Washington’s Return to Asia: A New Balance of Power?

The Obama administration has stated that the US has returned to Asia.  An article by Hilary Clinton in the November edition of Foreign Policy magazine made clear Washington’s intentions of focusing on the region.  Leon Panetta, the new US Secretary of Defense, reiterated this view on an October visit to important allies such as Japan and South Korea.  Finally, in Australia in mid-November US President Barack Obama announced the deployment of 2,500 US Marines to Darwin by 2014.  China has reacted cautiously thus far, although the People’s Daily warned that Australia risks being caught in any “crossfire”. 

Putting aside unspoken fiscal issues, the US decision suggests that the post-Cold War order is coming to an end.  The international system in Pacific Asia has changed since 1945, when the US loomed over a Japan in pieces and a China in ferment.  The Maoist revolution and the outbreak of the Korean War transformed Washington’s pre-eminence into a balance of power system divided into US and Soviet led camps.  However, after 1972 an informal anti-Soviet security alliance between the US and China helped shore up American power in the region in the aftermath of the Vietnam War.  (An excellent analysis of that shift came from the pen of international relations theorist Hedley Bull).  The Soviet Union compensated by increasing its Pacific naval capacity prior to collapse in 1991. 

China’s focus on economic development after the events of Tiananmen Square left the US dominant in East Asia through the 1990s.  Beijing was unable or unwilling to challenge the US until about 2001, powerless in its fury at US President Bill Clinton’s 1996 decision to deploy two aircraft carrier groups in response to Chinese missile testing in the Taiwan Straits. However, the rapid development of China’s economy, largely after its accession to the World Trade Organisation in 2001, has changed that dynamic.  Trading prowess and the acquisition of huge foreign exchange reserves have swelled China’s economic importance, while growing military spending has transformed the People’s Liberation Army.  If the 2001 EP3 spy plane incident and the standoff with the USS Impeccable in March 2009 show anything, it is that Beijing has moved away from Deng Xiaoping’s foreign policy adage that it must hide its brightness and bide its time.  In particular, since the 2008 financial crisis, China appears to have pursued a more assertive foreign policy, with notable developments including increased tensions in the South China Sea and, most recently, Beijing’s decision in November 2011 to deploy armed police to northern Thailand.  The new US strategy thus seeks to soothe regional concerns of powerlessness in the face of rising Chinese might.

In some ways, then, the US steps may presage moves away from US preponderance towards a more effective balance of power in East Asia.   A classic view of a balance of power system is one where each power recognises that other players have rights in certain spheres of interest.  The core principle underpinning this approach is one of “co-existence”.  The arrangements in Europe between powers such as Austria-Hungary, Britain, France, Prussia, and Russia between 1815 and the 1860s would constitute such a system, as might the more hostile division of Europe into pro-US and pro-Soviet camps between 1945 and 1989. 

Regional developments appear to support this assertion.  One reason behind the Darwin deployment is that Chinese over-the-horizon capabilities, such as its DF-21D missiles and the J-20 stealth fighter, will have the range to hit nearby US facilities. But not those in Australia.  The US troops there may also come from those already in South Korea and Japan, amounting to a restructuring rather than an expansion of regional forces.  Accordingly, the new policy may amount to de facto recognition of China’s growing clout and even its right to exert influence in its near abroad.  The move could thus contribute to a division of influence in Asia between a pro-US camp comprising maritime states such as Australia, perhaps India, Japan, the Philippines and South Korea, and a pro-Chinese camp composed of continental states such as Cambodia, Laos, Myanmar, North Korea and Pakistan.  In a positive reading, this scenario could evolve into a relatively amicable “concert of Asia” underpinned by strong trading links.  In a more confrontational scenario, it could lead to contest and efforts at containment, although the importance of the US-China trading relationship may for a time prevent the evolution of a new Cold War in Asia. 

