Rebalance the Rebalance China, India, and the United States By Alyssa Ayres, Elizabeth Economy, and Daniel Markey Foreign Affairs, July 13, 2016

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1 SNAPSHOT July 13, 2016 Rebalance the Rebalance China, India, and the United States By Alyssa Ayres, Elizabeth Economy, and Daniel Markey Foreign Affairs, July 13, 2016 When the Barack Obama administration announced its pivot, later branded a rebalance, to Asia in 2011, two elements captured international public attention: the military and East and Southeast Asia. Critics variously assailed the military buildup, which they argued would anger China, and accused Obama of walking away from European allies and Middle Eastern friends. Yet the rebalance was never just about the military, nor should observers have skipped over its implications for South and Central Asia. Those regions were left out of rebalance discussions, despite the fact that the strategy specifically sought to strengthen ties with India and despite the fact that long-term U.S. interests in Afghanistan and Pakistan hinge as much on helping both countries develop stronger trade ties with their Asian neighbors as on counterterrorism. 1

2 Kim Kyung-Hoon / Reuters India's President Pranab Mukherjee (2nd R) meets with Chinese President Xi Jinping (2nd L) during a meeting at the Great Hall of the People in Beijing, China, May 26, As the United States has focused on East and Southeast Asia, China has won a more prominent role for itself across South and Central Asia as the foremost regional investor, infrastructure provider, and champion of alternative multilateral organizations. The United States has long played a central role in the creation and maintenance of economic and security architectures in the Asia Pacific, but in South Asia, Central Asia, and the Indian Ocean, there are fewer established regional organizations and those that do exist lack deep ties with Washington. China s rising influence underscores the need for the United States to secure its own interests where they differ from those of China. In short, it is time for Washington to rebalance the rebalance and give adequate attention to U.S. national interests in South and Central Asia. For the United States to shore up its influence in Asia across the entirety of Asia Washington should revisit its economic engagement in the South Asian and Indian Ocean region. In particular, Washington should review how it got eclipsed by Beijing on its own New Silk Road plan and take steps to get back in the game. Washington should also pursue new and different kinds of diplomatic and security interactions with China and India. Suspicions are high, and improving transparency among the three powers should be a priority. Finally, the United States should work with China and India, and Pakistan if possible, to address the many environmental vulnerabilities that exacerbate regional tensions. 2

3 China s deepened involvement across South and Central Asia has the potential to fulfill much-needed infrastructure development needs and alter the region s geopolitical balance. FUTURE HISTORY In July 2011, Hillary Clinton then secretary of state delivered a speech at the Anna Centenary Library in Chennai, a city on India s southeast coast that looks out across the Bay of Bengal toward Southeast Asia. From India, she offered a phrase that would come to be a hallmark of the Obama administration s rebalance to Asia. We understand, she said, that much of the history of the twenty-first century will be written in Asia. The Asia she was describing encompassed India, one of the rising powers with which the United States needed to strengthen its ties. Halfway through the speech, she pivoted northwest, and discussed U.S. Afghanistan policy, laying out for the first time a U.S. strategy to prepare for the eventual withdrawal of the international military presence that Obama had already announced. Although a residual troop presence might support stability, it could not rebuild Afghanistan; ultimately, long-term stability would depend on economic recovery. And so the United States would promote a New Silk Road of economic connectivity and opportunity, one that would embed Afghanistan in a thriving South and Central Asia and connect Afghans to markets abroad. The New Silk Road soon became the blueprint for a series of projects focused on trade and energy connectivity and a centerpiece of U.S. strategy in the region. A little more than two years later, Chinese President Xi Jinping delivered a series of remarks outlining a new Chinese strategy: a Silk Road Economic Belt to cross Eurasia, and a Maritime Silk Road spanning the Asia Pacific and Indian Ocean. Within a year, the two were combined into One Belt, One Road later reduced to just Belt and Road. In parallel, Xi proposed the creation of an Asian Infrastructure Investment Bank, which would support related projects, among others, and by mid-2015 the China Development Bank announced plans to offer Belt and Road financing to the tune of nearly $900 billion. Separately, Xi unfurled plans to develop a China-Pakistan Economic Corridor, which involved energy, transportation, and communications infrastructure projects intended to spur growth and bring greater stability to Pakistan. Eventually, the corridor would serve as a transport route for goods all the way from Kashgar in China s Xinjiang region, through the Himalayan Karakoram highway, and down to the Pakistani deep water port in dusty Gwadar on the Arabian Sea. China s deepened involvement across South and Central Asia has the potential to fulfill much-needed infrastructure development needs and alter the region s geopolitical balance. Chinese projects will mainly be built with low-interest loans, rather than grants, as is common with U.S. Agency for International Development projects. And whereas the USAID budget for such projects is around $1 billion each year, China could spend trillions. 3

