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Global Trade Talk: How Japan is Utilizing the Coronavirus as a Catalyst for Economic and Structural Change and Increased Multilateral Cooperation

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Global Trade Talk: How Japan is Utilizing the Coronavirus as a Catalyst for Economic and Structural Change and Increased Multilateral Cooperation

Global Trade Talk is part of an ongoing series highlighting international business, trade, investment, and site location issues and opportunities.

This article focuses on the conversation between Mr. Takeshi Tashiro, Director of Policy Planning and Research Office, Ministry of Economy, Trade and Industry (Japan) and Keith Rabin, President, KWR International, Inc.

 

Hello Mr. Tashiro, it is a pleasure to meet you and to be speaking with a Ministry of Economy, Trade, and Industry (METI) official, who our firm has worked to support for many years. Before we begin, can you tell our readers about your background and current activities?

Thank you. My name is Takeshi Tashiro and I am a Director of Policy Planning and Research Office at the Trade Policy Bureau of METI. In this capacity, I provide international economic and policy analysis and help to develop planning options. Earlier in my career, I supported the development of “Abenomics”, the economic policies that have guided Japan since Shinzō Abe was elected to his second term as Prime Minister in December 2012. It is based on “three arrows”, including monetary easing from the Bank of Japan, fiscal stimulus through government spending, and structural reform. I also lived in the United States for three years while working at a think tank in Washington and studying for my master’s degree in public policy at Harvard’s Kennedy School. So, my work has focused on how to strengthen the Japanese economy, both domestically and internationally, how to alleviate deflation, and how to build economic ties and supply chains with Japan’s neighbors and other countries around the world.

Most recently, I directed the preparation of METI’s annual White Paper on International Economy and Trade 2020. It was released in July and includes our latest thinking on a wide range of issues. METI has been preparing annual White Papers for 72 years, and the current edition focuses on the Coronavirus pandemic, its impact on the global and Japanese economy, and trade policy direction.

While Japan is one of the world’s most advanced, and its third-largest economy, it attracts relatively little attention from international companies and investors. This is partially due to demographic pressures and several decades of perceived stagnation. Why is Japan underappreciated, what are its strengths and weaknesses, and can you give us some insight into the current state of Japan’s economy and why companies and investors should be paying more attention?

I think it is not just companies and investors, but the world itself should pay more attention to Japan. Our economy possesses many interesting opportunities – while providing lessons on pressing issues, including how to deal with an aging society, low growth, low-interest rates, and deflation. Larry Summers has described this as “secular stagnation” (some call this “Japanification”) and I believe the force of secular stagnation will become one of the world’s most formidable challenges as the effects of the Coronavirus pandemic crisis – which is the greatest economic disruption since the great depression – continues to rise. We don’t know when a vaccine will become available and despite rising asset prices – given abundant central bank liquidity – companies will be reluctant to expand and make long-term investments in this uncertain environment. That creates a rising propensity for savings, which has also been the main cause of Japan’s long stagnation for the past few decades.

Many people only look at the negative side, but it is important to also understand that even as Japan faced this long stagnation, it has silently transformed itself while maintaining social stability and high quality of life. There are so many interesting changes. One as you mentioned, is the strength of our development as a trading nation following the second world war, when we accumulated a large surplus though companies as Sony and Toyota manufactured products in Japan. That changed, however. Costs rose and we faced pressures from trading partners over surpluses and as a result Japan became an “investing nation”, optimizing supply and production chains by establishing facilities in developing and developed markets around the world. Although Japanese companies have expanded their overseas operations, Japan enjoys a relatively low unemployment rate among advanced economies. We leverage off Asian neighbors and their growing power and desire to develop themselves, both to maintain our own competitiveness and to grow their economies.

Given the difficulties Japan has faced in recent decades, coping with domestic stagnation, an aging society, and depressed demand, Japanese companies have enjoyed relatively strong performance and profitability, and one has to ask how this was achieved. The answer is through dedicated efforts to work overseas and establish a long-term presence in these economies. The Japanese government is also moving to understand the needs of countries in the region and to facilitate local and regional development while encouraging Japanese firms to optimize supply chains and production and to sell Japanese brands, products, components, and services in these markets and third countries around the world.

In the process, it has become more difficult to say that a company belongs to any one nation. Yes, the nationality of the company remains Japanese, but they rely on partnerships, labor and other agreements with other companies, people and institutions in the countries where they operate.  That is how Japan has maintained its edge and competitiveness in a globalized world, at a time when our own economy faces many challenges. In recent years, however, we are becoming increasingly concerned with the rising backlash against globalization and increased nationalist pressures. That is creating a wide range of risks as well.

Other nations, however, particularly mature economies that face similar, though perhaps fewer extreme challenges such as an aging population, can draw from this experience,  recognizing the benefits of expanded international trade and engagement.

Japan possesses formidable strength as an industrial and manufacturing power. This is true, not only in terms of consumer- and end-products, but even more so in terms of components, technology and machinery which is essential to the production of well-known products and brands from other nations and global supply chains across a wide range of sectors. Can you talk about Japan’s industrial strength and capacity, its role as a technology leader and as a critical link within global manufacturing and supply chains?

In addition to Japanese branded products, our companies provide important goods and components for brands and products all over the world as well as the machinery from which they are made. For example, without Japanese companies, you might not be able to obtain iPhones as many critical components are Japanese, even though the product itself is not from Japan. That is how global supply chains are now structured. Japanese firms provide components not only for iPhones but for automobiles, computers, airplanes, and other products. So even though Japanese firms face increased competition from Korean, Chinese, European, and other brands, inside these products you will find many Japanese parts and components, and, in some cases, they are Japanese-managed production on an OEM basis.

Therefore, while in the US you see many Toyota’s, Honda’s and other Japanese cars on the road, which are highly successful, I think our strength is based more on our ability to establish, manage and optimize complex supply chains. This allows us to compete in, and contribute to the development of, industries and countries all over the world, both in terms of sourcing and manufacturing, as well as distribution to businesses and consumers.

