Policy uncertainty threatens trade growth, says World Bank


February 22, 2017

Policy uncertainty threatens trade growth, says World Bank

Warning on protectionism and threats to trade agreements in Trump era

https://www.ft.com/content/9d49b092-f859-11e6-9516-2d969e0d3b65

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Political uncertainty is slowing trade growth, a World Bank report has concluded, indicating that the rise of Donald Trump may already be casting a shadow over the global economy.

Major international institutions such as the IMF, the OECD and World Bank have recently upgraded their forecasts of global economic growth largely due to expectations that tax cuts, rising infrastructure spending and a wave of deregulation will boost the US economy under the new president. But the report by World Bank economists, released on Tuesday, highlights the fragile state of one historically important engine of global growth — trade.

To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued. Michele Ruta, World Bank report co-author

The study avoids naming Mr Trump, but highlights rising protectionism and threats to unwind trade agreements — such as those made by the president. It also raises the prospect that attempts by the Trump administration to force companies to repatriate global supply chains to the US could undermine efforts to boost lagging productivity growth. To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued Michele Ruta, World Bank report co-author International trade has been growing below historic trends for the past five years. The 1.9 per cent growth recorded in 2016, according to the team at the bank, was the slowest since the 2009 collapse in commerce that followed the global financial crisis.

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Prime Minister Justin Trudeau meets with U.S. President Donald Trump in the Oval Office at the White House–The Future of NAFTA

The team found that some of the reasons for the anaemic trade growth, which affected both developed and developing economies, were broader trends such as slow economic growth around the world and a collapse in commodity prices. But in 2016 the principal change was a surge in uncertainty about economic policy. According to the World Bank’s calculations, such uncertainty was responsible for 0.6 percentage points of the 0.8 percentage-point fall in trade growth between 2015 and 2016. The team at the bank based their figure on a study of the relationship between trade and economic policy uncertainty in 18 countries over three decades. They added they expected the impact to continue in 2017. “To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued,” said Michele Ruta, one of the authors. The World Bank team also sought to quantify the impact of trade agreements on global trade growth. World trade grew at an annual rate of 6.53 per cent between 1995 and 2014, they calculated. Had no new members — including China — joined the World Trade Organisation or no new trade agreements been signed, international trade would have grown at just 4.76 per cent annually, they found.

One of the big consequences of the explosion in trade deals in recent decades has been the emergence of global supply chains. Such chains are widely seen by economists to have made businesses more efficient and boosted productivity. But Mr Trump and his administration have said they want to unwind those international supply chains and bring them home. “It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” Peter Navarro, one of the president’s top trade advisers, told the Financial Times last month.

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According to the World Bank team such a move, coupled with unwinding existing trade agreements that have encouraged the establishment of international supply chains, would hurt productivity growth. “Preserving and expanding the reach of trade agreements, rather than backtracking on existing commitments, would help to sustain the growth of productivity,” the bank’s economists wrote.

East Asia: Trade Regime critical for Economic Stability and Political Security


East Asia: Trade Regime critical for Economic Stability and Political Security

by  EAF Editorial Group

What the Trump Administration will ultimately do to the shape of the global trade regime is difficult to foretell but there’s no question that it will change it forever, even if there is strong global push-back against Trump’s threat to unravel trade agreements and carry a protectionist stick.

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The trade regime, and the way in which it encourages open trade and international interdependence among those who sign on to its rules, is not simply an instrument of economic policy strategy that can be changed without political consequence. For most countries, and certainly those in East Asia which are so dependent on open trade to sustain their basic livelihood, the trade regime is a critical instrument of political security.

Trump has already signed executive orders to withdraw the United States from the Trans-Pacific Partnership (TPP) and renegotiate the North American Free Trade Agreement (NAFTA). What appeared noisy campaign rhetoric has been transformed into concrete action.

