The Paciﬁc Age - The · PDF fileran, Parag Khanna, Patrick Low, Shuichiro Megata, Edward Melillo, ... The EconomistNovember 15th 2014 3 THE PACIFIC 2 1 enclaves

November 15th 2014

S P E C I A L R E P O R T

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The Economist November 15th 2014 1

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A list of sources is atEconomist.com/specialreports

An audio interview with the author is atEconomist.com/audiovideo/specialreports

CONTENT S

3 HistoryGalleons and gunships

4 Economic integrationThe flying factory

6 Free-trade pactsAmerica’s big bet

8 Maritime powerYour rules or mine?

10 North American energyOil and water

11 Latin AmericaPacific pumas

12 Chile and China¡Salud!

13 The future of the regionMerchants or missionaries?

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WILLIAM HENRY SEWARD was no misty-eyed dreamer. It was whaling,or what he eulogised as “the chase of the whale over his broad range ofthe universal ocean”, that first drew his attention to the Pacific. He was avisionary, though. The man who became Abraham Lincoln’s secretary ofstate in 1861 and bought Alaska from tsarist Russia in 1867 knew whatAmerica had to do to take advantage of the openingofthe Pacific. It need-ed to build on the Gold Rush spirit in California; finish a transcontinentalrailway to carry people and freight from one side ofAmerica to the other;dig a waterway through Central America for ships to pass through; and

acquire Pacific territories like Ha-waii and Midway as maritimehubsoftrade and security. All thiswas done either within his life-time orwithin a few decades of it.

He was also itching to wieldAmerica’s nascent power andsaw the Pacific as the place to doit. In a speech to Congress in 1852he predicted that the Europe-cen-tred Atlantic would decline in im-portance “while the PacificOcean, its shores, its islands andthe vast regions beyond, will be-come the chief theatre of eventsin the world’s great hereafter”.Commerce, he added, would bethe “great agent of this move-ment” and would flourish be-tween America and China.

The Pacific evokes that kindof enthusiasm. It is a 64m squaremile (165m square km) blank onthe map (except for a plethora of

small islands), bigger than the world’s entire landmass. Still, at times itseemed as though its destiny would never arrive. The refrain, “The Medi-terranean is the ocean of the past, the Atlantic is the ocean of the presentand the Pacific is the ocean of the future,” first heard more than 100 yearsago, is still repeated today. Yet exactly halfa century after Japan “rejoinedthe world” (in the phrase of Ian Buruma, a writer) by hosting the Olym-pics in 1964, the Pacific Age has now clearly arrived. Japan’s economicpowermay have peaked 25 years ago, but it produced a trans-Pacific com-petition that now has America and China vying with each other for thetitle of the world’s largest economy (at purchasing-power parity). Allthree Pacific nations trade vigorously with one another.

At the same time trade has surged into the farthest reaches of the Pa-cific (see charts, next page). Since the 1970s trade across the Pacific has faroutrun the Atlantic sort. China, for instance, has taken its hunger forhigh-protein food and raw materials to Latin America and become the biggesttradingpartnerofdistantChile. Byone estimate, in 2010 itpromised moreloans to Latin America than the World Bank, the Inter-American Devel-opment Bankand the United States Export-Import Bankcombined.

Such connections have made the developing rim of the Pacific a

The Pacific Age

Under American leadership the Pacific has become the engineroom of world trade. But the balance of power is shifting, writesHenry Tricks

ACKNOWLEDGMENT S

Many people helped in the prep-aration of this report, not all ofthem acknowledged in the text. Theauthor would like to expressparticular thanks to Manu Bhaska-ran, Parag Khanna, Patrick Low,Shuichiro Megata, Edward Melillo,Charles Morrison, Davíd Najera,Christopher Nelson, Mio Otashiro,Jonathan Pollack and Vivek Whadwa.

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growth factory. Whereas the United States’ economy grew by anaverage of1.6% a yearover the past decade and the European Un-ion’sby1.7%, Latin America’sexpanded by4.6%, EastAsia by5.4%and South-East Asia by 5.9%. The 21 economies of the largesttrans-Pacific grouping, Asia-Pacific Economic Co-operation(APEC), account fornearly halfofglobal trade. This special reportwill refer to them as “the Pacific”, though they exclude the trop-ical Oceanian economies. “The region comprises not only theworld’s ‘factory floor’ but also its most important sources of ser-vices, technology and investment, and final-goods markets,”writes Peter Petri, an international-trade economist.

