COVER STORY • Exploring Future Relations in East Asia • 1

Interview with Dr. Vinod K. Aggarwal, Travers Family Senior Faculty Fellow and Professor of
Political Science & Director of the Berkeley APEC Study Center (BASC) at the University ofCalifornia, Berkeley

U

S-China Rivalry:
Implications for East Asia

By Japan SPOTLIGHT
With an apparent decline in US leadership and an increase in political rivalry between China and theUnited States in Asia, East Asian nations are expected to play new roles as they face more volatility in theregion, both economically and politically. Japan SPOTLIGHT interviewed Dr. Vinod Aggarwal, Travers
Family senior faculty fellow and professor of political science, and director of the Berkeley APEC Study
Center at the University of California, Berkeley, to discuss how political-structural issues in the US could
make the East Asian political economy more volatile and complex. Is there room for optimism about the
future roles of East Asian nations in global governance and how can they use their soft power for
economic cooperation?
(Interviewed on Oct. 15, 2018)

Declining US Leadership
JS: The US seems to find it

difficult to play a leading rolein global governance today,
due to its economic structuralproblems. How do you
assess this decline in US
leadership in global
governance? Is it temporary
or structural?

someone like Donald Trump has
emerged. As a consequence, I think
populism will last on and off for a
decade – but not forever. I don’t seethat the political problem will be
resolved very easily and we might see
some alternation between an outwardlooking US and an inward-looking US,
which of course is not very good
because it does not provide stability
for the US in its engagement withinternational institutions.

Aggarwal: In my view, this is a
Dr. Vinod K. Aggarwal
political structural problem, which in
JS: How do you think thisstructural problem in the US
some ways is more important than an
economy can be resolved?
economic structural problem. By that I mean that there is a sharp
divide in the US between those who support an isolationist policy
Aggarwal: It’s not just an economic problem, it’s a political problem.
and those who are more internationally oriented. I think that we see
There’s no simple political solution, and ironically a political solution
this in the transition from the Obama administration to the Trump
is more difficult than an economic solution. The US is still an
administration. Part of the Republican Party is very isolationist, andextremely strong and dynamic economy with a strong stock market.
part of the Democratic Party is also isolationist, and unfortunately
So I don’t think there’s a fundamental economic problem with the US
the US bipartisan consensus has eroded over time. I think that this is
economy, but I think there is a fundamental problem with growing
more of a fundamental problem than US leadership. Although I thinkinequality, which has led to a lot of people feeling like they have been
the US economy is still strong and going well, it faces several
left by the wayside due to globalization. I think the real issue isunresolved issues, such as the failure to have real structural
whether we can move to some kind of political consensus on helping
adjustment to address changes in the global economy. The US has
the US to adapt to the global economy. Unfortunately, I don’t see any
failed to bolster job transition, education at the lower levels is not as
quick solution to this at this juncture.
strong as it used to be, and I think that the lack of the ability to adjust
the economy to the changing global system has led to unhappinessin various parts of the US. These problems help to explain why
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US-China Political Rivalry
JS: Will the US-China trade war be a short-term

problem or will it continue for many years andbecome an economic and cultural war?