For example, Japanese manufacturers build plants in the US, Southeast Asia, and other markets. These provide jobs, investment, and products that boost local and national economies, within markets that enjoy stronger growth rates than Japan. This allows our companies to expand and to grow and enjoy profitability far beyond what they could find in our economy.

I think that is one major industrial strength of Japan, and global supply chains are especially important for our economy. This necessitates a careful balance between efficiencies and disruption – including not only concerns over a host of trade issues but events such as the coronavirus pandemic. So, this reliance on trade and global supply chains is a strength but it is also a risk. It requires careful and ongoing reexamination so that our companies and economy do not become too dependent on any single source of supply and outlet so that we achieve sufficient diversification and have options given inevitable disruptions moving forward.

For many decades Japan-focused heavily on its relationship with the United States, both as its largest trading partner and as a guarantor of its security, as well as sales to Europe and other developed economies. As costs within Japan rose and China emerged as an alternative, Japan took advantage of its low-cost labor, and then targeted the market as consumption rose while demand was stagnating in Japan and exhibiting low growth in the US and other advanced economies. Today, China is the world’s second-largest economy.

It has become more assertive and there is growing concern about supply chain diversification as well as national and technological security, as seen in tensions in the South China Sea, events in Hong Kong, and the conflict over Huawei technology. We also note Japan’s recent announcement that it will be subsidizing companies to diversify their production base to strengthen supply chain resilience. What are your thoughts on this transformation? What does it mean for Japan and the region? What are the global obstacles and reasons behind it?

The role of China has been evolving and it is an important neighbor of ours. Economically it is rising rapidly, both as a source of production as well as a market for Japanese products and components. Growth has been strong over many decades and as you noted it is now the world’s second-largest economy. At the same time, we need to be careful not to become too concentrated or dependent on any trading partner. As I mentioned, if companies or Japan as a whole, places too much production, for example in electrical machinery, electronics or critical components, etc. in one geographic location, it can become dangerous, causing supply constrictions that can lead to major disruptions far beyond that product.

That is a trade-off we must address, particularly when considering the pandemic that has caused so much disruption to logistics and supply across the world. In fact, we need to consider this with every country though in the case of China it is particularly important given its growing size, proximity and the concentration of manufacturing and production-based there. We introduced subsidies for Japanese companies to diversify their supply chain. This is an initiative that seeks to maximize supply chain resilience across a range of industries for the benefit of the region and the global economy as a whole.

At the same time, even though Japan has become increasingly open to foreign workers, which some analysts believe could encompass up to about 5-6% of our total workforce by 2030, we recognize domestic production alone is not the answer. Aside from cost issues, we have also experienced disruptions from natural disasters in Japan such as the 2011 earthquake and we understand both the importance of diversification and that many products can be made more efficiently elsewhere. As a result, China became an important center of production and market for Japan.

In the US the coronavirus is generally viewed as a traumatic, but hopefully temporary obstacle, to be overcome so we can get back to “normal” as quickly as possible. At the same time some analysts in other countries, while recognizing the urgent need to address the pandemic, view it more as an accelerator of changes that have been occurring over the last decade, rather than a short-term phenomenon to be resolved once a vaccine is in place. While we hear Japan has been relatively successful in suppressing its spread, how has the coronavirus affected Japan? What are the regional and global implications, and do you view the virus more as a temporary obstacle or a transformational accelerant of trends already in motion? If the latter, what actions should governments and companies undertake to maintain and enhance their competitiveness moving forward?

I think we have to make this crisis an accelerator of change – though our success in doing so is likely to depend on our ability to join together, both within Japan, as well as other countries, to move in that direction. It would be unfortunate to just view it as a temporary traumatic obstacle and we have already seen dramatic changes of behavior and acceleration of trends that were underway. The rise of e-commerce, use of video conferencing, and more flexible workplace are just a few examples and are unlikely to reverse even after effective treatment and inoculation are available. To me, seeing so many people in the US and the western world wearing masks is quite surprising. It is something I could not have imagined when I lived in the US a short while ago.

Many other changes are underway, and we are developing policies to make the crisis work for us. This includes improving public health, infrastructure, supply chain, and other issues while allowing social distancing and our economy to reopen. In Japan, people wear masks as we learned from the pandemic a century ago and have high concern over spreading illness. That has allowed Japan, as you noted, to be successful in suppressing the spread. As other nations adopt, we will all be more prepared moving forward.

As a result, Japan is taking a comprehensive approach to encourage this transformation. We are working to create a new lifestyle that better allows social distancing to prevent illness and save and protect lives. Initiatives to facilitate digital transformation, online and digital payments, teleworking and telemedicine are all underway. I think even though, or because, this crisis is extremely traumatic we need to recognize and address the obstacles that are presented and use them as catalysts for needed change. Even though a therapeutic approach is needed to resolve the crisis, supplemented by provisions of liquidity to minimize economic disruption, we also recognize this is an opportunity to address and remove structural problems that have long troubled our economy.

That includes the need to digitalize our economy and our government and healthcare and payment systems. So, we are now trying to change our society and the crisis is helping to showcase the need to move more rapidly in that direction. The role of government is to help provide this support. The Japanese government is using fiscal stimulus not only to provide liquidity support to households and businesses but also to push telework and other forms of digital transformation.

The coronavirus pandemic has accelerated global efforts to stimulate national economies through massive stimulus programs similar to those that have existed in Japan for many years. This is leading to ever-accelerating levels of global debt which seem manageable when interest rates are at record lows and even negative in many countries – but potentially troubling for the long term. Similarly, many believe the world would be better off with a shift from monetary to fiscal solutions and infrastructure development.  Japan also has a lot of experience in this area as well. What are your views on the present health of the international economic system? What can the world learn from Japan and would a fiscal approach produce better results and help countries better deal with massive unemployment and the business trauma that has accompanied the pandemic?

The initial stimulus packages enacted at the onset of the coronavirus have been very effective. It is essential that we cope with the pandemic with the necessary tools both in terms of health and the economy. As a result, the US, Japan and other nations supported by their central banks invoked stimulus programs at an unprecedented scale, with low or in some cases negative interest rate policies, which have helped to contain and minimize the effect of the disruptions that have occurred. This was basically the right move and necessary to confront the panic and initial effects of the pandemic.