Trump’s withdrawal from the TPP is no big deal in itself: with the exception of what it promised in terms of liberalisation of the Japanese economy, the economic effects of the deal that was on the table were oversold. Even renegotiation of NAFTA may have more limited economic consequences than have been threatened. But these steps, together with the threat of punitive tariffs on imports from China and Mexico, plus a total retreat from multilateral or regional trade agreements, tears at the core principles upon which the US supported postwar economic order had been built.

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POTUS Donald J. Trump and China’s President Xi

Anyone who says that a switch of this magnitude and direction in the trade policy strategy of the world’s largest economy and second-largest international trader is of little consequence is seriously delusional. The old certainties that brought prosperity and a significant measure of stability to world affairs for nearly three-quarters of a century after the Second World War are under serious threat.

A world in which the defining characteristic is a lot of bilateral trade agreements rather than one in which multilateral and regional frameworks are predominant imposes costs on business and consumers alike because of the need for compliance with different rules of treatment across different trading partners. It also injects a different tone into international politics. These concerns are what motivates the argument for regional and global trade regimes that govern international flows of goods and services through unified rules and standards.

The broader the framework within which trade can take place, the greater will be the scope for division of labour and the higher the gains from international trade. Bilateral trade deals can’t replicate the gains from regional and multilateral agreement, and they will unhelpfully cut across global and regional value chains. As the largest centre of production networks, East Asia has much at stake in the push back against an open, global rules-based trading system and the regional arrangements that support it.

While the direct economic costs of Trump turning America’s back on the TPP and other measures might be relatively small, the systemic costs are much larger.

As Shiro Armstrong and Amy King write in this week’s lead essay, Trump’s executive order to withdraw the United States from the TPP agreement in the Asia Pacific ‘is a strategic turning point in the open economic order. It is a blow to furthering reform for some members, a lost opportunity for the United States to write the rules of international commerce, and more worryingly a sign of the United States turning its back on the global economic system it helped create and lead’.

How can East Asia, which includes China and Japan — the world’s largest and fourth-largest trading nations — stand against the corrosion of a global trading order that is so central to their common economic and political interests?

The economies of East Asia must, of course, stand quietly firm in global and regional forums and in all their bilateral representations to the United States against the undermining of the global trading system, giving strength to those forces in America that can help to shape much better outcomes than the present circumstances threaten. But, through their own commitment to collective liberalisation and reform, they can also help to lead the system back from the brink.

With major multilateral trade deals at the WTO now too difficult and bilaterals only able to make slow and incomplete progress towards freer markets, Armstrong and King observe, all eyes now turn to Asia’s Regional Comprehensive Economic Partnership (RCEP) agreement. It is the most important initiative on the global trade scene.

Image result for flags of asean member statesASEAN is the hub of RCEP Agreement

RCEP comprises the 10 Southeast Asian members of ASEAN as well as Australia, China, India, Japan, New Zealand and South Korea. Though, as Armstrong and King say, there are many misconceptions about the RCEP enterprise.

‘The first misconception is that RCEP is China-led. But China is a spoke and ASEAN is the hub of the arrangement. RCEP was built to consolidate ASEAN’s five separate free trade agreements with China, South Korea, Japan, India and Australia–New Zealand. And the RCEP idea and its guiding principles were crafted not in China, but in Indonesia. ASEAN centrality has ensured that RCEP has incorporated Asia’s other large power — Japan — and reflects Japanese preferences as much as those of China. Originally, China wanted to limit core membership of Asian cooperation to ASEAN plus China, Japan and South Korea. Japan wanted a larger membership, involving Australia, New Zealand and India, to help provide a counterweight to China’.

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In the end, ASEAN centrality and the interests of Australia and India in the region meant a broader and representative group ideally placed to take the lead collectively on global trade.

‘With the world trading system under threat’, as Armstrong and King conclude, ‘it is time for leaders in Asia to step up and push for opening markets and deepening reforms to enhance economic integration, not just with each other but with Europe, the United States and the rest of the world’.

