THE POLITICAL ECONOMY OF THE PIVOT

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1 Analysis No. 188, July 2013 THE POLITICAL ECONOMY OF THE PIVOT Mark Beeson Although the US s recent pivot toward the East Asian region has been much discussed, inadequate attention has been paid to the political and economic consequences of this initiative. This paper considers the political economy of the pivot and suggests that it is best understood as part of a long standing pattern of American engagement with the region. However, the rise of China is placing important new constraints on America s ability to use economic leverage as an element of its overall policies in the region. The paper explains why and details some of the most important elements in the evolving Asia Pacific political economy. Mark Beeson, Murdoch University, Perth, Australia 1 The opinions expressed herein are strictly personal and do not necessarily reflect the position of ISPI. The ISPI online papers are also published with the support of Cariplo

2 Few recent American foreign policy-initiatives have attracted more attention than the so-called pivot back toward the Asia-Pacific, or more specifically East Asia. Although the Obama administration has back-tracked from this original label rebalancing is now the preferred description whatever it s called, it marks a significant recalibration of American foreign policy priorities. Although most attention has focused on the high profile, conventionally strategic aspects of this process, there has been an equally noteworthy economic element to the policy that merits greater attention than it has received thus far. Indeed, ever since the US assumed the dominant strategic position in the Asia-Pacific in the aftermath of the Second World War, politics and economics have been critical components of American grand strategy. It s worth briefly backtracking half a century or so, to understand the basis of this claim. The story of America s postwar strategic engagement is well known and still manifest if the hub-and spoke strategic architecture that distinguishes the region. Less frequently observed is that Japan s post-war economic renaissance and by extension the entire East Asian miracle Japan did so much to encourage was a brilliantly successful artifact of America s postwar policies. Aid, trade and investment were the catalysts for economic take-off, especially when combined with the stimulatory impact of the Korean War from which Japan was an immediate beneficiary 1. Although economic development is frequently considered in isolation from security questions this is a mistake as they are inextricably linked, especially in East Asia 2. The Korean and Vietnam wars were the catalyst for the economies of East Asia to take-off-or they were for those countries not on the wrong side of the Cold War, at least. While this plainly assisted a number of regional economies it also created insurmountable divisions within what we now think of as East Asia. Consequently, the sort of region-wide economic integration that characterized Western Europe simply couldn t happen in the ideologically and militarily divided East Asian region. Geopolitics and geoeconomics This historical background is important for a number of reasons. First, it is only since the ending of the Cold War that genuinely region-wide economic integration has been possible. Not only has China paradoxically become one of the world s most successful capitalist economies as a consequence, but it has given substance to the idea if an 1 R. STUBBS, Rethinking Asia's Economic Miracle, Basingstoke, Palgrave, M BEESON, Regionalism and Globalization in East Asia: Politics, Security, and Economic Development, Palgrave Macmillan,

3 East Asian region. This merits emphasis because East Asia necessarily excludes the United States. Consolidating a regional identity and institutional architecture around the notion of East Asia would consequently have potentially important implications for the relative standing of both the US and China. As a result, there is much at stake in the way the region is defined and this helps to explain some aspects of recent American policy 3. Before considering that, though, it is important to emphasize a second legacy of the Cold War period that has figured in what is ostensibly economic policy: the willingness of the US to use its strategic leverage for economic purposes at times. It is no coincidence that as strategic imperatives relaxed, the US took a more aggressive attitude toward trade disputes with Japan, for example. Likewise the negotiation of free trade agreements (FTAs) with the likes of Australia have always been made with one eye on the strategic pay-offs that might accrue from such deals. In reality, of course, FTAs have generally been anything but, and invariably laden with caveats and opt-out clauses to protect powerful domestic industries in the US 4. The third point to emphasize and the issue that dominates both the strategic and economic aspects of the pivot is the rise of China. From an American perspective China s rise highlights the paradoxes of hegemonic influence. On the one hand China s integration into a global capitalist economy governed by American-sponsored international institutions looks like an unambiguous long-term triumph for the US over a former communist foe. On the other hand, however, China s accession to the WTO accelerated economic development in the Peoples Republic. As with Japan before it, America s grand strategy may have worked all too well, creating a formidable economic competitor that is on track to overtake the US as the world s largest economy by It is worth emphasizing that the reason we are all so preoccupied with China is first and foremost because of its astounding, historically-unprecedented economic rise. Without that, we would simply not be focusing on it in quite the same way. The key question is whether economic growth is a force for stability or an inevitable source of future conflict. 3 M BEESON, American hegemony and regionalism: The rise of East Asia and the end of the Asia-Pacific, «Geopolitics», vol. 11, no. 4, 2006, pp J. RAVENHILL, Economics and security in the Asia-Pacific region, «Pacific Review», vol. 26, no. 1, 2013, pp J. MOULDS, China s economy to overtake US in next four years, says OECD, «The Guardian», 9 November