Now, however, our attention is shifting to how to reopen our economies longer-term while maintaining social distancing and addressing other measures that constrain economic activity. This is difficult as if we stimulate and encourage face-face contact – infection rates will rise. So that is a major challenge. We have to proceed carefully, crafting measures that provide sufficient effect at an unprecedented scale, while accounting for necessary public health safety as well as concerns over rising debt load.

So, one lesson is we need to ensure advance planning and coordination so we can respond quickly and effectively to meet the challenges of the pandemic and other emergencies as they unfold. Another is that international cooperation is more important than ever before. Not just for dealing with the infection itself, but also to deal with the economic effects. Relating to your previous question – this is not just a catalyst for digital transformation – but also for international cooperation and political, economic and societal transformation with national, regional and global implications.

We also realize it is difficult to stimulate sufficiently with monetary policy alone, which is focused on liquidity and interest rates. The pandemic requires more careful targeting. That is because the negative impact is skewed toward service sectors such as travel, restaurants and entertainment and workers in these areas – while other areas such as cloud services, supermarkets and other industries benefit. Policies should be directed more specifically, including areas that lead to reform and I think that is important. This is not just our Japanese experience and our White Paper seeks to highlight how the pandemic provides opportunities that address important local as well as global issues through a careful, targeted approach.

Our firm has spent many years facilitating East Asian integration and trade and investment development for Japanese and other clients as well as other efforts in Southeast Asia to develop special economic zones and effective energy and infrastructure policies and planning. How do you view the importance and potential of Southeast Asia, both as an emerging market for goods and services and as a production platform and link within the global supply chain?  What advice can you give to firms and investors with an interest in this market?

Let me explain one interesting initiative METI is launching, called Asian Digital Transformation. Japan has long had good relations with its Asian neighbors. Many of these countries are undergoing very rapid deployment of digitalization and the societal and economic effects are enormous. Given they are starting from a lower base, in some cases the change is more rapid than what is occurring in Japan. This provides interesting economic opportunities as well as a catalyst for change in our own economy.

For example, Japanese companies and people can learn by interacting with our Asian neighbors. In the case of contact tracing, Southeast Asian government’s developed digital applications in cooperation with private companies and we can learn and facilitate these efforts by utilizing our networks and resources. This includes developing policies and guidelines that facilitate business activity and investment, regional development and integration, connecting Japanese funds, technologies and networks to encourage innovation and business activity within Southeast Asia. This is important, not just for their development but also for ours.

Since the end of the Second World War, the world has been guided by Bretton Woods institutions and a system that encouraged global coordination and led to free trade and prosperity. Over time it also led to the economic rise of nations who are now demanding a greater say. Modern technology, and the shift toward globalization, also introduced efficiencies and wealth – but resulted in more inequality, disparities, and concerns.

As a result, we are now experiencing a serious backlash and retreat from multilateralism toward more nationalist governments at a time when serious global problems, including the pandemic, climate change, technological standards, and other important issues that require a coordinated approach. What is your view of this problem and what steps can be taken to encourage global cooperation and to transform global institutions and systems to help guide us for the next 70+ years?

While the world is more connected than ever before, we are now facing a tough time when it comes to multilateralism. Last year marked the 75th anniversary of the post-war Bretton Woods agreements and divisive forces including growing distrust in international organizations, US withdrawal from the WHO, and Brexit, which are representative of a few of the many barriers that divide us. Nevertheless, improved global governance and cooperation is essential – with the pandemic being one of many issues we face – that does not respect national borders and requires a coordinated multilateral approach. It is also necessary to cope with other issues including inequality and vulnerable populations, food security and climate issues to name a few. I think Japan can help in that regard and we have been supporting the development of regional and bilateral trade agreements, and rules-based policies, not only in Asia but also in Europe, the US and other countries around the world.

This is not just about trade. Japan actively promotes global health at the United Nations, and while we realize it is a tough time for multilateralism we are determined not to give up and abandon it. With cooperation we can do a lot. For example, during the onset of the pandemic the US Federal Reserve provided liquidity to many countries with the support of the Bank of Japan other central banks and this helped to stabilize the markets. Without that cooperation the economic effects would have been far worse. Continuing cooperation now that the immediate panic has passed – to devise longer-term structures and solutions – is difficult though extremely important. We must recognize the world is far more integrated and bound than it was 75 years ago, and the role and importance of multilateralism is more important than ever before. In spite of the difficulties, however, I remain optimistic that we will find a way to deal with these pressures moving forward.

There is substantial potential for US and Japanese cooperation to strengthen supply chain resilience and to enter into other arrangements both between our governments and individual companies that allow closer cooperation, policy dialogue and innovation as well as profitable business arrangements and investments. How do you view the potential for US-Japanese government and private-sector cooperation? What areas are most suitable both globally as well as within third countries and the US and Japan?  

The US is our friend and ally. We share many values including democracy, liberty, freedom and dedication to a market economy, so I think our foundation is very strong and there is so much potential. Energy for example is one area worth highlighting. For example, there is already a program that has been developed called the Japan-US Strategic Energy Partnership (JUSEP), which provides cooperation to develop third-country infrastructure development. This has produced tangible developments including the Mekong Power Partnership, and in Vietnam, US and Japanese companies are working together on several sites that have been selected for development.

Another potential area of cooperation is in Latin America. We have not really explored this sufficiently, either as a market or a sourcing platform. In Brazil for example, Japanese and US companies are working together on digital infrastructure with Brazilian telecom companies. We also envision cooperation in Africa. This is a vast and challenging market with favorable demographics, which has huge potential both in terms of natural resources, supply chain management and growing consumer demand. US and Japanese companies have complementary characteristics. For example, US companies’ have knowledge and networking power in the region, while Japanese companies can provide strong manufacturing capabilities. As a result, this is a market where the US and Japan can work together.

