Asia's Dilemma: China's Butter, or America's Guns?

By Rodger Baker

Flying into Singapore's Changi Airport, one is struck by the fleet of ships lined up off shore, the tendrils of a global trade network squeezing through the narrow Malacca Strait. Singapore is the hub, the connector between the Indian Ocean, South China Sea and Pacific. Since the late 1970s, with little exception, trade has amounted to some 300 percent of Singapore's total gross domestic product, with exports making up between 150 and 230 percent of GDP. Singapore is the product of global trade, and the thriving multiethnic city-state can trace its trade role back centuries.

Having arrived in Singapore from Auckland, the contrast was stunning. It's not that New Zealand isn't heavily integrated into global trade networks — some 50 percent of its GDP is based on trade, and since its early days as a British colony it has been heavily dependent on distant trade partners. But whereas Singapore sits at the center of trade flows, New Zealand is at the far fringes, a remote outpost that has come to represent the leading edge of free trade agreements and calls for globally agreed-upon trade rules.

Given the significance of trade to the two, it is perhaps no wonder that New Zealand and Singapore were both part of the P3 countries (alongside Chile) that initiated Pacific trade talks in 2002, which emerged three years later as the first iteration of the Trans-Pacific Partnership (TPP), adding Brunei as the fourth founding signatory. Only a decade earlier, in the 1990s, trans-Pacific trade had exceeded trans-Atlantic trade, marking a shift in global patterns established for several centuries. Trade is the lifeblood of the Asia-Pacific, and even with rising examples of nationalism, the globalized world is still seen here as a greater benefit than risk. Whereas colonialism was exploitative, globalism is seen as the provision of opportunity for growth and national strength.

It is interesting that the theme of the "easternization" of the global system — the assertion that China is set to usurp the leadership role of an inward-turning United States — is not nearly as pronounced in the region as it is in the West. With regard to Singapore and New Zealand, one could argue that British heritage and history may play some role, but discussions with businessmen and policymakers from countries around the region seem less focused on the so-called Asian Century than on ensuring that global multilateral trade pacts remain the norm. Asia may trade primarily within Asia, but that doesn't mean it has any interest in being isolated from the rest of the world. And aside from assertions in some sectors in China (perhaps reminiscent of similar ideas espoused in Japan in the 1980s and early 1990s), there is little expectation that Asia is ready to take the lead, except perhaps in the promotion of open trade.

Growing Angst in the Asia-Pacific

Perhaps the most common theme I encountered in discussions in New Zealand and Singapore, and with individuals from around the region, was the future of the global trade environment — specifically, the implications of a potential trade war (or even a minor spat) between the United States and China. Like many countries in the Asia-Pacific, both Singapore and New Zealand have adapted to a basic post-Cold War regional status quo, one where economics center on China and regional security centers on the United States. But with the Brexit underway, the TPP gone, the United States flirting with a more nationalist rather than globalist trade policy, and China expanding its military activity throughout the region, there is growing angst that this unofficial balance will no longer be sustainable.

This is particularly pronounced among members of the Association of Southeast Asian Nations (ASEAN), the 10 Southeast Asian countries (nearly all post-colonial entities) that have for decades sought to strengthen their hand internationally through cooperation and shared negotiations. Nearly a quarter of ASEAN trade is within the bloc, but better than 19 percent is with China and Hong Kong. Overall, Asia and the West Pacific account for more than 66 percent of ASEAN's total trade. Just 10 percent is with the European Union and 9.4 percent with the United States. While economics is regional, security looks abroad. Two ASEAN members, Thailand and the Philippines, are formal treaty alliance partners with the United States, and several others have established or developing defense relations. There is little real complaint from the ASEAN states (or from countries including South Korea, Japan, Australia and New Zealand) of the United States' unofficial role as guarantor of freedom of navigation in the seas in the region. But there are growing challenges with China's expanding military activity and evolving assertion of its own role as the rightful regional security hegemon.

So long as China was largely seen as a beneficial trading partner and a source of investment, but fairly innocuous when it came to involvement in local politics or security, the dualistic approach toward Washington and Beijing was seen as not only acceptable, but preferential. China's economic heft balanced the United States' military heft, and vice versa. A slight sense of competition for regional friends between Beijing and Washington could be exploited to ASEAN's benefit, and even South Korea, Australia and New Zealand — close U.S. partners — saw merit to the system. China would increase its offer of preferential investments or trade access, Washington would counter with offers of more trade but also keep China's broader regional ambitions in check. This semi-equilibrium has been breaking down over the past several years, with two apparent case studies being the Philippines and South Korea.

