Trump is fantastic. Don’t worry.

Mr Trump’s telephone conversations with world leaders are indicative of his style, not substance.

Donald Trump’s phone calls with world leaders, screams a headline in the New York Times are “upsetting decades of diplomacy.” An already excited commentariat — around the world — is aghast at the fantastic manner in which the new US president-elect has been conducting the sublime act of statesmanship that is a telephone conversation. Just after some experts assessed that his fantastic phone call with the Pakistani prime minister might be unwelcome in India, their were jolted into assessing that Beijing would be upset (okay, make that apoplectic) after he announced that he spoke with the Taiwanese president. He even reportedly spoke to Rodrigo Duterte, the foul-mouthed president of the Philippines who had recently made a great show of insulting Barack Obama and kowtowing to Beijing. Oh yes, Mr Trump has violated the norms of the subtle, contrived and staid world of international diplomacy.

That is not a bad thing in itself. Nor is it much of a bad thing as far as US foreign policy towards Pakistan, China and the Philippines is concerned.

Mr Trump’s remarks to Nawaz Sharif appear more like the polite comments tourists make to their hosts regardless of the reality they observe. If he really meant what he said, then Pakistanis need to be worried right after they get over the surprise and puzzlement. Whoever believes that India should be concerned, less consider them unwelcome, is living in the 1990s. Analysts who believe that New Delhi is vying with Islamabad to court Washington’s favour must enlarge their frame of reference to the Indo-Pacific region, and set their watches to the present.

What about China? Hasn’t Mr Trump provoked the People’s Republic of China by exposing Beijing’s most dearly held—and most forcefully enforced—myth that the Republic of China on Taiwan does not exist as a normal state? Yes, and that’s not a bad thing at all. Perhaps due to the Western perception of its supposed exoticness, Beijing has usually had its way by pressing foreign governments to ‘respect its sensitivities’ over the Taiwan, the Dalai Lama, Xinjiang and the various territorial disputes it has with its neighbours. When the United States yields to this coercion, the rest of the world follows. If the United States were to be less inclined to ‘respect China’s sensitivities’, others are more likely to follow suit.

Beijing is quite likely to retaliate, but then, it has taken sharp foreign policy positions over the past decade without provocation. Let Beijing decide how long it wishes to play tit-for-tat with a much more powerful adversary. It remains to be seen if Mr Trump has the stomach for such a game.

It makes good sense for Mr Trump to reach out to Mr Duterte: at worst, it will confuse the Philippines establishment as it explores alignments with China and Russia. At best, it can cause Mr Duterte to execute a wild swing back towards Washington. To argue that Mr Trump must shun or punish Mr Duterte merely because the latter insulted President Obama would be to trade in foreign policy realism for soap opera sentimentalism. There is no evidence that the latter outperforms the former as a basis for pursuing a state’s interests.

For all his bluster, Mr Trump is out of his depth on matters of statecraft. He’s likely to learn on the job. Regardless of the value judgements we place on their content, it would be incorrect to take the fantastic man’s telephone conversations as indicators of his future administration’s real foreign policy positions.

China warns Singapore

As Singapore confronts difficult choices, it must sound out New Delhi.

It is an open secret that the Singapore Armed Forces (SAF) train in the Republic of China in Taiwan, and the two countries have enjoyed a quiet, but very productive partnership since the early 1970s. Like how actors in ’70s Hindi movies used to become totally unrecognisable merely by putting on a moustache and a beard, Singapore’s soldiers would become Taiwanese ones when they exercised in that country. The subterfuge was out of respect for diplomatic niceties, to placate the People’s Republic of China. For instance, Singapore service personnel would assume Taiwanese aliases. Sometimes this would lead to hilarious outcomes: like when my friend, an ethnic-Tamil Singaporean infantry platoon commander, had to pass off as Chong Wai-kiong.

Singapore’s defence cooperation with Taiwan (Project Starlight) predates the establishment of diplomatic relations with China. For its part, Beijing was content with this arrangement, even when it came close to war with Taiwan in the mid-1990s. Ian Storey writes that Li Peng, then China’s Premier, said that China ‘should not mind too much’ if Singapore continued its military relationship with Taiwan, but had asked that this be done discreetly.

