CREDIT: <a href="">Paco Alcantara</a> (<a href="">CC</a>).
CREDIT: Paco Alcantara (CC).

Policy Innovations Digital Magazine (2006-2016): Commentary: Obama's ASEAN Policy Looks Auspicious

May 19, 2010

When he touches down in Jakarta this summer, U.S. President Barack Obama may find he has arrived at an opportune moment. Evolving trade patterns and recent violence in the South China Sea have caught some of ASEAN's leadership off balance, while the bloc's successful effort to include China in the region's cooperative regimes may be at a new inflection point.

The president will likely find his hosts receptive to renewed American involvement, especially due to his personal ties to the region and his appealing multilateralism. His administration signed the Treaty of Amity and Cooperation in July 2009 and he was the first U.S. president to meet the bloc formally last November. Unlike false "resets" with Russia and the Arab world, Obama might get real diplomatic traction in Indonesia this June.

A new start is long overdue. For nearly 13 years, U.S. relationships with the 10 member nations quietly curdled. Washington's rough handling of the 1997 currency crisis and general disregard during the Bush years stood in marked contrast to China's full-court "charm offensive" in the region. Since 2004, China's rate of deepening engagement with ASEAN has been truly astounding. It is arguably the most vigorous, multidimensional relationship the PRC has formed in its 60-year history.

To foster cultural understanding, China has founded Confucius Institutes throughout the region. In 2004, there was one—now there are 70, with six more planned for Indonesia later this year. These nonprofit institutions cost $1 million to create and about $200,000 to maintain, though they pay "soft power" dividends through goodwill and sympathetic academic perspectives. Indeed, more Thai students now study in China than in the United States, often on generous scholarships. The PRC also recently set up China-Cambodia Friendship Radio in Phnom Penh, a broadcast comparable to Voice of America.

In the transport sector, China is building ports in Burma and Cambodia and is at work on a "game changing" shipping canal in Thailand. A high-speed train line from Kunming to Singapore will likely reorient the region's entire passenger rail infrastructure.

Throughout the past decade, Beijing has comported itself as an attentive partner. The ASEAN relationship now stands as the "crown jewel" of Hu Jintao's peaceful rise strategy. Gone are the PRC-sponsored communist insurrections of the 1960s or the shrill antics of Mischief Reef in the mid 1990s; in their place: ever-present, ensconcing warmth.

This is becoming a problem. "Too much of a good thing" with China may affect ASEAN's central role in East Asia's destiny as a peaceful, prosperous region. And many of the bloc's leaders know it.

Trading Imbalances

When the China-ASEAN free trade agreement (FTA) was first signed—back in November 2004 in a hotel in Vientiane built specifically for the summit—officials ambitiously expected trade with China to go from $100 billion to $140 billion within six years. That figure turned out to be an understatement—by 2008, China-ASEAN trade was running at $231 billion per year, far ahead of projections. But the nature of the trade had changed.

China has risen so quickly up the manufacturing value chain—from toys and "mere assembly" to industrial machinery and medical tech—that the bloc has lost its annual export surplus with China. The trade still offers a large volume but, in terms of finished goods, the group is now seeing a far higher percentage of imports than exports.

For example: In 2003, Indonesia recorded a surplus of $109 million in electrical and electronic equipment in its trade with China. By 2007, that surfeit was gone—Indonesia was running a deficit in electrical and electronic equipment of $117.3 million. The very next year, 2008, that deficit had jumped to $1.9 billion.

The "export overlap" that had long been the nightmare of labor unions in Indonesia is becoming a reality for industries in Malaysia and Thailand. Not only are Bangkok stores typically jammed with Chinese clothing and electronics, but the city's cranes are increasingly coming from Chongqing. Mainland equipment and machinery are coming in at a much lower price point.

In March, member nations actually saw a trade surplus with China, one that jumped to $2.7 billion from $300 million the year prior. Though an astonishing surge, this monthly number was due to two temporary factors—a later-than-usual Lunar New Year and Beijing's outsized stimulus spending. Chinese factories were shut in late February and slow to reopen after the celebration as workers straggled back from the inner provinces. Exports were down 25 percent compared to the first two months of 2010.

Prices also surged for the oil, iron, and other resources used for the mainland's now feverish property build-out. These prices have come down as Beijing has tightened bank lending due to inflation concerns, but resources will be more and more a portion of the ASEAN trade contribution. In fact, commodities are now 90 percent of Indonesia's total export to China, reaching $12.2 billion in 2009. They were 83 percent in 2008.

As long as the yuan remains pegged low, competitive pressures will continue, "hollowing out" industry in the developed ASEAN states and stunting development in the latecomers like Laos and Cambodia. The bloc has likewise seen a steady loss in foreign direct investment (FDI) as capital flows into China. This further erodes the pace of innovation needed to stay above China in the value chain.

True to its multilateral origins, the bloc is attempting to manage this through further linkages—additional trade agreements that enlarge their prospects and stabilize the situation. The India-ASEAN FTA is a case in point. In 2009, India ran a larger trade deficit with the bloc than China did, even though total trade was almost five times lower. With India's demand for natural resources, and the fact that its manufacturing sector will take years to develop, India may replace China as the source of renewed export growth for the ten nations.

The bloc's trade ministers will be traveling to the United States in May to drum up investment and promote the region as an economic hub. The U.S. portion of total ASEAN commerce fell to 10.6 percent in 2008 from 15 percent in 2000 and they hope to rectify that.