India is also a major emerging economy. It is now hindered by the coronavirus – though over 200 Japanese companies have created investment plans which we think will go into effect as the danger recedes. There are so many opportunities there and in other developing countries around the world. This is a topic we address in the White Paper I mentioned. These are young markets, with favorable demographics, a range of resources, and substantial growth before them for decades to come.

The Japanese and US governments are also working together to develop guidelines and policies to set up global rules to deal with trade-distorting practices in third countries. These include subsidies to boost sectors that are not always the most efficient, such as non-market-oriented policies and practices that lead to severe overcapacity. One success we had in a recent trilateral trade ministers (EU, Japan and US) meeting was a proposal to strengthen rules concerning industrial subsidies and a basic structure for cooperation has pretty much been developed to address forced technology transfer and other important issues. This activity will be expanded over time between our nations. The trilateral group cooperate on WTO reforms and to multilateralize the proposals.

For many years in our research, we have separated international investment and business activities by those that focus on production and supply to third countries and those that emphasize consumption and demand.  What opportunities and investment themes do you think are most important for foreign companies in the new environment that is emerging in Asia around the world? What regions are most important and what should US and other companies understand when considering long-term opportunities and expansion plans outside their own economies, particularly in the developing world?

The developing world is extremely attractive and there are many growth opportunities as their living standards rise, creating strong demand and consumption within a young, rapidly expanding middle class. At the same time, one also should look at developed countries such as Japan. While growth rates may be low, developed countries are large and established. They also lead in technological and supply chain reconfiguration, as well as many other trends that are rapidly changing life and society all over the world.

In Japan itself, we have been transforming our economy over the past few decades without a lot of attention and there are many opportunities here. Much can be learned from our achievements. One strength that is rarely noticed is that female participation in the Japanese economy has been rising to unprecedented levels. In many ways, it exceeds that of the US. For example, according to OECD, Japan’s female labor force participation rate was 72.6 percent, and that of the US was 68.9 percent in 2019.

In addition to investment, these developments have important societal and political implications. In Japan, for example, we can contribute to the discussion of how to adapt to an aging society including healthcare and related issues. This provides many opportunities for US and foreign firms, both within Japan as well as in adopting our approaches within their own economies. Another issue is payment systems. Japan aims to double the digital payment rate until 2025. When the additional consumption tax was introduced last October, METI devised a digital rebate program to offset the impact and promote cashless payments.

Although the rebate program ended this June, more people are now willing to use electric payments. We also lag in other industries and the development of important services. This is a real opportunity for US and foreign companies who have expertise in disruptive new services utilizing digital technology and an interest in introducing them to Japan.

Japan was an early leader on the climate change issue, organizing the Kyoto Protocol meetings which ultimately led to the 2015 Paris Agreement that seek to keep increases in global average temperature to well below 2 °C above pre-industrial levels. While international coordination has been difficult, particularly after the 2017 US withdrawal under President Trump, the pandemic has actually at least temporarily caused a global reduction of carbon emissions. There is also more emphasis on renewable energy and some advocate shifting more toward nuclear as a clean energy source. What is the potential effect of the pandemic on climate change discussions?

The pandemic has shown how many challenges remain in terms of climate change and other complicated global issues. While there have been short term benefits as industrial activities recede and production is suspended, over time this will come back if we do not develop long term solutions.

I think the pandemic has made it clear and allowed us to recognize how vulnerable global society is if we do not pay attention and react carefully in a coordinated way. We cannot simply deny the existence of problems and develop piecemeal solutions. In many ways the challenges of addressing the spread of the virus and climate change are the same – though the virus is occurring at a faster rate – so it is more visible and showcases the issue. These are global challenges and to effectively contain, resolve and manage these problems – in an age where we are so connected through supply chains, travel and technology – we need a global and coordinated approach.

In that sense, while the spread of the pandemic has been a real tragedy, we hope that ultimately it will serve as a positive influence serving as a catalyst for stronger international cooperation not only on climate change but the whole range of important issues we face today.

Thank you, Mr. Tashiro, for your time and attention. Look forward to speaking again soon!

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To read previously released articles in the series, click the links below:

Global Trade Talk: Navigating Geopolitical Currents in a Changing Southeast Asia

Global Trade Talk: Enhancing US-Korea Trade and Investment Cooperation in a Changing World Environment

Global Trade Talk: Reconfiguring US-China Supply Chains for a Post-Coronavirus World

Keith Rabin serves as President at KWR International, Inc., a global consulting firm specializing in international market entry; trade, business, investment and economic development; site location, as well as research and public relations/ public affairs services for a wide range of corporate and government clients.

ASEAN

Global Trade Talk: Navigating Geopolitical Currents in a Changing Southeast Asia

Global Trade Talk is part of an ongoing series highlighting international business, trade, investment, and site location issues and opportunities. This article focuses on the conversation between Simon Tay, Chairman of the Singapore Institute of International Affairs and Keith Rabin, President, KWR International, Inc.

Hello Simon. How have you been? Before we begin can you tell our readers about your background and current activities?

I am Chairman of the Singapore Institute of International Affairs (SIIA). We focus on the Association of Southeast Asian Nations (ASEAN), a regional organization comprised of ten countries in Southeast Asia, as well as the wider Asia Pacific and Singapore’s role as a hub for trade and investment and greater integration in the region. This includes a range of geopolitical issues including the rise of China, the role of the US, and most recently the coronavirus pandemic, which is serving as an accelerator for changes that have been occurring over the last decade.

Professionally, I am an attorney and was a member of Parliament from 1997-2001, serving during the Asian financial crisis. Then during the 2008 global financial crisis, I was stationed in New York at the Asia Society where we first met. These experiences have given me a unique perspective on the impact of globalization and other trends we have experienced over the past two decades.

While ASEAN currently possesses the third-largest economy in the Indo-Pacific and fifth largest in the world, many foreigners have never even heard of the regional group nor do they recognize its potential. Can you talk about how ASEAN evolved, what it represents as a commercial market and investment destination, and in terms of security and its global importance? What opportunities and obstacles and investment themes are of particular importance to foreign companies and investors in the coming years?

