[From Unsplash]
You can read Part 1, on the paradoxes that will shape geo-economics, here.
On April 26, China’s President Xi Jinping told the US Secretary of State Antony Blinken, in the course of the latter’s visit to Beijing, that “China and the United States should be partners rather than rivals.” Xi added that the two sides should “seek common ground and reserve differences, rather than engage in vicious competition,” and rather patronisingly added: “China would like to see a confident, open and prosperous United States." Blinken’s visit was meant to point out to Beijing that China’s covert support of Russia over its war with Ukraine wasn’t acceptable to the US and its allies. “Russia would struggle to sustain its assault on Ukraine without China’s support,” Blinken said and brought out the threat of the US’ favourite weapon—sanctions.
There were three points that clearly emerged from the visit. One, China wanted no US interference in the South China Sea and the Taiwan Straits, nor did it want the core of its political ascendancy globally—and particularly across Asia—threatened by competition in any way. Two, China sought to continue its geo-economic strategy without constraints and certainly without any heed to any realism-based nationalist tendencies across the US and its allies. Three, it believed that the US was now at Beijing’s table with Beijing’s rules of etiquette and not vice versa.
There is no getting away from the geo-economic links that emphasise how vital, and how influential, China will remain in the global economy
The US and its allies, including those in the Indo-Pacific like Japan, Australia, South Korea and India, could not, and would not, acquiesce to China. The recent military exercises in the Philippines only brought home that point decisively, as indeed did the actions of the US and its allies with their clear economic policies meant to build points of resilience vis-à-vis China. However, there is no getting away from the geo-economic links, detailed in the previous section, that emphasise how vital, and how influential, China will remain in the global economy, with the various trade entanglements in place, and the likelihood of more to come.
There is one clear axis that has emerged as a counterpoint to a US-led world—a China-led, Russia supported, alliance of nations that object to the US’ global hegemony. China’s rising uni-directional investments into Russia over the past couple of years across automobiles, consumer goods, engineering goods, etc., plus the oil and gas pipeline investments and the oil and gas purchases, entwines the two nations in ways that would have seemed improbable even half a decade ago.
Russia’s economic dependence upon China will grow over time and this will give Beijing an advantage that could dictate some elements of Russia’s foreign policy, though Moscow is known to be quite fierce about exercising its geopolitical independence.
The countries of the ASEAN region and India need to carefully balance between China and the US to manage their trade and economic growth
A look at regions like ASEAN or even economies like India, indicate how difficult trade and geo-economics make it for the world to break up into hard geopolitical blocs. The countries of the ASEAN region and India, for instance, need to carefully balance between China and the US to manage their trade and economic growth. Increasingly, so does Latin America and Africa. Besides these regions there is the Middle East which is extremely complex given its own subset of politics, and its trade and economic links to the wider world. Europe today is a Europe of constraints.
Clearly however, at the moment, economics, not ideology is driving any change, though the Chinese Communist Party’s credo and its means to exercise power is completely at odds with Western liberalism. Ideology may well become a factor in the decades to come, if China gains total ascendancy as the global hegemon, but it’s not the critical issue at the moment and nor is that particular scenario likely or acceptable across the world.
Yet, as events in the Red Sea indicate, it takes the US to ensure that the oceans are free for trade and provide a security umbrella over much of the world from Europe to the Middle East and across the Indo-Pacific. This overall scenario, with its many inconsistencies, drives the complexity of geopolitics today, leading to multi-layered alliances where each layer provides a definite benefit to countries across the world.
The European Question
Europe remains something of a geo-economic dilemma and thereby a geopolitical dilemma that simply cannot afford to decouple from China. And the economic and cultural links to the US add to the difficulties of the balancing act that it has to play.
The size of the European Union grouping, at $24.22 trillion would make it the world’s second largest nation, had it been one. But it’s not, and it has inherent political tensions and even contradictions. The EU’s structural problems like high input costs, high wage growth and vulnerability on the energy front, coupled with the economic fallout of the Russia-Ukraine war will keep it on a low keel.
The Eurozone cannot afford a decoupling from China not with economic growth as tepid as it is
The EU’s own economic security-driven and protectionist policies like the European Chips Act and the proposed tariffs over goods like EVs are an indicator of how the grouping will behave in the years to come. Protectionism may well boost local manufacturing to some extent, but much will depend upon how the world will handle the overcapacity problem.
However, hard decoupling from China as we have seen in the earlier section will only have deleterious economic effects and as politicians like Olaf Scholz of Germany and Emmanuel Macron of France have indicated is not really on the cards. The EU or the Eurozone cannot afford a decoupling from China not with economic growth as tepid as it is.