So last week, when Hong Kong customs authorities — tipped off by their Chinese counterparts — seized nine infantry vehicles on a ship that was making its way from Taiwan to Singapore, it appears that Beijing has decided to deliver a warning. Or more.

It comes as a surprise, but is clearly yet another manifestation of an emboldened China taking aggressive positions in its extended neighbourhood. Even if Beijing were to end the impasse by releasing SAF’s equipment in return for renewed Singaporean commitment to the One China policy, it would further strengthen the perception among East Asian countries that it is best not to antagonise China. It would also put greater caution, and perhaps even a suspension of the four-decade old Singapore-Taiwan military cooperation. Chastising Singapore has multiple benefits for China.

It is too early to tell if Beijing’s actions are informed by an expectation that the upcoming Trump administration will disengage from Asia, leaving the field open to China. China’s actions over the past few years suggest that Beijing is confident of upping the ante even in the face of US “pivot” to Asia. It may be American conceit to believe that Trump is leaving East Asia to China. The rulers in Beijing perhaps believe they already have Asia.

This is a crucial period for India’s own Act East policy. New Delhi must reassure Singapore, Hanoi, Jakarta, Seoul, Tokyo and Canberra that India has the wherewithal and a commitment to shape an Asian balance that does not surrender to Chinese hegemony. If the United States wishes to be part of such an arrangement, then it is all for the better. If not, the six Indo Pacific powers must manage on their own. Let’s not forget that if the United States is no longer in the picture, India is the only nuclear power on the other side of China.

On OBOR’s commercially suspect projects

Win-win, for China.

Analysts have observed that many projects that China is financing and building under Xi Jinping’s One Belt One Road (OBOR) initiative are commercially dubious. People whose job it is to worry about such things have have surmised that the real motivation might be military-strategic in nature.

There is another — less sinister, but non-mutually-exclusive — explanation. Fitch’s Kalai Pillay says that the real motivation is “exporting China’s excess construction capacity that is accompanied by financing from Chinese state-led enterprises.”

“A lot of the big construction companies in China have bulked themselves up significantly over the last 10 years to carry out the big infrastructure projects in China. As many of these come to the tail end they have this excess capacity, the know-how, the real technical knowledge, a lot of patented technology that can be sold abroad, that needs to be exported abroad,” Pillay says.

He adds that there may be little room for non-Chinese banks and institutions to play a role in financing OBOR infrastructure projects.

“The final leg to this is the capital. There is excess capital which finds itself into all kinds of things, international bond markets, the spread market wherever. But one way to export it also is through financing projects that’s going to take place outside of China. So that’s part of that OBOR strategy,” Pillay says. [The Asset]

In other words, China is providing cheap loans to regional countries to build infrastructure — that might not be commercially viable — using Chinese construction companies. If the projects take off, China benefits. If they don’t, then regional governments will be stuck with debts to the Chinese government.

Not bad. For Beijing, that is.

The big deal in Tokyo

After concluding the nuclear deal with Japan, the Modi government must review India’s atrocious nuclear liability regime.

It is a big deal. Owing to the controversy over the replacement of currency notes, though, it has almost slipped popular attention. India and Japan have concluded an agreement that allows Japanese vendors to compete in the India’s nuclear power market.

The deal holds potential for greater competition in the Indian market for nuclear reactors and technology. It also is a shot in the arm for Japan’s beleaguered nuclear power sector, and can help in attempts to rejuvenate the Japanese economy. That’s the economics of it.

Greater significance lies in what persuaded Japan to set aside its decades-old anti-nuclear, ‘anti-proliferation’ stance and conclude a deal with a non-signatory of the nuclear non-proliferation treaty (NPT). Shinzo Abe is finding greater political traction in making big changes to Japan’s traditional foreign policy in the light of an assertive China that is fast expanding its geopolitical footprint. Prime Minister Abe’s policies are by no means fully accepted in the Japanese polity, but he is likely to have his way. With Donald Trump having created unprecedented doubts as to the United States’ commitment to its treaty allies, realists in Tokyo are even more likely to desire closer relationships with potential non-treaty allies (better known as ‘strategic partners’). 

