Big surprise: Asia wants a regional trade bloc that includes China

The Obama Administration's big idea was a Trans Pacific Partnership that magically excluded China.  It is the lynchpin, along with the "strategic pivot" of US military forces into East Asia, of his dreamt-of 21st century containment of China's rise.

The "pivot" idea is merely stupid, but the TPP was magnificently dumb.

We encouraged China's rise (after encouraging the tigers and before that South Korea and Japan) by playing regional military Leviathan and enabling their export driven growth by keeping our markets open.  The implicit deal:  take that trade surplus (now consolidated by assembler-of-last-resort China) and plow it back into US debt markets, keeping our dollar cheap and enabling more of the same (we import goods, we export security, everybody peacefully rises, and the world is a better place).

That transaction strategy, as I have called it, worked wonderfully for years and years.  But it came to its logical endpoint in the crash of 2008.  We simply can't sustain such a grand strategy any more and, frankly, we don't need to.  Asia is risen, it remains peaceful, and its logical regional integration now proceeds.

Can we still play Leviathan in this process?  At great cost, yes, but a Leviathan is not what is needed now. It is now longer a possible achievement, given China's rise, and attempting to maintain that status now only gets you unnecessary tensions and arms racing.  

Instead, the economic integration needs to be matched by suitable regional security arrangements.  Those arrangements tend to come via crises or hotspots like the South China Sea issue.  You either fix them or they fix you.

The new grouping is seen as a rival to a trade initiative of the Obama administration, the 11-nation Trans-Pacific Partnership, which includes many of the same countries but excludes China.

The announcement came as China was facing pressure to back down from its hard-line stance in its disputes with four Southeast Asian countries over ownership of islands in the South China Sea.

What ASEAN's proposed Regional Comprehensive Economic Partnership says is that, no matter the lingering tension on the islets issue, Asia's economic and trade and investment integration will proceed.  And no, it won't be held hostage to Obama's containment fantasies.

Some analysts in Asia describe the Obama administration’s trade initiative as one element in a policy to contain China, the world’s largest producer and exporter of manufactured goods.

“China’s exclusion is strange, given its huge economic presence in the Asia-Pacific” region, Amitendu Palit, a visiting senior research fellow at the Institute of South Asian Studies at the National University of Singapore, wrote in a recent edition of East Asia Forum. “This has given rise to views that the United States is driving the Trans-Pacific Partnership with the strategic objective of marginalizing China.”

There are plenty of Chinese behaviors that we need to work, but we're no longer in charge of how things unfold in Asia, and no amount of military hardware parked there is going to change that.

The rest of Asia's hopes for China next stimulus package

Turns out China's one-party state is pretty predictable in its spoils system:  new leaders get in, investment boom follows, and you can bet the best connected princelings clean up.

So while the US resorts to QE3, the world waits and hopes for China's pattern to continue.  The biggest hopes for this path are located in Asia, where China's economic slowdown is causing the same for South Korea and Japan.

The Asian Union integration process has already begun.  Memberships were offered and accepted in the form of FDI flows and absorption into China's vast processing trade networks.  

Asia sinks or swims together, which makes for a new burden for China regarding leadership transparency (where in the world was/is Xi?), because Beijing's decisions matter far beyond China's borders.

West Hemisphere way behind on integrating intra-regional trade

Per the 10 March Economist editorial on Latin America's growing fears about being recaptured by China as just a source of commodities (deindustrialization) and per the recent Wikistrat sim on North America's Energy Export Boom where we discussed, in one master narrative, the notion of NAFTA using the lure of cheaper and cleaner energy to re-energize the Free Trade Area of the Americas initiative.

Now, you have to understand that this chart is misleading, because it counts intra-EU trade while not counting interstate trade within the multinational union known as the US.  If the stats were equalized on that scale, then the NorthAm numbers would be unreal.

But larger point about Latam's numbers being small (and presumably the W Hem numbers being commensurately low) is valid.  The US and the rest have not made the regional trade integration effort that is possible here, as South America is beginning to recognize its mistake is not pursuing FTAA.

People will paint this as de-globalization, but it's not a binary choice.  Globalization tends to push regions to up their regional integration for all sort of reasons, the primary one being the title of the editorial here: "unity is strength" in trade negoations.

But the long-term advantage here is substantial: if you want to grow, then you want to have high trade flows with faster-growing neighbors first and foremost.  China is doing that in SE Asia but US is not doing the same in W Hem, thus the strategic impulse now to go after things like reviving FTAA.

Wikistrat post @ CNN/GPS: 10 strategic issues with Obama's East Asia "pivot"

Editor’s Note: The following piece, exclusive to GPS, comes from Wikistrat, the world's first massively multiplayer online consultancy.  It leverages a global network of subject-matter experts via a crowd-sourcing methodology to provide unique insights.

The Obama Administration recently released a military strategic guidance document, which calls for a strategic “pivot” from the Middle East to East Asia. This bold move replaces President George W. Bush’s “long war” against violent Islamic extremism with a new, ongoing effort to shape China’s military rise.

