The contest for Indo-Pacific

Visiting the twitter handle of Rory Medcalf, I came to know of an extract from his recent book, ‘The Contest for the Indo-Pacific’. It is a long one running into seven pages. Worth a read. Found myself nodding my head several times.

A paragraph on mental maps:

Mental maps matter. Maps are about power. How leaders define regions can affect their allocation of resources and attention; the ranking of friends and foes; who is invited and who is overlooked at the top tables of diplomacy; what gets talked about, what gets done, and what gets forgotten. A sense of shared geography or “regionalism” can shape international co-operation and institutions, privileging some nations and diminishing others. The late 20th century notions of the Asia-Pacific and an East Asian hemisphere excluded India at the very time Asia’s second most populous country was opening up and looking east. This was not just unfair; it was untenable. The Indo-Pacific fixes that, although it is important to correct the assumption that this way of seeing the world is all about India: it is principally about recognizing and responding to China’s widening strategic horizons.

Does this explain China’s recent belligerence?

For China, in particular, there is a troubling thread between the domestic and the international. For Xi and the Communist Party to maintain their grip on total power, they have found it necessary to raise the Chinese people’s expectations that their nation will be great abroad, and will successfully handle resistance. Yet China’s expansive policies mean that its problems overseas are accumulating, and the chances of a major misstep are thus increasing. In turn, this puts Xi and the Communist Party at particular risk, because China alone among the great powers has staked much of the legitimacy of its political system on success abroad. When things go wrong, the Chinese system could suffer grievously — especially if crises of security, politics and economics intersect in ways hard to predict and impossible to manage.

This is intuitively correct and also accords with what one should expect after a pandemic and with the United States and Europe entering their ‘Fourth Turning’ (that is a subject of another post):

Contrary to turn-of-the-century dreams of globalization, economic interdependence is no longer just about breaking down borders and letting all states rise together: it has become a tool of power and influence, captured in the newly popular catch-all term, “geo-economics.”

This reminds me of pages 313-316 of Samuel Huntington’s ‘Clash of Civilisations’:

China and the US have entered a state of comprehensive struggle, amounting to full-spectrum rivalry. The situation could deteriorate further, through miscalculation or coercion. There have long been four well-known flashpoints in East Asia: Taiwan, the South China Sea, the East China Sea and the Korean Peninsula. But beyond these, there are now signs that conflict is increasingly conceivable in the wider Indo-Pacific. The US is only one of China’s potential adversaries: China-India and China-Japan relations will remain fraught and fragile. The flashpoints may not even be geographic, but could involve interventions in the information realm, such as cyber intrusions or disputes over freedom of expression. A conflict that begins in East Asia could escalate across the region, for instance, through distant naval blockades, cyberattacks and economic sabotage.

Reminds me of my point (3) in my previous blog post:

… given China’s great strategic weight and temptations toward hegemony, the Indo-Pacific idea is empowering for other countries, encouraging them to build new and defensive partnerships across outdated geographic boundaries…..

…..Whatever happens, nations need to build their resilience and harness all elements of their power for a long phase of contestation.

The notion of a ‘Middle Kingdom’ is untenable:

This is consonant with the ancient Asian concept of the mandala, originating from Hindu cosmology, which with many variations defined the universe according to circles and a central point. In the mandala model, as opposed to the “middle kingdom” worldview of China, centrality does not bestow superiority. Rather, the model recognizes a world of many places, many islands. In modern parlance, this equates to multipolarity, equal sovereignty and mutual respect — many belts and many roads.

The book may be worth buying.

The significance of Galwan Valley

A friend of mine sent me Mr. Shyam Saran’s article in HT today. Mr. Shyam Saran was the Foreign Secretary (senior bureaucrat in the Ministry of External Affairs) for the Government of India in the middle years of the Noughties.

(1) I am glad that he did not write, towards the end, that we should not be drawing closer  to the US. Don’t recall what he did when he was the Foreign Secy. But, now it is good. In fact, the only time China had been accommodative of India in recent years has been when India has drawn closer to the USA/the Quad. Therefore, the best leverage India has is to explicitly restrict Chinese investments into India and restrict trade with the nation and move closer to the Quad.

(2) Second, as for denying the encroachments domestically, it does play into China hands and tactics, on the face of it. But, if the Government of India were to concede publicly that it has happened, then the public outrage and  the media outrage in this 24*7 news frenzy world would end up tying policy hands.