To help get the deal through the Japanese Diet, Prime Minister Abe needs to reassure sceptics that Tokyo retains its anti-nuclear weapons positions. Hence, a note to the effect that Japan reserves the right to give a year’s notice and suspend nuclear commerce with India in the event of New Delhi conducting another nuclear test, was signed and exchanged following the formal nuclear agreement. The concession makes it easier to conclude the deal.

It is not unusual for Indian critics to complain that New Delhi conceded too much, based on a legalistic parsing of an international agreement and its associated notes. Such criticism is overstated. An agreement between two sovereign states depends to a overwhelming extent on the will of the parties to comply. If Japan seeks to renege, it can do so, no matter what is written and signed on paper. So legalities matter only to an extent. No sleep needs to be lost over the matter.

What policymakers and analysts in India should worry about is whether the atrocious law on nuclear liability is consistent with India’s energy, environmental and safety needs. At the moment it seems to restrict competition by keeping vendors from rule-of-law conscious countries out of the Indian market. Not only is the Indian power sector deprived of the possibility of newer and safer technologies, New Delhi (and its strategic partners) are unable to fully harvest the geopolitical rewards of nuclear deals. It makes little sense to sign nuclear deals with dozens of countries only to find that the liability clause is a show stopper.

All parties, including the BJP were complicit in enacting an unworkable nuclear liability law during the UPA government’s term. Now, the Modi government must undo the damage, confront the anti-nuclear lobbies and put in place a sensible nuclear liability regime.

Ad hoc defence

In my Business Standard column today I argue that structural reform of the armed forces is the unfinished business of Kargil:

It may appear that the country has been lucky to have escaped without too much damage for another 14 years. But the failure to restructure our armed forces in line with contemporary needs will impose strategic costs beyond just delays and scandals. The current structure, divided as it is between the army, navy and air force (and within their constituent arms), is unable to holistically conceptualise India’s strategic environment.

Take, for instance, the Cabinet’s approval for a new mountain strike corps to handle the Chinese threat along the unresolved boundary. It involves an army formation of 45,000 soldiers and a cost of Rs 62,000 crore over 2012-17, tasked with mounting an offensive in Tibet in the event of a Chinese attack. This move was widely hailed as a robust Indian response to China’s aggressive actions along the boundary and its steadfast refusal to move towards a settlement. Few asked where the money and the soldiers are going to come from. As my colleague Rohan Joshi notes, the army is already short of 10,000 officers and 30,000 soldiers. With slower economic growth, higher social expenditure and looming deficits, how does the government plan to finance this expansion?

The bigger question, though, is not the financial cost but the opportunity cost. Is an army strike corps India’s best response to the strategic threat from China?

It is possible to argue that by choosing an army strike corps, New Delhi has played right into China’s hands. Beijing has, by inexpensively raising tensions along the Himalayan boundary, managed to induce New Delhi to invest in an expensive military asset that is unlikely to be used. Nuclear deterrence makes a direct military conflict between the two countries unlikely; and a large-scale conflict necessitating the use of corps-level formations is even more unlikely.

Meanwhile, the geostrategic contest of our times is being played out in the oceans. The only regional force that can challenge the Chinese navy’s quest to dominate the Indo-Pacific waters is the Indian navy. And guess what? India has Rs 62,000 crore less to spend on the naval expansion of the kind that would have countered China’s maritime power.

Perhaps the decision to invest in a strike corps is the better one, though this columnist disagrees. Yet, absent the long-pending restructuring of the armed forces, we can never say that the big trade-offs were adequately weighed.

Fourteen years after Kargil, the country certainly cannot afford such ad hoc functioning. [Business Standard]

Coincidentally, another op-ed in another newspaper by one of India’s foremost thinkers on strategic affairs takes up this argument in greater detail. Admiral Raja Menon packs quite a punch in the pages of The Hindu when he argues that instead of a mountain strike corps, a “a flotilla of nuclear submarines and a three carrier air group” makes more sense:

Most of all, we appear not to have assessed the Chinese weakness and strengths. Their strength is the huge logistic network that they have built up in Tibet. By creating a one axis strike corps, we have played into their strengths. The Chinese weakness lies in the Indian Ocean, a fact that even Beijing will readily concede. The clash between their political system and economic prosperity requires resources and, increasingly, the Chinese resource pool is Africa, which generates massive sea lines of communication (SLOC) through the Indian Ocean. Today, they are merely SLOCs; tomorrow they will be the Chinese Jugular. Beijing’s paranoia about the Indian Ocean is therefore understandable but the threat according to its strategic commentators comes only from the U.S. Sixty thousand crore spent on strengthening the Indian Navy’s SLOC interdiction capability would have given us a stranglehold on the Chinese routes through the Indian Ocean. The Himalayan border, the entire border, could have been held hostage by our strength in the Indian Ocean with an investment of Rs.60,000 crore. [The Hindu]

