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The impact of EU crisis on EU-ASEAN Relations

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The Association of Southeast Asian Nations (ASEAN) countries have watched the crisis in Euro zone closely. Southeast Asia countries experience similar crisis towards the end of 1990s which shattered ‘the Asian micracle’ and, arguably, shifted EU interests away from the region.

Nowadays, peoples and governments in ASEAN countries perceived the EU crisis differently. These mixed responses reflect how Asian countries have assessed suspected sources and impacts of the crisis on the European integration. From those mixed responses, one may analyse some possible directions of EU-ASEAN relations.

This article addresses the impacts of EU financial crisis to inter-regional cooperation between EU and ASEAN such as EU-ASEAN dialogue, ASEAN Regional Forum, and Asia-Europe Meeting (ASEM). It is built around the argument that ASEAN countries would keep EU as an important partner but the character of the inter-regional relations is likely to change Despite EU financial difficulties and integration problems, people in ASEAN countries still believe that historically-proven European endurance would bring EU survive the crisis. The financial crisis, however, make the Southeast Asians not only perceive  EU less powerful than before but also  find out that  the global power has shifted to Asia. The study is based on primary and secondary data gathered from document study, Focus Group Discussion (FGD), interview with key actors, and observation of EU activities in ASEAN countries

The organization of the article is as follow: a short explanation on the importance and significance of the study is succeeded by an elaboration on the existing inter-regional relations between ASEAN and EU. It is continued with a description on economic and diplomatic relations  based on quantitative and qualitative data. Finally, the article analyses the impacts of the crisis on ASEAN-EU relations.

 

A. EU crisis and the need to study ASEAN-EU inter-regionalism
Crisis in Euro zone unfolded since 2009 has halted EU’s efforts to maintain a high standard welfare to peoples in its member countries. Indeed, the austerity packages in the crisis-thorned countries –the PIGS- to save their economies and the Euro have driven some people to question the objective of EU integration. The crisis in Euro zone started in Greece in 2009. A year later, Ireland, Italy, Portugal and Spain  experienced similar troubles.  This crisis has brough EU to continuing financial problems.

In Southeast Asia in which severe financial crisis rampaged toward the end of 1990s, bringing down some of the strongest regimes and collapsed what so-called ‘Asian economic tigers’, the EU crisis has been perceived with a mixed response.  Some are surprised given the fact that Euro was stronger than the US dollars for many years. Others see the crisis as the consequence of EU strange economic arrangement – having a single currency but maintaining independent fiscal policies. Some other are more positive toward the European strength, thinking crisis is natural in Europe and the people would overcome the crisis with their resilience that they would re-emerge stronger after the crisis. Nevertheless, a few people believe that the crisis is a ‘karma’ to the Europeans because of what they did to Asian people during the Asian financial crisis. These mixed responses reflect how Asian countries have assessed suspected sources and impacts of the crisis on the European integration. From those mixed response, one may analyse some possible directions of EU-ASEAN relations.

Within the context of Euro zone crisis and the mixed responses from people in Southeast Asia, the question on the future of EU-ASEAN inter-regionalism deserves a careful study. The question is important as the two regional institutions represent almost one third of world’s population and can form an alternative axis of global trade. ASEAN and EU key figures can be seen below:

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The significance of the study lies in three aspects. Firstly, ASEAN-EU inter-regionalis excludes the US, creating an alternative international relations from politico-strategic as well as economic and cultural perspectives. Secondly, the region-to-region, rather than country-to-country relations are a distinctive and new practice in international relations that requires an understanding of its merit and limitations.  This inter-regional pattern of interactions in international relations has arisen in the last two decades, so it is reasonable to investigate what can work or not work and what can be expected from such relations. Thirdly, the relations between Europe and  Southeast Asia date back to more than five centuries ago when the first European fleet when through the Straits of Malacca and started establishing colonialism. The centuries European occupation and trade monopoly have left various colonial legacies –positive and negative- in Southeast Asian countries. Any contemporary interactions between the two regions can not be made immune from the colonial experience and the feeling of anti-colonialism sometime emerge from the Asian side. The feeling sometimes stronger as the Southeast Asian countries shared common historica legacy vis-a-vis their European counterparts in the inter-regional relations.

The term ‘inter-regionalism’ refers to region-to-region relations, defining as a group of countries that become the member of regional institutuions, which in this study focus on ASEAN and EU. ASEAN countries consist of ten countries in Southeast, ie. Indonesia, Malaysia, Singapore, Thailand, the Philippines, Brunei, Vietnam, Cambodia, Laos and  Myanmar.  The EU consists of 27 member states namely  Austria, Belgium, Bulgaria, Czech Pepublic, Crovatia, Cyprus, Denmark, Estonia, Findland, French, Hungary, Ireland, Italy, Germany, Greece, Malta, Netherlands, Latvia, Lithuvania, Luxemburg, Poland, Portugal, Romania, Sweden, Slovakia Republic, Slovenia, Spain, United Kingdom. ‘Regionalism’ refers to the design and implementation of a set of preferential policies among countries within the same geographical area in order to build harmonious relations in any or all aspects such as politic-security, economy or socio-culture. Regionalization is defined as ‘the grow of societal integration within a region and to the often undirected process of social and economic interaction’ (Hurrell 1995). Thus, what differentiates regionalism from regionalization is the design; while the former is directed by governmental agreements the latter is officially undirected and grows more naturally among non-state actors. This study is focused on the inter-regionalism.