(3) Third, therefore, how does India extract and exercise leverage? China makes territorial claims everywhere with respect to Indonesia, the Philippines, Malaysia, Vietnam, Taiwan and in South China Sea, in general. Therefore, the only way they can be blocked is for India (being the largest of them all) to call for an alliance (temporary or permanent) of ‘Associations of Nations Against China’s Covert Aggression, Occupation and Annexation (ANACA) and issue a joint statement calling their bluff or introducing a resolution in UNGA and in UNSC against these moves. It may well be symbolic but highly so.

Read this portion of an extract from a new book by Rory Medcalf:

Consider, for instance, the possibility of a different quadrilateral: Japan, India, Indonesia and Australia. All four have serious differences with China and reasonable (and generally growing) convergences with each other when it comes to their national security. They happen to be champions of an emerging Indo-Pacific worldview. And they are hardly passive or lightweight nations. In 2018, the four had a combined population of 1.75 billion, a combined gross domestic product (or GDP, measured by purchasing power parity, or PPP, terms) of US$21 trillion and combined defense expenditures of US$147 billion. By contrast, the US has a population of 327.4 million, a GDP of US$20.49 trillion and defense spending of US$649 billion. For its part, China’s population is 1.39 billion, it has a US$25 trillion economy and its defense budget is US$250 billion.​1 (This assumes, of course, that official Chinese statistics regarding economic growth and population size are not inflated, and there is reason for doubt.)

Project the numbers forward a generation, to mid-century, and the picture of middle players as potent balancers become starker still. In 2050, the four middle players are expected to have a combined population of 2.108 billion and a combined GDP (PPP) of an astounding US$63.97 trillion. By then, America is estimated to have 379 million people and a GDP (PPP) of US$34 trillion. China will have 1.402 billion people and a GDP of US$58.45 trillion. Even just the big three of these Indo-Pacific partners — India, Japan and Indonesia — would together eclipse China in population and exceed it economically. By then, their combined defense budgets could also be larger than that of the mighty People’s Liberation Army. Include one or more other rising regional powers with their own China frictions, such as a Vietnam that may have about 120 million people and a top 20 global economy, and the numbers are stronger still. Even the combination of just two or three of these countries would give China pause. [Link]

(4) Four, economically, the public and the private sectors in India should be prepared to import from elsewhere or make at home or go without products that we import from China. That calls for a national sacrifice and short-term inconvenience, no doubt.

Fear the Dragon

Listing all the moves that China has made in the month of May, Shankkar Aiyar writes in ‘New Indian Express’:

In a cold and calculated move, China has sought to muscle in its hegemony under the cover of the chaos wrought by the COVID-19 pandemic.  [Link]

He is right. 

An article in ‘Wall Street Journal’ makes the same point but somewhat differently:

Mr. Xi has made establishing control of territory China claims an integral part of his agenda, and now faces mounting pressure from the public—as well as from more hawkish elements of the political elite—to make progress on those goals as the pandemic limits economic advances he also pledged, experts on Chinese politics say. [Link]

Matthew Klein (again, ht: Rohit Rajendiran) writes for Barron’s that China’s trajectory could follow that of the old Soviet Union. The latter appeared to catch up with America’s only to falter. Same afflictions are there for China too: aging population and debt dynamics. Read the article here.

In the meantime, Andy Mukherjee writes for Bloomberg that Mukesh Ambani’s planned listing of Reliance Jio in Nasdaq could become easier if the cold war between China and the United States worsened.

Two articles from Wall Street Journal provide a good perspective and information on the importance of Hong Kong to China. One provides the overview and the other backs it up with data.

The lever America has

China’s banks do much of their international business, mostly conducted in U.S. dollars, from Hong Kong. With Shanghai inside China’s walled garden of capital controls, there is no obvious replacement.

While the U.S. doesn’t directly control Hong Kong’s status as a financial center, Washington has demonstrated its extensive reach over the dollar system, with penalties against Korean, French and Lebanese financiers for dealing with sanctioned parties.

The U.S. recently threatened Iraq’s access to the New York Federal Reserve, demonstrating a growing willingness to use financial infrastructure as a tool of foreign policy.Even though the U.S. can’t legislate Hong Kong’s ability to support Chinese banks out of existence, the role of an international funding hub is greatly reduced if your counterparties are too fearful to do business with you. [Link]

This follow-up piece in WSJ provides facts and figures that reinforce the argument made in the earlier article, cited above.

Lack of cohesion in Europe

Italy’s lurch towards full-blown Euroscepticism threatens the bloc’s stability [Link]

In my view, Wolfgang Muenchau has written a thoughtful article, as he more often does, than does not. The attitudes of many Italians and the German youth towards China is bewildering.

