Indo-Pacific region wants to sidestep U.S.-China spat: Asian Development Bank head

A senior economist whose organization oversees economic-development projects across Asia says Canada’s Indo-Pacific strategy could help the region’s huge infrastructure needs, but risks falling flat if Ottawa tries to wedge countries against China.

“It’s great for Canada to develop closer ties with all of the countries in the region,” said Albert Park, chief economist of the Asian Development Bank.

“For a lot of leaders in Asia, they don’t want to have to pick sides.”

Canada is a founding member of the ADB, which since 1966 has provided loans to businesses from Kazakhstan to Fiji, with much of the financing coming from Japan and the U.S.

The bank is known for keeping tabs on each of the region’s economies and recently published a new assessment of macroeconomic trends, along with a forecast of growth and inflation for each country.

The ABD expects a boost in growth across the region, and expects inflation to gradually moderate back to pre-pandemic levels at speeds that will vary by country and depend on how world events such as Russia’s war in Ukraine play out.

During a recent visit to Ottawa from the bank’s headquarters in Manila, Park said the key factor is China’s economic reopening. Harsh COVID-19 lockdowns involved sudden factory closures that disrupted supply chains, during which Chinese consumers bought goods online but spent little on services.

Beijing makes up half of Asia’s gross domestic product, and it’s the most important trading partner for virtually every country on the continent.

“The region is more tightly connected with China than any other major power right now,” said Park, who appropriated a metaphor often used to compare Canada and the U.S.

“China is the elephant in Asia that everyone’s sleeping next to.”

His group tracks everything from official trade figures to mobility data, such as the fact Chinese subways now have roughly the same passenger traffic as before the pandemic. The bank has also noticed an uptick in demand for hospitality and transportation services, but a lasting hit to youth employment, income levels and the number of migrant workers in the country.

Slow growth in the U.S. and Europe has meant weak demand for manufactured goods from China. Yet Chinese citizens saved up cash through the pandemic and are starting to spend more on domestic services and tourism abroad, which could soon stimulate the country’s sagging housing market.

“What really matters is how the Chinese consumer starts to think about their spending,” Park said. “It’s a huge and unexpected windfall for the region.”

That applies to richer countries such as Japan and South Korea, as well as fast-growing economies such as India and members of the Association of Southeast Asian Nations.

Last November, Canada announced plans to seek closer ties with all of them through its Indo-Pacific strategy.

The document calls for Canada to continue trading with China, but to limit an economic reliance on Beijing and to freeze the country out of important strategic sectors.

Park said that will be a tricky balance to hit, given that almost every Asian country is seeking to maintain good relations with both Washington and Beijing.

“Most countries in Asia have been pretty consistent in advocating for open trade and continued regional economic integration and global economic integration,” he said.

“There’s kind of a resistance to having politics affect the opportunities for shared growth and prosperity across countries in the region.”

Yet Park did say that Canada’s bet to ramp up infrastructure spending in Asia could reap huge rewards on both ends.

Ottawa’s Indo-Pacific strategy pledges $750 million to finance infrastructure projects in Asia. The funding comes as the Liberals reduce their foreign aid spending, with Prime Minister Justin Trudeau saying that many developing countries want infrastructure development instead.

Park would not comment on domestic policy, but he said there are “huge financing needs” across Asia for bridges, ports and roads that accommodate for changing climate patterns.

“There’s enough need, where I think Canada can try to focus on the things that are so consistent with their own agenda on climate, gender, other things that they care about,” he said.

“That helps promote engagement, knowledge and network-building.”

He said the ABD is in touch with FinDev Canada, the Crown corporation overseeing the new infrastructure spend in Asia, about possibly co-financing projects and using the bank’s network to target the funding.

Park also met with officials at Global Affairs Canada and the International Development Research Centre, a Crown corporation that tracks how to best use aid dollars to yield results around the world.

Meanwhile, Park said his team is trying to gauge the impact of “friendshoring,” an American push for allies to rely on each other to make supply chains more resilient, and defang hostile actors from taxing or withholding goods.

It comes as the Biden administration restricts China’s access to semiconductor chips made with U.S. technology, in order to slow Beijing’s technological and military rise. Washington has also promised to spend big on green technology, pushing Canada and Europe to match corporate subsidies and tax breaks.

Park said it will take years for economists to see whether this has a lasting impact. America and Europe have had a rise in mutual foreign direct investment and a decline in FDI with China, since 2019. Yet Park said a recent wave of trade delegations to Beijing could reverse a reluctance of companies to move jobs and factories to China during lockdowns.

He also said industries are are diversifying their supply chains in general, given the unpredictability of pandemics, climate change, sanctions on Russia and hostility between the U.S. and China.

“Most multinationals, and many countries, are thinking just about diversifying supply-chain risk, given all of the craziness we’ve seen.”

Still, Park warned that protectionist policies and “excessive friendshoring” will likely cause more inflation and hurt economic productivity. He said he’s particularly concerned about medicines, foods and the technology needed to make a low-carbon transition.

“It’s just so less efficient, in pure economics. And with lower productivity growth, it means goods are not going to be produced as cheaply as they could,” he said.

Park said preliminary data suggests the U.S. and China have large enough economies that they could weather limiting trade between each other, but other countries who trade with both would bear the economic brunt of this decoupling.

“Each country has to pursue its own natural national interests in the way that they see fit,” he added.

“We just want to make these choices more informed.”