What China’s Belt and Road has to learn from 1920s America


May 17, 2017

What China’s Belt and Road has to learn from 1920s America

Chinese President Xi Jinping’s plan to resurrect the Silk Road must heed the lessons of a bygone era

By  Sourabh Gupta

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Perceptive China-watchers have observed that President Xi Jinping ( 習近平 ) has modelled his political mission on Deng Xiaoping ( 鄧小平 ) – even if his methods bear a whiff of Maoism.

Deng put an end to the turmoil of the Cultural Revolution and engineered China’s transformation towards socialist modernisation. Xi’s sweeping reforms and anti-corruption crackdown aim to engineer an analogous transformation that will deliver China to the cusp of a “moderately prosperous” society by the time of the Chinese Communist Party’s centennial founding in 2021.

In one notable respect though, Xi has broken with the Paramount Leader. Deng had counseled a 24-character strategy on his countrymen: “observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.” By contrast, Xi has not been shy to employ assertive diplomacy in support of an ambitious, long-term and strategic foreign policy.

No single political project personifies this more than the “Belt and Road Initiative”, which aims to resurrect the ancient Silk Road through infrastructure projects that will link Eurasian economies into a China-centred trading network. When two dozen or so heads of state assemble in Beijing for the Belt and Road Summit on Sunday and Monday, the magnitude of the imposing soft-power dimension of this “win-win” project that aspires to embed Xi’s “China Dream” within a “neighbourhood community of common destiny” will be on ample display. The BRICS Summit in Xiamen (廈門) this September will be a sideshow by comparison.

A variety of malignant motives, mainly economic, have been ascribed to the Belt and Road plan. It aims to channel Beijing’s allegedly manipulated reserve surpluses abroad, prop up the internationalisation of the yuan, unload China’s industrial overcapacity on neighbours, ensnare the recipient country in a cycle of debt, exploit the host country’s strategic resources and purchase their political affiliation along the way.

Steel pipes are loaded for export at Lianyungang port, Jiangsu province, China. Some critics see the Belt and Road as a way to unload China’s industrial overcapacity on neighbours. Photo: Reuters

While these claims contain merit, the redeeming arguments are more compelling. China’s hard currency reserves are better put to use in hard infrastructure projects in developing countries than deposited passively in New York’s financial market. At a time of volatility in liquidity provision in the international monetary system, yuan internationalisation and the rise of another issuer of safe, short-term and liquid instruments is to be welcomed. Moreover, the bilateral yuan swap lines and dedicated trade payments and securities settlement infrastructure that Beijing has rolled out over the past half-decade will enable recipient countries to denominate their borrowings in local currency, thereby limiting costs and exposures.

Transferring industrial capacity, improving infrastructure and reducing transaction costs on the other hand will enable developing countries to jump-start a dynamic upward spiral of growth and development in sectors where they enjoy latent comparative advantages – on lines similar to China’s own industrial jump-start in the 1980s. A comparison of China’s and the US’ Eximbank (Export-Import bank) loans to Africa, meanwhile, belie the oft-repeated claim that the former is directed solely at natural resources. China Eximbank has contributed to almost all 54 countries in Africa – resource rich or poor – and displays no perceptible pattern of favoured client state lending. US Eximbank loans, by contrast, are concentrated in energy and mining and confined to a favoured few.

Finally, with developing and emerging economies forecast to account for 59 per cent of world GDP in 2018 (neatly reversing the average 59 per cent accounted for by advanced economies from 1980 to 2007), as per the IMF, the rise of an alternate model of development financing that is leaner, cheaper, quicker and more flexibly attuned to host country systems and requirements should be welcomed, not stigmatised.

Development economics aside, the most consequential effects of the Belt and Road will be in international relations.

The Belt and Road’s storied predecessor, the Silk Road, two thousand years ago ushered in an age of commerce and civilizational exchange and afforded a set of loose principles of order and self-restraint. The Belt and Road’s ‘open regionalism’, likewise, will showcase Xi’s determination to practice a “new type of international relations” that binds China’s extended periphery as far out as Africa in a win-win embrace. Purposeful translation of his optimistic assessment for peace and development will realise the long-delayed promise of south-south cooperation in the post-colonial age. With luck, it will also confine the fascination with Great Power transition ‘traps’ – particularly the ‘Thucydides Trap’ (in which an established power’s fear of a rising power leads them into a vicious cycle of competition and eventually war) – to the armchairs of zero-sum-minded historians and think tank specialists.

