Inside Story

East Asia’s lost opportunity

The region has yet to recognise its potential role in global governance, writes Ross Buckley. To do that, China needs to change tack

Ross Buckley 6 September 2012 2489 words

SIXTY years ago, it might have made some sense for East Asia to play only a minor role in global economic and financial governance. Today, though, it doesn’t. East Asia – China, Japan, Korea and the ten ASEAN countries – produces 26.5 per cent of global GDP, more than the United States and as much as the European Union. China is the second largest economy in the world and holds about 30 per cent of worldwide official foreign currency reserves; Japan holds about another 15 per cent. For decades, China and Japan have been the principal buyers of US Treasury bonds; the two countries have saved and lent so that Americans can borrow and spend.

Traditionally, global economic governance was the preserve of the G7 nations. But during the global financial crisis it quickly became apparent that this select group – France, West Germany, Italy, Japan, United Kingdom, Canada and the United States – didn’t have the moral authority to craft a credible response to the crisis. So the G7 passed on its role on to the G20, a meeting of finance ministers that was promptly upgraded to a heads of government meeting.

The G20 is the only institution of global economic or financial governance at which East Asia’s representation roughly equals its contribution to global GDP. (For reasons of history, the region is very poorly represented in the governance of the International Monetary Fund, the Bank for International Settlements and the Financial Stability Board.) Yet the region has had little impact at the G20 because it doesn’t speak with one voice. Typically, Japan and Korea will oppose China’s initiatives, and vice versa. If East Asia is going to be able to exercise influence – the influence it should have given its foreign exchange reserves and its contribution to global GDP growth – then China, Japan and Korea need to cooperate and essentially speak with one voice.

The three countries’ economies have much in common. Their public finances are healthy, their banking systems and corporate balance sheets less stressed than most Western countries, and their huge foreign exchange reserves serve as potent insurance against external shocks. Their domestic economic policy settings are strongly pro-business, their social safety nets relatively meagre, and their policies generally favour domestic businesses over consumers through a mix of low interest rates and high tariffs. Although all three nations have relied on export-led growth, regional trade has been growing rapidly and is at an all-time high. And they share a common perspective on the appropriate role of governments in directing economic activities: Japan and Korea will say they follow a Western model, and China will say it is busy crafting an alternative development model, but what unites these countries on economic issues is far more than what divides them.

This relative economic strength and stability should give the region considerable economic clout in G20 deliberations. What is stopping that from happening is concern about security. Both Korea and Japan are worried by China’s military rise and its increasing bellicosity, and so they rarely agree with, or support, China in the G20.

FOR twenty years China’s foreign relations policies were, in the main, a model of the subtle but effective pursuit of national self-interest. Teaching studets about the region, I would contrast how Japan and China used aid funds to secure influence. Japan was heavily outspending China on regional aid but achieving far less bang for their yen. It funded worthy projects that gave its neighbours what Japan believed they needed, and what they often did need. China, on the other hand, gave what recipient governments wanted.

It was as if Japan was the parent who knew best and China the grandparent who bought soft toys and ice cream. Japan behaved like a stern parent. As the sole “developed” nation in East Asia, it acted as if it had earned the right to solve other nations’ problems. China behaved like a good friend who listens first, and then helps. Unsurprisingly, China won friends and influenced nations, whereas Japan spent a lot of money and did a lot of good, with not much gain for itself.

In those years there were tensions that diminished other nations’ trust in China: its “integration” of Tibet and desire to do the same to Taiwan, its unsettled land boundary with India. But it is fair to say that China’s star was in the ascendant as a potential regional leader. All this has started to change in the past few years with the rise of Chinese bellicosity.

Today we have China pushing its claim to the Spratly Islands in the South China Sea vigorously against the Philippines, Vietnam, Malaysia, Taiwan, Brunei – all of whom maintain claims to at least some of the islands. We have China establishing a military garrison in mid 2012 on the Paracel Islands, which are claimed by Vietnam, in what was described by one of Australia’s most perspicacious commentators as “an extraordinary act of provocation.” We have similar disputes over the Daioyu Islands, with Japan and China sending its fishing vessels into waters in the East China Sea claimed by Japan.

A quick look at a map shows the validity of the claim by the Philippines’s, and perhaps Vietnam’s, claim to the Spratlys and the vast oil and gas reserves beneath them. Any map also shows the fatuousness of China’s claim to the Spratlys, which is based entirely on history because geography cannot support it. Yet in July 2012 China resolved to garrison troops on one of the islands, and appointed forty-five legislators to govern them.

Formerly China would have sought oil and gas exploration rights over the Spratlys by offering the Philippines and Vietnam production-sharing agreements plus large amounts of aid and large, cheap loans. Today China bases its claims not on persuasion and largesse but on military might. China military strength will prevail, but at what cost to its longer term ambitions to be a genuine regional and global leader, and to begin shaping the global system so that it serves China’s, and East Asia’s, ends? Likewise for the Daioyu Islands, where China also relies on historical claims, even though the islands have been under Japanese control since 1895.

George W. Bush’s administration fixated on the Middle East and ignored East Asia. On coming to power in 2009 the Obama administration sought to rectify this oversight. But the conventional wisdom was that America had become so resented in the region that reclaiming its former influence would probably be impossible.

Yet, of late, China’s aggressive postures have so scared regional nations that they have been lining up to ask America to re-engage. So we see the Philippines asking America to re-open Clark Air Base and Subic Bay, military bases the Filipinos ordered closed over twenty years ago. We see Washington announcing it will move the bulk of its navy to the Pacific so that 60 per cent of its fleet, including six aircraft carrier groups, will be based in the Pacific by 2020. And we see Indonesia taking the unprecedented step of sending its newest Sukhoi fighter aircraft offshore for the first time ever – to Australia for joint training exercises in July this year. America has gone from being the resented imperialist to every regional nation’s new best friend.