*The EAF Editorial Group is composed of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel, Amy King and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.

http://www.eastasiaforum.org/2017/02/20/east-asias-agreement-to-keep-the-world-economy-open/

HRH Sultan Nazrin Shah: Understand Malaysia better through its History


February 14, 2017

HRH Sultan Nazrin Shah:  Understand Malaysia better through its History

COMMENT: HRH Sultan Nazrin Shah, the Oxford and Harvard-educated political economist, is to be congratulated for publishing a monumental book on Malaysia’s economic history.

One cannot dispute His Royal Highness’ view that understanding the country’s economic, political and socio-cultural history is important since it enables us to appreciate the progress we have achieved since Independence in 1957 due to the contributions of our diverse communities, and learn from our policy failures, and follies and frailties of our past leaders and administrators.

Our achievements have been spectacular by any measure  to earn the respect of the world. The developing world used to look up to us for our economic success. But in recent years, while we enjoy continued economic growth (in GDP terms), albeit modest by comparison with our past attainments, the management of our economy has been increasingly disappointing and depressing. The level of corruption is now the worst I have ever witnessed in my nearly 45 years of public, corporate, academic and civil society life.

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It is obvious to me at least that our present generation of UMNO-BN leaders have not learned the lessons of history especially why nations can and have failed because of corruption, abuse of power and sheer incompetence. HRH Sultan of Perak would, therefore, be well advised to remind Prime Minister Najib Razak of the consequences of poor governance. Preaching to the converted like me and others is inconsequential since we are not in power.

Finally, I must add my disappointment with this piece by Hanis Zainal. While publicizing HRH Sultan Nazrin’s book, she chose not acknowledge that scholars and academics like James Puthucheary, Agoes Salim, Lin See Yan, Rais Saniman, Junid Saham, Jomo Kwame Sundaram, Edmund Terrence Gomez, Mohamed Ariff (formally with MIER),Kamal Salih (USM), Lim Teck Ghee, Johan  Saravanamuttu et.al have contributed immensely to our understanding of Malaysia’s political economy and history. They have, in fact, preceded HRH Sultan Nazrin Shah.–Din Merican

by Hanis Zainal@www.thestar.com.my

The key to understanding a country better is through its history, so it is logical to assume the key to studying a country’s economy is through studying its econo­mic history.

This was what Perak Ruler Sultan Nazrin Muizzuddin Shah set out to achieve in Charting the Economy: Early 20th Century Malaya and Contemporary Malaysian Contrasts which was launched yesterday.

The book charts the country’s economic activities under colonial rule and contrasts it with the economic growth and development in contemporary Malaysia.

During the launch at a hotel here, Sultan Nazrin said that lessons learned from history carry “great relevance” for overcoming the economic challenges of modern-era Malaysia.

 “To better understand contemporary economic performance, it is necessary for us to go back into history to understand long-term trends,” he said.

In his book, Sultan Nazrin charts the changes – from an economy based largely on agriculture and mining in the past to one that is more diversified and broad today.

One of the most important lessons he learned in his study was of people’s contributions to the economy, said Sultan Nazrin.

“The truly remarkable economic and social transformation that Malaysia has experienced is due to the outstanding contributions made by all of our diverse communities working together.”

Quoting novelist Henri Fauconnier, who wrote the Soul of Malaya, Sultan Nazrin said the soul of Malaysia “is found in the country’s diverse people”.

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In his address, Harvard University’s Professor of Political Economy Prof Dwight Perkins noted the book’s importance to the economic literature of Malaysia.

Charting the Economy is published by Oxford University Press and retails at RM99 at all major bookshops in Malaysia.

 

The State of Asia Pacific Free Trade


February 11, 2017

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Number 370 | February 10, 2017
ANALYSIS

The State of Asia Pacific Free Trade

By Eduardo Pedrosa

On January 23, three days after taking office, President Donald Trump issued a memorandum to permanently withdraw the United States from the Trans-Pacific Partnership (TPP), fulfilling one of his campaign promises. The decision came amidst rising concerns about the future of globalization. Since 2006, the Pacific Economic Cooperation Council (PECC) has been undertaking an annual survey of policy experts to provide insights into the debate about free trade and globalization. The belief that the best route to growth is through freer trade is under siege, with accusations from seemingly opposite poles of the political spectrum, that globalization only benefits the top ten or even 1 percent of citizens of a particular country.