Aggarwal: I am not sure that a cultural war would develop. I think
this is really a political and economic issue, and if you look at the
Trump administration, advisors like Peter Navarro have made it veryclear that they would like to – in my view – create a bipolar world
similar to the Soviet Union-US relationship, which means there will
be little trade between the US and China and relatively lessinvestment between the two countries. We would then see countriesaligning with either the US or China, and I think that China for its partis taking the initiative to develop a system based on its own
economy. If you look at the kind of tariffs that we’ve seen – $250
billion – I don’t think they are going to go away anytime soon
because it’s not clear what the Chinese could do to make theAmericans happy in the short run. The US has said it would like to
see an elimination of China’s “Made in 2025” industrial policy, but
the Chinese show no inclination to do so because their wholedevelopment strategy has been based on aggressive industrial policy.
I think that most economists are naive and fail to understand that the
Chinese have been very successful in their industrial policy, and so inthat sense Navarro is right that the Chinese have used their industrial
policy successfully, just as the Japanese and the Koreans usedindustrial policy after the end of World War II. The difference is thatwhen the Japanese and Koreans used industrial policy, they wereboth allies of the US, and were dependent on American security. As aresult, the US could pressure both South Korea and Japan when thegovernment faced domestic protectionist lobbying, but it’s much lesscapable of doing that with China because it is not an ally or
dependent on the US for its security. When people compare
US-Japan and US-South Korea and US-China relations, they fail tounderstand the context in which US-China relations exist. The US
and China are peer competitors in geopolitics, and not just theeconomic realm, and therefore the Chinese have no interest in
getting rid of their industrial policy.
JS: The US and China are political rivals in the

security system. Does this mean that this trade war is
to be interpreted not as a simple economic conflict,but a competition for political hegemony in theworld?

Aggarwal: Yes, I think that is the way the Trump administration sees
it: the more we have trade and investment with China and the more

the Chinese use various policies to get technology from the US,
Europeans and other countries, the more it gives them a geopoliticaladvantage. The Chinese have been using their growing militarycapabilities to be more aggressive in the East and South China Seas,and the Americans are now very concerned about this kind of“technology-based Cold War”. One American response has been thepassage of FIRRMA – the Foreign Investment Risk Review
Modernization Act – that will enhance the review process of theCommittee of Foreign Investment of the US. I think that the US
remains skeptical about some of the Chinese investment coming in,
because they view it as Chinese companies coming in and trying totake American technology. Whether that is true or not, that is theview of the Trump administration. In that sense, my prediction is the
US-China trade tension will continue for a while.
JS: On the issue of a US-China technology-based

Cold War, do you think security risks form the main
perspective in thinking about future risks to tradeand investment?

Aggarwal: I think that what the Trump administration is trying to do– and the Department of Defense has just issued a planningdocument in September 2018 called “Assessing and Strengthening
the Manufacturing and Defense Industrial Base and Supply Chain
Resiliency of the United States” – is to argue that the US supply
chain has lots of vulnerabilities, including its reliance on foreign
firms. These vulnerabilities mean that we are reliant on China andother countries that are not friendly to the US. In this way, they aretrying to frame the debate in a way that makes it look like we need todecrease trade and investment with a lot of these countries because
of security risks. The problem I see is that it is very popular to lookat every import or investment as a security risk and I think that whatthat leads to is a lot of American firms seeking protection, claimingthat there is a security risk where there isn’t one. So I think that thedanger is that all imports will be seen to be a security risk. In the
1950s, for example, the woolen blanket industry argued that the US
had too much dependence on Japan as a supplier because woolen
blankets would be needed to protect people against radiation in caseof an atomic war! I think there is also a kind of false framing of
security when it comes to trade and investment. It is very likely thatwhile there are some important security risks in some parts of tradeand investment. I don’t think that for basic steel, for example, there
are many security risks given that there are many suppliers of steel
outside of China. One could argue that much of the trade war isreally a domestic protectionist effort on the part of American firms.
JS: In my understanding, no international rules body
Japan SPOTLIGHT • January / February 20195

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like the WTO or regional free trade agreements havementioned security risks. From now on, do you thinktrade negotiations for international treaties will touchon the issue of security risks much more?
Aggarwal: That’s not accurate because the GATT already had aprovision for national security risks (Article XXI). There are generally
provisions for national security in trade agreements so I don’t thinkthat is new. What is new is that the US and possibly other countries
will use the security argument to get protection, to avoid retaliation,and to basically maneuver around the rules of the WTO by sayingthat all of these things are security issues and not just economic
issues. In simple terms, there is a reframing of import competition
as security competition.
JS: You mentioned that the US has become concerned

about Chinese or other countries’ investment in the
US usurping the industrial or technological base of
the US. Has that concern resulted in a significant
decrease in US internal FDI in 2017?