Fault Lines beneath the Sea

The South China Sea is the second big issue that has the regional bloc looking for U.S. involvement. The area may well be the most contested swath of ocean awaiting resolution under UNCLOS, the UN Convention on the Law of the Sea. ASEAN "the consensus maker" has failed miserably to resolve these decades-old maritime disputes, which involve overlapping territorial claims by many of its members as well as by China.

The Paracel Islands have become the site of the most recent violence. These uninhabited atolls have been contested since 1974 when Chinese gun ships took the islands from Vietnam, and again, in 1988, 75 Vietnamese sailors died in a naval battle over the islands.

In January 2010, Beijing declared it would be building a snorkeling resort on the islands and began detaining Vietnamese fishermen caught in nearby waters. The actions have touched a raw nerve with the Vietnamese public. Its communist leadership, which is only a few months away from an important political shuffle, is feeling immense pressure to act.

Back in May 2009, in response to the China's new submarine base on Hainan, Vietnam bought six submarines and a number of Su-30 fighter jets from Moscow. Since the detainments, it has ordered frigates, missile boats, and a full submarine base. It has essentially tripled its arms spending in two years.

China has also upped the ante, continuing to kidnap fisherman and holding its largest ever naval training operation in the South China Sea on April 18. According to Larry Wortzel, head of the US-China Economic and Security Review Commission, "as the Chinese navy improves its strength, to include a possible aircraft carrier fleet in the near future, the balance of power in the region will swing strongly in China's favor. Already some nations are beginning to react..."

Georgetown professor Catharin Dalpino detects a new "sub-regional" policy at work in Beijing, one that treats undeveloped "mainland Southeast Asia" differently from developed "maritime Southeast Asia.

Massive investment and development aid to Laos, Cambodia, and Myanmar is generating something of a political alignment. (This is also happening in Sri Lanka, where China is financing infrastructure and military procurement.) Cambodia's return to China of 20 Uighurs seeking UN refugee status, quickly followed by $1 billion in assistance from Beijing days later, conforms to this theory. Historic rival Vietnam is treated roughly and curtailed.

Sadly, ASEAN has been uncomfortable addressing the Paracel issue. Vietnam has pressed the bloc members to resolve all maritime claims amid themselves and then negotiate as a bloc with China. China insists on strict bilateral, country-to-country negotiations—essentially playing one off the other.

Hanoi had intended to internationalize the dispute at the April 8 ASEAN Summit, as it held the chairmanship and had a unique once-in-a-decade role to set the agenda. But nothing came of it. The summit's final statement made no mention of the conflict, even though China's actions clearly violate the Declaration on a Code of Conduct signed by Beijing in 2002. According to Malaysia Maritime Institute's Nazery Khalid, "the fact that China has continued to negotiate bilaterally is a reflection not just of Beijing's strength, but ASEAN's weakness. ASEAN needs to work towards addressing that."

The incipient danger that Vietnam now faces is that the bloc's institutional framework does not provide it with a substitute for conventional "balance of power" versus China. This hurts multilateralism and the future prospects of ASEAN itself, as more and more of its mainland nations cope with Beijing's imperiousness alone.

New Steps We don't worry so much about having to compete with the US in the way some sectors worry about having to compete with China. From the Asean-US perspective on increasing trade and investment, it's more like, "Hey guys, the US is back."
Mari Pangestu, Trade Minister, Indonesia

The region's leaders recognize these examples as the iron fist that flexes under the velvet glove of China's new diplomacy.
Ernest Bower, Center for Strategic and International Studies

Barack Obama's trip to Jakarta has been delayed three times, but his administration clearly has an agenda for the region. Even as a candidate in 2008, his campaign team under Frank Januzzi had laid out objectives for renewing the relationship—signing TAC and joining the East Asia Summit. This U.S. approach is on track and now meeting with genuine reciprocity. The Jakarta Post reported on April 20 that the foreign ministers of the ten member states have been working on the expansion of the East Asian Summit to include Russia and the United States. Traditionally, Singapore and Indonesia have opposed the addition of new members. They have clearly dropped their reservations, and Indonesia is now very active in the expansion process. The consensus may now be: Chinese power has grown and the bloc needs to broaden its strategic canvas.

An ASEAN+8 certainly suggests a new watershed, with Russia and the United States brought on for both trade and security issues. At first glance it may appear strange. But it embodies the spirit of ASEAN: stay independent; keep linking up; build off from points of agreement; remain pragmatic.

To cope with fewer export opportunities to China, the group is expanding out to other large markets. To cope with the possibility of an arms race breaking out in the South China Sea, it is stretching itself to include new players at the East Asia Summit and bring wider consensus to bear on the issue. As Simon Tay of the Singapore Institute of International Affairs said recently, "ASEAN is not necessarily the star in Asia, but it will have more power if it can host the party. Whether it has the strength to do that is an open question." Can the center hold? Maintaining the bloc's leadership of East Asian regionalism may be critical to the future of the project. The best option for further and deeper cooperation is to keep the framework of decision-making multilateral and focused with the original members. A U.S.-Indonesia Comprehensive Partnership would help with that.

The aim of Obama's "respectful" diplomacy should be to strengthen the bloc's prominence and push for an international forum to expedite the maritime territorial disputes. The strategic vacuum that emerged in the South China Sea after the Cold War has created a tinderbox; an ASEAN+8 might be the only deliberative body that could resolve it.

China has historically been suspicious of multilateral institutions, seeking to neither "internationalize" nor "institutionalize" any particular process. It is the instinct of all great nations. But ASEAN's approach—to keep building relevance, to expand the architecture, to add participants—may actually be in China's long-term interest. It may keep Beijing from nationalistic indulgences and on its present path to a "peaceful rise" within a prosperous region.

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