Who Benefits from China’s “One Belt, One Road” Initiative?

Silk Road Economic Belt and the 21st-Century Maritime Silk Road
China’s Silk Road Economic Belt and the 21st-Century Maritime Silk Road

Under its Silk Road Economic Belt and the 21st-Century Maritime Silk Road (commonly known as the “One Belt, One Road” initiative) China has sought to build a network of infrastructure projects across Eurasia to encourage trade.  At first glance, it seems that all those involved should benefit.  Chinese loans would kick start the construction of the infrastructure projects.  Developing countries, in which the projects are built, would profit as transshipment points and from the development of new industries that could plug into international supply chains.  Revenues from the resultant economic growth would then repay the Chinese loans, with interest.

That all sounds rosy.  That is, if the new infrastructure network is used.  The mere existence of roads and ports does not ensure that trade will flourish.  Certainly economic growth at either end of the network would help.  But at the moment the economies of both China and Europe are slowing.  Indeed, global economic activity is slowing.  If there is not enough trade to make the new infrastructure profitable, then the benefits from the “One Belt, One Road” initiative only flows in one direction: China.

The operative word in the “One Belt, One Road” initiative’s financing is “loans.”  Chinese loans may have laxer requirements and carry a lower interest rate than those of commercial banks.  But they are loans.  China expects them to be repaid.  Plus, Chinese loans for infrastructure projects are often made with the understanding that the developing countries award construction contracts to Chinese companies.  In short, China benefits from both the financing and construction of infrastructure projects, while developing countries must bear all of the financial risk.  When trade is booming, that may not matter much.  But when it is not, that should be a concern.

In the past, many developing countries became heavily indebted as a result of infrastructure projects that fizzled.  Lenders ultimately had to forgive many of their debts, recognizing that their borrowers could never repay them.  China has forgiven some of its loans to developing countries too, about $3.9 billion in all.  But that is a small fraction of the total debts that developing countries owe it.  For example, in 2015 China cancelled $40 million in debt from Zimbabwe.  But Zimbabwe still owes China over $1 billion.  Moreover, at the time of China’s modest debt cancellation, Zimbabwe pledged that it would increase its use of the Chinese yuan in its foreign exchange reserves.[1]  To outside observers, it seemed that China had used its debt cancellation to achieve its larger foreign policy goals.

Still, several developing counties have welcomed Chinese financing.  Sri Lanka’s former President Mahinda Rajapaksa happily accepted Chinese loans to build a new port facility and airport at Hambantota.  When completed, the port facility will be the largest of its kind in South Asia.  But with slowing seaborne trade, Sri Lanka’s new government has been left with the burden of servicing the country’s $1.1 billion debt to China.  Despite the new government’s criticism of Rajapaksa’s acceptance of Chinese loans and the shortcomings of Chinese construction work, it had little choice but to finish the port and airport, lest it default on the country’s loans.  Indeed, China may believe that borrowers will be forced to repay their loans, because an outright default would severely curtail any developing country’s future access to credit.

Lately, however, some Asian countries have been playing harder to get with China.  That was the case with Indonesia last year.  When a Chinese-led consortium sought a contract to build a high-speed railway between Jakarta and Bandung, Indonesia leveraged the consortium’s eagerness to beat a Japanese-led rival to win a major concession: the consortium would drop its requirement for the Indonesian government to backstop China’s loans.  The consortium won the contract in the end.  But Indonesia offloaded the project’s financial risk onto China.

Thailand has been cautious too.  For years, China has talked about the construction of a long-distance, high-speed railway between Kunming and Bangkok.  After Thailand’s military coup in 2014, the two countries accelerated their talks over such a railway, as they developed closer ties.  But the terms that China offered disappointed Thai leaders.  They balked at China’s desired interest rate, its proposed ownership structure, and its request for development rights along the railway’s right of way.  So, Thailand shelved the project’s original plan.  Instead, it financed its own construction of a much shorter railway from Bangkok to Nakhon Ratchasima, only 250 km away.  While China would still supply the technology and oversee procurement, Thailand would use Thai construction companies to build the railway, not Chinese ones.

The two railway cases are telling.  China may believe that the thirst for low-interest loans in developing countries should make its “One Belt, One Road” initiative an easy sell.  But the leaders of those countries, at least those among them who are observant, know that China’s domestic economy is slowing and that China is increasingly concerned about keeping its construction companies working.  They also know what happened in places like Sri Lanka, Indonesia, and Thailand.  That knowledge gives them leverage to negotiate better terms from China.  If more developing countries do so, China’s “One Belt, One Road” initiative will be quite a bit tougher to realize.

[1] “Zimbabwe says China to cancel $40 million debt, increase yuan use,” Reuters, Dec. 21, 2015.

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China’s Encirclement Concerns

For almost two decades, Chinese strategists have worried about what they regard as the geopolitical encirclement of China. At various times, they have attributed that encirclement to the United States, then India, and most recently Japan.[1] No doubt last week’s large-scale naval exercise in the western Pacific did little to dispel their concerns. For the first time warships from India, Japan, and the United States jointly conducted anti-air and anti-submarine drills in the Philippine Sea, an area directly adjacent to the Chinese-claimed waters of the East and South China Seas.