I don’t blame people for not knowing ASEAN. When one looks to Asia, one’s eyes are first drawn to the giants. China in particular has done very well over the past twenty years and no country has grown faster during that time. As it developed and labor costs and standards of living rose, Southeast Asia began to capture the attention of businesses, and deservedly so. ASEAN now has growing appeal, because of greater integration as we create an ASEAN Community with increased consumption and growth. That is why many people refer to us as the fifth largest economy in the world.

The reality, however, is a bit short of that – as we are not really one country or one system. We are, however, working to realize the “ASEAN 2025 Vision.” This is a roadmap adopted in 2015 to articulate regional goals to create a more cohesive ASEAN Community. SIIA is currently working on the ASEAN mid-term review, which is examining our progress, and how crises such as the pandemic can strengthen our will to more fully integrate. While an unfinished project, given the diversity in the region, it is — in some ways — every bit as ambitious as the establishment of the European Union (EU). The trend is toward closer integration.

Before the Asian financial crisis, which began in the summer of 1997, the region was mostly viewed, at least in the US, through the lens of the Vietnam War. Over the last twenty+ years we have advanced, however, and growth in ASEAN has been reinforced. This is true both in developed countries such as Singapore and Thailand, developing nations such as Vietnam and Myanmar, and those in between. Before the pandemic, ASEAN as a whole was growing at a faster rate than China. While the pandemic is hitting our people and economies hard, the region should still outperform the world.

The fundamentals are real. ASEAN is ascending from a lower base, leaving substantial room for further growth. There are many opportunities as countries raise consumption and leapfrog using software, digital innovation, and a greater online presence. Diverse sectors can do well, including labor-intensive manufacturing, infrastructure, services, consumer markets, and others that are part of the new economy.

As you note many people view ASEAN as being similar to the EU, a vehicle grouping together a group of countries into a more integrated market, though without a common currency. Is that fair and can you talk about both the diversity of ASEAN as well as the steps being taken to link these ten nations into a more cohesive entity? Is it possible for companies to have an “ASEAN strategy” or should they be looking at individual markets?

Given what I said about ASEAN, and how it is not yet a cohesive union, that is a very good question. The answer is yes and yes. Movement toward greater integration is very clear but we are not like China or the EU where you can put up one office and that’s it for the region. In a way, this is an economic strength as well as a political challenge.

In ASEAN you have an opportunity to link supply chains from a hub like Singapore, which offers first-class amenities, to less developed markets with eager and driven populations rising out of poverty and looking for jobs in factories and a more modern lifestyle. Myanmar for example is a sizable country with a pool of young people looking for jobs and a government seeking to develop. Myanmar also has a sizable expatriate population that has lived and worked in countries such as Singapore and Thailand, as well as Australia, Europe and the US, where they received education and training. Now their economies are opening – and they are returning with capacity, experience and ideas to implement change. So these countries are not starting from zero.

In between, you have countries such as Vietnam, Thailand, Malaysia and Indonesia. Labor there remains hungry for work, the land is relatively cheap and demand is growing. Today, a lot of attention is focused on Vietnam in particular. This is a country of almost 100 million young, dynamic, and hard-working people, which is well on its way to becoming a competitive supply base for many products.

ASEAN also benefits from not being China. Our diversity offers a decentralized model that adds diversification to global supply chains. It can be more complex to work across ASEAN — there is no one President or government to go to – but it is also less risky for those who can manage across borders – as it is not a case where if one government or economy fails, then the investor also fails. Moreover, ASEAN is not a threat to anyone politically. Vietnam for example has a trade surplus with the US whereas Singapore has a deficit.

Those who invest in ASEAN benefit from having an alternative to China, though are still located in this growing region. This allows synergies with production clusters based there. Being in ASEAN allows companies and investors to benefit and participate in this growing regional economy without putting more eggs into the China basket.

You mentioned the US has enjoyed strong ties with ASEAN since its birth in 1967. This was a time when the US sought to develop regional allies in the face of the Vietnam and Cold Wars. Today, however, despite a move to initiate an “Asian Pivot” under the Obama administration and talk of the “Indo-Pacific” under President Trump, some question US commitment to the region. How do you view the US presence and role within ASEAN? What should US companies and leaders know about ASEAN and how does their presence compare to other nations including Japan, Korea, Australia, and the EU?

The US remains an important partner and market for ASEAN and when looking at its involvement in the region, there are three strands we can talk about. The first is like an underlying current in the ocean, the second is the waves on top, and third like a bright object on the surface. If you look at the current, the destiny of the US remains very much an outward one. It is the country that created the modern world and global trading system you and I have grown up in. It was built to America’s advantage and I think this strong current of the US having shaped and benefitted from this world is ever-present despite current tensions. So we have not seen, whichever President, a lack of interest from US business, its military or security establishment. So whether you call it an Asian Pivot, Indo-Pacific region or before that the War on Terrorism, we believe this current can and should have reasons to continue.

At the same time, there are waves on the surface. These are more noticeable, as it is hard to see the underlying current unless you put your hand deep below. The waves do matter and I would say right now they are choppy and we are now going through a period where Americans are questioning globalization and retreating from multilateralism and international engagement. I was in Seattle during the 1999 WTO protests. At the time President Clinton had the political savvy to suggest we let these voices in to assuage concerns – even as he was the president who signed and implemented the NAFTA agreement. As a result, after a time, things calmed down and the situation became less tense for the moment.

Since then, however, the waves have gotten more turbulent, and it is important to recognize the tensions that brought Trump into office are not singular to him. Remember that Hillary Clinton responded to those choppy waves in her election bid. She supported the Trans-Pacific Partnership (TPP) agreement while Secretary of State, and yet as a candidate against Trump, she too expressed doubts about the TPP. So it is not just the Trump administration and we can see a wave of US constituencies questioning and expressing concerns.

The concern is rising to the point where now even the underlying current of outward movement that I mentioned is less visible. Companies are now being judged by how many jobs they are reshoring and their loyalty to America and American jobs. This is now seen as more important than an overall win-win growing the global economic pie paradigm, which has guided the thinking of policymakers and companies for decades.