Previous scholars have written on the inter-regionalism between ASEAN and EU. The inter-regionalism of ASEAN and EU were observed within the Asia-Europe Meeting (ASEM), as an exercise ground for a new pattern of global relationship ASEM has been observed as an exercise ground for a new pattern of global relationship (Dent 1997/1998; Cammak and Richards 1999; Gilson 2002, 2005). Nevertheless, there are two contrasting views of the application of the interregional framework. The earlier studies of ASEM treat the inter-regional relations between Asia and Europe in ASEM as the consequence of the failure of ASEAN-EU relations in 1980s  and as an alternative axis in the regional-based world order (Dent 1997/1998; Hanggi 1999; Cammak and Richards 1999; Dent 2001; Yeo 2007). Later studies on the inter-regional level of analysis and suggest that the inter-regionalism should be examined with a focus on the relations of the two regions, that is the social interactions between them, rather than as the consequence of some outside phenomenon (Gilson 2002, 2005).  

The focus on the importance of the inter-regional framework between Asia and European countries is particularly relevant when accepting the notion that the post-Cold War era is the time for the emergence of regional order, substituting the strategic competition of a bipolar world with cooperation and discord in the regional framework).  ASEAN-EU has also posed challenges in its mission to connect the Asian and European countries as they have different approaches to cooperation and international relations. Despite the rhetoric in ASEM’s summit statements that call for a deeper understanding towards each other, the Asian and European countries brought their own cooperation culture and approaches to international relations, thereby creating divertgent of interest. At the end, inter-regional relationships such as ASEM  and ASEAN-EU may work in both functional and cognitive ways (Gilson 2005, p. 310).

The inter-regionalism can also be approached with constructivist framework. In their analysis on inter-regionalism, Hettne and Soderbaum (2002), and Fawcett (2004) emphasize that regionalism is socially constructed through cognitive processes as actors respond to each other and to their environmental pressures. The framework helps identify the emergence of a defensive identity vis-à-vis external actors (Lee and Park 2001; Yeo 2003). It was also applied by Gilson (2002) in investigating the cognitive process of ASEM inter-regionalism  which reveals the social construction of regional identity for both ASEAN countries and their partners in Northeast Asia vis-a-vis EU countries through communication and interpretation of ‘us’ and ‘other’.

Study the inter-regionalism between EU and ASEAN as the consequences of the financial crisis in Euro zone area, thus, could provide insights into not only the competences of ASEAN and EU as regional actors but also recent perceptions of ASEAN and EU towards ecah other.

 

B. History of EU-ASEAN inter-regionalism
ASEAN and EU have been linked since 1970s when the European Economic Community (EEC) became the first institution that built a linkage for dialogue and cooperation with countries in the Southeast Asia. This linkage was formalized in 1977 in the 10th ASEAN Ministerial Meeting which followed by the first forum in Brussels.  Despite the creation of  EU-ASEAN Cooperation Agreement in 1980, however, the inter-regional framework could not develop further to enhance the relations of the two regions. Geographical distance between the two regions is a problem to strengthen economic and socio-cultural relations, nevertheless the difference of political values and agenda of cooperation seem to be the main reason for the deadlock. The most disagreement is on political issues, especially on human rights and democratization (Palmujoki 1997; Wisela 2007). Autoritarian governments in ASEAN countries were irritated with criticism from EU countries while the Europeans thought they should participate actively in global politics as the champion of human rights and democratization. Therefore, the contacts in 1970s and 1980s were more rhetorical than substantial in nature (Leifer and Djiwandono1998, p. 203; Stockhof and van der Velde 1999).  
It was the rapid and high economic development in East and Southeast Asia during the 1980s that drew the Europeans’ attention to what was perceived as ‘the world’s most dynamic region in the 21st century’ (Edwards and Regelsberger, 1990, p. 5; see also Richards and Kirkpatrick, 1999; Forster 1999). Consequently, EU launched ‘the New Asia Strategy’ in 1994 that underpinned the need of European countries to resume close ties with the Asian countries whose economic growth had been seen as a world phenomenon (European Commission, 1994).  

The inauguration of the Asia-Europe Meeting (ASEM) in Bangkok in 1996 was celebrated with enthusiasm and hopes in the two regions because this region-to-region forum represented a breakthrough in Asia-Europe relations and a unique arrangement: it did not include the United States (US) and was the first forum to which Asian countries have been summoned as a group to sit vis-à-vis their Europeans counterparts.  For Southeast Asian countries, the region-to-region relations between Asian and European countries in ASEM have some characteristics that are unusual in terms of their engagements in regional and global affairs. ASEM does not include the United States (US) and it was initially expected to balance the US-EU-Asia triangle. In addition, ASEM is the first forum in which Southeast Asian countries have been able to meet and coordinate collectively with countries in Northeast Asia, namely Japan, China and South Korea vis-à-visanother partner.  However, the enthusiasm soon shifted toward pessimism and criticism after the Asian financial crisis in 1997/1998 and following the war against terrorism after 9/11. Nevertheless, ASEM –now has 51 members- has survived despite the many criticisms about its ineffectiveness (Fitriani 2010).

