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Evan A Feigenbaum: Challenge of a changing Asia

The business of Asia is still business. And India and East Asia have some distance yet to travel

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It’s been a rough six months in East Asia, as tensions ratchet up in Korea, navies drill, and governments, from China to Vietnam, trade barbs, claims and counterclaims to the South China Sea.

But even as anxieties grow, it is economics, not security, that still defines the essential strategic reality of Asia today: China is fast becoming the central player in a new economic regionalism. And as economic integration tightens, the US and India risk being left out.

For its part, the US has endured decades of loose talk about American “decline” in Asia. But in the months since North Korea torpedoed a South Korean naval corvette in March, America’s security role has been strongly reinforced.

Yet, ironically, that’s part of the problem: Even as America’s security role remains the backbone of strategic stability, the economic pillars of US credibility are eroding across Asia.

In the postwar period, US leadership in Asia depended not just on alliances, bases and carrier battle groups. It flowed, too, from a sustained commitment to three economic pillars: market openness, faith in America’s own competitiveness and strong US leadership on international trade agreements and regimes.

But all three pillars are now under fierce attack in the US. And this both compounds and further contributes to a rapid erosion of American economic influence, as China becomes the central player in a growing web of trade and financial connections.

Take Southeast Asia. From 2000 to 2009, China’s share of Asean’s total trade increased threefold, surpassing that of the US, whose share declined by a third in the same period. Meanwhile, when the dust settles from the current financial crisis, the character of economic globalisation may be significantly changed with respect to capital flows, production chains and trade patterns. Asian countries are moving forward together in various ways — on trade, financial arrangements, technical standards and investment rules. And increasingly, they are moving forward on a pan-Asian basis and without Washington.

This is precisely why American strategy in Asia is simply not sustainable with the kind of trade policy Washington has presently.

For generations, deep trade and investment relationships have been the tangible representation of US economic weight in Asia, reflecting a widespread faith in the future economic and strategic strength of the US. This was true in the 19th century, when fast-sailing clipper ships first vaulted America into a role that spanned China, India and the waters betwixt and between. It remains true today.

The good news is that US President Barack Obama’s November visit to Seoul has given Washington strong incentives to complete the this fall. But there is virtually no prospect that the US will keep pace with Beijing’s burgeoning trade and investment initiatives. And across Asia, anxieties persist about America’s own economic prospects: the scope and nature of its recovery from the financial crisis; its commitment to stave off protectionist sentiment; and whether it can muster a bipartisan political consensus to manage its debts.

This offers a cautionary tale for India.

Strategically, India has been bottled up in the subcontinent for generations, but it wasn’t always so: Southeast Asia bears the hallmarks of a bygone era in names like “Indonesia” and “Indochina”, and Indian sailors once plied the trade routes from the Indian Ocean to the Strait of Malacca.

But as it again “looks East”, India risks being left out in Asia because of the significant mismatch between its lofty strategic goals and more earthbound economic realities.

Make no mistake, India’s strategic connections to East Asia are being restored. Yet, this is happening, in large part, because India is widely viewed as a potential — if still very modest — counterbalance to Chinese power. Diplomacy and politics remain the central drivers, not least, for example, in the invitation to India to become a more active player in East Asian regional groups.

But, at the end of the day, strategic intentions alone cannot sustain a larger role for India in Asia writ large. As America is rediscovering, economic content is essential. Greater economic content to India’s relations with East Asia will be required. And, investment-related reforms will surely be essential, too, to enhance the flow of goods, capital and opportunity.

Trade plays a growing role in the Indian economy, and India has signed preferential trade agreements with Asean and South Korea. Yet, scale remains a handicap: 11.6 per cent of Asean’s trade is with China, just 2.5 per cent with India. Meanwhile, the backbone of East Asian economies remains integrated supply and production chains to which India is largely irrelevant.

More manufacturing in India’s southern states could mean greater integration into East Asian supply and production chains, or not. Likewise with outbound investment from corporate India: it could, perhaps, transform India’s interactions with Southeast Asia; but, here too, scale remains a handicap.

The business of Asia is still business. And India and East Asia have some distance yet to travel.

The author is head, Asia Group at Eurasia Group and is adjunct senior fellow for Asia at the Council on Foreign Relations, Washington DC

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