While I am not a fan of aircraft carriers, I am of the same opinion as Admiral Menon on the need to invest in naval and expeditionary assets. The absence of a higher defence structure that can look at strategy in a comprehensive manner—including the nuclear dimension—is causing India to engage in linearism, incrementalism and ad hocism.

The Waheed regime’s games

New Delhi must punish Maldives’ Waheed regime, but without playing into its hands

Mohammed Waheed Hassan’s regime seized power through dubious means. It now seeks to acquire domestic popularity and external support by reneging on an airport operations contract with India’s GMR group. Contrary to its claims, the matter is not merely an issue of the business case turning out to be different than what was previously assumed. If that were so, it would not declared that it is expelling GMR and would select a different airport operator. Renegotiating with an existing vendor is less expensive, less difficult and more reasonable course of action if the intentions were purely commercial. [This ANI report has more details about the project]

The high-level politics of this is clear. The Waheed regime seeks to bolster its ‘nationalist’ credentials by showing it can take on the big, domineering neighbour. It seeks to acquire external support by playing on the India-China contest in the Indo-Pacific. If New Delhi can be provoked to react punitively, the Waheed regime gets the space to court Chinese or other foreign companies. That it was emboldened to attempt such a move is an indicator of New Delhi’s failure of neighbourhood policy.

What should New Delhi do now? First, it should not provide the Waheed regime the excuse it seeks. Diplomatic relations, economic ties, tourism and aid must not be suspended. Second, India should bolster the democratic opposition to the Waheed regime—including Mohamed Nasheed, who happens to be the legitimately elected president—and turn the heat on its illegitimate hold on power. Third, New Delhi must encourage GMR and Axis Bank to use the Singapore courts—the jurisdiction chosen by the contracting parties—to the fullest extent.

The arbitration verdict might well have gone in favour of the Waheed regime, but the Singapore court has stayed the eviction of GMR. If the Waheed regime refused to comply with the court’s orders—as it has declared it will—GMR can seek legal recourse. Similarly Axis Bank might have a case against the Maldives government if the latter has a sovereign guarantee obligation and does not discharge it. The Maldives government has financial and fixed assets in Singapore, which can be targeted by GMR & Axis Bank’s lawyers.

New Delhi has risks to its reputation at stake. If governments of the region come to expect that expropriating Indian companies will be inexpensive and will not have bad consequences, there is a greater chance that they will engage in such behaviour. The Waheed regime must be made to incur the costs of its politics. Not bluntly, though.

The issue will take on an entirely different dimension should the Waheed regime use force against Indian nationals, or engineer or condone violence against them. In such circumstances, it is proper to keep all options on the table.

Is China being bullied by the Philippines?

The disproportionate negotiating power of strategic proxies

Today’s Asian Balance column in Business Standard.

The small-country bullies
China’s aggressive posturing over maritime boundaries has caused East Asian countries to look at other powers for support

It’s those Chinese fishing vessels again. Last month they ventured into a shoal in the South China Sea, presumably hunting for giant clams, when they were apprehended by the Philippines’ naval patrols. If the Philippines claims the Scarborough shoal – a few hectares worth of low-lying rocks 200 kilometres from its shores – China claims the entire South China Sea as its own. In what has become a familiar pattern over the last few years, the Chinese fishing vessels triggered off a confrontation that quickly escalated into a maritime and diplomatic stand-off. Chinese tourists left the Philippines, and Filipino bananas face an uncertain prospect now in clearing China’s food safety tests.

The two countries are now trying to back off at this time, but not before the “w” word surfaced in the popular discourse.
War? Over some uninhabited rocks in the middle of nowhere? Between China (GDP $7.3 trillion, defence budget $106.4 billion) and the Philippines (GDP $213 billion, defence budget $2.3 billion)? Who would want it?