4 Not surprisingly, U.S. foreign policy critics began to describe the U.S. New Silk Road idea as mainly rhetoric. It is true that Beijing is willing to spend more than the United States, which means that Washington must be smarter about how it uses its tools of economic statecraft. It has at its disposal a number of institutions that it can leverage, including Export-Import Bank support for trade with the region; Overseas Private Investment Corporation guarantees and incentives to underwrite investment and help limit risk; U.S. Trade and Development Agency expertise in the nuts and bolts of trade; and USAID training programs to skill up regional businesses. U.S. institutions can also expand their leverage through regional partnerships. For example, partnership with Indian organizations such as the Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry has helped provide even more training programs at a low cost within the region. The China-Pakistan Economic Corridor could be an important test case for Washington s use of creative economic statecraft. As Chinese investments pour into Pakistan, U.S. officials should work with their Pakistani counterparts to ensure that American firms backed by the Overseas Private Investment Corporation will enjoy a level playing field. Then, in coordination with Beijing and Islamabad, Washington can identify new projects, particularly in areas of American strength such as clean energy, telecommunications, and agriculture, that would complement ongoing efforts. Through these targeted investments, the United States can advance its agenda of improving Pakistan s security by helping to grow its economy for a fraction of the cost associated with USAID grant-based projects, while testing China s commitment to keeping One Belt, One Road transparent and inclusive. If successful in Pakistan, similar U.S. initiatives could be attempted elsewhere along the belt, giving the United States access and influence in parts of Eurasia where it might otherwise be squeezed out. Washington s relations with Beijing and New Delhi have raised other suspicions as well. INSTITUTIONAL LEADER The United States has played the leading role in creating a number of Asia Pacific institutions. It has wellestablished alliances with Australia, Japan, New Zealand, the Philippines, Singapore, South Korea, and Thailand and is the core of the U.S.-led Asia-Pacific alliance network. Its Southeast Asian Treaty Organization has also included Pakistan during its 20-year existence. The U.S. security umbrella supported the rise of ASEAN, which is now a foundational regional institution. The United States, too, helped create the Asia-Pacific Economic Cooperation forum, and more recently has been a driving force behind the Trans-Pacific Partnership, the regional free trade agreement. Yet Washington has not played a comparable role in South Asia and the Indian Ocean. And efforts to start have been quickly overshadowed by the rise of alternative regional institutions in which the United States 4

5 plays no role, particularly those spanning Asia s northwest. Such institutions were spurred first by a seemingly unrelated issue. The growing size of the Chinese and Indian economies, and their interests in obtaining greater representation within the major international financial institutions, prompted a longoverdue reform process with the International Monetary Fund in 2010, to which the United States agreed in principle. The U.S. Congress, however, had to approve of the new arrangement, which increased voting shares of some countries China most significantly but India as well. Congress delayed action on the matter for five years. In the interim, Asian powers created their own development banks. In 2012, the BRICS formation announced during their New Delhi summit the concept of a new development bank of their own. By 2015, the BRICS New Development Bank had a charter, a headquarters in Shanghai, and an Indian president in place. Meanwhile, in 2013, China s president, Xi, proposed the creation of an Asian Infrastructure Investment Bank (AIIB) in speeches given in Southeast Asia and Central Asia. The United States elected to stay outside the bank, but allies and friends, with the exception of Japan, eagerly signed up. The AIIB came into being in 2015, with China as the lead capital contributor, India as its second largest, and more than 55 other signatories. (The AIIB will support One Belt, One Road, alongside contributions from China s Silk Road Fund of $40 billion and China-Pakistan Economic Corridor commitments of $46 billion.) A second and similar development in the security arena appears to be under way. We traveled to Shanghai in July 2014, and noticed immense paintings on the side of buildings trumpeting the CICA summit the Conference on Interaction and Confidence-Building in Asia, an organization originally proposed by Kazakhstan. It meets biennially at the summit level to discuss regional peace and security. Unlike the East Asia Summit or ASEAN, CICA s writ runs from Central Asia to Turkey, through several Gulf countries, and all the way across South, Southeast, and Northeast Asia. China is the current chair and hosted the 2014 summit. That year, Xi proposed that CICA serve as a security dialogue platform for the region; CICA and the Shanghai Cooperation Organization signed a memorandum of understanding during the summit. The Shanghai Cooperation Organization, originally a Eurasian security organization led by China, four Central Asian countries, and Russia, has expanded its remit as well. India and Pakistan both applied to upgrade their status from observers to members, and were accepted in They will need to complete a process of accession, but they appear poised for full membership. This marks another security-focused forum in which the United States has interests but plays no role. With a clear shift toward new institutions that countries of the region see as more responsive to their own needs, Washington makes a mistake by standing apart. Given the country s deep involvement in South Asia, including the continued U.S. troop presence in Afghanistan, concerns about terrorism and regional stability, and hopes for more vibrant regional economic growth, it does not make sense to forego the opportunity to be present as these regional organizations develop. New regional stresses pose heightened 5