Banners advertise the Belt and Road Forum in Beijing. Photo: AP

China’s re-emergence at the turn of, and the first few decades of, the 21st century bears remarkable parallels to America’s rise a century ago. Between 1890 and the early-1900s, the proportion of US manufacturers engaged in exports rose from less than a quarter to more than two-thirds, as the burgeoning surpluses of farms and factories were absorbed overseas. By the late-1910s and through the 1920s, the US became a prodigious exporter of capital as more than US$1 billion a year in loans surged out of New York. Nearly one-third as many foreign bonds floated on Wall Street as bonds of US companies.

As the Belt and Road becomes a conduit for the export of Chinese capital on as prodigious a scale as the US a century ago, its design and roll-out must also be informed by the cautionary lessons of that era. When boom had periodically turned to bust in the US economy and subjected many of her poorer hemispheric trade partners and raw material suppliers to simultaneous capital and commodity market shocks, Washington failed to provide the public goods (international development financing; recycling of capital flight; inter-governmental institutionalisation, and stabilisation loans, and so on) that could have placed a floor under the crash – and misery – overseas. China’s capital exports must avoid such boom-bust patterns and instead marry hard physical capital with soft technical know-how, managerial skills and local project ownership with purpose and patience.

During the next decade, China will replace the US as the world’s largest economic power. As it grows richer, it must assume the mantle of collaborative leadership and provider of global public goods. The Belt and Road is an appetising start but the proof of the pudding will be in its eating, as well as its ability to draw sceptical bystanders in the West and in Asia to the banquet

America first, geo-economic logic last


April 27, 2017

America first, geo-economic logic last

by Gary Hawke, Victoria University of Wellington

http://www.eastasiaforum.org

Image result for tomahawk over syriaTrumponomics–Military Power over Geo-Economics

The Trump Administration has introduced a new set of challenges to the international economy. It has profoundly changed the role of the United States in international economic diplomacy, ceasing to be a champion of multilateralism.

Within the first 100 days of the Trump administration, reality has overwhelmed a good deal of campaign rhetoric, and individuals experienced and skilled in conventional public management have prevailed over some who epitomised revolt against elites. But ideas that challenge longstanding US positions on the world economy and international integration remain at the core of the Trump administration.

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Get the Message, Theresa May?

Bilateral trade balances have long been known to be an inappropriate policy objective. Yet the Trump administration is pursuing this without any sound argument. Its belief is that only bilaterally balanced trade (or an excess of US exports) is ‘fair trade’. This nonsense is reinforced by concentrating on trade in goods, ignoring surpluses on services trade. And the capital account is ignored entirely.

Trump expands the idea of bilateral balance to the trading relationship with every other country. He insists on what Gary Hufbauer has called ‘mirror-image reciprocity’. Every component of a deal, every individual tariff rate, any provision about rules of origin for specific products, and any condition for foreign investment must be no less favourable for US exporters than the corresponding rule applied to the United States. This is misplaced concreteness has gone mad.

The idea of a win-win overall deal is rejected. The very idea of complementarities between economies is ignored. That this is endorsed by the chair of the newly established National Trade Council Peter Navarro, who holds a Harvard PhD in economics, is a conclusive argument for an enquiry into Harvard standards.

Two of Trump’s executive orders on trade deficits and trade laws would both fail the most elementary of economics examinations.

Under the Trump Administration, history is no more respected than economics. It has been argued that the WTO and its predecessor GATT were intended to apply only to developed economies. Those who were at the Havana conference in the 1940s and those who negotiated with developing economies in the Uruguay Round saw no such belief among their US colleagues.

This is a thin disguise for wishing to continue using subterfuge rather than economic logic in consideration of so-called ‘countervailing duties’ and ‘anti-dumping penalties’ against China. The idea that there is an indisputable definition of a ‘market economy’ is absurd, but then so is the underlying idea of dumping. Artificial lowering of prices with the intention of raising them after forcing a competitor out of business should be countered — if it were ever properly detected.