And then there is the ball or float which can be seen in tweets and incendiary rhetoric. These attract a lot of attention and concern but they are not necessarily consistent. You mentioned the Indo-Pacific strategy and frankly, I haven’t really seen one. I have seen Indo-Pacific statements and senior US officials talking about issues, but I haven’t seen an overall strategy tying things together. I have to say I view this from an ASEAN perspective and generally, ASEAN is the final stop after a comprehensive strategy dealing with other parts of Asia is finalized.

There is also much less US involvement in multilateral institutions. This is important given the nature of the problems the world faces today. I also think the State Department itself has less access and the whole US establishment which has guided foreign policy and economic engagement, has been weakened.

At the same time other countries – and China in particular – have upped their game. They engage us, not only at the top level – but very thoroughly on an ongoing basis.  Ambassadors of these countries, whether you agree with them or not, are out all the time engaging people, and are much more present. The US is still here but less than in the past. Take something as simple as Ambassadors. How many ASEAN countries have sitting US Ambassadors? And if you talk with the ones that are here, how much access do they have into Washington and White House decision-making at a high level? Stove-piping is always a problem in big countries, but it is now becoming a more serious issue.

Since the early days of ASEAN, China has developed rapidly and has now become the world’s second-largest economy. It is also a major driver of economic growth and seeks greater regional and global influence through vehicles such as the Belt and Road Initiative (BRI) and Asian Infrastructure Investment Bank (AIIB), at a time when the US is backing away from multilateral institutions and its traditional role as a global leader on a range of important issues. As tensions rise between China and the US, both in terms of trade as well as influence and security, how is the region affected, and what are the challenges ASEAN countries face in navigating this changing environment?

The pandemic makes a vast difference. We are trying to figure out in a post-pandemic world whether China or the US will recover faster and at the moment the answer seems to be China. It is still early, however, and of course, there is now an outbreak in Beijing so we will have to see. At the same time within China, there seems to be a growing understanding they need to remain engaged with the outside world. They also did not have this pre-pandemic spirit of isolationism and questioning of whether it is good for China to export and invest abroad. So unlike the US, they did not come into this with a globalization backlash, strengthened further by the pandemic.

Singapore recently entered into a “green lane” agreement with China for business travel and Singapore-based businesses of all nationalities can now travel to six cities and regions of China with minimal testing as a first step toward reopening our borders. This is not political but an effort to restore supply chain links and our ability to operate as a hub while maintaining decent safety levels. We are also trying to open Australia and New Zealand, and other countries in ASEAN, but those discussions are not yet concluded.

Also, if you look back to the global financial crisis of 2008, it is notable that Asia and China kept growing. While the US did not shrink, in relative terms its global market share declined. That caused an adjustment similar to when an elevator goes up and suddenly stops. I feel if the US does not respond correctly to the current situation, we may experience another of those adjustments; it doesn’t mean the US will fade and fall down the elevator shaft, but there will be another jerky moment and perceptions in this part of the world will shift further as they did after the onset of the global financial crisis.

That said, people in ASEAN want more US involvement and encourage US investment and more participation by US firms. We think of the market and technology as rational and neutral, but it is beginning to get colored. Meaning if people think the winner will be China there is a tendency to go more in that direction – even though we are still fighting to keep things as neutral, rational, and as inclusive as possible. You can see that in the struggle over the decision this week to award Singapore’s 5G network to Ericsson and Nokia, though it still maintained a smaller role for Huawei.

In the past, there was a belief in the west that China’s development would lead it toward a more democratic form of government and integration within the global trading system that arose following the Second World War. In recent years it has become apparent this is not the case and China is embarking on its own path. This has led to growing concerns about China’s aspirations and efforts to exert global leadership and establish standards in new technologies as seen its “Made in China 2025 initiative”, its policy toward Hong Kong and Taiwan, cybersecurity and privacy, social credit scoring and other policies, practices, and beliefs. Do you share these concerns? How does China’s model translate to ASEAN and do you see a new “Cold War” developing in which countries will be asked to choose sides?

I have studied, lived in, and like the US, but never assumed China would become more democratic. I believe the Party will have to evolve and change in response to China’s development but never assumed this would necessarily be in a democratic direction. When I look at the region beyond China, I would also say most in Asia are not a democracy in the US-style. Even look at Japan, which you Keith know well. It is not a one-party system like China but it is not a US-style democracy. Neither is Singapore. We will have an election here in less than two weeks, yet there is almost no doubt which party will win. So I am not sure you as an American would describe such systems as democracy.

So I do not look at China through an ideological lens of democracy and have always thought China would do what made sense for China. As neighbors, we do have to figure out whether what is good for China will be a threat to us, rather than win-win. This applies when we look at Chinese investment; we tend to look at it through pragmatic calculations. I do not begin with the assumption that it is an attempt to politically suborn every place where they invest. There are of course risks that remain but they can be managed. For example, with BRI we have talked to Myanmar and others about the risks of unproven projects that burden them with high debt. That is Singapore’s style. We initiate projects incrementally. We start with one terminal and gradually expand to five, or one chemical factory into a large complex as demand is proven. We have an idea of where we want to go – but build incrementally rather than start with grand projects.

That is why you now see a number of Singapore industrial parks in Vietnam. These parks are not just physical spaces. Some provide training, education, and skills development for local workers so they can better serve companies based there. This helps our neighbors while developing our role as a hub. Singapore companies are also involved in BRI. For example, Surbana Jurong provides consultancy services to some Chinese investors in ASEAN countries, as well as acting for the hosts on other occasions. The Port of Singapore Authority (PSA) is also pushing out into the region and beyond; recently opening a joint port in Greece with Cosco, a Chinese shipping line. So Singaporean efforts are to seek cooperation and commercial deals that look non-ideologically to support globalization and free trade around the world.

The bigger question is the “new Cold War” between the USA and China. We do feel it. We try to make rational decisions based on market principles but increasingly everything is reduced to whether “you are for or against China or the US.” For the AIIB, Singapore participated from the start because infrastructure is a big issue in the region. We are in the Asian Development Bank (ADB) too and the World Bank. We think there is no reason we can’t be in more than one, and I do not see why the US objected to the AIIB or what was the alternative they were offering. On the other hand, when American’s spoke about the Indo-Pacific we were happy to work with our ASEAN colleagues to develop an ASEAN understanding and response.