China's Encirclement Concerns
China’s Encirclement Concerns

Events over the past month likely added to China’s concerns. Last Friday, Indian Prime Minister Narendra Modi visited Bangkok in part to expand his country’s defense and maritime security cooperation with Thailand. A week earlier, he met with President Barack Obama at the White House, highlighting India’s closer ties with the United States. At a summit in late May, the United States and Japan, along with other Group of Seven countries, openly voiced their concern over China’s maritime actions. Days before the summit, Obama flew to Hanoi where he lifted the long-standing U.S. arms embargo against Vietnam, one of China’s South China Sea antagonists. Then after the summit, Japanese Prime Minister Shinzō Abe welcomed a Vietnamese delegation to discuss how they could enhance their military cooperation.

Certainly Chinese concerns over encirclement are not new. During the Cold War, China worried about the Soviet Union pursuing a similar geopolitical strategy. Even earlier, the Chinese Communist Party faced several all too real “encirclement campaigns” during China’s long civil war. Those experiences could have left an imprint may have left their imprint on China’s strategic thinking ever since.

What is clear is that Asia-Pacific countries have begun to prepare for what could be an era of heightened tensions. Such hedging has recently accelerated, as Chinese behavior in the East China Sea, South China Sea, and on its border with India has grown increasingly muscular. The United States has pursued its “pivot” or “rebalance” toward Asia, which shifted the bulk of American naval might to the Pacific. India and Japan have boosted their diplomatic and economic engagement in Southeast Asia and strengthened their military postures. Other countries have begun to do the same. As Australia’s 2016 defense white paper warned, “competing claims for territory and natural resources [in the region]… could undermine stability.”[2] But does such hedging constitute an encirclement of China?

Imagined Encirclements

In the early 2000s, China agonized over a possible American encirclement on its western border as U.S. forces streamed into Afghanistan and Central Asia. But a decade later, a persistent insurgency had worn down the United States and its allies. U.S. military bases in Kyrgyzstan and Uzbekistan were closed; America’s once-close relationship with Pakistan became acrimonious; and U.S. forces began their long withdrawal. China’s concern never materialized.

Now Beijing fears an even wider encirclement by the countries along the Asia-Pacific periphery, as they hedge against China’s assertive behavior. But most of them are still in the early stages of building up their strength. Although Australia has launched an ambitious military modernization program, its forces remain small. India’s defense bureaucracy continues to frustrate its military’s modernization and expansion plans. While Japan fields highly capable forces, its fragile economy constrains its military’s ability to grow. Even America’s “pivot” toward Asia may not be as weighty as it sounds, as the Obama administration has trimmed the overall size of the U.S. Navy. Hence, one could argue that China’s concern over an encirclement is, at least for the moment, not wholly warranted.

Undermine the Encirclement

Besides, the countries that China fears will encircle it are not yet a cohesive bunch. Officially non-aligned, India remains skittish about is relationship with the United States. And while Australia and Japan have security treaties with the United States, they do not have strong ties with each other. That was evident when Australia, at the last minute, chose to purchase France’s Scorpene-class submarine over Japan’s Sōryū-class submarine for its next-generation submarine fleet. India’s security relationships with Australia and Japan are equally tenuous. China could use bilateral deals to weaken those relationships and hinder a nascent encirclement from coalescing any further.

Breakout of the Encirclement

But even if China’s fear was to manifest itself, Beijing is already developing the means to break out of it. In late 2013, China turned heads across Asia with its “One Belt, One Road” initiative. Among the many infrastructure projects it has financed in Southeast Asia are a special economic zone in Cambodia, hydroelectric dams in Laos, and energy and railway projects in Malaysia. While China’s “yuan diplomacy” has not always been successful, it has had an impact. Cambodia and Laos have become reliable advocates for China within ASEAN. Malaysia largely remains on the sidelines of the South China Sea dispute, despite a rising number of Chinese infringements of its exclusive economic zone. China’s initiative may prove useful even in the Philippines, which has been a thorn in Beijing’s side. The Philippines’ new president, Rodridgo Duterte, has indicated that he would undertake the bilateral dialogue that China has long sought in exchange for Chinese economic development assistance.

Benefit of the Encirclement

Still, Beijing may have reason to play up its fears of encirclement. Despite its remarkable economic achievements, China faces a host of problems. Today, Chinese leaders must manage their country’s difficult transition from investment-led growth to expansion by private consumption, while dealing with its various debt-fueled bubbles. Even under the best conditions, those challenges are bound to be volatile. So some may see fears of encirclement as a way to rally public sentiment and maintain the “social stability” needed to ensure the longevity of communist rule. In any case, whether the “encirclement of China” is imagined or real, effective or not, one can expect the phrase to remain in Beijing’s lexicon for years to come.

