The AsianSquare Dance -- Part 1

Goldman Sachs first coined the expression BRICs - Brazil, Russia, India and China - to identify the economic giants of the future that will reshape the world economic order. While Russia's economy is linked to the prices of commodities, energy in particular, Brazil has not lived up to expectations. Of the four countries, China and India have shown the most impressive growth in recent years with, respectively, 10% and 8%. Excluding Brazil, the population of the BRIC represents 40% of the world's inhabitants.

With Asia, reckoned to be today the most dynamic continent, accounting for 65% of the world's population, and China and India together accounting for 40%, these two countries can potentially alter the fragile equilibrium of the world's economy. It is forecast that by 2030 the East Asian economies will be the world's largest economic bloc.

Due to diverging political ideologies and concerns, however, this bloc does not, in fact, exist other than in prose. Even worse, all the countries in the area have made significant investments in military equipment over the recent past thus sharply increasing the risk of conflict particularly as fears grow over China's intentions.

The US' dream, during the cold war, of creating an Asian equivalent to NATO was short lived. Today, Asia has five nuclear powers: Pakistan, India, China, North Korea and Russia. On the other hand, the US is constrained by budgetary problems.

Our argument in this series of articles is that the development of Asia, and its impact on the rest of the world, depends to a large extent on the relations between five countries: China, India, Japan, South Korea and the US. Depending on the structure of the type of relations that will develop, and choices made by Russia and the US, for instance on their energy policy, we may see a new world order developing, very different from that of the last four hundred years. Further, if the Chinese economy faces difficulties in the future, the US will be instrumental in determining Asia's future. Conversely, if the US economy falters, China, if it so wishes, could assume the world's economic leadership.

Since the end of the Second World War, the US' role in the area has been a major influencing factor politically, militarily and economically and while it has declined recently, it remains, nevertheless, important. Asia is challenging the EU as the world's most important trade bloc.

The US imports from Asia for over $2 trillion per year, thus making the US responsible for the creation of hundreds of thousands of jobs. A weakening of the US dollar could significantly diminish the US' role in the region.

At issue here is what A F K Organski has termed 'Power transition theory' - i.e. the change of the guard of the dominant power where the dominant power occupies this position because of its control of resources, be they demographic, economic, geographic, natural or military.

According to the theory, the dominant power, or powers, must ensure the stability of the system failing what the system might be challenged by an emerging hegemon. These situations are conducive to confrontation, very often military.

The emerging hegemon is, no doubt, China, and the events in Eurasia, over the coming quarter century will witness an indirect confrontation between China and the US, a confrontation whose secondary actors are India and Russia.

Is China striving to attain the status of great power and challenge the US, at least regionally, and what role do the other regional powers, as well as Russia and the US play? Or is it just trying to reduce its feeling of being surrounded by enemies?

Asia has become a powerhouse with several countries showing economic strength and appearing to be rivals. A dangerous rivalry inasmuch as five countries in the area have a nuclear arsenal (China, India, North Korea, Pakistan and Russia), with two more (Japan and South Korea) able to produce a nuclear bomb in a relatively short time.

Monetary reserves in Asia are sufficient to allow the area to develop without much further foreign investments. Further, an increase in economic stability is heralded by the recent agreement between several Asian countries - the members of ASEAN, China, Japan and South Korea - to pool their financial resources in case of a speculative attack.

While the major trade partner of most of the countries in the area is Australia, the European Union and the United States, regional trade has increased considerably. Services such as tourism also cater increasingly to Asians.

There remains the question of whether the continent is able to develop its own technological base to compete with Europe and the US. There are diverging points of view on the issue.

The perception by the Asian countries of the effect of China's domination of the continent evolved into an understanding that they only have two options - siding with China or with Japan and its US ally.

The financial difficulties originating in the US and which have spilled all over the world have affected Asia in its role of major exporter. As a reaction, China, Japan and South Korea are considering the creation of a community modelled on the European Union that would help them expand trade within their area and increase trade with the ASEAN countries, Russia, the Middle East and Europe. They are encouraged in this action as inter-Asian trade has been growing at twice the rate of global trade. Inter-Asian trade is more important as a percentage of total trade than inter-NAFTA trade.

The US should fear the creation of a trading block including China, Japan and South Korea as it would represent 43% of US' foreign trade and holdings of over one trillion dollars in US Treasury paper.

Common problems
The countries in the area, with the notable exception of Russia, share two major problems: access to raw materials in general, and energy in particular, and an economy essentially geared to exports, and thus very dependent on the purchasing power of EU and US consumers. This last aspect is changing rapidly though with domestic markets starting to take shape and offering local producers a partial insulation from the American-led boom and bust cycles.

It is generally felt in the US that China has not been doing enough to stimulate internal demand - the number of consumers is no bigger than Italy while the population is 20 times that of the European country - and that the situation has been worsened by the decision of the Chinese government to peg the Yuan to the US dollar, thus effectively undertaking a devaluation.