The view of the Indo-Pacific that ASEAN has developed is slightly different than the US, as our goal was to make it more inclusive and not just for democracies. But we do agree a larger framework for the region is necessary. For Singapore, as close friends with India, we have no problems working with them as well and continue to hope they will become more and more integrated with the region.

Even before the coronavirus and heightened US-China trade tensions, corporations were beginning to reevaluate global supply chains to lessen their reliance on Chinese production. Many view ASEAN as a natural beneficiary, offering cost and diversification benefits. As a result, we see many clients giving the region more consideration given its strategic location, strong infrastructure and its ability to bridge operations that had been based in China and still rely on inputs from there. How do you view ASEAN’s potential as the region rises in importance as a hub within the global supply chain? What are the prospects for developing and more developed countries in ASEAN– as well as integration between the two, for example, the relationship between Singapore and Batam/Bintan and the Riau Islands, where we have been active for many years, located in Indonesia only 12 miles away?

Our greatest fear is not a splintering of global supply chains but rather the idea of bringing everything back home in response to growing nationalism. Big countries sometimes think they can do that – whether it is the US, China, India, or even Indonesia. They believe they can produce everything for themselves and capture their own market. We used to see this in the “import substitution” and “beggar thy neighbor” days. That is something we need to work together to avoid. Post-pandemic there will be exceptions and a degree of self-supply is important, for example with masks and ventilators, to prevent a cut-off of supply. Similarly, markets such as Singapore which imports almost 100% of its food supply, need to rethink being completely reliant on offshore sourcing. But we need to make sure that tilt does not go too far.

But I would emphasize we are not going to exclude China either. The interesting question is whether we still believe in global supply chains. I think the answer is that we do, provided that security and other key concerns can still be addressed. If that is the case, countries that can provide that, who can reliably manage increasing supply chain complexity with good governance and rule of law, with an ability to deliver will be rewarded. ASEAN and Singapore are well-positioned in that regard.

The larger danger is that countries retreat back completely to a reliance on national production and protectionism. It is a lesser danger for supply chains to split into two, one being the US and the other a Chinese supply chain. Sometimes it is important for other countries to have guts and stand up against that and bullying from either side. This is especially important during the pandemic when some powerful countries were trying to grab masks and other medical supplies for themselves when these had been contracted to others. For Singapore, and for me as an attorney and international lawyer, I emphasize the importance of fulfilling contracts. This does not always work to our advantage in Singapore. Sometimes in the pandemic, neighbors cut off supply but we still try our best to observe our commitments. The rule of law is important. The bottom line is – trust is something you can’t ditch in a crisis.

You ask about Batam and Bintan as part of our strategy to expand across the region. These islands are part of Indonesia but stand just a small distance from Singapore. Back in the early 1990s, there was a lot of excitement in Singapore about their development as an early step in regionalization and cross border cooperation. They are still significant; proximity still matters, but not quite as much as before. Other opportunities arise, and regionalization has deepened. One newer aspect is whether that proximity is connected to another market.

For example, a major Singaporean company now has an industrial park operating in central Java that caters to Indonesia, rather than offshore markets like Batam and Bintan. Singapore also has more than seven industrial parks in Vietnam – and we do more there than in these Indonesian islands nearest us. Why? It is not because we do not like Batam and Bintan; they also have a role to play. But they do not enjoy any special preferences or contiguous market, have no natural workforce so workers there are imported from other parts of Indonesia. In the end, they remain useful, allow easy commuting, but do not provide a definitive advantage in an environment characterized by deeper and more complex regional integration.

ASEAN has been severely affected by the coronavirus – and by most measures handled the pandemic relatively well. Can you talk about how the virus has been handled in Singapore and other countries in ASEAN, the nature of regional cooperation, and how the pandemic is likely to affect economic and other aspects of integration moving forward? What lessons should the US take from the ASEAN experience dealing with the virus?

There are differences in how ASEAN countries have handled this and from what we can see, Vietnam has come out on top in terms of controlling the pandemic. In Singapore, the overall national numbers may look scary, but it is under control for most of the community though the problem is acute within the foreign work dormitories which account for the bulk of numbers.

Singapore has a strong health system and has ramped up testing and treatment facilities; our medical system has coped and there has been a very low mortality rate. Malaysia and Thailand are also doing relatively well. For Laos, Cambodia, and Myanmar the numbers seem ok but it is really hard to know for sure, given low levels of testing. In Southeast Asia, I think the biggest worry is Indonesia where numbers are beginning to rise while the country faces strong economic pressure to reopen.

A key question is transparency. The more you test the more you find cases. So we look at testing rates as an indicator. In Singapore, we have good testing for a small population. As testing increased in dorms for migrant workers, this caused our numbers to really jump. It was just last week that Indonesia overtook us as having the most cases – and we have to ask why did it take that long? Basically, many countries are not testing enough. When they do test, it is for confirmed cases and not more generally – and the number of tests per million is very low. So from the reported numbers, the situation may look acceptable, but no one can be quite sure.

The current question is how to ease up the restrictions to restart the economy and allow travel across borders. There are worries about importing cases and all countries have at least temporarily closed off tourism, which are important parts of their economies. In the pipeline, I think green lanes for business are possible. But there will continue to be concerns about large numbers of tourists unless easy and reliable testing and (ideally) vaccines are ready. So we will have to figure out how to manage borders – allowing transport of workers as well as goods and services – to restart our economies and manage our integration and supply chains in an increasingly interdependent region.

One of the things we have learned is we have to be open to help from outside and cooperation is critical. In early February we first had a China-ASEAN meeting on how to deal with the virus and it was just China, but then we had an ASEAN Summit and this was notable in bringing in Japan and Korea – two countries that have the industry and technology needed to help. Now some of us are advocating Australia and New Zealand also need to be added as well. If we address the pandemic together – we have a much better chance of containing and dealing with it. Harmonizing our approaches to treatment and travel is important. Multilateral dialogue and cooperation are essential and world leaders should encourage talk rather than just closing borders.

