Dynamics of the Asia-Pacific and Corresponding Strategies

By Zhang Yunling

The Asia-Pacific is the most economically vibrant region and weighs heavily in the world economy. It also sees the convergence of interests and build-up of tensions between China and the United States. Situation in the Asia-Pacific is the focus of all countries. Hence, a full grasp of its status quo is of great importance.

I. New pattern of the Asia-Pacific economy

The Asia-Pacific economy features a macro pattern of consumption by North America and production by East Asia wherein the expansion of the latter hinges heavily on the growth of the former, which results in a “precarious balance”. Under this pattern, the US shifts its manufacturing to East Asia, which leads to the predominance of the service industry of the U.S. economy with the dwindling of the manufacturing industry at about 10% of its economy. East Asia is exactly the opposite. As it absorbs massive American investment and other investment in the industrial chain, manufacturing now becomes its dominant industry while the share of the service industry decreases. However, despite such a macro pattern, capital flow in the Asia-Pacific is reversed, i.e., East Asia accumulates a prodigious sum of dollars which flows to North America in the form of indirect investment, making the US the borrower and East Asia the investor. Henceforth, the direct investment needed by East Asia flows again out of the US, which results in yet another “precarious balance”.
The subprime mortgage crisis in 2008 has broken these two kinds of “precarious balance” and given rise to the structural separation of consumption and manufacturing as well as the disruption of the capital backflow chain. First, due to the credit crisis, consumption in the US shrank instead of expanding, dealing a blow to manufacturing in East Asia which, short of external support, found no impetus to expand. That explains why after the 2008 financial crisis, the bulk of manufacturers had not imagined their post-crisis adjustment would take so long. It has been eight years now since the outbreak of the crisis, yet no one knows how long it will still take. Why is it so sluggish? One critical reason is that the new balance is yet to take shape. So, is a new balance possible in the future? And with no clean direction in its structure what will it be based on?

First, with regard to the reestablishment of balance, is there any need for internal restructuring so as to seek new breakthroughs? For instance, the US is painstakingly rebuilding its manufacturing. There are signs that the US is making an effort to revive manufacturing and increase its share in the national economy by rolling out incentive measures. This entails tremendous difficulties, but the US appears determined. What should be the priority of this restructuring by the U.S. side? My observation is that its strength probably lies in the innovation industry rather than traditional ones. Yet, it remains to be seen. As for East Asia, it will not return to the path of self-sustaining production; instead, it should participate in the division of labor. It also needs to increase its consumption capacity and the share of the service industry. Going forward, East Asia could further restructure its internal consumption, while in the meantime, retaining its strength in manufacturing. Those East Asian countries, including Japan, the ROK, China and Malaysia need to continue to bolster its manufacturing. The growth of consumption capacity, coupled with economic restructuring and the development of service industry, will inject fresh vitality into the growth of East Asia. But it requires further investigation as to the drive for such restructuring and its pathway. 

Second, how to establish a new growth mechanism and where is it to be found? I believe that East Asia holds the potential for Asia-Pacific development. Our new approach now is that potential growth of East Asia mainly lies in improving the overall development environment of developing countries in this region. The “Belt and Road” Initiatives aim at promoting a new type of development cooperation by focusing on tapping the potential of all-round economic development through improving the environment for development. The reality is that the economy of Southeast Asian countries along the “Belt and Road” is externally driven whose internal infrastructure is weak and overall development potential is untapped. ASEAN now advocates connectivity. Yet, progress is quite slow due to capital shortage. The ASEAN FTA is now in place with a basically zero tariff for intra-regional trade, but still, it is difficult to boost internal trade and investment. Why? One important reason is the poor overall development environment, in particular, its deficient infrastructure which makes external trade easy but internal trade difficult. By focusing on infrastructure, the “Belt and Road” Initiatives will help improve infrastructure in Southeast Asia to better bring out its internal development potential. Several years ago, I proposed making efforts both in opening-up and in cooperation and unleashing the endogenous economic impetus through cooperation and improvement of overall development environment. The improvement of connectivity via the “Belt and Road” Initiatives will boost the development potential of East Asia, create new growth areas and drive the entire economic restructuring of the Asia-Pacific. This is the master approach.

