COVER STORY • 2

Digital Asia: Responding to Challenges
from GVCs Digitalization, US-China
Decoupling & the Covid-19 Pandemic

By Lurong ChenDigitalization, US-China decoupling, and the coronavirus (Covid19) pandemic represent the three remarkable sources of change
faced by the world economy. Asia’s response to these challenges will
determine its economic prosperity and regional stability, as well as
the reconstruction of global value chains (GVCs) and theestablishment of a new world order. Digital transformation is not justabout disruptive innovation and technology adoption. More
importantly, it represents a new wave of massive technologicalprogress that will drive socio-economic transition and the changes ininternational relations in the 21st century. This article proposes ways
in which Asia could harness the digital economy as part of its
response to the long-term, medium-term, and short-term challengesof regional development.

Digitalization as a Global Trend in the Long Run
Digitalization can affect economic growth via its effect on reducing
trade costs, similar to the effect of the industrial revolution in the18th and19th centuries and that of the information revolution in the20th century. In the first wave of massive technological progress
during the industrial revolution, the use of steamships and railways
drove down the cost of transportation. Mass production, economies
of scale, and industry-wide division of labor became feasible.
Producers and consumers in different countries benefited from tradewith each other. But at this stage, international trade was dominatedby trade in goods, and the main content of trade was final goods or
raw materials.
In the second wave of massive technological progress during theinformation revolution, the applications of information andcommunication technologies (ICTs) – mainly through their effect of
reducing the cost of communication – set the stage for the birth of
GVCs and lowered the threshold for countries to join theinternational division of labor. Since then, GVC participation has
become the new thinking on development, and the idea of economic
liberalization became widely accepted as the way a country could
facilitate its involvement in GVCs to pursue economic prosperity anddevelopment. To meet the needs for coordinating GVCs, service links– especially those of business and financial services – were making
great strides forward as well. As a result, the world economy became
further interconnected via GVCs. Increasingly, there is more to trade,and countries trade more.
Digitalization tends to extend the coverage of GVCs and increase
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Author Lurong Chen

their sophistication by lowering the cost of people-to-people
connection, increasing information transparency to all GVCs, andblurring the boundaries between different links of the value chains.
Moreover, with the application of digital technologies and related
business models, the service sector will become much moreinnovative and productive. Digital-armed service links – either digital
enabled or digital born – will improve the capacity of GVC
coordination, facilitate the network extension, and allow GVCs toevolve toward an ecosystem that is better connected, smarter, andmore efficient.
However, the changes triggered by digitalization could be wider,deeper, and less predictable than ever before, especially with thedevelopment and the use of Artificial Intelligence (AI), big data, andthe Internet of Things (IoT). For instance, at the early stage of theInternet’s development, it was relatively easy for Internet users tohave their real life and that in the cyberspace separated.
But with the advance of digital technologies, the boundaries
between cyberspace and reality tend to evaporate over time. For
individuals, the virtual identity in the online world has to be mappedwith the physical one; while for countries, cyberspace, which wasconceived as borderless, is becoming an ever more integral part ofnational sovereignty.
On the one hand, news, opinions, and speech disseminated via theInternet and social media have increasing influence on real-life
activities and decision making. On the other hand, rules andregulations on online behavior, such as that of data flow, privacy,consumer protection, competition, and cybersecurity, are reshaping
the cyber landscape and extend the current international order tocyberspace. Unavoidably, the diversity of countries’ attitudes towards
the governance of cyberspace (“cyber-governance”) and theconsequent policies represent the differences of the economic andlegal systems, institutions, social values, and even the ideologies
that are ubiquitous amongst countries.
For that reason, digital transformation will be a process marked bystrong competition and conflicts between different values, cultures,and social systems, and the ongoing dispute between the UnitedStates and China will be discussed in this broader context. Asia willbe the first to bear the brunt of the consequent shocks from their
possible decoupling.

