In an exclusive interview with Technical Politics, Professor Jayant Menon, Visiting Senior Fellow at the ISEAS Yusof Ishak Institute in Singapore discussed the US-China trade war, the economic effects of the coronavirus pandemic in Southeast Asia and his thoughts on the Regional Comprehensive Economic Partnership (RCEP).

Prof. Menon started his career as an academic economist after studying in Australia, where he gained a Doctorate in International Economics from the University of Melbourne. Subsequently, he became a Senior Research Fellow at the Monash University, and concurrently, before he joined the Asian Development Bank (ADB) in 1999. During his tenure at the ADB, he worked on the India Desk, the Regional Economic Monitoring Unit, the Southeast Asia Department, and the Office of Regional Economic Integration, before a final post as lead economist in the Office of the Chief Economist. He also worked as Senior Research Fellow at the ADB Institute in Tokyo from 2005 to 2008.

One of Menon’s major achievements was the development of the international trade stream, and the formation of a dedicated trade team. He was invited by the Royal Government of Cambodia to develop a long-term economic vision for the nation, namely Cambodia Vision 2030. Prior to his work at the ADB, he worked as an academic in Australia for more than a decade. He currently holds appointments with the Australian National University, University of Nottingham in the UK, and IDEAS, Malaysia. In addition to this, he has served as the Board Director of CDRI, Cambodia, and sits on the Advisory Board of the University of Nottingham Campus in Malaysia.

Prof. Menon serves on the editorial board of several academic journals including the Journal of Asian Economics, Asian Economic Journal, Journal of Asian Economic Integration and Foreign Trade Review, among others. He is the Book Review Editor for the Journal of Asia-Pacific Economy.

It is unsurprising therefore to note that Prof. Menon has established himself as a leading economist focusing on the economics of the Southeast Asian region, in the process of which he has authored or edited fifteen books, more than forty book chapters, and over seventy articles in academic journals.

Moving Production out of China

NW: What did the US-China Trade War achieve? Was it a success for the US?

JM: What I think the US-China Trade War has produced is the disruption of global supply chains. We have seen a lot of relocation of investment out of China into other countries in the region and this has been disruptive. It has placed a great cost onto China, the US, but also on firms in other countries. They have had to move their investments around in order to avoid the punitive bilateral tariffs. There have been winners and losers from this, [but] both China and the US have lost, the world on a whole has lost. The winners have been in Southeast Asia, particularly in Vietnam, Malaysia and Thailand. With firms moving out of China to then producing in these nations instead.

NW: How did China respond to the US-China Trade War? Was China successful in its response to it?

JM: The US did not achieve its objectives; the trade war did not benefit US firms and it didn’t really punish China that much. Firstly, China responded with its own tariffs but not on as much trade as the US. This is because China runs a trade surplus, so it sells more to the US than it buys from the US. The terms were relatively equal, there were rounds of 10%, 15% and 25% tariffs. What I think China has been a lot better at is the restructuring of its supply chains. People are talking about lots of firms moving out of China, but China itself has been moving out of China. So, there have been relocating to Vietnam to avoid those tariffs. It is Chinese-owned, but it is not located in China.

NW: Is it the case with manufacturing that you can make 95 per cent of a mobile phone in China, make the remaining 5% in Malaysia, and therefore it is made in Malaysia? Do you mean it in that context, or is it more to do with Chinese manufacturers moving directly out of China?

JM: I think it is a bit of both, the first example is more realistic in Vietnam. This is mostly transhipment; this is where we see mostly everything is made in China, but is then exported to a third country like Vietnam as if to make it appear that it has come from that country. This was happening at the start of the Trade War, but the US authorities clamped down on this very quickly on Malaysia, Vietnam and the Philippines as transhipment points. Because of this, firms having been moving substantial parts of production out of China. It is important to remember that the tariff is placed on 100% of the value even if only 5% is produced in China. I think, therefore, lots of restructuring has occurred from a relatively small tariff.

NW: Where does ASEAN fit between the economic Great Powers?

JM: I think there are two answers to that question. Firstly, there is what should ASEAN do? The second is, what is it doing? Regarding what it should do, ASEAN should not pick sides, this is often said, but I agree that it is true. But China and the US are important markets for these countries. China is more important on the production side, while the US is more important on the consumer or demand side. They are too important to pick one over the other. However, in practice this is not always the case. ASEAN is a diverse grouping and its member states have different levels of engagement with various countries. It is an open secret that Laos and Cambodia are more aligned with China than with the US. It is down to the engagements ASEAN states have with the powers. When ASEAN has tried to take a common position, it normally fails. Because of this, there is no clear-cut answer to this, each country will respond differently, but what they should do is not pick sides.