However, it is not yet clear that Washington is willing to settle for a regional balance of power based on principles of “coexistence”.  First, the Pentagon is developing an Air-Sea Battle Concept which would seek to counter Chinese efforts to deny US forces regional access.  This doctrine is notably assertive, since it would involve strikes on weapons systems based in mainland China, such as missile sites.  It is worth mentioning in this context that one source of friction between Moscow and Washington in the early Cold War was the US ability to deploy nuclear weapons. In part, this capability prompted the Soviet Union to retain control in Eastern Europe so as to make it harder for US bombers to reach Moscow.  China’s planners may take a comparable view of the Air-Sea Battle Concept and alter policy accordingly. Second, a US presence in Australia would permit easy access to both the Indian and Pacific Oceans, thus facilitating the imposition of a maritime blockade on China.  Turning again to history, it was Japan’s fear of blockade which prompted the invasion of South East Asia in 1941.  China, too, would react to any such threat. Third, the new strategy appears to include US efforts to expand influence on China’s periphery, both in states that have a fraught relationship with China, such as Vietnam, and perhaps now in client states such as Myanmar.  Arguably, one reason for Cold War stability in Europe was US unwillingness to engage in “rollback” of Soviet influence in Germany in 1953 or Hungary in 1956.  Should the US seek to push back Chinese influence in Myanmar or elsewhere, Beijing may react badly.  And finally, in terms of economic restraints, success in implementing the Trans-Pacific Partnership, a new regional trade pact, might make bilateral trade with China less of an inhibition to US strategy.

The new order is emerging, then.  Australia has decided to move closer to the US despite its trading reliance on China.  Other states, such as Myanmar, Thailand, and Vietnam, will seek to hedge, but may in time have to choose one or another side.  As such, places such as Thailand, which is a US treaty partner but could soon have Chinese armed police operating on its territory, will be important barometers for regional relations.  For its part, the US must find a balance between soothing its allies’ fears and not stoking perceptions of containment or even rollback in Beijing.  That will prove difficult, though, and so the prospects of strategic competition between China and America are rising.  


Hub and Spoke Security in East Asia

Two recent developments hint at a weakening of the US dominated security system in East Asia.  In September 2011, US President Obama told Congress that his administration would refit Taiwan’s F-16 A/Bs but would not provide next generation F-16 C/Ds.  Prior to that, as China has become Australia's most important trading partner, a debate had emerged about Australia’s stance as a key alliance partner of the US.

Australia is an intriguing example of the dilemma facing many regional powers.  In the last few years, China has become its most important trading partner, accounting in 2010 for 19.1% of trade (of AUS103 billion), ahead of Japan at 12.3% and the US at 9%.   China took 22.2% of Australian exports in 2010,  worth some AUS64 billion, while Japan took AUS45.7 billion worth of goods. Rates of growth in Chinese trade are also strong, with exports growing by 34% in 2010 compared to 13.4% for trade with Japan.  China was also the third most important source of foreign direct investment into Australia in 2010.  

In short, Australian economic dependence on China is significant and growing.  This situation has good aspects.  Australia ran a large trading surplus with China in 2010, presenting a pleasing contrast to the US or European economies (excepting Germany).  The fiscal windfall has also permitted the government to run counter-cyclical economic policies.  Yet it also has bad aspects, such as an overreliance on commodity exports and a risk of Dutch disease owing to the high price of the Australian dollar.  

This economic relationship is also intensifying the strategic dilemma facing Canberra.  Australia’s main security relationship is with the US, through the 1951 ANZUS Treaty and other strategic commitments.  These links originated in joint efforts to defeat Japan in World War Two, but evolved to see Canberra through the Cold War years and concerns about Indonesia in the 1990s.  The perception of Jakarta as a threat to Australia has faded, though, as that country has democratised.  Most states in South East Asia are now on good terms with Australia, and in any event lack the wherewithal necessary to attack, given the distances involved and Australia’s own military capacity.  Accordingly, the biggest potential threat to regional security now derives from the rise of China and any potential US response to that systemic shift.  It is that change which has prompted Australians to ask questions about the alliance’s merit.  

