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Asia at a Crossroads: Rising Powers Contest U.S. Dominance

November 13, 2019
By Bob Herrera-Lim & Gabriel Wildau

The rise of China is upsetting the longstanding geopolitical equilibrium in East Asia. The U.S. has dominated the region militarily since World War II, while U.S. economic and diplomatic clout has allowed it to exert regional influence with carrots as well as sticks. Today, the U.S.’ position in Asia faces an unprecedented challenge. The Soviet Union strived to challenge U.S. military dominance in the region, but the Soviets had limited ability to exert economic influence. Conversely, Japan emerged as an economic rival to the U.S. in the 1980s, but Japan’s ironclad military alliance with the U.S. limited the scope of this rivalry.

China’s economy is already the world’s largest at purchasing power parity and is expected to surpass the United States at market exchange rates by the end of the next decade. China’s military spending more than doubled between 2010 and 2018, reaching 38% of U.S. levels by 2018, compared to only 18% in 2010. China has grown increasingly assertive and daring in pursuing its disputed territorial claims in the South and East China seas, especially by using its growing naval power to challenge both commercial and naval vessels from other countries that venture into disputed waters. From early in his presidency, Barack Obama indicated that a priority for his administration would be to strengthen the position of the United States in Asia. As China’s behavior grew more assertive, the Obama administration articulated what became known first as the “pivot to Asia” and later the “Asia rebalance” strategy.

During Obama’s second term, his rebalance strategy took on a sharper edge, as the administration increased deployments of advanced military hardware to the Asia Pacific, strengthened alliances with Japan, South Korea, and the Philippines, and forged closer military relations with Vietnam. The administration pursued an economic strategy, too, centered on the Trans-Pacific Partnership. The TPP was in part an effort to counter the influence of China’s Belt and Road Initiative (BRI), which aims to deepen Beijing’s economic and political relationships in Asia through investment in infrastructure like ports, railways, roads, and energy pipelines. But Obama was unable to navigate the TPP through Congress, and by the end of his administration, the economic pillar of the rebalance was in shambles.

On his first full day in office, Donald Trump signaled his determination to break with Obama by announcing U.S. withdrawal from the TPP. The Pentagon’s 2017 National Defense Strategy identifies “long-term strategic competition with China” as one of the agency’s “principal priorities,” but Trump himself rattled the bilateral security alliances that had been the cornerstone of U.S. security policy in the region for decades. He warned during the 2016 campaign that he believed allies like Japan and South Korea had taken advantage of the U.S. security guarantee and should take more responsibility for their own national defense, including possibly acquiring their own nuclear weapons.

Given the potential for a landmark shift in the balance of power in Asia, this chapter describes three possible scenarios for how the region will look in 2030: 1) China gradually supplants the U.S. as the region’s dominant power; 2) the U.S. re-commits against the Chinese challenge; and 3) an uneasy stalemate in which the U.S. maintains military superiority while China’s economic power surpasses that of the U.S.

Scenario I: China Gradually Supplants the U.S.

By the middle of the 2020s, it was apparent that the U.S. military presence in East Asia was not what it once was. While the U.S. still deployed its most advanced warships and airplanes to its bases in the region, the U.S. defense establishment had never really solved the problem of China’s anti-access / area denial strategy, which restricts the U.S.’ ability to move its assets into a combat theater and maneuver within that theater. The U.S. security guarantees to its treaty allies continued to exist on paper — although the reconciliation process on the Korean peninsula was making its alliance with South Korea increasingly irrelevant — but China’s arsenal of ballistic missiles, cruise missiles, drones, and submarines, as well as cyber and other “irregular” capabilities meant that both China and U.S. allies wondered how meaningful the security guarantees still were. In an extreme version of this scenario, Trump’s reelection in 2020 emboldens him to ignore the objections of the U.S. national security establishment and fulfill his offer to North Korean leader Kim Jong-un to withdraw U.S. troops from South Korea.

