Published daily by the Lowy Institute

Economic diplomacy brief: Asian infrastructure, Indonesian trade and Trump management

China walks the talk on infrastructure spending, Chinese tourists overtake Australians in Bali, and two different views on Trump and the global economy.

Driving through oil and gas fields in central Xinjiang. Photo: (Flickr/ADB)
Driving through oil and gas fields in central Xinjiang. Photo: (Flickr/ADB)

China walks the walk

Australia’s new $300 million infrastructure spending program over 10 years in Indonesia is a relative drop in the bucket compared with the Asian Development Bank’s latest estimate of the region’s needs over roughly the same time period of US$26 trillion.

The agency’s estimate of required spending from 2016 to 2030 amounts to US$1.7 trillion a year. And to underline how this poses a serious restraint on Asian potential growth, that’s up from the US$750 billion a year when the ADB’s last estimate was made in 2009. Even more tellingly, it is about double the US$880 billion actually spent in 2015.

The latest gap is somewhat exaggerated by the inclusion of a climate change mitigation assessment (US$3 trillion), some additional smaller countries, and the use of 2015 prices but that doesn’t really detract from the basic challenge that the funding shortfall is about 2.5% of GDP.

What’s striking about the estimates is how they show China is not just talking big on the diplomatic stage with its One Belt One Road (OBOR)/Asian Infrastructure Investment Bank (AIIB) initiatives, it is getting the runs on the board at home with infrastructure investment.

China is estimated to be meeting $US686 of its estimated US$837 billion climate change-adjusted needed spending – or a gap of only 1.2% of GDP. Take China out of the numbers and the gap for the rest of Asia is 5%. Indonesia and India are the key laggards with spending gaps above that level.

There are problems putting the OBOR initiatives in place (as we have reported on Thailand) and a debate about whether most of the action is really going to be in China anyway. But these numbers provide a compelling marketing strategy for the new Chinese institutions in the region.

Meanwhile, Australia’s new 10-year, $300 million Indonesian infrastructure assistance will begin next month after being signed off by Prime Minister Malcolm Turnbull and President Joko Widodo when they met in Sydney in February.

This program involves less spending than originally planned, consistent with the cutbacks in aid to Indonesia and a shift from actual construction to trying to improve the quality of Indonesian planning and construction. It involves closer alignment with the big multilateral lenders for infrastructure in Indonesia like the ADB, and acknowledges that Australia will need to cooperate more with the AIIB over the 10-year time frame.

Talking Mandarin in Bali

Malcolm Turnbull managed to squeeze in a visit to Jakarta this week to push for a bilateral trade deal this year (which will likely have a new tourism focus), just in time to avoid the new demographic reality of Indonesian tourism

Chinese visitors have now overtaken Australians as the biggest source of tourists in Bali, according to the statistics for January, which show a doubling of arrivals from China compared with the same time last year. The 147,000 Chinese accounted for 32% of arrivals, while the 91,000 Australians accounted for only 20% of arrivals. This happened in Phuket, Thailand, years ago. But at least it may spell the end of the apocryphal idea that many of these tourists think they are holidaying in an extension of Australia.

The long-running negotiations on the Indonesia-Australia Closer Economic Partnership Agreement (IA-CEPA) have seen much discussion over tourism with Indonesians seeking skills training in Australia and some Australian businesses seeking to align with Joko Widodo’s maritime development priority.  See Fairfax Media's Jewel Topsfield on some more positive moves here.

Despite trade access developments on sugar and pesticides during the Turnbull-Widodo talks, and the reiterated deadline for a deal this year, scepticism still  prevails over the scope of the outcome.

Ian Satchwell identifies a new focus on 'powerhousing' in this post or working together to tackle third markets that neither nation could fully access on its own. This was also a big focus of the 2015 Australia-Indonesia Center report Succeeding Together.

The big question will be how much businesses from two countries can really function in third countries if they don’t have some better basis for operating in their respective home markets. This idea of third country cooperation has long been discussed in the Australia-Japan relationship but usually based on well-established bilateral activity.

Meanwhile, Australian National University economists Hal Hill, Arianto Patunru and Budi Resosudarmo warn the two countries have very different approaches to trade deals and Indonesia is more interested in access to Australia’s labour market than its goods market. This presents a very different trade liberalisation challenge for Australia.

Trumpwatch: Disaster planning v cherry picking

It’s a measure of how much the election of Donald Trump has unsettled the mainstream policy making community in the US that studies from two eminent institutions this week have postulated starkly different survival strategies.

In a defence of traditional Bretton Woods-style US international engagement, Peterson Institute for International Economics senior fellow Edwin Truman argues in this Policy Brief that global financial crisis prevention and resolution will be much more complicated due to uncertainty about how the Trump Administration will behave.

He says the administration’s possible approaches to an inevitable future global financial crisis range from discouraging to frightening and may add to a crisis by spurring competing regulatory systems.

Truman hopes Trump will be drawn into the existing system by a financial crisis in a country he perceives to be a US friend, as George W Bush was early on with Turkey. But he concludes: 'One should not hope for disaster, but sometimes disasters are necessary to change policies and attitudes'.

In contrast the Asia Society Policy Institute argues in Charting a Course  for Trade and Economic Integration in the Asia-Pacific that countries should move forward with the principles in the Trans-Pacific Partnership (TPP) trade agreement putting them in place where possible, drawing other countries into the fold and laying the foundations for the US to possibly return to the deal.

The Institute’s special trade panel, which included former Australian trade negotiator and ambassador Peter Grey, maintains that the US rejection of multilateral trade liberalisation will not necessarily flow on around the world.

It suggests that TPP countries could consider a stand-alone agreement which would cover smaller businesses, giving them access to ecommerce platforms and fending off the perception that such plurilateral deals are really driven by global companies.

As we have reported here, the group puts a big emphasis on now drawing some TPP provisions into the Regional Comprehensive Economic Partnership (RCEP)  negotiations over a more Asia focused trade deal.

But, notably, while the panel favors drawing new countries into the remaining 11 member TPP group, it opposes ramping up the now Chinese-backed (but one time US proposal) and larger Free Trade Area of the Asia Pacific arguing that with one agreement stranded (TPP) and one struggling to get momentum (RCEP), any new framework needs some serious low-level planning first.

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