Third, how to revitalize East Asia? The manufacturing center of East Asia used to be China. Now, through adjustment and expansion, Vietnam has taken over, and in the future, India is likely to join the rank of East Asian countries. Of course, this is controversial in that the Indian economy is dominated by the service industry and its manufacturing is weak. However, India is now charting a blueprint for manufacturing development. Prime Minister Modi made considerable adjustment to the previous development plan after his inauguration. So in East Asia, China’s potential remains and new manufacturing clusters like Vietnam and India are rising. A new manufacturing center will probably emerge in East Asia which not only belongs to the region but also to the world.
Fourth, how to propel Asia-Pacific cooperation? The close economic ties in this region call for a grand framework for opening-up and cooperation. In 1989, APEC was established by Asia-Pacific countries with the goal of creating a single, highly integrated, open and cooperative regional market and economy. Yet, due to the 1997 financial crisis and other reasons, some digression has occurred and APEC has lost its clout in Asia-Pacific integration. In 2010, the Free Trade Area of the Asia-Pacific (FTAAP) was moved forward thanks to a joint statement by its leaders. In 2014, China launched the FTAAP into track through the APEC meeting in Beijing. With strategic studies led by China and the US, a strategic report was completed in 2016 and leaders agreed to continue the development of the FTAAP. But in a practical light, this will go a long way, as Brexit has sparked reflection on regional cooperation. Past regional cooperation usually started from the FTA, which would be upgraded step by step to a common market and finally a community. This has become a fixed pathway from a low to a high status. But now, the applicability of this pathway poses a question. Situation in East Asia is fairly complicated, and it is quite difficult to establish an integral regional organization. In the heyday of East Asian cooperation, some hoped that the East Asia Summit mechanism would replace the “ASEAN+” dialogue mechanism, yet this proposal failed. Others advocated a single monetary system in East Asia which was actively supported by Japan, but this proposal again did not work out. Probably, there will never be a single monetary system or an integral organization for regional cooperation in East Asia. East Asia needs cooperation, but cooperation comes in various forms. ASEAN proves a success, which pools ten countries together to form a community. Yet, it is hard to extend ASEAN to the entire East Asia. Given the new context, the issue of regional cooperation requires further consideration. The high-standard Trans-Pacific Partnership (TPP) led by the US with the exclusion of China will not solve the problems of the US, rather, it will lead to a divided Asia-Pacific. An Asia-Pacific dominated by the TPP is not the way out. As TPP members vary markedly in economic development level, their agreement will fall short of the standards set by the US while too much concession will only meet objection from interest groups in the US. In the US general election, the TPP was opposed by both the Democratic candidate Hilary Clinton and the Republican candidate Donald Trump. And now, President-elect Trump declared that the US would exit the TPP and turn to bilateral negotiation.

The Regional Comprehensive Economic Partnership (RCEP) now under negotiation by 16 East Asian countries with ASEAN at its core does not include the US. If the cooperation model is sound, it is bound to work out. The RCEP has its own model tailored to the economic structure and future development of East Asia. The RCEP should not be modeled after the TPP. Former East Asian participants to the TPP like Japan, Singapore, Australia and New Zealand all hope that the RCEP can borrow as much as possible from the TPP. Now, as the TPP breaks down, the burden on the RCEP is relieved and an architecture fit for East Asia could be pursued. The RCEP is not supposed to provide a package solution; instead, it will only move forward step by step.

My original design for the Asia-Pacific, ideally, is to either combine these two approaches or give a direct boost to the FTAAP, but either way proves difficult. While the RCEP is still under negotiation, President Trump orders the US exit Pacific cooperation. Currently speaking, the US will not be interested in FTAAP negotiation. So, how to further promote the development of Asia-Pacific cooperation? It merits further study.