Meanwhile, China’s pursuit of disputed territorial claims in the South China Sea and East China Sea grew progressively more assertive. Vietnam, the Philippines, and Taiwan largely gave up efforts to challenge Chinese land reclamation and island-building in the Paracel and Spratly Islands. Chinese military installations on these islands serve as an effective deterrent.

Beyond the shifting military balance in the region, allies and adversaries ultimately wondered whether the U.S. still had the will to defend its Asian allies. Post-Trump U.S. presidents targeted bloated defense budgets in order to find funding for other priorities, particularly after the recession early in 2020s led to another cycle of swelling budget deficits and congressional battles over spending cuts. The polarized U.S. political system, meanwhile, made it more difficult to muster a coherent and unified response if, for example, China applied economic pressure and used cyber-attacks and other “hybrid” tactics to counter a Taiwanese independence campaign or coerce a U.S. ally into backing down in a dispute.

U.S. allies did not respond by abandoning the U.S. or jumping fully onto China’s bandwagon. Instead, while maintaining economic ties with China, they hedged against Chinese military power by bolstering their own defenses and forging the Japan-India-Australia group into the nucleus of a proto-NATO aimed at deterring Chinese adventurism in disputed areas. The most dramatic change was in Japan, where the government — building on the reforms introduced by the Abe government in the 2010s – invested in a more robust domestic arms industry and moved towards more formal alliance ties with India and Australia. Tokyo even began a serious debate about Japan’s acquiring its own nuclear deterrent, as much because of the prospect of a united, nuclear-armed Korea as because of China’s arsenal. The region grew more unstable, resembling Europe in the decades before World War I. By 2030, the region’s great powers began seeking mechanisms to contain the expensive arms race and establish communications mechanisms to prevent crises from spiraling out of control.

Meanwhile, in the economic realm, U.S. influence in the region declined even more precipitously. Trump’s withdrawal from the Trans-Pacific Partnership doomed the possibility of a U.S.-led framework for regional trade, investment, and intellectual property. China’s rival framework, the Regional Comprehensive Economic Partnership, came online in the mid-2020s with terms more favorable to China’s statist approach to economic governance. For most if not all countries in the region, exports to China far exceed those to the U.S. and Europe, due both to RECP and to the role of BRI infrastructure projects in facilitating trade. China’s dominance in regional trade gives China significant leverage, with the threat of “boycott diplomacy” making regional trading partners reluctant to challenge China on security issues.

Initially a mashup of China-sponsored or funded projects, BRI gradually evolved into a more coherent set of projects that help expand the regional reach of Chinese investment, supply chains, and technology. Building on the Asia Infrastructure Investment Bank, China established other regional institutions, while leveraging the attractiveness of China as a market for regional exporters. Beijing’s tools of regional influence increasingly resemble those that the U.S. and Japan used in the postwar era.

Improved infrastructure connectivity from BRI and increased intra-Asian trade due to more integrated Asian supplier networks that formed in response to U.S. tariffs increasingly drew South and Southeast Asian economies into China’s economic orbit. Though caution about Chinese investment persists due to concerns about Chinese “debt-trap diplomacy,” labor practices, environmental impacts, and opaque contracting procedures, Chinese investors and lenders adapt in response to these criticisms by reducing lending rates, improving anticorruption practices and ensuring better use of domestic labor.

Regional economies become even more important as suppliers of natural resource and intermediate goods to China. Similar to Japan’s role in Southeast Asia in the 1970s and 1980s, BRI’s role in improving the region’s infrastructure induced a follow-on wave of Chinese manufacturing investment to Southeast Asia, as Chinese factories relocate to these lower-cost regions. Already underway in the 2010s, the migration of low-end manufacturing to Myanmar and Cambodia accelerated. Indonesia further emerged as a destination for mid-level export processing, while Malaysia and Thailand expanded their role in producing higher-end technology and white goods.