NOTES

[1] Zhang Yunbi, “Tokyo urged not to stir tension in the South China Sea,” China Daily, Mar. 10, 2016, http://www.chinadaily.com.cn/world/2016-03/10/content_23806572.htm; “Tokyo’s move to encircle China will lead nowhere,” Global Times, Nov. 23, 2015, www.globaltimes.cn/content/954471.shtml; Hu Qingyun, “US to increase troops stationed in Australia: Deal seen as move to ‘encircle’ China,” Global Times, Aug. 13, 2014, http://www.globaltimes.cn/content/875836.shtml; Li Hongmei, “India’s ‘Look East Policy’ means to encircle China,” People’s Daily Online, Oct. 27, 2010, http://en.people.cn/90002/96417/7179404.html; Dai Xu, “U.S. building ‘Asian NATO’ to encircle China,” China.org.cn, Aug. 11, 2010, http://www.china.org.cn/opinion/2010-08/11/content_20687335.htm; “China feels encircled,” Economist, Jun. 6, 2002.

[2] Australian Department of Defence, 2016 Defence White Paper (Canberra: Commonwealth of Australia, 2016), p. 57.

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China’s “One Belt, One Road” to Where?

During visits to Central and Southeast Asia in 2013, Chinese President Xi Jinping unveiled Beijing’s aspiration to create what it called the Silk Road Economic Belt and the 21st-Century Maritime Silk Road.  Both would entail the construction of new infrastructure to better connect the present-day countries along what was once the ancient Silk Road between China and Europe.  The former would do so over land with roads, railways, and airports; the latter across the ocean with seaports.  China’s two-part aspiration is now commonly referred to as its “One Belt, One Road” initiative.

China One Belt, One Road Initiative

At the time of Xi’s unveiling, China was near the zenith of its economic power.  Not even the 2008 global financial crisis seemed able to derail China’s economic ascent.  Some saw the “One Belt, One Road” initiative as a way for China to extend not only its economic, but also its political reach across Eurasia.  India had begun to worry about what it considered to be China’s “string of pearls,” a series of Chinese-built seaports across the Indian Ocean.  Others viewed the initiative even more broadly as an ambitious effort to reorient global commerce towards China.

But since then the air of invincibility surrounding China’s economy has dissipated.  China’s engines of growth—export manufacturing and infrastructure construction—have sputtered, as the debt that fueled them and the overcapacity that they created have ballooned.  Over the last year and half, Chinese leaders have been forced to repeatedly “fine tune” their economy to keep it growing.  They boosted China’s government spending, devalued its currency, cut its interest rates six times, lowered its bank reserve ratio seven times, and even directly intervened in its stock market.  Still, China’s economy continues to slow.

That slowdown has spurred Chinese leaders to seriously begin to shift their export and infrastructure-led economy to one that is driven by consumers.  How successful that transition will be is uncertain.  But one thing is clear, the “social stability” so prized by the Chinese Communist Party has begun to fray.  Popular unrest is on the rise.  The number of labor protests in China has soared from about 100 in 2010 to almost 2,500 in 2015.[1]

Thus, Beijing has every incentive to keep its giant manufacturing and infrastructure-construction state-owned enterprises (SOE) humming, as its economy makes the transition.  Seen in that light, China’s “One Belt, One Road” initiative looks less like a well-planned strategy and more like a scramble to keep the order books of its SOEs full.  New infrastructure contracts abroad would help do that; and once built that new infrastructure might help Chinese manufacturers export at a lower cost.

One can see China’s push to build more infrastructure projects from Indonesia to Pakistan.  In September, a Chinese-led consortium won approval from Indonesia to build a $5.5-billion high-speed railway in Jakarta.  But the consortium won only after it agreed that the Indonesian government would not have to guarantee the Chinese loans needed to finance the railway’s construction.  While that concession may have secured the approval, it also increased the potential financial losses that the consortium would have to bear if anything goes wrong.  With such large and complex construction projects, it is hard to ensure that will not happen.

Surely, China expected a different outcome after its construction companies built a port at Gwadar for Pakistan in 2007.  Despite a total investment of over $1 billion, the port has remained virtually idle.  Now China is doubling down on the Gwadar project.  It has promised $45.7 billion in fresh financing to build the China-Pakistan Economic Corridor, a series of energy, road, railway, and pipeline projects that will more closely tie Gwadar to China.

Of course, China can still benefit from such infrastructure projects even if they turn out to be unprofitable.  The new road, rail, and pipeline routes through Pakistan will enable China to import strategic resources, like oil, natural gas, and minerals, from the Middle East without being reliant on sea routes through the Indian Ocean.  The projects could also deepen China’s “all-weather” friendship with Pakistan by creating new constituencies within Pakistan that benefit from the economic activity that the trade routes to China could foster.

Other land-based links to China could do the same. The Kunming-to-Bangkok railway is another example.  The portion of it in China is already finished; the portion in Laos broke ground in December; and the final portion in Thailand is slated to begin construction in May 2016.  Given the massive scale of Chinese trade, even if a small portion of it is redirected over the railway, it could reshape the economic interests of a small country like Laos.  Indeed, China may hope to use the railway to pry Laos away from its traditional ally, Vietnam, and gain another friend in ASEAN.  On the other hand, China would not benefit to the same degree from Chinese-built seaports and airports that are not directly connected to it.  While they may boost trade in the host country, the course of that trade could be redirected elsewhere, if trade with China does not evolve as expected.