Even more absurd is the notion that ‘over capacity’ is something that requires government intervention. Consumers gain from cheap products. When producers cannot sustain output levels at such low prices, the appropriate response is for the least efficient producers to exit. In the case of steel, ‘least efficient’ is probably not the same as ‘Chinese’.

Most concerning is an attack on the WTO dispute resolution system. US opposition to it predated the Trump administration. The Obama administration vetoed the reappointment of a judge to the Appellate Body for the little-disguised reason that his decisions were uncongenial.

US resistance to the dispute resolution system has never been far from the surface. It is often rationalised by a constitutional principle that only the US Congress can create laws which bind US citizens. Some US judges can nevertheless make positive use of international reasoning, and previous administrations have recognised that membership of international institutions could require them to persuade Congress to amend US law or to compensate a foreign party.

The language in the final statement of the WTO dispute resolution system is in no way an exemption of the United States from the dispute resolution system. The words of the dispute settlement understanding that a ruling can’t ‘add to or diminish the rights or obligations’ of a member country — relate to member countries’ commitments, not US law, and their interpretation is not a US prerogative.

Rhetoric about a ‘rules-based international order’ or the ‘modern liberal international order’ is now entirely empty when set beside the declared intentions of the Trump administration. Again, the problem is deeper than Trump. No country can be an effective advocate of the rule of law when its partisan politics dominates the choice of its most senior judges. Fundamentally, the United States has to adjust to no longer being able to dominate global affairs.

Economic integration now has to be led by countries other than the United States. But successful integration elsewhere will cause responses within the United States as businesses miss profitable opportunities and as voters see that they are missing out on consumption and employment gains.

Gary Hawke is retired Head of the School of Government and Professor of Economic History, Victoria University of Wellington.

Canada’s Foreign Policy: Middle Power Engagement with Asia-Pacific in Trade and Peace


April 23, 2017

Canada’s Foreign Policy: Middle Power Engagement with Asia-Pacific in Trade and Peace

by Adam P MacDonald

http://www.eastasiaforum.org

Image result for Justin Trudeau

Ever since Washington unveiled its ‘rebalance’ strategy for the Asia Pacific, debate has emerged in Canada over the need for a similar ‘mini-pivot’ towards the region. Despite its large Western coastline, Canada does not self-identify as a Pacific state due to enduring ties to Europe and the Atlantic.

Image result for Trudeau and China's Xi

But East Asia is increasingly the focus of Canada’s efforts to diversify trade partners and secure access to emerging markets. This is exemplified by the 2015 Canada–Korea Free Trade Agreement, China recently becoming Canada’s second largest trading partner, and Ottawa’s support for and participation in the now terminated Trans-Pacific Partnership (TPP) negotiations.

Still, growing economic relations in East Asia have not been accompanied by any sustained political or strategic engagement despite the abundance of security interests of direct relevance for Canada. These interests include promoting global and regional stability amid shifting power configurations, resolving outstanding regional maritime disputes and North Korea’s growing nuclear and missile capabilities (motivating renewed discussions about Ottawa joining Washington’s Ballistic Missile Defence program). East Asian states’ growing interest and involvement in the Arctic — particularly China — is also a source of speculation and debate within Canadian strategic circles.

Successive governments have spoken eloquently of Canada’s long and enduring interests and involvement in East Asia. But Canada’s presence has been sporadic and on a downward slope since its zenith in the mid-1990s. Canadian engagement with the region has been ‘fair-weather’, whereby the degree of participation is not determined by enduring interests but as a function of available resources and the absence of competing foreign policy demands.

But there may be glimpses of a more concerted and sustained Canadian effort to remain regularly engaged with East Asia. Prime Minister Trudeau’s high-profile visits to Japan and China within the first year of his tenure along with the ongoing six-month deployment of two Canadian naval warships to the region are positive signs. Defence officials, in particular, explain the recent deployment as signalling the strategic importance of the region to Canada and as reinforcing a commitment to regional peace and security. Despite the navy’s declining size and capability, major deployments to East Asia are planned for the next two years.

