[New Year Special Commentary Series - EAI Korean Diplomacy 2021 Outlook and Strategy] V. The World Trade Order in Turmoil and Korea's Response

Editor's Note

In the fifth installment of the New Year Special Commentary series, "EAI Korean Diplomacy 2021 Outlook and Strategy," Lee Seung-joo, Director of EAI's Center for Trade, Technology, and Transformation (and Professor of Political Science and International Relations at Chung-Ang University), predicts the global trade order following the inauguration of the Biden administration and suggests future directions for Korea. The author analyzes that the new Biden administration will maintain a hardline stance against China while solidifying cooperation among democratic nations. He explains that the RCEP, the first mega-FTA involving Asian countries, could be a significant factor influencing the Biden administration's strategy to return to a multilateral trade order. The author argues that amidst the turbulent global trade order, Korea must closely watch the Biden administration's return to multilateralism and proactively prepare with the US's CPTPP revision and the establishment of WTO digital trade rules in mind. Furthermore, he diagnoses that Korea needs to continuously strive to upgrade the Korea-US FTA in line with changes in the global trade environment. The author proposes that Korea should first undertake domestic legal and institutional reforms and simultaneously consider improving Korea-Japan relations for regional economic order.

Biden Administration's Launch and the Global Trade Order's Direction

"America is back." Amidst a global economic downturn and persistent "America First" sentiment due to the spread of COVID-19, President-elect Joe Biden clearly stated in November 2020 that the United States would lead a cooperation-based multilateralism again while continuing a hardline policy against China, which has unfairly benefited. The incoming Biden administration has presented clear goals and directions for its foreign economic policy; the issue lies in the methodology. To predict the leadership the Biden administration will exercise in restoring multilateralism, an evaluation of the achievements and limitations of the Trump administration's four years is necessary.

The Trump administration boldly pursued a hardline policy against China, continuously expanding trade restrictions on Chinese technology companies, including Huawei, for security reasons. This clearly differentiated it from the 'diplomatic grammar' of previous administrations. Despite causing political divisions and conflicts in numerous domestic policies, the Trump administration was relatively successful in creating a basis for bipartisan consensus on its China policy. This can be considered a political legacy of the Trump administration that favors the Biden administration's continuation of a hardline stance against China. However, the Biden administration also inherited the political burdens of the Trump administration. Despite the Trump administration's willingness to engage in trade wars to correct trade imbalances, their effectiveness remains questionable. While the US deficit with China increased from $375.1 billion in 2017 to a record $418.9 billion in 2018, it decreased to $283.5 billion in 2020. The reduction in the trade deficit with China might appear, at first glance, as a significant achievement of the Trump administration's trade war. However, the overall US trade deficit actually increased in 2020. Notably, the deficit in goods and services in November 2020 reached $68.1 billion, the largest since August 2006, when it recorded $68.3 billion. As a result of the trade war, the trade imbalance has merely shifted from China to other countries; the structural causes of the trade imbalance have not been resolved. Furthermore, the reduction in the trade deficit with China during President Trump's tenure was accompanied by a decrease in the trade volume between the US and China from $635.1 billion in 2017 to $503.5 billion in 2020. This suggests that the US and China are moving towards an era of 'managed interdependence' by continuously reducing the level of mutual dependence in the medium to long term.

Restoration of International Cooperation and the Complex US-China-EU Game

The Trump administration's repeated unilateral actions towards allies and partners weakened the foundation of international cooperation that could have enhanced the effectiveness of its China policy. President-elect Biden assessed that Trump's "America First" policy had resulted in an "America alone" situation and made it clear that he would "re-establish America's historic role as a global leader," judging that unilateral approaches would be insufficient to effectively contain China. President-elect Biden further proposed cooperation among democratic nations as a new means to counter China, which threatens the rules-based multilateral order. His proposal in December 2020 to hold a "Summit for Democracy" to "reforge the shared spirit and purpose of the free world" suggests that cooperation among democratic nations will not remain mere diplomatic rhetoric. Biden's stated return to multilateralism is not simply a restoration of the existing rules-based multilateral order but an intention for 'transformation' to adapt it to the changing domestic and international landscape.

The 'complex competitive and cooperative dynamics among the US, China, and the EU' will be a significant challenge for the Biden administration in restoring international cooperation. China responded swiftly to the Biden administration's return to multilateralism by reaching a principle agreement on an investment treaty with the EU in December 2020. Although an investment treaty is narrower in scope than an FTA and its impact is relatively limited, it has a considerable effect on the global economic order and the US's foreign economic strategy. From the EU's perspective, the investment treaty with China is a strategy targeting both China and the US. The Chinese government's regulations and discriminatory practices against foreign companies in the investment and financial services markets are well-known. By concluding the investment treaty, the EU can be said to have established a basis for fair competition in the Chinese market. Moreover, the EU-China investment treaty is also a countermeasure against the US. The Trump administration employed a dual approach (good cop, bad cop routine) towards China, leading to the Phase One agreement between the US and China in January 2020. From the EU's viewpoint, the US-China Phase One agreement helped US companies secure a superior position in accessing the Chinese market. Therefore, the EU-China investment treaty could have the effect of 'leveling the playing field' for European companies not only against Chinese companies but also against US companies. For the Biden administration, the EU's proactive move suggests that pursuing a China policy based on democratic cooperation and transatlantic cooperation will not be straightforward. This is a legacy of unilateralism left by the Trump administration.

