Asia-Pacific Economic Security, Supply Chain Diversification, and Multilateralism in the Indo-Pacific

Roselyn Hsueh is associate professor of political science at Temple University. This piece was written for Perry World House’s 2023 workshop “Economic Security and the Future of the Global Order in the Indo-Pacific.” 

Chinese President Xi Jinping today presides over a China less open to global markets, more authoritarian, and more precarious for global security than any time since the Tiananmen Square Incident in 1989. Whether it is the Uyighur labor camps, the country’s shifting COVID policy, escalated military threats against Taiwan, failure to condemn Russia’s invasion of Ukraine, or the country’s expanding aerial surveillance program, China presents unpredictability and instability not just in global security and human welfare but also in the global economy. It is thus imperative that the United States redouble its efforts with democratic allies around the world to reconfigure supply chains and global production networks. Doing so will be a win not only for free trade but also for democracy globally.    

A bipartisan resolution in the US Congress called the recent January-February spy balloon incident “a brazen violation of US sovereignty.” On February 1, a Chinese spy balloon was spotted over continental United States days before Secretary of State Antony Blinken was to visit Beijing for the first visit by a US secretary of state to China since 2018. The Chinese government claimed that it was a weather balloon out of its control. The Biden administration cancelled the trip, where during which Blinken was expected to meet with Xi Jinping. The US military eventually shot down the balloon near the South Carolina coast and several unidentified high-altitude objects flying over Alaska, the US-Canada border, and the Great Lakes.

These diplomatic disputes over air space sovereignty spotlight the economic and security nexus and the techno-security developmentalism that drive Chinese capitalism and development at the expense of global norms of business. China has achieved increasing dominance up and down the semiconductor value chain and headway in dual-use advanced communications and smart textiles, such as the canopy for the spy balloons. This has enabled China’s aerial surveillance within and external to the earth’s atmosphere and orbit, including an extensive spy balloon program that has mounted dozens of missions since 2018 to more than 40 forty countries across five continents. The US Department of Commerce has placed Chinese entities supplying smart textiles, cameras, and signals communications for surveillance balloons on its trade sanctions list. 

It is important to note that dual-use technologies are produced not just by state-owned and state-sponsored companies but also heretofore private enterprises. The latter experience corporate governance interventions and other reregulation by the Chinese state to achieve civil-military fusion and political consolidation. Of course, the U.S.S can sanction China, impose export controls, and place the companies supplying the balloon canopies, cameras, and communications devices on the entity list. The most effective long -term solution, however, is the diversification of US supply chains to reduce reliance on China as a producer and market for non-defense-related products, much less those with dual-use capabilities.  

The United States can be proactive and market oriented in its assurance of peaceful coexistence and sustainable development by strengthening economic cooperation and global production networks with our democratic allies and trade partners in the Indo-Pacific. Important steps are already being taken. The Biden administration’s Indo-Pacific Economic Framework is designed to work with US’ Asian allies to diversify supply chains, especially in semiconductors—the backbone of high-tech industries from mobile telecommunications and cloud services to autonomous driving vehicles. The US Congress also passed the $280 billion CHIPS and Science Act with bipartisan support. This is in addition to the export controls to protect the transfer of the most US national security sensitive high-tech intellectual property and a ban on China-produced telecommunications and video surveillance equipment deemed to pose a national security threat.  

Following China’s 2001 entry into the World Trade Organization (WTO), it seemed the country was poised for political change given its seeming embrace of economic liberalism. Instead, after successfully courting foreign direct investment (FDI), the Chinese government has reregulated to manage market entry, business scope, technical standards setting, and ownership structure to build the national technology base and strengthen authoritarian rule over telecommunications, semiconductors, and other critical dual use sectors. This “liberalization two-step” began shortly after WTO accession. The Xi Jinping era intensified the scope of state intervention in market coordination in the context of more market actors across ownership types.  