That is now a real possibility.  If the Chinese economy continues to soften, it means that China will need to import fewer raw materials and export fewer finished goods.  In the second half of 2015 China’s monthly imports fell 10 to 20 percent from a year earlier; and its exports slipped too.  Unless global demand revives or Chinese consumers pick up the slack, Beijing might well expect its “One Belt, One Road” initiative to yield more long-lasting political than economic benefits.

[1] “Number of strikes and worker protests in China hits record high in November,” China Labour Bulletin, Dec. 3, 2015.

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Japan’s Security Role in Southeast Asia (and the South China Sea)

Only a few years ago, it would have seemed inconceivable that Japan would have any security role outside of Japanese territorial waters.  But in a January 2015 interview, Admiral Robert Thomas, commander of the U.S. Seventh Fleet, related that Washington would welcome Japanese maritime air patrols in the South China Sea.  He said that they could help to stabilize the region by balancing China’s growing naval strength there.  That broke a long-standing taboo in Japan on public discussion of such uses for the Japanese armed forces.  While it still may be some time before Japan mounts maritime air patrols over the South China Sea, yesterday it held an historic naval exercise in those waters.

It was the first time Japan’s Maritime Self-Defense Force ever conducted a bilateral exercise with the Philippines.  Two Japanese destroyers and a Philippine corvette practiced how to deal with “unplanned encounters at sea.”  They exercised near Subic Bay, a big Philippine (and former U.S.) naval base that is only 260 km from Scarborough Shoal—the spot where Chinese and Philippine patrol boats were locked in a months-long standoff in 2012 and where the Chinese coast guard used a water cannon to drive away Filipino fishermen just last month.[1]

Even before the naval exercise, the Japanese and Philippine coast guards held a smaller drill in Manila Bay a week ago.  Later this year, Japan will deliver the first of ten offshore patrol boats that it promised the Philippines in 2013.  Manila plans to use them to better monitor its territorial waters in the South China Sea and prevent intrusions into them.  Security ties between the two countries have grown substantially.  Last year, Japanese Prime Minister Shinzō Abe invited Philippine President Benigno Aquino III to Tokyo to discuss greater security cooperation.  At the time, Aquino went so far as to say that “nations of goodwill can only benefit if the Japanese government is empowered to assist others… especially in the area of collective self-defense,” giving a nod to Abe’s efforts to loosen Japan’s constitutional constraints that prevent his country from defending allies under attack.[2]

South China Sea - Japan

Japan has also expanded its security activities with other Southeast Asian countries.  Early this year, it mended ties with Thailand, whose coup led to a surge of Chinese influence there and strained relations with its longtime ally, the United States.  In March, Japan signed an accord with Indonesia to enhance military exchanges and collaboration on defense equipment development.  And Japan has steadily expanded its military cooperation with Vietnam, another claimant in the South China Sea dispute.  Japan promised it offshore patrol boats too.  In fact, immediately after the Japanese coast guard finished its drill in the Philippines last week, one of its cutters proceeded to Vietnam to participate in an exercise there.[3]  Japan has clearly sought a greater role in the security of the region.

Nonetheless, there is a question of whether Japan’s military can sustain a wider role.  Contrary to China’s claims, Japan’s defense budget has not grown much.  It rose less than three percent in the last year (and not at all in U.S. dollar terms).  Any real expansion of Japanese military presence in Southeast Asia will have to run on a shoestring until Tokyo can afford a true increase in military spending.  That is not to say Japan is without options.  Its new long-range P-1 maritime patrol aircraft would be useful for patrols over the South China Sea.  Moreover, Japan could enlarge its navy by simply slowing the pace at which it decommissions older warships, many of which are still highly capable.  But there are limits too.  Keeping older warships in service entails higher maintenance costs which may crowd out investment in new weapon systems.

As Japan expands its security role in Southeast Asia, new questions will arise.  Foremost among them is whether Japan’s new role will lead to greater stability or instability?  On the one hand, the absence of an adequately balancing force in Southeast Asia has given China a free hand to assert itself in the South China Sea, as marked by its massive land reclamation activities in the Spratly Islands.  Given how grindingly slow America’s rebalance to Asia has been, Japan’s security support could be just what the region needs.

On the other hand, any minor incident between Chinese and Japanese forces in the South China Sea could easily escalate tensions between their two countries.  Anyone who remembers the accidental collision between an American EP-3 surveillance plane and a Chinese J-8 fighter in 2001 can imagine how a similar incident between Japanese reconnaissance aircraft and intercepting Chinese fighters could spiral into a major crisis.  Let us hope deterrence prevails.

[1] Mynardo Macaraig, “Philippines and Japan hold historic naval drills in flashpoint waters,” AFP News, May 12, 2015; Manuel Mogato, Adam Rose, and Ben Blanchard, “Philippines, Japan coast guards hold anti-piracy drills,” Reuters, May 6, 2015.

[2] Louis Bacani, “Aquino: Beneficial if Japan can defend allies under attack,” Philstar.com, Jun. 24, 2014, http://www.philstar.com/headlines/2014/06/24/1338501/aquino-beneficial-if-japan-can-defend-allies-under-attack.

