America Needs Economic Statecraft in Asia

November 12, 2014

Few U.S. national security officials pay much attention to the Asia-Pacific Economic Cooperation (APEC) forum or economic statecraft in general. But they should. The APEC meeting just completed in Beijing is fraught with strategic implications. In a region where economics is synonymous with security, the impact of the quarter-century-old institution to promote trade liberalization may change the course of tomorrow’s security framework.

A quarter century from now, we will know whether China genuinely wished to be a responsible stakeholder by adopting and adapting existing international institutions. While China experts argue over the degree to which Beijing is buying into the existing global system or bent on a revisionist path, U.S. officials need to realize that they are facing a “use-it-or-lose-it” crisis that has nothing to do with nuclear weapons.

Either the United States moves forward with deeper and more open trade, investment and economic development across the Asia-Pacific region, adapting existing institutions it helped to build, or those institutions will just fade away. Likewise, either the United States follows through on its initiatives like a gold-standard trade framework that would include virtually all sectors and reduce tariff and non-tariff barriers alike, or America’s ability to integrate with the century’s decisive region will be diminished. Economic statecraft is necessary to secure the foundation on which American security will be built. But it is as equally about rule-making as it is about money.

Given Beijing’s obvious interest in erecting a new set of China-led institutions and development dominated by infrastructure, the 2014 APEC meeting could well go down in history as the Construction Summit. The only question is what will be torn down to make way for the coming construction boom.

Clearly some old infrastructure definitely deserves to be torn down: take the Berlin Wall, a structure that was toppled 25 years ago, the same year that APEC was born. In January 1989, Australian Prime Minister Bob Hawke argued that Asia was becoming the center of the global economy, a trend that demanded routine, formal and high-level meetings among the regional economies. By early November, days before the Berlin Wall fell, ministers from the United States and 11 other economies met to inaugurate the new institution. Today, APEC brings together 21 economies at the leader and ministerial levels, and unlike other official forums, Taiwan has a seat at the table of this one.

Taiwan President Ma Ying-jeou was not invited to Beijing for a “summit-level” meeting with President Xi Jinping. Instead, Xi met with Vincent Siew, the “Economic Leader of Chinese Taipei.” As at the founding of APEC, Asia is always ready to talk about trade, but only rarely to speak seriously of security. Strategic issues now have their own forum, especially at the decade-old East Asia Summit, which begins today in the capital of Myanmar.

In Beijing, President Xi wanted to send off the summiteers with a clear sense of China’s emerging prominence and power. In this sense, 2014 APEC is redolent of the 2008 Olympics, which China hosted amidst a global financial crisis blamed on the United States. Xi hoped APEC discussions would help dispel the notion that China harbors aggressive designs on the region. China has thrived within the existing system, and it wants to buy into that system, or so goes a frequently echoed narrative. Perhaps, but in a different realm a pattern of maritime coercion since at least 2009 has reinforced another view in many capitals across the Indo-Pacific region; in that alternative view, there is a yawning gap between Xi’s stated aims and China’s empirical actions.

The economic focus of APEC allows China to dwell on its most compelling attribute: money. That is why Xi initiated APEC with a speech on Sunday touting the linear projection that China will invest some $1.25 trillion over the next decade overseas, and wants to invest $40 billion in re-establishing the old Silk Road while also building a new Maritime Silk Road. These sums are in addition to China’s proposal for a new $50 billion Asia Infrastructure Investment Bank. As for the strings attached and standards to be applied, well summits simply do not allow for scrutinizing the fine print governing the global economy.

APEC atmospherics reinforced the immutable rise of China. In this respect, some of China’s words should be taken at face value.  Certainly President Xi’s foreign policy aims to safeguard China’s three core national interests: the Communist Party of China and its rule, territorial sovereignty and economic development.  What those words downplay is the assertive manner in which a more powerful and nationalistic China is pursuing those goals.  As President Xi made clear in a speech in October 2013, for instance, he is dedicated to helping China realize its “centenary goals” of wealth and power by 2020 and 2050, respectively.  Specifically, he is dedicated to doubling Gross Domestic Product and per capita income by the 2021 centenary of the Communist Party of China and achieving “the great rejuvenation of the Chinese nation” by the centenary of the founding of the People’s Republic of China in 1949.