Yet, much in Europe will also depend upon the outcome of the Russia-Ukraine war and the role future US presidents would be willing to play on the continent. An emboldened Russia and Putin, with links into Beijing, will hold a fair sway over the EU and a wider Europe. Putin will be in a position to drive hard bargains over energy and NATO expansion, for instance, again threatening the EU’s security.
The question of collective defence over the Baltic states and potential new entrants like Georgia will be hard to resolve, given Putin’s own interests in those geographies. Energy supply and prices are the issues that are critical for Europe. However, its ability to spend on defence manufacturing and technologies, which could well provide a boost to the EU economy, will be limited both by economics and its domestic social trends. Eventually, however, the EU will be driven towards greater defence spending, given the vulnerabilities it perceives vis-a-vis Russia. But the China-Russia axis, and its geo-economic compulsions will compel the EU, if not a larger non-Russia dominated Europe, to carefully balance its relationship between China and the US.
Russia will remain a bothersome neighbour when the war does end, perhaps sometime in 2025 when Ukraine is truly worn out and the EU tires of the war and the continuing risks and costs to its economy. It won’t end satisfactorily for Ukraine or the EU, and though much global capital would be willing to invest in rebuilding that country, Moscow will hold something of a veto over the investment. It’s not a scenario that the Europeans find at all palatable but given the grouping’s, and the US’, dithering over its Russia policy over the last two years, and the weaknesses and limitations of economics, it’s the most realistic scenario likely at the moment. Ukraine is fighting a defensive war, and at this late moment US and EU arms could only shift the envelope defensively, without giving Kyiv the ability to shift to conclusive war defining offence.
The Middle East is Complicated
Beijing is not a security provider unlike the US… China is not the world’s primary financial market either
Across a wider Middle East, though, China’s strategically directed FDI into the Gulf Cooperation Council countries, notably Saudi Arabia, the UAE and Oman, drive another complex and layered set of alliances. At the moment, China is economically vital, but Beijing is not a security provider unlike the US, a role it has demonstrated lately in the Red Sea-Houthi crisis. China is not the world’s primary financial market either. That title still rests with the US and its allies, including nations like Singapore.
Iran, firmly in the China-Russia bloc, is now willy-nilly the key factor that drives any analysis of the Middle East
China brokered a rapprochement between Saudi Arabia and Iran last year, but the Israel-Hamas war, the behaviour of Iran’s proxies in the region and, indeed, Iran’s willingness to provoke further instability across critical geographies like Syria, Lebanon and the sea lanes threaten the Gulf Cooperation Council (GCC) countries’ economic growth plans.
Iran, firmly in the China-Russia bloc, out of both geopolitical and economic necessity, and with its long-standing animosity to the US or the “Great Satan”, is now willy-nilly the key factor that drives any analysis of the Middle East’s politics and economics. After the Hamas attack on Israel in October last year, Iran’s position has become strategically even more important. It indirectly holds say in at least three geographically and politically important Middle Eastern nations—Syria, Lebanon, and Yemen—through its proxies.
Tehran undoubtedly holds some indirect power over crucial sea routes like the Red Sea and the Straits of Hormuz through its proxies like the Houthis. Russia and China’s ties to Iran are political, but hold the promise of investment both across its oil and gas and broader industry, though not much has actually taken place.
The US military factor in the global oil markets will necessarily carry currency across much of the geopolitical analysis in the Middle East
China has shown no sign that it can conclusively rein in Iran, certainly not alone and without the support of states like Russia and Saudi Arabia, despite its close economic ties. It does not have the willingness to put its feet down militarily like the US has in recent weeks and months, out of both discretion and an unwillingness to upset the economic applecart. This means that the US military factor in the global oil markets will necessarily carry currency across much of the geopolitical analysis in the Middle East.
Qatar’s long-term gas market dominance strategy means that like other players in the Middle East, Doha needs to tread carefully. It’s vulnerability to war risk in the Middle East, particularly if an Iran-linked war comes into play, remains high. It shares the world’s biggest gas field with Iran, and it’s locked within the Persian Gulf with the Strait of Hormuz the only point of egress.
An Iran-linked war would also raise the risks for countries like Oman, which share the waters of the Strait of Hormuz with Iran. A war would quickly bring the Gulf of Oman into play militarily, when countries like the US get involved. Oman also houses one of the largest US military bases in the world. Iranian proxies have already highlighted the risk to other sea routes like the one to the Red Sea through Bab-el-Mandeb with revenues in the Suez Canal falling, and affecting the Egyptian economy.