While it is premature to extrapolate any emerging trends from these plans, a number of scholars advocate regular naval deployments for Canada to pursue maritime diplomacy as an ambitious but attainable avenue to achieve staying power in the region. This would also provide in-theatre capability for Canada to conduct a wide spectrum of operations ranging from combat to humanitarian assistance and disaster relief.

But even with the recent comprehensive refit of Canada’s last remaining major class of surface ships and a large-scale shipbuilding strategy to recapitalise the Canadian Navy, Canada’s naval forces will remain highly limited both in numbers and capabilities for the next 10–15 years.

Maritime diplomacy enables and supports but does not in and of itself constitute a regional strategy. While Ottawa is in the midst of a defence policy review largely focused on constructing a fiscal framework for major procurement projects, there appears to be little appetite to conduct a foreign policy review to guide and inform the use of military power in Canada’s international affairs.

Some have voiced aversion to any increased strategic interaction in East Asia, arguing the presence of even a small Canadian naval force will unnecessarily antagonise China and hamper economic relations. It would also put warships at risk in an increasingly tense geopolitical environment, be seen as an unwelcome interference in regional issues, and ultimately as a disjointed venture given the now uncertain trajectory of US regional policy.

Despite some reasonable concerns, Canada should also not avoid the region due to fears of being dragged into a local conflict or that national interests do not warrant such an investment. Canada has direct economic and political ties to the region and has a larger interest as a middle power supportive of a rules-based international system. Canada has also been criticised for too little engagement with the region, not too much. But such a maritime diplomacy strategy also requires Ottawa to acknowledge the reciprocal freedoms of other states to access maritime regions sensitive to Canada, especially the Arctic.

Any augmentation of strategic interactions also presents the challenge of perceptions that Ottawa’s presence is an extension of US policy in the region, especially regarding how military power is employed. While a close ally with the United States and sharing common international interests, Canada is never going to be a major player in the region given its limited ability to project power and influence. Ottawa is ill-suited to adopt similar strategies to Washington in this respect.

Instead, Canada does have an ability to participate in the regional political discourse, especially regarding areas of tension. For example, as an Arctic state, Canada could positively contribute to advising on structures for joint management by competing claimants over disputed areas, such as in the South China Sea. But Ottawa should not confuse a regional strategy with a strategy specifically about this or other disputed areas. Canada must first build and strengthen relations with the region to promote the necessary political conditions to address outstanding territorial and maritime disputes.

Maritime diplomacy is not the only avenue towards increasing relations with East Asia. But it does allow Canadian leaders to signal a visible presence and commitment to the region and creates an impetus for Ottawa to construct a more comprehensive, clear and independent foreign engagement strategy. Whether the recent dispatching of warships is the start of a real determination to shed its fair-weather status is yet to be seen.

Adam P MacDonald is an independent researcher based in Halifax, Canada.

Illiberal Stagnation


April 9, 2017

Illiberal Stagnation

by Joseph E. Stiglitz

https://www.project-syndicate.org

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Today (April 2), a quarter-century after the Cold War’s end, the West and Russia are again at odds. This time, though, at least on one side, the dispute is more transparently about geopolitical power, not ideology. The West has supported in a variety of ways democratic movements in the post-Soviet region, hardly hiding its enthusiasm for the various “color” revolutions that have replaced long-standing dictators with more responsive leaders – though not all have turned out to be the committed democrats they pretended to be.

Too many countries of the former Soviet bloc remain under the control of authoritarian leaders, including some, like Russian President Vladimir Putin, who have learned how to maintain a more convincing façade of elections than their communist predecessors. They sell their system of “illiberal democracy” on the basis of pragmatism, not some universal theory of history. These leaders claim that they are simply more effective at getting things done.

Russia is now enabling the Taliban’s disingenuous diplomacy by pretending that ISIS is the more worrisome threat. It’s a game the Russians have been playing for more than a year.–Russia’s New Favorite Jihadis: The Taliban

That is certainly true when it comes to stirring nationalist sentiment and stifling dissent. They have been less effective, however, in nurturing long-term economic growth. Once one of the world’s two superpowers, Russia’s GDP is now about 40% of Germany’s and just over 50% of France’s. Life expectancy at birth ranks 153rd in the world, just behind Honduras and Kazakhstan.