He is also pointing out that Merkels’ ‘Hamilton moment’ – the joint Franco-German proposal to issue EU debt of EUR500.0bn to provide grants to some Southern European nations may not quite make a dent in their situations.

That said, at the margin, it is a step forward. Interesting that Bloomberg and FT have a different ‘take’ on the response of the four frugal states – Austria, Denmark, Sweden and the Netherlands. See here for Bloomberg’s coverage and here for FT’s reporting on the paper that the ‘Frugal Four’ put out over the weekend.

Covid switches crops and other links

This story appeared in ‘The Indian Express’ a while ago and it shows the positive effect of the law of unintended consequences. Punjab farmers were growing a lot of rice and wheat. The deleterious effects of them on Delhi haze, on groundwater, etc., were well documented by Mridula Ramesh in this article published in ‘First Post’ in November 2019.

The law of unintended consequences operating in its usual not-so-happy ways is documented here. It is about how America’s ‘Cares Act benefits for those who lost their jobs pays them more than what they earned while employed. I have no personal quibble here but down the road it will have repercussions on getting people back int jobs, especially if no vaccine is found.

Warren Buffett selling down his Goldman Sachs and also exiting airline stocks sends a big message. See here and here.

But, stock investors are not listening. Quite what makes them deaf to such messages is beyond me. Myopia, Fed liquidity, years of ignoring and forgetting how to price risk…? Two good warning messages here and here, for what they are worth.

Pompeo calls WHO decision not to invite Taiwan to the World Health Assembly deliberations spiteful. He is right. Taiwan has done very well in controlling the spread of the virus. The world is the loser because of WHO decision that, in turn, was influenced by China.

In the meantime, Japan calls Taiwan an “extremely important partner”.

America moves to cut the supply of important chips to Huawei. The tensions between the two nations have risen several notches for many reasons.

We are all Japan now

By now, enough has been written about the shifting global supply chain dynamics that readers should not expect to take away anything new from this post. If they do, that would be as much due to their creativity as to the content of this post. I am putting this up here just to remember the origins of this discussion about two months ago, nearly.

Noah Smith wrote on March 24th that offshoring left the United States unprepared for the virus:

Economics predicts that businesses decide what to produce based on what makes a little bit more profit. The siren song of marginal profit drew the U.S. relentlessly away from mask production….

… If businesses will always make decisions on the margin, then it’s government’s job to insure the country against big shocks such as pandemics and wars….

The U.S. could have used trade barriers and government support to make sure that the entire supply chain for medical equipment stayed in the country….

… The coronavirus crisis should cause advocates of unrestricted free trade to rethink their blanket opposition to protectionism. [Link]

The Chief Economist of EBRD echoes Noah Smith here:

… almost three-quarters of blood thinners imported by Italy come from China. The same is true for 60 per cent of antibiotics imported by Japan and 40 per cent imported by Germany, Italy and France. …

… This means building in redundancy and perhaps even moving away from the practice of holding near-zero inventories. Costs will certainly rise but, in the post-Covid world, concerns about supply chain fragility will come right after those over cost. Firms will be expected to assess resilience of their second and third-tier suppliers, too. [Link]

This ‘Wall Street Journal’ article on supply-chain financing suggests that there is more to it than what meets the eye. It is not simply a question of borrowing from a bank to pay your supplier. These borrowings are securitised. Buyers – i.e., companies who borrow to pay suppliers – report them differently, etc. What a tangled web, we weave when we financialise things?! A slightly more detailed explanation of supply chain financing is here.

In the end, the accent on margins and wafer-thin inventory that put profitability ahead of safety depended on an inter-dependent and smoothly functioning world. Geopolitics was beginning to change that partly in response to rising domestic inequality and worker insecurity. Voters had to be heeded.

The virus, by putting lives on the line, has lent a huge dose of legitimacy to the moves to re-shore production. In the end, as this article puts it well, “we are all Japan”:

Japan has always consciously viewed its economy as the sum of its companies, their tangible assets and intellectual property, says a retired official from the Ministry of Economy, Trade and Industry. But it has tended, to the intense frustration of investors, to take a much broader view than other countries of which ones needed to be protected to keep that economy intact.

Japan, says the senior executive of one of the country’s largest companies, has long built its policy around the anxieties of an island: coronavirus is now requiring everyone else to do the same. [Link]

The journalist who wrote the above piece has anticipated well:

Manfred Weber, a senior German conservative and head of the centre-right EPP grouping in the EU Parliament, told Germany’s Welt am Sonntag newspaper that he was in favour of declaring a twelve-month ban for Chinese investors who want to buy European firms. [Link]