II. New balance of power in the Asia-Pacific

The shift of balance of power in the Asia-Pacific is worth our attention, because its influence, both economic and political, is significant. The most prominent feature of this shift is the rise of China’s overall strength driven by its augmenting economic power. While China’s economy rises to the second place in the world, it also becomes the major driving force of Asia-Pacific economy. China contributes a much larger proportion to both regional and global economy than the US, making itself a major locomotive of Asia-Pacific and global economic growth. In particular, the improvement of China’s overall strength has exerted tremendous influence on the relations between Asia-Pacific countries. Overall strength is a meaningful factor in inter-state relations. As major strength of a country is mainly reflected in aggregate indicators, even if China’s per capita GDP remains in the world’s midstream after 2050, its overall strength will still rank among the top. Aggregate indicators represent a country’s ability of mobilization. That is why the US pays so much attention to the rapid increase of China’s overall strength.

The Asia-Pacific used to undergo major transformation in the balance of power. Japan was once the second largest economy in the world, yet its overall strength has not since risen as rapidly as China. Japan is an “incomplete country”. It relies on its alliance with the US without independent security building capacity of its own, so its overall strength fails to increase. The rise of Japan was mainly an economic one, which explains the then serious trade friction between Japan and the US. China differs from Japan in terms of its rise in overall strength, so friction between China and the US will not only occur in economy and trade, but also in security.
Predicted influence is another factor in the shift of power. Almost all the current predictions agree that China will become the world’s largest economy by 2050. Once accepted, these predictions will probably have an impact and countries will prepare themselves for this trend. Martin Jacques once wrote a book called When China Rules the World, and the prediction he made has had a considerable influence on the Asia-Pacific. That is why though China does not accept the notion of “G2”, the Asia-Pacific has become a de-facto arena for competition between China and the US. Present views hold that China lags far behind the US, but people still believe this prediction. When it comes to analysis of the balance of power and decision-making, this prediction can be very influential. In addition, as a latecomer, China is considered an all-round blow and challenge to US hegemony. It is particularly awe-inspiring given the fact that China was once a strong power which later declined and now rises again. And contrary to the general belief that a reemerging country tends to reconstruct itself on the new starting point, China, a former world power, will probably reclaim all it has lost. These two factors combined further complicate prediction about China and give rise to many present tensions.
Though China rises within the current international and regional system, the impact of this rise is multi-faceted. Economically, China should enhance its competitiveness. Rejuvenation means restoring glory and reclaiming what is lost. The “Belt and Road” Initiatives are about promoting a new type of development cooperation, but reference to the silk road denotes in itself recollection of the past. As China used to be a world power, this recollection may also arouse concern in the sense that China might reestablish its dominance. In security aspects, the US has been dominating world security ever since the Cold War, but this should not be the way into the future. China proposes the building of a new type of major-country relationship and a fairer and more equitable order, which causes anxiety on the part of the US. China opposes hegemony and pronounces that it will never seek hegemony, but how will China convince the world that the new system it proposes is truly equitable, cooperative and peaceful? Many countries, large and small, are perturbed by China’s rise and hence huddle together to contain China. A number of countries straddle across two boats and try to strike a balance between various interests. Therefore, relationships and cooperation in this region are confronted with complicated challenges from the rise of China and the strategic reconfiguration of the US.

III. New features of hot-spot issues in the Asia-Pacific
Hot-spot issues come in the way during the shift of power and confuse the larger picture. There were hot-spot issues in the past, but not as hot as they are now. Issues concerning Northeast Asia and the Korean Peninsula seem to have backtracked to confrontation. The dominant trend in Northeast Asia had long been consultation and cooperation. But with the return of the US to Asia, nuclear tests of the DPRK and the launch of THAAD by the ROK, cooperation has given way to adversary and confrontation. Will the hot-spot issues cool down? Will the escalation of confrontation slow down or intensify? These are worrying. The Korean Peninsula is still beset with crises. Instead of making concessions, stakeholders see tensions escalate: North-South confrontation is locked in stalemate and major countries are involved without any consensus reached. It waits to be seen whether there will be change in the US policy after the general election as well as in the situation of the ROK which is experiencing political turmoil. However, there might be one consensus, that is, war is too dangerous and there will be no absolute victor. This may be a red line that will contain the escalation of confrontation. Northeast Asian countries used to share the positive outcomes of the Six-party Talks, but they seem to be returning to the old path now. In this light, confrontation will not be cooled down for the time being, nor will dialogue or cooperation be launched. And it remains to be observed as to whether and when consultation and dialogue will be resumed. In this context, China should play a great role by putting forward influential strategies. And it merits further study as to what choice China should make and how big a role it will play.