It has also seen an astounding increase in prosperity. Inpoorer parts of Asia the size of the middle classes—those livingon $2-$20 a day—has increased sevenfold since the turn of themillennium. In Latin America it has doubled. Parts of Malaysiahave become so bourgeois that taxi drivers moonlight as sales-men of smart apartments overlooking the Strait of Malacca, oneof the world’s busiest trade routes.

Both America and China know how important it is to keepthis economic engine running, so in public they generally usemoderate language about each other. In 2011 Hillary Clinton,then America’s secretary of state, explained President BarackObama’s “pivot” to Asia in an article in Foreign Policy: “We allknow that fears and misconceptions linger on both sides of thePacific. Some in our country see China’s progress as a threat tothe United States; some in China worry that America seeks toconstrain China’s growth. We reject both those views.” China’spresident, Xi Jinping, at a meeting with Mr Obama in Californialast year, responded in kind: “The vast Pacific Ocean has enoughspace for the two large countries ofChina and the United States.”

Choppy watersYet just when the Pacific Age should be celebrating its half-

century, the region is showing signs of strain, from increased ri-valry between the superpowers and emerging nationalism in Ja-pan, China and elsewhere to sudden squalls in places like HongKong, Thailand and, as ever, North Korea. “The shifting land-scape in the Asia-Pacific and associated risks are about as chal-

lengingas they’ve been since APEC was established in 1989,” saysAlan Bollard, the organisation’s executive director.

There are complex counter-currents. Many East Asiancountries worry that America’s commitment to the region couldbe put at risk by more immediate threats in the Middle East andUkraine. At the same time they do not want America to provokeChina by becoming too involved. The rhetoric has recently beenturned up. Chuck Hagel, America’s defence secretary, wagged afinger at China when he told a gathering of military chiefs at theShangri-La dialogue in Singapore in May: “One of the most criti-cal tests facing the region is whether nations will choose to re-solve disputes through diplomacy and well-established interna-tional rules and norms or through intimidation and coercion.Nowhere is this more evident than in the South China Sea.” Inhis own speech a day later, Lieutenant-General Wang Guan-zhong, head of the Chinese delegation, retorted: “Assertivenesshas come from the joint actions of the United States and Japan,not China.”

Recently the tensions have spread to the economic sphere,too. China has interrupted investment and trade with neigh-bours who stand up to its territorial assertiveness, such as Japan,the Philippines and Vietnam. China and America each havetheir own plans for turning the Pacific into a giant free-trade areathat both see as a test of their influence in the region—and in thewider world. The Obama administration says it wants to forge atrade pact with the world’s most sophisticated rules in the Pacif-ic: the Trans-PacificPartnership. It characterisesChina aswantingto perpetuate a model ofstate capitalism.

Fred Bergsten ofthe Peterson Institute for International Eco-nomics in Washington describes the overlapping commercialand strategic concerns as a juggling tournament. “We’re in themiddle of an historic transformation of the economic architec-ture ofthe whole Pacific region. There are competingmodels andhigh politics. It’s a very complex set ofballs in the air,” he says.

Pacific history—an underdeveloped field of study com-pared with that of the Atlantic, as its scholars dolefully note—isawash with big-power rivalries (see box, next page). For centu-ries European powers were carving it into monopolistic trading


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enclaves that they defended ruthlessly. The only free-traderswere pirates. The risks ofhistory repeating itselfare palpable.

Many argue that the ocean’s most vulnerable spot is its lackof robust institutions to ensure fair play. They point to the Atlan-tic Charter, forged in 1941 in the heat ofwar by Winston Churchilland Franklin Roosevelt, that laid down rules to prevent territori-al aggression, reduce trade restrictionsand ensure freedom oftheseas. All of these are live issues in the western Pacific today.

Mr Bergsten says the “obvious cultural affinities” across theAtlantic that produced the charter, and institutions such asNATO, are “of a different order” fromthose across the Pacific, or even withinEast Asia. “Having a beach on the Pacificdoes not make you a member of a com-munity,” snorts Robert Manningofthe At-lantic Council, a Washington think-tank.Some say that the only shared ideology inEast Asia is nationalism and a sense ofhistorical grievance against each other.