[3] Rosemarie Francisco, Manuel Mogato, Linda Sieg, Tim Kelly, and Nobuhiro Kubo, “Japan steps up maritime engagement with Philippines, Vietnam,” Reuters, May 12, 2015; “Japan – Indonesia Joint Statement: Towards Further Strengthening of the Strategic Partnership Underpinned by Sea and Democracy,” Ministry of Foreign Affairs of Japan, Mar. 23, 2015; Mitsuru Obe, “Japan Reaffirms Economic Ties With Thailand,” Wall Street Journal, Feb. 9, 2015; Bagus BT Saragih, “Indonesia and Japan improve military ties,” Jakarta Post, Jan. 30 2013.

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Wanting It Both Ways, Principled and Practical: U.S. Policy toward Thailand

The increased strain between the United States and Thailand, longtime allies in Southeast Asia, was evident during their 34th annual Cobra Gold military exercise last week.  The size of the U.S. contingent was noticeably smaller than a year earlier and the scope of the exercise was limited to humanitarian assistance and disaster relief (normally it includes an amphibious landing component).  At the exercise’s opening ceremony, the U.S. representative directly commented on the “challenging” times that “has necessitated a modified Cobra Gold.”[1]

The reason for that strain was the American reaction to the Thai military’s coup d’état, which overthrew Thailand’s democratically-elected civilian government in May 2014.  From its perspective, the Thai military believed that it had little choice but to do so.  The civilian government was, at best, emptying the national coffers with an ill-conceived rice-payment scheme and, at worst, allowing (or even encouraging) the political paralysis that had already gripped the country for six months to continue.  Washington responded to the coup by suspending a symbolic $4.7 million in military aid and cancelling a number of joint military and law enforcement activities.

Southeast Asia Kunming Bangkok Singapore Railways

What made the American reaction all the more awkward was that the United States had been trying to bolster its relationship with Thailand.  Just a few years ago, former Secretary of State Hillary Clinton envisioned that Thailand would be at the core of her Lower Mekong Initiative—a bid to boost American engagement with continental Southeast Asia.  Add to that the fact that those in Thailand who backed the coup (including most of its urban middle class and business elites) represent some of the country’s most pro-Western elements.  During the Cold War, the Thai military supported U.S. efforts to counter communism in Southeast Asia (when it was decidedly unpopular to do so) and even hosted 27,000 U.S. military personnel at seven of its bases—from which the U.S. air force flew strategic bombing missions over Vietnam.  Afterwards, the Thai military cooperated with the United States in its campaigns against drug smuggling and human trafficking in the region.

Hence, these elements of Thai society have seen the American sanctions, regardless of their size, as an affront.  They also bristled at the pointed criticism made by U.S. Assistant Secretary of State Daniel Russel as an attempt to interfere with the internal affairs of Thailand.[2]  Despite earlier Thai military coups, the United States had not treated Thailand this way before.

China has been happy to capitalize on that Thai sentiment.  A month after the coup, China assured Bangkok that it would continue to support Thailand’s development and hosted a delegation of senior Thai military officials in Beijing.  China Mobile followed with a $900 million investment in a Bangkok telecommunications company.  But more importantly, China won approval for a new railway that will connect Kunming and Bangkok, through northeastern Thailand.  Once completed, that railway will tie Thailand’s economy (and interests) more closely to China, just as Thailand’s seaports had moved the country closer to the West in an earlier time.  Late last year, Thai Prime Minister Prayuth Chan-o-cha, the former army chief who led the coup, urged Thais to “stop bickering” and look to China for inspiration.  In February 2015, he agreed to strengthen Thailand’s military ties with China over the next five years.[3]

Of course, Prayuth may simply be making the point to the United States that it should not take Thailand for granted.  Still, he has opened the door for China to make real inroads into Thailand’s economy and politics.  Concerned about growing Chinese influence in Southeast Asia, Japan appears to have rushed into the breach opened by the United States.  Japanese Prime Minister Shinzō Abe flew to Bangkok early last week to emphasize Japan’s continued interest in Thailand and pledge Japanese support in developing the country’s rail networks and promoting its joint venture with Myanmar, the Dawei Special Economic Zone.[4]

The clarity of Japan’s approach to Thailand stands in contrast to the awkwardness of U.S. policy toward the country.  To some extent, that was unavoidable.  Washington wants it both ways.  It wants to preserve its practical interests in the region.  But it also wants to make a principled stand for democracy.  The problem for the United States is that its principled stand may come at the expense of its practical interests, particularly its strategic ones (as happened in Egypt during the Arab Spring).

Ultimately, Washington hopes that Thailand’s military will restore the country’s democracy; and American relations with Bangkok can return to what they were before the coup.  But doing so essentially leaves the future direction of U.S. policy in the hands of Thai military leaders.  Plus, the longer it takes them to restore Thailand’s democracy, the more opportunity China will have to change the facts on the ground.  With new trade routes already being built through Laos and Cambodia, the direction of Thai trade (and interests) have already begun to be drawn away from its southern ports to the West towards its northern roads (and future railways) to China.

By levying some minor sanctions against Thailand but carrying on with a scaled-down Cobra Gold exercise, Washington might have believed that it struck the right balance between promoting democratic principles and preserving practical American interests.  Perhaps there were few better ways to reconcile the two in this case.  But it does demonstrate to Southeast Asia how unreliable the United States can be as a long-term partner.  Making principled stands regardless of their practical consequences are a luxury.  The United States could afford to make such stands in the unipolar world of the 1990s.  But it is less wise to do so today, especially if they leave the United States beholden to events beyond its control or leave it in a weakened state.

