How RCEP Benefits US Companies in Asia

The Regional Comprehensive Economic Partnership Agreement (RCEP) — a free trade agreement (FTA) signed by 15 Asian countries on November 15, 2020, and accounting for 30 percent of world trade — is a significant pact that will strengthen regional supply chains in Asia by cutting tariffs on trade among the parties. BGA is closely monitoring the ratification process and implementation of the pact and what it may mean for U.S. companies.

The RCEP members include the 10 ASEAN countries plus Australia, China, Japan, New Zealand and South Korea and will go into effect 60 days after six ASEAN countries and three of the other partners ratify the agreement. While the United States is not a member, U.S. companies can take advantage of the RCEP’s provisions — including tariff reductions and common rules of origin — if they have existing operations in one of the 15 Asian markets or are planning on expanding into the region through local manufacturing.

In particular, the agreement will benefit companies with supply chains that reach across multiple markets in Asia and whose products and components face existing tariffs. How exactly companies take advantage of the RCEP will vary significantly given the complexity of the agreement — not just in terms of the uniqueness of the markets involved but also how provisions will affect individual sectors and products in practice over the next few years.

Companies with operations in the RCEP markets will benefit greatly from harmonized rules of origin as intermediate goods can be sourced across any of the 15 RCEP countries. Only 40 percent of RCEP’s regional value of content is required for goods to meet rules of origin requirements. In some cases, companies can cumulate content from any RCEP country to meet requirements.

As uncertainty increases over U.S.-China trade relations, the RCEP’s common rules of origin and low tariffs will encourage companies to diversify supply chains and manufacturing operations to Southeast Asia to take advantage of the preferential access. U.S. companies will be able to use the RCEP to circumvent tariffs and possibly the export controls China imposed late last year on inputs for biotechnology, construction and telecommunications.

The manufacturing sectors in which RCEP parties have existing tariff barriers — particularly electrical machinery, industrial machinery, telecommunications equipment and autos — will be the biggest beneficiaries of the agreement. For China, Japan and South Korea, two-thirds of new trade attributable to RCEP will consist of advanced manufacturing, which depends on multi-country supply chains.

The RCEP marks the first time that China, Japan and South Korea have entered together into a single FTA. These countries will be the largest beneficiaries as exports are estimated to increase by $248 billion for China, $128 billion for Japan and $63 billion for South Korea by 2030. The agreement is estimated to add $186 billion to the world economy. Other significant beneficiaries include Indonesia, Malaysia, Thailand and Vietnam.

The agreement eliminates up to 90 percent of tariff lines over a phased 20-year period. Until reductions are fully phased in, import tariffs may differ depending on the originating RCEP country and the destination RCEP market.

BGA will be keeping an eye on the ongoing consequences of RCEP and how they affect U.S. companies. These include general geopolitical effects as well as more specific implications for industries and sectors in certain markets in the Indo-Pacific region.

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Tracking Biden’s Team and Asia Strategy: Personnel is Policy

In Washington, it is often said that personnel is policy. As U.S. President Joe Biden’s administration continues to staff up in the coming weeks and months, this process will tell us much about who will lead key portfolios in the administration’s Asia approach and how it plans to approach the region more generally.

BGA is closely monitoring the staffing of key positions in the Biden administration as this takes shape over the next few months. This includes not just Biden’s initial Cabinet nominees – such as Secretary of State Antony Blinken who emphasized Asia’s centrality in his confirmation hearings and U.S. Trade Representative nominee Katherine Tai who is a strong advocate of confronting China’s trade practices – but the hundreds of expected subsequent appointments at the under secretary, assistant secretary and deputy assistant secretary levels currently held by holdovers from the previous administration or by acting officials.

As part of our continued commitment to this, BGA has developed an interactive document (included in this post) outlining which Cabinet and sub-Cabinet officials to date we believe will be key drivers of Asia policy in the new administration. This captures a snapshot of the status of the Cabinet thus far and the background of high-ranking officials who will play a vital role in steering their departments as part of the new administration’s approach to Asia.