Not China. While it certainly wants to keep its territorial claims alive by letting intrepid fishing vessels do to South China Sea islands what dogs do to lamp posts, it knows that an outright military conflict will be counterproductive to its longer-term interests.

Provocative fishing vessels and Beijing’s aggressive diplomatic posturing over maritime boundaries have already caused East Asian countries to look at the United States, India and other powers for support. In case China finds itself in a war with the Philippines, opposition to Beijing will consolidate, and the US will make strategic inroads into the region, making it harder for China to achieve its goal of dominating the Western Pacific.

The US too does not want a war. It has a military alliance with the Philippines, and Manila could call upon US support if it is attacked. Washington is understandably reluctant to let itself be dragged into a war against a great power by a small ally over a tiny issue. The Obama administration has signalled that territorial disputes are outside the scope of the defence pact. Even so, if it is seen as shirking from supporting its ally, the value of Washington’s strategic promissory notes in East Asia will sharply depreciate. It cannot, however, support its ally without provoking Beijing. A war would cause the US to choose between losing its reputation and getting into an unwanted confrontation with China.

Most East Asian countries do not want war either. They have spent the last decade attempting to engineer “regional security architectures” – essentially multilateral forums that discuss security issues – that hope to solve tricky geopolitical disputes without being bullied and without having to fight. Yet for all its achievements, the Association of South East Asian Nations (Asean) has little to show in terms of ability to manage armed conflict, even between its member states. Thailand, for instance, has stonewalled the deployment of Indonesian military observers over its border dispute with Cambodia over the Preah Vihear temple.

Nor has Asean been very vocal in insisting that China comply with the code of conduct in the South China Sea they agreed to in 2002. Its member states are unlikely to want their solidarity to be put to the kind of test that a China-Philippines naval conflict would entail.

What about the Philippines itself? For Manila, maritime boundaries in the South China Sea assume an economic significance that goes beyond nationalistic sentiment over territory. The seabed is supposed to have rich reserves of oil and natural gas, although estimates vary. The technology to exploit natural gas fields in the South China Sea is maturing. China National Offshore Oil Corporation already has semi-submersible deep sea drilling platforms. Manila has its eyes on healthy revenue streams from energy exports which can make a substantial difference to its fiscal position and overall economic health.

This, coupled with the security guarantee the Philippines enjoys by virtue of its alliance with the US, has caused it to stand firm and confront China. So much so that Dai Bingguo, one of Beijing’s top foreign policy hands, accused the Philippines, “a smaller country”, of bullying China. He has a point. As China’s leaders ought to know all too well, small countries that are backed by great powers have disproportionate negotiating power, and they “bully” both their adversaries and their backers. The Philippines might calculate that it has relatively less to lose by letting tensions escalate.

That’s the main risk — when pesky fishing boats, Chinese law enforcement vessels and Philippines naval ships are facing off each other, an accidental trigger can cause an unintentional escalation. Given the turbulence in China’s civil-military relations ahead of this autumn’s leadership transition, and the numerous Chinese state agencies engaged in the South China Sea, the risk of escalation is higher on its side. The onus, therefore, is on Beijing to keep a lid on the tensions.

Unrelated to the stand-off, a contingent of four warships from the Indian Navy’s Eastern Command is on a routine long-range overseas deployment to the South China Sea, and ports in China and the Philippines are among those it will call on. It does come at an interesting time, given its mission of what the Navy terms “generating goodwill among the neighbouring countries”.

Copyright © 2012. Business Standard. All Rights Reserved.

The price of minding Mr Hu’s delicate sensibilities

It is not in New Delhi’s interests to be seen as a craven appeaser of China

There are a number of reasons why states come together and form international groupings. These include common interests, common causes, common weaknesses, common fears, gawking, lurking and sabotaging. One of the more inexplicable reasons they form groupings is because some research at some investment bank wrote a report lumping them together based on their growth rates and sizes of their economy. That’s why when outrage suppresses yawn when BRICS summits are held.

If the Indian foreign service is understaffed and overstretched, it also is guilty of enthusiastically expending resources in one too many pointless clubs, from the Commonwealth to the Non-aligned Movement and now to BRICS. The opportunity cost of getting wrapped up in pointless pageantry is lower attention to more important forums like the G-20 and the East Asia Summit. Like in many other areas, the UPA government’s sense of priorities is highly questionable.

