Wednesday, November 28, 2012

US pivot bumps Asian economic reality

[This post originally appeared at Asia Times Online on Nov. 22, 2012.  It can be reposted if ATOl is credited and a link provided.]

President Barack Obama's first post - election mission is a trip to Southeast Asia - Myanmar, Thailand, and Cambodia - to affirm his signature diplomatic and strategic initiative, the pivot to Asia.

Despite concerted hosannas in the Western press, President Obama's trip was overshadowed - perhaps intentionally - by Israel pitching Gaza back into the meat grinder and drawing attention back to the Middle East, a region that the Obama administration is nakedly and desperately eager to abandon.

In Asia, Obama will find a different set of problems, ones that have a lot to do with the United States attempts to assert a leading role in the region by leveraging its military presence - despite the fact
that the region is remarkably peaceful, especially compared to that previous beneficiary of heightened US military attention, the Middle East - and arguing for the centrality of its role as regional economic hegemon - despite the fact the only contribution that the United States has made to the Asian economy in the last five years was a negative one, as it drove the global financial system off a cliff in 2007 - 2008.

Objectively, US claims of "global leadership," particularly in Asia, have a peculiar taste:

Population of Asia: 4.16 billion
Population of the United States: 311 million
Asian tradition of great urban civilizations: 2,500 years
US tradition of great urban civilization: 150 years
US share of GDP, 2011: 25.9%, expected to hold steady or increase somewhat by 2050
Asian share of GDP, 2011: 26.9%, projected to exceed 50% by 2050

On the quantitative side, there are still 711 billion reasons for Asia to pay attention to the United States:

US defense budget: $711 billion
Combined defense budgets of China, India, Japan, South Korea, and Taiwan: $224 billion. [1]

However, even this dominant military position will erode as the world's developing economies channel some of their wealth into control over their own security destinies; one estimate predicts the US share of global defense spending will drop from 41% to 30% over the next few years. [2]

As its share of the global economy shrinks, the United States is relying more on qualitative claims of its moral stature as practitioner and promoter of democracy, open markets, and free speech - rather than quantitative claims that it holds the balance of economic and military power in its hands.

But the United States is not in refocusing on Asia for the moral satisfaction of promoting democracy, or even the intangible psychic benefits of protecting its brown and yellow brothers in Asia from themselves with its benevolent military might. As shown by the bloody path of human catastrophe that the United States has created and enabled in the Middle East, the United States' foreign relations are not driven by a compulsion to impose democracy or open economies.

The Asian game - the expenditure of military, moral, and diplomatic capital - is worth the candle to the United States because of the increasing importance of Asia to world trade.

Or, to put it in less American - centric terms, the center of world trade is shifting to Asia and away from the "Atlantic Powers", ie Europe and the United States.

Even today, the United States, thanks to its immense and structural fiscal deficits, is no longer able leverage its GDP advantage to act as the world's demand engine and call the economic shots in Asia. Instead, the United States wants to weaken its currency and increase exports to Asia, challenging the export - driven model that has driven the rise of Japan, Taiwan, Hong Kong, and China.

Unsurprisingly, given these liabilities, it is time for America to whip out the secret sauce of freedom promotion in order to claim a unique moral authority to set the Asian agenda. And to create a compelling freedom narrative, a compelling anti - freedom bogeyman is required.

In other words, enter China.

The dirty secret of the US pivot to Asia is that it requires tension, polarization, and a zero sum antagonist. In other words, it needs China to justify a destabilizing US presence in the region.

I believe it is an accurate characterization of the aims of the Chinese leadership that it would happily live the next 30 years of its existence as it lived the past 30 years: amorally free-riding on debt-fueled US demand and the US security regime in East Asia, until the US consumes itself in a fiscal bonfire and leaves China as the last East Asian power standing, without a single shot fired in anger.

Now, for national and domestic reasons, the United States is trying to change the rules of the game.

It is a credit to the tunnel vision of Western pundits that the destabilizing consequences of a major, publicly announced, US strategic reemphasis on Asia - the famous "pivot" - is ignored in favor of a narrative that paints China's continued focus on business as usual - success in economic growth - as the "China rising" threat to Asian stability.

One can either believe that the United States is selflessly injecting itself into the South China Sea disputes in order to protect the right of smaller Asian nations to argue with the PRC over worthless rocks and protect "freedom of navigation and commerce" (even though the vast majority of traffic through the South China Sea is going to and from PRC ports)... or one might perceive a concerted US effort to wrench the Asian economic focus away from the PRC and toward the United States by polarizing Asia into pro-US vs pro-China camps.