The return of the US to multilateralism is clearly a new era's task assigned to the Biden administration. However, for the Biden administration to re-anchor the US in the multilateral trade order and, furthermore, to exercise leadership in its restructuring, a rebalancing between foreign and domestic policies is necessary. While the need for the US to return to the multilateral trade order is significant, considerable domestic political resistance is also anticipated. To heal the economic polarization and political divisions caused by globalization and free trade and to return to multilateralism, the Biden administration needs to overcome confrontational and exhausting debates. To this end, the Biden administration is expected to pursue a strategy of forming a domestic political foundation for a "third globalization" by mitigating economic polarization and political divisions through the expansion of the middle class. This is also a task of reconstructing the political and ideological foundation that supports multilateralism at the external level.脱globalization

RCEP's Conclusion and the New Dimension of US-China Competition

Another significant factor that could influence the Biden administration's strategy for returning to the multilateral trade order is the conclusion of the RCEP, the first mega-FTA involving Asian countries, after eight years of protracted negotiations, immediately following the US presidential election. The Biden administration, upon taking office, cannot but prioritize domestic policy issues such as responding to COVID-19 and economic recovery measures. Furthermore, the Biden administration will likely need to invest considerable political resources in balancing and harmonizing policies with potentially conflicting political interests, such as environmental policies and manufacturing labor policies, and in seeking the understanding of its support base. The reason for questioning the feasibility of the Biden administration's return to multilateralism, despite its declared commitment, is the domestic political situation that leaves no room for the Biden administration to disperse political resources towards foreign economic policy.

However, the momentum for change was created externally. The conclusion of the RCEP holds significant economic and strategic implications. While RCEP can be evaluated in various ways depending on one's perspective, it can be assessed against the "RCEP Guiding Principles" as proclaimed by the RCEP participating countries themselves. According to these principles, the RCEP participating countries aimed for a "modern, comprehensive, high-quality and mutually beneficial economic partnership agreement." Although it is difficult to consider that RCEP, consisting of 20 chapters, 17 annexes, and 54 schedules of implementation, has fully achieved all these goals, there is no doubt that it is the first mega-FTA to establish basic trade rules across Asia. Moreover, the RCEP participating countries include many economically vibrant nations such as China, Vietnam, and Indonesia, and it is projected that by 2050, seven of the RCEP participating countries will be among the world's top 20 economies. This is why the economic effects of RCEP, composed of countries accounting for 29% of global GDP, 29% of the world's population, and 25% of world trade, are highly anticipated in the future.

Furthermore, considering that Korea and Japan, and China and Japan, had not concluded bilateral FTAs among the RCEP participating countries, RCEP is expected to have the effect of a Korea-China-Japan FTA, promoting economic integration in Northeast Asia and, by extension, between Northeast and Southeast Asia. While many bilateral FTAs existed among RCEP participating countries, their utilization was low due to the 'spaghetti bowl effect' caused by inconsistencies and non-uniformity in FTA rules. RCEP is expected to resolve a significant portion of these issues by unifying trade rules. Additionally, RCEP has increased usability by unifying rules of origin and simplifying certificate of origin procedures for participating countries, thereby activating trade within regional value chains. On the other hand, considering that the CPTPP, which replaced and entered into force after the TPP, has limitations in expanding trade within supply chains due to the US withdrawal, it is necessary to closely monitor the impact of RCEP on future regional economic integration and regional economic architecture. Although not a core element of the negotiations, its inclusion of digital trade, intellectual property, environment, labor, and financial services also provides meaning by opening possibilities for a high-quality FTA in the future.

The strategic significance of RCEP is even greater. Chinese Premier Li Keqiang stated that the conclusion of RCEP, despite the waves of protectionism and the global economic downturn caused by COVID-19, confirms support for free trade and multilateralism. Chinese President Xi Jinping went a step further, suggesting that China would positively consider joining the CPTPP, implying that China would lead the restructuring of the future regional economic order. Facing the protectionist offensive of the Trump administration, the Chinese government pursued a dual circulation strategy (domestic and international) based on expanding domestic demand. Although the Chinese economy recorded an economic growth rate of -6.8% in the first quarter of 2020 due to the spread of COVID-19, it recovered rapidly, with an average annual economic growth rate of about 3% expected for 2020. RCEP is projected to contribute to the formation of a dual circulation structure between China's domestic demand and foreign trade. In this case, it is expected to lead to the formation of regional value chains and a regional economic order centered around China, thereby having a certain impact on the decoupling led by the US.