The climate for inter-regional discourse has also been changing. Despite some downturns at the end of the 1990s and early 2000s, the inter-regional relations between Asia and Europe in ASEM have been constructed during a critical period of world history when East Asia has been developing as an economic powerhouse, while Europe has been seeking an identity as a global actor under EU. In January 2003 EU and ASEAN sigh joint declaration on Cooperation to Combat Terrorism. In July of the same year, EU commission launced its policy paper ‘A new partnership with Southeast Asia’.  This inter-regional cooperation was expanded in 2007 with the Nurenberg Declaration on the enhancement of EU-ASEAN Partnership followed by the Plan of Action which is adopted in the first ASEAN-EU Commemorative Summit in Singapore.   A year later, the inter-regional cooperation was planned for a free trade as the two regional entities agreed to negotiate a free trade agreement (FTA). This plan has been suspended in 2010 and EU started negotiating bilateral FTA with several ASEAN member states such as Singapore (concluded), Malaysia, and Thailand.

The development of the inter-regional relations between EU and ASEAN has been revivalized  since 2012. In April the two adopted Bandar Seri Begawan Plan of Action 2013-2017 to define to rout map of cooperation in the next five year. In July, EU also signed the ASEAN Treaty of Amity and Cooperation (TAC).     EU delegation in ASEAN countries has also been busy with various approaches and events to speed up the cooperation, not only between Government-to-Government but also between Business-to-Business.

 

C.  Impact of the Euro crisis on ASEAN-EU economic relation

The crisis in Euro zone and the continuing problems of settlement process have put a stress on Euro value.  The exchange rate on this currently has decreased significantly since 2008 the when first hit of global financial crises took place. Chart1 shows the drecreasing trend of the Euro value against the US Dollars.

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The Euro crisis and the financial crisis in the US have caused a shard declined of global trade experienced (see Chart 2 below). The collapsed of the rate of global trade in the period of 2008 to 2010 was believed as badly as the financial crisis during the great recession in 1930s.

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The declined global trade seems to bring no impact on EU-ASEAN trade relations as the trade between the two regions has kept growing after a sudden drop in 2009. The following chart show the development of EU-ASEAN trade from 1995 to  2011.

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Despite the increasing trend of EU-ASEAN trade in term of value, the place of EU among ASEAN trading partners decresed. The main trading partners of ASEAN countries are their Southeast Asian neighbours.   Chart 4 below implies that ASEA’s intra-regional trade remains the highest.

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In term of investment, EU countries has maintained their collective position as the second biggest source of FDI to ASEAN countries. The value of EU investment increased in 2011, however its proportion to the total investment in ASEAN fell.  The table below shows the figures from 2009 to 2011 gatherred by the ASEAN Secretariat.

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Notes: Details may not add up to totals due to rounding off errors.
1/ Ranked according to FDI inflows in 2011; covers countries on which data is available.
2/ Includes inflow from all other countries, as well as total reinvested earnings and inter-company loans in the Philippines.
3/Singapore’s data for 2011 excludes inter-company loans as geographical and industry breakdown are presently not available. Inter-company loans with intra-/extra-ASEAN breakdown for 2011 shown are estimated by the ASEAN Secretariat.
Source: ASEAN Secretariat FDI Statistic

 

The gap left by EU investors was quickly filled by intra-regional ones. The data in the following table reveals that capital inflows inform of FDI to ASEAN countries has increased drastically –threefold- since 2009.

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The above data also bring about the fact that for the first time, intra-ASEAN investment has grown significantly, jumping from 6,000 million US$ to almost 26,000 million US$ in three years. Economic integration among ASEAN economies, besides the worsening investment conditions in other parts of the world, may have encouraged ASEAN countries to send FDI to each other.

The financial crisis in the Eurozone also hit official development assistant from EU to ASEAN countries. The figures are fluctuated with a decreasing trend. While reached the highest in 2008, the annual growth of EU ODA to the Southeast Asian countries decreased in 2009 before hiked again in 2010 and followed with a drastic drop in 2011.

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The data shows that the financial crisi in Euro zone has brought some negative impacts on EU economic engagements in ASEAN countries. The conclusion of FTA negotiation between EU with Singapore and negotiation with Thailand and Malaysia seems to contribute to the rise of the trade value between EU and ASEAN countries. The EU position among ASEAN trading partners, however, decreased in 2011. Trading with China and intra-ASEAN continue to dominate ASEAN trade.  Similar trend –increasing in value but decreasing in proportion againts other ASEAN partners- also took place in regard to EU investment in ASEAN countries. It is unavoidably the result of EU financial difficulties. In addition, the shortage of EU financial resource also hit the flow of development assistant from EU to ASEAN countries  that have been fluctuated since 2006.  The total amount of FDI flow from EU to ASEAN countries has decreased since 2010 despite the fact that EU maintains a position as the second biggest source of FDI for Southeast Asia. Similarly, the annual growth of ODA from EU to ASEAN countries has slowed down to 20% in 2011 compared with 80% in 2008. In short, in economic relations, EU is an important partner of the ASEAN countries; the European countries, however, are not the most important one.

 

D. Impact of the Euro crisis on ASEAN-EU

Previous section has shown briefly the economic impacts of the Euro crisis on EU-ASEAN relations. This section analysis further impacts of prolonged crisis on the European and Southeast Asian countries political and diplomatic interactions.