Less openly expressed, however, are the evolving ambitions and intentions of Xi and other Chinese leaders with respect to military power.  Although Xi claims that the “Chinese people don’t have the gene for invasion or hegemony in their blood,” China’s future intentions may be altered by growing capabilities. Certainly others outside China often interpret China’s actions in a less charitable and more menacing light. First, they are often seen as China’s attempt to achieve the near-term ability to dominate regionally and ensuring China can deny and counter regional interventions by 2020.  This includes but is not limited to an ability to dissuade and deter the United States from supporting Taiwan in a cross-strait crisis.  Under Xi’s leadership, China is seeking to achieve this objective by harnessing all levers of power–improving anti-access and area-denial capabilities, combined with propaganda, legal argumentation and economic instruments. Secondly, China’s ambitions are also often perceived in the region as an effort to achieve hegemonic status in the Asia-Pacific by the middle of the century.  This goal is far more vague and involves the equally amorphous doctrine of achieving “the Chinese dream.”

Trade and construction are the most tangible aspects of China’s vision. Yet even these pursuits have a competitive side. The trade architecture of Asia is complex and contentious. The arguments and alternative frameworks are well known throughout the region, although far less understood by most Americans.

China managed to conclude the APEC summit with a general commitment to take further steps towards realizing a Free Trade Area of the Asia-Pacific. China champions this framework, along with the Association of Southeast Asian Nations’ proposal for a Regional Comprehensive Economic Partnership, because both of these focus on trade liberalization at rather than beyond the border (i.e., lowering tariffs).

The United States, however, preferred to orchestrate momentum behind the idea of a Trans-Pacific Partnership (TPP). America has thrown its oar in the water with 11 other nations attempting to set up this ambitious free trade framework, which would establish higher trade standards than agreed upon by the World Trade Organization. After all, trade is not free when countries can exempt certain sectors, when state-owned enterprises do not operate with the same resources as private businesses and when intellectual property rights may be summarily ignored.

As the astute War on the Rocks reader will know, trade is intertwined with grand strategy. U.S. architects of postwar reconstruction and the postwar economic order—including General George C. Marshall and Dean Acheson—understood the strategic importance of a revived Europe and a rules-based system built around the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade (forerunner of the World Trade Organization).

Where are George Marshall and Dean Acheson when we need them? Today, we need to ensure vibrant and growing markets and anchor the American economy to the dynamic Asian economies of tomorrow.

Security is rooted in trade. This is particularly true in the Asia-Pacific region, the locus of global economic power in the twenty-first century. Asia, as former Singapore leader Lew Kwan Yew once said, is recovering its place in the world, and a policy of more active engagement must be the direction of U.S. policy.

If TPP fails, U.S. economic interests in Asia will atrophy, U.S. security commitments will be rendered less credible and the United States will be marginalized. Some may find that acceptable, but if so they should think hard about how much the American people will lose in terms of benefiting from the most powerful region of the world. The most important decisions would be made not by agreed upon rules but by the Chinese. Either the United States needs to find a way to establish high trade standards across the Pacific, or another power will fill the vacuum with its own standards.

Strategy in this sense is inseparable from the question of who makes the rules. The United States cannot impose the rules. If China seeks to impose rules by force, it will backfire. So we are competing in trying to market different approaches to the regional and global economy. The United States has the better argument, but China has more disposable income; and China’s top-down system can deliver more efficiently than a fractious democracy.

Despite the competitive aspect of trade architecture, trade is also very much a cooperative venture. The ultimate American goal is to bring China into an open, inclusive, rules-based regime. To accomplish that, the United States must try to connect the various overlapping institutions, both extant and incipient. Significantly, China rebuffed an early invitation to participate in TPP. And more work is required on an even a bilateral investment treaty that both sides desire. Even so, the door will be left open for China. In this regard, China-U.S. progress at APEC on expanding the WTO 1997 Information Technology Agreement, to include advanced semiconductors, medical devices and other modern electronic technology, sent a clear signal that Washington wants Beijing to be a responsible stakeholder within the global system. But while the United States works on that long-term project, first it must finalize the Trans-Pacific Partnership as soon as possible.

Russia and China have a different model of rule-making. The announcement on the margins of APEC of a preliminary gas deal, the second mega Sino-Russian energy deal in six months, is a blatant attempt to show how the two major powers can construct their own regime. As Gilbert Rozman has argued, their marriage of convenience is turning into a long-term relationship based on a common interest in eroding Western and U.S.-led rules and the international system it helped to uphold. The United States is irreplaceable for such a rules-based, inclusive system, but it is not irreplaceable altogether. An “Asia for Asians” system, however coercive and similar to the historic Middle Kingdom’s tributary system, is not unfathomable, especially if there is no alternative.

If TPP succeeds, in 2025 or 2050, the inclusive, rules-based system of trade will ensure greater U.S. opportunity and reduce regional risk. Moreover, it will lock in U.S. engagement with competitive societies, technological research and development and preserve a degree of interdependence likely to push back on unilateral changes through force or coercion. To reiterate, TPP is as or more important for the precedents and links it establishes as it is for the commercial opportunities it promises.