[1] “Cobra Gold 2015 Opening Remarks by W. Patrick Murphy, Chargé d’affaires,” U.S. Embassy, Bangkok, Feb. 9, 2015, http://bangkok.usembassy.gov/020915_cda_cg15remarks.html.

[2] Prangthong Jitcharoenkul, “Foreign Ministry summons US over visiting diplomat’s comments,” Bangkok Post, Jan. 28, 2015, http://www.bangkokpost.com/news/politics/461168/foreign-ministry-summons-us-over-visiting-diplomat-comments; Amy Sawitta Lefevre, “Thailand warns U.S. to mind its own business over politics,” Reuters, Jan. 28, 2015.

[3] Amy Sawitta Lefevre, “Thailand boosts military ties with China amid U.S. spat,” Reuters, Feb. 6, 2015.

[4] Masaaki Kameda, “Abe, Thai junta leader agree to cooperate on railway development, special economic zone,” Japan Times, Feb. 9, 2015.

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Railway to Somewhere: Thailand’s Politics and China’s Reach in Southeast Asia

Despite elections last Sunday, Thailand remains riven by political conflict.  On the one side is the current government of Prime Minister Yingluck Shinawatra (and nominally her brother, Thaksin Shinawatra, who was ousted from power in 2006).  Their supporters dominate Thailand’s north and northeast.  On the other side is the Democrat Party, whose adherents are largely drawn from Bangkok’s middle class, southern Thailand, and the royalist establishment.  While many issues divide the two sides, the outcome of their struggle may have an impact on China’s reach in Southeast Asia.

Countries have long dreamed of a railway connecting China and Southeast Asia.  A century ago, both the British and French governments hoped to link their Southeast Asian colonies with China.  But ultimately terrain and war halted those ambitions.  The Cold War poured further cold water on the idea, as revolutionary China seemed more intent on exporting communism than trade.

But a decade after China implemented its market reforms, things began to change.  By the mid-1990s, the ASEAN-Mekong Basin Development Cooperation revived hopes for a railway between China and Singapore.  But a lack of funding prevented its progress.  Finally in 2011, the Asian Development Bank, working with the region’s countries, agreed to finance a circuitous railway that ran from China, down the length of Vietnam, across Cambodia, through Thailand, and finally down to Malaysia and Singapore.  Railway construction costs were held down by the fact that the route knitted together several existing railway lines, though a substantial sum would be needed to upgrade existing rails and rolling stock.

But China has since upended the plan.  It sought a more direct route to Southeast Asia.  It had already built a railway from Kunming (in southern China) to its border with Laos.  Then China’s railway minister pushed for $5 billion worth of Chinese financing to extend that railway to Vientiane, the Lao capital.  The early 2013 downfall of that minister on corruption charges (and the elimination of his railway ministry) left some to wonder whether the proposed railway would proceed.  But that uncertainty was lifted a few months later when Chinese President Xi Jinping proposed the creation of a China-backed Asian infrastructure development bank, part of his new charm offensive in Southeast Asia.  One of the infrastructure projects that he highlighted was the proposed railway.  However, even if its financing looks more settled, the railway still faces the challenge of construction.  While its route is more direct, it will require scores of bridges and tunnels to wend its way through Laos’ mountains.  Meanwhile, at the other end of the hoped-for railway, China has expressed interest in the expected tender for the Malaysia-Singapore segment later of it in 2014.

Such a railway would have strategic value for China.  Just as the transcontinental railways across the United States helped bind its eastern and western halves in the late 1800s, China’s north-south railway would help better integrate Southeast Asia—a mainly seaward-facing (and American-leaning) region—with its economy and political interests.  In addition to being more direct, the route that China’s railway has chosen would tighten the connection between it and its ally Laos and entirely avoid Vietnam, a country with which China shares a long and quarrelsome history.

Whether the north-south railway from Kunming to Singapore is completed depends on Thailand, which sits in the middle of its projected path.  Thailand’s current government has already discussed with China the possibility of building a connecting line between Vientiane and Bangkok, using concessionary Chinese loans.  (Rather than replace the existing railway, a new high-speed one would be built next to it.)  That connecting line would bring construction jobs to Thailand’s economically-lagging northeast.  But there are those in the region who are concerned about the schemes of China and Laos, due to their unfettered hydroelectric dam development on the Mekong River and its tributaries (those dams could cause droughts or floods on their agricultural lands if they are poorly managed).  Should the Democrats succeed in displacing the current government from power, one might expect that talks with China over the railway would continue, given that many of their Bangkok supporters also favored hydroelectric dam construction on the Mekong River.  However, in the tit-for-tat nature of Thailand’s politics, grudges can be deeply held and if the proposed railway between Vientiane and Bangkok is too closely associated with the current government, the railway could become a casualty of the domestic politics between the two factions.

