The Coronavirus Pandemic presents severe stress to a world already torn by existing geopolitical tension and accustomed to multi-country production networks.
The outbreak took place in the midst of simmering trade tensions between China and the United States and the still unresolved dispute in the South China Sea. Countries, developed and developing alike, also enacted deficit spending to deal with the public health crisis and the economic aftereffects, catapulting their respective debt load.
For its part, Indonesia relaxed its legal limit on annual fiscal deficit of 3 percent of gross domestic product (GDP) by spending an extra Rp 405.1 trillion in the 2020 budget, increasing it to 5.07 percent of GDP.
Will countries seize this opportunity to resolve longstanding disputes: territorial and trade alike? Will nations rise to the occasion to showcase solidarity, especially toward the least developed ones? Will the world engineer globalisation to be pandemic-proof the next time it strikes?
The first trend to note is the stubborn persistence of realpolitik interests, despite hopes for their disposal or at least a halt in the face of a global health crisis. For example, despite the pandemic wreaking havoc on every claimant and relevant countries in the region, tension and dispute in the South China Sea continue apace.
In early April, a collision took place in the Paracels between a Vietnamese fishing vessel and a Chinese Coast Guard ship, resulting in the former’s sinking. Later that month, a Chinese geological survey vessel Haiyang Dizhi 8 conducted exploratory activities inside the Malaysian exclusive economic zone (EEZ).
Although it seemed like Beijing was exploiting the pandemic to improve its position, its actions were more reflective of its consistent move in proclaiming its “historic right”, namely the nine-dash-line claim that has been declared illegal by the International Tribunal of the Law of the Sea. Whatever its territorial and geopolitical intentions in the South China Sea, the pandemic does not compel Beijing to pause on them, no matter the struggle of other countries.
The second trend that lingers is unilateralism and lack of solidarity by some. Even as the pandemic ravages its own population, the United States suspended funding for the World Health Organisation (WHO), after accusing the body of being biased toward China, including in its core tasks of investigating early reports on the virus from China in December 2019.
As the US is the largest single funder of the WHO, accounting for 15 percent of its total budget, it is not clear yet how detrimental the effects of this funding withdrawal will be. Washington is also sitting out other multilateral efforts to tackle the virus. In early May, it refused to join a global effort by various countries and organisations to pool funding amounting to US$8 billion to discover a coronavirus vaccine.
Instead, the Trump administration opted to unilaterally push for a vaccine discovery through the President’s son-in-law Jared Kushner, called “Operation Warp Speed”.
Unfortunately, this lack of solidarity is not confined to the US. There have been calls for suspension of interest payments, principal repayment relief, or some kind of debt restructuring for developing and least-developed countries that have been saddled with high debt burden, even before the pandemic called for massive emergency spending.
In a summit in mid-April, Group of 20 (G20) countries accommodated this by agreeing to freeze government loan repayments for low-income countries for 2020, with the possibility of extension next year. All G20 countries, except one. As the biggest emerging creditor other than multilateral financial institutions, China signed up to the pledge but added the caveat of excluding its bilateral loans.
The bulk of Chinese loans to the developing world have been in bilateral loans in its Belt and Road Initiative (BRI); often likened to the Marshall Plan, which unlike BRI were actually grants, not loans. Most of these bilateral loans came from China’s policy banks such as the Export-Import Bank of China, with around 1800 projects around the globe. Due to their “commercial” nature, Beijing decreed that these loans were “not applicable for debt relief.”
The third trend is a casualty from the pandemic that most likely survives: globalisation. Factory closures from lockdowns and social distancing measures cause supply chain disruptions across Southeast Asia. Furthermore, export restrictions of medical supplies and agricultural products to prioritise domestic needs aggravate this disruption.
Cambodia and Vietnam have introduced rice export controls, endangering food security of neighbouring countries. Indonesia itself in March this year introduced a temporary export ban on antiseptic, mask raw materials, masks and personal protective equipment (PPE). These have understandably prompted calls for some reversing of globalisation: “reshoring” of critical production to be in-country and supply chain diversification.
But the logic of comparative advantage that spurs firms to outsource across multi-country supply chains during good times will make them do so again once they return. It is not clear how the pandemic will alter the fundamental dynamic of cost differentials and product availability that prompted companies to offshore in the first instance.
Even before the pandemic struck, a famous example was the failure of Apple in 2013 to bring back its production of Macbook Pros from Asia to Texas because of the lack of a specific screw made in America.
And asking companies to have multiple suppliers for a single component is essentially asking them to shoulder redundancies: a hefty request as this means more costs for those already on razor thin margins, even before sales dropped because of the post-lockdown drop in household spending.
Furthermore, it is doubtful where firms can indeed outsource and diversify during these days when the pandemic and its subsequent lockdowns are across the board: national, regional and global. Japanese multinationals, for example, have been reluctant to completely leave their Chinese plants despite cash incentives from Tokyo to diversify their supply chains.
In this regard, the best that countries can do seems to be building up strategic reserves, identifying specific bottlenecks in production and distribution, and proceeding with trade liberalisation. It is encouraging that ASEAN leaders agreed to establish an ASEAN COVID-19 Response Fund, even though its funding is not from new sources but redirecting around 10 percent of resources from the ASEAN Development Fund.
Apart from assisting countries “procure medical supplies and equipment for front line responses”, the fund should also help ASEAN countries build up reserves to weather future pandemic waves. In addition, it turns out ASEAN countries still charge high tariffs for importing PPE products, ranging from 17.1 percent in Thailand to 9.6 percent in Laos. Singapore has set an example by eliminating tariffs on them.
And fortunately, in the background, with a little help from video-conference technology, negotiations for the Regional Comprehensive Economic Partnership (RCEP) proceeded with expectations for a deal in November during a leader’s summit. For Jakarta specifically, the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) is set to enter into force on July 5 this year, 60 days after the Indonesian ratification.
These trends suggest that countries will most likely not use the opportunity presented by the pandemic to fix traditional concerns. There are indeed options to enact to deal with some excesses on the margins, especially on globalisation. But in these unprecedented times, we would still have to deal with our old world problems. The old world is dead, long live the old world.