A new era of geoeconomics in the Asia-Pacific Region: Will Xi trump Trump?

Picture of Dr Jane Golley

Dr Jane Golley

Dr Jane Golley

In December 2016, shortly after his election victory, US President Donald Trump created the National Trade Council (NTC) to advise him on trade negotiations, assess US capabilities in manufacturing and the defence industrial base, and find unemployed American workers new jobs in the manufacturing sector. The NTC will be headed by Peter Navarro, a long-standing critic of China’s ‘unfair trading practices’, which he has estimated to account for 41 per cent of China’s competitive advantage over the United States, remarkably close to the 45 per cent tariff threatened by Trump during his election campaign.

While that threat hasn’t materialised (and is highly unlikely to), Trump has already delivered on another election promise by withdrawing the United States from the TPP, an ambitious trade liberalisation initiative among 12 economies in the Asia Pacific, proposed by his predecessor Barack Obama. Although the details of US trade policy remain decidedly murky 100 days into Trump’s presidency, the TPP withdrawal, along with Navarro’s appointment and the NTC-led ‘Buy America Hire America' program, suggest that it will contain an array of protectionist elements, with many of them targeting China.

Meanwhile, in mid-January, Chinese President Xi Jinping delivered a keynote speech at the World Economic Forum in Davos, Switzerland. In a staunch defence of globalisation, Xi pledged China’s ongoing commitment to free trade and "open, transparent and win-win regional free trade agreements" while adamantly (and poetically) rejecting the "pursuit of protectionism" which he likened to "locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air. No one will emerge as a winner in a trade war".

Xi also celebrated his Belt and Road Initiative (BRI) in Davos (a recent official renaming of what was formerly known as the One-Belt-One-Road Initiative, or OBOR), noting the ‘warm responses and support’ of over 100 countries and international organisations in the three years since it began. With more than $50 billion of investment already made by Chinese companies across the Belt and Road’s expansive map, and with much more to come, Xi emphasised its role in creating jobs and spurring economic development beyond China’s own borders.

Following Xi’s speech, newspapers across the world reported him as the new ‘champion’ of free trade and the international economic order, a role traditionally accorded to presidents of the United States. With the current US president now appearing to reject that role, is it possible that China’s president will assume it instead? If only.

Geoeconomics 101: China 1, United States 0

In their 2016 book, War by Other Means: Geoeonomics and Statecraft, Robert Blackwill and Jennifer Harris, Senior Fellows at the United States Council on Foreign Relations, define geoeconomics as “the use of economic instruments to promote and defend national interests and to produce geopolitical results; and the effects of another nation’s economic actions on a country’s geopolitical goals” (p.20).

With two chapters dedicated to the geoeconomic strategies being pursued by China, Blackwill and Harris contend that “The global geoeconomic playing field is now sharply tilting against the United States, and unless this is corrected, the price in blood and treasure for the United States will only grow” (p. 2).

Former US President Obama understood this well. His American ‘pivot’ or ‘rebalance’ towards the Asia-Pacific region, and the TPP in particular, was an explicit attempt to ensure that “countries like China [would not] write the rules of the global economy. We should write those rules.” Underlining the geopolitical significance of the trade agreement, US Secretary of Defense Ashton Carter declared that “in terms of our rebalance in the broadest sense, passing TPP is as important to me as another aircraft carrier.”

Blackwill and Harris were also emphatic that the TPP was the “overriding geoeconomic component of the Asia pivot” (p. 229). With the TPP now off the agenda, they will be lamenting that United States geoeconomic policy in the Asia-Pacific region is weaker than ever before.

China’s geoeconomic strategy, on the other hand, is gaining momentum, primarily under the banner of BRI. There is plenty in the Initiative that makes good economic sense: trade-enabling infrastructure, tariff reductions, simplified customs procedures and ‘enhanced economic policy coordination’ between China and its BRI partners. Yet this does not preclude it from being inherently strategic.

This is evident in the words of Huo Jianguo, Director of the Chinese Academy of International Trade and Economic Cooperation (a subsidiary of the Ministry of Commerce) who described the initiative as "a grand strategic design" to counter the TPP, which he viewed as a deliberate ploy by the United States to control the rules of international trade in ways that “undoubtedly challenge and threaten China”. Viewed in this light, the ‘BRI-TPP’ battle seems to have concluded, with a geoeconomic victory for China.