Four reasons for optimism�et this special report will argue that

even when values clash, shared interestsin the region tend to prevail. East Asia, likeAmerica, is a place where power is judgedfirstand foremostbywealth. “In EastAsia,with the exception of North Korea,growth far more than any abstract politi-cal theory is the primary means by whichgovernments legitimate their rule,” saysBilahari Kausikan, Singapore’s ambassa-dor-at-large. “This does not guaranteepeace. But East Asian governments atleast have a strong self-interest to min-imise actions that would disrupt growth.”

Besides growth, the promise of thePacific rests on three other fairly sturdylegs: trade, ideas and connectivity. Trade ispart of the Pacific’s DNA. While valuesand ideals travelled across the Atlanticwith the Pilgrim Fathers, goodswere flow-ingacross the Pacific: silver, silk, porcelain,spices, sandalwood, much of it beautiful-lycrafted in China. Todaymuch ofthe traf-fic is in silicon.

Trade moves with the times. Japan’selegant “flying geese” model (with Japanleading industrialisation in Asia and therest following in V-formation) broughtmanufacturing to the “miracle” econo-mies of South-East Asia in the 1990s andeven survived the abrupt intrusion of theChinese dragon in the 2000s. But no onecan glide complacently. America is be-comingmore competitive, thanks to frack-ing, its energy revolution of the past half-decade; so some Asian economies arelikely to become more closely connectedto and more dependent on it.

With trade come ideas. KishoreMahbubani, a Singaporean writer, putsfree-marketeconomicsat the head of a listof“seven pillars ofwisdom” that Asia hasimported from the West, along with sci-ence and technology, meritocracy, prag-

matism, peace, rule of law and education. At the same time Pacif-icLatin American countriesare lookingto EastAsia for economicmodels.

Even China’s “state capitalism” may be exaggerated. In anew book, “Markets over Mao”, Nicholas Lardy, an Americaneconomist, crunches the numbers to argue that the secret ofChi-na’s success is private business, not the state-owned giants. Priv-ate firms have become “the major source of economic growth,the sole source of job creation and the major contributor to Chi-na’s still-growing role as a global trader”, he writes.

THE RUINS OF St Paul’s church on a hill in theMalaysian city of Malacca provide a good viewof the vicissitudes of Pacific trade. Peerthrough the late-monsoon haze from itscobbled courtyard, and you can just aboutsee container ships and oil tankers chuggingthrough the blue-green waters of the Straitof Malacca. At least 70,000 ships pass ontheir way to and from the Pacific and Indianoceans each year, carrying a third of theworld’s seaborne oil and many of its goods.

From its beginning, Malacca has beenan entrepot between the Pacific and the restof the world. Shortly after the city wasfounded in 1400, a Chinese Muslim from theMing court, the eunuch Zheng He, used it asa base for his “treasure ships”. Hundreds ofvessels bore 20,000 crewmen, passengersand horses through the western Pacific totake silk, porcelain and tea to countries asfar away as east Africa.

But after 1433 China abruptly stoppedtrading missions to the outside world, and amuch uglier form of trade emerged. This wasthe European version, laden with mercantil-ist and imperialist ambitions partly dis-guised as a mission to spread Christianity. StPaul’s, originally called Our Lady of the Hill,was built by the Portuguese after theyblitzed Malacca in 1511, driving out thesultan. It was a staging post for underminingVenice’s monopoly over the trading of Asianspices through the Mediterranean. Portugalwanted its own monopoly, and got it.

One of the Portuguese victors at Malac-ca was Ferdinand Magellan. With an eye onestablishing a rival trading route to theSpice Islands, he later defected to Spain,found a passage around Cape Horn andbaptised the Pacific Ocean. His Spanishsuccessors, sailing from Acapulco withgalleons full of silver, used the Philippines(named after their king, Philip II) as a hubfor trade with China between 1565 and 1815.The Pacific became a Spanish lake, defendedby cannon from all manner of pirates.

In 1641it was the turn of the Dutch toblast the Portuguese out of Malacca. Theyturned the church into a Protestant one andchanged its name to St Paul’s. A nearby fortis engraved with the letters VOC, after theDutch East India Company. The vast firm builtits own monopoly in the Spice Islands. Allclove and nutmeg trees apart from thosebelonging to the VOCwere uprooted, andanyone unconnected to the company caughtgrowing or selling cloves was executed.