India also represents a major economy that borders ASEAN and has traditionally had a major impact though often gets overlooked given the attention paid to China. What is your view on India as a regional and global player and how important is its economy to the development of ASEAN and how should companies be approaching this important market? Additionally, any thoughts on current tensions between India and China?

Last year before the pandemic we had the Regional Comprehensive Economic Partnership (RCEP) discussions which could potentially not only open up India but bring India more into the region as a major global manufacturer and supplier – much as China embarked on that path decades ago. RCEP’s importance rose after the US withdrew from TPP negotiations, and aimed to bring together all ASEAN members and our key trading partners — including India, Australia, China, Japan, New Zealand, and South Korea. But it seems the Indians didn’t like that vision or thought the costs of opening up their market were too high and walked away.

They thought they could scupper the whole initiative, but ASEAN has decided to go ahead without them. That was not our hope and it would have been much better to include them, but we were not going to let India veto RCEP, and it will now proceed, aiming to conclude by the end of 2020. I always tell my Indian friends we have to move – particularly now with the pandemic – and they would be advised to jump on board.

India has tremendous potential and their size and promise will always be there – but it is a bit like a giant universe operating by itself – cut off from the outside. That is sad as there are some really top-class Indian companies that can more than compete in the region. But India as a whole has not really been fully engaged. The politics are complicated – and while Singapore remains great friends of India – it remains to be seen if a path forward can be found. If Prime Minister Modi with all the support he enjoys is not willing to open up, how and when will it happen? Compound that with the pandemic and a lack of desire to integrate, and my fear is India will miss the boat.

For Indonesia, the largest country in ASEAN, it’s different. They know investors are questioning reliance on China because of costs and Sino-American conflict and are working to catch the attention to join global chains and attract more investment to create more and better paying industrial jobs. They are trying but it won’t be easy. China has retained many supply chains, and many that moved decided to go to Vietnam.  One Indonesian minister I know quite well is working hard to attract jobs and promote innovation and some companies are moving to base there. The minister told me his scorecard is based on an ability to attract foreign investors and industry. It will be difficult, but it is good they are trying. India, however, has mostly been sitting on the sidelines and it may only get harder over time.

Singapore is one of the world’s great success stories and has become a preferred destination to establish businesses and operate for companies in a wide range of sectors, including as a world financial center. For many years we operated our own company there as a base for activities in Myanmar, Indonesia and other ASEAN markets which lacked the same level of infrastructure, governance and services. Does the Singapore model hold, and what changes need to be made, as neighboring countries develop? Can you tell us about current Singapore initiatives, the upcoming election and the “bubbles” that are being created for business, travel and trade?

Singapore understands we serve as a hub for the region and if we cut ourselves off due to the pandemic and health reasons, we will find ourselves in a bubble that does not have enough air for all of us. You can live your life that way if you need to, but resources become scarce and it will not be much of a life. So we have to reopen, and all small economies face similar issues. New Zealand for example is further away but faces similar decisions.

That is why we talk about green lanes and bubbles. We need to start but in a controlled way with trusted partners. In the past, we were wide open. When you entered Changi Airport, even before you got to the doors, they opened wide. There was seldom a line and often no one even checked your luggage. Now, while I have not been there in five months, I imagine the scanners are working overtime. You need to show a health certificate and the process is much more cautious and guarded.

My analogy is that we have gone from an automatic door and seamless travel to a situation that requires a special pass and perhaps a key before you will be able to pass. Safety concerns are a priority. But for Singapore, the important thing is the doors need to remain open even if there are more checks and verifications to ensure adequate safety and easy passage. Singapore is committed to that. The government just formed a new public-private partnership called the “Emerging Stronger Task Force”. This will gather ideas on how to develop new processes and procedures to get better ideas on Singapore’s economic strengths, and how to move forward into the “new normal” in the wake of the pandemic.

It won’t be easy. But when I look back, there is reason to believe we can rise to the challenges. Singapore came out stronger from the Asian financial crisis and we are determined to do that again. That was true after the global financial crisis as well. If we get it right, Singapore can come out stronger this time as well. Of course, we could get it wrong and have made mistakes along the way;  two recoveries do not automatically translate into a third so we have to be careful not to have hubris and to work hard and innovate to succeed.

As you know we have been active and involved with Myanmar’s development for many decades, and one of the more interesting developments – at least in terms of Singapore – are long term plans to develop deep seaports in Kyauphyu, which would provide a land route into China. This initiative would allow shippers to bypass the Straits of Malacca and the Port of Singapore which has long dominated trade in the region. How do you view Myanmar’s prospects and the potential of these projects?

Do we see other ports in the region as a direct threat to Singapore? The answer is no. We think win-win. Our ports are busy and before the pandemic operated almost at full capacity. If Asia continues to grow, the volume of traffic will grow even more. The PSA has been expanding internationally to places in the region and beyond. Moreover, within Singapore land is very valuable and there is a plan to create a new mega port named Tuas in the north of the island. The current site of one port is very close to the city and is such valuable land that, rather than stacking containers, far more value can be realized if it is used for real estate and infrastructure development. So while we do want Singapore to continue as a major port, this means that we welcome and want to participate in growth across the region.

As for Myanmar more generally, we are very encouraged and remain positive. We would love to see them come up like Vietnam. As mentioned, there are several Singaporean industrial parks there and while there are none are as yet in Myanmar – we have very good relationships there and see lots of potential. Many people from Myanmar received their education and training in Singapore and many Myanmar companies rely on Singapore for banking, legal and financial services. So there are extensive people-people relationships and we want to help and be part of their development. Also, two of the most active banks in Myanmar, UOB and OCBC are from Singapore and as Myanmar opens up and liberalizes they are seeking to increase their presence.

Thank you Simon for your time and attention. Look forward to speaking again soon!

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Keith Rabin serves as President at KWR International, Inc., a global consulting firm specializing in international market entry; trade, business, investment and economic development; site location, as well as research and public relations/ public affairs services for a wide range of corporate and government clients.