BGA will continue to monitor key staffing changes and will inform our clients of relevant updates and engagement opportunities. These include broader personnel shifts important in assessing more granular aspects of continuity and change in Asia policy as well as the evolving shape of individual teams, be it the National Security Council which has the largest Indo-Pacific team to date or the Pentagon which is expected to be a hub for U.S. thinking about competition with China.

Unleashing Nepal’s Potential in 2021 and Beyond

After a challenging 2020 that included Covid-19, Nepal is among the Indo-Pacific countries looking to better realize some of the opportunities in front of it in 2021. BGA Senior Advisor Sujeev Shakya has continued to chart some of the pathways to unleash Nepal’s full potential in some of his ongoing work as well as writing and speaking engagements, building off of insights he had provided in his book “Unleashing the Vajra”. Below is a brief interview with Sujeev about Nepal’s current state and its future prospects.

1) One of the themes in some of your writing, including the title of your latest book “Unleashing the Vajra” is a need to move beyond the overemphasis by some on the challenges Nepal has and seizing some of the opportunities for the country in spite of the issues that remain. Can you elaborate on the origin of the term “Vajra” and its significance in your view?

The “Vajra’ has different meaning for different folks who follow Buddhism or Hinduism. For many it is the weapon that combines the indestructible force of the diamond and the unlimited force of the thunderbolt. For me it has been the symbol of potential as well as the indestructible power of positivity. It is symbol of the potential to unleash the dreams of many Nepalis who are land-linked to the two large economies of China and India.

2) As you’ve recently noted for a piece at the East Asia Forum, 2020 was a rocky year for Nepal for a range of reasons which derailed some initial high hopes for the country, including with the onset of Covid-19. Beyond some of the immediate effects, how would you say that observers ought to think about how it might affect Nepal’s positioning and the country’s story more generally?

Nepalis have great resilience as we can see the way we emerged from the decade-long insurgency and the big Gorkha Earthquake of April 2015. We will overcome the challenges posed by the Covid-19 as there is sense of moving on. We already see people talking about Covid-19 in past tense. International tourism will be affected for some time and take a bit of a hit. That said, Nepal’s tourism and hospitality industry, which is dependent on locals, has already started to show signs of recovering.

3) Despite the pandemic, you’ve also been continuing to do select travel and some virtual interactions internationally, and you’ve also written about the interactions between Nepal and the world, including people-to-people connections and the sense of “global Nepali.” What are some things that have struck you about cross-border connections amid Covid-19?

It is very interesting to note that flights from and to Nepal have been full, indicating Nepalis remain connected to the world (5 million out of the total population of around 30 million people work or live outside Nepal). We see the movement of Nepalis who are continuing to search greener pastures for jobs and opportunities. While the pandemic has impacted travel to many countries, people also find ways to use charter flights and other means to connect. Already, I’m seeing that Nepalis are traveling through Dubai to Bangkok, and I expect this will continue and even expedite as the world opens up more in the coming months.

4) Domestically, looking ahead to the rest of the year, Nepal has some key upcoming developments, including the potential for elections previously scheduled. What are some other major signposts you think will be important for businesses to watch looking ahead to the rest of 2021 and into 2022?

Nepal’s prime minister, who was leading a party with two-thirds majority of the house with the support of the President, dissolved parliament in December 2020, that is being contested as the Supreme Court. Whatever decision it takes, Nepal’s political landscape will see uncertainty, horse-trading and potential attempts to move to autocratic rule.

It will be important to see what Nepal’s military will do in this context. Additionally, given the fact that both China and India are deeply concerned about an unstable Nepal emerging, there will be geopolitical maneuvers to bring back stability.

However, we need to bear in mind that Nepali economy and society has continued to move ahead for decades amidst political uncertainty. Uncertainty is the only constant.

5) Among Nepal’s overseas relationships, one that has been in focus has been that with the United States with the new Biden administration. How do you think the new administration might affect the shape of engagement in U.S.-Nepal relations, and what would you say are some of the most significant avenues for additional collaboration?