China’s building of the semiconductor industry from scratch employing FDI and state intervention at the sector and corporate levels is a critical case. Backed by global venture capital in a joint venture with the Shanghai government, the Shanghai-based Semiconductor Manufacturing International Corporation, known as China’s first pure-play semiconductor foundry, was co-founded in 2000 by a former executive at Texas Instruments, Richard Chang, with a Peking University professor Wang Yangyuan. However, the ouster of Chang as CEO in 2009 and the divestment of foreign equity stakes signaled how political objectives in the country’s quest for self-sufficiency in technological advancement has consistently trumped market forces in China.   

The November 2020 halting of the global listing of Chinese entrepreneur Jack Ma’s Ant Group and the subsequent forced reorganization of his company’s fintech holdings follow the same modus operandi. These companies act as commercial actors and abide by the will of the authoritarian Chinese state and its military. The recent restructuring of the state-controlled Tsinghua Unigroup and its subsidiaries, and the detention of Zhao Weiguo, its former head, further show the Chinese state’s bent on creating a globally competitive indigenous semiconductor industry under the government’s direct control. These illiberal interventions to manage sectoral development and to achieve political consolidation reveal the Chinese government’s lack of interest in playing by established global rules of business.  

The United States can cultivate a sustainable global division of labor and production that reflects freedom of flows of information, capital, and goods and services, and that contributes to global development. The future of global economic cooperation in high-tech manufacturing and services is working together with our Indo-Pacific allies, including Taiwan and India. Taiwan is home to the world’s largest foundry Taiwan Semiconductor Manufacturing Corporation (TSMC) and semiconductor companies. These nodes of the global production network have been established and extended via manufacturing facilities around the world, including Southeast Asia, where they join existing and planned US investments, such as Intel in Malaysia. TSMC is building a factory in Japan and has broken ground for a new $12 billion plant in Arizona.  

In India, liberalized markets in information communications technology have attracted such investment as from Google to develop a customized Android operating system and a budget 5G smartphone. Today, the United States is India’s second largest source of foreign capital and earlier this year surpassed China as the country’s top trading partner earlier this year . This occurred as the Indian government increased scrutiny on Chinese capital after clashes between the two countries’ troops in 2020 over their contested border in the Himalayas. The dual urgency of developmental and border security challenges means that India would welcome the diversification of supply chains and multilateral efforts to address economic security.  

Doing more business with Indo-Pacific countries will also reduce the US’ trade deficit with many of them and enhance cooperation on green technology and social and cultural exchanges that tackle climate change and inclusive development. The focus on diversified global production networks helps level the playing field for American workers and companies while spreading economic and infrastructural development around the world. The United States can play a role in ensuring internationally recognized labor rights in both established and fledgling democracies—from Japan to Malaysia—as laid out in the Biden’s administration’s Indo-Pacific framework.   

Tappingo tap into markets in Southeast Asia will require that the United States to seriously reengages with multilateral efforts in the region, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the successor to the Trans-Pacific Partnership. CPTPP members, applicants, and would-be applicants are democracies, such as Taiwan, South Korea, Costa Rica, and Ecuador, which have all experienced economic coercion by China. Reengagement will afford the US an opportunity to negotiate a worker-based trade policy that prioritizes labor and environmental standards to achieve market access and sustainable development in the Global South. The United States and Taiwan are already engaging in third country partnerships to develop supply chain ecosystems, ensure border security, and diffuse conflict between neighboring countries in Central America, for example. These efforts centered on inculcating sustainable peace and development are an alternative to China’s Belt and Road Initiative. 

Recalibrating trade with China and diversifying supply chains recognize that Chinese-style capitalism is the authoritarian foundation of China’s globalization strategy. The United States needs to move away from the current reliance on Chinese supply chains and markets given China’s authoritarian consolidation, muscle flexing in Asia, and global security issues surrounding aerial surveillance. Proactive and market-oriented multilateral efforts to diversify global supply chains are long-term solutions for global economic security that will benefit the United States and our Indo-Pacific allies.