Disputed borders: a tripwire for war

 October 14, 2010

Whilst the world’s attention was recently focused on a relatively minor incident involving disputed islands in the South China Sea, the 4,000-km disputed border between India and China is quietly being beefed up militarily by both sides. In the words of M. Taylor Fravel, borders specialist with MIT, the border in question is “the most continuously negotiated border in modern history”.

Tensions generated by the Indian-Chinese border, which in 1962 erupted into full-fledged war between the two countries, date back to the times of the British Raj. Indeed, in 1914 the border was arbitrarily established by the simple drawing of a line on a map by Sir Robert MacMahon. Following this, in 1914 the British, on behalf of the Indians, signed the notorious Simla accord with the Tibetan government, which had briefly declared independence from China. Republican China had refused to take part in the talks and never recognised the loss of southern Tibet – a territory the size of Austria that goes these days by the name of Arunchal Pradesh – to the British colony, India.

After independence from Britain, India split along confessional lines, with Pakistan and Banglandesh appearing on the map. To date, India went to war in 1965 with Pakistan over Kashmir in the north, and with China over Aksai-Chin (a territory the size of Switzerland occupied by Chinese troops in 1962), as well as over Arunchal Pradesh (a Buddhist territory rich in forests and agricultural land).

The inconclusive conflict of 1962 ended with the two armies retreating behind the Line of Actual Control (LAC) which roughly follows the infamous MacMahon line. Since then, there have been incursions and so-called border violations in their thousands, as the old MacMahon line allowed for a 10 km “give-or-take” corridor the length of the entire border.

Relations between the two superpowers remained largely frozen until the eighties when both Deng Xiaoping and the Indian leadership realised that the two countries have to finalise their border disputes once and for all. Thus in 1993, the two sides agreed to adopt the CBM (Confidence Building Measures) agreement, which provided for non-aggression, notification of large troop movements and the establishment of a 10 km no-fly zone for military aircraft.

Negotiations between China and India continued, with the signing in 2005 of a “strategic partnership for peace and prosperity” by Wen Jiabao and Indian premier M. Sinh. The partnership is aimed at ensuring that border disputes are solved amiably and would not degenerate into a second border war between the two countries.

Latest developments

The neo-conservative Bush Jr. administration in Washington decided to befriend India and use it to contain China’s rise. It agreed to overlook India’s violation of the nuclear non-proliferation Treaty and the US replaced India’s traditional ally, the defunct Soviet Union, as the country’s new strategic partner. According to Washington Times editorialists, India started to be groomed by the State Department as a “new Australia” in Asia, in spite of the Indian political leadership’s deep suspicion of the US – a 50-year ally of Pakistan.

In 2007, the US military’s involvement with India culminated with joint naval exercises in the Bay of Bengal, in which Singapore, the Australian and Japanese navies also took part. In 2009, India acquired 3.5 billion dollars’ worth of arms from the US, greatly alarming China.

Beijing describes India’s new foreign policy as based on the principle of “befriending the far and attacking the near”. Since the 1980’s the Dalai Lama – the old CIA protege – was reactivated and encouraged to tour world capitals in support of a Tibet cause, as the 1914 border accord had been signed with a de facto Tibetan state that had never been recognised internationally and disappeared after a few years.

The Indian public is continuously bombarded with news about so-called Chinese violations of Indian borders and of a Chinese military build-up of the border zones. In fact, as the same Taylor Fravel of MIT points out, China has successfully concluded permanent border agreements with all its neighbours except India and Bhutan. Its upgrade of military facilities does not target India in particular, as it encompasses the full length of China’s borders.

The anti-Chinese rhetoric has recently culminated with an article published by Baharat Verma, editor of the Indian Defense Review, in which he predicted that by 2012 China will attack India over the disputed territories. The scare tactics might, however, have been employed by the defence establishment in order to obtain the funds needed to renew its antiquated equipment. Thus, on October 7, 2010, India has signed a pre-contract agreement with Russia for the supply of between 250 and 300 latest generation Sukhoi fighter jets at an estimated cost of some 30 billion dollars, or 100 million USD per jet. Some fighter jets were already dispatched close to Arunchal Pradesh and 100,000 mountain troops were also sent to the area.