In 1819 the British claimed Malaccafrom the Dutch, ran up a big Union Jack at StPaul’s, used the church as an ammunitiondump and put a lighthouse in front. In thesecond world war Malacca was briefly over-run by the Japanese, but recently it hasreturned to the tranquillity of its birth.

When your correspondent visited, amuezzin’s call to Friday prayers floated upfrom a nearby mosque. Islam, too, first cameto South-East Asia on Arab trading dhows.Its influence has been much more enduringthan that of Christianity.

Galleons and gunships

Pacific history has been defined by bullies enforcing their rules

Witness to a turbulent past

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IN 1999 ANDY CHAN, a middle-aged Hong Kong business-man, setup a company in Shenzhen, justover the border on

the Chinese mainland, making pretty sets of bath soap to fillAmerican Christmas stockings. They were sold at $10 apiece atretailers like Walmart. His firm made and shipped them, by thehundreds of thousands in each steel container, for just $4. In thefirst few years his firm made a bomb. He paid his workers a pit-tance, 290 yuan (then $35) a month, and imported his raw mate-rials from Malaysia for next to nothing. But then China’s ex-change rate soared, his workers’ wages rose almost tenfold, theauthorities started enforcing overtime rules and competitionturned brutal. The business collapsed. Now he is a taxi driver.“You can’t do this business in Shenzhen any more unless youbreak the law. You have to go to South-East Asia,” he says bitterly.

Hard as it is on Mr Chan, trade in East Asia is ruthlessly op-portunistic. Since Japanese multination-als put the “Flying Geese” model ofmanufacturing into practice in the 1980s,Asian factories have migrated, via thecontinent’s “miracle” economies, to Chi-na and South-East Asia. Fuelled largely byforeign investment, they are on a perma-nent quest for cheaper labour and greaterefficiency. As cities along China’s throb-bing coastline are priced out of the mar-ket, inland locations such as Chongqing,or lower-wage countries like Vietnam and

Cambodia, have become the new goslings.But the image offlying geese is no longer as fitting as it once

was, because the production apparatus has become more like aspider’s web, with components flitting in all directions andgoods crossing and recrossing borders. Victor and William Fung,owners of Li and Fung, a Hong-Kong-based company that helpsorchestrate these supply chains, have said that this network has“ripped the roof off the factory”. Suppliers can now be any-where. In their book, “Competing in a Flat World” (written withYoram Wind), the two Fungs use the example of a pair of shortsthey made for an American retailer. The buttons came from Chi-na, the zips from Japan, the yarn was spun in Bangladesh andwoven into fabric and dyed in China, and the garment wasstitched together in Pakistan. “Yet every pair of shorts has to lookas if it were made in one factory.”

Tangled webAs a result, East Asia has become one of the most intercon-

nected regions in the world. Trade among EU nations remainseven more extensive, but theyare partofa single market whereasEast Asia has only a tangle of free-trade agreements. As Prema-chandra Athukorala, an economistbased in Australia, points out,network trade has been the most dynamic part of world manu-facturing exports since the 1990s. The share of East Asian devel-oping countries increased from 14% in 1992-93 to over 30% in2007-08, with China the main driving force (see chart1).

Such is the pull of China within this new “Factory Asia”that the currencies of most countries in the region now track theChinese renminbi more closely than they do the American dol-lar, reckon Arvind Subramanian and Martin Kessler, formerly ofthe Peterson Institute. Yet for all its power, China is still only apart of the spider’s web, not the centre of it. “What makes the re-gion unique is that you have a tight fit between regional and glo-bal integration. The supply chain is linked to final-goods marketsin the United States and the EU,” says Razeen Sally of the LeeKuan Yew School ofPublic Policy in Singapore.

Global trade has slowed down in the past two years, and in2012 East Asian trade with the rest of the world for the first timemade no contribution to growth. Yet despite the lingering falloutfrom the 2008 global financial crisis the network effect is still go-ing strong. Exports, especially to America, have shown signs ofpicking up this summer. Sudhir Shetty, the World Bank’s chiefeconomist forEast Asia and the Pacific region, expects the emerg-ing countries in his area to grow by 7% this year, far faster thananywhere else in the developing world.

