Author: Einar Tangen
As the world and China gaze into the tea leaves of the last 40 years, we see a growing schism between the rhetoric and the reality of China and its future. On one side is ongoing rhetoric about the inevitable liberal democratic capitalist theory, metrics and ideology, and the continuing march toward Francis Fukuyama's "The End of History." On the other side is the reality of what China has achieved using a hybrid Socialist-Communist pragmatism, which has challenged the current paradigm metrics and created a new kind of economic and political realism.
Rather than repeat the successes and challenges of China's last 40 years, which is being covered at length in numerous opinion pieces, this article will take a look at how existing political and economic paradigms are changing -- the reality of China and Asia's rapidly growing consumer markets, as well as how these changes are elevating Asia from second-class status to an equal partner in geopolitical affairs.
The best example of this is the current rapprochement of India and China. Population and capital: A global tipping point
The post-WWII, Cold War economic and political world is at a tipping point. Developed nations -- with their negative population growth and slowing economies -- while controlling the majority of the capital, do not have the markets they need to grow. In looking at the graph above, there can be little doubt where the consumer markets are, and will continue to be. Developing and emerging nations, especially in Asia, with their large populations and growing middle classes, have fast growth but lack capital.
China and India alone represent 40 percent of the world's population and will soon have more middle-class people than the total populations of the U.S. and EU combined. Add ASEAN, and you are closer to 50 percent of the world's population. Add the fact that these nations are growing at more than twice the rate of developed nations, the asymmetrical dependency is clear.
To date, the assumption has been that capital controls markets, but with their slow growth economies and shrinking populations, the developed nations (the U.S. and EU alone control 60 percent of the world's capital), cannot rely on their own markets. The only feasible investment alternative is the fast-growing emerging markets.
Once relegated to second-tier political and economic significance, these emerging Asian nations are coming to realize that they are now the gatekeepers of their own markets. The idea that market entry is a privilege, which can be imposed on countries, rather than an issue to be negotiated, is over. Developed economies and their corporations will soon find themselves, as they have in China, negotiating their entrance through bilateral or multilateral accords, rather than dictating terms. This is the basis of what seems to be a new kind of economic and political reality, which is causing friction with failing post-WWII and Cold War paradigms. The rise of Asia's markets and realpolitik
The race to tap Asia's massive markets has been on for some time. Over the last 17 years, under the WTO, the world has changed from one dominated by the U.S., Europe and a handful of other developed nations, to a multipolar economic and political world order, where new fast-growing consumer markets in Asia have displaced the supremacy of American and European ones.
Japan and S. Korea have long been the leaders of Asian development, now followed by China, India and ASEAN. These market changes have exposed political frictions between the incumbent developed nations, especially the U.S., and the rising nations like China and the rest of BRICS (Brazil, Russia, India, China and South Africa). At the core of this conflict is the American conviction that its economic, political and military dominance, rooted in American exceptionalism, is essential to imposing liberal democratic capitalism on the rest of the world. The irony is hard to escape, as it was China and Russia's determination to do the same with Communism which sparked the U.S. to paint them as ideological extremists. To understand how this is playing out, you have to look at the current political postures of each nation, but the conclusion is inescapable: the U.S. is becoming more isolated by the day, as Trump seeks to impose by brute force his vision of "America First," which ignores all conventional diplomacy in favor of naked self-interest. Policy and strategy in the post-Cold-War world The U.S.
The unstated policy of the U.S. is to control China's expansion by encircling its trade routes in the East and South China Seas, creating leverage over China's access to resources and markets. This desire represents a revisionist return to the "greatness" Trump promised to those who elected him. The dream is to reestablish American political, economic and military hegemony as means to ensure American prosperity. This mercantilist vision discards the multilateral trade framework that the U.S. itself prioritized and created, in favor of bilateral trade agreements, where the U.S. can use its superior military, economic and political muscle to exact favorable trade terms, arms sales and security concessions. The irony is that for the U.S. to grow, it will need to tap into the very markets it is alienating with its ham-handed tactics. China
China's response is the Belt and Road Initiative, a project of multi-pronged land and sea routes that aims to ensure access to all its adjoining resources and markets. It is envisioned as a "win-win" strategy that will create and connect markets based on trade, not ideology. Xi has made it clear he has the will and the time to see the project through, but he will need other countries to see the value and invest in this grand multilateral approach. Unfortunately for China, its rapid growth, while envied by many, is causing uncertainty among its neighbors, in large part fanned by media from developed countries wedded to liberal democratic capitalist ideology, but confounded by China's continued success. For evidence of this, one only has to look at the predictions of publications like The Economist, which has forecast China's imminent demise for the last two decades. Russia
Russia is still nursing hard feelings because of promises made as the USSR was being dismantled, which were broken by the U.S. and EU. In response, Moscow has been moving closer to Beijing, as its relationship with Washington deteriorates. In his 2007 speech in Munich, Putin outlined his frustration with a world order he saw as rigged against Russia, and if anything, things have gotten worse since then. Effectively locked out by economic sanctions aimed at crippling its energy businesses and economy, Russia is seeking alternatives. Their recent move to put more of its energy trade in euros is an example. And if Trump continues to make enemies and alienate allies, this could be a threat to the petrodollar hegemony the U.S. has enjoyed since the early 1970s. The EU
Politically, the EU is in the middle; still standing by the U.S., but unnerved by Donald Trump's unilateralism, nativism, climate change denial and unreliability. The EU is still in financial recovery mode, and while it still sees itself as a champion of liberal democratic capitalism, it is a much more socialist brand than that being promoted by the U.S. The differences in policy and style are alienating Brussels from Washington. In addition, the EU is also dealing with overexpansion, lack of leadership and an impossible fiscal status, not to mention distractions like Brexit and the political rise of fringe groups advocating separatism and neofascism.
