America’s new alliance with the United Kingdom and Australia, the AUKUS agreement, marks an important change in the balance of power in the Indo-Pacific region and has led to much hand-wringing over its consequences. Some observers worry that AUKUS will only provoke China to retaliate against the US and its allies and so lead to more tensions in the region. Others are concerned that it will spark off a spiral of ever-increasing and ever more wasteful military spending, resulting in the deployment of dangerous new weaponry. Worse still, with the US and China eyeing each other more antagonistically, it is hard to envisage the two cooperating together to face global challenges such as climate change.
No one should downplay the risks, which are real enough. However, it is necessary to look at the whole picture which would include two sets of positives. The first is a better balance of power in the Indo-Pacific which will deter either big power from making mischief and secondly, it could surprisingly yield a number potential economic benefits. Taking these into account, it could even be argued that the smaller countries in the Indo-Pacific may be better off as a result of this new alliance.
What has changed?
Let us start by understanding what difference the AUKUS makes.
- The principal change is a reinforced military alliance, with China as the clear target. The US, UK and Australia are already collaborating in defence matters in various ways such as the Five Eyes intelligence-sharing arrangement. But this new agreement upgrades that relationship among the three into a full-fledged and multi-dimensional alliance. And, while the partners deny that theirs is an anti-China front, that is what it is. So, after years of not explicitly committing to side with the US against China, Australia has now done so. The UK has also been brought into the arrangement despite being a European power, not an Asian one.
- In pulling this off, the Biden Administration has demonstrated that the US retains a convening power to rally allies that China lacks. Within days of the AUKUS being announced, President Joe Biden held a summit meeting of the Quad, which brings the US, India, Japan and Australia together to solve common problems in the Indo-Pacific such as infrastructure and responses to natural disasters, although the Quad has a small military component as well. Thus, the US has now put in place a multi-layered series of initiatives directed at China.
- The US has also just announced that it successfully tested an advanced hypersonic missile system that it says will “offer next-generation capability” to the US military. This is an indirect riposte to China’s development of formidable new missiles which are capable of attacking America’s aircraft carriers. The US is showing that its technological prowess will enable it to match whatever high tech offensive weapons China tries to develop. It can extend such new defence technology to its allies in AUKUS.
- As a result, the military balance is altered in the US’s favour. The nuclear-powered submarines which most commentators focused on will have a strong impact on the military balance but as they are deployed in twenty years’ time, around 2040, the effects are far away. Still, there are other immediate military effects. The US will be rotating many more air and naval forces through the region using Australian bases. Australia’s air force and navy will get air-launched and Tomahawk cruise missiles that can target China. The three nations will also cooperate in developing defence technology and in cyber warfare.
Why this reduces the chances of military conflict
In short, the US has strengthened its position in the Indo-Pacific against a rising China despite all the concerns raised about its credibility by its botched military withdrawal from Afghanistan. China’s growing military capacity will now be more effectively countered by the multi-layered alliances the US has created. We would argue that this revised balance of power reduces the risk of an outright military conflict and could result in better behaviour by either of the big powers. The AUKUS alliance will strengthen the US ability to counter any aggressive move by China, which will thus be more cautious, for example, in how it treats countries such as Vietnam in the South China Sea.
China’s threat to use military force to reunify Taiwan with the mainland will also look less intimidating since the military response from the US could now be much more lethal. China’s assumption had been that its unremitting military build-up combined with a declining America would mean that the US would eventually decide that the costs of defending Taiwan were untenable. That would then open the way open for Beijing to force Taiwan to accede to its demands. That assumption is less likely to be the case now.
Finally, with the US and allies now more committed to the region, President Xi Jinping and his colleagues in Beijing may realise that it should not be alienating the other nations in the region. This may persuade China to dial down its assertive conduct in the South China Sea. For example, China may cut back on its approach of continuously sending in China’s maritime militia into waters claimed by Vietnam, the Philippines, Brunei and Malaysia, to assert its claims there.
