cases, 55(table) North American Free Trade Agreement (NAFTA), 152 North Atlantic Treaty Organization (NATO) allies, Trump’s attacks on, 153–154 Northern Mariana Islands: Covid-19 cases, 55(table) nuclear policy: Taiwan’s Green Economy Programs, 106–107 Nye, Joseph, 37 Obama administration: multilateralism, 151–152; “Pivot to Asia” policy, 149– 150 obesity rates: PICs, 61 offshore production: Annual Survey of Offshore Manufacturing for Taiwan Export Orders, 125(table); China+1 approach, 124–126; effects of the USChina trade war on Taiwan, 128–129; impact of Covid-19, 131; Taiwan’s ECM relocation options, 118, 122– 124, 132–137; US-China rivalry and, 126–128 offshore wind power, 105, 107–108, 110 Omicron variant of Covid, 2, 6, 28–29, 48(n2), 149

239

Organisation for Economic Co-operation and Development (OECD): digital trade, 173, 175–177, 181; TiVA database, 117, 119–120 overdependency: China+1 approach, 124; New Zealand’s trade with China, 42, 44, 47–48 Pacific Basin, defining, 10 Pacific Island Countries (PICs): effect of US-China competition on regional economies, 162–163; external responses to Covid-19, 57–60; GDP growth projections, 2020-2022, 8(table); rebuilding the economies, 63–64; social solidarity economy and rehabilitation, 60–62 Pacific Islands Forum (PIF), 58, 162–163 Pacific Labour Scheme (PLS), 58 Pacific Rim, defining, 10 Pacific Step-Up policy (Australia), 58, 64 Palau: Covid-19 cases, 55(table) Papua New Guinea: Australia’s medical assistance, 58; China’s provision of Covid relief, 59; Covid-19 cases, 55, 55(table) Partners in the Blue Pacific (US), 163 Payne, Marise, 58 PCR (polymerase chain reaction) tests, 83 personal protective equipment (PPE): Australia’s provision, 58. See also mask production Pfizer vaccine, 26–28, 33(n33), 57–58 Philippines: Taiwan’s investment, 20182020, 133(fig.); unemployment in APEC countries, 2019–2020, 9(fig.) Pitcairn Island: Covid-19 cases in the PICs, 55 plurilateral trade agreements: DEPA, 182–183, 185; digital trade governance, 176–177; New Zealand, 39–40 political liberalism: political-economic intersection in New Zealand’s trade with China, 44 political sector: economic-political intersection of New Zealand’s trade with China, 47–48 poverty: human security in the Pacific, 54–57; international poverty line,

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66(n7); social solidarity economy in the PICs, 61–62, 65 power politics: defining small states, 11– 12 Precision Machinery Research and Development Center (Taiwan), 77–78 preferential trade agreements, 39–40, 153, 188(n33) private–public sector cooperation. See mask production (Taiwan) production capacity: supply chain participation, 141; Taiwan’s Face Mask Team, 70, 75–80, 82, 84; US and European strategic autonomy policies, 137–138 production output: Taiwan’s mask production, 75, 79–82 protectionist policies: China, 43; digital protectionism, 174–176; US under Trump, 150, 153, 194–195 public housing: Singapore, 23, 32(n14) Quadrilateral Security Dialogue (QUAD), 152–153 recovery rates for Covid-19 infection: PICs, 56 “reform and open-up” policy, China’s, 122–123 Regional Comprehensive Economic Partnership (RCEP), 164, 189– 190(n80); benefits and problems, 158; China’s influence in shaping, 179; China’s multilateral presence, 161; digital trade governance, 189– 190(n80), 196; small-state digital trade governance, 180 regional perspectives of Covid-19, 5–8 regional trade agreements, 150–151, 188(n33). See also Regional Comprehensive Economic Partnership renewable energy: Korean Green New Deal, 105–106; offshore wind power, 105, 107–108, 110; Taiwan’s green economy programs, 107–108; USChina rivalry, 101–104 rent seeking: Taiwan’s businessgovernment cooperation, 72–73 research and development (R&D): green economic recovery, 105; supply chain nationalism, 141; Taiwan’s

