China and India will have more middle class people than the total populations of the US and EU combined.
The post WWII Cold War economic and political world is at a tipping point. Developed nations with their negative population growth and slowing economies, while controlling the majority of the capital, do not have the markets they need to grow. Developing and emerging nations, especially in Asia, with their large populations and growing middle classes, have fast growth, but lack capital.
The change factor is the rise of China, India and ASEAN. China and India alone represent 40% of the world’s population and will have more middle class people than the total populations of the US and EU combined. Add ASEAN, and you are closer to 50% of the world’s population.
To date, the assumption has been that capital controls markets, but with their slow moving economies and shrinking populations, the developed nations, which control the capital, cannot rely on their own markets for growth. The only feasible alternatives are the fast growing emerging markets, but there is no way Asia will be treated like a colonial possession this time.
Once relegated to second tier political and economic significance, these emerging Asian nations are beginning to realise that they are now the gate keepers of their markets and can set the terms for entry. Developed economies and their corporations will soon find themselves, as they have in China, negotiating their entrance, rather than dictating their terms.
RISE OF ASIA’S -MARKETS
The race to tap Asia’s massive markets has been on for some time. Over the last 17 years, under the WTO, the economic and political world has changed from one dominated by the US, Europe and a handful of other developed nations, to a multipolar economic as well as political world, where new markets in Asia have displaced the supremacy of American and European markets.
In Asia, Japan and South Korea were the leading edges of Asian development, which is now being followed by China, India and ASEAN. But it is not limited to Asia, even in other parts of the world, like South America, the economic focus has swivelled from the US to Asia. Just ask Mike Pence, as he returns from the botched Summit of Americas. Maybe former Secretary of State Rex Tillerson’s suggestion that a new version of the Monroe Doctrine was needed and Trump’s decision to skip it in favour of tweeting about Syria and his domestic troubles, wasn’t helpful for setting a good stage.
POLICY AND STRATEGY, POST-COLD WAR
* UNITED STATES: The unstated policy of the US is to control China’s expansion by encircling its trade routes in the East and South China Seas, giving it leverage over China’s access to resources and markets. The desire is a revisionist return to the “greatness” Trump promised to those who elected him. The dream is to re-establish American political, economic and military hegemony as means to ensure American prosperity. This vision discards the multilateral trade framework the US prioritised and created, in favour of bilateral trade agreements, where the US can use its superior military, economic and political muscle to exact favourable trade terms, arms sales and security concessions. The irony is that for the US to grow, it will need to tap into the very markets it is alienating with its ham handed tactics.
* CHINA: China’s response has been the Belt and Road Initiative, a multi-pronged land and sea route system that aims to ensure its ability to access resources and markets. It is envisioned as a “win win” strategy that will create and connect markets based on trade, not ideology. Xi Jinping has made it clear he has the will and the time to see the project through, but he will need other countries to see the value and invest in this grand multilateral approach. Unfortunately for China, its rapid growth, while envied by many, is upsetting the status quo and its neighbours.
* RUSSIA: Russia is still nursing hard feelings because of the promises, made as the USSR was being dismantled, which were broken by the US and EU. In response, Moscow has been moving closer to Beijing, as its relationship with Washington deteriorates. In his 2007 Munich speech, Vladimir Putin outlined his frustration with a world order he saw as rigged against Russia, if anything things have gotten worse since then. Effectively locked out by economic sanctions aimed at crippling its energy businesses, Russia needs an alternative or it will consider other options.
* EU: The EU is in the middle; still standing by the US, but unnerved by Donald Trump’s anti-multilateralism, isolationism, climate change denial and unreliability. The EU is still in a financial recovery mode, and while it still sees itself as a champion of Liberal Democratic Capitalism, it is a much more Socialist brand than that being promoted by the US. The differences in policy and style are alienating Brussels from Washington. In addition, it is also dealing with over expansion, lack of leadership and an impossible fiscal status, not to mention distractions like Brexit and the political rise of the Right. Like the US it needs new markets to grow.
* JAPAN: Japan is under a 30-year shadow of low growth, deflation and a declining population. Economically, Abenomics has failed to deliver the structural changes that were going to jump start the economy. Real wages are languishing amongst productivity problems, meanwhile a stronger yen and weaker dollar are eating into revenues for companies producing in Japan. Politically, Tokyo has eyed China’s rise warily, both as a regional rival and ideological adversary. It has used the threat of a rising China together with the DPRK as an argument to revoke its pacifist constitutional requirements. Shinzo Abe thought he had a bromance with Donald Trump, only to be kicked in the teeth over steel and aluminium. Both issues combined with alleged scandals at home are likely to cost the government and Abe in the next election. After the trade tariffs were announced and Japan did not get an exemption, an overture to China was sent indicating interest in the Belt and Road Initiative. Like India and many other countries around the world, Japan may admire the US form of government, but not its current leader Donald Trump, whose unpredictability is making China’s stability more attractive every day. If Japan were to join the Belt and Road Initiative, and the TPP, in which Japan is a prime actor, signs a trade agreement with China, it would in essence isolate the US economically.
While Japan would want to continue its security arrangements with the US, over the long term it would be difficult to reconcile the two.
* INDIA: India, which is badly in need of both private business and public infrastructure investment, may be looking to balance its US security relationship, with a Chinese trade relationship. India has its own brand of political and economic issues and Narendra Modi now needs a revolutionary idea to turn India’s perceived weaknesses, its massive population, lack of funding, social needs and high youth unemployment, into strengths. It is a country with tremendous markets, which are languishing due to lack of capital, poor infrastructure, red tape and corruption. Each of these issues needs to be solved, but to finance private investment, pay for infrastructure and pay higher wages to its government workers, so it is not necessary to be corrupt. India has to monetise itself as a market opportunity.
FORMING OF A NEW GLOBAL ECONOMIC, POLITICAL REALITY
Against this backdrop, If Modi and Xi were to agree to work together economically, the combination of China and India would flip the political, economic and social calculus of the world. As the gate keepers to their markets, China and India would have unprecedented leverage over developed nations. While this would bring up new issues, it reflects the reality of a world that will be more fragmented and multi-polar.
The other consequence of a China-India economic pact would be to change the shape and range of the Belt and Road Initiative. To date: China has been careful to create a series of redundant trade routes that can both guarantee its access to resources and markets, and grow regional markets in previously poorly accessible, and therefore underdeveloped, areas. The strategy is to make sure no competing power can control its trade routes. If India were to allow the China-Nepal rail line to continue through India to its East coast, the value to all would be compounded. China would have an open door to African and the Middle East which bypasses the Malacca Straits and the US’ string of military bases. It would be an open economic door to Western China. India would have a two-way corridor for goods domestically and internationally and an open development path for its eastern provinces.
In addition, with an alternative Trans-India route, Beijing would be less reticent about cooperating with Russia on a Trans-Siberian route to Europe. For Russia it would also be a golden opportunity to reach eastern markets and open up its vast eastern resources. For China, it would create a safe passage to Europe for value added goods along a resource rich zone which would bypass any sea issues and shorten transit times.
This would also decrease pressure on China to establish and maintain a safe route through Pakistan while speeding up trade development. The US should have concerns about this, but given the current domestic and international circus in Trump’s Washington, it is doubtful it will be understood.
CONCLUSION
Modi is scheduled to meet Xi on the sidelines of the Shanghai Cooperation Organisation, if both sides see the economic upside to their economic cooperation and sign an agreement to work together on the BRI or allow China to establish a railway link to India’s east coast ports, it will be the beginning of a new era where Asian markets will be on equal footing with the developed economy capital.