In this context, in September 2010, Hugh White, a professor at the Australian National University in Canberra, outlined his view of Australia’s strategic dilemma.  White argued that the best outcome for Australia of China’s rise would be US acceptance of Beijing’s new status in a “Concert of Asia”.  White contrasted this benign scenario with any American effort to contain China’s growing influence, which might provoke friction, even war, between the two powers, with major implications for Australian national security.  White then set out a range of policy options, such as retaining close ties with the US, moving towards China in strategic terms, adopting a policy of armed neutrality on a Swiss or Swedish model, and building an alliance with South East Asian states.  He also raised the prospect of fading into a weak neutrality, as New Zealand has done, simply by failing to make a difficult choice.   This debate has revived in the last few weeks as new trade figures have reinforced the scale of Australian reliance on Chinese growth.  

It is hard not to see the debate in Australia as a sign of the weakening of the US led “hub and spoke” or San Francisco (after the US treaty with Japan) system, particularly because the debate has arisen notwithstanding the Obama administration’s much publicised “return to Asia”.    After all, the system is strong but fragile; commentators have long argued that the failure of the US to fulfil its obligations to one party would render the other alliances worthless.  Australia is the southern anchor of the system, and its departure would seriously weaken US ambitions to provide security in East Asia.  

For all the strategic merits of White’s argument, though, they still do not match public opinion in Australia, which looks back to military achievements at Gallipoli in World War One and alongside the US in World War Two.  Australia’s liberal democratic tradition also leaves its public deeply suspicious of Chinese intentions.  Canberra thus remains tied the US by history, as are other US allies such as South Korea, Japan, Taiwan and the Philippines, which comprise the other “spokes”.  Furthermore, China’s increasingly assertive foreign policy has driven these powers closer to the US despite the economic relationships.  

For the moment, then, the “hub and spoke” system is sound.  Yet this debate in Australia highlights the system’s growing vulnerabilities.  Its component parts all hope to avoid choosing between Washington and Beijing, but a sense is growing that sooner or later a choice is inevitable.  Any such move would alter the balance of power in East Asia significantly, with unpredictable consequences.     


Transparency in Chinese Government

The furore over the collision in July of two trains on China’s new high speed railway has led to questions about the prospect of new freedoms, even democracy, in China.  

Commentators on the crash, which killed about 40 people and injured a further 120, vented their fury on the internet, showing an unusual willingness to criticise the authorities.  Their discussions targeted corruption, epitomised in the February arrest of then Minister for Railways, Liu Zhijun, as well as broader administrative failings, embodied in local officials’ slapdash rescue effort.  People made comparisons with Sichuan’s shoddily built schools, which toppled in a 2008 earthquake.  China’s journalists also showed themselves less willing than ever before to refrain from criticism.  The government appeared wrong-footed, banning discussion days later, with China’s premier Wen Jiabao travelling to the site.  He blamed ill health for his tardy arrival, bowed and promised a “transparent” investigation.  

Wen’s call for transparency is notable, since he sits on the liberal wing of the Chinese Communist Party (CCP), but at first glance it looks misplaced.  Wen’s role in government ends next year, and official media generally ignore or criticise his more liberal statements.  More, no sign has emerged of the CCP moving away from habits of opacity acquired in the 1920s and 1930s, when secrecy was a matter of life and death, traditions hardened by doctrine and years of authoritarian rule. 

Opacity in government also has a venerable history in China.  A longstanding principle of Chinese governance has been that the administration should be visible in public life, even overbearing, but that the actual ruler should live a closeted life.  Thus China’s emperors built imposing palace complexes which dominated city centres, but limited entry to all but a select few.  This tradition seemingly thrives, with the CCP ruling from Zhongnanhai, a (formerly imperial) enclave within central Beijing. 

A further difficulty relates to language.  While the word “transparency” in English has positive connotations, recalling, say, clear but cold running water, the word in Chinese – “tou ming” – is made up of two characters which mean “penetrate”, “pierce”, or “thoroughly” (透) and “clear”, “bright” or “understand” (明).  The word may thus have a more intrusive meaning than its more passive English version, unsettling to those who desire a harmonious society. 

