US-China conflict doesn’t define the future

It started in October, 2011, when Zbigniew Brzezinski of the Center for Strategic and International Studies and Fred Bergsten of the Peterson Institute for International Economics proposed that the US and China form a “G-2” to solve the world’s problems.

No G-7, no G-8. Inputs from Western Europe, Japan, Russia, India and others not required. Underlying this proposal was an assumption of common interests, that China would play by Western rules and let the US take the lead.

Eight years later, Americans have realized that China does not share their view of the world, does not play by the same rules, poses a serious economic and strategic challenge and is not going to let them take the lead. The American government now sees China, with its Belt & Road stretching around the world, as a one-country axis of evil. And it is trying to make everyone else choose sides.

But with a few exceptions, the rest of the world does not want to align exclusively with either the US or China. And despite all the talk of economic disengagement, a new cold war and a global digital divide, it is big enough that it doesn’t have to.

Alternative

In September, 2019, Japan agreed to join the European Union’s effort to provide an alternative to China’s Belt and Road Initiative by establishing an infrastructure development plan “backed by a 60 billion euro ($65.48 billion) EU guarantee fund, development banks and private investors” that, according to European Commission PresidentJean-Claude Junker, will be “without mountains of debt,” not dependent “on a single country” and with high environmental standards. (Reuters, September 27, 2019)

The two sides intend to “promote free, open, rules-based, fair, non-discriminatory and predictable regional and international trade and investment, transparent procurement practices, the ensuring of debt sustainability and the high standards of economic, fiscal, financial, social and environmental sustainability.” (EURACTIV, October 2, 2019)

Japanese Prime Minister Shinzo Abe, speaking at a conference entitled “Communication Connecting Europe and Asia“ held in Brussels, said “Whether it be a single road or a single port, when the EU and Japan undertake something, we are able to build sustainable, rules-based connectivity from the Indo-Pacific to the Western Balkans and Africa.” (Reuters, September 27, 2019)

Following the signing of EU-Japan strategic and economic partnership agreements in 2018 – and the signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-USA) the same year – this furthers the emergence of a counterweight to Chinese mercantilism and American unilateralism.

The EU-Japan relationship is also worth considering in the context of Brexit. The EU may be losing the UK (population 67.5 million, GDP $2.8 trillion), but it has gained a partnership with Japan (population 126.3 million, GDP $5.2 trillion), which also has a similar mindset regarding government’s role in the economy.

In dollar terms, the GDP of the EU minus the UK but plus Japan is about the same size as that of the US and 55% larger than the GDP of China. In terms of purchasing power parity, it is almost 20% larger than that of the US and only 7% smaller than Chinas. By either measure, the US and China are alike in accounting for less than one quarter of global economic output each. (IMF, 2019 estimates)

President Trump says China’s “supply chain is all broken, like an egg; they want to make a deal, perhaps they have to make a deal.” (The Guardian, November 9, 2019)

But the Peterson Institute for International Economics reports that “non-financial foreign direct investment in China is currently running at an annual rate of almost $140 billion, meaning that thousands of new foreign firms are established in China every month.”

The institute also notes that a recent member survey by the US-China Business Council “found that 97 percent reported that their operations in China are profitable, and 87 percent said they had not relocated and had no plans to relocate any of their activities.” (September 10, 2019)

Research by our firm, JA Research, shows that most Japanese companies that have moved production out of China have either limited themselves to operations producing for the US market or gone in search of lower wages elsewhere. Leading multinational companies such as Nidec, the Japanese motor maker, and ABB, the Swiss-Swedish engineering company, tend to have production bases in Europe, America and China.

National security

Turning to national security: in September, Singapore and the US renewed the Memorandum of Understanding Regarding United States Use of Facilities in Singapore, extending it for another 15 years until 2035. Originally signed in 1990, the agreement provides the US military with access to air and naval bases in Singapore, as well as local support for transiting personnel, aircraft, and vessels including nuclear submarines, aircraft carrier groups and littoral combat ships.

Then, in October, Singapore and China agreed to expand bilateral military relations under their Agreement on Defense Exchanges and Security Cooperation. These now include port calls, joint exercises, mutual logistics support, cross-attendance of courses for officers, and regular dialogue between their defense ministers.

We could go on to discuss other examples, including Japan’s close cooperation with India, Bangladesh and other countries in infrastructure and industrial development, and the economic independence of India and its ties with Russia, but you get the idea. Signing up for a view of the world centered on the US and China risks ignoring what the majority of humanity has in mind.

Scott Foster is a partner and analyst with JA Research, Tokyo