Meanwhile, the implications of India's non-participation are more pronounced strategically than economically. India's absence meant that Asian countries failed to form a self-contained regional economic architecture. It was widely anticipated that if India participated in RCEP along with Japan and Australia, it would establish an economic version of the US-led Indo-Pacific strategy, thereby containing China within the framework of the regional architecture. The US was in the process of concretizing its Indo-Pacific strategy, which had remained in the conceptual stage, by moving it to the execution phase. While the Indo-Pacific strategy showed achievements in various aspects, such as the Quad, Blue Dot Network, Clean Path Initiative, and Economic Prosperity Network, it had the limitation of lacking a comprehensive trade-based economic strategy. India's participation in RCEP could have complemented economic cooperation initiatives, enhancing the completeness of the Indo-Pacific strategy and thereby containing China. However, India's non-participation has resulted in a greater emphasis on China's influence.

Korea's Response Strategy?

The Biden administration's declaration of a return to multilateralism and the conclusion of the RCEP mega-FTA are expected to bring about changes in the multilateral trade order. How should Korea respond to the waves of change in the global trade order? First, Korea needs to pay close attention to the steps and methods the Biden administration will take to return to multilateralism. As mentioned above, the Biden administration is unlikely to rush its return to multilateralism or mega-FTAs for domestic political reasons. However, the Biden administration has also made it clear that "the US should write the world trade rules," not China, and is therefore expected to seek a form of multilateralism or mega-FTA that can be politically accepted domestically. Considering this, it is unlikely that the Biden administration will return to the existing CPTPP with its provisions frozen in favor of US preferences. It may propose strengthening labor and environmental rules as a condition for its return. This approach could serve as a political balance point that the Biden administration can use to persuade progressive factions within the Democratic Party and Republicans. Simultaneously, the Biden administration is likely to pursue a dual-track approach, including labor, environmental, and digital trade rules in the WTO agenda.

Korea needs to proactively prepare for the Biden administration's utilization of mega-FTAs and the WTO. First, Korea needs to make efforts to upgrade the Korea-US FTA. Korea has a precedent of amending the Korea-US FTA once with the Trump administration. Korea should proactively reflect changes in the global trade environment and continuously upgrade the Korea-US FTA to use it as a means to lead global trade standards. Regarding the Biden administration's use of the WTO, Korea needs to exercise leadership in bridging the gap between "21st-century trade realities and 20th-century trade rules." In 2019, 76 WTO member states agreed to submit a proposal for negotiations to promote e-commerce talks in a wide range of areas, including spam, source code, open government data, trade facilitation, market access in services, electronic signatures and certifications, and online consumer protection. As the Biden administration may promote negotiations on establishing WTO-level digital trade rules to return to multilateralism, Korea needs to prepare for this proactively.

Second, to lead digital trade rules, domestic legal and institutional reforms must precede. Although the passage of the "Data Three Acts" in January 2020 was evaluated as establishing a legal basis for the development of the data industry, there are also assessments that the regulations on the cross-border transfer of personal information, one of the core issues of digital trade, are insufficient. Therefore, more detailed preparation is needed in this area. Only when domestic institutional reforms are achieved can Korea take a more active stance in multilateral negotiations for the establishment of digital trade rules at the external level.

Third, it is necessary to systematically review the impact of the RCEP conclusion on the regional economic order and prepare proactively for the direction of change. Korea played a role in the background leadership during the RCEP conclusion process. With India's final decision not to participate, and in a situation where Japan, which had a strong need to contain China, sought to delay the conclusion of negotiations until India's participation, Korea exercised leadership in the successful conclusion of RCEP in cooperation with ASEAN countries. Now, Korea needs to actively seek ways to continue its leadership in the restructuring process of the regional economic order following the conclusion of RCEP. TPP and RCEP differ in many aspects. While CPTPP, with its frozen provisions, is a high-level mega-FTA aiming for "WTO plus," RCEP can be described as a developing country model aiming for "WTO-consistent." For Korea to exercise leadership in forming an integrated regional economic order by harmonizing such disparate mega-FTAs, it needs to explore various ways to participate in the CPTPP. As the Biden administration may seek to gradually participate through revisions to the CPTPP, its feasibility needs to be closely examined and prepared for proactively.

Fourth, Japan is a country that holds a significant position in the restructuring process of the regional economic order by participating in both CPTPP and RCEP. Japan demonstrated strategic multilateralism during the conclusion and launch of CPTPP and is expected to actively pursue the US's return to CPTPP and India's participation in RCEP in the future. For Korea to exercise leadership in the regional economic order, a review of its relationship with Japan is required.■

■ Author: Lee Seung-joo_Director of EAI Center for Trade, Technology, and Transformation & Professor of Political Science and International Relations at Chung-Ang University. He received his Ph.D. in Political Science from the University of California, Berkeley. His main research areas include international political economy, the international politics of trade, and global digital governance. His major works and edited volumes include "The Political Economy of Cyberspace" (edited by Lee Seung-joo), "Institutional Balancing and the Politics of Mega FTAs in East Asia," "Northeast Asia: Ripe for Integration?" (co-edited), and "Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions" (co-edited).

■ Managed and Edited by: Seo Jung-hye, EAI Research Fellow

Inquiries: 02 2277 1683 (ext. 207) / jhsuh@eai.or.kr

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