Australia has recent first-hand experience of this new Chinese approach to diplomacy. In June 2012, a former senior Chinese army officer said that “Australia has to find a godfather sooner or later. Australia always has to depend on somebody else, whether it is to be the ‘son’ of the US or ‘son’ of China.” This far from random comment coincided with the Chinese foreign minister’s telling Bob Carr, our foreign minister, that its dependence on the United States for security was a relic of the Cold War.

International messages are usually couched in words of exquisite politeness. Yet China’s two messages to Australia had the subtlety of a school yard bully. Words like “godfather” convey a palpable sense of threat.

How can China imagine that threatening Australia will cause it to trust them in security matters? How can threats to Australia, and threats to its neighbours, do anything but cause these nations to cleave ever closer to the United States?

The answer lies not in what China expects the results of its actions to be, but in what is motivating its actions. In the decades when China’s foreign relations policies were a model of the subtle but effective pursuit of national self-interest, China was seeking regional influence and supporters in global fora. It was not, however, dealing with issues of territoriality. While the idea of Asia or East Asia is not particularly strong, the idea of China is both powerful and resonant for Chinese people. And so, once territory comes into the equation, the idea of China becomes very important. China becomes aggressive and assertive in ways that do not serve its wider interests.

What is at stake for China is not just some small collection of islands, even with massive oil and gas reserves. What is at stake is part of the historical idea of China. It is the idea of China as the central kingdom, China as mother of the world’s most populous people, China as the “moral guardian,” in Confucian terms, of her people. This is part of the reason why China treats as its nationals people who were born there but have migrated here, renounced their Chinese citizenship and assumed Australian citizenship. It is part of the reason why, when China first opened up to foreign investors, the investment that was most welcomed by provincial and national governments, and was most likely to succeed, was investment by overseas Chinese. It is an idea at once larger, more influential and more powerful than the ideas that underpin most nations. Ironically, perhaps the only other nation in the world that is as defined and influenced by its founding ideas is the other member of the G2, the United States.

The power and resonance of this idea of China is why the nation is behaving so counter-productively over the territorial disputes in the South China and East China seas. And any resolution of these conflicts is going to have to accommodate the present-day reality and influence of this idea. China will need to be assisted to see its interests through a lens that is larger than one merely of sovereignty and preserving the idea of China. It would be well served by being helped to see clearly its pivotal role in a world of two superpowers, a role that is so much bigger, and has more far-reaching consequences for China and others, than the historical idea of China and its geographical ambit.

China is the regional superpower. It now has real muscles to flex. Perhaps doing so provides some sort of steroidal satisfaction or perhaps all this bellicosity is for domestic consumption. In a time of transition in the leadership in Beijing, it may be, in the words of Kishore Mahbubani, the dean of the Lee Kuan Yew School of Public Policy at National University of Singapore, that the leaders in Beijing, “have to be seen domestically as strong and tough in the next few months.” The problem with this interpretation is that the aggressive posturing in the South China and East China Seas was occurring well before 2012 (although it has ramped up during 2012). And there is a clear pattern here – when China is seeking to gain access to resources or influence with other nations it behaves adroitly and subtly, but when the issue at stake touches on China’s territorial sovereignty the subtlety gives way entirely to bellicosity. This regional aggression is distinctly at the expense of China’s national interests. China’s former course of building its soft power and trustworthiness was far better calculated to advance its own interests. Its current behavior has seen American influence rise in the region far more than anyone believed possible three years ago.

FOR now, China’s new aggressive posture on security issues effectively derails any possibility of a unified voice on economic governance issues. By driving Japan and Korea ever more strongly under the American military umbrella, China inevitably gives the United States the power to shape the Japanese and Korean positions on economic issues to an extent that would not otherwise be possible, and therefore derails opportunities for a cohesive voice in the G20.

This is to everybody’s detriment. The G20 would be a more effective institution of global economic governance if it received strong and unified policy input from East Asia. After all, the region that is consistently posting the highest growth rates in the world undoubtedly has useful perspectives to contribute to global economic deliberations and deserves to be listened to carefully. The capacity to bring this about lies in China’s hands, but it is going to require years of careful, considerate behaviour as China convinces its East Asian neighbours it has the region’s best interests at heart and can be trusted to deliver prosperity and security to the region.

For as long as China pursues power through threats and military intimidation security tensions will irreparably undermine any convergence of the region’s economic voice. China is thus paying a huge price in lost influence for taking its utterly uncompromising stance on territorial issues. This is a real loss for the G20, the agenda of which is impoverished by the lack of a real East Asian contribution. It is a real loss for the region, which is destabilised and spends much more than it would otherwise need to do on military expenditures. It is tragedy for China, Japan and Korea, which spend their energy squabbling among themselves rather than shaping agendas in ways that would serve them and the region.

Since opening up to foreign investment under the leadership of Deng Xiaoping, China’s strategies have been characterised by subtle, astute, long-term thinking – three elements missing from its current approach. A return by China to its former policies of seeking regional leadership and influence through soft power and the strategic use of aid funds and largesse will probably require China to share the oil and gas resources in the South China and East China Seas. But the cost to China of sharing these resources would be far less than the cost to China of the loss of the opportunity to shape the global economic and regulatory agenda.

Ross Buckley is Professor of International Finance Law at the University of New South Wales.

Photo: zennie/ iStockphoto