Nepal shares a good relationship with the United States, especially at the people-to-people level. The United States is a significant development partner in Nepal and a sizable number of Nepalis over the past three decades have lived in the United States. Indeed, Nepal continues to be among top countries in terms of sources of students, and education along with programs such as the Peace Corps provide continuity in the relationship.

Turning to sources of change, immigration will be one where we might see Nepal benefit from Biden’s policies. The U.S. Ambassador to Nepal has already been quick to reach out with the message of the United States wanting to engage more deeply in Nepal, and therefore we should see investments along with increase in development assistance. It bears noting that Nepal’s development is in line with the values the United States stands for and promotes, be it in terms of women empowerment, ethnic inclusion or addressing pending issues of transitional justice.

Major and Middle Powers in the Indo-Pacific

On November 25, BGA collaborated on a virtual panel with the Stratbase Albert Del Rosario Institute (ADRi), an independent international and strategic research organization, as part of the Pilipinas Conference. The event featured some of the company’s leadership, including President and CEO Ernie Bower and managing directors from Australia, India, Japan and Singapore.

The BGA team participated in a conference panel focused on the geopolitics of the Indo-Pacific region, including the role of major and middle powers. The panel, which was moderated by BGA Senior Director Tiffany Ma, included remarks by Bower along with Managing Director for Australia Fergus Hanson, Managing Director for Singapore James Carouso, Managing Director for Japan Kiyoaki Aburaki and Managing Director of India Ratan Shrivastava. It also featured opening remarks by Stratbase ADRi President and BGA Philippines Managing Director Dindo Manhit and a keynote address by Philippine Secretary of National Defense Delfin Lorenzana.

Manhit’s remarks emphasized the multipolarity of the region apart from what he termed as “unipolar hegemony, and Lorenzana, in his keynote address, stressed the important role of ASEAN amid growing U.S.-China rivalry. In framing remarks before the panel, Ma noted the importance of appreciating the agency of key powers in a post-World War II regional order that is in flux, as well as their ability and willingness to shape the region’s future. Aburaki, Hanson, and Shrivastava all reinforced the role of major powers in the region, including Japan following the transition from Shinzo Abe to Yoshihide Suga, Australia and its delicate balancing act in managing ties with China, and India under the Act East Policy of Prime Minister Narendra Modi.

With the event coming just after the U.S. presidential election, the U.S. role unsurprisingly featured prominently in the discussions. Bower said he expected the Biden administration to reinvest in Asian architecture, including the East Asia Summit or the Asia-Pacific Economic Cooperation (APEC) forum, while Carouso noted that the simple desire to “show up” at multilateral for a would itself be a big departure from the current administration’s more transactional approach.

In concluding remarks wrapping up the panel, Ma added that the remarks reinforced the fact that contrary to some of the headlines often seen, individual powers in Asia are not just hedging their bets between the United States and China, but also seeking to drive agendas and asserting influence well beyond their borders as well. This was a theme that resonated more generally throughout the conference, now in its fifth year.

Introduction

Asia-Pacific Forecast | H1 2021 

Dear friends and colleagues,

The past year has changed us all. We won’t work the same way, we won’t think the same way. The pandemic and actions required to limit its impact have been humbling at best. I hope you and those you hold dear are healthy. If you’ve suffered losses, our thoughts and prayers are with you and yours.

In the global context, Asia has done relatively well, and we feel fortunate and deeply grateful to be focused on this resilient region. We have prepared this forecast to help you understand what is happening in Asia, know what to look for and plan to adapt, cope and seize opportunities.

Covid-19 will continue to cast a long shadow on Asia into 2021, even if the region’s role as the engine of global growth and innovation remains. The bigger question for 2021 is which leaders, countries and companies will be able to best position themselves to chart the path for post-pandemic viability and success.

Charting that path will require getting the basics right. As is the case for each of us, knowing who you are and who you want to be is important. That is the case for companies and countries too. All are in the midst of some sort of reckoning, reaffirming core principles and values, taking stock of priorities and building determination to run the rest of this marathon.