In terms of per capita income, Russia now ranks 73rd (in terms of purchasing power parity) – well below the Soviet Union’s former satellites in Central and Eastern Europe. The country has deindustrialized: the vast majority of its exports now come from natural resources. It has not evolved into a “normal” market economy, but rather into a peculiar form of crony-state capitalism.

Yes, Russia still punches above its weight in some areas, like nuclear weapons. And it retains veto power at the United Nations. As the recent hacking of the Democratic Party in the United States shows, it has cyber capacities that enable it to be enormously meddlesome in Western elections.

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There is every reason to believe that such intrusions will continue. Given US President Donald Trump’s deep ties with unsavory Russian characters (themselves closely linked to Putin), Americans are deeply concerned about potential Russian influences in the US – matters that may be clarified by ongoing investigations.

Many had much higher hopes for Russia, and the former Soviet Union more broadly, when the Iron Curtain fell. After seven decades of Communism, the transition to a democratic market economy would not be easy. But, given the obvious advantages of democratic market capitalism to the system that had just fallen apart, it was assumed that the economy would flourish and citizens would demand a greater voice.

What went wrong? Who, if anyone, is to blame? Could Russia’s post-communist transition have been managed better?

We can never answer such questions definitively: history cannot be re-run. But I believe what we are confronting is partly the legacy of the flawed Washington Consensus that shaped Russia’s transition. This framework’s influences was reflected in the tremendous emphasis reformers placed on privatization, no matter how it was done, with speed taking precedence over everything else, including creating the institutional infrastructure needed to make a market economy work.

Fifteen years ago, when I wrote Globalization and its Discontents, I argued that this “shock therapy” approach to economic reform was a dismal failure. But defenders of that doctrine cautioned patience: one could make such judgments only with a longer-run perspective.

Image result for Stiglitz--Globalisation and Its Discontents

Today, more than a quarter-century since the onset of transition, those earlier results have been confirmed, and those who argued that private property rights, once created, would give rise to broader demands for the rule of law have been proven wrong. Russia and many of the other transition countries are lagging further behind the advanced economies than ever. GDP in some transition countries is below its level at the beginning of the transition.

Many in Russia believe that the US Treasury pushed Washington Consensus policies to weaken their country. The deep corruption of the Harvard University team chosen to “help” Russia in its transition, described in a detailed account published in 2006 by Institutional Investor, reinforced these beliefs.

I believe the explanation was less sinister: flawed ideas, even with the best of intentions, can have serious consequences. And the opportunities for self-interested greed offered by Russia were simply too great for some to resist. Clearly, democratization in Russia required efforts aimed at ensuring shared prosperity, not policies that led to the creation of an oligarchy.

The West’s failures then should not undermine its resolve now to work to create democratic states respecting human rights and international law. The US is struggling to prevent the Trump administration’s extremism – whether it’s a travel ban aimed at Muslims, science-denying environmental policies, or threats to ignore international trade commitments – from being normalized. But other countries’ violations of international law, such as Russia’s actions in Ukraine, cannot be “normalized” either.

 

Donald Trump retaliates with Tomahawk Missiles


April 7, 2017

Donald Trump retaliates against Bashar al-Assad with Tomahawk Missiles

by Reuters/www.malaysiakini.com

The US military launched cruise missile strikes ordered by President Donald Trump against a Syrian airbase controlled by President Bashar al-Assad’s forces in response to a deadly chemical attack in a rebel-held area, a US official said yesterday.

Facing his biggest foreign policy crisis since taking office in January, Trump took the toughest direct US action yet in Syria’s six-year-old civil war, raising the risk of confrontation with Russia and Iran, Assad’s two main military backers

Some 50 Tomahawk missiles were launched from US Navy warships in the Mediterranean Sea, the US official said, speaking on condition of anonymity. A target was identified as an airbase in Homs. Further details on the target and the results of the strikes were not immediately known.

Trump ordered the strikes just a day after he pointed the finger at Assad for this week’s chemical attack, which killed at least 70 people, many of them children, in the Syrian town of Khan Sheikhoun. The Syrian government has denied it was behind the attack.

Image result for Trump and Xi in Florida