Authors: Mari Pangestu, University of Indonesia, and Christopher Findlay, University of Adelaide

The world in which Asia Pacific Economies operate is changing. Two main forces are driving this change — one ‘top-down’, the other ‘bottom-up’.

The top-down force is the emergence of a world with a larger number of key economies. In recent decades, growth rates around the world have diverged. For much of Asia, this has meant dramatic improvements in incomes and a huge reduction in the number of people living in poverty. It has also meant a new order among countries — a multipolar world.

The bottom-up force is the change in the way Production is organised, driven by progress in communications and information technology. Technological improvements have shifted the location of production, with production processes becoming increasingly fragmented across countries. The nature of work and the composition of skills within economies have changed.

Given the new order of production and trade, the Trump administration’s mercantilist focus on reducing merchandise trade deficits will end up hurting the United States, as well as disrupting global production networks.

As trade flows change, pressure for domestic structural change can arise. In the United States, a decline in support for international trade and openness has been exacerbated by a lack of adjustment support for geographically concentrated bearers of the burden. Their reaction via domestic political processes has shocked the international system.

In the United States and elsewhere, good macroeconomic outcomes no longer win elections. Much economic policy is now driven by nationalistic and protectionist politics. This is particularly evident in US initiatives to protect its domestic production and seek adjustments from China.

These political conditions were preceded by waning support for openness at a multilateral level. As multilateral negotiations stalled, the response has been the emergence of ‘mega-regional’ platforms such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP 11) and the East Asian Regional Comprehensive Economic Partnership (RCEP).

These initiatives sit atop a ‘noodle bowl’ of messy bilateral agreements. Before the current US America First regime, these mega-regional and bilateral agreements still operated under the lid of the World Trade Organization. The rules-based trading system was still an anchor for economic integration, especially the dispute settlement mechanism.

Today, the principles of openness, non-discrimination, transparency and open regionalism — which have helped generate prosperity in the region, especially for developing economies in Asia — are being severely challenged. When the United States leaves the TPP, undertakes unilateral action and declares that the multilateral rules have not served US interests, the anchor of the trading system is challenged. At most international forums like the G20, policymakers’ time is being wasted on phrasing defensive communiques instead of cooperating on the substantive trade and investment issues of the day.

At the same time, new issues are emerging in relation to trade and investment, such as the taxation of international income flows, the treatment of data flows and the management of intellectual property. Responding to climate change and finding appropriate policies to deal with inequality are also among the challenges.

Progress will be difficult in the multipolar world without clear leadership from the major economies.

Waiting for a consensus to emerge among key economies about the importance of maintaining these anchor principles — while at the same time dealing with the new issues that have emerged — is not an option. There are no obvious forces now at work to resolve this lack of consensus within a reasonable timeframe. Lower-income people in rural ASEAN areas, for example, should not have to wait for the rest of the world to figure out how to shift their own economies and communities to new sources of growth.

In the absence of leadership from the advanced economies, a shared leadership model in the region should be the answer. The key then is the response of the increasingly influential ‘second-tier’ economies. No actors are more important than Indonesia and Southeast Asia, operating through ASEAN and the ASEAN-plus regional agreements that are already in place and being consolidated under RCEP.

Recent statements by leaders in Indonesia indicate recognition of the role it can play and wants to play. But Indonesia’s contribution will be so much greater and more effective if it acts in concert with others. Concerted action could take multiple forms. It might include unilateral reforms, or working on sustainability initiatives that are in both local and global interests.

Effective concerted action depends on a few factors. Foremost, it depends on shared principles. Part of this is agreeing on a purpose, such as the basic principles of non-discrimination, transparency and support for the rules-based trading system. Other principles can relate to specifics, such as the management of open data flows. These principles provide important reference points as countries take their own actions. There is value in sharing experience and aligning countries’ expectations about each other’s reform programs.

These are not new approaches. Readers with long memories will recall efforts like the APEC non-binding investment principles and Individual Action Plans. But this is the point — we already have relevant structures for mobilising this cooperation that can be rejuvenated.

APEC is the most relevant example. Putting weight on APEC does carry a risk. But APEC has a well-developed network of second-track structures that can be engaged more deeply. Given the complexities of the new issues facing the regional economic order, it is even more imperative that there be wide, multi-stakeholder participation and input.

Even more importantly, APEC remains a forum in our region where key economies in the multipolar world and the leading second-tier countries can interact effectively, and where the major protagonist, the United States, can still be engaged.

Mari Pangestu is former Indonesian trade minister and Professor at the University of Indonesia. Christopher Findlay is Professor and Executive Dean of the Faculty of the Professions at the University of Adelaide.

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Trade Wars in Asia’.