Economically, like the U.S., the EU needs new markets to preserve its political stability. If the euro becomes an alternative settlement currency, the flow of funds would provide a new source of liquidity for the zone. Where the EU stands in terms of Asia's markets is mired in its political outlook, but increased friction with the U.S. could be a factor in pushing an alliance of expediency. Additionally, EU companies would be in the best position to benefit from any U.S.-China trade war, as they are the only real competition the U.S. has. Japan
Japan is under a thirty-year shadow of low growth, deflation and a declining population. Economically, Abenomics has failed to deliver the structural changes that were essential to Abe's approach to jump-starting Japan's economy. Real wages are languishing in the midst of productivity problems, while a stronger yen and weaker dollar are eating into revenues for companies producing in Japan. Politically, Tokyo has eyed China's rise warily, both as a regional rival and ideological adversary. It has used the threat of a rising China together with the DPRK as an argument to revoke its pacifist constitutional requirements.
Shinzo Abe thought he had a "bromance" with Donald Trump, only to be disappointed over steel and aluminum. This added to alleged scandals at home is likely to cost Abe the government in the next election.
After trade tariffs were announced and Japan did not get an exemption, they sent an overture to China indicating interest in the Belt and Road Initiative. Like India and many other countries around the world, Japan may admire the U.S. form of government, but not its current leader whose unpredictability is making China's stability more attractive every day. If Japan were to join the Belt and Road Initiative, and China were to negotiate a bilateral with the Trans-Pacific Partnership, it would in effect isolate the U.S. economically. India
India, which is badly in need of investment in both private business and public infrastructure, may be looking to balance its U.S. security arrangements with a Chinese trade relationship. India has its own brand of political and economic issues, and Modi now needs a revolutionary idea to turn India's perceived weaknesses -- its massive population, lack of funding, social needs and high youth unemployment -- into strengths. It is a country with tremendous markets, which are languishing due to lack of capital, poor infrastructure, red tape and corruption. Each of these issues needs to be solved, but to finance private investment, pay for infrastructure and pay higher wages to government workers to nullify corruption, India has to monetize itself as a market opportunity. Sino-Indian economic accord: A new global economic and political reality
Against this backdrop, If Modi and Xi were to agree to work together economically, the combination of China and India would flip the political, economic and social calculus of the world. As the gatekeepers to their own markets, China and India would have unprecedented leverage over developed nations. While this would raise new issues, it would also reflect the reality of a world increasingly fragmented and multipolar, marked more than ever by political and economic realism -- a less ideological, more pragmatic approach to global and country-to-country relations.
The other consequence of a China-India economic pact would be to change the shape and range of the Belt and Road Initiative. To date, China has been careful to create a series of redundant trade routes that can both guarantee its access to resources and markets, and grow regional markets in historically less accessible and underdeveloped areas. The strategy, as can be seen on the map, is to ensure no competing power can control its trade routes. If India was to allow the China-Nepal rail line to continue through India to its east coast, the value to all would be compounded. China would have an open door to Africa and the Middle East that would bypass the Malacca Strait and the U.S.'s string of military bases. It would create an open economic door to western China. India would have a two-way corridor for both domestic and international goods and an open development path for its eastern provinces.
In addition, with an alternative Trans-India route, Beijing would be less reticent about cooperating with Russia on a Trans-Siberian route to Europe. For Russia it would also be a golden opportunity to reach eastern markets and open up its vast eastern resources. For China, it would create a safe passage to Europe for value-added goods through a resource-rich route which would bypass complications at sea and shorten transmission times.
This would also decrease pressure on China to establish and maintain a safe route through Pakistan while speeding up trade development. The U.S. should be concerned about this, but given the current domestic and international circus in Trump's Washington, it is doubtful it will be understood. Conclusion
Modi is scheduled to meet Xi on the sidelines of the SCO. If both sides see the economic upside to their economic cooperation and sign an agreement to work together on the BRI, or allow China to establish a railway link to India's east coast ports, it will be the beginning of a new era where Asian markets will be on equal footing with developed economy capital. It will also signal the start of a new era of economic and political realism, where countries will balance their security and growth concerns -- an era that does not align with Trump's vision of continued American economic, political and military dominance. Einar Tangen is a political and economic affairs commentator, author and columnist.