Meanwhile, Indian military officials and foreign policy pundits are claiming that China has replaced Pakistan as India’s biggest threat. Tensions, however, are mitigated by the fact that bilateral trade between the two countries is booming. If in 1990 this was worth 270 million dollars, the figure has reached around 60 billion dollars in 2009-2010. Clearly, India’s politicians and business establishment have a strong vested interest in normalising relations with China, whose economy is 4 times larger than India’s and is growing at a faster pace.

The Obama administration has fortunately abandoned the Bush administration’s reliance on India as a centerpiece of the US’ geostrategic realignment in Asia. President Obama is on record for saying that China and not India is the US’ main partner in Asia, provided the country abides by its self-imposed “peaceful rise” strategy.

India and China, however, still have the largest unsolved border issue in the world, with the potential to degenerate into full-fledged war at any time. If one takes into account the fact that the two countries are the largest and most populous in Asia and that they are both economically strong and nuclearly armed, one could more easily realise why the resolution of the issue cannot be delayed much longer without enormous risks for peace in Asia. (sources: Hindustan Times, Pakistan Daily, Arunchal News, People’s Daily, WSJ, Newsweek, The Australian, Washington Times, Japan Times)

China's Investment Strategy in Central Asia

 

October 5, 2010

Over the past few years, China has become a major player in Central Asia’s oil & gas and in Afghanistan’s mining sector. Its investments in the region are an important part of its worldwide FDI strategy.

To date, China’s biggest purchases of gas come from Turkmenistan. In 2009 the Chinese president inaugurated a gas pipeline that stretches for 4,000 miles from Turkmenistan via Kazakhstan and Uzbekistan to China. 30 billion cubic metres per year will be supplied by Turkmenistan, while 10 billion cubic metres will come from Kazakhstan’s gas fields. The vast amount of gas will supply some 50 percent of China’s gas needs, estimated at over 80 billion cubic metres per annum. The Chinese will pay USD 195/1,000 cubic metres over 30 years, thus bringing their country into competition with Russia, as well as the EU with its Nabucco pipeline project. To get to the Turkmen gas the Chinese paid around 3 billion USD necessary for the construction of the pipeline and the development of the fields.

In Kazakhstan, China National Petrol Corporation together with Kazmunay Gas inaugurated in 2006 a 2,200 km oil pipeline between Atyrau (Kazakhstan) and Xinjiang in China – the first such pipeline to connect China to the Central Asian oil & gas fields. In 2009 CNPC took a 50 percent stake in Kazakhstan’s largest oil & gas company, in exchange for a USD 5 billion loan to Kazakhstan.

This year Uzbekistan’s state company UzbekNeftegaz officially announced that it entered discussions with CNPC to supply China with 10 billion cubic metres of gas per annum, on top of the 40 billion cubic metres supplied jointly by Kazakhstan and Turkmenistan.

In Afghanistan, MCC of CHina has signed a 3,5 billion USD deal with the Afghan government to exploit Aynak’s estimated 240 million-ton copper deposits. To seal the deal, China has offered to build a railroad and provide the infrastructure needed, the project being the biggest FDI to date in Afghanistan. Chinese negotiators outfoxed their American and Indian competitors and worked – as they did elsewhere in Central Asia – closely with their Russian counterparts in order to finalise the deal. The Afghan government will also receive hundreds of millions of dollars every year in royalty fees after the mine becomes operational.

According to American, Australian and Canadian geologists, Afghanistan is the “Saudi Arabia of lithium” and also has significant deposits of gold, copper, cobalt and iron, which could not be exploited until now because of 50 years of continuous warfare that had ripped through the country. In the quest for Afghanistan’s mineral deposits, China is favoured to develop most of them, as it did not intervene militarily there and has Pakistan on its side. The latter in turn could help the Chinese to be shielded from attacks by the Taliban and even, if the political environment changes, to win their favour.