Trade with wealthy and rising economies is one matter, but economic ties with the developing and under-developed world raises additional elements of regional competition. Thus, dueling development architecture visions could also be lurking in the background of the APEC forum. Xi’s opening pledge to pump more than a trillion dollars offshore over the next decade, along with a new Asian development bank and a new Silk Road fund, suggested that China was ready to dwarf Western trade and development with less prosperous economies. After all, the Asia-Pacific region remains home to two-thirds of the world’s poor. And now the leader of China has promised to lead development across Eurasia, from East Asia to the Mediterranean and from the Pacific to the Indian Oceans. China is poised to develop new core national interests and influence.

While much of this development can be a force for good, competition would be better. There should be dueling development strategies as well as trade strategies. The first Quadrennial Diplomacy and Development Review (QDDR) in 2010 (entitled Leading Through Civilian Power) was a bit of a bust. Even ideas that were wholly implemented were hardly transformational, and few could seriously contend that U.S. foreign assistance programs are game-changers that are strategically bolstering U.S. diplomacy today.

If America can no longer think big and mean it, perhaps it can be more effective at the game of small ball. For instance, without attempting to match China’s surplus reserves, the United States can tap existing institutions and mobilize a wealth of knowledge when it comes to smart, sustainable development.

Let me cite just a single example of what might be done to revitalize our strategic use of Official Development Assistance. We should start in Asia with a complete makeover of what has been passed off as America’s leading regional development initiative: the Lower Mekong Initiative. This well-meaning initiative still defies clear explanation and lacks strategic design or serious resourcing. A far better idea has been suggested by former State Department employee David Roberts, who wrote earlier this year in The New York Times about how the United States could champion a serious and innovative approach to the sustainable development of the Lower Mekong region. It could be financed at relatively little cost through a global fund within the Asian Development Bank (ADB). Instead of environmentally damaging large-dam projects that have become the hallmark of Chinese engineering, the use of newer technologies—including micro hydropower generators—would be better for truly sustainable development. Secretary of State John Kerry, having served his nation once upon a time on the Mekong River, would be a logical leader for such an effort, and Japan would be a logical co-leader. While showing good development at lower cost, the countries would also rejuvenate existing institutions and help mainland Southeast Asia not be dominated by an exclusive dependency on China. Meanwhile, countries such as Vietnam would benefit downstream. Some will dismiss this scheme as a zero-sum gambit, but it is really a matter of standing up for healthy competition based on better ideas.

Of course, after this week’s summit in Beijing, APEC may never be the same. For on its margins the Chinese leadership also orchestrated what it hoped would be round two of a new type of great power relationship. Specifically, the bilateral summit with President Barack Obama was meant to replicate last year’s “informal” summit in Sunnylands, California. Far from an emerging G-2 meeting, however, the summit was neither that informal nor that groundbreaking. Then as now, the White House would settle for finding a few concrete areas of cooperation and a bit more equilibrium in a multifaceted relationship that has soured of late. Confidence-building measures to avoid dangerous military incidents is useful if non-binding. The main deliverable was in advancing a new agreement to expand the Information Technology Agreement, the first major tariff-reducing accord within the WTO framework in 17 years. That kind of cooperation may not produce a new type of major power relations, but it does whet the appetite for greater U.S.-China economic and trade cooperation.

In APEC, as at the East Asia Summit in Myanmar and the G-20 summit to follow in Australia, the President entered the fray in the wake of a political setback at home. Being perceived as a lame duck may not enhance one’s clout abroad, but facing no more elections may also have a liberating side, too. The President has no more elections and can operate internationally more independently than he can when it comes to even more contentious domestic issues.

If President Obama can return to the United States after this series of regional summits with a trade framework deal in hand, there is no reason he cannot persuade a Republican-led Congress to go along with a resolute and focused political push. Both the TPP and its essential corresponding legislation known as Trade Promotion Authority need to be enacted before next summer, when the posture for the 2016 election will intensify. It would be a mistake to ignore the obstacles, but GOP leadership in Congress may create an ideal window of opportunity for a major bipartisan deal on trade.

President Obama could accompany this historic trade framework with a creative development initiative, such as a region-wide, ADB-led effort to create sustainable economic, environmental and energy development of the Lower Mekong region. These initiatives would go a long way to putting some balance in President Obama’s policy of rebalance to Asia. It would simultaneously signal to the region that there is an alternative to China’s mercantilist and coercive approaches to trade and development.

Ideally, China should eventually become a full-fledged partner in the same frameworks. But in the absence of agreement and in the face of China’s attempts to create its own order, the United States must recognize the strategic importance of trade and development.

 

Dr. Patrick M. Cronin is Senior Advisor and Senior Director of the Asia-Pacific Security Program at the bipartisan Center for a New American Security.