coordination problems, 72; Taiwan’s ECM companies in China, 123–124; Taiwan’s face mask production, 77– 78; Taiwan’s GSC participation recommendation, 139 returned investment in ECM, 135, 137 rules-based trading order (New Zealand), 36–37, 40, 43, 164 Russia. See Ukraine, Russia’s invasion of Samoa: China’s provision of Covid relief, 59; Covid-19 cases, 55(table); Covid-19 response, 55–56; digital barter system, 62; economic recovery, 63 Samsung, 141 Sang-Hyup Kim, 98 SARS (severe acute respiratory syndrome) epidemic, Taiwan’s, 71, 76, 78, 80–81, 83 scale economy: Taiwan’s Covid-19 disruptions, 130–131 Seasonal Workers Programme (SWP), 58 security environment: China’s aid to PICs, 64; China’s response to AUKUS, 159; Covid-19 replacing climate change as major security issue, 56; economics-security nexus in New Zealand-China trade, 36–38; regulating digital trade, 174–175; securitization of non-controversial issues, 4–5; security and dependency concerns over New Zealand-PRC trade relations, 42–45; Singapore’s policy objectives and fundamentals, 21; Trump’s bolstering of US presence in Asia, 152 security partnerships: liberal international order, 151 self-reliance: challenging New Zealand’s trade relations with China, 47–48 semiconductor market: geographical concentration issues, 139–140; strategic autonomy trade policy, 137– 138; supply distortion, 141–142; Taiwan’s ECM, 120; Taiwan’s GSC positioning, 142 service commodities: economic impact of Covid-19, 154–155; FDI flows, 7; New Zealand-China trade, 42 servicification, 172–173 Shen Jong-chin, 75–76, 80

Index shipping capacity: economic impact of Covid-19, 155 Singapore, 98; cosmopolitanism, 22–24; Covid case data, 19; DEPA, 180–181; digital economy agreements, 183– 184; effect of US-China competition, 163; foreign policy objectives and fundamentals, 20–22; green technology, 98, 108–110; pandemic response addressing cosmopolitan elites and heartland supporters, 196– 197; public housing, 32(n14); restrictions on social gatherings, 28– 30; Taiwan’s free trade agreements, 159–160; Taiwan’s investment, 20182020, 133(fig.); trading partners, 97; unemployment in APEC countries, 2019–2020, 9(fig.); vaccine choices, 26–28, 33(n33) Singapore-Australia DEA (SADEA), 183–184 Sinopharm vaccine, 28 Sinovac (Chinese-made Covid vaccine), 26–28, 57–58 small and medium enterprises (SMEs), 100–101; digital trade governance and regulation, 175, 181–182; Singapore’s Green Plans, 109 small states, defining, 11–12 smart energy conservation: Taiwan’s green economy programs, 106–107 smart grid technologies, 105 social and solidarity economies: absorbing the economic shock of Covid-19, 55; building resilience through, 53–54, 56; economic rebuilding in the PICs, 64–65; pandemic conditions encouraging, 195; PIC response to the pandemic, 60–62 social conditions: impact of Covid-19 in the PICs, 57 social gatherings, restrictions on: Singapore, 28–30 societal factors in Singapore’s policymaking, 19–20 Solomon Islands, 43; Covid-19 cases, 55(table) South China Sea: criticism of PRC policy, 42–43 state of emergency: Covid-19 infection in the PICs, 55–56

241

state power: China’s greening efforts, 102–103 state sector: Taiwan’s face mask policy coordination, 70–71. See also state–private sector cooperation state-owned enterprise (SOE) sector, China’s, 158 state–private sector cooperation: East Asia’s green economic initiatives, 99; ingredients of developmental states, 99–100. See also mask production (Taiwan); Taiwan stayed investment, Taiwan’s business plan for, 137 Step-Up policy in the PICs, Australia’s, 58, 64 strategic autonomy policies: elements and priorities, 137–139; impact on Taiwan, 143, 194; supply chain nationalism, 140–141; Taiwan’s GSC participation, 140 Strategic Competition Act (US; 2021), 128 strategic interests: CPTPP, 157; humanitarian aid to Pacific communities, 54; New Zealand’s foreign policy, 59 subsistence sector: PICs social solidarity economy, 60–62 sunrise industries, 100 supplier concentration issues, 139–140 supply chain. See global supply chain supply distortion, 141–142 sustainability: Singapore’s Green Plans, 109 Sustainable Development Goals (SDGs): impact of Covid-19 in the Asian region, 54 Taiwan: China+1 approach, 124–126; Covid-19 disruptions, 130–132; CPTPP application, 159–160; ECMrelated supply chain adjustments, 2020, 129(table); effects of the USChina trade war, 128–129; Electronic Contract Manufacturing model, 117– 124; export portfolio changes, 121(fig.); face mask distribution and sales monitoring, 81–82; face mask policy coordination, 70–71; green economy initiatives, 98, 106–108; implications for GSC participation,