Aggarwal: I think that it’s difficult to attribute the decline ininvestment in the US to these new rules because there was also adecline from 2016 to 2017. Inward foreign investment into the US
was $146 billion in 2016, and in the first quarter of 2017 it was $90
billion, and this was when Trump was just elected. So I don’t think
we can attribute all of this to Trump’s policies. Over the long run, if
there is growing anti-globalization sentiment then we will see less
FDI. But looking at any one year-to-year decline of $51 billion and
immediately claiming that this is a transformation of the global
economy and that investment is stopping is not good analysis. It isalso worth remembering that the rules have really gone into effectimmediately, and have not blocked large amounts of investment.
These developments are also complicated by new tax laws andconcerns about Chinese investing more in Asia, so I don’t think we
can attribute all of this to anti-globalization.

Role of East Asia in Mitigating Trade Wars
JS: On the economic side, given increased

interdependencies among nations, the policy
implications of protectionism by big countries likethe US and China would be enormous. Assuming thisfriction continues, how can we mitigate this negative
impact?

Aggarwal: That is right to some extent, but I think that this is really
6 Japan SPOTLIGHT • January / February 2019

an issue for countries that are middle powers like South Korea. For
its part, Japan is bigger than a middle power but not a superpower. I
think these countries are trying to make accommodations. If you
look at South Korea, for example, it has agreed to revise the South
Korea-US Free Trade Agreement and has made some concessions
with regard to auto exports. At the same time, South Korea has good
relations with the China. So if we move to what the Trumpadministration wants in terms of protectionism and industrial policy,
it may not necessarily be directed against every country in the world.
Indeed, a lot of the protectionism may be focused on trade andinvestment between the US and China. At the beginning of the Trumpadministration, US policy targeted a large number of countries onsteel and aluminum and autos, but I think we are slowly evolving to apolicy where the main focus of the US is on China. So the realquestion is, will the middle, small, and large countries be able to playa game where they can work with the US and continue to trade andinvest in China without the US balking? This raises a big issue forthese middle powers in terms of policy. At UC Berkeley we are doinga major project collaborating with scholars from South Korea,
Taiwan and others on middle power strategies in a rapidly evolving
geopolitical and economic landscape. Although US-China tension will
have a global impact, that does not rule out that countries can sell toboth the US and China and receive investment from both countries.
So, while I am not advocating a bipolar economic world between the
US and China because there will obviously be damage to supply
chains, one can imagine that there will be a kind of restructuring of
the global economy so that some of the supply chains will be tied toeach of these two poles.
JS: As you said, most of the East Asian countries are

middle powers. How do you see the role of East Asia
in mitigating the negative impact on the global
economy?

Aggarwal: When you say East Asia, I assume you mean East Asia
without China. If we look, for example, at Japan and South Korea, I
think these countries are now in a difficult situation because they
have a lot of economic interdependence with China. The Chinese
have been buying products from these countries and often are
subsequently transforming these products for export to the US. You
may recall that during the 2008 financial crisis there was a lot of
impact on the non-Chinese East Asian economies due to therecession in the US through this supply chain. So I think there will besome wrenching of supply chains, and if South Korea and othercountries were selling to the Chinese and the Chinese were notselling to the US, these supply chains would no longer exist to thesame extent. So I think that there will be a reorientation of theseCOVER STORY 1