China’s slowing growth rate remains a concern, but the tenmembers of the Association of South-East Asian Nations(ASEAN), including Indonesia, the Philippines, Singapore and�

ietnam, are trying to make their region more self-sustaining.Next year ASEAN plans to establish an “economic communi-ty”—a single market to make network trade more seamless.

But China’s assertiveness over disputed territories in theSouth and East China Seas has put it at loggerheads with impor-

Economic integration

The flying factory

Asia has built a web of economic interdependencewhich China would be ill-advised to unravel

Smaller countries around the Pacific, such as the Associa-tion of South-East Asian Nations (ASEAN), band together forstrength in numbers against the big powers. There is a constantflow ofpeople, across the Pacific to Silic��alley and backagain;and there are pop-culture excursions between three countries,China, Japan and South Korea, that are otherwise staunchlynationalist. The Pacific is where the 21st century’s habit of net-working is most advanced. From Silic��alley to Shanghai, theworld’s biggest internet firms have flourished. Nirvikar Singh,co-editor of “The Oxford Handbook of the Economics of the Pa-cific Rim”, published earlier this year, says the ocean is becomingthe world’s “digital playground”.

To be a playground rather than a battleground, however, itneeds rules that govern trade and the sea routes across whichcommerce flows. Since the second world war these rules havebeen underpinned by an American security presence that hashelped keep the peace in the Pacific—give or take self-inflictedwounds, such as��ietnam war. Yet America is not the only ar-biter. APEC’s Mr Bollard says the region has benefited from a setof “loose-tight” standards of behaviour—guidelines rather thanhard-and-fast rules—that have helped the region muddlethrough Vietnam, the spread of communism, China’s culturalrevolution and other periods ofsevere instability. A rising China,too, wants a say in setting the rules, especially in its own neigh-bourhood. Getting all sides to agree on what those rules shouldbe is the challenge for the next half-century of the Pacific Age. 7


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tant trading partners such as Vietnam and Japan. As yet the eco-nomic costs have been bearable, but the risks are high.

JamesReillyofthe UniversityofSydney thinks that China’snew posturing is a revival of an old practice known as economicstatecraft, meaning it is deploying its wealth for strategic foreign-policy purposes. This practice involves both carrots and sticks. InAsia the carrots have included pipelines, railways and trunkroads that China has provided around the region, mainly to sup-ply its own economy with raw materials, but with wider bene-fits, especially for its poorer neighbours.

But there is also coercion, even if this is often counterpro-ductive. In 2012, for example, Chinese officials indirectly encour-aged a consumer boycott of Japanese goods as Japan reassertedits claim to disputed islands it calls the Senkakusand the Chinesecall the Diaoyus. Customs officials tightened up inspections ofJapanese import��et Japan did not back down. Instead, it gotcloser to neighbours in the region who also objected to Chineseaggressiveness, says Mr Reilly. In the same year Chinese restric-tions on banana imports from the Philippines led to a backlashamong Filipinos that brought their country closer to America.

Bonnie Glaser of the Centre for Strategic and InternationalStudies, a think-tank in Washington, says China may even bepursuing economic integration to strengthen its leverage. “Chi-na’s strategy is to weave together a network of economic inter-dependence. It is using the centrality of its power to persuadeother nations that to challenge China on territorial issues is sim-ply not worth it.” But its neighbours are not sitting placidly by.Last summer Chinese businesses in Vietnam were attacked bylocals after a Chinese state-owned oil firm put an oil rig in waters

that both countries lay claim to. Since then, American officials say, its

allies in the region have become some-what keener to move into America’s eco-nomic orbit to keep China in check. Japa-nese investment in China fell to $9.1billion in 2013, from $13.5 billion the yearbefore. At the same time Japan’s invest-ment in ASEAN more than doubled, to$23.6 billion. Myanmar, until recently a sa-trap ofChina, is opening up to the West.

Even in Singapore, which has a bigethnicChinese communityand sees itselfas a cultural bridge between east andwest, China’s conduct has raised eye-brows. Simon Tay, chairman of the Singa-pore Institute of International Affairs,says its treatment of countries such as

ietnam shows that political integrationhas failed to match the economic sort.“The post-war period has provided asense of stability that has enabled Asiansto mind their own business—literally thebusiness of business,” he says. “There isunease about a China-centric region.”