What are the strategic, military trade-offs of this historic shift? Wikistrat, the world’s first massively multiplayer online consultancy, recently tapped its global network of several hundred analysts to ponder this question. This online network offers a uniquely powerful and unprecedented strategic consulting service: the Internet's only central intelligence exchange for strategic analysis and forecasting, delivered - for the first time - in a real-time, interactive platform. Exclusive to GPS, here are Wikistrat’s top ten strategic, military issues to bear in mind as this “pivot” unfolds:

Read the entire post at CNN's Fareed Zakaria GPS site.

NPR's All Things Considered: My appearance yesterday on US-China relations

The segment:

Analyst Spells Out U.S. Interests In Pacific Rim

November 17, 2011

President Obama used his trip to the Pacific Rim this week to announce plans for a new American military base in Darwin, Australia. The move changes the stance of U.S. forces in the region — countering the growing strength and presence of China's military. Guy Raz talks with Thomas P. M. Barnett, chief analyst for Wikistrat, a consultancy that provides geopolitical analysis. He's also executive vice president of the Center for America-China Partnership.

Download this: http://thomaspmbarnett.squarespace.com/storage/20111117_atc_15.mp3 or go here to find the NPR/ATC page.

Wikistrat's "The World According to Tom Barnett" 2011 brief, Part 3 (Flow of Money)

This section of the brief focuses on the rise of the global middle class, the evolution of national economies, why China won't "rule the world" for all that long, and what the future evolution of East Asia holds.

WPR's The New Rules: A Look Ahead at the Geography of Global Security

As part of a “big think” forecast project commissioned by an intelligence community sponsor, I’ve begun to think about the future geography of global security. As often with this kind of project, I find myself falling into list-making mode as I contemplate slides for the brief. So here are nine big structural issues that I think any such presentation must include . . .

Read the entire column at World Politics Review.

WPR's The New Rules: Debunking the Pentagon's Chinese Nationalism Hype

There exists within the Pentagon an unshakeable line of reasoning that says the Chinese military threat to the United States in Asia is profound and growing, that the most likely great-power war conflict will be over Taiwan or the South China Sea, and that the primary trigger will be China's burgeoning -- and uncontrollable -- nationalism. Objectively, China's military capabilities are certainly growing dramatically, but our conventional wisdom tends to break down in the structural plausibility of the scenarios. That's why the firm belief that rampant nationalism will trigger an eventual conflict becomes so crucial, especially when considered in combination with an additional line of speculation that emerged earlier this year, after the Chinese military trotted out a fifth-generation fighter jet the same day that former U.S. Defense Secretary Robert Gates arrived in Beijing for confidence-building talks: At the time, Gates suggested that maybe the People's Liberation Army was getting too big for its britches, and according to those who emphasize the Chinese threat, when the Chinese Communist Party eventually caves in the face of out-of-control popular nationalism, the PLA will step in and take matters into its own hands.

Read the entire column at World Politics Review.

China's slows but still grows, thanks to regional "gravity"

Economist talking up a new book by Arvind Subramanian, who often writes for the FT. It's called "Eclipse."

Why China looms large in the future global economy, according to Subramanian: demography, convergence, and "gravity."

Convergence is a take on the healing of the "great divergence" that began around 1800: West grows 1200% over two next centuries while the rest lost 50% (much due to colonialization). The "great convergence," as many call it, predicts that the West grows 600% this century while the rest grow 1200%. Doesn't eliminate difference, but closes gap mightily.

Demography, in Subramanian's take, is all about heft: China is 4X size of US so only needs 1/4 GDP per capita to outpace.  He blows off the ageing issue, according to the Economist, and he doesn't seem to be tracking the decrease in labor either.

Subramanian is no pie-in-the-sky trajectionist, meaning those who place China on a neverending track of 8-10% growth. He buys into the S-curve argument and says China will grow about 5% for next two decades. That's the pattern we've seen in East Asia in the past (reach 25% of US per cap GDP and then slow to 5-6% growth).

The idea that caught my attention was the gravity one: 

. . . the "gravity" model of trade, which assumes that commerce between countries depends on their economic weight and the distance between them. China's trade will outpace America's both because its own economy will expand faster and also because its neighbors will grow faster than those in America's backyard.

Point being: China works its region while we do not.  We play the drug war and China is working infrastructure like crazy in SE Asia. China will also logically work toward an Asian Union with its economy as the centerpiece, while the US puts up a border wall.

Back to an argument I continue to make: we need to be opening up to the south like crazy, not shutting ourselves off on immigration and drugs.  We'll make ourselves weak relative to China and India due to their bulk populations, when our version of their interior rural poor are there for the taking.

We should be expanding the United States, not closing it down.

The real leading indicator of China's power

Apologies for no post for two days. I was in DC and busy.

FT story here on how the demographics are already playing out in China: fewer workers entering the work force can be choosier and more demanding on wages. That sends wages skyrocketing in China along the coast. Companies have two choices: go inland for cheaper Chinese labor - but then accept the higher transpo costs, or they go to neighboring states - all of which are just now on the cusp on a very big and long demographic dividend that will make their labor cheaper than China's from here on out. Those neighbors are basically all of Southeast Asia and especially India and Bangladesh.

So the subheader here says it all: "Demographcis and Beijing policy on workers' pay mean manufacturing is relocating in Asia."

Won't change a whole lot about America's trade deficit with Asia. It was large when "factory Asia" was just Japan and South Korea and ASEAN, and it got bigger when China cleverly inserted itself at the top of that assembling chain and consolidated the region's trade suprlus with America into its massive foreign currency holdings. And it won't go away when others displace China increasingly.