If you voted for the economic argument, well, the Obama administration agrees with you.

Tom Donilon, President Obama's National Security Advisor, set the table for President Obama's trip to Myanmar, Thailand, and Cambodia with a speech before the Center for Strategic and International Studies on November 15. He said:
The United States is a Pacific power whose interests are inextricably linked ... with Asia's economic security and political order. America's success in the 20th (sic) century is tied to the success of Asia.

The region accounts for 25% of US goods and services exports and 30% of our goods and services imports. An estimated 2.4 million Americans now have jobs supported by exports to Asia, and this number is growing. In short, robust US trade and investment in Asia will continue to be critical for our economic recovery and for our long - term economic strength. [3]
As to the economic and security order evolving in Asia, Donilon rather self-servingly sees it as demanding a specific, American kind of leadership. The secret sauce:
In addition to the traditional security challenges, new demands for humanitarian assistance and disaster relief, there's a demand for economic, American economic engagement and trade integration, as well as strengthening of regional institutions, codes of conduct, rule of law to solve disputes, and the protection of individual human rights.

... our overarching objective is to sustain a stable security environment and regional order rooted in economic openness, peaceful resolution to disputes, democratic governance and political freedom.

This objective stems from our long - range vision. We aspire to see a region where the rise of new powers occurs peacefully, with the freedom to access the sea, air, space and cyberspace, empowers vibrant commerce, where multinational forums help promote shared values, and where citizens increasingly have the ability to influence their governments, and universal rights are upheld - universal human rights are upheld. That's the future we seek in partnership with our allies and friends.
So what about China, which ranks pretty low on the "free access to cyberspace", "shared values", "citizens' ability to influence governments", "universal human rights" scale, certainly in the terms with which the United States feels comfortable?

Indonesia's ambassador to the United States put Donilon on the spot with a refreshingly direct question concerning the Obama administration's China policy, and Donilon responded with several paragraphs of prevaricating mush:
Q: Good to see you. My name is Dino Djalal; I am ambassador of Indonesia. Very much interested in how you described your evolving relationship with India and China. I noticed you described India as a strategic partner and a different term for China. My question is, what do you see as the qualitative - I underline the term qualitative - difference between India and China so that you describe India as a strategic partnership, but China as something else.

And there's more of an element of competition when you described your relationship with China and there's nothing like that when you describe your relationship with India. Is it too much for us in Southeast Asia, for example, to expect that one day there will be a strategic partnership between US and China?

DONILON: Thanks. The relationship with India is obviously rooted in history and it's - and it's rooted in a shared system of democracy. And it is - it is a - it's a unique relationship that we're building out. It has a - it has different aspects to it. The relationship with China is more complex.

We are trying to do something here which Secretary Clinton said in her US Institute for Peace speech, and that the Chinese leadership including Xi Jinping has said as well, which is that we're trying to build a relationship - and a complicated relationship, multidimensional relationship that's profoundly important to both nations and to the world, between two systems that are very different.

And working that through is one of the great challenges that we have. We're trying to build a relationship - a stable, productive, constructive relationship between the United States and China where there are elements of competition. We're trying to build a relationship between China and the - and the United States against a backdrop of theoreticians who say that this is not - that this is not possible to do; that history would point you to the inevitability of conflict between a rising power and a status quo power. We don't believe that. We don't believe that international relations is some subset of physics. There is human agency and leadership involved here, and that's what we're trying to - that's what we're trying to do, to build this out in the most constructive and positive, productive relationship that we can.

But there are challenges, obviously. And one of the key things is to be very direct about confronting those conceptual and practical challenges, and we have spent an enormous amount of time with the Chinese leadership talking about those very things, talking about the challenges of the kind of relationship that we're trying to build, which is a - which is a unique setting, if you will, between the United States and China. But we're committed to doing that. I think the Chinese leadership is committed to doing that as well.

With respect to India, we have given a full embrace of India's rise…
Blah blah blah challenge challenge challenge. In other words, it isn't easy kicking China in the butt while we're pretending to pat its behind.

The most overt effort to shift the Asian economic focus from the PRC to the USA is the TPP, the Trans Pacific Partnership, a "high standards" free-trade zone whose high standards by coincidence are too high to include the PRC. Per Donilon:
The TPP is widely viewed as the most significant negotiation currently under way in the international trading system. Beyond its original seven members, the TPP now has expanded to include Vietnam, Malaysia, Mexico and Canada. Japan and other nations have expressed interest as joining as well.