For companies, it is a critical time to reassess the future and what’s important, and that ranges from assessing teams to confirming market priorities. It means knowing your customers well and understanding the communities you work in and influence with the utmost care. Making those decisions and communicating them carefully to people involved in your future will be an urgent task for 2021 and beyond. Doing so effectively in Asia will require deep understanding, proactive adaptation and empathy.

For countries that remain hardest hit by the virus, such as the India, Indonesia, the Philippines and the United States, that means ensuring the pandemic is under control in a sustained way by flattening the curve and balancing that effort with economic revival.

For others who have been more successful in managing the virus, there will be more room to think about the shape of economic recovery and getting ahead of the curve. For instance, Taiwan, which has seen its international reputation soar amid deft handling of Covid-19, will continue to use 2021 to leverage what is the largest wave of investment reshoring in decades to strengthen its role in supply chain reorganization. With the pandemic largely under control in the last half of 2020, China managed to kick off substantial economic recovery by boosting manufacturing and exports, which is expected to continue into 2021.

Some Asian governments are beginning to use their recovery period to supercharge future-oriented priorities. In that context, the evolution of recently announced plans — be it South Korea’s “K-New Deal” that seeks to advance digital and green revolutions or Singapore’s five-year Research, Innovation and Enterprise (RIE) 2025 plan focused on the digital economy — will be critical to navigating in 2021 and beyond. Asia will change and adapt faster than the rest of the world.

New policy initiatives will not occur in a vacuum. Political leaders will face strong political headwinds into next year. For instance, Vietnam and Laos both have their Communist Party congresses in early 2021, Mongolia will hold its presidential election in June and there will be political maneuvering in countries with elections in 2022, including Fiji and the Philippines where President Rodrigo Duterte’s single, event-filled six-year term will expire.

Beyond regular political cycles, government leaders are recalibrating their relationships with core stakeholders. Geopolitical realities are more dynamic than they have been in decades. Populism and nationalism are strong movements that politicians are seeking to harness and channel. Such sentiment can be useful or dangerous, even terminal, for political leaders who can’t adapt quickly enough.

In this volatile context, the most successful companies are preparing for what a post-pandemic future means for their business from the nature of work and promoting diversity to secure supply chains and environmental, sustainable and corporate governance (ESG) to resourcing priority markets. That change will dominate the coming year is fully predictable.

Street protests demand significant political and social change in countries like Thailand, Pakistan and the United States. Leaders struggling to adapt and maintain political power in countries ranging from Malaysia to Papua New Guinea are timely reminders not to take legacy state-society relationships for granted. Parties that have dominated the political landscape for decades, such as UMNO in Malaysia, Indonesia’s Golkar and the Republican and Democratic parties in the United States are being challenged and reshaped.

The path to a post-pandemic future cannot be forged without comprehensive collaboration, as we have seen from the flurry of vaccine diplomacy in recent months and the travel bubbles popping up such as the Bula Bubble between Australia, New Zealand and Fiji. Even Indian Prime Minister Narendra Modi’s vision of a self-reliant India (“AtmaNirbhar Bharat”) recognizes that the country cannot afford to be isolated. His advisers have maintained that this does not imply a closed India, as evidenced by New Delhi’s efforts to invest in relationships across the Indo-Pacific.

Regional and multilateral organizations will be increasingly relevant in new year as well. We were reminded of this with the historic signing of the ASEAN-led Regional Comprehensive Economic Partnership (RCEP) trade agreement. While headlines will focus on China-U.S. geopolitical and economic competition, smart money will focus on ASEAN-centric economic and security architecture as the foundation for progress in the mid- to long-term. Regional summitry next year will put the limelight on the rising relevance of smaller and medium-sized countries as power becomes more diffuse. Specifically, we will see smaller countries playing a bigger role than usual with Brunei chairing ASEAN and New Zealand chairing the Asia-Pacific Economic Cooperation (APEC) forum.

There is real risk in rising geopolitical tensions. China’s assertiveness and pushback from neighboring states — manifested everywhere from border tensions with India to maritime muscle-flexing in the South China Sea to economic coercion directed against Australia — shows no sign of abating, especially with the Communist Party’s fifth plenum reinforcing that Xi Jinping’s rule is set to continue well into the future. Tensions with China over water use will continue to play out in the Mekong region of mainland Southeast Asia. Tensions are likely to flare in other areas around Asia such as cyclical saber-rattling by North Korea and India-Pakistan enmity.