Yet Wen’s liberal stance still has roots in Chinese tradition.  Confucian thinking offers the doctrine of the Mandate of Heaven or “tian ming”.  This doctrine contends that the right to rule derives from heavenly authority and depends on the provision of humane and effective government; the legitimacy of the rulers thus rests in part on the perceptions of the governed.  Should a ruler fail to provide good government, heaven will withdraw its mandate and the ruler will fall to a sanctioned rebellion. 

As such, the mandate of heaven bears some comparison with forms of social contract such as those advocated by the western philosophers John Locke or Jean-Jacques Rousseau.  It is thus arguable that the mandate of heaven could provide a Confucian underpinning to more representative government or even democracy.  In addition, the mandate of heaven amounts to an ineluctable law of politics as played out in Chinese history.  The model is: a ruler comes to power and establishes a new and strong administration; over time, the dynasty wanes as weaker rulers cede influence to corrupt advisers or eunuchs; a rebellion, fuelled by grievances at bad government, breaks out, or an invasion takes place; and the dynasty is replaced.  This perspective bears comparison with communism, which has its own laws of historical process leading to a state of utopian socialism, although the cyclical nature of the Chinese doctrine contrasts with the linear form of Marxism.  China’s citizens, aware and proud of their history, may thus watch events like the crash and ask themselves at what stage of the cycle they sit.  

Theory has limited impact on life, of course, but it does show that transparency and democracy have philosophical underpinnings in the Confucian world.  The political models in Chinese countries demonstrate as much, varying as they do from the noisy but flawed democracy of Taiwan, through the rule of law and relative transparency of Hong Kong, to the faux-liberalism of Singapore and the stolid authoritarianism of mainland China.  In this context, it is intriguing, if mischievous, to ask whether a reunification with Taiwan might propel a real democratisation on the mainland; the Kuomintang could perhaps return to its historical role of offering a political alternative to the CCP.   

A train crash does not amount to the withdrawal of the Mandate of Heaven from China’s communist rulers, nor does corruption demonstrate the morbidity of the existing dynasty.  However, the Wenzhou crash did at the very least underline the difficulties of controlling information in the internet age.  In this context, it could with hindsight be a milestone on the road to greater political freedom in mainland China, although that road as yet looks very long.     


Typhoon Season in the South China Sea

The summer typhoons are not the only storms brewing in the South China Sea.  Tensions have risen abruptly as the Philippines and Vietnam have come under pressure from China in a range of incidents aimed at preventing oil exploration activity.  The row has worsened to the extent that the Chief of Staff of the People’s Liberation Army (PLA), Chen Bingde, and his US counterpart, Admiral Mike Mullen, expressed differences over the sea in mid-July.  

The latest incidents are worth cataloguing.  In late May 2011, the Philippines accused the Chinese government of erecting military facilities on the Iroquois Reef-Amy Douglas Bank, an area located well within the Philippines Exclusive Economic Zone (EEZ).  This action followed moves in March by Chinese vessels near Palawan to harass oil exploration ships operated by the UK-based Forum Energy.  The Vietnamese government then announced in late May that a Chinese fishing boat, joined later by two China Maritime Surveillance Forces vessels, had cut the submarine tow cable of a Talisman Energy ship conducting an oil exploration survey; in June another fishing boat tangled its nets with a similar cable and was chased off by the Vietnamese.  The May incident took place just 120 nautical miles from Vietnam’s coastline, and so nowhere near the disputed Spratly or Paracel Islands.  Hanoi then conducted live fire naval exercises to demonstrate a willingness to fight.  A joint Chinese and Vietnamese naval patrol later in June presaged the dampening of differences.