Worse, because China’s highly Tibet-sensitive president was to attend the summit, the Indian government found it necessary to round up not only Tibetan protestors, but anyone else who faintly resembled them. Calling it our shameful kow-tow, Mihir Sharma writes of “Tibetans being rounded up, made to squat in the sun; the ever-sensitive Delhi Police indulging in the worst sort of racial profiling, demanding that people who look even vaguely Tibetan prove their credentials or be locked up.”

Having met some of the top Indian officials dealing with China policy, I can say with some confidence that they are not the appeasing sort. So why did Delhi Police (which takes orders from the Union home ministry) behave in such a demeaning manner?

One explanation that you might hear is that since New Delhi is playing hardball where its core interests are concerned there is no point in gratuitously embarrassing China’s leader in the eyes of his peers. This being a crucial year for the Chinese leadership—where power is supposed to change hands at the Party Congress amid factional strife, economic uncertainties and internal instability—why make President Hu Jintao lose face? There’s some merit in this argument. You don’t need to make a public show of your intentions. Making your guest comfortable is as good a principle in diplomacy as in daily life (although some Leftists didn’t believe this ought to extend to a US president).

Nor does preventing pro-Tibet protests prejudice India’s current or future negotiating position on the Tibetan issue. After all, “Free Tibet” protests can take place elsewhere in the country and on any other day of the calendar.

It’s not uplifting, it’s not fragrant, but there is merit in this logic. However, it still misses a larger point. The world—and especially the countries of East Asia—are watching. What they saw is a potential counter to Chinese hegemony bend over backwards (a reverse kow-tow?) to please China’s leader. Although they have seen some measures by New Delhi that persuades them of India’s intentions to contribute to the Asian balance of power, such signals risk confusing them. Small and medium-powers in India’s extended eastern neighbourhood will begin to have doubts about New Delhi’s ability to stand up to Chinese assertiveness. This will make it much more difficult for India to pursue its own interests in East Asia.

Finally, the perception that New Delhi ‘appeased’ Beijing yet again will exacerbate the hysteria in the media and public discourse on matters concerning China. Ironically, the UPA government has ended up embarrassing itself in front of its people in order to avoid embarrassing Mr Hu in front of his. Senior Indian officials have complained that the way the Indian media report issues pertaining to India-China relations complicates matters. The way the Indian established handled Mr Hu’s visit doesn’t help matters either. Feeding a narrative of a weak India unable to show spine to China on core democratic values is unlikely to help New Delhi make tough decisions of give-and-take if the opportunity presents itself. After all, we are all just prisoners here, of our own narratives.

What does Taiwan’s election result mean for India?

Ma’s victory and India’s dilemma

Yesterday’s Asian Balance column in Business Standard.

Taiwan’s presidential elections, since they first started in 1996, have in large part been referendums on the “One China” policy. Voters have been offered two deviations from the delicious ambiguity of the status quo: either a path towards eventual re-unification with mainland China or a dangerous path towards independence. Taiwan’s grand old party, the Kuomintang (KMT), espouses the former, while the Opposition Democratic Progressive Party (DPP) favours the latter.

The stakes, obviously, are high for Beijing — whose leaders have tried, unsuccessfully, bullying, coercion and suasion to influence the Taiwanese voter. But the stakes are also high for the Indo-Pacific region because Taiwan is critical to the stability of US-China relations, especially at a time when they both are attempting to move away from the confrontation of the past two years.

Neither China nor the United States wants the Taiwanese voter to rock the boat. Both had let it be known that they would prefer the incumbent president, the KMT’s Ma Ying-jeou, to win. In the event, on Saturday, the Taiwanese people agreed. But not before pre-election opinion polls showed that the election would go down to the wire, prompting thousands of expatriate Taiwanese from places like Silicon Valley to crowd into flights back to the island to cast their ballot.

That Ma found himself neck-to-neck with Tsai Ing-yen, his DPP challenger, is interesting. Four years ago, he was voted in after people felt that the DPP’s Chen Shui-bian was taking Taiwan into dangerous waters with his pro-independence line. Ma delivered on his campaign promise of closer ties with the mainland, sealing a major trade deal with China in 2010, boosting trade, travel, communications and investments.