What this means for the rest of us

Unfortunately, this victory does not amount to a victory for the international economic order that has served so many of our region’s economies so well in the past. Instead, three key features of BRI seem to be fundamentally incompatible with that order. The first feature is that it builds on China’s approach to its (internal) regional development strategies in the past, in which a heavy-handed, multi faceted and multi layered state is used to direct investment, primarily into infrastructure, to support economic growth in state-favoured regions.

The second is a reliance on state-owned enterprises (SOEs) to actively implement state plans, reflected in their dominance in China’s direct investment overseas. And the third is the explicit role of Chinese development finance as a “servant of China’s national strategic interests”, as described by Chen Yuan, the founding Chairman of the China Development Bank, directly under the State Council and now the world’s largest development finance institution.

Leaders of countries in the Asia-Pacific region, as elsewhere in the world, are justifiably uncomfortable about these features of what is essentially a ‘grand transnational development strategy’ of a ‘rising great power’. This strategy is befitting for a Communist Party leadership that seeks to uphold ‘Socialism with Chinese characteristics’. That does not make it an exemplar for the rest of the world to follow. But then, at this juncture, neither does the United States’ trade strategy.

In this new era of geoeconomics, some countries have started to take matters into their own hands. In 2015, Japan, quick to interpret the BRI as being inherently geopolitical, announced its own $110 billion infrastructure fund, which will target ‘East-West’ economic integration between Southeast Asia and the global economy as a deliberate counter to China’s ‘North-South’ infrastructure projects which seek to integrate Southeast Asia with the Chinese economy.

Since 2014, Indian Prime Minister Modi has transformed the ‘Look East’ policy – a key feature of the country’s integration into the global economy since 1991 –into an ‘Act East’ policy, which aims to “strengthen strategic and economic ties with Southeast Asian countries that would possibly act as a counterweight to the influence of China in the region”. Geoeconomic competitions such as these will help the region to ‘rebalance’ away from the excessive reliance on China that many countries fear.

In Australia, Prime Minister Turnbull was quick to defy Trump in declaring not only that the TPP could proceed without the United States, but also that there was potential for China to join. While this particular outcome seems unlikely, any attempts to engage China in regional trade agreements – such as the Regional Comprehensive Economic Partnership (RCEP), a multilateral agreement by 16 nations including Australia, China, India and Japan – should be lauded.

There is also plenty that Xi Jinping can do to live up to his Davos words. There is ample opportunity for China to improve its openness and transparency in implementing the vast array of BRI projects across the region, and to make its SOEs compete on a more level playing field than they have in the past. Ensuring that the Asian Infrastructure Investment Bank, and other Chinese state-backed financial institutions, maintain the highest possible standards of ‘regionally-inclusive’ governance, will also contribute to making the BRI a successful cornerstone of China’s evolving geoeconomic strategy, with widespread benefits for the region as well.

This will not be sufficient, however. Far more worrying in China’s geoeconomic toolkit are the various techniques it uses to punish countries that act against its foreign policy interests. South Korea is the latest recipient of such punishments, which have also been deployed against Japan, the Philippines and Taiwan.

Following South Korea’s decision to deploy the US-supplied THAAD missile defence system in March, China’s state media actively encouraged the boycotting of South Korean goods, culture and tourism, inflicting high costs on the South Korean economy. This kind of behaviour will not win China friends in the region. Nor will it enable Xi Jinping to be the free-trade champion the region needs him to be.

And finally, there is Donald Trump. After predicting that his meeting with Xi Jinping on 6-7 April would prove "very difficult", Trump has since celebrated their "very very great relationship", while touting a 100-day plan for the two countries to boost American exports and reduce their bilateral trade imbalances.

On 16 April, he backtracked on yet another election promise, in what may have been his first ‘geoeconomic’ tweet: “Why would I call China a currency manipulator when they are working with us on the North Korean problem. We’ll see what happens!" Far from clever geoeconomics, but at least a currency war now appears to be off the agenda.

Yet there is still ample reason to believe that the United States under Trump will be more protectionist than in the past, and that China will be the number one target. If so, a number of low-cost countries in the Asia-Pacific region could see a surge in their own manufacturing sectors – a far more likely prospect than this happening in the United States itself.

Overall however, the regional impact of a protectionist trade policy emanating from the world’s wealthiest economy would be catastrophic, and most obviously for China. Proactive diplomacy to dissuade the United States from pursuing such a policy should be made a regional priority above all else – aside from preventing a nuclear war with North Korea.

Updated:  24 April, 2017/Responsible Officer:  Dean, ANU College of Asia & the Pacific/Page Contact:  CAP Web Team