Saudi Arabia, the biggest economy in the Middle East, is now in a change mode. Recently, Saudi Arabia’s Ministry of Economy and Planning said that oil accounted for just 50% of its GDP in 2023. Exports of products like critical minerals and aluminium were up along with downstream petrochemicals like fertilisers. The Saudis are now actively courting global FDI, and driving their domestic and foreign policy accordingly.
The Saudis need around $355 billion to sustain their diversification from oil, with nearly $100 million needed in FDI, according to some estimates. Saudi Arabia is also reckoned to be a key future source of critical minerals such as nickel, copper, manganese, phosphates, and bauxite—some analysts estimate these reserves at anything between $1.3 trillion to $2.5 trillion. China’s FDI is making inroads with a record 21 greenfield projects announced by Chinese companies in the Kingdom, worth around $16.2 billion in the first nine months of 2023, according to fDi Markets. These are not boats that the Saudis would like rocked by Iran or its proxies. So, while China’s money is critical to the region, the US’ security umbrella remains critical.
The US and Saudi Arabia are reportedly close to signing a new trade and defense deal, and China is trying to work out an agreement that reconciles Hamas and Fatah. It’s not clear what the contours of these two agreements might be. There are variables that complicate matters. China might or might not succeed immediately, but a US-Saudi agreement is likely in the next few months. The outcomes, irrespective of the variables, could be quite epoch-making. They impact not just the long-term power dynamics across the region, but also enhance Saudi Arabia’s centrality in the emerging power play between the US and China in the Middle East.
The Indo-Pacific’s Layered Politics
In East and South-East Asia and, indeed, a wider Indo-Pacific region, things are perhaps a bit opaque. Four factors determine the contours of power and alliances in this region. The first is geography. The nations in the South China Sea, industrial powers like Japan, South Korea, India, or even Australia are all geographically in China’s immediate inner or outer neighbourhood.
The second is China’s industrial supremacy and trade power, which has driven both FDI and trade across the region. A network of alliances like the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) are slowly but surely adding to the centrality of China in regional trade.
The third is that despite any growing centrality and trade power that China possesses across this region, the US, the EU and those within Asia that oppose China’s dominance like Japan, South Korea, and Australia, will necessarily hold considerable levels of economic say given the size of their collective economies and their ability to drive demand for products from across the region.
The last thing many across these countries want is Beijing’s stranglehold over their country’s politics. This willy-nilly brings the US into the picture as a security provider
The fourth is China’s belligerence. Despite their willingness to accept China’s FDI, countries like Vietnam, Indonesia, etc. are chary of Beijing’s ideological leanings and its revanchism. The last thing many across these countries want is Beijing’s stranglehold over their country’s politics. This willy-nilly brings the US into the picture as a security provider. US military bases exist through the region, and even countries like Japan are calling for a greater level of ties with the US military in order to secure themselves against China’s clear belligerence. This belligerence has prompted even Japan to boost its military presence in the South China Sea.
Very recently, following a meeting between their country heads, Japan, the Philippines and the US underscored that they shared a commitment to “a free and open Indo-Pacific and international order based on international law.” The language stopped short of using the words “military alliance” but clearly hinted at a level of cooperation that could dramatically enhance the security of the region. The US and the Philippines are now planning a series of joint military exercises outside the latter’s territorial waters for the first time ever, greatly discomfiting China.
Ominously, China’s army continues to modernise at a very fast pace. Xi has accelerated 2035 milestones to 2027, built layers of air and naval defences, grown missile capabilities significantly, and created a Strategic Support Force, integrating space, electronic and cyber capabilities. It’s also quickly building up its oil and gas reserves, a sign that it may be preparing for war in earnest. However, if China does invade Taiwan in the five-year time frame that this analysis looks at, everything from economics and trade to geopolitics would need hard reassessment.
India’s purchase of Russian oil will come to mean less and less for Russia, once a Moscow-led-and-dominated peace is imposed in Ukraine
India’s geopolitical situation, and indeed its geographical location, will call for greater support from the US and its allies in the coming years, as Russia increasingly entwines with China. Russia’s options might soon be limited to playing a diplomatic conciliatory role over the next few years, with China calling the shots over its economy. The Russia-China alliance in geopolitics and the alternate pole that it represents will grow increasingly important for Moscow, as its industrial links with even neighbours like the EU dwindle. India’s purchase of Russian oil will come to mean less and less for Russia, once a Moscow-led-and-dominated peace is imposed in Ukraine. Alliances like AUKUS will gain importance in India’s scheme of things, though New Delhi will always draw a public posture of balanced, non-aligned realism.
Coming on Thursday, 9 May 2024: In the final part of this 3-part series, Vivek Kelkar argues that asymmetric cooperation, rather than absolute hegemony by the US and China, will be the driving force