supply chains for domestic demand in China and in the US. I thinkthat what people are missing is the new NAFTA agreement, which is
now called the US-Mexico-Canada agreement. This is an example oftrying to create more supply chains within North America. I think thatpart of the strategy of East Asian countries including Japan andSouth Korea is to invest in Mexico or invest in the US and be part ofthose supply chains for American-oriented economies. That will haveto continue if the US becomes more protectionist, but in general it
has not been very protectionist against Japan or South Korea or
European countries. Indeed, the Japanese have agreed to startnegotiating with the US on a bilateral FTA and this serves as an
example by which Japan can get around some of the conflicts
between the US and China.
I should mention that I don’t think this is a great outcome; I am
just giving a realistic assessment of what is likely to happen.
Restructuring of supply chains would be costly to the middle power
economies, for American, Chinese, and Japanese corporations, andfor firms in the supply chains in both Asia and North America. We
should also remember that ASEAN countries comprise a market ofover 600 million people, and that Japan and South Korea may be
paying more attention to ASEAN countries given its relative size andgeographical proximity.
There are also alternatives to looking to North American or East
Asian markets. India, for example, has approximately the same
population as China and will eventually surpass China in terms ofmarket size, so I think there are other important markets that middle
powers in Southeast and Northeast Asian countries can focus on.
Africa, where the Chinese have had a free hand and invested
aggressively, also represents an untapped market for these players.
JS: Another way might be to persuade China and the

US to accept the idea of free trade as being importantto achieve global economic prosperity. It is aclassical economics textbook argument.

Aggarwal: I think this argument is ridiculous. I think economists
have created this problem, because they have been naive about thegeopolitical implications of trade. The other problem is that countries
have continued to pursue industrial policy and the WTO has not been
set up to deal with these countries. There are regulatory measuresthat can be taken on a global basis, but if you are a small country
pursuing industrial policy, the US and other countries may ignore it.
If you are a heavy rider such as China with industrial policies
fundamentally in contradiction with the WTO and with free market
economics – economists cannot understand this. Economists simply
claim the Chinese are inefficient, and that industrial policy is a failure,
all the while ignoring the fact that Japan became a great economic

power after the war by pursuing an aggressive industrial policy inshipping and steel. From the 1950s to the 1980s it served as anextremely successful development strategy for both Japan and South
Korea. Contrary to what most economists claim, their strategy was
not just good macroeconomics. Liberal market economics simply
ignores the large amount of literature that shows theinterconnectedness between politics and economics and the fact thatsome countries under some circumstances successfully pursue
industrial policy – and that the WTO is not structured to cope with
that, especially when a large country is doing it. So it’s not that the
Chinese don’t understand free trade, but that their interpretation offree trade is very different from neoclassical economists.
JS: I read an article by Harvard Professor Dani Rodrik

in the Financial Times recently, in which he seems tobe advocating the idea of global trade rules being
adapted to economic diversity. Since emerging
economies play an important role in the global
economy, we cannot force them to accept the valuesof OECD nations unanimously.

Aggarwal: This is hardly a new idea. In 1964 we had the creation ofUnited Nations Conference on Trade and Development (UNCTAD)
and since then developing countries have received special anddifferential treatment. In many of the multilateral agreements,
developing countries are treated differently. The real problem here isthat China is not a developing country, so to say that we should give
developing states benefits and help is fine, but that’s not the samething with massive, successful economies that now pose a threat tothe global trading system. So I think we have had special rules for
emerging economies and I support those rules by and large, but I
think that’s very different from saying we should have special rules
for China or Japan or India, which are large, dynamic economies.
JS: As you mentioned, China understands free tradevery well. But what seems to be lacking in Chinese
foreign policy is the idea of reciprocity. Could APEC
or a more free and open approach towards
international rules be a good way for China toparticipate in the discussion.

Aggarwal: I think this is a good point but fundamentally
misunderstands the Chinese view. The Chinese understandreciprocity completely; they simply don’t want to pursue it. It’s notthat someone has to teach them economics and how countries
should behave; they have some of the leading economists andpolitical scientists in the world. It is a matter of choice, and theJapan SPOTLIGHT • January / February 20197

COVER STORY 1

Chinese choose not to have reciprocity because having an aggressive
industrial policy in which they support domestic firms over foreigncompetitors is fundamentally incompatible with an open marketbased global trading system. In a global trading system designed by
the GATT and the successor organization, the WTO, the logic wasmarket-based players with minimal government support. The level ofgovernment support and the use of regulations in China and othercountries pursuing industrial policy are fundamentally incompatible
with the WTO.
JS: How about the TPP11? Could it encourage

competitive trade liberalization and even induce
China and the US to join?