Toward the end of the first decade of the 21st century, whereas the Euro zone experienced financial crisis, the ASEAN countries enjoyed an economic growth accelerated by the rise of China economy. Indeed, the East Asia became the engine of the global growth when the EU and the US suffered from the financial problems. The Southeast Asian region that was overlooked by the EU due to the financial crisis a decade before was transformed to a lucratic market of 600 million population with growing middle classes and increasing purchasing power. Consequently, there is an increasing trend in which EU pays more attention to ASEAN countries. As a global trading actor, EU naturally turns to see ASEAN countries as it main interests. Since 2009, there has been more enthusiasm from the EU side to approach to ASEAN.  In the same year, EU started appointing Ambassadors as representative to ASEAN after the Southeast Asian countries launched the ASEAN Charter that transform the regional institution as a legal entity.

In the subsequent years, EU launched an active economic diplomacy toward ASEAN. In 2011 the ASEAN-EU Business Summit (AEBS) was conducted in Jakarta to be followed by the second Summit in Phnom Penh a year after. EU Delegation in Southeast Asia and member states also exercised an active diplomacy to attract ASEAN investors. The regional FTA, which had been negotiated since 2007, was aborted in 2010. Subsequently, EU changed its strategy to approach ASEAN countries through bilateral FTA with the most advanced countries in Southeast Asia. The shift of efforts to establish regional FTA (EU-ASEAN) to bilateral FTA with several ASEAN countries shows EU short term strategy to accelerate trade relations with the most convenient partners while accepting the fact that ASEAN countries so vary in term of economic development and the readiness to wage effective trade relations. Despite the change of FTA strategy, EU trade deficit against the ASEAN countries prevailed.

Nevertheless, EU is keen to support the ASEAN integration. Provide funds for ASEAN integration projects. Since 2007, EU has actively assisted ASEAN integration.  The amount of official development assistants that EU provided for projects towards ASEAN integration to 70 million Euro for the period of 2007-2012.  It was used for various initiative in supporting ASEAN three communities.

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Table 3 shows that EU supports for the regional integration of ASEAN vary from establishing trust to trade liberalization and climate change. On one hand, those various supports reflect EU competence to play its role as a partner in regional development. On other hand, however, the supports were likely to be ineffective since they were operated through the project-based cycles in which sustainability is problematic. EU officials frequently stated that a more integrated ASEAN is better for the EU. This opinion perhaps derived from their frustration in negotiating with ASEAN member states. With the decreased of EU development assistant to ASEAN as showed in Chart 6, the European support for the regional integration in ASEAN is also under questions.

Under the active economic diplomacy, leaders of EU institutions as well as EU member states have frequently visited ASEAN countries. All top leaders from EU biggest member states took the difficulties of long haul flights from Europe to meet their counterparts in the capital cities of ASEAN member states. This trend – so many high profile figures from EU and EU member states to visit ASEAN countries- is never seen before. This phenomenon is in contrast with the frequent absence of EU leaders in the ASEM summits, especially those after the Asian financial crisis.

EU active economic diplomacy and the frequent visit of U top leaders have created a better atmosphere in EU-ASEAN relations. EU criticism on social or political practices in ASEAN countries continues but with a less frequency and intensity. This change on EU diplomatic style may derive from several factors. The first is EU leaders and official realized that they had a higher priority to pursue economic interests vis-à-vis the ASEAN countries. Secondly, the changes that took place in Southeast Asian countries have addressed different perspectives between EU and ASEAN countries, especially in political issues and human rights. The political openness and transformation in Myanmar, that used to be the problems in EU-ASEAN relations, seem to contribute indispensably in this improvement of political atmosphere. Thirdly, perhaps by paying more attention to ASEAN countries and by realizing their interest in the region, the Europeans are able to build a more culturally, socially, and politically sensitive approach in their diplomacy with ASEAN.  With this kind of approach, the EU officials as well as officials of EU member states  seem to be more open mind and more ‘appreciate’ to  what have been considered as Asian values and ‘ASEAN way’. The approach is reflected in more prudent comments on political issues in ASEAN countries and more restrain in putting forward criticism towards the ‘ASEAN way’. One of strategic steps taken by the EU is to accede to the ASEAN Treaty of Amity and Cooperation (TAC) in July 2012.

The crisis in the Euro zone and its impacts on EU active diplomacy in Southeast Asia has created mixed perceptions in ASEAN. An optimist view sees EU as a crisis fighter and believe that, as those in the past, the European countries would reemerge from the crisis stronger. However, the financial crisis has also spread skeptical views on regional integration and strengthened the refusal of ASEAN Economic Community. Those who adopt the latter perspective believe that the European integration and the common currency are very risky experiments that could create social, political and economic disaster if not chaos. The crisis in the Euro zone is a valuable lesson learn for regional integration in other parts of the world including in Southeast Asia. In addition, what has happened in Europe encourage perceptions that EU’s power is decreasing.

Despite the financial crisis and challenges to EU’s role as a global player, EU has shown an intention to deepen its relations with ASEAN. In April 2012, the two regional entities adopted the Bandar Seri Begawan Plan of Action which states to strengthen EU-ASEAN enhanced partnership for 2013-2017. The plan to enhance the inter-regional relations includes cooperation in policy and security. In 2012 and 2013, EU Representatives and high level officials from member states frequently stated that they expect EU could play a bigger role in the regional security.  However, it is not clear the reason behind this intention and what kind of role that EU could play in the Asian security. For ASEAN countries, China’s rise, its increasing assertiveness and the US’ pivot have increased tension in the regional politics and security. It would be a question whether EU needs a pivot to Southeast Asia too.  