Some economists say China’s asser-tive behaviour may also be a way of test-ing whether America’s economic powerin the region is waning, as many of itsleaders believe. They think that the Chi-nese maywant to re-establish the old hier-archical system in which they were clear-ly in control but at the same time felt asense ofnoblesse oblige.

Two striking hints of this came dur-ing Xi Jinping’s first visits as China’s presi-

dent to ASEAN countries lastyearand to the Indian Ocean in Sep-tember this year. On both tours he spoke of his desire to create a“maritime SilkRoad” thatwould build port infrastructure and es-tablish shipping co-operation with smaller, friendly nations likeCambodia and Sri Lanka along ancient trade routes establishedwhen China was the undisputed hegemonic power. He also an-nounced the creation of the Asian Infrastructure InvestmentBank, a rival to the Japan-driven Asian Development Bank butwith deeper pockets—at least $50 billion in startup funds.

et for all its swagger, China is not impregnable. Its eco-nomic growth looks increasingly unsustainable, and most of itspeople are still relatively poor. Though there is a middle-classboom in coastal cities, the country’s average GDP per person issomewhere between that of the Philippines and Malaysia andstill a longwayfrom South Korea or Japan. The Communist Partyknows that, to a large extent, its legitimacy rests on continuing toimprove living standards.

From silk to servicesThat means taking economic reform further and increasing

the value of goods and services produced in China, hoping toemulate the success of Singapore and Hong Kong, which gener-ate far more value from services such as banking than from sell-ing manufactured goods. Mr Xi has made reforms to the servicesector a priority. He must also be casting a wary eye to NorthAmerica where robotics, 3D printing, mass customisation andother new trends could put pressure on Asia’s factory model.

There are some promising alternatives to manufacturing.Last summer’s huge IPO ofAlibaba, a Chinese e-commerce firm,

LastsummerChinesebusinessesin Vietnamwereattacked bylocals aftera Chineseoil firm puta rig incontestedwaters

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JAPAN TRIED TO negotiate the first trans-Pacific tradeagreement exactly 400 years ago. It sent a robed samurai,

Hasekura Tsunenaga, to Europe via Acapulco to request the rightto trade directly with New Spain (today’s Mexico). Among otherthings, he needed permission from the pope. But because theshogun was slaughtering Catholics at the time, he did not get it.

Only in the past decade have such agreements finally start-ed to flourish (see chart 3). But they are still dominated by inter-ests that go beyond the nuts and bolts of trade and into the realmof geopolitics. America and China are pursuing three separatetracks towards trade pacts that would help define the future oftrans-Pacific commerce. One ofthe three does not include China,another excludes the United States (see chart 2). The third is stillpie in the sky.

All three involve un-wieldy acronyms, thoughwhichever wins could one daybecome as familiar as NAFTA

(the North American Free-TradeAgreement). The furthest ad-vanced is the American-ledTrans-Pacific Partnership (TPP),in which China plays no part.On a parallel track, though fur-ther behind, is the RegionalComprehensive EconomicPart-nership (RCEP), which coversonly Asian countries and in-cludes China, plus severalcountries that are also negotiat-ing the TPP.

The distant dream is the Free-Trade Area of the Asia-Pacific(FTAAP), which would include both America and China, andpossibly cobble together elements of both TPP and RCEP. Chinapushed the FTAAP ahead of the 21-country APEC summit in Beij-ing in November, givinga newlease oflife to an old idea. PeterPe-tri and Ali Abdul-Raheem write in a new paper for the PacificEconomic Co-operation Council: “Nearly 50 years after it wasfirst proposed, it is gaining traction due to the emergence ofRCEP

and TPP initiatives and the continuing stalemate in global tradenegotiations.”

As trade experts see it, the TPP is the most ambitious in theshort term. It is dominated by America and Japan and also in-cludes Australia, Brunei, Canada, Chile, Malaysia, Mexico, NewZealand, Peru, Singapore and Vietnam. Together these countriesaccount for about 40% ofglobal GDP, making it one ofAmerica’sbiggest potential free-trade agreements (FTAs). The Obama ad-ministration hopes that it would be complemented by an evenmore ambitious agreement with the EU.