Japan SPOTLIGHT • November / December 2021

9Interpreting US-China Decoupling in the Contextof Global Digital Transformation
The economic cost of decoupling is high for the US, China, andthe rest of Asia. It is very likely that Washington’s restrictions onimports from China will generate more trade diversion than tradecreation effects. That means American producers will have to findalternative supply locally or from elsewhere in the world. Either
means higher costs and lower efficiency. Moreover, Beijing’s traderetaliation could damage American exports to the world’s mostpopulous market. Ultimately, consumers will have to bear the burdenin terms of higher prices.
Similarly, consumers and producers in China will also suffer
higher costs due to the trade war. Given the role that international
trade and foreign investment have played in promoting Chineseeconomic reform, from a Chinese perspective, decoupling with theUS means not just the loss of the world’s largest market, but more
importantly, cutting off its main channel of gaining know-how.
For the rest of Asia, the network of regional production sharingthat involves both the US and China has been the cornerstone of
Asian development. In the past, the cooperative competition between
the US and China created a development friendly environment forother Asian countries, allowing them to benefit from capital inflows
and technology diffusion, as well as access to both large markets.
US-China decoupling will introduce uncertainty and probably makethe region less attractive to international capital and outsourcedactivities.
In particular, the rising distrust in the high-tech area, especiallythat of digital technologies, symbolizes some deep-rooted difference
between the US and China. During the honeymoon period of theUS-China relationship, the existence of wide technology gaps andhigh economic complementarity provided plenty of space forcollaboration. For example, innovation and new designs from Silicon
Valley and Original Entrusted Manufacture (OEM) activities inShenzhen are linked via GVCs, creating a win-win situation for bothsides as well as the rest of the world. At the time, China was eager tolearn from the American experience and adopt best practices fromthe West as useful guidelines for its domestic reform, while the US
saw a rising China as a favorable factor in global stability anddevelopment.
The 2008 credit crunch seemed to have foreshadowed today’s
US-China dispute. The outbreak of the subprime crisis exposedsome deficiencies of the US economy. Although the crisis may nothave completely destroyed America’s image as a reference for
Chinese market reform, it seemed to have served as a wake-up callfor Chinese leaders and made them rethink whether those
10 Japan SPOTLIGHT • November / December 2021

supposedly good practices are really that good. China wascooperative in supporting the US to tame the fire in the capital
market, but has since then become more cautious in market
opening, especially in the fields of finance, media, and the Internet.
Increasingly, the US has felt the pressure of competition from
China, especially in the development of the digital economy. China
has started to take the lead in areas such as 5G infrastructure,
e-commerce, and fintech. Chinese companies such as Huawei andZTE are amongst the frontrunners in the global race to 5G, together
accounting for over 20% of global 5G technology patents. The
Chinese e-commerce market has maintained two-digit growth since2015. In 2019, China owned the world’s largest online marketplaceand contributed over two-fifths of global total e-commerce revenue.
The country also has the world’s largest group of e-payment users.
Its central bank, the People’s Bank of China, issued a digitalcurrency, the e-RMB, in April 2021. With such clear signs ofprogress, China is expected to be the first country to realise acashless society.
China is also catching up quickly in areas such as AI, big data,cloud computing, industrial Internet, and smart city building. But theway the Chinese government promotes its digital economy has beenquestioned by foreign competitors. For example, China’s restrictive
data policy and regulations on news censorship have acted as defacto barriers that have stopped major foreign digital giants fromentering the domestic market. While Baidu, Alibaba, and Tencent
were allowed to compete in the US market and even raise funds via
IPOs there, their American competitors – Google, Amazon, andFacebook – still see their door to the Chinese market remain locked.
Another example is that the overseas expansion of Chinesecompanies is often backed up by the government, giving themadvantages in global competition.
Such outstanding problems of non-reciprocity in market accesshave aggravated the distrust between Beijing and the White House,
especially when the US and China see accelerating digitaltransformation as part of the strategic focus of economicdevelopment. On the one side, the White House may have read Madein China 2025 as a declaration of China’s ambition to challenge US
leadership in GVCs; while on the other side, Beijing may haveinterpreted Biden’s upholding of a hardline China policy as a sign thatin bilateral relations carrots from the White House will be scarce butsticks will be plenty.
Asia’s development faces the challenge from the reconstruction ofGVCs resulting from US-China decoupling, combined with disruptivechanges triggered by new digital technologies. The Covid-19
pandemic provided a beta test on the effect of digitalization on
increasing the GVCs’ resilience.