Southeast Asia Shines amid the Coronavirus Pandemic

NW: Which countries have succeed economically in ASEAN with handling the coronavirus pandemic, and what does this mean for the future?

JM: Four countries that have not dealt with coronavirus well: the Philippines, Indonesia, Myanmar and Malaysia. All other countries have kept transmissions down while in contrast the Philippines and Indonesia have seen the highest rates of community transmissions and highest number of infections and deaths. The Philippines introduced a very strong lockdown, but is still struggling with the virus, while Indonesia did not and is still struggling with the [virus]. Lockdowns are not a guarantee of stopping the spread of the virus, but is a guarantee is an economic crisis. Because of this the Philippines has a deep economic crisis, while Indonesia has avoided that.

The nation that did well was Vietnam. This is because they locked down very quickly and reduced the spread. They also avoided the recession. So, it is a mixture of things; there are no golden rules. Acting quickly and forcefully seems to work in this region, but you need to have the institutional setup to ensure that lockdowns operate as they should. I think it is obvious that you cannot lockdown in countries that are a lot poorer. This is because of the lack of a social safety net and have lots of people that rely on a day-to-day living wage, lockdowns will be breached if you cannot compensate people.

NW: Do you think that the coronavirus pandemic will be used as an excuse to start economically decoupling for China and diversifying trade within the Asia-Pacific, like is being seen in Japan and India?

JM: I think we blame the coronavirus pandemic for a lot of the economic problems, when in fact all it has done is accelerate the existing trends… The restructuring of the supply chains has mainly been due to the US-China trade war. I do not think we would be seeing too much economic decoupling form the pandemic alone. This is because the decoupling started a long time ago; this is with raising wages in China and rising environmental regulations after joining the WTO. In short, some countries might want to exploit this opportunity if they have an interest in marginalising China, but, by and large, the pandemic has not had any major effect. …

NW: What does the rise of Vietnam and Indonesia as regional economic powers mean for China and its economy, especially regarding the potential for further economic decoupling from China?

JM: I think the rise of Southeast Asia need not and does not threaten China. China is a giant and cannot be threatened by the rapid growth of its neighbours. What I think it will do is to help China with its own growth in the region. The difference comes back to supply chains and are critical in this understanding. Supply chains involve a large amount of interdependency, and one country winning an investment over other another does not mean that the loser will not benefit. It is all linked up, and a lot of these countries have succeeded due to China’s growth. This will become obvious during the pandemic recovery. Southeast Asia is doing so much better than other regions. As China has recovered, so have they. You cannot separate out the growth story between both parties in the region.

A Shallow Agreement

NW: What your thoughts on the RCEP?

It is a good thing that RCEP has concluded recently after eight years [during which time] they have missed several deadlines. I think for it to be concluded in this climate of gloom and doom is a very good signal. This is especially relevant when the temptation to retreat behind borders and look inwards is rising. The reason this is a good signal is because it shows that countries are committed to engaging with each other on a rules-based trading system. This is at a time when multilateral institutions are also under attack, particularly from the Trump Administration in the US. In practice, RCEP will have positive impacts in the growth of supply chains in the region.

We also must recognise that RCEP is a shallow agreement. This is because it leaves a lot of the difficult issues by either ignoring them or deals with them relatively superficially. As a result, it does not have the same level of depth that the TPP has. I hope that RCEP will remain outward-looking like ASEAN has been. I hope that India considers joining, and that will boost multilateralism.

NW: What is one thing that no one is talking about, but you feel is important within academia?

Firstly, it is being discussed again, and it is easy to forget because we have taken it for granted: it is the need for a rules-based order. Having a system where rules govern our behaviours and when they are broken there is an efficient dispute mechanism to resolve said grievances. We have taken these for granted for too long. Slowly but surely, we are returning to that. The WTO regaining its place is important. Its crown jewel is its dispute settling mechanism, which has been paralysed by the US not wanting to appoint judges. So, that is one thing I would highlight, [namely] the return of a rules-based order, in general, and, in particular, the revival of the WTO.

It remains unclear how the incoming Biden Presidency will approach its relationship with China. What is clear is that the US-China trade war was a failure for both parties. For Southeast Asia, the coming months and years will show how well it has responded in economic terms to the coronavirus pandemic, and how effective the RCEP has been.

Nathan Wilson is a student of philosophy and politics at the University of Stirling, specialising in International Politics and Political Violence within the Asia-Pacific region. He previously studied abroad at Lingnan University in Hong Kong. 

Picture of RCEP meeting courtesy of the Australian Department of Foreign Affairs and Trade via Flickr. CC BY 2.0. 

Picture of Prof. Menon reproduced by permission.