America, which already has FTAs with six other TPP coun-tries, sees openingup Japan as the bigprize. But the TPP is not justaimed at dismantling tariff barriers. It is also meant to tackletough issues such as intellectual property, services, governmentprocurement, labour and environmental standards. Since itsmembers include economies such as�ietnam and Malaysiawhose supply chains depend on cheap labour, negotiationswere always likely to be tricky. When Japan, which likes to spoilits farmers, joined in 2013, they became even trickier. But after 19rounds of negotiations, considerable progress has been made.There is a strong push to finish it by the end of this year, though asimilar deadline last year was missed.

RCEP, which is led by ASEAN, has the unenviable task ofbringing China and Japan to the same table. It is more focusedthan TPP on market access and on smoothing the way for supplychains. But it includes foot-dragging India, and may suffer fromASEAN’s softly-softly way ofnegotiating by consensus.

Aim higherMichael Froman, America’s trade representative, says the

TPP is about ensuring high labour standards, exposing state-owned enterprises to level competition with private enterprisesand including digital activity “to ensure a free and open inter-net”. When he held informal talks with TPP counterparts at a get-together in Myanmar in August, he asked them about RCEP andwas not impressed by what he heard. Whereas the TPP was aim-ing to eliminate almost all tariffs, India was asking RCEP to keepthe figure as low as 40%. China was somewhere in between, ap-parently waiting to see where everyone else ended up.

Predictably, in the run-up to the 21-country APEC summit in

Free-trade pacts

America’s big bet

America needs to push a free-trade pact in the Pacificmore vigorously

underscores the potential of digital business. Tencent, anotherChinese internet company, has more revenues and profits thanFacebook. Lisa Hanson of Niko Partners, a Silic� �alley-basedtech consultancy, says companies like Tencent have turned Chi-na into a world leader in online gaming.

One of the best tools for promoting economic reform is touse free trade and foreign competition to force overprotected ser-vice industries to modernise. Jiang Zemin, the president at thetime, understood that when he took China into the World TradeOrganisation in 2001. Japan’s prime minister, Shinzo Abe, has of-ten made the same point when justifying his decision to join theTrans-Pacific Partnership, a free-trade grouping led by America.The big question is whether Messrs Xi and Abe are prepared touse Pacific-wide trade pacts to maintain that reformist zeal—andwhetherAmerica has the political will to accommodate them. 7


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Beijing this month, America and China have also been at oddsover the FTAAP plan being promoted by the Chinese. WangShouwen, China’s deputy trade minister, has memorably de-scribed the TPP and the RCEP as “two wheels of a bicycle”, andthe Obama administration has been heartened to find that theChinese government no longer dismisses the TPP as an anti-Chi-na ploy. But APEC insiders say that American officials have op-posed China’s plan for an FTAAP feasibility study, and they dis-agree over timing. As one official says, America is “dead set onachieving a breakthrough on TPP” and does not want to be dis-tracted by FTAAP.

They also differ over which should be the FTAAP’s mainbuilding block. Eventually America would like to bring Chinainto the TPP and use that as the basis for a highly sophisticatedtrans-Pacific FTA. But China will be reluctant to accept Americanrules on things like state-owned enterprises and internet access.Going down an RCEP route would give it more say.

Messrs Petri and Abdul-Raheem think that a trade agree-ment between America and China would bring big gains, what-ever the route. But they reckon that a more rigorous TPP-stylemodel would bring economic benefits worth almost $1 trillionmore than one based on RCEP, though it would be much harderto persuade China to go along with it.

Crossing the Ts�et the TPP itself still has huge hurdles to overcome, mainly

political rather than technical. The Obama administration’smain headache—some say self-inflicted—is another acronym,Trade Promotion Authority (TPA). This enables the Americangovernment to negotiate free-trade agreements without havingthem picked apart afterwards; Congress can only validate or re-ject en bloc what has been negotiated. Once called “fast track”,TPA lapsed for new trade agreements in 2007. Since 2012 theWhite House has been seeking renewal, but even its own Demo-crats on Capitol Hill have stonewalled.

Japan’s obstacles are more elegiac than TPA, but just asstubbornly entrenched. They have to do with rice and other “sa-cred” products of the land, such as wheat, beef and pork, dairyand sugar. Japanese farmers are few and far between, and mostof them are getting on in years, but as guardians of the nation’s

most cherished harvests they yield to no one. Backed by JA, avast Tokyo-based farm lobby, they have spent their lives resistingefforts to lower tariffs on such products. Richard Katz, an econo-mist, says that their rural toils produce just 0.8% of Japan’s GDP,yet they match America’s Congress in holding TPP hostage.