 

E. Conclude
Inter-regional relations between ASEAN and EU have been established since 1970s.  This region-to-region engagement has gone through three crises that shape not only the nature of the relations but also the perceptions of each side towards each other.  The first is the strained relations during 1980s due to different political values that can be categorized as the crisis of common values between ASEAN and EU. This crisis hampered the development of the inter-regional relations; EU however preceded by enhancing bilateral relations with individual ASEAN countries namely Singapore and Thailand. The second is the Asian financial crisis that cracked some ASEAN countries towards the end of 1990s; the crisis that switched European previous interests and hopes on what so called ‘Asian economic miracle’. In the context of EU-ASEAN relations, this crisis loomed the relations and created a substantial negative feeling among affected ASEAN countries as the EU economies failed to respond as sincere partners that could be relied on for real supports and needed assistance. This crisis halted the development of not only ASEAN-EU relations but also their relations in the ASEM process. EU countries seem lost their interests in ASEAN and switched their attention to newly integrated countries in Central and Eastern Europe. The third and most recent event is the financial crisis in the Euro zone that has been responded variously by people and key persons from ASEAN, creating a momentum to re-address the inter-regional relations. This period is concomitantly with continuously high economic growth in East Asia, including main countries in ASEAN, encouraging the EU countries to realize on the importance of ASEAN economies for their own. The relations mirror those in early 2000s when enthusiasm in at side was met by cautiousness and restrained at the other side.

The data collected for this study show that economic relations between the two regions have been influenced by the crisis in the Euro zone since 2009. In term of trade, export and import of goods between the two regions has increased steadily after a drop in 2009. The data implies that the Euro crisis has boasted trade between the two regions, indicated by more active governments and business from EU countries to approach their partners in Asia. The trade, nevertheless, booked a surplus for the ASEAN countries. The increased trend of an active engagement in the inter-regional trade did not take place in investment and official development assistant.

The Euro crisis has created a more balanced enthusiasm in EU-ASEAN relations. Whereas EU seems to lost interests in Southeast Asia after the Asian financial crisis, the European countries return their attention to the lucratic market of ASEAN countries when they experience the crisis.  It may not ideal relations but economic interests continue to be the primary motive of the relations between the two regions.

The financial crisis in Euro zone makes the Southeast Asians not only perceive EU less powerful than before but also find out that the global power has shifted to Asia. It seems that ASEAN countries would keep EU as an important partner either in ASEAN-EU Dialogue Forum, ARF or ASEM; however, the character of the inter-regional relations is likely to change.

 

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Digital Economy Development in China Shifts the Focus to the Production Side

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Just recently, China’s Central Commission for Comprehensively Deepening Reform reviewed various plans for data system, including a guideline on building the basic systems for data and making better use of data resources. The central government’s layout from the construction of the basic system of data is intended to lay a solid foundation for the further development of the digital economy, in addition to pushing for the development of the data-based data industry to further accumulate resources and driving force. These new changes in the digital economy signify that there is the establishment and improvement of rules in the digital economy of China.

Looking at the content of the guidelines and plans, there are two aspects worth noting, the first is to clarify the ownership and classification of data, and the second is to build a mechanism for data transactions. The clarification of the ownership and the rights and responsibilities is crucial in establishing the legal foundation for data transactions. Of course, the new plan has yet to clarify this, but it does present the hope to develop a system with clear ownership so that the corresponding data transactions can be carried out. Although Shanghai, Beijing, Hainan, and other places have begun the attempt of creating data exchanges and data transactions, in terms of scale and transaction frequency, this is still in the initial trial stage. Researchers at ANBOUND believe that the focus of data resource development and application of digitalization will shift from the consumer side to the production side.

While the new concept provides a framework for the establishment of the data system, it does not mean short-term boost for the development of the data industry or the digital economy can be formed. The future relies on digital technology to generate data, rather than monetize data, and the same is true in other fields. With this, the model of harvesting from online traffic flow by capital and market expansion will face higher and higher business costs and regulatory barriers. Judging from the development trend of the digital economy in China, after the rectification of internet platforms and the country’s domestic 5G network reaching the stage of large-scale popularization, the overall driving force for the development of the digital economy will be weakened.

Statistics reveal that in 2020, the scale of China’s digital economy has reached USD 5.4 trillion, accounting for 38.6% of GDP, maintaining a high growth rate of 9.7% and becoming the key driving force for stable economic growth. Yet, the growth rate still dropped by 5.9 percentage points from the previous year. The downward trend in the growth rate of the digital economy deserves attention. In 2021, the expected growth of the digital economy scale was RMB 42.4 trillion, accounting for 37.06%, a slight decline from the previous year. At the same time, the proportion of China’s digital economy in GDP was 21.4 percentage points lower than that of the United States, Germany, and the United Kingdom, and 5.1 percentage points lower than the global average.

Researchers at ANBOUND pointed out that the main problem that needs to be solved in the future development of China’s digital economy is the ownership of data resources. The main issue being disputed in the country’s traffic economy that is constraining internet platforms is precisely about the right to data usage. In the existing internet platform economy like online consumption, when the market expansion encounters boundaries and the cost of data acquisition is getting higher and higher, internet platforms that rely on their own accumulated customer data are seeking to realize cash in consumption and finance. This has brought a great impact on the current real economy and financial sectors, and is also an important cause of the authority’s rectification of internet platforms. As noted by ANBOUND, clarifying and resolving the matter in regard to the ownership of data resources is becoming a pragmatic issue. As far as data resources are concerned, although there is still some room for development in the medical and financial fields, under the background of the increasingly perfect anti-monopoly system and the continuous improvement of supervision, the traffic economy is now being constrained and restricted. This signifies that the space for the application and development of the existing large amount of data resources based on consumer data will be constrained on the consumer end.