Tensions grow up in the South China Sea as a result of the unilateral lawsuit brought up by the Philippines for unilateral arbitration and greater interference from the US. Given the complicated situation, how is this issue to be resolved and what is the way out? From my point of view, it would be better to observe the situation with a sober mind and wait for the opportune time instead of being anxious and agitated. Settlement of territorial dispute is the most difficult and also time-consuming, so waiting in patience for changes might be a wise strategy. In my view, when conflicts escalate, “public goods” should be promoted. As public goods are complicated both in concept and practice, the key lies in putting forth notions and taking actions that are acceptable to all. For instance, China used to propose “shelving differences and seeking common development under the pretext of acknowledging China’s sovereignty over the disputed area”, which means seeking peace and cooperation while upholding China’s sovereignty. Though the outcome of common development is not that satisfactory, it has nonetheless eased the situation, raised consciousness of cooperation and propelled actions. Are the public goods to be provided by one party or by all? What are these public goods? In particular, how will China draw up its strategy? These questions call for more study. With the political developments in the Philippines, situation in the Huangyan Island changes accordingly from confrontation to cooperation, which is to be welcomed. Some scholars propose the concept of shared sovereignty for the settlement of disputes over the territorial land and sea as well as special economic zones in the South China Sea. This concept is hard to accept, for example, when it comes to sharing sovereignty over the Huangyan Island by China and the Philippines, both countries will find it hard to accept. The Philippines proposes that the two sides put aside their differences first and change the disputed sea area into a shared fishing zone and the lagoon into a protected zone. This might be a good approach which goes one step further towards shelving differences.

As new developments occur in the South China Sea, China is also changing its strategy. Its capability to control this area is growing ever stronger. Yet when other forces are also meddling, the South China Sea becomes a wrestling ground of different forces in this region. The essence of the South China Sea issue is overall stability, so China needs to play the card of development and cooperation in order to seek the greatest common divisor. The US way of flaunting military power is no solution.

The East China Sea issue is also heating up. Its crux is the change in the balance of power between China and Japan. Since its emergence in the modern time, Japan has been exercising control over the East China Sea. After its defeat in the Second World War, it became a close ally of the US, and the Diaoyu Island became an issue in this context. Now, China’s overall strength has grown. In 2010, its GDP overtook that of Japan and now more than doubles Japan’s GDP. Competition between the two countries is about interests and it is likely to last for long. Japan is renewing itself to react to China’s rise. Under this scenario, it is vital to stabilize China-Japan relations. In the meanwhile, dispute over the East China Sea is not only between China and Japan, but also involves the US which seeks to establish order in this region. Transformation of order takes time, and the ideal status is smooth progression which requires both power and time.
The rejuvenation of the Chinese nation is our major concern. It not only rests on the improvement of China’s own strength and capabilities, but also hinges on how well China manages its external environment. The Asia-Pacific is and will continue experiencing major changes, among which China itself is becoming an ever more critical variable. This is the important bedrock for assessment the development of the Asia-Pacific. As research fellows, we need to adopt new thinking, perspectives and methods in our observation and analysis.

(Transcription by Sun Xiqin)

* This article is based on a keynote speech by Research Fellow Zhang Yunling at the 2016 annual meeting of the China Society of Asia-Pacific.
Supplements and revision were made by the author upon publication.

Zhang Yunling is Member of the Presidium of Academic Divisions and Director of the
Academic Division of International Studies of the Chinese Academy of Social Sciences and Chairperson of the China Society of Asia-Pacific.