But it does mean that China's days of "inexhaustible" cheap labor are already ending.

And it means that India's eclipsing of China as the next big thing - to include all the soft power that goes with that (which will be greater for democratic India than authoritarian China) - has already begun.

Beijing seeks bigger role throughout Asia, making all nervous

WSJ story:  Vice Premier and future premier Li Keqiang in Beijing says the China-Australia needs to move beyond stuff to shared efforts at R&D.  Article also says China eyeing developed countries as they need infrastructure and China has built up tremendous resources on that score.

But all this push scares as well:  FT story on Indonesian private equity firm head decrying growing Chinese investment (China had just agreed to fund about $4b in infrastructure there):

Our state is in the hands of the Chinese and the Koreans.  We allow the foreigners to rape and pillage us.

Get used to the "ugly Chinese."  The soft sell/"charm offensive" is over and China will end up paying for the end of that honeymoon.

Nobody who matters really wants a weak US

Argument from Lee Kuan Yew that fits with everything I've come across in recent work for the USG: those who understand how this world got built are not eager to see the US retreat from its power and influence in continuing to undergird its further development.

LKY:

The world has developed because of the stability America established . . . If that stability is rocked, we are going to have a different situation.

Singapore's old leader (now officially "mentor" to the government) shows how the strong man leaves behind the right sort of system:  he builds it up and then retreats to the background, like Deng Xiaoping and plays mentor.  America, to a certain extent, faces the same evolution.  It's just that we're so given to fits of pique - as in, we're either all-in or all-out.

But the real message here:  it's okay to retreat a bit from the world if the outcome is regeneration.

On the US and China in special interview with WSJ:

Mr. Lee said he thinks a "challenge may come gradually from China," but he doubts China and the U.S. will come into serious conflict anytime soon.  China needs American markets, American investments and American technology, and won't want to "upset the apple cart," he said.

My addendum: and when they may care to, it will be too late, as they'll hit those various walls (demographics, environmental and social decrepitude, resource dependencies, defensiveness and - ultimately - the strong impulse toward democracy) I described last Jan in Esquire.

In the end, says LKY:

I believe the Americans will always have the advantage because of their all-embracive society, and the English language that makes it easy to attract foreign talent.

One of the smartest guys of the 20th century, who blesses us with his wisdom in the 21st.  I rarely disagree with the man, he is so sensible.

Does Asia stall or fulfill the dream of the Pacific century?

Warnings from officials at the Asian Development Bank (Reuters by way of Stewart Ross):

Home to 3.3 billion people, Asia has led the global economy in recent years, and the rise of China and India has lifted the region's profile and influence in world markets.

But the region also has nearly 2 billion people living on less than $2 a day, including in China and India, who are most at risk from sharp rises in food and fuel prices this year.

"Sure we have had a tremendous growth story, incomes have increased, and Asia has a lot to be proud of," ADB Managing Director General Rajat Nag told Reuters.

"But you also 700 million people without access to clean water, you have 1.7 billion people without access to sanitation, you've got maternal mortality which is high, you've got child malnutrition," he said.

Around 3,000 people will gather in Hanoi for the May 3-6 meeting, and the ADB, charged with fighting poverty in Asia and the Pacific, will push the case for the region to face up to its responsibilities.

The message, Nag said, was clear: "Your rise is not preordained; it is plausible, but you've got to earn it."

"You've got to make some policy decisions now to reduce inequity, increase the basic education, address issues of governance and corruption, show leadership, have strong regional integration if you are going to avoid the middle-income trap."

That trap, where per capita income levels rise to about $7,000-10,000 and then stall, had afflicted countries in Latin America and the Philippines in Asia, he said.

By avoiding the trap, Asia would account for half of world output by 2050, from 27 percent now, with per capita income of about $39,000, in purchasing power parity terms, and billions lifted out of poverty, an ADB-commissioned study found.

"If on the other hand you get caught in the middle-income trap, the per capita income will only be about half, about $20,000 per capita, and Asia's output will account for about 32 percent," Nag said. "So the potential loss is huge."

When I talk about the big shift from extensive growth (more stuff) to intensive growth (more innovation), this is really what I'm describing.  You accomplish the basic stuff with a segment of your economy (i.e., there are still plenty of rural poor) and then it's a question of whether you can take it to the next level by cleaning up a lot of bad practices you've still got or accumulated in the process of development.  That's the progressive-era point that America hit in the late 1800s, and either you muscle past that or you get stuck.  

Essential to the process:  democracy that allows the effective articulation of society's demands for improvements, a professional civil service that reduces the corruption factor, rise of an environmental movement, effective taxation to raise funds for the public-goods improvements needed for those who aren't moving ahead, sound public education, good rules to attract investment beyond the early basics (commodities, cheap manufacturing, etc.)

All of this is to say:  there is no "Asian way" that circumvents these problems, and please, don't toss Singapore in my face, because city-states are not countries.  They will need to travel the same progressive territory that the West once did - and they will end up in the same place.  

Good news for Asia:  outside of China, Japan, Australia/NZ and South Korea, the rest of the place is just hitting its demographic dividend - that sweet spot of about 25 years in the transition from high fertility/mortality to low fertility/mortality.  One has to take advantage to make as much advance proceed as possible during this window, otherwise you run into the Chinese get-old-before-you-get-rich problem.