Trade-skeptic sentiments are strongest in high income economies. As seen in the PECC survey, respondents from high income economies like the United States gave the lowest assessment of the political environment for freer trade with a net favorability rating of only +16 percent, compared to +41 percent in emerging economies. While the decision to withdraw the US from the TPP may have been driven by opposition to this particular trade deal rather than free trade generally, it will nonetheless hamper attempts to modernize trade rules already out of synch with commercial reality.

In place of the TPP, the Trump administration has said that it will pursue a series of bilateral deals, an approach that runs counter to a trend to consolidate multi-member trade deals in the Asia-Pacific region.  The Regional Comprehensive Economic Partnership (RCEP) negotiations, for example, are an attempt to consolidate ASEAN’s existing bilateral agreements, and the Pacific Alliance (PA) consolidates a series of bilateral agreements among Latin American economies.

The reason for this consolidation was that the “spaghetti bowl” of bilateral agreements was making it harder and more costly to do business, especially for smaller firms. Much of the increase in global trade in recent years has come from the emergence of global value chains. These international chains of production require components to cross borders multiple times. Global value chains have led to a significant reduction in the prices of goods such as cars and mobile phones, making them more affordable for consumers. However, complex rules of origin in bilateral deals made them hard to use and hence costs were passed on to the consumer.

The introduction of more border taxes will raise costs for consumers, and is unlikely to create the kinds of jobs people hope for. Where businesses choose to base production depends on a variety of factors – proximity to the market, availability of skills, ease of doing business, and the applicable tax regime. The current uncertainty over policy is adding to the economic volatility evident since the 2008 Global Financial Crisis, with businesses taking a ‘wait and see’ attitude towards hiring and capital expenditure. One reason for this attitude is uncertainty and negative expectations for future global growth. Increased trade frictions are likely to lead to even greater caution from members of the corporate sector, encouraging them to keep even more cash on their balance sheets. Concerns about protectionism are rising dramatically, with 32 percent of respondents to the PECC survey selecting it as a top five risk to economic growth compared to 16 percent two years ago. North Americans were the most worried about the impact of rising protectionism on their economies with 52 percent of respondents picking it as a top five risk to growth (making it the 2nd highest risk).

“If progress is made on trade deals such as the RCEP and PA, businesses will view the economies involved as beneficial locations to operate.”

If progress is made on trade deals such as the RCEP and PA, businesses will view the economies involved as beneficial locations to operate because of lower costs, a predictable trade environment, and proximity to the world’s fastest growing markets. A fifth of North American respondents to the PECC survey thought that the RCEP would have a negative impact on their economy – echoing a concern from an earlier era about ‘drawing a line down the Pacific.’ This uncertainty about transpacific cooperation comes at a critical juncture – over the next 5 years the Asia-Pacific is expected to account for almost two-thirds of all global growth.

The PECC survey results also give some indication of the challenges to freer trade today. Respondents were asked to rate different factors that influence attitudes toward freer trade: income inequality, job security, failure to communicate the benefits of trade, slower global economic growth, and sustained political leadership. Two findings stand out: First, North American respondents were much more concerned about all factors compared to all other survey respondents; and second, there are problems with perceptions about trade (the failure to communicate) and other deeper problems such as rising income inequality and job insecurity.

While a lot of energy and time will be expended on the future of globalization, the critical question is: where are jobs and growth going to come from? Over the past 4 years two-thirds of the region’s growth has come from the services sector, compared to 28 percent from the manufacturing sector. At an average of 57 percent of total output, the services sector in the region’s emerging economies is smaller compared to 80 percent of total output in more advanced economies. Moreover, the way in which services are being delivered is changing – 70 percent of respondents to PECC’s survey thought that digital trade, e-commerce, and the internet economy would be very or extremely important to the future growth of their economies.