6 risks of conflict and instability in Asia. And since this part of Asia lacks the intensity of the institutional diplomatic calendar that exists for East Asia, more institutionalization in the region would be a net boon. Although the United States has observer status with CICA, it has not sought observership in the Shanghai Cooperation Organization. It has balked at the AIIB although it is supportive of joint projects with the Asian Development Bank and World Bank and does not have a relationship with the New Development Bank. In a world in which the U.S. financial contribution to regional connectivity is going to be outmatched by China s and by that of the newer development banks, Washington should indicate its interest in participating in these institutions as an observer and offer U.S. views. Eduardo Munoz / Reuters People take part in the 35th India Day Parade in New York August 16, TENSE TRIANGLE Across South Asia, the traditional strategic triangle of China, India, and Pakistan is tense enough. But another emerging and equally challenging regional strategic triangle is emerging: the United States, China, and India. The historic enmity between India and Pakistan four wars since 1947 has tended to capture the headlines, but India and China are no friends either. They went to war in 1962 over their still- 6

7 undemarcated border. Routine border scuffles keep this Cold War era standoff alive, and both sides are expanding and modernizing their forces devoted to this territory. By playing host to a large community of Tibetan exiles, New Delhi finds itself at odds with Beijing on a major point of Chinese sensitivity. China has asserted claims to territory across the Sino-Indian border, including by redrawing maps in passports and on the Web. From time to time, including last month, China checks Indian membership ambitions for select global institutions, such as the Nuclear Suppliers Group. India worries that China s submarine fleet and new overseas port in Djibouti, combined with its port access in Sri Lanka, will come with even more extensive visions of territorial reach. India is expanding its own navy, and has begun developing its Andaman command as a counterbalance. China s alliance with Pakistan fuels India s concerns, as have China s greatly expanded political and economic ties across all of South and Central Asia, which New Delhi sees as an effort to limit India s strategic options. Desperate to access the energy resources of Central Asia and the Middle East, India fears a tightening Chinese noose enabled by access through Pakistan to ports along the Arabian Sea. The Indian government has registered official objections to China-Pakistan Economic Corridor plans involving disputed territory, and the Indian press is markedly suspicious about China s designs once the corridor and One Belt, One Road are complete. In addition, leading foreign policy strategists in India increasingly voice concern that Washington seeks Indian support for U.S. strategic goals for East Asia but has not been willing to support Indian goals in South Asia. Framed as convergence to the east, divergence to the west, Indian strategists question how the United States can see China as aggressive in East Asia and yet remain all too eager to coordinate with Beijing in the other direction, for instance in the Quadrilateral talks in Afghanistan. New Delhi worries that the United States does not appreciate the threat posed by a China-Pakistan axis, and worse, continues to assist Pakistan with financial and military support despite Pakistan s own sponsorship of terrorism that targets India. Such concerns have never been easy for Washington to address. That said, if China can be held to an inclusive agenda with the China-Pakistan Economic Corridor, one that encourages outside (non-chinese) participants and literally paves the way for an eventual opening of Pakistani trade to India, New Delhi could finally achieve a breakthrough in its diplomatic efforts. Over time, India would have a better chance of building business constituencies that favor peace on both sides of the border. Washington s relations with Beijing and New Delhi have raised other suspicions as well. China fears that U.S. efforts to assist India s rise are designed to contain its own, particularly as India increases its role in China s maritime backyard in the South China Sea and the United States and India enhance their defense partnership. Yet despite their suspicions, all three countries benefit from expanding trade and economic ties. China has become India s largest trading partner in goods, just as it has for so many other countries around the world. India and China have also found ways to bridge their divides when it comes to 7