Rebalancing needed all over the place, including SE Asia

Map found here

FT story on "rail renaissance" in SE Asia.  Driver?  "There is a realisation that they should do more to tap into intra-regional trade."   So says a UN RR expert out of Bangkok.

Why must they do more?

SE Asia sees writing on wall:  the region as a whole cannot rely on Europe and America to same degree on export-driven growth. So, to keep up with networking China, SE Asia, which has talked about a common market by 2015 but done little to do it (why bother when the export-driven growth remains hot?), now feels some real urgency to begin.  Infrastructure is considered the big bottleneck.  

Hence the $2.2B investment plan so the region's RR consists of more than just that coastal line that wraps around.

Goal is to make consumer goods travel better through SE Asia, cut down supply chain costs to rest of world, and open up another land bridge route between China and India--more to the latter's east coast than the current one.  On all routes, the RR vision competes with paved roads, but the logic overall is, the more the merrier.

Some will look at this and see "regionalism replaces globalization!"  But in truth, we're talking about a filling-in-the-blanks dynamic long overdue.  If anything, this is globalization spreading far deeper and more pervasively across the region, because all this intra-regional connectivity allows everybody more rapid access to everybody else.

Taiwan Relations Act: The Brer Rabbit defense

My friend Galrahn dutifully--and correctly--takes me to task for not specifying, in last week's post, that the Defense Department is obligated by law to both provide for Taiwan's defense against China (sell them arms) and maintain a US military capacity to resist Chinese force.  He says that my critiquing the Pentagon on this is unfair.

While Galrahn's points are technically correct, it's also certainly true that the Defense Deparment has a lot of leeway on how they can interpret meeting that requirement.  After all, what stops us from simply noting that we've got a lot of nukes and they can be enough to deter China from invading Taiwan.  Nothing in the Taiwan Relations Act of 1979 specifies conventional capabilities versus nuclear.  It just says "to maintain the capacity of the United States to resist any resort to force or other forms of coercion that would jeopardize the security, or the social or economic system, of the people on Taiwan." Give Taiwan enough defensive firepower, promise a nuclear back-up and call it a day.  But we choose, or rather, our Defense Department now chooses, to build an entire big-war warfighting concept around this scenario (no, no, nothing provocative there).  Nothing in the law demands that level of strategic focus or conventional effort.  So no, Galrahn, my rant wasn't misdirected. Pointing the Pentagon's finger at Congress and saying, "I'm just following orders" doesn't cut it here.

We've made a series of choices inside the Pentagon to elevate the meaning of Taiwan going back a decade and a half.  No outside power forced these choices; the military made this call on its own. The Taiwan scenario has become the calling-card scenario for the big-war force, much sturdier than the pathetic North Korean scenarios of collapse, or the bomb-heavy vignettes for Iran (unless you think we want to occupy that place too any time soon).  Simply put, until the Taiwan Strait crises in 1995-96 got the DoD turned-on to China as the near-peer competitor, you simply never heard about the Act as a baseline justification for force structure.  It merely explained arms sales to the island.  I know this, because I worked force structure issues for the Navy at the Center for Naval Analyses in the early 1990s (it was, like, bullet 4-a on slide 53, and when you saw it, you'd turn to the guy next to you, and intone knowingly, "Of course, the Taiwan Relations Act of 1979," and then you'd be back to business).  The Act was a completely backburner issue until the Sov residual threat got so low in those early post-Cold War years (after it became likewise apparent that the "rising sun" wasn't going to fulfill anybody's fantasies except Michael Crichton's--yes, I actually had senior military officers tell me in great seriousness to read the book to understand the future looming Japanese threat), that the Act sort of surfaced like a bureaucratic bedrock at low tide.

The Taiwan Strait crises also birthed many of the original network-centric warfare concepts.  It really was a seminal series of events--the proverbial wake-up call.  But then 9/11 comes and we don't hear about it all that much anymore--save for those pesky arms sales and the usual huffing and puffing from Beijing on the subject. 

The difference today is that the AirSea Battle Concept--basically a navalized, mini-me version of the AirLand Battle concept vis-a-vis the Sovs in Europe during the 1980s--is clearly based on this scenario, with a paltry assist from Iran (not a great country you want to lump in, image-wise, when you seek China's help on Iranian nuke developments, but a sale is a sale).  And I gotta tell you, that's some chutzpah, basing a new high-end combat ordering principle on the same nation you're seeking all this cooperation from--like salvaging your economy right now.

Seriously, anybody has to admit that making an entire air-sea, big-war battle concept out of the Taiwan Relations Act is going above and beyond the call of duty.  In my opinion, it goes beyond defense policy to a good share of foreign policy as well, cementing in something for the long haul that may not serve our overall purposes in our evolving bilateral relationship with China.  

Is this a step we debate as Americans?  No.  Is this something our president explains to us, or our Secretary of State?  Not really. It's just an inside-the-Beltway affair led by a think tank that results in some language here and there in various planning docs and ultimately finds its expression in the budget.  Would the Navy or Air Force protest?  Above their pay grade, as they say, although plenty of retired flags from both services will tell you openly they think this is an odd path to be on, given the larger picture.  But most, if not all, will readily admit, as I do in an upcoming China Security piece, that, once you accept the deterrence logic on Taiwan, America needs to make the AirSea Battle Concept happen as merely the next-step ante to stay in this poker game.  And frankly, given the shopping list ginned up, any protest would sound very much in the Brer Rabbit mode.  After all, these are tight budgetary times, and quite frankly, Gates' logic begins with the need to find synergistic savings.  So why target the best thing going (enshrined in law!)?  I mean, the Chinese do the same, do they not?