4 Liberalism or realism? Some of the most prominent analysts of foreign policy in the US believe that a conflict with China cannot be avoided 6. As countries become richer, the argument goes, they will inevitably spend some of this wealth on modernizing their militaries. This in turn will lead the rising power to challenge the reigning hegemon as it seeks to create an international order that more accurately reflects and furthers its interests. The policy advice that flows from this reading of history is to put off the inevitable as long as possible: the US should do everything it can to slow rather than encourage the economic development of potential rivals such as China. An alternative reading of historical development is that greater economic integration changes the foreign policy calculus of leading states: they prefer more stable and peaceful international relations as they recognize that they have too much to lose by jeopardizing an international system from which they directly benefit. This was in part, at least the logic that informed America s grand strategy toward East Asia: creating prosperous capitalist economies was the best way to secure allies and maintain stability. This essentially liberal understanding of development and international relations has one other major potential pay-off: the very process of participating in the increasingly important multilateral institutions will have the effect of socializing policymakers from China in particular into good behaviour 7. This claim assumes a suitably pivotal importance given that most observers agree especially in the PRC itself 8 that China has been the principal trigger for the recent rebalancing of American priorities. While there is no doubt that China s foreign policy has changed in remarkable and hitherto unimaginable ways over the twenty or thirty years, it is also plain that there are limits to this process. The timing of the pivot is explained in part by the fact that the Middle East is potentially a less pressing problem, but in part by the fact that China has suddenly started to play a much more high profile, even aggressive role in its numerous territorial disputes in the region. The question for American policymakers is whether, even if they decided to act on the advice of the realists rather than the liberals, would they be able to do so? The answers to this question are not simply 6 J.J. MEARSHEIMER, The Tragedy of Great Power Politics, New York, W.W. Norton, A.I. JOHNSTON, Social States: China in International Relations, , Princeton, Princeton University Press, M.D. SWAINE, Chinese leadership and elite responses to the US Pacific pivot, «China Leadership Monitor», 2012, pp

5 strategic and they tell us much about the nature of the contemporary international system as a consequence. Chimerica Niall Ferguson has famously described the symbiotic economic relationship between the US and China as Chimerica 9. In one of the most striking features of the contemporary international system, the economic fates and welfare of the world s two biggest economies have become deeply integrated and interdependent. At the very least this is an important test for those who argue such connections have a pacifying impact and make war unthinkable. 10 No doubt we all hope they are correct. There are, however, potential problems and contradictions that may upset this rosy picture. As China s economic growth and development have taken off it has like Japan and most of the other Asian economies before it acquired a huge trade surplus with the US. This has become an increasingly high profile source of unhappiness in the US, despite the fact that much of the value of Chinese exports is actually created by American companies operating in China to take advantage of what was formerly an abundant and cheap Chinese labour force. The real problem for the US is not the trade relationship though, as American consumers actually benefit from cheap goods. The real potential problem for America s grand strategists, at least, is what happens to the flood of American dollars that are used to pay for ostensibly Chinese exports. Thus far, the Chinese have obligingly recycled many of them into American government debt or Treasury bonds. With interest rates at all time lows they are not especially good investments, but they re widely thought to be safe and there s a seemingly endless capacity to absorb quickly the piles of cash that accumulate in China from both trade and the undoubted manipulation of its currency 11. While the economic and strategic relationship remains stable, both sides benefit. The US get access to cheap credit and the Chinese have a convenient repository for all their cash. The question is, what happens if things go wrong? If the US allows the dollar to decline to address domestic problems and 9 N FERGUSON and M. SCHULARICK, Chimerica' and the global asset market boom, «International Finance», vol. 10, no. 3, 2007, pp E. GARTZKE, The capitalist peace, «American Journal of Political Science», vol. 51, no. 1, 2007, pp D.A. STEINBERG and V.C: SHIH, Interest group influence in authoritarian states: The political determinants of Chinese exchange rate policy, «Comparative Political Studies», vol. 45, no. 11, 2012, pp