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139–142; investment in China, 20102020, 127(fig.); mask and vaccine donations, 92–93(n132); mask stealing by employees, 92(n119); migration of production to China, 122–124; offshore production relocation options, 132–137; outbound investment approval, 135; the pandemic accelerating economic policies, 194; per capita GDP growth, 1990-2020, 123(fig.); state intervention in economic development, 72–75; trading partners, 97; unemployment in APEC countries, 2019–2020, 9(fig.); US and Vietnam sectoral investment, 134(fig.). See also mask production (Taiwan) Taiwan Face Mask Team, 75–79, 84, 90– 91(n85) Taiwan Machine Tool and Accessory Builders Association, 77–79, 83–84 Taiwan Pharmacy Association, 81 Taiwan Semiconductor Manufacturing Company (TSMC), 131–132, 139– 141 Taiwan Textile Research Institute, 79–80 tax havens: Taiwan’s ECM investment in the British Caribbean, 135 taxation: enterprise income tax reform, 126 Thailand: CPTPP accession, 160; digital trade governance, 177; Taiwan’s investment, 2018–2020, 133(fig.); Taiwan’s offshore production alternatives, 132; unemployment in APEC countries, 2019–2020, 9(fig.) Tonga: Covid-19 cases, 55(table); digital barter system, 62 tourism industry: downturn and recovery, 7–8; FDI flows, 7; rebuilding the PIC economies, 63; recovery of the PICs, 57 trade diversion: Taiwan’s returned investment, 135, 137 Trade in Value Added (TiVA) database, 117, 119–120, 143(n1) trade liberalization: New Zealand’s strategy, 39–40 trade policy: digital technologies transforming, 172–173; digital trade during and after the pandemic, 173–

174; economic impact of Covid-19 on Taiwan, 130–132; economics-security nexus of trade relations, 36–38; effect of the pandemic on, 154–155; evolution of New Zealand’s trade policy with China, 47–48; growth of China’s share of global trade, 35; history of New Zealand’s policy, 38– 42; Korea’s relations with China and the US, 97; New Zealand’s concerns over China’s human rights violations, 46–47; shift in US policy under Trump, 151–152. See also global supply chain trade surplus: New Zealand-China trade, 41 trade war. See United States-China competition transaction cost economics: New Zealand’s economic ties with China, 37; Taiwan’s private-state mask production, 73–75, 82–84 Trans-Pacific Partnership (TPP), 151– 152, 178 transportation: digital barter system in the PICs, 62 Trump administration: economic nationalism, 150; green technology tariffs, 103–104; RCEP progress, 158; shift in US foreign and trade policy, 151–152; US-China trade war, 128. See also vacuum in Asia Pacific’s economic architecture Tsai Ing-wen, 98, 106–107 Tuvalu: Covid-19 cases and responses in the PICs, 55–56, 63 Ukraine, Russia’s invasion of, 150; effect on economic autonomy, 118; effect on New Zealand’s China policy, 44–45, 47; effect on regional economies, 162–163; impact on the Asia-Pacific region, 149 unemployment: abatement, 8; APEC countries, 2019–2020, 9(fig.); effect of lockdowns, 98; human security in the PICs, 53, 57 unipolar world: the effect of the USChina rivalry, 3; US geopolitical engagement, 151 United Kingdom: accession to the CPTPP, 164; digital economy