My point is this:  is this the best we can do at this point in history?  China doesn't need any help triggering a balancing response across Asia, as I've noted here many times; they do it brilliantly on their own.  Frankly, we don't need much of a hedging strategy as a result; the containment policy writes itself--again, thanks to Chinese heavy-handedness.  

But the larger effort isn't particularly being made:  we are not building a better, bigger positive relationship with China, especially in mil-mil relations, to supersede the legacy negative one.  You can tell me that the Pentagon is just doing its job--following Congressional orders, as it were.  I just want something more imaginative at this point in history, you know, something that preps the diplomatic "battlefield" a bit--something the navy does well throughout history.  

And I just don't see it happening.  Our offers of cooperation with China typically involve asking them to join our party on our terms, whatever the situation in question.  Will you do what we want you to do in Iran/Sudan/Myanmar/North Korea/South China Sea/etc.?  You know, show us you're responsible by giving us what we want.  [Then there's the awkward but oddly workable--if entirely unfair in burden sharing--"limited liability partnership," as I call it, in Iraq and Afghanistan, where our blood pays for Chinese treasure.]  

And big surprise, rising powers don't negotiate well on those terms.  America rarely did during its decades of rising. That sort of trajectory makes you arrogant and full of yourself, and China is definitely in that mode.  

And yes, while that sort of thing needs to be subtly resisted, we need to be preparing for the leaner years--as in, our leaner years and China post-some crash or inevitable slowdown.  We need to building something--again--positive, and mil-mil relations can be spectacularly positive in that way.

I don't think we've thought through, in any comprehensive sense, what our devotion to this blue law from from the Cold War is costing us--opportunity-wise, or the signals that it sends, or what we risk with it in a strategic sense.  I think it's simply on the books, so the bureaucracy grinds its answer, and when sanctuary from a scary budgetary climate is sought, that "requirement" is not just an oldie but a very goodie.

It's just not where we're going as a power or where this system is going.  We are steering by our wake, because it feels comfortable and good, and--damn it--it's the law!

And I don't see a lot of strategy in that.  I see people, like Galrahn, patting the Obama administration on the back for simply having foolish behavior fall into their laps and doing the right thing by it--again, because it feels good and it makes us seem more important than--quite frankly--we really are.  Our "cooperative strategy," as he calls it, is pretty much what it's always been in the Pacific:  make us the most important bilateral partner with as many states there as possible.  Again, with the Chinese playing the fools (i.e., old Soviet role) on this one, that's not a hard strategy to pursue, but it's one that retards the Asian integration process to a certain extent, in the name of hedging against, and somewhat containing, China.  

And if we were set to play global policeman with budgetary ease for the next couple of decades, I would be the first to say, fine and dandy.  Wait on these guys to grow up, and democratize, and a whole bunch of other requirements.  But I don't think our finances or globalization will wait on those evolutions, so I think we need to start thinking about making do with the landscape--and players therein--as they're presented to us.  Because keeping China in this retarded state of "pol-mil" development (and I use that term of art purposefully) isn't wise, in my opinion.  I think we need to do more--faster--than just keep them in their place until they demonstrate the preferred type of global following skills (I mean, leadership).  I think that attitude retards our own, much needed pol-mil development (yes, we actually have some things still to learn about this globalization of our making).

Unless you think U.S. military power is what makes us who we are. I've always thought it enables us to display leadership, but that it's not a substitute for it.  

And that worries me--this unstated, barely articulated strategic course we seem to be on.

I got accused a lot--and rightfully--of granting Bush-Cheney better rationales for their policies than they themselves had. I think Galrahn does the same here with Obama and Clinton.  I think Hillary is the shining star simply by default, because I see no great accomplishments, just well-worn reactions to a perceived rival's foolish behavior.  Remember, these guys came in with Jim Steinburg's "strategic reassurance," when "nice" China was having a good year (2008-09) and we were grateful for their saving the global economy (and let's admit it, no China, and things get a whole lot worse).  Now China is having a bad year, as Galrahn rightfully notes, and now we're all about overstating our interest in the South China Sea so as to match China's absurd claim of sovereignty.  If that's isn't chasing events or trends, than what is?

This is Schadenfreude masquerading as grand strategy--too much of it, actually, on both sides.  Mirror-imaging in this regard ("Look how popular we are in Asia right now!  Vietnam loves us! Take that, China!") isn't all that imaginative.  China's "charm offensive" got offensive, so now we've fallen into one by default.

And you know, hoping Brett self-destructs isn't the same as getting the Packers into the Super Bowl.

There are other paths and there are other voices.  If we want to get this future right, we should invent it ourselves.