Amid these complexities, we should not forget the power of people to shape Asia’s future. In terms of leadership, the transition in Japan from Shinzo Abe to Yoshihide Suga will be closely watched in 2021 amid the Liberal Democratic Party leadership election expected next autumn and the potential holding of a delayed 2020 Summer Olympics and Paralympic Games in Japan.

Former Vice President Joe Biden’s victory in the 2020 U.S. elections also offers the United States an opportunity to reset its ties with Asia from the legacy left by Donald Trump. Though Biden and his team are committed to reengaging with the world and an Asia-first foreign policy vision, a complete reset could prove challenging given a full plate of domestic issues. Biden may have trouble making significant changes with a Senate that is likely to be Republican controlled and differing views from within his own party of how he should prioritize. Acrimony over economic and political differences will continue between the United States and China. While Biden may try to reset the tone of the relations by cooperating in such areas as climate change, bilateral competition will continue to dominate.

Beyond new leaders, we can expect citizens around Asia to remind their leaders and all of us of the increasing role they play in decision-making and policy in their countries. The pandemic has spotlighted their significance — be it in Sri Lanka where informal workers who lack protection make up the majority of the labor force, Hong Kong where discontent lingers under China’s newly enforced national security law, or the United States where the Black Lives Matter movement brought racial justice to the fore.

Although Covid-19 will continue to hold headlines into 2021, it will likely be seen as having accelerated Asia’s centrality as the engine of global growth and the leading edge of innovation in the 21st century. Crisis, in this regard, has speeded up change. How countries, companies and people adapt in 2021 will tell us a lot about who will succeed in the years ahead.

Prepare for change. Embrace it. Use knowledge, a commitment to agility and open-mindedness as core tools.

At this time of Thanksgiving in my country, I want to thank you for your trust and confidence in my team and me. It is our honor to help you build these tools in Asia and to help you use them well. We wish you and yours the best for the rest of this year and for 2021 and beyond.

Sincerely,

Ernest Z. Bower,
President and CEO, BowerGroupAsia

Editor’s Note: Population, GDP and growth data reflected below is largely taken from the International Monetary Fund’s biannual “World Economic Outlook” report, most recently published in October 2020. As the pandemic impeded the normal collection of data earlier this year, some figures may appear inconsistent with previous reports. Additionally, GDP data for Pakistan reflects the most recent year of reliable data, 2019, due to issues relating to that country’s IMF bailout.

 

Japan’s Post-Abe Landscape

One of the key geopolitical events in the Indo-Pacific thus far in 2020 has been the stepping down of Japanese Prime Minister Shinzo Abe and the transition to Yoshihide Suga following Abe’s initial announcement August 28. Given Abe’s significant role in the Japan’s development and regional geopolitics and the fact that this is the first leadership change in Japan in eight years, the development has produced a flood of commentary about the extent to which the world should expect continuity and change from Japan both domestically and internationally.

While there may be a tendency to focus first and foremost on the aggregate consequences of leadership change, it is also important to consider more granular aspects as well, including how this will affect companies and their interests. Here, the reality is more complex: though uncertainty in some minds will probably settle a bit more once the shape of specific policies becomes clearer, there are nonetheless some sources of inbuilt stability as well.  As BGA Japan Managing Director Kiyo Aburaki recently put it in a note to BGA clients, a short excerpt of which was shared on BGA social media, “While Abe’s strong leadership will be missed, a new government is expected to invest more political capital to revitalize the economy and to strengthen U.S.-Japan relations as a prerequisite to winning the next general election of the Lower House.”

As Suga’s leadership takes shape, there will be a focus on some developments further down the road, including the next general election. More generally, though Japan faces a range of challenges ahead of it post-Abe, it also has some seasoned leaders who may be able to help it navigate through them, with Suga being a particular case in point. As Aburaki succinctly noted in a recent interview: “Nobody has had as long a tenure as Suga…He knows everything. He knows how government works. He knows how sectionalism has previously prevented change. That is a great asset for him.”