The TPP will deepen regional economic integration not only by lowering tariffs but by addressing 21st-century trade and investment issues. This includes good regulatory practices, ensuring that state - owned enterprises compete on a level playing field, market - based trading in digital goods and innovation, and addressing the challenges placed - faced by small businesses.
Donilon's assertion that TPP is "widely viewed as the most significant negotiation under way in the international trading system" might be more correct if "widely viewed" were modified to "widely viewed - by US think-tankers attempting to will a new Asian economic order into existence".

As the Wall Street Journal reports, Asian countries are not demonstrably eager to hitch their wagon to the star of the United States - a wannabe growing exporter to the region - if it means shutting out China, which has the potential to become an insatiable consumer of Asian goods, services, and investment. Instead, in what could almost be viewed as a rebuff to the US and Western corporate - friendly TPP - and President Obama's presence at the confab - ASEAN threw its weight behind the competing regional trade regime that includes China:
PHNOM PENH - A plan by Asian leaders to start talks on one of the world's biggest trade pacts could accelerate the global economy's shift to the fast-growing region and would overshadow Washington's separate push for a trade deal with Asia. Sixteen countries including China, Japan, India and Australia are aiming to establish the Regional Comprehensive Economic Partnership, or RCEP...

"The Japanese have been very supportive, the Chinese have been supportive, the Australians have been rather eager, the Indians are also very interested in this, because in the end we are creating a new landscape," Asean Secretary-General Surin Pitsuwan said. [4]
As indicated by the sharp question from the Indonesian ambassador and the ASEAN moves on RCEP, the US return to Asia is not a simple matter of economic liberators being welcomed by rose petals.

The PRC has conspicuous liabilities: shaky local governance, an inefficient and bubble-prone capital sector, the declining ability of export growth to drive the economy and avoid the middle income trap, flaccid domestic demand, a dodgy banking system, overweening state-owned enterprises, an assertive but opaque security posture, a weakness for pell-mell, rip-off regional investment…

But the United States brings its own, less evident disadvantages to Asia: a growing priority on exports instead of imports, heavy-handed initiatives to leverage its dominance over the world financial system to advance its geopolitical goals, a preoccupation with unleveling the playing field so that more sophisticated Western corporations can brush aside local protectionism in Asian markets, and an obsession with sustaining and expanding that big, divisive military footprint even as its ability to restrain the independent military ambitions of the Asian powers diminishes.

It is an open question whether the nations of East Asia, with a fondness for managed trade, managed democracy, and protectionist policies that strikingly resemble those of the PRC, are really that eager to enter that brave new world of sovereign corporations and West-dominated transnational institutions that the United States is promoting as an economic ideal.

Global Times made the point with its usual subtlety:
The proposition that countries should rely on the US to balance China is tempting, but ASEAN countries lack experience in dealing with great powers. They may risk becoming the puppet of countries like the US and Japan.

Realistically speaking, it's impossible for ASEAN countries to unitedly confront China. China is the biggest trading partner with ASEAN. Cooperating with China is more urgent than guarding against any "China threat," as there are more practical national interests attached to the former. Even the Philippines must seek a balance between confrontation and cooperation with China. Vietnam also pays attention to not exaggerating territorial disputes with China. [5]
Unsurprisingly, given the less-than-rock-solid strategic fundamentals of the pivot, the Obama administration tries to make hay when the sun shines, as the hurried rapprochement with Myanmar indicates.

The Myanmar regime made a tactical and strategic decision to rebalance its foreign diplomatic and military relations away from China and, at the same time, alleviate the tensions between the military government and the alienated citizenry.

The country is no garden spot of democracy. Its parliament will remain dominated by the front party of the junta, the USDP, at least until 2015, when the first election with full and free participation of the opposition parties is scheduled to occur. The western part of the country, Rakhine State, is convulsed by a vicious, state-sanctioned pogrom against the Rohingya minority.

Free Myanmar activists and Aung San Suu Kyi questioned whether this was the right time to reward the Myanmar government with relaxation of sanctions, let alone a visit by President Obama.

However, the Obama administration charged ahead, lifting restrictions on investment for US corporations, while simultaneously throwing the Burmese opposition a perfunctory bone by imposing merely pro forma reporting requirements on energy companies yearning to do business with Myanmar's corrupt national oil company. Per Voice of America:
Competing soft drink giants Coca-Cola and Pepsi Co. are returning to Myanmar for the first time in many years. Meanwhile, both MasterCard and Visa have reached deals with Burmese banks for use of their internationally known credit cards. The ConocoPhillips and Chevron energy companies have been looking for investment opportunities as well. [6]
And Obama visited Myanmar in order to "lock down" the gains US diplomacy had achieved in the country and claim a momentum-creating victory in Myanmar.

