China is economically thrashing America in Asia
How China overtook the US to be the continent's dominant trading power, and what this means for future influence
UPDATED: This is a much updated version of the post I sent out on Tuesday, including new images and input on the role of manufacturing on trade from Stewart Paterson, the author of “China, Trade and Power: Why the West's Economic Engagement Has Failed”. Thanks, Stewart.
Across the Asia Pacific region, America is more popular and has deeper security relationships compared with China.
But at the end of the day, it is economic power that buys the most influence, and here China is sweeping the floor with the US. In part this is due to China having overtaken the US as the world’s primary manufacturer.
US policy under Biden must focus on resuscitating America’s economic sway in Asia if it wants to retain influence in the long-run.
As Joe Biden puts his Cabinet together he will have many weighty problems on his mind. Most will be domestic.
But what should be of concern too is the rapidly shrinking influence of America abroad. True, the country remains popular and is the military top dog, but what seems to have been forgotten is the importance of economic influence.
POPULAR AND MILITARILY CONNECTED…
Although things are changing now, America has been the dominant economic power for generations. The US still has the edge in soft power. Even after the last four years of Donald Trumps’s presidency, which has been routinely pummelled in the Asian press, America remains popular. According to research by Pew published earlier this year, 64% of people in the six Asia Pacific nations surveyed have a favourable opinion of the US, with sentiments highest in South Korea and the Philippines.
By contrast, China is overwhelmingly seen in an unfavourable light by many. 81% of Australians, 75% of South Koreans, and 86% of Japanese think negatively of China, with only 34% of those surveyed in Asia having a positive opinion of the People’s Republic.
Then there is the defence angle. China might now have the world’s biggest fleet (the first time since WWII that the US hasn’t held that title), and have a defence budget that is up to 87% of America’s, but its armed forces are way behind America’s in effectiveness and experience. The last war the People’s Liberation Army fought was against Vietnam in 1979, and then it received a very bloody nose from a force a tenth of its size.
The US is currently building what some have termed a NATO of the East, a group of countries in loose alliance with America that surround China on several sides. Even India, which has been non-aligned for ever, has joined with America, such is its worry about Beijing’s intentions following the bloody border clash in May.
…BUT THE US IS LOSING ECONOMICALLY
Yet, as we all know, popularity and strength will only get you so far in life. Where influence really matters is a country’s economic power, because that underpins everything else. Economic improvement is the way for leaders to lift their people out of poverty, to meet their aspirations on what they can afford to buy, and to strengthen the country overall.
Unfortunately for the US, it is losing the economic power battle in Asia, and “bigly”, as The Donald would say.
This is particularly true when it comes to trade. Data from the World Bank shows that in 2000 the US enjoyed trade with Asia worth $703.4 billion, which was more than fifty percent higher than the figure for China’s total global trade that same year, $474.3 billion.
At the same time, America was the dominant trade partner of 80% of the world. This included almost every country in Asia, with the exception of Iran and a smattering of Central Asian states.
Today the roles are almost entirely reversed. China has overtaken its strategic rival in total global trade - $4.6 trillion to $4.3 trillion as of 2018 – and has also replaced America as the dominant trade partner in 128 countries out of 190 measured.
Such is the scale of the reversal between the two great powers that by 2018, the only nation that America still dominated in trade in Asia was Bhutan, a remote Himalayan kingdom with less than a million people.
Even in parts of Asia where the US long held economic sway, like South East Asia, the roles have been reversed.
In the year 2000 America did about $135bn of trade with the member countries of the Association of Southeast Asian Nations (ASEAN), compared to China-ASEAN trade of $41bn. Today China is head and shoulders above the US when it comes to trade, as this graph shows:
As the China watcher Stewart Paterson, author of “China, Trade and Power: Why the West's Economic Engagement Has Failed” notes, Beijing’s trade success is no accident. It is, says Paterson, “what happens when a country manages to insert itself into the middle of the global value chain.”
He is right. Whilst goods aren’t the only items traded, they are the bulk in terms of volume and value, and so if you control manufacture then you are likely to have a hold on trade. As if to prove the point, China now accounts for 28% of global manufacturing, compared to America’s 16%. In 2002, it was the US that held 28% of global manufacture, with China around 7%.
China’s increased economic power also has an impact at the individual level. Someone I know in Singapore, a wealthy, Western-educated man, has now turned his back on doing business with the West. China has far more opportunities for him, and his firm is now almost entirely focused on the People’s Republic.
I have seen this being repeated across Asia, from Mongolia to Malaysia, from Indonesia to the Philippines. The wealthy elites are increasingly being tempted to do business with China because that is where they see the most opportunities for them personally – despite the fact that the overwhelming majority of them will have educated their offspring in the West.
The longer this happens, the more they will persuade their home countries to look to China, at the expense of America and the West.
And all before the latest economic initiative by China kicks in.
THE RCEP EFFECT
On 15th November, fifteen countries accounting for 2.2 billion people and 30% of the world’s economic output, signed the Regional Comprehensive Economic Partnership (RCEP).
Although the scope of the agreement is limited and not a proper free trade agreement, it will still reduce or eliminate tariffs on a whole host of goods and services, and make it easier to set up integrated supply chains across the signatories. This will, of course, play nicely into China’s regional economic strategy given its dominant role at the centre of Asia’s (and the world’s) supply chain.
Not surprisingly, just a few days after RCEP launched into life, the biggest winners and losers are already clear. For a start, have a look at the signatories other than China: ten members of ASEAN, plus Australia, Japan, South Korea, and New Zealand. The fact that staunch US allies like Australia are signing up to further integrate with China is a sure sign that American power is waning.
What is so infuriating from an American point of view, unless you are Trump, is that the US had a plan to push back on China’s economic influence in Asia Pacific. The Trans-Pacific Partnership (TPP) was meant to serve as the cornerstone for American-led economic success in the region; when Trump tore the agreement up, in one of his first acts as President, he opened the door for Chinese influence to increase across APAC.
Matters were made worse by the Trade War. It seems, from conversations I had at least, that many in America thought that picking an economic conflict with China would push them back into their box. Perhaps, but not the clumsy way it was done.
Instead, the consequence has been for Beijing to pivot its trade away from Washington and towards more receptive parts of the world, including South East Asia. Partly this is because of Chinese companies wanting to set up shop in countries that have good ties with America, like Thailand or Singapore, so as to avid US tariffs. Partly, though, it is because China wants to trade and if America won’t play nicely, then others will.
RCEP will likely increase this trend. It’s good news that Biden has already announced that he will look at revitalising alliances across the world, but he has not been overly forthcoming about what this means for economic leadership in Asia. Indeed, he has been critical of the TPP in the past.
What this means is that Biden isn’t by any means nailed on to bring back American economic leadership in Asia. It is, in any case, a far harder task now even if he wanted to, given the strategic advantage that America lost through abandoning the TPP, and China has won through RCEP.
At the end of the day history tells us that economic strength and influence is at the root of a country’s power. Unless it gets its act together and starts to properly compete with China in Asian trade soon, then it is hard, if not impossible, to see how Washington can maintain its influence in the region for the long-term.
Just because people in Asia prefer America to China now, it doesn’t mean it will stay that way. Even if it doesn’t, money talks – and it has the habit of drowning out everyone else’s voice in the end.
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NEXT WEEK: Unless any other events of world importance happen between now and then, next week we’ll be looking at the military side of China. Does President Xi want to be the new Napoleon, or is the People’s Liberation Army more bovine in character – very large, but generally harmless unless significantly provoked?