Deng: Develop the place, then decide the sovereignty

Another John Milligan-Whyte & Dain Min piece, this time in China Daily.com.  They argue that China needs to stop standing on the sidelines fuming about joint US naval ops/exercises with locals and simply join them, which I think is brilliant.  If China wants to assert the normality of their naval ops in their local waters, then they need to exercise with everybody at every opportunity.  They need to make their presence a welcome, stabilizing thing, because right now, their own operations in their own waters ARE destabilizing, because they are perceived to be about establishing/claiming sovereignty in a way that trumps the diplomatic process.

The underlying logic of the piece is even smarter--right out of Deng's mouth:

What can China do about having jurisdictional disputes with its neighboring countries which have now been complicated by China and America asserting conflicting "vital national interests" in the South China Sea? How can China put jurisdictional disputes back into their normal peaceful mode? China and the nations that it has jurisdictional disputes with can form a joint development corporation called "South China Sea Joint Development Corporation" to economically develop the disputed areas peacefully. It is easier to negotiate the size of each participating nation's investments, responsibilities and share of the profits of such a corporation with multinational win-win policies. The joint development corporation approach avoids the zero sum game ownership disputes during which no nation can safely develop the economic benefits nor safe guard its national pride and interests in the disputed areas.

On February 22, 1984 Deng Xiaoping discussed what now for decades have been China's successful solutions to the Taiwan and Hong Kong sovereignty issues with the Center for Strategic and International Studies. He said, "I have also considered the possibility of resolving certain territorial disputes by having the countries concerned jointly develop the disputed areas before discussing the question of sovereignty. New approaches should be sought to solve such problems according to realities."

Smart stuff.

Make the development happen first, and then calmly divide the spoils, rather than get all huffy up front and suggest the only acceptable answer is that somebody wins and somebody must lose.  In the end, China will end up winning most of the time, NOT because of the supply of its military power, which will consistently backfire in its application, but because of the power of its domestic demand, which everyone will want to satisfy because there is good money to be made in doing so.

This week in globalization

Clearing out my files for the week:

• Martin Wolf on why the US is going to win the global currency battle:  "To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US."  We win because we have infinite ammo.  But better that we come, per my Monday column, to some agreement at the G-20. 

• Sebastian Mallaby, also in FT, says that, despite the current currency struggles, the "genie of global finance is out of the bottle" and not to be stuffed back in.  Wolf had noted $800B capital inflows to emerging markets 2010-2011, which is gargantuan, thus the crazy struggle of some places to keep their currencies low.  As for America stopping China from buying US bonds in retaliation for our not being able to buy Chinese assets?  China holds only about one-third of the US T-bonds abroad ($3T total), so it can buy all its wants from others in the system.  There is no turning back, he says.

• Meanwhile, the Pentagon makes plans to turn back the clock on the globalization of defense manufacturing.  A new spending bill provision--inserted at DoD's request--includes the power to exclude foreign parts suppliers (read China). Just about every US-based defense firm uses offshore suppliers, so this is going to get very expensive very fast.  It'll be a lot harder to find that $100B in savings over five years. This is almost a fifth generation warfare version of shooting yourself in the foot--first, before the other guy can.  China does nothing here, that frankly we shouldn't be able to handle, but we move down a path that instantly adds a significant tax to everything we buy in the growing-by-leaps-and-bounds IT realm.  One hopes there's a half-billion for that American rare earths mining co. that's looking for a new investor.  Interesting how China's becoming vulnerable to, and dependent on, so many unstable parts of the world for resources, and we're going to cut off the tip of our IT nose to spite our face.  I can imagine a cheaper way, but that would be so naive in comparison to spending all this extra money.

• China continues to buy low, as a ruthless capitalist should. Giving us a taste of what it could be like if we don't get too protectionist, it's buying up Greece's "toxic government bonds."--and plenty more in Europe. All of the EU is getting a taste, says Newsweek, as Chinese investors are snapping up bankrupt enterprises and--apparently--putting people back to work.  China also, like a ruthless capitalist, seeks to make bilats reduce the chance of EU-wide restrictions on its trade. Old American trick.

• Another sign of globalization on the march:  emerging economies buying up food and beverage companies in the West that would otherwise naturally be targeting them for future expansion. Bankers expect the trend to continue.  Gotta feed and water that global middle class that keeps emerging at 70-75m a year.  Emerging economies are buying up the companies from equity firms that had previously bought them during down times.

• Great FT story on how Turkey has the Iranian middle class in its sights.  Long history of smuggling inTurkey dips a toe in, would like to drink entire tub eastern Turkey.  Sanctions hold up what could be a major trade, so the black-marketing local Turks mostly smuggle gasoline--and a certain amount of heroin.  But the official goal is clear enough:  be ready to take advantage whenever Iran opens up.  A local Turkish chamber of commerce official floats the notion of a free trade zone at the border. Those 70m underserved Iranian consumers beckon.

• Bloomberg Businessweek stories on how China's working aggressively to get western technology and cooperation to allow it to work its significant coal-bed and shale gas reserves.  Russia's exporting nuclear reactors like nobody's business, and Mongolia's beginning a long boom as "one of the last places on earth with huge, untapped metal ore resources" (guess who's showing up in numbers--with cash).

• India's airline industry can't keep up with demand generated by itsGet me planes and pilots--now! booming middle class. Boeing says Indian airlines will buy over 1,000 jets in the next two decades. Already they're forced to have one-in-five pilots be foreigners.