The incidents prompted a major diplomatic row, overshadowing the end of May meeting of the Shangri-La Dialogue, at which China’s defence minister, Liang Guanglie, stressed that China was maintaining its “peaceful rise”.   Beijing also stated that it would not use force to resolve the issue, but vice foreign minister Cui Tiankai told the US to stay out of the dispute.  Vietnam and the Philippines condemned Chinese actions, and even Singapore has called for clarity from Beijing.  The US is moving ahead with planned exchanges with the Vietnamese navy, which PLA chief Chen Bingde described in mid-July as “extremely inappropriate”.  The US Senate also passed a unanimous resolution in June condemning China’s actions in the Sea.  The row is affecting other issues, with 45 senators currently calling for the sale of F-16 fighter aircraft to Taiwan.  Taipei is a claimant (on the same lines as China) and actually maintains a small garrison on the largest islet of the Spratly chain, Pratas or Itu Abu Island.  
Somnolent since the late 1990s, tensions in the South China Sea have spiked in the last few years partly owing to the end of a Joint Maritime Seismic Survey in 2008 and a return to unilateral oil exploration efforts, and partly because of the 2009 deadline for the filing of claims under the United Nations Convention on the Law of the Sea (UNCLOS).  Tensions rose further in mid-2010, when US Secretary of State Hilary Clinton reacted to alleged Chinese claims that the Sea comprised a “core interest” by announcing that freedom of navigation in the sea was a US national interest.  

That the latest incidents relate to oil exploration is no coincidence.  A longstanding (if unconfirmed) belief is that beneath the South China Sea lie immense reserves of untapped oil and gas.  Some estimates are as high as 213 billion barrels for the whole South China Sea; natural gas reserves may amount to about 900 million trillion cubic feet.  It is worth noting in this context that the main Chinese player in offshore oil and gas development is China National Offshore Oil Corporation (CNOOC), which produced more than 50 million tonnes of oil equivalent in China’s offshore waters in 2010.  CNOOC played a role in the multi-lateral exploration activity which took place under the Joint Maritime Seismic Survey until its termination in 2008, and the company plans to produce about 500,000 barrels per day (bpd) of oil from the South China Sea by 2015, rising to one million bpd by 2020.  In May 2011 CNOOC announced the sale of 19 South China Sea oil blocks to foreign investors (most in the Pearl River Delta region) and took possession of a massive new offshore drilling rig, Offshore Oil 981, which Xinhua stated in June would operate in the disputed sea. 

As such, it is tempting to ask whether current policy relates to CNOOC’s oil exploration efforts.  After all, in July 2008 Chinese diplomats in Washington demanded US energy major Exxon pull out of an exploration contract with PetroVietnam, and exploration work slowed until Manila and the Philippines restarted in late 2010, apparently emboldened by US statements.  It is that which has heightened tensions.  Furthermore, it is China’s Maritime Surveillance Forces which are applying pressure; they operate under the State Council, China’s executive, which tends to focus more on energy issues than other parts of the government.  If correct, such a view may be grounds for cautious optimism; a model for resolution may lie on the border between Japan and China.  Tensions in that dispute intensified with the discovery of a CNOOC drilling platform at the Chunxiao gasfield in 2006.  The Japanese protested, but by June 2008 the two governments had agreed a joint development arrangement.  The accord is not ideal, not least since the Chinese side has yet to implement it and maritime friction is a continuing problem, but it has gone some way to normalise relations. 

A less appealing alternative, though, is that the dispute is a sign of a broader assertiveness in Chinese foreign policy, the structure of which, after all, conspires against the undue influence of CNOOC.  Foreign policy decisions fall to the Politburo Standing Committee (PBSC), which receives input from three core organisations: the Chinese Communist Party (CCP), which controls three important leading groups on foreign affairs, national security and on Taiwan; the State Council, which includes both the foreign ministry and the leading group for energy; and the Central Military Commission (CMC), which is both a leadership group dealing with military affairs and the People’s Liberation Army headquarters.  CNOOC may be able to influence policymaking, then, for instance through the leading group on energy, but only insofar as its claims compete with other concerns.  This view seems plausible as Beijing appears increasingly willing to trample roughshod over the claims of smaller powers, buoyed by its growing military capacity.  Such a stance suggests that China is willing to sacrifice regional goodwill in order to maintain its claims. 

Accordingly, the militarisation of the South China Sea is moving ahead.  Vietnam is buying six Kilo class diesel submarines from Russia, while the Philippines is currently reminding the US of its treaty obligations to the island state (its coast guard receives US support).  Even Singapore has blinked, permitting the basing of two American littoral combat ships in its port, the first US ships to operate on a permanent basis from the city state.  Washington has also stated its determination to “return” to Asia, and is actively courting partners in the region.  China, though, seems unlikely to back away from its current policy.  In this context, the arrival in the Sea of China’s new oil rig may spark the next phase in the crisis, particularly if Vietnam or the Philippines seek to block its deployment and if China acts to protect it. 

