Economic diplomacy: Japan + China, BRI push back

Watching Shinzo Abe try a high wire act with China’s Xi Jinping, and what tourism tells us about Asia’s economic ties.

Greg Earl

25 October 20185 min read

Bonsai diplomacy

Australia’s China-befuddled political class could do worse than observe how the world’s leading centre-right politician Shinzo Abe manages a masterclass in “bifurcated hedging” when he arrives in Beijing today.

The Japanese Prime Minister will be trying to rebuild old economic supply chains with China in response to US President Donald Trump’s erratic protectionism, while not retreating from the US security alliance that runs through his family bloodline.

Abe and Xi both appreciate that their countries are among the greatest beneficiaries of the global liberal economic order that the US used to defend.

It’s a delicate task, given the Japan-China historic rivalry. However, Abe and China’s President Xi Jinping both appreciate that their countries are among the greatest beneficiaries of the global liberal economic order that the US used to defend.

And the fix is already in. It is little appreciated that Japanese investment has been flowing back into China for several months led by car makers, with the encouragement of Chinese officials worried about Trump. (See Canon Institute for Global Studies Kiyoyuki Seguchi here). And more business deals are set to flow in the next three days.

And the same goes for the infrastructure Great Game. It appears likely that Japan and China will agree to cooperate on Thailand’s huge eastern seaboard development plans. This could be a role model for delivering some of the estimated US$26 trillion in infrastructure needed across Asia in a decade.

In a neat bit of pea and thimble diplomacy, Abe will reportedly end Japan’s development aid to China and offer to instead provide it to more needy countries in an equal partnership with China.

Abe appears confident that he can rely on the US commitment to Japan’s defence under the bilateral mutual security treaty. But he can’t be confident about the security of Japanese commercial supply chains around the world under the US determination to protect its high technology companies from Chinese competition.

It’s a high wire act, but Abe has shown more willingness (for example with the revamped Trans-Pacific Partnership) to deal with these dilemmas than most of his peers.

BRI watch

The emergence of a democratic backlash against China’s infrastructure building Belt and Road Initiative (BRI) is gathering pace, this time with Indonesia’s alternative president Prabowo Subianto threatening to review Chinese-funded projects.

Prabowo’s brother and financier Hashim Djojohadikusumo has specifically attacked the high profile, soft-loan financed China Development Bank project to build a fast train line between Jakarta and Bandung as too expensive. Given this congestion-busting venture was meant to be a flagship of President Joko Widodo’s new “Father of Development” styled election campaign next year, there are obvious local political factors in play.

But the BRI is facing an unexpected new obstacle from the electoral cycle in the region’s democracies. This has been led by Malaysia’s new leader Mahathir Mohamad, with his delays or cancellation of several BRI-funded projects amid warnings about new colonialism. Hashim pointedly aligned his brother with Mahathir’s mix of populism and fiscal conservatism.

Election opposition to BRI lending has been reinforced in the Maldives. Authoritarian former President Abdulla Yameen was rejected at the polls after embracing Chinese finance for major projects. Chinese funded projects have also come under scrutiny in Sri Lanka and Pakistan after recent elections.

Democracy might be under pressure in Asia and the Chinese funding remains attractive, but it is hard to imagine the BRI designers in Zhongnanhai would have anticipated this sort of roadblock.

The Echoing-Sand Mountain, Dunhuang (Photo: Iwtt/ Flickr)

Digging deep in India

The Minerals Council of Australia (MCA) has sprung to the defence of Australia’s moribund bilateral trade deal negotiation with India. It marks the latest contribution to the vexed question of how to build a new economic relationship with the world’s fastest growing major economy.

Former diplomat Peter Varghese’s weighty India Economic Strategy, released in July, tended towards shelving the bilateral approach – at least for some considerable time – in favour of concentrating on the plurilateral Regional Comprehensive Economic Partnership (RCEP) and various non-trade initiatives.

The latest volume of the MCA-commissioned New Frontiers series acknowledges Varghese’s approach. But it nevertheless argues the bilateral negotiation “is too important for advancing the economic relationship to be allowed to remain in limbo”.

The New Frontiers study, written by former trade diplomats, argues that the bilateral deal is a high priority for Australian business. It would provide certainty about trade and investment in the challenging Indian economy.

They want a more formalised approach than Varghese, in which whatever happens with the RCEP negotiation would become a baseline for further bilateral negotiations, with no backtracking from RCEP. This type of approach allowed Australia to cut a bilateral deal with Malaysia in 2012, built on the pre-existing regional agreement with the Association of Southeast Asian Nations group.

While Varghese, and others such as Australia India Council chairman Ashok Jacob, talk up fields such as education and vocational training as the cutting edge of bilateral economic engagement, the New Frontiers report argues India’s inefficient domestic resources industry means it will remain a big market for Australia mining, equipment and training services.

Tourists to the rescue

Asia’s regional economic integration has increased modestly over the past year amid the global tensions over trade protectionism and the great firewall emerging between the US and China over technology development.

The Asian Development Bank says the evidence of greater integration in trade, investment, and even tourism, measured by its Regional Cooperation and Integration Index, may help provide some regional stability in a global financial upheaval. This would be important to Australia which depends on Asia for about two thirds of its trade.

Intraregional trade rose to 57.8% in 2017. This compared with the five-year average of 55.9%. In addition, Asian trade volume grew faster than global trade, and faster than Asian economic growth, for the first time since 2012. The volume of trade grew 14% after two years of declines.

Even though Asia remains the biggest recipient of foreign direct investment (FDI) from all over the world, intraregional inward foreign direct investment rose slightly above 50% of total investment last year. It suggests Asia is producing more of its own capital.

While most of this intra-Asian investment occurs close to home in each respective sub-region, the overall trend is for more pan-Asian investment, which has doubled to 18.9% of the total in the past 14 years.

But tourism is one of the strongest measures of integration, with intra-regional Asian tourists accounting for 295 million of the region’s 378 million inbound tourists in 2016.