The Quad and International Trade? The U.S., Australia, Japan and India

By: Bob Brewer, Braumiller Law Group

When the “Big Bully” is also your best friend, economically speaking, and metaphorically speaking, they are paying for your lunch, but at the same time are slapping you around on the playground…do you hit back, or just take it on the chin? You need your lunch, as you have to eat. You and your three other playground friends, call yourselves The Quad, (The U.S., Australia, India and Japan) which sounds semi-menacing, (superhero capes included) but keep in mind, the rest of the kids on the playground are always watching to see how you deal with the bully. To them, sometimes you may seem a little too passive, and other times, maybe a little too aggressive in response. What matters is, you don’t just stand there, getting slapped repeatedly, faces turning increasingly red, simply discussing what to do together to stop the abuse. Actions of course always speak louder than words and are much more formidable as a group with a common goal.

This union of The Quad was initiated in 2004 for humanitarian reasons (tsunami), scrapped in 2007, and then revived in 2017 for seemingly more military than economic reasons to keep China in check. Their mantra is “A Force for Global Good.” Yes, military might in this day and age is essential in the Asia Pacific region, but the economic landscape is paramount in regard to potential change for improvement in relations, and if you ask me about finding the root of most problems, or solving them,  I always defer to “Just Follow the Benjamins,” as it’s always about the Benjamins, and in this particular case, the rupee, yen, RMB, and the AUD as well. (For those not familiar with the phrase, Benjamin Franklin’s face is on the U.S. $100 dollar bill).

On the official government documents, The Quad, or Quadrilateral Security Dialogue, is an informal strategic forum, featuring semi-regular summits, information exchanges and military drills. While not a formal military alliance like the North Atlantic Treaty Organization (NATO), it is viewed by many as a potential deterrent to growing Chinese influence and aggression in Asia-Pacific. From what I could glean from my research, many top officials with each country’s government feel that although “The Quad” members share a common concern about China, and about the need to uphold world order, they also lack harmony regarding just what to do about China. There is a veritable plethora of books on the subject by self-proclaimed experts. I do not profess to be one and have instead simply been an interested student for the past 10 years. In the mix of topics on the table for discussion, the priorities differ among members, with India mostly focused on the Indian Ocean while Australia and Japan are more concerned about the South China Sea, as they should be given the recent activity. Just outside the conference room, megaphone in hand, the Chinese state-owned newspaper, The Global Times, called the group an “empty talk club” in a recent report. The report also suggested that the framework of the group was flimsy at best, simply symbolic, and would ultimately amount to nothing, falling just short of calling it an absolutely pathetic group at best. While The Quad on the playground countered, “Sticks and stones may break our bones, but we have a massive military in combined strength. Would you like to see some video of our latest military drill of combined forces conducted in the South China sea?

Chest pounding, escalated levels of testosterone, and military might aside, let’s get back to the Benjamins, as well as other monetary units in the group, the big picture, and the notion of problem solving, instead of just blowing each other up. The Biden Administration’s overall plan with improving global trade relations is of course to rely on the partnerships with its allies to strengthen each FTA in the region. (Even though the U.S. won’t be joining RCEP anytime soon) Therefore, the Quad mantra should be that the strength of relations is built on the backs of economies being robust based on cross-border trade with one another. Subsequently, that entire premise should also be the underlying grand idea behind this particular group of countries. So once again, (drum roll please) I present to you, The Quad: Australia, India, Japan, and the United States. (insert round of applause here, however faint it may be from the Chinese delegation)

What’s happening with The Quad? Well, President Biden recently hosted The Quad’s first ever leader-level summit on March 12th, 2021.  He spoke about us sharing a vision of a free, open, inclusive, and healthy Indo-Pacific region, unconstrained by coercion, and anchored by democratic values.  He also mentioned that “we make a good team,” (ball caps and t-shirts with the Quad logo coming soon-all Made in China) and that our continued cooperation will strengthen common efforts to ensure security in the East and South China Seas. Sounds great, but in the meantime, on a global scale, China (The Big Bully) is a major player in all things considered with cross-border trade and is outpacing the U.S in economic growth, quite notably in this Asian sector of the world. For the sake of seeing how the playground quarrels may evolve, and are currently viewed, (coordinated military drills aside) let’s zero in on this particular union and get some insight into how things are playing out in relation to trade developments, or not, with China having the broadest shoulders.