By contrast, the US – which spent a reported 940 billion USD over the past 8 years in Afghanistan – and their Indian ally are not likely to capitalise on the development of Afghanistan’s mining sector. (sources: Asian Times, Reuters, Xinhua, The Guardian, Far Eastern Economic Review, WSJ, Daily Finance, NYT)

Asian Union Plans Attract Japan

 September 24, 2009

The plans for creating an Asian economic community grouping China, ASEAN and Japan have received an important boost recently. During his informal meeting in New York with Chinese president Hu Jintao, the new Japanese premier Mr. Hatoyama has proposed the creation of an East-Asian community which would emulate the model of the European Union. Closer ties between Japan and China should eventually create the nucleus towards which the other East-Asian nations would gravitate economically :

“Whilst recognizing our differences, Japan and China should surpass them and build a relationship based on trust. This would be the basis of the East-Asian community that I would like to create”. (Yukio Hatoyama, quoted by Asahi Shimbun and Courrier International)

The Japanese prime minister’s overtures have been positively received by the Chinese leader, himself in favour of closer economic and political ties with Japan.

At first glance, the new Japanese premier’s plans might seem premature. Not according to new data provided by seasoned economists, such as Neal Soss of Credit Suisse New York. Talking to The New York Times reporters recently, he points out that for some time now the gravity centre of the global economy is shifting towards China. The current crisis, however, marks a turning point. Until now, the United States was always the first to recover from recessions, followed by Europe and then Asia. This year, China has replaced the US as Japan’s biggest trading partner and it is actually leading the world out of the crisis, due to its massive recovery package and the banking credits extended to the business sector and individuals alike .

The corresponding increase in consumption by Chinese businesses and households has also prompted a surge in US exports to China, especially in May, June and July this year. German manufacturers, too, are looking East to increase their exports, less towards the United States. According to Jens Nagel from the Federal Association of German Exporters, “what we lose in exports to the US, we gain in China” (Courrier International).

Nor is this all. The Chinese have not only increased the amount of imports from the US, but continue to finance the huge US budget deficit on which the American recovery depends.

This considerable economic clout would have been unachievable in such a short period of time without the financial crisis, which spurred the Chinese recovery efforts. Little wonder, therefore, that Japan sees its economic future in Asia, which is fast replacing the impoverished US market as its main trading partner.

When all these developments are taken into consideration, the Japanese prime minister’s proposal makes a lot of sense. The two leading actors of the European Union, France and Germany, have gone through two devastating wars before becoming founding partners of the EEC. The bitter enmity between the two nations was in time superseded by strong economic bonds and ever-closer political ties, an outcome surely desired by the Japanese premier in his dealings with China.

However disfunctional the EU might prove at times to be from a political perspective, from an economic point of view it is the great success story of the last few decades. To be sure, the success achieved by the 27 European nations in bridging their differences and working together for economic prosperity represents a good model to follow by the world’s largest emerging trade bloc

Can ASEAN+1 Emulate EU Integration Experience ? Interview with Professor Bruce McKern

 The current economic tsunami has accelerated integration moves between ASEAN countries, China and other regional powerhouses. The planned launch of Asia’s and the world’s largest trade bloc has prompted me to ask Professor Bruce McKern, a renowned International Management expert, for an interview concerning its prospects in emulating the European Union’s economic integration experience. Professor McKern teaches International Business at the Universities of Sydney and Stanford Graduate School of Business. During the 1980’s, as a Director of Macquarie University’s (Australia) Graduate School of Management, he has accomplished extensive work with and on behalf of ASEAN countries’ academic establishments.

Florian Pantazi: Ever since the 1998 Asian financial crisis, most ASEAN countries and China have intensified their economic integration drive. Do you believe the current crisis might lead to a European-style common market in Asia ?

Bruce McKern: The area already has a significant degree of integration. Intra-regional trade within East Asia was more than 53% of total trade in 2003, which is higher than the proportion within NAFTA. Japan is a major investor within the Asian region. The current crisis will accelerate this trend towards integration, partly because China will be unable to rely as strongly on the United States as it has in the past.

However, I believe this trend will not culminate in a common market or an economic union such as the EU, because of persistent differences between countries in terms of their current stage of development and policies on growth. Countries in the Asian region have already ratified some 37 Free Trade Agreements between themselves and countries outside the region, and China, Japan, Korea and Australia-New Zealand have implemented individual FTAs with ASEAN. I expect to see this patchwork of agreements evolving towards a broader Free Trade Area, rather than in an economic union, as a Free Trade Area will allow individual countries more freedom to set their own economic policies.