8 partnering on the world stage to achieve greater representation for their interests as rising powers, as illustrated by their cooperation in creating new institutions and on climate change. What is missing, however, is a structure for consultation that encompasses the United States, China, and India together, one that could build transparency, provide a forum for concerns, and help assuage the fears that China and India each have about the United States ties with the other. A high-level trilateral arrangement would provide scope to coordinate on major global issues, but it would also serve to create a platform in which concerns of any of the three countries could be addressed. Although no dialogue can prevent conflict in and of itself, the absence of one can worsen already tense relationships. Beijing, New Delhi, and Washington are obviously capable of sharing intelligence and communicating bilaterally, but a trilateral institution with a permanent headquarters and staff would structure and focus their diplomatic efforts under normal conditions and facilitate communication at times of tension. Naturally, all three members of the trilateral are likely to have concerns about the possibility that it would be used for coercive two against one diplomatic maneuvers, so the institution should be structured and staffed in ways that support confidence building and communications efforts, not binding negotiations. And because all three states would also aim to avoid replicating their work in other forums such as the United Nations or upsetting friends and allies not included in the trilateral, they should keep the institution s agenda narrowly focused on matters of trilateral significance and as transparent as possible. COOPERATIVE CHANNEL Southern Asia s flashpoints are well known. Less remarked upon is the fact that South Asia is uniquely vulnerable to natural disasters like tsunamis and earthquakes as well. Add to that the increased prospects for disasters, such as flooding and droughts, due to climate change and related extreme weather. Each of these holds the potential to cause catastrophic harm when layered on top of the numerous political, economic, and environmental stresses already present. In the case of the December 2004 tsunami and Nepal s April 2015 earthquake, international assistance and relief also created new opportunities for cooperation. China and India even opened up their own communication channel with each other to coordinate relief in Nepal a country where their own competition has intensified in recent years. Humanitarian assistance and disaster relief is the one arena that requires close civil-military cooperation, and can, as a result, bring together militaries that might ordinarily never have a shared objective. In the humanitarian world, experts have identified how planning for prevention and for the fastest and most skilled deployment of assistance can directly prevent greater harm and limit damage from disasters. For this reason, disaster risk reduction has become a UN watchword. Given the likelihood of future earthquakes, floods, and cyclones across southern Asia, developing disaster risk reduction as a continued 8

9 line of cooperation makes a lot of sense. And it would surely save lives as it supports shared planning across civilian and military lines of communication. The South Asian Area of Regional Cooperation has a disaster management center located in New Delhi, and in November of 2015 for the very first time it convened South Asia wide disaster relief exercises, called the South Asian Annual Disaster Management Exercise, or SAADMEx. The United States has particular experience in advance planning for immediate relief and in developing risk reduction measures. Whether through the South Asian Association for Regional Cooperation, a relatively weak organization but one to which China and the United States are both observers, or via bilateral cooperation with each country, Washington can proactively offer its expertise to China, India, and Pakistan to develop shared plans for the known contingencies of major earthquakes, floods, and coastal extreme weather. The Lower Mekong Initiative is a highly successful model for developing a regionally shared approach to environmental challenges and public health; the urgency of disaster risk reduction suggests the need to replicate a similar cooperative effort in South Asia. POWER PLAY U.S. diplomats and policymakers need to think creatively about how best to harness the United States inherent advantages in South and Central Asia and thereby offset China s overwhelming financial investments and diplomatic initiatives. Strategies should include enhancing commercial diplomacy and capacity-building efforts through U.S. institutions, such as Ex-Im Bank and Overseas Private Investment Corporation, as well as advancing cooperative development projects between China-led development banks and the World Bank and Asian Development Bank. The United States remains the most important guarantor of security in the Asia-Pacific region. Yet the region is fraught with tension. Establishing a trilateral Indian-Chinese-U.S. security dialogue to enhance transparency and build confidence is essential; eventually, it may also provide new opportunities for security burden-sharing. Although the United States is not as central to maintaining regional order in South Asia as it has been in the Asia-Pacific, that limitation offers its own opportunity. Without predetermined obligations in South Asia, Washington can play a more focused role, taking the initiative in select issues and seizing opportunities to influence the region s unfolding geopolitics. If it manages these relationships effectively, the United States can utilize even a relatively limited presence to achieve outsized geopolitical gains should Washington choose to do so. ## 9