There are still some downsides of course …
China will not give up on its aim of retaking Taiwan. It will simply change its strategy for pulling this off. Within days of the AUKUS agreement being announced, China sent in 24 People’s Liberation Army aircraft into Taiwan’s air defence identification zone a clear signal to Taiwan that China will be unrelenting in pursuit of reunification. Instead of hoping for military pressure to succeed, Beijing may now resort to squeezing Taiwan’s political, economic and military space while wooing pro-unification groups in Taiwan itself. Xi was quick to congratulate Eric Chu, who was just elected leader of the Kuomintang Party in Taiwan and is known to favour closer ties with Beijing. More efforts to subvert Taiwan through the spread of fake news and cyber attacks are also possible.
China will also have to review its military procurement and defence technology development plans as well. Although deployment of Australia’s nuclear-powered submarines is a long way off, the enhanced threat to China that this deployment poses will require China to invest heavily in counter-measures. It will thus have to increase its defence budget and find ways to finance the higher expenditure just as the demands of an ageing society absorb its fiscal resources.
Another Chinese response might be to firm up its growing alliance with Russia. Already, the two have mounted joint air patrols close to South Korea and Japan. Expanded military cooperation in north Asia between the two is likely.
There could be economic upsides too
The fundamental gap in America’s strategy in the Indo-Pacific is the lack of an economic dimension. The priority of Asian nations remains economic development, for which access to large markets and inflows of foreign investment are helpful. Without a strong economic offering, the US will struggle to match China’s growing influence in the region. China is now the single biggest export destination for most Asian economies. China is also integrated with much of Asia through bilateral free trade agreements as well as the recently signed Regional Comprehensive Economic Partnership agreement. Chinese investments are increasingly important in Southeast Asia as well. In contrast, the US pulled out of the Trans-Pacific Partnership (TPP) agreement in 2017 and its toxic domestic politics makes it virtually impossible for it to rejoin that or any other meaningful multilateral trade agreement.
This is why China expedited its application to join the TPP’s successor, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) within days of the AUKUS being announced. As soon as it did so, Taiwan rushed its application in as well. Thailand’s senior trade official noted that with China potentially a member of the CPTPP, the case for Thailand joining it became stronger. South Korea is already reported to be preparing an application while the UK has submitted its application. With a reasonable chance that China might one day become a member of the CPTPP, many other countries would want to join it as well. In other words, the creation of the AUKUS military alliance has given added momentum to the CPTPP.
Because the CPTPP is seen as a high-standard trade agreement with the potential to create huge economic synergies for its members, the broader its membership, the greater the economic gains as it expands. Some observers have dismissed the chances of China being accepted into the CPTPP since Japan, Canada and Australia are likely to object. But we think it will be awkward for these countries to veto China’s application if the rest of the members want China in. Others say that China’s “socialist market economy” with its large state enterprises, timid labour unions, aversion to inter-state dispute settlement mechanisms and dislike of free flows of cross-border data and other restrictions would not fit in with the CPTPP’s provisions. However, the attraction of China’s huge market is so great that we believe some kind of compromise is possible that would allow China to join in some form of affiliate capacity initially.
Another economic upside could come from China expanding its Belt & Road Initiative (BRI). This is another area where the US has not been able to match China. Faced with a greater need to woo friends in the region, it is possible that China revamps the BRI so that it is more targeted at helping countries in Southeast Asia that are strategically useful to China.
Overall, the region may benefit
Putting it altogether, we see some good coming out of the new military balance in the region. First, a Chinese military operation against Taiwan is much less likely now. The AUKUS alliance makes the risks of such a military option too great.
Second, China will probably see a need to improve its approach to the region. It makes sense for it to stop alienating countries in the region through highly assertive intrusions into waters claimed by others. That gives the smaller Asian nations some breathing space and greater room for manoeuvre.
Third, stepped up economic engagement with the region through more generous schemes, whether part of a revamped Belt & Road Initiative or other economic partnerships can also be expected. The US, Japan and allies will have to offer some economic incentives as well so as not to allow China to gain an advantage.
Manu Bhaskaran is CEO of Centennial Asia Advisors
Photo: Bloomberg