FP: In your assessment, will China replace Japan as the main economic powerhouse of Asia in the years ahead ? To what extent would reunification with Taiwan contribute to this ?

BM: China will very soon be a larger economy than Japan, if the current difference in growth rates between the two countries continues. In 2008, China’s GDP at nominal exchange rates was $4.2 trillion whereas Japan’s was $4.8 trillion. While there is reason to expect that China’s growth rate will fall somewhat over the next few years, which could make the catch-up somewhat slower, Japan is also experiencing a severe recession at the moment. So we can expect to see China on an equal footing with Japan as a major power in the region within the next decade. China will be an equal to Japan, not only in terms of its economic weight, but because of its great importance in trade in the region and its growing outward and foreign investment.

Reunification between mainland China and Taiwan would of course make a unified China a larger economic entity. But Taiwan, despite its high standard of living, has a GDP of only $400 billion at nominal exchange rates, only one tenth that of mainland China. So, important as reunification is for China politically, it is not significant in terms of China’s economic importance in the region.

China’s economic power has to be seen in relation to the ASEAN grouping. The ten ASEAN countries have a population of 570 million people, third after China and India and a combined GDP of estimated at around US$1 trillion, second only to China in emerging Asia. However, although their combined weight is substantial, they do not operate as a single bloc and no one country could be seen as a challenger to China. Indonesia, the most populous country in the region after China, has a GDP of $500 billion, not much greater than Taiwan’s.

FP: The ASEAN-plus-one trade bloc should become operational by 2011. Will Japan, South Korea and Taiwan follow suit and apply for membership ? How about Australia ?

BM: Japan and South Korea have been actively discussing closer relationships with the ASEAN bloc and it is likely that they will seek membership. It will be more difficult for Taiwan unless it becomes integrated with mainland China, as China will likely oppose its admission. Australia has already signed a Free Trade Agreement with the ASEAN (along with New Zealand), although it is not formally a member of the group. So enlargement is already under way, and it will no doubt continue, subject to the important caveat that all countries are at present concerned about their trade relationships, and protectionist sentiment could slow down the integration movement.

FP: How realistic are ASEAN politicians’ expectations that lost ASEAN exports to the United States could be compensated by stimulating domestic consumption and intra-ASEAN trade ?

BM: The United States will take some time to recover its economic growth, and it is very likely that US consumers will be more focused on repairing their balance sheets than on the high consumption patterns of recent years. So ASEAN and China will be less able to depend on the US consumer to restore the heady growth of recent years. Likewise, the European Union is not going to provide a replacement either. Nor is Japan. So the only realistic alternatives are to focus on domestic consumption growth and to promote intra-ASEAN trade. China is proposing steps to strengthen domestic infrastructure spending, and this is a possible path for the ASEAN countries. But this shift in spending will rely to a greater extent on government deficits, and will take some time to have an impact on employment and growth. Likewise, intra-ASEAN trade will be affected by the slowdown in all of the regional economies. The best opportunity for the ASEAN countries will be to focus on China and look to expand their exports to that country. There should be opportunities in areas related to infrastructure spending, foodstuffs, raw materials and capital goods.

FP: From a macro-economic point of view, is the planned Asian Currency Unit (ACU) feasible ?

BM: I don’t believe the proposed ACU is a feasible alternative as a reserve currency. A reserve currency requires three things: the backing of a central bank; a mechanism by which other nations can acquire assets denominated in that currency; and unshakeable faith in the issuer of the reserve currency. A common Asian currency unit would require a much higher degree of economic integration than I envisage for Asia for many years, and there is no country in the region that could provide the backing and credibility for the unit. Also, the long string of current account deficits that the United States has run over the last few years have resulted in huge holdings of dollars in the hands of creditor countries and the liquidity expansion which has led in part to our recent troubles. For an ACU to have comparable liquidity would require the Asian countries to run current account deficits, which is opposite to their recent history. Although the Euro is now traded widely, and even held amongst the reserves of central banks, it still has a relatively minor role compared with the US dollar.