 

“Under Beijing’s Shadow: Southeast Asia’s China Challenge.”

BGA Head of Research Murray Hiebert’s much-awaited new book on China-Southeast Asia relations “Under Beijing’s Shadow: Southeast Asia’s China Challenge” is now available for purchase. In the book, which draws on Hiebert’s nearly half-century of expertise on Southeast Asia including stints in journalism, think tanks, and business, he delves into what has become one of the key storylines of Southeast Asia’s present and future.

Hiebert’s on-the-ground, country-by-country assessment of Beijing’s role in the subregion, based on interviews with key interlocutors, epitomizes BGA’s commitment to

granular, ground-based insights which is reflected throughout the company including the research team which he leads. His book will continue to be promoted in the United States and across the Asia-Pacific in the coming months.

Below is a brief interview with Murray about his book and his experience in engaging with audiences in the Asia-Pacific thus far.

You’ve been working on a range of issues across Southeast Asia and Asia more generally for decades. Why did you decide to focus this latest book on China’s role in Southeast Asia?
I had been watching how China was snaring features from Vietnam and the Philippines in the South China Sea since the late 1980s and the boost and challenges the Southeast Asia countries had experienced since China’s economic growth exploded, so I thought it would be useful to document with more detail and granularity what was going on. I also realized that the most recent books on the impact of China’s rise on Southeast Asia had stopped before Xi Jinping took office, so wanted to explore if he had brought changes to China’s policies to its neighbors to the immediate south.

While China’s role in the region may not be new, the central premise of the book is that Beijing’s influence has grown, along with the shadow it has cast in the region in terms of opportunities and challenges. What would you say are some of the key distinguishing features of China’s shadow in Southeast Asia today relative to the past?
China has become more assertive in the South China Sea since about 2013. It’s continuing to build dams on the mainstream of the Mekong in China – 11 are completed and nine more are being planned – has a giant impact on the Lower Mekong countries which are suffering from drought; the reduced water flow is affecting fish spawning and the lack of silt is threatening Vietnam’s Mekong Delta with salt water intrusion from the sea. China’s enhanced levels of trade and investment are boosting economic growth in Southeast Asia. China is also stepping up military cooperation, including arms sales and military exchanges, and bolstering its soft power by inviting more students to study in China and establishing more Confucius Institutes for language training.

The book takes a very granular approach to understanding how the region is responding to China, down to delving into country responses and grouping them. What are some of the key similarities and differences that you found between these country responses?
Some like Vietnam and Singapore would like to respond to China collectively through groupings such as ASEAN.  Others like Malaysia want to keep their heads down in the hope that China won’t step up its pressure against the country’s claims in the South China Sea.  President Jokowi in Indonesia wants to focus only on getting China to provide maximum investment to infrastructure development, so he tries to ignore China’s activities in the South China Sea and only gets activated when China challenges Indonesia’s claims over the Natuna Islands. Cambodia wants to ignore China’s assertive behavior and tries to block ASEAN consensus on the South China Sea, for example, hoping it will be rewarded with stepped up levels of Beijing’s largesse.

The book also addresses aspects of how we might think about China’s role in the region moving forward that goes beyond the extreme scenarios sometimes talked about, including total dominance. How should we think about the various scenarios for Beijing’s role in Southeast Asia in the coming years?
China certainly doesn’t want Southeast Asia siding with the United States in the dispute between Washington and Beijing. China wants Southeast Asia to be cooperative, particularly on the trade and investment front. Beijing would like enhanced military cooperation. If Southeast Asia is friendly to China, Beijing feels no need to try to dominate the region, but it looks increasingly like China will want to dominate the features and resources within its nine-dash line in the South China Sea.

As you’ve been talking about the book to regional audiences, what is the question you most often get and what are people most interested in understanding more about?
I get asked over and over again: what are China’s long-term goals, and is it seeking to dominate Southeast Asia? These are difficult and important questions, and my hope is that the book will provide at least an attempt at answering them.