China’s increasing influence in the region made multinational companies feel they had little choice but to increase investments in China, despite persistent complaints about lack of market access, competition with stateowned enterprises, and loss of intellectual property. Increased infrastructure connectivity between China and the rest of Asia made China irresistible as a regional trading hub for serving the region. But companies also feel increased pressure to show deference to China’s nationalist sensitivities around Taiwan and the South China Sea. This deference was aimed not only at pleasing the government but also at pleasing Chinese consumers, whose purchasing power continued to grow along with China’s economy.

Scenario II: U.S. Re-engages in Asia

By the mid-2020s, the U.S. had managed to shift the regional balance of power back in its favor. Its economy weathered the “lesser recession” relatively well, while China’s economy increasingly looked like Japan’s after its bubble burst. Chinese growth faltered due to long-festering problems with excessive debt, wasteful investment, and demographic ageing. China was still a potent military power, but the Trump administration and its successors invested in maintaining the U.S. edge in defense technology. The U.S. deployed intermediate-range ballistic missiles across the region — not without its allies having to face down political opposition, of course. And as the U.S. began to disengage from the Middle East and Europe, it was able to redirect more of its assets to Asia to reassure allies of its ability to deter China and uphold its security guarantees.

The U.S. also sought to restore its economic influence in Asia. A post- Trump president revived the TPP —or a similar initiative with a different name —enabling regional economics to diversify their trade and investment relationships and avoid excessive reliance on China. This U.S.-led regional trade bloc was based on liberal norms of economic governance, including requirements that state-owned enterprises operate on a level playing field with private groups. As a result, China faced pressure to adopt domestic economic reforms that it has long resisted, in order to gain access to favorable terms of trade that other regional countries enjoy.

As a U.S.-led alternative to BRI, the Trump administration launched the U.S. International Development  Finance Corporation, with Trump and his successors providing generous funding. This initiative proved attractive to regional partners because it avoids problems afflicting BRI. With many Southeast Asian countries under budget stress and China largely unable to effectively navigate the complexities of investment in the region, capitals from Yangon to Jakarta turned to the U.S., Japan, South Korea, and Australia for infrastructure funding and technological expertise. Stung by the uneven performance of Chinese firms and contractors, Southeast Asian companies and consumers continue to prefer Western counterparties. Concerned about Chinese spying and wary of China’s use of technology for censorship and political repression, Southeast Asian governments largely turned away from Huawei and other major Chinese technology suppliers.

Meanwhile, U.S. economic growth was relatively strong, relieving some of the political tensions of the preceding decades. U.S. leaders felt more confident in their ability to respond to challenges in Asia. The U.S. was still not able to spend as much on defense as before, leading it to rely more on burden sharing with Japan and Australia to deter China. But U.S. economic reengagement and tighter military alliances with Japan and Australia promote partial economic decoupling between these U.S. allies and China, minimizing these allies’ vulnerability to Chinese pressure. China responded by tightening its alliance with Russia in East Asia, with more encounters and standoffs between U.S. partners and Russian or Chinese armed forces in the region’s seas and skies.

As China’s growth slowed, some multinational companies decided the upside of the Chinese market no longer justified the headaches of doing business there. Few companies exited China entirely, but most tempered their ambitions and slowed the pace of new investment. Some foreign companies were scared away by Magnitsky-style sanctions that some countries placed on Chinese leaders involved in the mass internment of Uighur Muslims in western China’s Xinjiang region. Others judged that China had become mired in the “middleincome” trap and judged that the golden era of Chinese consumption growth had passed.

Scenario III: Uneasy Stalemate

This scenario, which is probably the most likely, encompasses some but not all aspects of the previous two scenarios, resulting in a regional power balance in which neither the U.S. nor China can reliably expect cooperation or fealty from other countries in the region. Most Asian countries oscillate between the U.S. and China on an issue-by-issue basis, embracing a transactional foreign policy while resisting a clear, overarching alignment with either one.