• Fascinating WSJ story on how China's car economy is going wild, with ordinary Chinese exploring the freedom of the road.  Drive-in service is taking off, weekend jaunts mean hotel business, etc. In past visits I saw a lot of this coming down the pike.  Just like when America's car culture went crazy after WWII, this is a serious social revolution.

Don't forget your meal of eternal happiness!

• "Brazil and China banks join list of world's top credit card issuers."  And so it begins.

• Funny thing about all this South China Sea hubbub: "Corporate ties linking China and Japan have never been stronger," says the WSJ.  Serious driver?  Japan is exporting its mania for golf to China--the fastest growing market for the sport.  It's what middle-class guys do.

Coming soon: the "golf wars"

• WSJ story on Vietnam creating its own Facebook to keep a closer eye on its netizens.  Defeat the anti-capitalist insurgents!What caught my attention: "The team has added online English tests and several state-approved video games, including a violent multi-player contest featuring a band of militants bent on stopping the spread of global capitalism."  I would say we finally won the Vietnam War.

On food, Asia can't keep pace with rising middle class demand

WSJ story on how Asia's food demand continues to rise while the amount of land devoted to food production is pretty much capped this decade due to urbanization and planned investments just aren't happening as envisioned (so yield per acre not rising enough to cover the delta in demand).

The plan was to dramatically boost farm investment in Asia's developing countries after the scary price spikes in 2007-08, which may be remembered in the same way as the original OPEC price spikes of the early and late 1970s--a harbinger of a permanently tight market where any de-synching of demand and supply leads to real and perceived crises of the highest order (as in, governments fear for their regime stability).  

Examples of the investment:  opening up land previously considered marginal and improving farm-to-processor infrastructure (mostly roads and storage facilities).  The big hold-up, unsurprisingly, is the financial crisis.  Then there's the usual uncertainty on land ownership and fears of environmental ruin.  

Why things won't get so bad globally this time around:  grain stores are up and the economy is weaker, but these are temporary conditions that do not obviate the strong underlying trends.  As one researcher on rice puts it in the piece, "2008 was not just a blip, this is the way things will be, with repeated shocks."

The financial crisis, in my mind, caught Asia about a decade too early--not enough rules and not enough positive evolution on politics (especially the talent level of leadership) and not enough development of financial markets (in terms of being more fluid and responsive).  Asia in general is still burdened by rules and leadership and mindsets better attuned to extensive growth (throw in more stuff!) and the ag scene calls for intensive-growth answers (much higher yields on same amount of land).  The Philippines, as the piece notes, produced 92% of its rice in 2000, but is already down below 80% today.  That gap will only grow, because most dreams of getting access to unused land won't come true (the urbanization going on is likewise intense) and even if access is had, yields won't be so high without serious investment.

In the end, all the brave talk about food self-sufficiency in Asia is just nonsense; ain't never gonna happen. But Asia certainly could do better, so that the demand doesn't outstrip local supply too intensely too fast.  We've seen more than a few Asian states move into that outsourcing trend of renting or buying up nice farmland overseas (in Africa, for example), but that only buys you a whole new load of responsibilities that I think a lot of these countries--especially China--are ill-prepared to follow through on.

I remember driving from Addis Ababa down to Awassa in southern Ethiopia and seeing huge chunks of the best farmland sort of tarp'd off--as in, covered on all sides and seemingly roofed with simple metal skeletons wrapped in this thin but opaque poly skin (I assumed the topsides where clear enough to let in the bulk of the sunlight).    It was a stunning sight to behold:  all this open, rich farmland still operated in very early 20th century terms and then these huge, fenced off and covered up tracts where--apparently--a whole new level of effort was being made.  Unsurprisingly, I saw labor barracks nearby with a Chinese flag flying out front.

Now, you can say, this all works so long as the local government makes it work, but if a food crisis really comes along and the local population is suffering in a way that's undeniable in terms of global news coverage, then that thin poly cover-up won't be enough to keep that food production secret and safe.  And China will find itself unusually responsible for what comes next in places like Ethiopia.

And that's when the whole "non-interference" things gets revealed as so much empty talk.  There is no way China rises and becomes what it is becoming without have huge interfering effect all over the planet, and people will hold it responsible for all that change--both the good and bad.  

Don't get me wrong:  I think China's impact will be overwhelmingly positive overall, as the sustained demand for resources does plenty to jump start and fuel development in places like Africa in ways that the boom-and-bust cycle previously offered by the West did not.  But with the good will come the bad, and that means China gets dragged into all sorts of uncomfortable dynamics it has previously sought to avoid.  

This is why I argue that serious strategic partnership with the U.S. is hardly just in America's short- and medium-term interest (due to its current straining to meet its global security obligations). Over the long term, it's far more in China's interest. Back in "Blueprint," I said America needed to "lock in China at today's prices," but the obverse is equally true now:  prices will never be lower and China will never find a more pragmatic leader than Obama, because if he loses in 2012, expect the usual "apres moi, le deluge!" reactions to kick in. 

This is another example of why I think the 2010s are a turning-point decade--as in, get it right and globalization's future is secured, but screw it up, and far different global pathways are made possible.  Inside all those dynamics, the US-Chinese relationship is the long pole in the tent:  get it right and nothing can go wrong, but get it wrong and nothing will likely go right. Why?  The rise of the global middle class means there will be so little slack in so many systems, that it'll feel like we're collectively in constant crisis.  This environment yields the "keeping all the balls in the air" mindset currently on display at State with Clinton (who needs to aspire to higher goals than just this).  The same is unfortunately true in Beijing.  All this kicking-the-cans-down-the-road lack-of-ambition serves the world poorly at this moment of great structural change: everybody of note seems to avoid leadership.