A little over a century ago, Joseph Conrad wrote of the South China Sea in his novel, Typhoon:  “Observing the steady fall of the barometer, Captain MacWhirr thought, ‘There’s some dirty weather knocking about.’”  The barometer does seem to be falling. 


The Euro Crisis and Wealth Transfer

THE rhetoric around the euro crisis is apocalyptic, comprising discussions about the currency’s survival, a new financial crisis, and a default by other sovereign governments.

It also presents a stern morality tale, since the Greek crisis is ultimately about living beyond one’s means.  Since its adoption of the euro, Greece has had an artificially high exchange rate, encouraging excessive spending.  Greece was not alone.  Spain and Ireland did the same, as did states with separate currencies, such as the UK and US, and this profligacy in turn may have led to the humbling reality of the financial crisis.   

This episode in the financial crisis soap opera seems peculiarly European, and yet it casts light on the role of Asia in the world economy.  In this context, the application of a piece of economic theory – that of factor price equalisation – is illustrative.  Factor price equalisation is a trade theory which suggests that given free trade the prices of core factors such land, capital and labour in different trading states will come to equalise.  If the theory is correct and given that many millions of Chinese and other workers have entered the global labour market, movement towards the equalisation of factor prices should have taken place in the world economy in the last two decades.  

So what actually happened?  First, the massive glut of cheap manufactures in Asia resulted in a real increase in wealth in that region; strong trade figures resulted in capital transfers from rich countries to Asia, often returned as purchases of sovereign debt.  Second, data from economies such as the US suggests that real incomes stagnated in the last decade, hinting at a relative decline in living standards in line with factor price equalisation; certainly manufacturing in the US and elsewhere has struggled to compete with China with jobs losses resulting.  Third, in this context consumers, companies and governments throughout Europe and the US turned to easy credit (subsidised in effect by the recycling of Asia’s surpluses) to pay for perceived needs, such as wars in Iraq, pensions at 50 and healthcare from cradle to grave.  This easy credit disguised the day to day consequences of a transfer of wealth to Asian states and of a relative decline in the price of labour in the purchasing countries.   Finally, the collapse of Lehman Brothers and subsequent financial crisis pulled back the curtain on reality.   

Even those countries with strong current and trade accounts, such as Germany, are no exception to this trend.  In the last decade, Germany’s export strength (particularly in machine goods) has relied on two key premises.  First, Germany has benefitted from its euro membership, since the value of the euro has probably been lower than the deutsche mark would have been; dragged down, as ever, by the likes of Greece.  Second, in 2005 former German Chancellor Gerhard Schroder introduced some employment measures which in effect pushed down German wages. For instance, he created a system whereby workers might sacrifice days at work on an individual basis so that companies did not have to cut jobs.  As such, Germany held down its exchange rate, nominally in terms of the euro and really in terms of wages, thereby responding to the challenge posed by trade in Asian goods.  This could be taken as a movement towards factor price equalisation.  

In the well-balanced world of economic theory, the counterpart of this contention is visible in the much trumpeted rise of China’s yuan and the wage inflation which troubles factory managers in Guangdong province.  That is not to say that these trends of rapid growth and transfer of wealth will necessarily continue.  China, for one, faces severe challenges, in the form of excessive municipal government debt, massive misallocation of capital, a flawed banking system and a tricky prospective transition to increased domestic consumption.  Yet unless it reverts to isolationism or collapses, both unlikely, the pressures inherent in the price of Chinese labour will continue to ripple throughout the world economy.  

The financial crisis, then, is not simply a matter of bank regulation.  It is a symptom of broader changes at work in the world economy.  The European countries and the US must innovate and cut costs in order to maintain competitive advantage.  In its acceptance of this brutal reality, Germany has taken the lead.  Greece, by contrast, is learning the hard way.