Aggarwal: Competitive liberalization is completely nonsense. It isdisastrous because it encourages the US to pursue bilateral trade
agreements, to pursue sectoral trade agreements, and to essentiallyignore the WTO. The Peterson Institute for International Economics
kept thinking that somehow, competitive liberalization would lead toa conclusion of the Doha Round by 2007 if the George W. Bushadministration pursued bilateral trade agreements. That iscompletely incorrect – the US pursued bilateral trade agreementsthat simply undermined the coalition for free trade that would havesupported the WTO. I am a big fan of the WTO, and I believe it is avery important organization that manages disputes.
As far as the TPP11 is concerned, I support it too, although I
prefer the WTO as a forum. Just because the US has pulled out, it
does not mean that Japan and other countries like Singapore should
not trade within a minilateral framework. If the US and China decideto join the TPP11, I think it would be great, but I don’t think we cancall that competitive liberalization. The Chinese and Americans
understand TPP well and, in fact, the US tried to convert it into a
political security instrument for domestic political reasons. Initially,
the US was not blocking China’s membership but then it became
popular to use security arguments and create a TPP without China.
We must also bear in mind the Transatlantic Trade and Investment
Partnership (TTIP) effort between the EU and US – which also ofcourse does not include China. The Obama administration’s goal
became to create two institutions, the TPP and TTIP, which both
excluded China and set the rules for the global trading system. That
has now been replaced by a direct bipolar strategy of the Trumpadministration, which is to ignore the TPP, pretty much ignore theTTIP, and simply focus on blocking trade and investment with China
as a way of punishing the Chinese for their industrial policy strategy
that they have pursued successfully for many years.
JS: I think East Asia, including China, needs to take
8 Japan SPOTLIGHT • January / February 2019some initiatives regarding good global governance.
Unfortunately, this seems unrealistic in terms ofpolitics, but in terms of the economy or culture it
might be possible to achieve a more meaningfulforeign policy among countries in East Asia, namely
Japan, South Korea and China. How do you think we
can achieve such good relations and a good foreign
policy among these three countries?
Aggarwal: I think it is simply impossible, and I think the reason that
there is no Northeast Asian agreement of any significance is becauseof political disagreements between the three countries. There’s theJapan-South Korea dispute over islands and Japan’s conduct during
WWII, there’s a similar China-Japan dispute over territory, and theSouth China Sea controversy has continued in the broader region. I
think it is naive to believe that economics and politics can continue
on separate paths without colliding. We had that for some time, butthere was always a lot of tension, and the Chinese have stopped
following Deng Xiaoping’s view of the world which was “Let’s have apeaceful rise” and have now decided to be much more aggressive inthe political and security realms. I don’t think you can have very
good economic and open relations when the political system and the
security system start closing down. I think we had that for some time
because the US was very much involved in East Asia and China wasfollowing a policy of trying to develop its supply chains and buying
products from all over Southeast Asia to sell to the US, but I believethat world is coming to an end.

Role of Economic Relations & Soft Powerin Mitigating Political Confrontation
JS: Wouldn’t a recognition of the merits of economic

relations be to some extent helpful in mitigating
political conflicts?

Aggarwal: I think that sounds good, but I am not a believer in thetheory of “commercial peace”, which argues that growing economic
interdependence leads to global peace. I simply don’t believe that
proposition. Norman Angell expounded this in 1913, and then WorldWar I took place in 1914 shortly after the book was published. The
notion that trade and cultural relations will help overcome
fundamental political problems is unrealistic. I don’t think that
economic cooperation will suddenly lead to peace and harmony.
Until there is a fundamental approach to dealing with these politicaland security problems including their territorial disputes and China’s
unwillingness to abide by judicial rulings from the Permanent Courtof Arbitration, states in East Asia have little reason to shift theirCOVER STORY 1