6 try to restore competiveness (as they have in the past) 12, Chinese investments would immediately be worth much less. If the Chinese get nervous and even look like withdrawing their investments, they could trigger a massive financial crisis. This is what Larry Summers famously described as the balance of financial terror. Even more problematically from the perspective of the US s strategic planners, however, the growing economic reliance on China is placing real constraints on foreign policy options. Thanks to Wikileaks we now what former Secretary of State Hillary Clinton thinks about the relationship with China. When urged by Kevin Rudd, former Australian Prime Minister and self-confessed brutal realist, to take a firmer line with China, Clinton memorably replied how do you argue with your banker? 13 Clearly, this does not mean that there are no circumstances in which the US will not confront China, but it does make the calculation more difficult and the threshold for action has undoubtedly been raised. It also makes containment by other means all the more attractive, and this is precisely what appears to be happening. The Trans Pacific Partnership America s enthusiasm for regional trade agreements and the institutions that might encourage them has waxed and waned over the years and reflects both the geopolitical priorities of the time and the importance different American presidents have attached to such matters. The relative importance of what is potentially the Asia-Pacific s most important trade grouping the Asia Pacific Economic Cooperation (APEC) forum is testimony to the importance of American interest and indifference. As the US s attention shifted from the region and became preoccupied with wars in the Middle East, APEC withered on the vine. Now, however, there is renewed interest in both the Asia-Pacific and in the possibility of regional trade agreements, although not through the auspices of APEC. The new preferred vehicle for trade issues and American engagement is the Trans Pacific Partnership, an initially obscure initiative between Brunei, Chile, Singapore and New Zealand, which has suddenly been given renewed importance and a wider membership including, crucially, the US. Equally significantly, some of the other new members such as Australia, the Philippines and even Vietnam are either actual or potential allies of the US. As China has 12 M. BEESON and A. BROOME, Hegemonic instability and East Asia: Contradictions, crises and US power, «Globalizations», vol. 7, no. 4, 2010, pp E. MACASKILL, WikiLeaks: Hillary Clinton's question: how can we stand up to Beijing?, «The Guardian», 4 December

7 become more assertive and threatening as far as the region s smaller maritime powers are concerned, any agreement that ties America to the region has begun to look more attractive. Even famously protectionist Japan is edging towards inclusion as strategic tensions with China continue to rise. Unlike APEC which advocates a form of open regionalism, the TPP (Trans-Pacific Partnership) is discriminatory and designed to confer any benefits exclusively on its members. It contains potentially far reaching legally-binding agreements on labour relations, intellectual property, investment and much more, although the secretive nature of the negotiations make it difficult to be sure just how extensive the agreement could actually be. The major point to emphasize, however, is about which countries have not been invited to join. Unsurprisingly, perhaps, China sees its exclusion and the coming together of so many American allies as another example of American attempts to contain it. In any case, even if it were invited to join and what sort of economic agreement wouldn t want to include the most important economy in the region? it would find it impossible to comply with some of the TPP s proposed initiatives, especially wholesale tariff elimination 14. What s at stake in the region? No doubt some find discussions of trade agreements rather eye-glazing and not the main geopolitical game. But in the absence of outright war which has arguably been made less likely because of economic interdependence the low politics of commerce actually is the main game. This is why we need to pay more attention to the political-economy of great power relations, not just the more overt manifestations of national power. Even for those who argue that international relations is ultimately all about military capabilities, they have still got to be paid for. Equally importantly, it is debatable whether China s ability to project power in a conventional sense is actually more important than the influence of its economic might. It is striking that China has done more to improve both its image and arguably its national security by playing the role of a responsible stakeholder in East Asia than it has by its ill-judged attempts to assert itself militarily. The China-Asean Free Trade Agreement, for example, did more for China s reputation in Southeast Asia than anything else. It was such a success because China made an economic sacrifice in unilaterally allowing the ASEAN states market access in return for geopolitical influence. Much of this good will has been subsequently squandered, of course. Nevertheless, China s experience suggests that 14 D. PILLING, It won t be easy to build an anyone but China club, «Financial Times», 22 May

8 economic interdependence, multilateral negotiation and creative diplomacy are more effective than crude assertions of unilateral power 15. Ironically, therefore, the US s great regional rival may offer some important lessons in this regard. Economic agreements may be important stepping stones to wider influence, especially where they give tangible benefits to smaller powers. Even though many regional powers are scrambling to improve their relationships with the US, if the benefits of the TPP are seen to accrue primarily to the US and discriminate against non-members this is unlikely to endear America to the region. The danger for the US is that China rediscovers its diplomatic mojo and uses its economic leverage to create a regional order that excludes the US. Enlightened economic policy could be critical for both sides. Sino-US relations aren t inevitably zero sum and destined to end in conflict. There is nothing inevitable in international affairs, as the abrupt end of the Cold War reminds us. Nevertheless, for better or worse the relationship between China and the US a G2 in all but name will be the most important bilateral relationship in the world. We must hope that policymakers on both sides remember that economic interdependence is a critically important, easily damaged part of overall national security. 15 G. CHIN and R. STUBBS, China, regional institution-building and the China-ASEAN Free Trade Area, «Review of International Political Economy», vol. 18, no. 3, 2011, pp