The Covid-19 Pandemic: a Supply Chain Crisis
In the economic area, the Covid-19 pandemic can be seen as a
global supply chain crisis, with shocks coming from both the supply
and the demand sides. It started with a negative supply-side shock.
The world supply chains became fractured when China locked its
borders to prevent wider spread of the virus. Exports from China
suddenly halted, causing a shortage of supply of goods and services,
either final or intermediate, to the global market. As orders from theirdownstream clients in China were either cancelled or postponed,
foreign suppliers in the upstream of value chains encountered anegative demand-side shock. When Covid-19 turned into apandemic, countries’ lockdown measures worked like pushing a“Pause” button on GVCs, causing the global contagion ofplummeting of international trade and a short-term economicrecession.
Digitalization has been rising to prominence during the Covid-19
pandemic when digital technologies and related business models
backed up the government’s emergency response to the crisis, suchas the implementation of social distancing and lockdown measures.
The world’s number of Internet users increased by more than 100
million in 2020. More people have adopted online learning, working,and shopping, which has become an integral part of their daily lives
and has replaced offline activities. Without digital solutions thatempowered people and businesses, the Covid-19 pandemic could
have caused far greater harm.
The world economy had shown strong signs of recovery by thefirst half of 2021, thanks to China resuming production, as well as
the efforts of countries’ stimulus measures, such as fiscal aid and an
easing of monetary policy, that had meant to pull the economy out ofdepression by stimulating demand. However, the Covid-19 pandemic
may persist for longer and harm the economy more deeply thanpolicymakers expected. Unless the supply side can quickly regain its
productivity and enter a growth track, the stimulus-driven recovery
will only be temporary, and the economy will face the risk of highinflation.

Digitalization in the Post-Covid-19 Recovery& Growth
Accelerating digital transformation will be of help to deal with this
supply side problem. First of all, GVCs’ digitalization (blending digitaltechnologies into the GVCs), especially with the application of big
data, AI, robotics, and IoT into production and management, tends tostrengthen the connection within the network and improve its overall
resilience. It is not the Covid-19 pandemic but policy measures in

response to it that have caused supply chains to disconnect andtransformed a global public health crisis into an economic crisis.
Measures like restrictions on people’s mobility and border
lockdowns seemed to affect more the links that involve intensive
labor participation than those with automatic control. The idea is tomake GVCs “smarter” by adopting digital tools, services, andbusiness models into the network and increase its resilience byreducing the risk of introducing shocks to the system through theireffect on humans.
Second, digitalization is the most important source of economic
power in the 21st century. The annual gross output of Silicon Valley
has been higher than Finland’s national GDP. Research andDevelopment and applications of digital technologies can unleash
market potential not only by giving birth to new industries, but also
via the combination with technologies in new materials and newenergies. Taking Industry 4.0 (4IR) in ASEAN as an example,
projections suggest that adopting 4IR will contribute 35%–40% of
incremental market value added to ASEAN within 10 years. For thewhole region, 4IR could bring an increase of about $210–$230billion in output and a $40–$45 billion increase in revenue.
Digital technologies are normally interlinked and compatible withone another. Combining different technologies could further givebirth to new products and new services, and generate new markets.
This could then multiply the market potential, create new job
opportunities, and provide a steady flow of innovation andproductivity improvement. As an example, AI – defined as a set oftechnologies that enables machines to perform human-like functions– has a great variety of applications in our economy and society.
Some have started being widely used in our daily life, such as
augmented research, intelligent agents, generative product design,
robotic process automation, autonomous vehicles and drones,speech and image recognition, biometric recognition,
recommendation systems, and predictive systems.