FP: Could the United States continue to rely on Asian investment money to finance its budget deficits ?

BM: As American consumers contract their spending over the next few years, we will see the US narrowing its current account deficit with other countries, and that means that the growth of US dollar holdings amongst creditor countries will slow. So there will be a somewhat lesser dependence by the US on other countries to finance its twin deficits. However, it is very likely that the US will continue to look to other countries to hold liquid dollar assets. What I think we will see more of is countries swapping their short-term assets for longer term direct investments in the US.

FP: In your opinion, would the creation of the Asian trade bloc force the US and the EU into adopting protectionist policies ?

There is debate about the impact of free trade agreements on global trade relationships, and most economists argue for multilateral agreements as being a first-best solution. We should recognize that since the creation of the Bretton Woods system there has been enormous progress in trade liberalisation across the globe, with the resultant explosion in international trade and undoubted economic benefits. So the preference is for multilateral agreements, but progress is currently stymied by the difficulties in completing the Doha round.

In the absence of comprehensive agreements, regional trading blocs such as NAFTA, ASEAN and the European Union have been employed to expand the benefits of trade integration between members. Provided that countries within such blocs continue to be open to negotiating bilateral agreements with other countries, the pace of integration we have seen in recent years can continue. More recently we are seeing some agreements between trading blocs and individual countries, such as the recent agreement between ASEAN and the Australia-New Zealand free-trade area. There is no reason why this development should not continue, although more slowly, as the climate for expansion will be less favourable for some time.

The increasing integration we have seen over the last decades between the United States and Asia, and between the EU and Asia, has brought great benefit to all parties, and has resulted in a much higher degree of mutual interdependence than hitherto. It’s unlikely that this will disappear with the formalisation of a larger Asian trading bloc. I believe there is also a strong belief in economic integration amongst the world’s policy makers, and I am hopeful that this will counter calls for protectionism arising from opportunistic politicians.

(C) Florian Pantazi. April 22,2009

Beijing's Olive Branch Offer

 March 6, 2009

Even as Western economists disagree as to the depth and duration of the current economic crisis, one thing is certain : it fosters closer economic cooperation between China and its Asian neighbours. The crisis might also generate unexpected peace dividends for the region.

Speaking before the National People’s Congress yesterday, the Chinese premier claimed his country was ready “to hold talks on cross-strait political and military issues and create conditions for ending the state of hostility and the conclusion of a peace agreement between the two sides of the Taiwan Strait.” (source: China Post) In a bid to placate Taiwanese critics, premier Wen also hinted that China would consider ways of allowing Taiwan to participate in the activities of international organisations.

The Chinese premier was even more generous with the economic aid package. He promised financial assistance for Taiwanese businesses operating on the mainland and an acceleration of efforts to normalise cross-strait economic relations, culminating with the signing of a comprehensive trade agreement. To be sure, this was welcome news for the Taipei stock exchange, which was up 2.11 per cent following the announcement, whilst the New Taiwan dollar exchange rate rose by 12 cents. This contrasted sharply with the Dow Jones’s 4.1 per cent drop the same day, following news about the troubles affecting US icons General Motors and Citicorp.(source: WSJ)

The fresh peace overtures from Beijing come as the Chinese budget mandates another 15 per cent increase in defence spending for 2009. For Western military analysts, the rise is disquieting. Rightly or wrongly, most intelligence officials see it as leading to a heightening of military tensions in Asia-Pacific. Some also claim that the ultimate aim of increased spending is Asian hegemonism, a charge that Chinese officials reject. The latter cite US sales of sophisticated weapons to Taiwan as justification for the continued rise in the military budget.

Less hawkish analysts, however, consider that the reasons behind the repeated rises in China’s defence budget are Chinese paranoia about NATO’s presence in Afghanistan and its army’s need to modernise antiquated weapons systems.

Ultimately, it may just be that Beijing’s recent peace initiative is simply good old-fashioned Chinese pragmatism at work. As the crisis starts to bite, establishing closer economic ties with Taiwan could prove much more fruitful than continuing with the military or diplomatic confrontations of yesteryear. Time will tell.