While tariffs and border taxes have come down from an average of 17 percent to less than 6 percent, many of the barriers that remain are regulatory in nature. Two-thirds of respondents to PECC’s survey selected transparency, multiple layers of authority, and predictability of regulations as serious or very serious impediments to services trade. These issues are not easily dealt with in the context of trade negotiations – for the most part they are not designed with foreign trade in mind, but are put in place to protect other concerns such as consumer safety. A forward-looking trade agenda needs to find ways to reduce the burden on businesses to allow them to grow – creating jobs and lowering prices.

The Asia-Pacific is undergoing a period of historic change and its trajectory, now more than ever, is unclear. Given the large populations and rising incomes, it is most likely to remain the center of global growth for decades. While the Asia-Pacific policy community remains committed to freer trade, there are significant differences on the domestic political economy of freer trade. A trade agenda that addresses the concerns of those negatively impacted by trade will be critical to continuing the forward momentum in making free trade more desirable and sustainable.

About the Author

Eduardo Pedrosa is the Secretary General of the Pacific Economic Cooperation Council (PECC). He can be contacted at Eduardo.Pedrosa@PECC.org
The East-West Center promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through cooperative study, research, and dialogue.

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50 Year Old ASEAN–No Longer Business As Usual


February 10, 2017

50 Year Old ASEAN–No Longer Business As Usual

by Dr. Munir Majid@www.thestar.com.my

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IT is not business as usual. As ASEAN’s array of official and private sector meetings roll out for the year, urgent thought must be given to dramatically new challenges beyond the stubborn issues that continue to arrest the region’s meaningful integration.

The advent of Donald Trump as President of the United States has overturned many regional assumptions and threatens to cause economic as well as political turmoil. These developments should make ASEAN think crisis management – even if, in the end, the worst does not happen.

There are a number of “what ifs” which should be addressed.What if Trump causes a trade war to break out between America and China by imposing the punitive import duties on Chinese goods that he has threatened?

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It will then not be a simple outcome of relocation of manufacturing centres from China to low-cost Vietnam, for instance, as some have rather sanguinely suggested. The supply chains to which many ASEAN exports are linked for the finished Chinese product would be broken. There will be export disruption – not just for China.

There are countries in ASEAN, apart from Vietnam (90%), like Singapore (176%), Thailand (69%) and Malaysia (71%) whose exports amount to a substantial proportion of their GDP.

On top of exports through China, their own direct exports to the US will also be affected, as will any relocated exports from Vietnam.

There will be no winners in a trade war, no benefits to be derived from China’s apparently singular predicament. The knock-on effect will be widespread. In time, as excess capacity looks for export sales, dumping will become a problem, as will protection against it.

Motor cars that cannot get into America will have to go somewhere. Steel turned away from the US as Trump seeks to protect mills and jobs in the mid-west will have to be shipped somewhere else. Even the textile industry will be spinning in different directions as Trump has promised to revive it in America.

The whole global free trade ecosystem will go topsy-turvy. How will free trade within the ASEAN Economic Community, such as it is, be maintained? Can ASEAN+6 move on to the Regional Comprehensive Economic Partnership (RCEP) as the fallout from Trump’s America First trade policy hits the world?

Asia – and ASEAN – will have to stick together and carry on with the open, albeit reduced, global free trade and investment system. Will that happen?

Some ASEAN states with larger domestic economies are less dependent on international trade than others. Already, now, they take a different position on opening up their market. Will it get worse in the situation of stress, should it come about?

ASEAN must talk about these possibilities now, before they happen. Someone must take the lead. Too often this does not happen in ASEAN. Can the officials, or the secretariat, or the private sector do this scenario-setting for the ministers, for the leaders? Or is ASEAN going to carry on as if everything is not changing around it?

I am reminded of what George Orwell has been said to have remarked: In a time of universal deceit, telling the truth is a revolutionary act. The tendency to take to the ASEAN level what routinely happens in many ASEAN domestic systems should be snapped. Some functionary in ASEAN must warn the regional grouping of the dire threat facing it.