From the overall trend, when the internet platform is constrained and the traffic economy encounters incremental bottlenecks, the development of digital industrialization dominated by terminal digital consumption will face difficulties in transformation after going through a stage of rapid growth. Looking at the data industry, on the one hand, strengthening supervision means that the Big Data resources, mainly consumer data, also face institutional obstacles to further development and “diversion”. The development of digital industrialization not only faces the obstacles of insufficient digital infrastructure, but also requires technological breakthroughs in its industrialization development itself. In addition, the production side also faces the basic hurdle of lack of a large amount of production data. Therefore, in the new growth space of the digital economy, the demand for large amounts of data on the production side will be the key driving force for building a basic data system and establishing a data transaction mechanism.

The central and western regions of China are building data centers to meet the current and future needs for large amounts of data storage. However, the application of these data and the development of data resources not only face basic systemic problems, but also lack the development of data application fields. In Guiyang, known for its development of the Big Data industry, the focus is chiefly on storage, and the Big Data investment projects there are mainly on the data centers. To mine data resources, it is not only necessary to realize the accumulation and mining of data, this also requires the support of technology and industry to realize the appreciation of data through digital technology. However, the weak real economy and lack of data development capabilities have become the biggest shortcoming of Guiyang’s development. This makes its data industry generally at the middle and low end of the value chain, and its core competitiveness is rather weak. If the Big Data industry in various places wishes to assume further roles, it still needs the upgrading and integrated development of basic industries. The future development of the data industry depends on the accumulation, application, and development of a large amount of production data. This also means that the future focus of the development of the digital economy begins to shift from the consumer side to the production side.

Final analysis conclusion:

The Central Commission for Comprehensively Deepening Reform’s conception of the construction of data infrastructure means that it will solve the fuzzy area of data ownership and further realize the tradability and transfer of data. This provides an institutional and market foundation for large-scale data development. The digital industrialization of the consumer side, as things stand, has come to an end, where the growth focus of the digital economy will shift to the production side.

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Economy

Economic Sanctions As An Act Of War

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The outbreak of the Russo-Ukraine war in 2022 saw the imposition of one of the most comprehensive international economic sanctions on any country in history. These sanctions were expressly aimed to damage the Russian economy, pressure its population and force its leaders to cease hostilities against Ukraine. These measures caused a run on banks, an economic recession and sky-high inflation in Russia. In response, Russia imposed retaliatory sanctions of its own and, described the Western sanctions as an ‘Act of War’. North Korea had raised a similar contention in 2017 in response to similar sanctions.  This author seeks to focus on and examine this claim on its merits and normative value in International Law.

I argue that, from an effects-based perspective, comprehensive and long-term economic sanctions should be regarded as an ‘Act of War’. In a globalised world, economic sanctions can have a disproportionate and indiscriminate effect on a nation’s populace, comparable to that of a direct military intervention in the form of a blockade. The decision to impose economic sanctions should thus ideally be regarded as such and be subjected to the same level of scrutiny and qualifications such as what the case for an armed intervention to be legitimate in modern International Law. A calibrated standard to determine a ‘legal’ economic sanction not amounting to an act of war, will allow for proportionate use of sanctions, to minimise their human costs and respect the rights of economically weaker states.

Economic Sanctions in International Law

The term ‘sanction’ in international law refers to a peaceful action, usually responding to a breach of an international law principle and aiming to economically constrain a target state, entity or individual , imposed by a state or authority with the legal capacity to do so.  Sanctions may be comprehensive, such as completely prohibiting commercial activity with an entire country, or they may be targeted, blocking specific types of transactions, with specific entities or individuals.

Sanctions act as tools of coercion aimed to cause popular dissatisfaction and create pressure on a country’s leadership to change its foreign policies. Importantly, sanctions imposed by major powers such as the US and EU, include ‘Secondary Sanctions’. Such sanctions extend similar trade restrictions to any other third country which continues to deal in the restricted trade with the target country. Secondary sanctions reduce the alternative trade partners for a target country and magnify the effects of sanctions.

The UN Charter itself, in Art. 41, mentions the use of economic sanctions as a measure by the Security Council to give effect to its decisions. It clearly treats it as a separate, less egregious measure then the use of armed force provided for in Art.42. ‘Blockades’ are also mentioned separately as within the scope of use of armed force by the Security Council.

The UN framework does not provide the only legal basis for states to impose economic sanctions, as states are relatively free in customary international law to adopt unilateral sanctions against states, entities and individuals. Various regional treaties also allow for use of collective economic sanctions.

It is also important to acknowledge a long-running movement in the UN to delegitimatize use of unilateral economic measures as a method of coercion, recognising that such measures significantly disadvantage developing countries in particular. This movement has manifested itself in form of various General Assembly resolutions such as Resolution 2131, ‘Declaration on the Inadmissibility of Intervention in the Domestic Affairs of States and the Protection of Their Independence and Sovereignty’, 1965; Resolution 2625 (XXV), ‘Declaration on Principles of International Law concerning Friendly Relations and Cooperation among States in Accordance with the Charter of the United Nations’, 1970;   

However, such resolutions are non-binding in nature. As it stands, a strict reading of the UN Charter and associated international legal instruments, does not per se allow for regarding economic sanctions as an act of war, as will be elaborated below.

