The European Union’s adoption of a Strategy for cooperation the Indo-Pacific in April 2021 is a milestone. But it lacks a much-needed reassessment of its trade policy in the region, especially as regards to ASEAN and Taiwan.
The emergence of an EU-wide overarching approach to a region “encompassing the geographic area from the east coast of Africa to the Pacific Island States,” as the EU member states put it, shows how much the world and the EU have changed. One could call the Strategy for cooperation the Indo-Pacific a ‘Not-China’ strategy for Asia.
The EU adopted a China strategy in 2019, which defined China a ‘systemic rival’ with which the EU will, however, continue to cooperate in areas of common interest. The COVID-19 pandemic, with its supply shortages of medical equipment and of critical industrial inputs, and the recent flare-up of political tensions between Beijing and EU member states has strengthened the desire in the EU to become less dependent on China. The intention now is to diversify political and trade relations in Asia.
The Indo-Pacific strategy is not anti-China. In fact it reaffirms the EU’s goal to ratify the Comprehensive Agreement on Investment concluded in December 2020. CAI’s ratification is currently on ice due to deteriorating EU-China political relations.
If it is ever ratified, CAI would subject China to international rules which more ‘like-minded’ Asia-Pacific partners of the EU would also welcome. This includes subjecting state-owned enterprises to rules mandating market-friendly commercial behaviour, transparency for industrial subsidies and the abolition of forced labour.
Work in progress
The new strategy itself is not yet settled.
The April document is from the Council of the European Union. Its ten pages offer a general direction for the EU’s external action in the region. In these ‘conclusions’ EU member states have tasked the European Commission and External Action Service with presenting a more detailed ‘joint communication’ by September 2021, which will come up with further policy proposals.
Trade and investment policy is only one topic of the new EU strategy, which also covers, among others, maritime security, connectivity, and other political, environmental and social matters.
The member state document says that the EU’s engagement with the Indo-Pacific should “foster rules-based international order, a level playing field, as well as an open and fair environment for trade and investment, reciprocity, the strengthening of resilience, tackling climate change and support connectivity with the EU.”
The document states that “the EU will need to strengthen its strategic trade position and level the playing field.” It adds that the EU “will continue to explore and negotiate ambitious trade and investment agreements in the region (…). It will aim to conclude free trade agreements with Australia, Indonesia and New Zealand (…). The EU will continue to explore deepening economic relations with India.”
The strategy paper further talks of “protecting our supply chains.” Last but not least, it stresses EU “support for ASEAN centrality.”
ASEAN is the group of ten South-East Asian countries that is seen as a driving force behind recent mega-regional trade agreements such as the Regional Comprehensive Economic Partnership – or RCEP – where China also participates. ‘ASEAN-centrality’ is a term used by academics and policy makers to give the 10-country grouping a defining role in shaping the rules and norms of the Indo-Pacific region.
ASEAN represents in total 4.2% of EU goods trade and 4.4% of its services trade. Japan, with which the EU has a free trade agreement in force, represents 3% of its goods trade and 2.4% of its services trade. For Korea the numbers are 2.5% and 1.1% respectively, and for Australia 1% and 1.3%. Giant India represents only 1.8% of EU goods trade and 1.7% of services trade.
The EU already has free trade agreements in force with Japan, Korea and Singapore and Vietnam. It re-launched long-stalled trade negotiations with India in May 2021.
Business as usual on trade
The trade policy aspects of the new strategy offer nothing new. The document merely describes what the EU is already doing. That is a problem.
There has been no extra thought into what could be a more systematic Indo-Pacific trade strategy for the region in light of recent developments.
The European Commission recently revised its industrial strategy. It studied in-depth the ‘strategic dependencies’ revealed during the pandemic, which have the potential to “significantly affect the EU’s core interests and limit the EU’s freedom to analyse, make decisions and act according to its own priorities.”
The Commission found that about 6% of EU imports are ‘at risk’. The health, digital and electronics and energy sectors are seen as the most ‘critical’ for the EU. China caters for 52% of that risk. But other Indo-Pacific countries were also identified as potential sources of supply chain risk: Vietnam, Singapore and South Korea, which supply critical industrial inputs.
During the crisis, the EU has also discovered how much it was dependent on the companies of one major economy in the region for some of its inputs, not least semiconductors: Taiwan. Yet the strategy paper does not mention Taiwan anywhere, despite its economic significance in the region and for EU industry.
Taiwanese firms hold about 60% of the market share for global semiconductor fabrication, according to research by the think tank Bruegel in Brussels. Contrary to the US, which also depends on semiconductors from Asia, the EU does not even have meaningful design capacity for such critical components. Yet without such components, the ongoing digitalisation of EU Industry – a key German interest – is not conceivable.
Innovation needed on ASEAN and Taiwan
The EU needs to innovate in its trade policy approach to ASEAN and to Taiwan.
The industrial dependency figures of the Commission show that the EU should have an interest in sources of critical industrial supply chains are further diversified. If Vietnam is the source of so much critical inputs for the EU this is because many global companies have invested there already to diversify away from China.
Vietnam already has a wide-ranging free trade agreement with the EU that subjects trade to rules that reduce the scope for governments to enforce export restrictions. But like any bilateral FTA, the benefits of the trade agreement for industrial products are limited by stringent rules-of-origin. These rules mandate a minimum amount of local production that is required for a product to qualify for duty-free treatment.
If a country like Vietnam is becoming a source of potential worry for those caring about supply security in Europe, this means the EU needs to source more easily from a wider pool of countries in ASEAN. It also needs to have flexible rule of origin arrangements to have firms be able to shift sourcing in times of demand or supply chocs.
This means the EU needs to think again about starting negotiations on an ASEAN-wide arrangement on trade with the EU that involves common rules on technical industrial standards, on export restrictions, and in particular flexible rules of origin that facilitate cumulation of inputs across the region.
The EU has had plans to launch a region-to-region FTA in the past but these failed. The EU should start thinking again about a more flexible approach in its trade agreements with ASEAN focused this time round on industrial supply chains.
There is Taiwan. The EU is simply ducking the question of what to do about the island. Yet Taiwan is one of the top critical issues at the moment in terms of maritime safety and broader stability in the Indo-Pacific, on top of being a thriving democracy and a critical industrial player for EU industry.
Brussels fears China’s reaction to any move that would look like the pursuit of formal diplomatic engagement with Taiwan. Yet Taiwan is an autonomous customs territory, a full-fledged World Trade Organization member and has a suite of bilateral trade and investment agreements in place with countries in Asia that strictly follow the One-China principle.
It’s time for the EU to start thinking again about an economic agreement with Taiwan – perhaps a trade agreement that focuses on tariffs, technical standards and other critical trade rules rather than an investment agreement. Thinking and action needs to start now.
Views expressed by columnists at Borderlex are strictly their own.