After a decade characterized by significant constraints — fiscal, demographic, and climate-related — neither of the region’s major powers was able to shift the balance of power decisively. The U.S. struggled to convince allies and adversaries that its security commitments are credible, but the U.S. still possesses the region’s strongest military. Faced with slower growth, China was unable to maintain significant increases in defense spending. Therefore, while China has become a potent rival, it is not strong enough to confidently pressure or coerce U.S. allies without fear of a damaging conflict with the U.S. Dealing with similar challenges, Japan, Australia, and South Korea found it difficult to spend more on their own militaries or to substantially de-couple from China’s economy.

India never quite panned out as an East Asian power, constrained by its growth struggles, lingering distrust of the U.S., and economic interdependence with China. India still poses a threat to China, particularly as China expands its maritime presence in the Indian Ocean, but New Delhi resists greater integration into the U.S.-led alliance system, limiting its impact on the regional balance of power.

During the 2020s, the potential for accidental conflict caused by a misunderstanding between the U.S. and Chinese navies will temporarily increase as China grows more assertive in pursuing its disputed territorial claims. But by 2030, as Beijing gradually recognizes the limits of its capabilities and reality of stalemate, Chinese leaders will temper their ambitions in pursuing their claims. A decade’s worth of experience with minor naval incidents equips both regional powers with enough experience to avoid an unintended conflict.

With no clear victor emerging from a decade of U.S.-China competition, multinational companies hedge their bets. Companies searched for a middle path between the two regional hegemons, despite efforts by the U.S. and some European governments to use controls and investment restrictions as a weapon to hinder China’s climb up the technological value chain. Most companies maintained neutrality on sensitive regional political issues, resisting efforts by both governments to force companies to choose sides. China remained an important market for many companies, but the by-now-familiar frustrations of the Chinese market also prompt companies to diversify to other Asian markets.

Domestic Factors Likely to be Decisive

In attempting to determine which of these three scenarios is emerging over the course of the 2020s, the natural tendency will be to focus on diplomatic and military maneuverings in the region. While these maneuverings certainly matter, domestic political and economic developments in the U.S. and China could be even more important. If the U.S. falls into a prolonged recession, or if the U.S. political system remains mired in gridlock, any notional commitment to strengthening U.S. influence in Asia will likely prove ineffectual. Economic stagnation or political paralysis would not only weaken the U.S.’ ability to formulate and execute an effective foreign policy, but also diminish the prestige of the U.S. economic and political model in the eyes of Asian regional countries.

If “Scenario I” is realized, it will be due at least in part to the perception in Asia that the U.S. economic and political model is no longer worth emulating, while the “China Model” appears to be producing better results. China’s shift towards a more state-led economic model following the 2008 financial crisis was due in part to a perception that the crisis exposed deep flaws in U.S.-style free-market capitalism. This perception was not limited to Beijing. For political leaders around Asia, the choice between the U.S. and Chinese systems was far less obvious, especially after Beijing used state-led economic stimulus policies to engineer a swift recovery from the crisis.

But in the last five years, the undesirable consequences of China’s state-heavy economy and authoritarian politics have increasingly emerged. Excessive debt, stagnant productivity, inefficient capital allocation, and lossmaking stateowned enterprises are among the many economic challenges that China faces in the 2020s. Politically, Xi Jinping appears to have consolidated his power and imposed unity and discipline on a Communist Party that was riven with factionalism and corruption when he took power in 2013. Yet like the early successes of China’s post-crisis stimulus, this political success may also prove temporary. Xi’s elimination of presidential term limits may usher in a decade of stability in the 2020s, but it may also lead to a messy succession crisis — a persistent feature of Chinese politics dating back to the dynastic period. The spectacle of Xi seeking to maintain himself as president for life in order to avoid placing himself at the mercy of the many political enemies he has made during his ruthless consolidation of power would dim the prestige of the “China Model” for other Asian countries.

For both the U.S. and China, then, the battle for supremacy in Asia ultimately depends as much on their ability to put their own respective houses in order as on their activities in the international arena.

The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

This article appeared in Teneo's Vision 2020 Book.
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