Economic Sanctions as an ‘Act of War’

Defining ‘Act of War’

Art. 2(4) of the UN Charter prohibits all UN members from resorting to the threat or use of force, against the territorial integrity or political independence of any State. However, Art. 51 allows for use of force authorised by the UN Security Council, or in the exercise of the rights of individual or collective self-defence. The word “force” in this context was initially generally understood to refer only to military force. “Acts of War” are thus restricted by international law. General Assembly Resolution 3314, passed in 1974, also sought to define ‘acts of aggression’, but excluded ‘economic aggression’ from the ambit of the resolution.

Comparison to Blockade

The closest ‘act of war’ that may be ‘analogous’ to a comprehensive economic sanction may be the act of a ‘blockade’. A ‘blockade’ is an act of war which involves restricting ships or aircrafts of some or all nations from entering or existing specific ports or coastal areas of a target country, by the threat or use of armed force. Such an act aims to degrade a country’s economy and affect its populace by preventing trade and movement of essential goods. It is included as an act of aggression in Resolution 3314 and also mentioned in Art. 42 of the UN Charter as a type of armed force that may be used by the Security Council.

A sanctioning country uses legal barriers to restrict its trade with a target country and also usually uses its economic heft to dissuade other countries from trading with a target country, by threatening to sanction them too. The question that arises is that how is this situation, from an effects-based perspective, different from a comprehensive economic sanction?  If the net result is the same, that the country’s trade is restricted and its populace is deprived of essential goods, why should only a physical blockade be regarded as an act of war and be subject to stricter scrutiny. This similarity of effects can be proved empirically using historical instances of comprehensive sanctions.

Comprehensive economic sanctions cut off a country from the global financial system, block foreign investment and remittances, cause loss of employment in export industries, causes shortage of essential import goods and high-end technology, which has ripple effects on the economy and popular welfare. These effects are particular amplified for a smaller, developing country which is less likely to be self-sufficient in essential goods.

Various case studies by Prof. Joy Gordon of use of sanctions in Iran, Iraq, and Cuba, demonstrate the damaging effects of sanctions on a country’s economy and tangible loss of life and popular welfare, easily comparable to a devastating armed conflict. For instance, the sanctions regime in Iraq resulted in the deaths of an estimated 500,000 civilians, exceeding the casualties in the Gulf War that followed. The sanctions had included restrictions on import of food grains and import of essential ‘dual use’ goods such as fertilizers for agriculture and chlorine for water purification, which resulted in a famine, epidemic and rise in infant mortality.

Addressing Counter-Arguments

Exercise of State Sovereignty

The first probable argument against treating economic sanctions as an act of war, would be based on state sovereignty, namely the right of a state to dictate its own trade policy. This principle was affirmed in Republic of Nicaragua v. The United States of America, 1986 I.C.J. 14, with specific reference to trade relations— that in the absence of a treaty commitment or other specific legal obligation, a state is not bound to continue particular trade relations longer than it sees fit to do so. States may thus argue that they have the right to choose their trade partners and treating these decisions as an act of war, would make them contingent to UNSC approval and abrogate their economic independence. 

However, state sovereignty is not an absolute principle, especially when pitted against humanitarian interests and interests of other states. The above argument may be addressed by a more careful calibration of standards on what kind of sanctions may amount to an act of war. A probable standard could be considering only those comprehensive economic sanctions which are imposed on essential goods, a shortage of which endanger the basic human rights (such as those to food, clean water, medication etc) of the citizens of the recipient state. This would amount to a reasonable restriction on the right of a trade of a sovereign country, namely that it should not wilfully endanger the essential rights of civilians of another country.

It is also essential to note that the existing regime of economic sanctions can also be differently viewed as a restriction on state sovereignty, as countries with disproportionate economic power are able to use ‘secondary sanctions’ to force other states to comply with sanctions on a target country. This also derogates sovereignty of other states by limiting their trade with a target country.

Economic Sanctions as a ‘Soft Tool’

It may also be argued that treating economic sanctions may deprive countries of an essential ‘soft’ tool to influence ‘rogue’ states and uphold the international legal order, without crossing the threshold of armed conflict.

However, a calibrated standard, as described above, would not completely preclude the use of economic sanctions. Countries may continue to use targeted economic sanctions against the political and economic leadership of a rogue state such as restricting their movement, seizing their overseas assets and crippling their businesses to exert pressure. Military and non-essential goods may continue to be restricted completely. In fact, recent studies have demonstrated the comparative effectiveness of targeted sanctions to influence state policy, as compared to general sanctions, with reduced human cost on the powerless sections of the society of the target country.

Moreover, even in this proposed model, comprehensive economic sanctions may be employed, if necessary, with the approval of the UN Security Council, which still has the authority to exercise use of force, under the UN Charter.

Conclusion

In summary, it is clear from an effects-based perspective, that comprehensive economic sanctions are comparable to direct military intervention such as a blockade.  Economic sanctions should thus be brought into the ambit of an act of war, and international legal safeguards on use of force should be applied.