policy. In fact, by continuing with economic exchanges with China
and closing one’s eyes to what the Chinese are doing, I think it justconvinces the Chinese that they can continue what they have been
doing, which is being aggressive in terms of their territorial demands
and guaranteeing their economic supply chains.
Instead, the Trump administration has set out to address China’s
industrial policy. I am not a great fan of the Trump administration
with regard to other policies so I am not advocating that it is doing agood job. We should remember that the Obama administration was
also very concerned about China – as evidenced in several WTO
filings arguing that the Chinese are undermining American industry
and engaging in behavior detrimental to the global trade regime. The
fundamental difference is that the Trump administration is much
more aggressive. Ironically, there is much more continuity in US
policy toward China with respect to trade and investment than wemight think.
JS: I’d like to ask about soft power. What do you thinkin general about the role of soft power? For example,
there are many tourists coming to Japan from China
today. They seem to have a good impression ofJapan, and so could this to some extent have someeffect in mitigating political confrontation?

Aggarwal: My view on this is very negative. I am a strong believer incultural exchanges and in educational exchanges and I think tourism
is a good thing. However, if we believe that these educational
exchanges and tourism will lead to global peace, then that is very
naive. I don’t think that Japan or South Korea or any state shouldbase their policy on hoping that more Chinese tourism will lead theChinese to have a more favorable impression of their country.
Tourism is undertaken by individuals, while policy is made at a highlevel by Chinese government officials. In a strong authoritarian state
like China, there is a strong disjuncture between the population andthe government. I support tourism, but I don’t think it will do muchin terms of changing Chinese policies.

WTO’s Role in Global Trade Conflicts

unilateral power to push the Japanese into voluntary export
restraints in textiles, in steel, in televisions, and automobiles during
both Republican and Democratic administrations. The problem now
is that the Chinese have no inclination to do this because they are notdependent on US security. My problem is that the WTO, which I
strongly support, is not designed for countries like China or evencountries like Japan. But with respect to the latter, Japan’s relianceon the US led to bilaterally agreed-upon policies that helped toovercome the problem. I don’t see that happening in the case of
China. The WTO works well for countries that are willing to abide notjust by the rules of the WTO, but by the norms. The norms are very
important and while I don’t care much for soft power, there arenorms that influence behavior, and I don’t think the Chinese areinterested in these norms.
JS: How do you think the WTO could be

strengthened?

Aggarwal: It is very difficult to strengthen the WTO in the current
environment. China is a member of the WTO and the WTO operates
in terms of unanimity, and so I really don’t see any particular strategy
to strengthen it at this point beyond procedural improvements suchas expedited rulings. In general, I support WTO rules and believe thatthe dispute resolution process is very useful, despite it being slow
and easily circumvented.
As I noted, I am not sure if you could design a better WTO in thecurrent environment, although in practice I wish we could. There has
been talk of majority rule and I am not against such an idea, but how
do you reconcile countries pursuing aggressive industrial policy withan institution that is explicitly designed to punish state intervention
in the market? This question has fundamentally not been resolved by
the WTO and its member states. I think that one can talk about ways
to fix the WTO but until the Chinese make some commitment to it ina serious way, I think the US will remain skeptical of it, as alreadydemonstrated by the Trump administration. In my mind, the GATTand WTO were the greatest trade institutions in the postwar era, andunfortunately they have been undermined by countries seeking a freeride.

JS: Finally, I would like to ask about the WTO. You

seem to support the WTO strongly, but unfortunately
it does not seem to be working very well today.

Aggarwal: The problem is that the GATT/WTO was designed for asystem of free market economics where countries would by andlarge desist from intervening in their economies. When the US did
not want to use the GATT against Japan, the US simply used

Edited with the cooperation of Joel Challender, who is a translator, interpreter,
researcher and writer specializing in Japanese disaster preparedness.

Japan SPOTLIGHT • January / February 20199