Right now…as previously mentioned, the bully isn’t just slapping The Quad” kids on the playground while in unison they repeat, “Hey, stop that, it hurts.”  Nope, not going to happen. We’re (the U.S) one of the bigger kids on the playground, so it begs the question, has the U.S. hit back hard enough? Too hard? Are we just slapping ourselves in the face by implementing, and prolonging a huge tariff war with China? Honestly, regarding the Section 301 penalties, we know by now, tariff escalation is not the answer. In fact, in the on-going tit-for-tat around the globe it has hurt more than helped the economies involved. Let’s face it, (face slapping aside) China means a great deal to the U.S. in trade, and is the largest trading partner with India, Australia, and Japan. So, when it comes to “playground clout” they stand above all others, quite notably in this Indo-Pacific scenario. To highlight clout examples, and deeply rooted loyalties, China took in roughly 20% of Japan’s exports last year, jumping ahead of the U.S. as the leading destination. Even though India’s trade with China fell to a five-year low at $45 billion, China still ranks as India’s number one trading partner, recently taking that position from the U.S. China is also Australia’s largest trading partner at $261 billion annually flowing in two-way trade. China has dropped to the 3rd largest trading partner with the U.S. behind Mexico and Canada, but still was involved in $560 billion in two-way trade in 2020. To say the least, there is a lot at stake when laying the groundwork for “getting along” and making concessions to agree on policy for the benefit of all concerned, if that is even possible at this time given the ongoing China coercion in the S. China sea.

Ahhhhh, China, (insert mellow background music here, and Morgan Freeman voiceover) “The Quads” largest trading partner, and best friend economically speaking, and biggest bully. That’s quite a conundrum. So, what’s the real problem? Displaced aggression? To some extent, but simply put, President Biden hasn’t attached the words “free trade” to the pact’s main focal points for consideration since his official involvement began when moving into the Whitehouse. Many feel that this lack of focus on free trade will eventually become a major problem for all and will weaken the U.S.-led effort to balance Chinese power. Others however feel as though Biden’s meeting in March with the prime ministers of each country within “The Quad” was a major step in the right direction. Perhaps looking at this part of the world through rose colored glasses, The Quad leaders’, in a recent joint statement, described the “Spirt of the Quad”, reaffirming its shared vision for the free and open Indo-Pacific and advancing security and prosperity.

Quad statement: https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/12/quad-leaders-joint-statement-the-spirit-of-the-quad/

What some feel is missing, myself included, is that the economic foundation of their policies for greatness and prosperity has not been brought to the forefront, outlined, highlighted, and given enough press. The “rule of law, freedom of navigation and overflight, peaceful resolution of disputes, democratic values, territorial integrity, cyber space, critical technologies, counterterrorism, quality infrastructure investment” are all listed in the Quad statements, but there is no real mention of cross-border trade.

Some government officials just outside the Quad feel as though the Biden administration has well made known its willingness to co-operate with China on difficult issues like climate change and arms control, but not on critical issues regarding the economies. Are there any obvious roadblocks to discussions? Well yes, the fact remains, former President Donald Trump’s unilateral tariffs on China, currently being challenged in the U.S. Court of International Trade via 3700+ cases being filed on behalf of U.S. importers, demanding a refund, stating that they were illegal in the first place, remain, and according to the Biden Administration, will continue to stay in place for the unforeseen future. Other evident roadblocks? War games perhaps? If the U.S. and its allies are to develop an attractive alternative to a regional order dominated by China, they will need to do more than combine their military clout. At the time of this writing, 5/20/2021, a United States Navy warship sailed near disputed Beijing-controlled islands in the South China Sea just hours after President Biden said that the U.S. must protect open access to the waterway. Beijing is not happy about the event.

Stay the course into the storm, the free and open Indo-Pacific still needs a broader, and more well-defined economic agenda. So, is The Quad getting at least the framework together for potential resolution in the region with China amid the turmoil? Well, it depends on your perspective. Optimists would say “sure,” and point in the direction of the economies being dependent on one another. Realists, would say, not at this time, and point to the growing volatility in the region. The realists have solid ground to stand on, as there is still a lot of fighting taking place on the Indo-Pacific playground between the “The Quad Kids” and China. Regarding Australia and China, things are not exactly copasetic, souring further when Prime Minister Scott Morrison called for an independent investigation into the origins of the Covid-19 pandemic which threatened to challenge Beijing’s version of the origins of the viral outbreak. This has since snowballed into an ongoing problem, as tensions escalate and Australian exports to China now face growing roadblocks to entry. In addition, overall Chinese investment in Australia plunged 62% in 2020. Recently, Beijing announced the “indefinite suspension” of the China-Australia Strategic Economic Dialogue. One commodity has been the glue keeping the trade relationship solid for decades: iron ore. Yep, it just so happens that Australia is the world’s largest producer of iron ore, of which China is a major consumer, mining more than 900 million metric tons in the 2019-2020 fiscal year alone. Lost in the tit-for-tat punishment is the fact that for more than two decades, China and Australia have assisted in rapidly growing each other’s economies through trade in raw resources, especially iron ore and coal. However, the exchange of this commodity has instead now soured things even further in scope as Australia is making iron ore prices soar, and they are responsible for 60% of China’s imports annually.