Digitalization to Mitigate Shocks from US-China
Decoupling
To Asia, the cost of losing either the US or China will be very high.
Asia’s economic achievements in the past were inseparable from theinterlinkages of global demand, supply, and regional production
sharing via GVCs that supported the region to be the world’s largest
platform of exports. Regional production sharing in Asia, theso-called Factory Asia, functions on the basis of a multi-layered
network intertwined with intensive cross-border activities. Close
links with both the US and China contribute to increasing the region’s
overall competitiveness in the global market.
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Although possible US-China decoupling cannot and will notchange the direction of the long-term trend of economic
digitalization, a long-lasting dispute would affect the trajectory ofdigital transformation and probably alter the resulting patterns. The
countries of ASEAN and East Asia should get ready for the changes.
It is important to strengthen the connection with both the US andChina, even though both sides have kept drifting apart. Slowing
down the pace of decoupling could win them more time to make theneeded adjustments. In case the decoupling forces GVCs to split into
two competing blocs, the region needs to make sure that the two
blocs overlap in Asia. The region shall have economic gravitation solarge that both the US and China will stick to the Asian market
despite their decoupling.
Developing the digital economy can help increase regionalcohesion and strengthen the region’s market gravitation in the global
economy. Unleashing Asia’s potential in the digital economy needs
regional collaboration in areas such as data flow, consumer
protection, cybersecurity, IPR protection, and dispute resolution.
With regional integration and digital transformation mutually
reinforcing, Asia could increase its weight in GVCs in the digital era
and have a greater say in regional and global affairs.

Accelerating Digital Transformation in Asia
In short, deepening regional integration and promoting the digital
economy will stay at the core of Asia’s long-term development
strategy. This is in line with the global trend of digitalization in thelong term. It could also help Asian countries work more closely
together to mitigate the negative impacts of the US-China dispute. In
the short run, this will be an important part of the region’s policy
response to deal with the economic shocks triggered by the Covid19 pandemic and possible inflation afterwards.
To accelerate digital transformation in Asia, policies in terms of thefollowing four aspects are worth considering. First, the digital
economy is also known as “creative economy” or “innovativeeconomy”. Supporting innovative economic growth needs innovative
policy thoughts. The diversity of Asian countries in their stage ofdevelopment and the structure of their economies will provide
policymakers with more flexibility and an enlarged policy space. In
addition to efforts on nurturing their own digital unicorns, a policy
focus will be the polish of the countries’ competitive edges byembracing digital technologies in traditional sectors, i.e. agriculture
and handicrafts.
Second, by changing the manner of people-to-people connections
and lowering its costs, digital transformation is not just an economictransformation, but also a process of social transformation that12 Japan SPOTLIGHT • November / December 2021

contains changes in the way people live, work, and study. For Eastand Southeast Asia, improving people-to-people connections will bea policy focus, as they can provide necessary conditions to realize
the ambitions of regional development, such as eliminating
development gaps and promoting inclusive growth.
Third, rule setting to enable free flow of data with trust represents
a bigger challenge in improving digital connectivity, which remains at
the core of digital transformation and GVCs in Asia, when compared
to building data-related infrastructure. Improving connectivity means
not only better infrastructure for physical connectivity, but also asmoother and safer information flow in cyberspace.
Thanks to the widespread use of smartphones, the Internet, andtechnologies that facilitate data collection, processing, storage, anddistribution, technological barriers to data flow have been effectivelyreduced. More data and information today are already digital-born –they were born to be borderless, and their life cycle exists incyberspace. But “trust” highlights the increasing concern about data
accuracy and safety and privacy protection. While the advance of ICT
facilitates the use of data, it also increases the risk that data could beillegally leaked, stolen, or misused. Free flow of data needs to besafeguarded by a series of backup policies, especially when data has
become the main carrier of value in the digital economy.
Asia is known for its gradualism and pragmatism in pushing
forward the process of regional cooperation. A similar strategy could
be applied to “trust building” in the field of cooperation in the digital
economy. For example, Asian countries could start with collaborationin harvesting the low-hanging fruits of the digital economy, such as
promoting e-commerce and facilitating digital trade, and then extend
to areas where cooperation requires greater mutual trust.
Fourth, promoting the digital economy calls for a broader
regulatory framework comprising a wide range of related issues –from consumer protection to competition. Although most of theseissues are not new and have been regulated previously, digitalization
has introduced new content and challenges. Unless it is accepted by
the market and adopted by the private sector, any proposed
regulatory system may fail to achieve its original goal of promoting
the digital economy. Preserving the voice of the private sector in thecycle of policy design and rule-making will be useful, and so isbalancing the interests of digital giants with those of small andmedium-sized enterprises.

Dr. Lurong Chen is a senior economist of the Economic Research Institutefor ASEAN and East Asia (ERIA), Indonesia. He received his Ph.D. in International
Economics from the Graduate Institute of International Studies (IUHEI), Geneva,
Switzerland.