Just how concerned should observers be about a railway that ties Southeast Asia more closely to China?  In the short run, they probably need not worry too much.  After all, China financed and built a port and pipeline in Myanmar that linked its coast to China’s border, but Myanmar still sought to build stronger relationships with Japan and the United States.  But over the long run, as economic interests in the infrastructure become entrenched and if they come to influence a country’s government, then national interests can shift.  Thus, it would be wise for Japan and the United States to encourage the speedier construction of the Asian Development Bank’s railway route through Vietnam.  That route would not only encourage stronger Cambodian bonds with Thailand and Vietnam, but also enable Cambodia to become less reliant on Chinese foreign direct investment for its economic growth.

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Diamond (Still) in the Rough: China’s New Charm Offensive in Southeast Asia

In early September, China hosted the 10th China-ASEAN Expo in southern Chinese city of Nanning.  There, Chinese Premier Li Keqiang glowingly characterized the last ten years as a “golden decade” of growing economic ties between China and the countries of Southeast Asia, all of which are members of the Association of Southeast Asian Nations (ASEAN).  He now foresaw that the next decade would be even better—a “diamond decade.”

Together with Chinese President Xi Jinping’s visits to Indonesia and Malaysia and his high-level meetings at the Asia-Pacific Economic Cooperation (APEC) forum that would soon follow, Li’s remarks appeared to mark the start of a new charm offensive in Southeast Asia.  China’s last charm offensive, despite Li’s depiction of a “golden decade,” had sputtered out at the end of that decade, overshadowed by China’s growing economic and political assertiveness on land and at sea.  Although China’s disputes with its maritime neighbors have drawn more attention, China also managed to irritate its neighbors across Indochina.  Its state-owned companies operating in the region have often been high-handed.  Their cavalier attitude towards displacing communities and destroying cultural relics contributed to Myanmar’s decision to halt the construction of the Myitsone dam in 2011—the first time any Southeast Asian country blocked a major Chinese-sponsored infrastructure project.  Meanwhile, China’s unrestrained hydroelectric development on its upstream stretch of the Mekong River has worried many downstream communities in Southeast Asia, even though their governments seldom voice their concerns.

Worse for China’s image is its maritime disputes with Southeast Asia, which were put under an international spotlight in 2010 when several ASEAN countries confronted China about its behavior in the South China Sea at the 17th ASEAN Regional Forum.  Regional concerns over Chinese intentions were further stoked by China’s increased interference of Vietnamese oil exploration ship; its months-long standoff with the Philippines over Scarborough Shoal in the spring of 2012; and its escalatory attitude toward Japan over the Senkaku/Diaoyu Islands since September of that year.  Finally, many believed that Chinese pressure directly contributed to rifts in ASEAN itself, when the 2012 ASEAN foreign ministers’ meeting failed to produce any progress on a multilateral code of conduct for the South China Sea or even issue a closing joint communiqué that mentioned one.  Surely such rising concerns have led the Philippines and Vietnam to accelerate the pace of their military buildups.

However, many Chinese believe they see the hand of the United States in China’s recently contentious relations with Southeast Asia.  They see American policy as either creating the environment that has allowed Southeast Asian countries to resist China’s interests or directly encouraging those countries to resist them.  In either case, they see the flare up of disagreements between China and its ASEAN neighbors as evidence of a larger American effort to contain China’s rise.  Hence, Beijing may believe that initiating a new charm offensive could not only capitalize on Southeast Asia’s continued view of China as a source of economic growth, but also diminish the effect of that American effort.  Whether Beijing’s new tack is momentary or longer lasting is too early to tell.

Yet China has already met with some success, perhaps enhanced as a result of President Barack Obama’s absence from the APEC meetings.  While it was not the first time an American president was absent, Obama’s absence came at a time when many Southeast Asians were looking for reassurance of American commitment.  At the very least, it allowed Xi to become the center of attention.  And Xi brought China’s “diamond decade” message with him.  He pointed out several areas of opportunity: upgrading China’s free-trade agreement with ASEAN, improving communications between China and Southeast Asian countries, strengthening financial cooperation across borders, developing maritime cooperation, and enhancing Chinese cultural exchanges with Southeast Asia.

Even before the APEC meetings, Xi visited Malaysia and Indonesia.  He heralded the advent of “strategic cooperative relationships” with those countries and was the first foreign leader to address the Indonesian parliament.  Then after the APEC meetings, Li arrived in Southeast Asia to continue China’s diplomatic efforts in Brunei, Thailand, and Vietnam.  In Brunei, Li discussed joint energy development.  In Thailand, he championed plans for a high-speed railway project connecting China to Singapore that has lain dormant for many years.  And in Vietnam—a country that has its share of maritime disputes with China—Li and his Vietnamese counterparts announced that the two countries would set up a joint maritime development working committee to ease the tensions in the South China Sea.

For their part, ASEAN countries seem to have responded positively (and possibly opportunistically).  Malaysia—perhaps sensing that the Philippines has, for the moment, halted China’s broader assertiveness in the South China Sea—may now view Chinese overtures as a chance to boost its own economy.  And while Thailand still sees the high-speed railway project as too expensive for it to undertake alone, it has encouraged China to contribute to the financing.