The other challenge facing Asia and ASEAN is the risk Trump poses to regional peace and stability. This comes from the challenge again thrown at China, this time in respect of its claim to the South China Sea. As China’s predominance in the disputed expanse of territory is by no means ideal, its exposure to a more counter-assertive and belligerent American stance under Trump – no Chinese access to islands artificial or militarised that do not belong to China “under international law” – may encourage claimant ASEAN states to be less compliant with the China-set path of dispute management.

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Since the law of the sea tribunal decision last July, there has been a lowering of temperature in the South China Sea dispute, even if at the cost of not highlighting the baselessness and futility of China’s claims under international law. The return has been a commitment by China in the diplomatic channeling with ASEAN to having a code of conduct (COC) finally in place this year – although only in framework form.

It has been a long-term ASEAN objective to have this COC for peaceful conduct in the South China Sea. China has hitherto been dragging its feet on this. With a more assertive American policy against China, would there be among ASEAN states a disposition to push with the US to get a better deal on the South China Sea?

This kind of geopolitical arbitrage may be attractive, but it would come at a longer-term cost to regional cooperation, which has become critical because of Trump’s foreign economic and trade policies. This is a dilemma ASEAN states would do well to address together.

Already, beyond ASEAN, India appears attracted to taking advantage of the predicament China might be in with Trump. India, of course, has long-standing border disputes with China, which Beijing has been happy to keep unresolved. At the same time, there is strategic competition between the two over their regional place in Asia.

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Another could be Japan which, again, has many unresolved disputes and issues with China. India, in particular, appears to want to flirt with Trump even at the cost of frustrating conclusion of the RCEP. The cost to India, however, could be isolation from the Asia-Pacific region for an uncertain alliance with Trump’s America.

You cannot do strategy with a counter-party whose leitmotif is transactional. With Trump it is not going to be win-win. It is going to be win-win-win for America.

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Trump’s Win For America First Foreign Policy

ASEAN states should want to address these profound issues. Even dissuade member and partner countries from wanting to sup with the devil, as it were.

China, of course, has not been the ideal big country partner beyond platitudinous statements and suffocation of ASEAN by money. Its actions in the South China Sea are not indicative of a great power that will not grind your face in the dirt if you did not do its bidding.

Will China become the good big brother it claims it wants to be, even as America becomes the bad and ugly one?

It looks like ASEAN might be caught between a rock and a hard place. Individual member states no doubt will be doing their calculation with the hope to position themselves in a better than survival mode.

However they will all be better off if they also worked together among themselves and partnered Asia-Pacific countries to achieve better economic integration, whose benefit will discourage them from playing dangerous geopolitical games.

So, as ASEAN under Philippines leadership looks at themes such as inclusive growth, an excellent focus, and addresses the many stubborn issues that are barriers to better integration, it must prepare also for the very difficult economic and political environment which will be fashioned by the Trump administration.

Tan Sri Munir Majid, Chairman of Bank Muamalat and visiting senior fellow at LSE IDEAS (Centre for International Affairs, Diplomacy and Strategy), is also chairman of CIMB ASEAN Research Institute.

 

China’s Quest for Regional Community


February 3, 2017

China’s Quest for Regional Community

by Zhang Yunling, Chinese Academy of Social Sciences

http://www.eastasiaforum.org/2017/02/03/chinas-neighbours-and-the-quest-for-regional-community/

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China’s Xi and Indonesia’s Jokowi

China’s meteoric rise has put the spotlight on the relationships it shares with its neighbours. Distinct national interests and the substantial social and political diversity in the region make the development of a regional community a complex and delicate task.

China shares land borders with 14 countries and has eight maritime neighbours. But to truly understand China’s relations with its neighbours, one must go beyond geography and consider how history, culture, geopolitics and geo-economics have shaped, and will continue to shape, these relationships.

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President Duterte of  the Philippines and China’s Xi Jinping

Serious consideration must also be given to competitive national interests in the evolution of these increasingly interdependent relationships. The rise of China presents new challenges and opportunities for the development of neighbourhood relations and regional strategies. The close involvement of extra-regional powers, such as the United States, Japan and India, serves to further complicate China’s relationships with its neighbours.