China-Taiwan trade is currently around $160 billion. Taiwanese investors pumped in close to $40 billion in the four years of Ma’s first term. Chinese investors reciprocated, albeit only to the tune of $170 million. Increasing the number of direct flights to almost 100 a day brought in 2 million Chinese tourists and $3 billion in receipts. There has been a parallel improvement in official relations between Beijing and Taipei, as much in form as in substance.

Why then did Ma face a tough election? One answer is what we would call an anti-incumbency effect. As he admitted last month, there were some economic goals his government failed to achieve, especially those relating to employment and income growth. The other answer, one that goes beyond economic angst and back to the China-Taiwan question, might be a preference by voters to drag deviations from the status quo to the middle. As Russell Hsiao, a political analyst, wrote in the Jamestown Foundation’s “China Brief” last month, a majority of Taiwanese people want to perpetuate the status quo and will punish politicians who stray too far from it. This might also explain both the closeness of the contest and the verdict itself.

Over in Beijing, Ma’s victory is seen as vindication and a political triumph for President Hu Jintao. In the internal dynamics of the Communist Party of China, it is likely to empower individuals and factions close to Hu, influencing the pecking order of the new administration that will take over after this year’s party congress. Also, as Willy Lam, a Hong Kong-based commentator, points out, “if the KMT continues to rule, one can assume that tensions will be lowered further and the [People’s Liberation Army] will have no reason to ask for a higher budget.” To the extent that the issue of Taiwan’s status becomes less of a thorn in Beijing’s side, the political salience of the hawkish factions will, on the margin, diminish. This in turn can help reduce tensions with the United States.

In Washington, some commentators have already begun asking whether it makes sense to continue to allow Taiwan to poison relations between the United States and China. While it is unlikely that such a policy reversal is in the offing, it is already clear that Washington would prefer a Taiwan that doesn’t raise the temperature in East Asia. Washington’s strategic calculus, like that of the other major powers in Indo-Pacific, is about shaping a favourable balance of power, not triggering a military confrontation.

India faces a dilemma. On the one hand, the geopolitical stability suggested by a KMT government means greater economic opportunities for India to engage Taiwan. Compared to Japan, South Korea and Singapore, our bilateral trade and investment with Taiwan is negligible. The country accounts for one per cent of India’s foreign trade. At 0.03 per cent of the total foreign direct investment in India, Taiwan ranks below countries like Chile and Turkey. Bilateral trade agreements can help, but only if domestic reforms make India relatively more attractive as an investment destination.

On the other hand, a Beijing less preoccupied with issues in its backyard will find it easier to project power elsewhere, including against India.

Geoeconomic opportunities are, thus, stacked against geopolitical risks. So unless New Delhi uses the space created by Saturday’s elections to rapidly scale up economic ties, India will have little upside from Ma’s success.
Copyright © 2012. Business Standard. All Rights Reserved. [Business Standard]

The Asian Balance: Dealing with a vulnerable China

China’s external, economic and ethnic vulnerabilities are worsening

Here’s today’s Asian Balance column in Business Standard.

This may come as a surprise to many, but China today is at its most vulnerable since the Tiananmen Square protests of 1989. That’s not all; it is unlikely that the country will shake off its vulnerabilities – geopolitical, economic and internal security – over the next three to five years.

The developments in East Asia in the past few weeks, focused around the East Asia Summit at Bali, have put China on the defensive. Not only is the United States reinvesting its military assets into the Indo-Pacific region, but almost all of China’s neighbours have moved to construct bulwarks against China. Even Myanmar is showing signs of wanting out of China’s orbit, and is opening up to India, the United States and Vietnam. If countries of the region are ganging up against China, it is largely Beijing’s fault. Picking a fight with each one of your neighbours at the same time is not the smartest of moves. Yet, that’s what China has done over the past couple of years.

What happened in Beijing’s foreign policy kitchen is anyone’s guess but China no longer enjoys a favourable external environment that it used to for the last two decades.

Let’s come to economics. Not only does China hold more than a trillion dollars of US debt, it is likely to have to increase its dollar holdings given the sovereign debt crises in the euro zone. So a lot of China’s money is, and will be for some time, at the mercy of its biggest strategic rival. Continue reading “The Asian Balance: Dealing with a vulnerable China”