But there's no question about China becoming far more of a global leader; it has no choice.  The question is how much of this leadership emerges pro-actively from Beijing, and how much is teeth-pulling from the rest of the world.

China's JFK is yet to emerge, but he was one of the "heroes of the future" I cited at the end of "Blueprint for Action":  the leader who steps up and asks China to think less of what the world owes it (after all those decades of "humiliation" and the long slow climb back up from widespread poverty) and more about what China owes the world.  That moment/leader will be a defining dynamic for the 21st century and how the world evolves.

And food is more likely to drive that process than energy or anything else.

Japan starts pushing China on trade and currency

FT story on how Japan getting testy in China's direction over rise of yen and growing Chinese purchases of Japanese debt--sound familiar?

Japan's finance minister, speaking in the parliament, complains that it's a one-way street:  Japan cannot buy Chinese currency or debt.  Meanwhile, China's yen purchases this year are 6x larger than the previous five years put together.

All this while the latest maritime spat plays itself out.

Japan's Democratic Party won power for several reasons, to include their promise to work for a "relationship of trust" with China.

No one, for now, predicting a decline in relationships similar to 2005, because the economic bonds have grown spectacularly since then.  But something to watch:  in May China promised to restart talks on bilat exploitation of gas in East China Sea.  Does that go away now?

South Koreans are now bitching about the same things.

So we see continue to see natural regional resistance to China's rise, which is less a choice on China's part and more of a negotiation on everybody's part. Beijing seems to be losing track of the latter reality.

But that will change.

Krepenevich sees a "Finlandization" strategy by China in the Pac

Andrew Krepinevich op-ed in the WSJ that's a bit breathless in its admiration for the much-hyped Chinese strategy of the "assassin's mace."  It always kills me how so many experts criticized net-centric warfare as so much high-tech BS and then seem to swallow this stuff hook, line and sinker from a military that hasn't actually fought anybody in a sustained fashion for more than half a century.

Of course, we might outspend everybody by gajillions and yet our stuff is sooooooo easy to counter, but China is going to pull off this amazing collection of high-tech hijinks the very first time and it'll be so amazingly hard to counter.

Naturally, Krepinevich's logic exists in his usual vacuum where economics and political repercussions of such behavior are set aside--to wit, his argument that China is building up all this power to "Finlandize" the region.

Well, turns out, looking at my post from yesterday, that SE Asian weapon buying has doubled in the past half decade and America seems to be having no trouble locating new military friends from this neck of the woods.

Ah, but we are told that Team Obama is the naive player here, even though virtually every China hand will tell you that Bush-Cheney talked a tougher game but were more lenient with China while Obama-Biden talk a nicer game but actually are tougher. The reason why Pentagon planners refer to China as "Voldemort" (i.e., the threat that dare not be named) is that the scenarios for conflict are bleeding plausibility with each passing year.  The Pentagon, in its complete isolation from the economic world and globalization and global supply chains and global financial flows, might find pumping up the China threat to be a tough sell, and that tough sell may be particularly galling for the Air Force and Navy that see their platform budgets tightened thanks to Long War dynamics that favor the Army and Marines more, but watching Krepinevich trying to sell the stealthiness of China's military rise is just sad.

No one is ignoring this build-up--not the US with its annual report nor China's neighbors, and balancing has naturally resulted in the region.  Krepinevich oversells the regional fear and overhypes the notion that, unless we start spending mucho on the USAF-USN-heavy Leviathan, that SE Asia "may have no choice but to follow Finland's Cold War example."

I mean, I'd love to read the scenario whereby China's "dazzles" a few US satellites and launches some surprise cyber attacks and blows up a couple of US warships with missiles and voila! Suddenly everybody in SE Asia is China's cowed minions willing to do whatever it says.  Oh, and the rest of the world just accepts this fait accompli, offering no response. Doesn't that fantastic logic strike you as mirror-imaging the same sort of net-centric "shock and awe" that we've never been able to pull off on anyone to any lasting effect?  So how come China, with its completely inexperienced military, is going to make that happen with such ease and such obvious and permanent gain (i.e., "finlandization)?

It's amazing to me: we supposedly learn the harsh reality of war in the 21st century in Iraq and Afghanistan (i.e., that the high-tech most certainly does not rule--much less guarantee victory), but now we're supposed to freak out and go all Cold War over China because it's able--on a zero-experience base--to do everything we weren't able to do with net-centric warfare and they'll be so good at it that we'll never see it coming and we'll lose everything before we even know what hit us.

Am I the only national-security type who finds this straight-faced juxta-positioning to be ludicrous?

If Krepinevich represents Pentagon war planning thinking, then he's demonstrating that the Defense Department is no closer to understanding globalization today than it was back in 2001.  This is classic war-within-the-context-of-war myopia.

All I can say is, thank God for Gates. Obama better do everything in his power to keep him past 2011. The President has no idea how bad the Pentagon's internal dynamics could get in his absence, or what a bulwark he is against such narrow thinking.

Yikes!