The flurry of diplomatic activities in the past few months is reflective of a kind of shaky equilibrium that is forming in the contestation between the US and China.
In this evolving landscape of big power frictions that fall short of outright military clashes, Southeast Asia’s leaders will have to manage the damage that results while finding ways to extract advantages from it. With the right approaches in political and economic diplomacy, there is no reason why the region cannot emerge as a winner from this new equilibrium.
An increasingly fractious environment
Despite their distrust of each other, China and the US know that they have to establish mechanisms to avoid extreme risks such as a direct military clash that neither wants. That is why the two big powers have been holding so many direct exchanges in the past few months even in the face of growing acrimony.
The likely endpoint could be the guard rails that the Soviet Union and the US eventually put in place during the Cold War such as hotlines, regular high-level meetings, frequent communications about military exercises and negotiations to limit the deployment of the most dangerous weaponry such as nuclear missiles. Such mechanisms helped to prevent war between the two rivals then and can do the same in the new era of US-China tussles.
Still, such an understanding will not prevent the two big powers from intensifying competition in other ways. There will be several dimensions of this competition. At one level, we will no doubt see even more trade, technology and financial restrictions imposed against each other. That could result in more economic disengagement between the US and China, with implications for our region.
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At another level, a lot more diplomacy and alliance building is also likely, with each big power trying to win friends. This could extend to increased economic outreach to key nations whose support will be vital. Because Southeast Asia is one of the main arenas in which China and the US will compete against each other, the region will be showered with lots of love and affection.
But there will also be less benign dimensions of this big power game. The South China Sea is strategically so vital to the big powers that there will be a temptation on the part of one or both of them to establish a more domineering military presence. Hence China’s hard line on asserting its rights in the disputed waters.
In recent days and weeks, we have seen how Chinese official vessels tried to prevent the Philippines from supplying its marines based on a disputed atoll while the Chinese coast guard used water cannons against Vietnamese fishermen in the waters abutting the disputed Paracel Islands which China and Vietnam claim. The US has also increased its military activities in the region and has made clear that its defence treaty with the Philippines requires it to come to the Philippines’ support in the event of a serious clash.
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The region can also expect more efforts by big powers to use influence operations to secure the support of important constituencies within the countries of the region. The spread of fake news and one-sided commentaries has increased, which could make it difficult for governments to stand up to the activities of certain big powers.
Widening consequences
Some of the implications of the new landscape described above are known. As China and the US impose ever more economic restrictions on each other, their two economies will become more disengaged — not quite decoupling entirely as that is too damaging but certainly drifting apart.
• This is evident in the trade data. China’s share of American imports is now at its lowest point since 2006. Mexico is reported to have displaced China recently as a source of imports for the US. Vietnam’s share of US imports has increased significantly as well. Some commentators argue that this is less than meets the eye because Mexico and Vietnam still rely on China for critical components and so the US and China are still intricately interconnected but in an indirect way. This is true — but only for now.
Over time, those firms that have moved final assembly to Mexico, Vietnam or other locations will find ways to source intermediate goods locally and eventually displace China. Companies that moved production from China suffer some loss of profitability as they cannot immediately replace the cost efficiencies coming from China’s super-competitive manufacturing eco-system. These companies will not simply sit still and accept this diminished profitability. More likely they will find ways to improve productivity in the countries they relocate to so that eventually those new countries become more efficient as well and attract more investment.
• In parallel, with this shift in trade, there will be shifts in foreign direct investment (FDI). The latest UNCTAD World Investment Report showed how the share of global FDI by Asean is now well ahead of China’s share. This reflects the reconfiguration of supply chains as production is moved out of China. Mexico and Southeast Asia have been big winners from this process. Judging from surveys, company announcements and data from regional investment promotion agencies, we sense that this reconfiguration is accelerating, with more countries now benefiting — such as India, Indonesia, Thailand and Malaysia.
In recent weeks, there has been an added twist to this changing landscape which could have wide-ranging implications for the region.
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In fits and starts, the US is learning to better compete against China by leveraging its advantages in technology and finance. Even with the surge in Chinese investment in the region in the past decade, the US is still the largest single investor in Southeast Asia. That position is not likely to change anytime soon. The US has also realised that the provision of advanced technology is something that the countries in Asia it is wooing appreciate and that this is an area where it can out-compete China because of its extraordinary innovation capacity.