However, the one country in the region that China has not courted is the Philippines.  Instead, China seemed to go out of its way to isolate it.  Indeed, it is a strategy that some Chinese foreign policy scholars have advocated.  As if to underline the point, after China issued invitations to all the heads of state in Southeast Asia to attend the China-ASEAN Expo, it rescinded its invitation to Philippine President Benigno Aquino III.  And so, the Philippines was the only ASEAN country not represented at the event.  And so, even as China seeks to emphasize its kinder, gentler side, its steely side remains.  Relations between China and Southeast Asia may yet improve during the “diamond decade,” but mostly on Chinese terms.

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Looper: The Asian Financial Crisis Redux?

Financial crises and their associated economic disruptions (or vice versa) can alter the international political order among countries by changing their relative power relationships.  What precipitates these crises and disruptions have many origins; but in many cases their underlying causes slowly build up pressures that suddenly erupt in a ruinous episode.  Decades of declining economic productivity, big budget deficits, and an overvalued currency eventually led Russia to default on its sovereign debt in 1998.  Following on the heels of the demise of the Soviet Union, the default led Russia into a particularly nasty recession as well as a particularly dark eclipse of its power across Asia and Europe for over half a decade.

Another crisis that began a year earlier, the Asian financial crisis, also changed what many had at the time expected to be the political trajectory of Southeast Asia.  The proximal cause of the crisis was the devaluation of Thailand’s currency, when its central bank ran short of U.S. dollars needed to defend its pegged exchange rate.  That triggered several similar crises across Asia and ultimately derailed Southeast Asia’s “tiger economies.”  Also derailed was the internal stability that Southeast Asian governments had attained after decades of conflict during the Cold War.  After the crisis, Indonesia’s long-ruling President Suharto was removed from office, and Malaysia’s equally long-serving Prime Minister Mahathir Mohammed was weakened (leaving office in 2003).  Thailand, whose prosperity in the early 1990s allowed it to become the first East Asian country to acquire an aircraft carrier in 1997, saw its wider ambitions thwarted.  Indeed, most countries in the region turned inward, as they shelved military modernization plans and their citizens clamored for political change.  On reflection, had the region made those military investments and developed the political self-confidence that often comes with internal stability, it would have been in a better position to balance China’s rise today.

Instead, Southeast Asia grasped at China’s refusal to devalue its currency during the crisis as a sign of friendship and inspired hope that they need not balance China’s rise and could assimilate their giant neighbor into the region’s multilateral norms.  Fifteen years on, that hope has proven misplaced.  China emerged from the Asian financial crisis relatively unscathed and ultimately became more assertive.  While it had to write off a mountain of bad loans on the balance sheets of its state-owned banks, Beijing really had no other choice, since those banks play a key policy role in its management of the Chinese economy.  Fortunately for China, continued foreign direct investment and major domestic infrastructure spending allowed it to grow out of its economic problems.

Southeast Asia was not so fortunate.  As the economies of countries like Thailand expanded during the first half of the 1990s, they also attracted a great deal of speculative investment and credit.  Eventually Thailand’s economy cooled, as less productive investments were made, U.S. interest rates rose, and Japan sharply devalued its currency.  As a result, the stability of Thailand’s leveraged economy and the ability of its central bank to defend its exchange rate peg became dubious—prompting money to flow out of the country and credit to suddenly contract.  A similar logic played out in other East Asian economies, causing a domino effect that engulfed Indonesia, Hong Kong, Laos, Malaysia, the Philippines, and South Korea.  Within a few months, local currencies plummeted, hundreds of businesses were shuttered, and millions found themselves unemployed.

Today, economic clouds are once again gathering over East Asia.  And Mark Twain’s quote seems particularly apt: “history does not repeat itself, but it does rhyme.”  The region’s economic growth is slowing.  Yet Southeast Asian countries continue to pile high consumer and sovereign debt.  They are even considering issuing U.S.-dollar denominated obligations, which are more difficult to pay off if their local currencies devalue.  But, of course, that may not occur this time, since the countries of Southeast Asia learned to amass large U.S. dollar reserves to forestall any run on their currencies.  As China and Taiwan showed during the 1997 Asian financial crisis, large U.S. dollar reserves can help avert the worst effects of such an event.

But such financial defenses are now starting to be tested, as Japanese Prime Minister Abe Shinzō’s economic policies have caused the yen to sharply fall against currencies across Southeast Asia (whether intentional or not).  As a result, Southeast Asian exporters are feeling the strain and have already called upon their respective central banks to match the Japanese effort.  But without an overt exchange rate peg to defend, Southeast Asian central banks have more leeway than they did in 1997.  And fortunately for them, U.S. interest rates are unlikely to jump in the coming year.  Still, the groundwork for a second Asian financial crisis is in place.  This time, China may not be spared, as many of its exporters are already barely profitable, the structural distortions in its economy are as big as ever, and it seems to lack a clear way to grow out of the next crisis (apart from even more domestic infrastructure spending).  But should Southeast Asia again turn inward, the United States should be prepared to do more to maintain the region’s balance of power.  A wider Asian financial crisis that ensnares Japan or South Korea may require an even larger American effort.  But this does not mean that American military power will be what is needed.  Rather, the region’s countries are keen on other sorts of American engagement, particularly economic ones.  And it is precisely those ties that will be most wanted if a crisis does occur.

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