Japan’s relationship with China? Exports to China are very robust, but currently worth noting, Japan has designated $2.2 billion of its economic stimulus package to assist its manufacturers in shifting production out of China as the coronavirus still disrupts supply chains between the major trading partners. The package’s purpose is to try to offset the effects of the pandemic, which includes 220 billion yen ($2 billion) for companies shifting production back to Japan and 23.5 billion yen for those seeking to move production to other countries. Obviously, it sounds a lot like the “Made in America” initiative, which has a long way to go before we start waving that flag in victory. Also keep in mind, China has initiated this same program. The stated goals of Made in China 2025 include increasing the Chinese-domestic content of core materials to 40 percent by 2020 and 70 percent by 2025.  The COVID-19 pandemic was the catalyst for Beijing to invest an additional $1.4 trillion into the MIC 2025 initiative.

India and China? In 2020, two-way trade between India and China stood at $77.7 billion, which is lower than the previous year’s total of $85.5 billion, but still healthy given the pandemic.  As anyone alive and alert knows, the two countries were involved in another bloody border conflict last year that caused India to pull the trigger on banning, to date, a total of 220 Chinese tech apps. However, that didn’t stop China from outpacing the U.S. in 2020 to become India’s biggest trade partner. A common note among The Quad, despite efforts by India to become more self-reliant and curb trade with China, is that it still relies deeply on Chinese-made heavy machinery, telecom equipment, and home appliances.

The U.S. relationship with China, well, to say the least, is very strained at best, not to mention (but I will again anyway) the $300 billion in tariffs that still remain in place on Chinese imports via Section 301. This relationship is a monumental task regarding all global maneuvers being perceived as threats, subsequently thwarting any navigation to common goal diplomacy, if/when it’s found. The Phase One agreement has been an abject failure thus far, and the somewhat recent March meeting with the government officials from both countries in Alaska didn’t go very well to say the least, as an airing of grievances were covered in opening remarks.

China feels very confident that there has been a shift of power over the last decade in their favor. So, what about China’s ever-growing global footprint moving forward? The last two decades has revealed amazing growth in global economies where they take part in day-to-day transactions, as well as the necessary long-term investment in infrastructure. (Belt and Road Initiative, and deep pockets) At a glance within this Quad group regarding infrastructure, China even owns the port of Darwin in Australia, as well as mines, agricultural land, dairy processors, valuable real estate, state-sponsored schools, plus water and energy companies. In all fairness to Australia, there are websites dedicated to how much of the U.S. China owns.

Showing another side, their leadership in negotiations (along with Japan) to solidify RCEP, even after India dropped out, says that they want to be part of an economic powerhouse collective, but this remains in question as we wait for the partnership, ten years in the making, to develop to its full potential as a free trade deal which is projected to encompass an estimated 30% of the world’s GDP once optimal (larger than the USMCA).  Also, we all (Quad included) learned another valuable lesson via the pandemic about various dire consequences that can arise with supply chain shortcomings in regard to ones dependance on another country for production of essential goods. PPE (Personal Protective Equipment) of course is the standout in this case as China was relied on heavily around the globe during the pandemic, and still is to this day, including the vaccine distribution. Fact remains, PPE aside, imports overall from China are very cost efficiently produced in comparison to a great portion of the world’s manufacturing and are usually available quickly and in sufficient supply. They are the globe’s “go-to” for raw sourcing as well, dominating the world’s supply chain.

So, to draw conclusion, and reiterate, if the U.S. and its allies are to develop a viable and truly concrete alternative to the bullying in the Indo-Pacific region, it needs to be based on an economic path rather than a build -up of military might. As previously mentioned, The Quad vaccine initiative (increasing vaccine production to 1 billion for Southeast Asia) is at least a sign of good things to hopefully come of the group’s joint efforts moving forward, but the free and open Indo-Pacific still needs a broader, and more defined economic agenda. USTR Katherine Tai has her work cut out for her in this part of the world.

Worth noting at this juncture, the Quad has the potential to grow into The Quad Plus, with New Zealand, S. Korea, and Vietnam already active, as well as The Quad Plus-Plus, inclusive of U.K., Canada, France, and several other ASEAN countries, and of course The Quad Plus, Plus, Plus, or at that point, The Quad 4.0.

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Other articles from Bob Brewer