President Biden’s just-concluded visit to Vietnam gives us clues as to how the US might use this advantage. Vietnam agreed to elevate its relationship with the US to the highest level of “comprehensive strategic partnership”, a status that only a few countries such as China, Russia and India have. A major reason for this is that Vietnam needs the US as a strategic counterweight against China which claims territories and waters that Vietnam also claims.
However, a major sweetener for Vietnam was the US offer of high-technology. Vietnam’s leaders are ambitious and want to move their country up the value chain and away from low-value assembly and cheap component production. The US understood this and has encouraged its high-technology firms to invest in Vietnam.
Big names such as Amkor Technology (a US$1.6 billion or $2.18 billion factory in Bac Ninh Province), Marvell Technology and Synopsys (semiconductor design and incubation centres), Microsoft (introducing “generative AI-based solution tailored for Vietnam and emerging markets), and Nvidia (partnering with Vietnam’s FPT, Viettel and Vingroup on artificial intelligence work in the country) are investing in Vietnam.
Earlier in the year, the US also offered to share recent progress in nuclear reactor technology with Thailand and the Philippines. It is likely the American provision of technology to Southeast Asia will expand in a calibrated manner as the US intensifies its competition for influence against China.
The US knows it will struggle to match China’s largesse set aside for infrastructure funding. However, even here, the US and its allies are finding selective ways to stay in the game. The US will partner with India, the European Union, and Saudi Arabia to establish the India-Middle East-Europe Economic Corridor under the aegis of the G7 nations’ Partnership for Global Infrastructure Investment (PGII) initiative which the US and allies conceived as a way of countering China’s success with its Belt & Road Initiative. This project could be a template for the US to engage similarly with Southeast Asia.
As the US and its allies improve their economic offers to regional countries, China will also find ways to counter this. The forthcoming Belt & Road Initiative (BRI) forum in Beijing will, we suspect, be an opportunity for China to refine its BRI offering, for example. We are also likely to see a surge in outbound investment by Chinese firms. As the Chinese economy expands and becomes more mature, its companies will seek to globalise as well. Chinese companies will also need to produce abroad to skirt Western restrictions on trade with China. Much of this outbound investment is likely to head to Southeast Asia which is geographically close to China and with whom China has long and comfortable ties.
In short, economic competition between the US and China offers this region a great opportunity.
Regional countries are improving their fundamentals
Just as the big powers are adapting their strategies, regional leaders are also devising new approaches to adapt to the new landscape.
First, there is a continuing interest in maintaining the momentum of trade opening through “mini-lateral” trade arrangements such as the CPTPP and RCEP. We may see, for example, the new Thai government applying to join the CPTPP. By expanding trade connectivity, regional policymakers are securing protection against trade protectionism.
Second, there are some hints that countries in the region are also exploring more integration or cross-border economic cooperation. Malaysia and Singapore may explore a closer relationship between the city-state and Malaysia’s southernmost state of Johor following the call by a senior Malaysian minister for a special economic zone between the two territories.
Third, policy-makers in the region are aware of the increased competition for foreign investment. This is why they are stepping up efforts to improve their attractiveness to foreign investors so as not lose the great opportunity that comes with the reconfiguration of supply chains. Even the Philippines which has been a difficult place for foreign investors is considering constitutional amendments that would allow it to offer a better regulatory environment for foreign corporations. With the disruptions from the Covid-19 pandemic out of the way, countries like Indonesia and the Philippines are preparing to reactivate major infrastructure initiatives.
Conclusion
An acrimonious relationship between the US and China is not helpful to our region. The proliferation of restrictive measures in trade, technology and finance between the two big powers will damage the global economy by depriving it of the grand efficiencies that resulted from the globalisation of the past two decades. Nevertheless, there are some benefits for Southeast Asia as America and China compete for the region’s affection. These benefits will be all the greater if the region’s leaders are nimble enough in their diplomacy to keep both China and the US engaged with the region — and even better if policymakers introduce reforms to enhance the region’s fundamental attractiveness to investors.
Manu Bhaskaran is CEO at Centennial Asia Advisors