In his remarks, Donilon made it clear that the Obama administration hopes that North Korea will also heed the siren call of US investment and soft drinks (and he also acknowledged that US sanctions somehow end up promoting the geopolitical interests of the United States):
And that's a very important focus, I think, of the Burmese leadership right now, is the economic prospects and promises of their coming into the international community as supported by the United States.

That is a path that if the North Koreans would address the nuclear issue, would be - would be available to them. And we've said that from the outset. And I think it is an important - it's an important example for them to contemplate. It's a regime that has - obviously continues to be isolated, a regime - the complete outlier, a regime that is failing economically, failing its people economically, that there is another path. And I think that example is an important - is an important one, the example of a country totally isolated for many years, obviously, under extreme sanctions from the United States, making a determination and a decision to go a different way. And what the positive aspects of that are for their people and their country are manifest, and will be obviously very clearly underscored by the president's visit. And I think it is - it is - it is an important example for the - for the leadership of North Korea to contemplate.
North Korea has struggled for decades to resist overbearing Chinese influence, arguably more successfully than Myanmar, whose generals became corrupt local enablers for a PRC agenda of resource plunder.

But the North Korean regime's lust for unfettered access to Coca-Cola may be tempered by the realization that a modus vivendi with the PRC - based upon the fundamentals of shared borders and integrated economies as well as a shared interest in the continued survival of the regime - is at least as important as throwing itself into the welcoming arms of the United States.

In both Myanmar and North Korea, the PRC has not opted for the counterproductive, indignant sputtering (and arm-twisting of resistant neighbors) that marked its first response to the Asian pivot: Secretary Clinton's announcement at the July 2010 Hanoi ASEAN summit that South China Sea matters entered into the US purview.

Instead, the PRC seems to be upping its game in acknowledgment that it has to compete for the loyalty of its satellites, moving beyond crude economic exploitation to try to ingratiate itself with the locals at its oil and gas projects in Myanmar, and by nudging North Korea in the direction of free-market reforms.

China's efforts to win hearts and minds are not particularly elegant, especially when considering its concurrent, unrepentant effort to bring Japan to its knees on the Senkaku/Diaoyutai issue to punish it for its fealty to the US strategy. But the US pivot to Asia is not particularly elegant, either.

The United States is injecting itself into Asian diplomacy on the strength of an a priori assumption that, despite some persuasive evidence to the contrary, the region requires US "leadership". By doing so, it leverages its military, diplomatic, and financial advantages (including the ability to impose sanctions on countries with insufficient pro-US zeal) to promote the bifurcation of Asia into US vs China-led blocs.

According to the optimistic scenario, the PRC over-reacts to the US moves, triggering a spiral of confrontation that drives more countries into the US camp. In its essence, the game as conceived by the United States is zero sum: Asia gets its growth, America gets its exports and investment, and only China suffers the consequences of economic and diplomatic polarization and isolation.

Worst case, of course, the United States decides it lacks the interest and determination to slug it out with China, and the smaller nations of Asia end up on the wrong side of the zero sum equation: they follow the United States and find their economies beholden to a remote and marginalized North American power and lose out on the economic growth driven by China.

If economics is any guide, the developing nations of Asia and the pariah states will both continue to hedge their bets between China and the United States.

The key question in "The Pacific Century" will not be whether or not China will continue to pursue its vital economic interests in Asia; it will be whether the United States has the sustained will and determination to continue to drive events in a region where it is becoming an increasingly peripheral player - and even if its pretensions to leadership lead to counterproductive confrontation with the dominant regional power.

That is a question that today President Obama and the United States cannot answer.

1. A New Analysis of Defense Budgets in Asia, CSIS, Nov 5, 2012.
2. Trends in US Military Spending, Council on Foreign Relations, Aug 23, 2012.
3. President Obama's Asia Policy and Upcoming Trip to the Region, CSIS, Nov 15, 2012.
4. Asia Leaders Push Regional Trade Pact, WSJ, Nov19, 2012.
5. Obama can't distract ASEAN from focus, Global Times, Nov 19, 2012.
6. As US Sanctions Against Myanmar Ease, American Companies Start Investing, VOA, Nov 19, 2012.


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