A calibrated standard to determine a ‘legal’ economic sanction not amounting to an act of war, would allow the use of sanctions in a regulated, proportionate manner, to minimise their human costs and respect the rights of economically weaker states.

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Economy

Yen Becomes the Next Eye of the Storm in the International Capital Market

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With the recent acceleration of interest rate hikes of the Federal Reserve, the yen is under increasing pressure while the U.S. dollar index remains high. This, in turn, causes the Japanese currency to show a trend of continuous depreciation. The exchange rate of the yen against the U.S. dollar broke through the key node of JPY 135, reaching a high of JPY 136 on June 21. On June 23, USD/JPY continued to hover around a 24-year high of 136. Earlier this week, at one point, the exchange rate of the dollar against the yen reached the highest since October 1998 to JPY 136.70.

Since the beginning of this year, the yen has depreciated by more than 18% against the dollar, and its depreciation rate ranks among the top among the G10 countries. The changes brought about by the devaluation of the yen have greatly changed its role as a traditional safe-haven currency, and it has increasingly become the center of focus for speculation.

With the continuous depreciation of the yen, Japanese government bonds have also shown a gradual downward trend, and have repeatedly exceeded the 0.25% yield ceiling of the Bank of Japan (BOJ)’s yield curve control (YCC). Although the BOJ has repeatedly increased its purchases to maintain the yield of the bonds, this is still insufficient to help the currency exchange rate at the same time. Consequently, the current speculative attack on the yen and Japanese government bonds has become an opportunity that hedge funds are keen on. Indeed, the market has been paying attention to such speculation on the BOJ in the bond market. Although the central bank has implemented the strategy of unlimited purchases of Japanese government bonds since March to drive down long-term interest rates, the market is still skeptical that it can hold the bottom line, hence the commencement of the so-called “widow-maker”.

The main reason for such a situation is the widening of the monetary policy gap between the United States and the BOJ. As the Fed began to tighten monetary policy, simultaneously raising interest rates and shrinking its balance sheet, the BOJ still adhered to the quantitative easing policy, which is one of the “three arrows” of Abenomics. On the one hand, it maintains negative interest rates, and on the other hand, it continues to inject yen liquidity into the market by purchasing yen assets. However, with the recent rise in global inflation, Japan’s inflation has achieved the 2% target that has been difficult to achieve for many years. In April this year, Japan’s inflation rate reached 2%, with the core inflation rate being 2.1%. Driven by the depreciation of the yen and rising international energy prices, the country’s inflation may reach 2.5% in May, and the core inflation will remain at the level of 2.1%. This is arguably the achievement of the BOJ’s policy goals for many years. However, the achievement of this target is largely dependent on the depreciation of the Japanese currency, rather than the increase in demand. Under the pressure of inflationary pressure brought about by the depreciation of the yen and the rising yield of Japanese government bonds, whether the BOJ can adjust its policy and whether it can maintain the strategy of yield curve control is the key concern for the market institutions. Some analysts believe that when other central banks abroad are making a choice between economic growth and controlling inflation, the BOJ has to face a choice between the yen and Japanese bonds.

Japanese Prime Minister Fumio Kishida and the BOJ Governor Haruhiko Kuroda have both stated that they do not want the sharp depreciation of the yen to continue and will pay attention to the trend of the foreign exchange market. That being said, there is no perceivable specific action to intervene in the market, and the market could very well let the yen depreciate. The depreciation of the yen has always been considered positive for the Japanese economy and its stock market, while Abenomics also saw it as a key means to boost inflation and stimulate the economy. Nonetheless, many institutions and scholars have repeatedly pointed out that the situation this year has been very different from the beginning of Abenomics. The damage to the Japanese economy caused by inflation and the depreciation of the yen is far greater than the gain. In the past two years, both the Japanese economy and the Nikkei have been “decoupling” from the trend of the yen. Economist Nouriel Roubini, touted as “Dr. Doom”, recently warned that if the yen exchange rate falls further to 140, it will bring serious inflation problems to the BOJ, and the central bank will be forced to make policy adjustments, abandoning aggressive monetary policies such as zero interest rates and YCC. This means that the BOJ’s policy shift has come under increasing pressure, and is being anticipated and bet on by more and more markets. This has turned the yen from a safe-haven currency to the eye of the storm, so to speak, in the current market game.

Yet, if the Japanese central bank abandons the quantitative easing policy that has been implemented for years, there will also be huge impact on the market. Some analysts opine that the YCC of the BOJ is the last anchor of the old global yield curve structure that utilizes arbitrage conditions, as well as the liquidity of the dollar and yen. If this is dismantled, the impact will be global, and it will place even more pressure on bond yields in the United States, Europe, and Asia. On the Asian side, the South Korean won, the Philippine peso, the Hong Kong dollar, and the Chinese yuan are also under pressure from rising bond yields and currency depreciation. If the BOJ’s policy changes, the consequences will be so terrifying that it may very well be the last straw to bringing down the global capital market.

Final analysis conclusion:

With the widening policy differences between the Federal Reserve and the Bank of Japan, as well as with the rising inflation in Japan, the yen continues to depreciate. This has turned it from a traditionally safe-haven currency into the eye of the storm within the international capital market. The game between the market and the BOJ has caused the Japanese central bank’s future policy choice to become a global focus. Regardless of what the outcome might be, it will certainly have a huge impact on the market.

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