China and its neighbours have a shared interest in maintaining a peaceful and friendly relationship. If mishandled, all sides will suffer. This is the implication behind the Chinese leadership’s call for a ‘community of shared interests and common destiny’ with its neighbours through a number of new initiatives. This new, grand strategy is underpinned by China’s growing confidence in its ability to shape the regional environment. It reflects a new mode of strategic thinking on how to position China among its neighbours and how to understand the new importance of China’s neighbouring regions.

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President of China Xi Jinping and Cambodia’s Prime Minister Hun Sen

China has developed initiatives to enhance regional ties, but the political, social and economic diversity among China’s neighbours is immense. Relations are further complicated by conflicts of interest between the neighbours themselves, as well as by intervention from extra-regional powers, which engage in overt and covert competition in the region.

As China’s influence rises, its neighbours’ distrust grows. Some of them worry that China’s harbours ambitions for regional hegemony. Maritime and territorial disputes, over the exclusive economic zones in the East China Sea and South China Sea in particular, have resulted in rising tension between China, Japan and some ASEAN members. There has been widespread concern that confrontations may lead to a military conflict. The announcement and implementation of the United States’ ‘pivot to Asia’ strategy, which stokes US–China competition in the region, has amplified these difficulties.

China’s rise has triggered complex reactions among its neighbours. In some cases, it has exacerbated existing disputes. When China was weaker, disputes were more likely to be shelved — China often lacked the capacity to address them, and neighbouring countries considered their relations with China to be a lower priority.

As a rising power, China will naturally expand its interests and exert its influence. This could lead to competition and conflict, particularly with the United States. As a result, a growing sense of anxiety has emerged among regional states that fear that a strong China would seek regional hegemony at their expense.

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Malaysian Prime Minister Najib Razak with President Xi Jinping

Disputes among nations, including territorial disputes, should — for the sake of all involved — never be resolved by resort to war.

Traditional Chinese culture advocates peace and harmony, commends defusing contradictions, pursues reconciliation and believes in the tactical principle of subduing enemy troops without resorting to war. The time for China to display this ‘culture of harmony’ may be arriving.

The concept of harmony has shaped Chinese culture and politics for centuries. In September 2011, the Chinese State Council Information Office incorporated these values into China’s foreign policy by releasing a white paper entitled ‘China’s Peaceful Development’. This report outlines the core values that should define China’s strategic rise to global prominence, with an emphasis on the concept of a ‘harmonious’ culture.

The Chinese leadership has recently called for building a ‘community of shared interests and common destiny’ among China and its neighbours, based on the guiding principles of ‘amity, sincerity, mutual benefit and inclusiveness’. But realising this communal dream will depend on the will and wisdom of both China and its neighbours.

Both sides have made great efforts made to develop the China–ASEAN relationship. The China–ASEAN Free Trade Area and strategic partnership is just one example of an attempt by both parties to build a cooperative framework based on good will and real interests. But tensions in the South China Sea, especially in light of the Philippines’ unilateral action through the Permanent Court of Arbitration in The Hague, hamper progress. And the United States’ military presence pours oil on the fire.

Fortunately, China and ASEAN have reconfirmed their commitment to a peaceful solution based on negotiations, and the Philippines’ newly elected president, Rodrigo Duterte, supports this approach. Both China and ASEAN recognise that cooperation, rather than confrontation, will lead to the best outcome in handling the dispute. Such an agreement could be based on consultation and negotiation, focusing on easing regional tensions and finding the best way to allocate resources.

The process of regional cooperation helps to build up a sense of community spirit and shared interests. One of the most important changes for East Asia is that the foundation of regional cooperation is now based on a multilayered structure ranging from bilateral to regional-level mechanisms, such as the ASEAN+3 and +6 frameworks and the East Asia Summit.

China has so far played an active role in promoting this kind of regional cooperation, showing that what a rising China wants is to build and reinforce the regional community — not a China-dominated ‘Middle Kingdom order’.

Zhang Yunling is Professor of International Economics and Director of International Studies of the Chinese Academy of Social Sciences.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Managing China’.