When Philippine President Rodrigo Duterte took office last year, he challenged the country's defense relationship with the United States, arguing that close ties with Washington had undermined Philippine relations with Beijing without providing security against China's occupation and construction on disputed islets. Essentially, the Philippines lost economic opportunities with China yet failed to benefit from security guarantees by the United States. It was the worst of both worlds. Duterte has since pursued a policy far different from that of his predecessor, Benigno Aquino III, who doubled down on the relationship with the United States and took a largely confrontational attitude toward China. This is not to say that Manila has simply accepted the dual economic and security role for China in the region. It continues to assert its own rights, is expanding economic and security ties with Japan, and continues to engage with U.S. military forces in the region — and in the Philippines itself.

South Korea is another case study in the dualistic policy of tying the economy to China and security to the United States, perhaps more overtly than most other countries in the region. South Korea has free trade agreements with both the United States and China. A quarter of South Korean exports go to China, a number that nears 30 percent when adding in Hong Kong. This compared with 14 percent to the United States. Meanwhile, China accounts for 21 percent of South Korean imports, while the United States accounts for just 10 percent. And China's role in the overall Korean supply chain, particularly with electronics, is masked in these baseline numbers. But when it comes to defense, the balance is entirely one-sided. The United States maintains 28,500 troops on the Korean Peninsula and retains operational control of South Korean forces in the Combined Forces Command, should hostilities with the North break out.

South Korea's decision to host the U.S. Terminal High Altitude Area Defense (THAAD) missile system triggered a strong outcry from China. Beijing began complaining even before Seoul and Washington entered formal discussions about the deployment, and since a decision was made it has used unofficial measures to strike at the South Korean economy. Tourism flows to South Korea have slowed, Korean cultural and entertainment exports and tours in China have been curtailed, and Korean businesses are facing boycotts, spools of red tape and bureaucratic sluggishness. Washington, in return, has accelerated the pace of THAAD deployment, hoping to complete the placement of the systems before early South Korean elections, which are likely to bring a progressive candidate to power — one who could revisit the THAAD agreement.

A Broken Consensus 

With U.S. participation in the TPP off the table, and U.S. defense seen as either insufficient to address regional concerns or, going to the other extreme, exacerbating economic challenges with China, there is a growing sense throughout Asia that the United States is simply not able to be counted on as a counterweight to China, at least not for the next several years. China's expanded military capability and activity is only reinforcing these views. The consensus forming is that the status quo balance between Chinese economy and U.S. security has already broken down. China's expansion was not effectively countered, whether by the so-called U.S. pivot (or re-balance) to Asia or by U.S. engagement with ASEAN and regional trade initiatives. For many in the region, it is not a question of what they prefer, but rather an acknowledgement of the shifting regional realities. When a country the size of China begins to assert its own interests, changes to the existing regional structure are inevitable.

The discussion now is about options. Simply accepting that China will be a regional hegemon is unlikely for most countries in the region. Even the Philippines, which has seen such a dramatic shift in its public policy, is looking for a balancer to China's regional power and influence, possibly in Japan. And South Korea is re-thinking its overreliance on the Chinese economy. Some countries that were in the expanded TPP are looking to maintain momentum even without the United States, hoping that together they can either shape China's economic behavior or perhaps lure the United States back into at least a modified version of the trade agreement down the road. ASEAN is pressing for the long-delayed Code of Conduct with China to try to curtail China's apparent expansionist tendencies. But few individually or together have the overall heft of the United States.

In Singapore and New Zealand, two countries that have successfully navigated their dual relations with Washington and Beijing for some time, there is a fear that they may be forced to choose. If a trade war breaks out between the United States and China, it will not be only about trade; it will be about regional relationships, about interpretations of the rights of passage through the South China Sea, about the options for dealing with North Korea — in short, about the whole of Asia-Pacific stability. China is facing deep structural challenges as it undertakes the painful transition from an export-based economy to a consumption-based one, and it will consider any strong U.S. economic action to be a clear attempt to disrupt the transition and contain China. The United States sees each further step by China to assert its military capability through the South China Sea as a clear challenge to a core interest of freedom of navigation and control of the seas.

Stuck between these two powers lie the Asia-Pacific countries, adapting to the changing balance of power and fearing a dramatic break in the pattern. Their ability to play both sides, to use the bookend powers of the Pacific Ocean as counterweights, may prove untenable if the there is a substantial slide in U.S.-China relations toward the negative. Few in the region are eager to choose sides, all are assessing their limited options, and the pervading hope is that somehow Washington and Beijing will continue their uneasy dance, leaving Asia-Pacific countries space enough to cheer both on.