Should China's export drive remain as a major contributor the country's economy, the accumulation of reserves by 2020 will be bigger than that of Germany, Japan and the Middle East countries put together. America's response could be to return to a more isolationist policy by slapping import duties on Chinese products or getting China to open its doors to greater exports of US products.

Both China and India have to contend with an extremely large population. In fact, they are the only two countries with a population of over 1 billion persons. Economic development has brought, to both countries, an uneven distribution of wealth to the extent that social disruptions can be feared in the future.

China has become the world's second largest oil consumer and it is likely that it will surpass the US to lead the world in energy use. Imports which represent 50% of consumption are likely to rise to reach 80% in another 10 - 15 years particularly considering the oil intensity of economic growth is particularly high, as in most developing countries. Thus, for each 1% growth in GDP, the country needs 1.2% additional oil.

In fact, China is the world's fast-growing energy user, Russia is the most inefficient user of energy and he US is the country with the largest carbon footprint.

China is also the world's largest consumer of several raw materials.

The country's search for natural resources has been done in a predatory way, and there is fear that, backed by its staggering reserves, it could encourage suppliers to increase prices at levels beyond those acceptable to a large number of other users.

India's energy requirements are expected to grow by 30% in the next 3 to 5 years and its imported crude oil dependency is expected to reach 95% by 2025.

India depends for 50% of its energy needs on coal and increasing its use would create major environmental problems.

Its gas suppliers are considered to be relatively unreliable and include Bangladesh, Iran, Myanmar and Turkmenistan.

This situation has encouraged India to pursue the road to nuclear power.

Such growth in raw material requirements is not sustainable and is strategically dangerous.

Both China and India have very large armies (in fact the largest in the world) and nuclear weapons.

Japan is also a major energy importer, relying entirely on imports for oil. Japan has an important stockpile of energy products, and it has encouraged other Asian countries, including China, to jointly plan the stocks and their administration.

Indeed, Asia's energy needs are expected to double in the coming 20 years. In spite of this, OPEC countries do not seem to be prepared to invest in increasing production, in large part because of the massive funds required. They have been estimated by McKinsey to be of the order of $ 45 billion a year over the next three decades.

The countries in the area perceive themselves as rivals in securing energy sources and China, particularly, has shown an eagerness to develop partnerships, whether through limited investments, or through political support, in the United Nations, of countries like Iran.

Hydrocarbon reserves in the China Sea are claimed by several countries, and are a growing point of contention. Neighboring countries are fearful of China's rising military power and have led them to develop closer relations with the US.

In an effort to temper their competition, India and China have made some joint bids to buy and share oil fields.

Japan too is dependent on energy imports and has recently been unlucky with their supply sources. Thus, they have had to curtail their investments in Iran, Kuwait, Russia and Saudi Arabia.

To counterbalance these losses, Japan has offered Saudi Arabia the possibility of building oil-storage facilities in Okinawa, provided Japan can have access to them in case of emergency.

A closer rapprochement between the two countries depends, however, on the US' willingness for this to take place as the Saudi monarchy depends on the US military shield against the rising threat of Iran and of the djihadists, and there is no way Japan can replace the US in that role. This, in spite of the fact that Asia is today, by far, the largest buyer of both Saudi and more generally, Middle Eastern oil - up to 60% and 70% of their exports, respectively.

Reliance on Russia for energy is therefore extremely important. While a pipeline is being built from Siberia to the Pacific that could partly alleviate these escalating needs, a number of other pipeline projects have been proposed. All these projects require large investments ($ 1-2 million per kilometer of pipeline or around $ 12 billion for the pipeline that will link Russia and China), long delays in building and face substantial political and ecological problems. Further, the gas transmission systems in China and Japan are under-developed and therefore not suitable for the transport of large quantities of imported gas.

Russian industry has access to gas supplies at prices substantially below those practised on world markets and has therefore become a voracious user. The Russian government will be increasing prices for domestic consumption, including for private heating, and / or turning to alternative energy sources such as coal, hydro-electric or nuclear power.

Other possibilities have also been considered, but they all depend on Russia's cooperation.

Thus, for instance, integrating the energy grids of Russia with those of China, Japan and the two Koreas has been proposed to enable the exchange of seasonal surplus.

This entails not only Russia's cooperation, but also North Korea's. It also requires large investments, although possibly not of the scale of building a pipeline network.

Another common point between the China, India, Japan and South Korea is that they constitute, jointly, the world's largest weapons market and their suppliers are the European Union, Russia and the United States.

China and Japan also share the will to stop North Korea's nuclear program.

The two countries are also large emitters of greenhouse gases.

Both China and Russia fear, perhaps rightly so, that the US is conducting an encirclement strategy due to their military presence in Central Asia as well as, in Japan, South Korea and Taiwan as far as China is concerned, and Russia is concerned with a possible NATO expansion in Europe.