Index agreements, 183–184; FTA negotiation with New Zealand, 161; New Zealand’s loss of trade relations with, 39; state–private sector coordination problems, 85–86 United Kingdom-Singapore DEA (UKSDEA), 183–184 United Nations Development Programme (UNDP), 61 United Nations Framework Convention on Climate Change (UNFCCC), 107 United Nations Framework for the Immediate Socio-Economic Response, 6 United Nations Inter-Agency Task Force on the Social and Solidarity Economy (UNTFSSE), 61 United States: carbon emissions, 101; competition with China for green technology, 103–104; digital trade regulation, 177–180; East Asia’s trade partners, 97; external responses to Covid-19 in PICs, 57; face mask production shortfalls, 79–80; greening efforts, 101–103; growth rates for total export and electronic products, 2020, 136(fig.); multilateralism and economic engagement after the pandemic, 155– 164; multilateralism and economic engagement before the pandemic, 150–154; New Zealand’s trade relations with China and, 43–44; Obama’s “Pivot to Asia” policy, 149– 150; post-Cold War relations with China, 38; shift away from multilateralism under Trump, 150– 154; as Singapore’s investment guarantor, 109–110; strategic autonomy trade policy, 137–139; Taiwan’s ECM-related supply chain adjustments, 2020, 129(table); Taiwan’s GSC participation, 139; Taiwan’s investment, 2018-2020, 133(fig.)–134(fig.); Taiwan’s mask and vaccine donations, 92–93(n132); Taiwan’s offshore investment patterns, 132; unemployment in APEC countries, 2019–2020, 9(fig.); withdrawal from the TPP, 178. See also Trump administration; United States-China competition

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United States-China competition, 5; accelerating the China+1 approach, 126–130; data flow governance, 179– 180; defining small states, 11–12; effect on regional economies, 162–164; GSC restructuring, 118–119; the impact of Covid-19 on globalization, 198–199; impact on East Asian green economic initiatives, 98–99; impact on global green economy shifts, 110–111; inspiring Korea’s green economic recovery, 106; pressures for coordinated multilateral responses, 197–198; regional economic vacuum in Asia Pacific, 150; Singapore’s vaccine options, 27–28; strengthening Taiwan’s green economy programs, 107–108; trade war, 43, 124, 126, 128– 129, 152, 155; Trump’s policy, 152 vaccination mandates, 29–30 vaccines: anticipating the decline of Covid-19 impacts, 154–155; Australia’s provision, 58; China’s travel policy, 33(n36); donations as diplomatic tool, 92–93(n132); donations to PICs, 57–58; external responses to Covid-19 in PICs, 57– 58; Singapore’s procurement options, 26–29, 33(n33); Taiwan’s slow procurement, 69–70 vacuum in Asia Pacific’s economic architecture: Biden’s failure to fill, 155–156, 161; IPEF recommendations, 157; Trump’s protectionism leading to, 150, 154– 155; US-China competition following, 162–163, 165, 195 value chains, effect of digital technology on, 172–173 Vanuatu: China’s provision of Covid relief, 59; Covid-19 cases, 55(table); Covid-19 precautions, 56; Cyclone Harold, 61; digital barter system, 62; rebuilding the PIC economies, 63 Vietnam: Taiwan’s investment, 20182020, 133(fig.)–134(fig.), 135; Taiwan’s offshore investment patterns, 132–133; unemployment in APEC countries, 2019–2020, 9(fig.) wage increases: China+1 approach, 125

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Index

Wallis and Futuna: Covid-19 cases, 55(table) wind power development, 100, 105, 107– 108, 110 wood exports: New Zealand-China trade growth during the pandemic, 41 World Health Organization (WHO): Covid-19 cases in the PICs, 55; regional perspectives of Covid-19, 5– 8 World Trade Organization (WTO): China’s trade dispute against the US, 128; digital trade, 173, 176–177; establishment of, 151; GBC index data, 119–120, 119(table); ineffectiveness with negotiation for multilateralism, 164; New Zealand support for PRC accession, 40; rules-

based trading order, 37; US policy under Trump, 152 Xinjiang, China, 43–44, 46 Xu Haodong, 78 Yen Jui-hsiung, 77 Young, Soogil, 98 zero-Covid policy, China’s: China’s economic recovery, 35, 48(n2); economic impact on Taiwan, 131– 132, 194; effect of the Omicron variant, 149; global economic recovery, 143; siege mentality preventing international engagement, 43–44 zero-Covid policy, Hong Kong’s, 29

About the Book

BOTH THE SPREAD OF COVID-19 AND THE INTENSE US-CHINA RIVALRY

have been sources of stress for national economies throughout Asia Pacific. The authors of Asia-Pacific Small States, eschewing the usual focus on the region’s powerhouses, turn their attention instead to the coping strategies of the smaller economies. Showing how these smaller states have been navigating the current turbulent times, they shed light not only on national experiences and recovery strategies, but also on the importance of so-called marginal players in today’s geopolitical competition among major powers. Stephen Noakes is senior lecturer in politics and international relations and director of the China Studies Centre at the University of Auckland. Alexander C. Tan is professor of political science and international relations at the University of Canterbury.

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