U.S.-China Rivalry in Regional Economic Cooperation: Opportunities and Challenges for ASEAN

ASEAN countries should increasingly rely on regional economic cooperation as a platform for engaging with China and the United States, especially with their continuing geopolitical tensions. After the withdrawal of the U.S. from the Trans-Pacific Partnership (TPP) in January 2017, the remaining TPP members formulated the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which took effect on 30 December 2018. According to the 2022 State of Southeast Asia (SSEA) Survey, the main impact of the U.S.’s absence on the CPTPP is the rise in China’s regional influence.

China has played an increasingly important role in ASEAN’s trade over the past decade. Almost half of SSEA respondents perceive the rise in China as filling the void left by the U.S. (Figure 1). Such a perception reflects the rapid growth of China-ASEAN trade relative to U.S.-ASEAN trade. China was the top-ranked trading partner of ASEAN, while the U.S. was the region’s second largest trading partner, in 2019. China-ASEAN trade expanded from US$235 billion in 2010 to US$508.0 billion in 2019; this 116 per cent growth was nearly double that of U.S.-ASEAN trade, which increased by 63 per cent.

China’s membership in the Regional Comprehensive Economic Partnership (RCEP) and the prospect of its accession to the CPTPP further increase China’s role in supporting the rules-based multilateral system to which the U.S. is making a steady but selective comeback. The RCEP comprises ASEAN-10 countries as well as five non-ASEAN signatory countries, namely Australia, China, Japan, New Zealand, and South Korea. It has positioned China at the heart of the largest inter-continental trade bloc, which accounts for about 30 per cent of both global gross domestic product (GDP) and global population. The implementation of RCEP began on 1 January 2022 and should serve as a key engine of trade and investment in ASEAN and East Asian countries in 2022 and beyond. By 2035, trade and investment liberalisation under the RCEP will generate income gains of US$675 billion for its members. China and ASEAN account for 56 and 24 per cent of total income gains, respectively.  

In addition, Chinese presence in the CPTPP — subject to approval of its September 2021 application for membership — is expected to deliver substantial benefits for China and other CPTPP partners. Enlarging the CPTPP to China and other interested countries such as South Korea, Indonesia, the Philippines, and Thailand stands to increase global income by an estimated US$1,225 billion per year, which is seven times more than the current CPTPP’s contribution. However, there are concerns over China’s ability to comply with the CPTPP rules, such as promoting transparency in state-owned enterprises (SOEs), reducing state subsidies to SOEs, increasing intellectual property protection, and liberalising foreign direct investment.

The U.S. is likely to offset the rise of China’s regional influence through economic cooperation agreements and security pacts. On the upside, even if the U.S. does not return to the CPTPP, it may reengage with Asia through an “Indo-Pacific Economic Framework” (IPEF) as announced by President Biden in October 2021. The IPEF aims to strengthen the U.S.’s economic relations with Asian countries as a counterbalance to China. It may include the U.S.’s key trading partners in the region such as Australia, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Thailand, and Vietnam.

Even if the U.S. does not return to the CPTPP, it may reengage with Asia through an “Indo-Pacific Economic Framework” (IPEF) as announced by President Biden in October 2021.

Some possible areas of economic cooperation under the IPEF may include promoting high-standards trade, governing the digital economy, enhancing supply-chain resilience and security, and building digital connectivity. Translating these objectives into commitments and actions would require several rounds of negotiations to derive free trade or comprehensive economic agreements that set out rules for participating countries. If the IPEF is designed to compete with the existing regional trade agreements (RTAs) such as CPTPP and RCEP, the IPEF partners should conclude the agreement with broader and deeper commitments than those of its RTA competitors. 

Downside risks will derive mainly from the U.S. focusing more on security issues in Asia and the Pacific. 23.2 per cent of SSEA survey respondents fear the rise in regional tensions as the U.S. may shift its focus from RTAs to security pacts in the region (Figure 1). The spectre of these tensions weighs heavily on 15.9 per cent of respondents in Laos and 16.7 per cent in Vietnam to 26.4 per cent in Brunei and 29.8 per cent in Indonesia. Russia’s recent invasion of Ukraine, for example, would raise the U.S.’s concerns on the stability of the South China Sea and the Taiwan Strait. Such concerns may prompt the U.S. to reconsider its security commitments to Southeast Asia, and to expand its defence partnerships with allies and partners, including ASEAN countries.

U.S.-China rivalry in regional economic cooperation can generate benefits for ASEAN. The CPTPP plus China and other ASEAN countries, coupled with rigorous monitoring mechanisms, stand to deliver mutual benefits for its members. Translating possible areas of economic cooperation under the IPEF into free trade or comprehensive economic agreements should strengthen economic relations between the U.S. and some ASEAN countries. However, ASEAN countries may face the escalation of tensions between the U.S. and China on regional security issues.

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