In September, just days after Mr Abe reiterated in Americathat TPP was crucial for raising Japan’s agricultural competitive-ness and helping it adjust to an ageing society, TPP talks betweenthe two countries abruptly broke down. Each side blamed theother, though Americans continue to suspect that the problem isnot Mr Abe’s own commitment but the weight the farmers carrywith his bureaucrats. The Japanese, for their part, realise thattheir best offer may never be good enough for Congress, so with-out TPA there is unlikely to be TPP.

Mr Froman, the trade tsar, puts TPP into a dauntingly ambi-tious context. He calls it central to America’s pivot to Asia, achance to show the country’s commitment to creating institu-tions that moderate territorial disputes, and an opportunity toshow emerging economies (meaning China) what economicrules the global economy should follow. “At a time when there isuncertainty about the direction of the global trading system, TPP

can play a central role in setting rules of the road for a critical re-gion in flux,” he says. The flipside of this is that failure becomesan even bigger risk, which Mr Froman acknowledges. Perhaps inan effort to prod a somnolent, introspective Congress into action,he makes the dramatic claim that failure could mean America“would forfeit its seat at the centre of the global economy”.

Many pundits in Washington agree that American leader-ship in Asia ison the table. Michael Green ofthe Centre forStrate-gicand International Studies saysTPP failure would “underminethe impression of the United States as a Pacific power and looklike an abdication of leadership”. It would also take pressure offJapan and China to reform theireconomies. Mireya Solís, a Japanexpert at the Brookings Institution, says it would be a “devastat-ing blow to the United States’ credibility”.

Those views are echoed in East Asia. Mr Tay in Singaporesays TPP failure would be a disaster: “If the domestic issues ofthese two countries cannot be resolved, there is no sense that theUS-Japan alliance can provide any kind of steerage for the re-gion.” Deborah Elms, head of the Singapore-based Asian Trade

Sacred rice, and a trade treaty, in his hands

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COMMUTERS BETWEEN MARIN COUNTY and San Fran-cisco in northern California are getting used to a new spec-

tacle during rush hour. Vast, ungainly container ships, bearingChina’s flag and name, plough along under the glorious GoldenGate Bridge. They are bringing goods into the Port of Oakland—and taking back America’s trade deficit. Any pleasure yachts zip-ping around the bay give them a wide berth.

This is China as a Pacific power, a commercial rather than anaval one. According to statistics gathered by Michael McDevitt,a retired rear-admiral atAmerica’sCentre forNaval Analyses, it isnow the world’s largest shipbuilder; has the third-largest mer-chant marine, and by far the largest num-ber of vessels flying its own flag; andboasts a 695,000-strong fishing fleet. It ac-counts for about a quarter of the world’scontainer trade. And almost all the steelboxes shipped on the world’s oceans aremade in China, too.

Much ofthe securityofthat trade across the Pacific is the giftofAmerica. China “free-rides” on the protection provided by theUnited States Pacific Fleet, based in Pearl Harbour, Hawaii, so itbenefits from America’s enforcement of the rules of sea-basedactivity. But in the western Pacific China has behaved provoca-tively towards some staunch American allies, testing the boundsof international maritime law.

That implicit challenge comes up often in speeches byAmerican officials. Whethercivilian ormilitary, they use an odd-ly terrestrial metaphor when discussing America’s leadership inthe world’s biggest ocean. It is all about enforcing “the rules ofthe road”, they say. One set of those rules are those on trade,which, as discussed in the previous article, America hopes tomodernise via the Trans-Pacific Partnership (TPP). Another isabout maritime security, particularly in the sea lanes throughdisputed territorial waters in what China calls its “near seas”.America argues that to safeguard those vital routes ofcommerce,

any territorial quarrels should be settled according to interna-tional law, not by force and intimidation. Otherwise, says DanielRussel, assistant secretary of state for Asia-Pacific, it is a danger-ous world where “might makes right.”

However, as Henry Kissinger writes in his new book,“World Order”, China does not necessarily see the rules the wayAmerica does: “When urged to adhere to the international sys-tem’s ‘rules of the game’ and ‘responsibilities’, the visceral reac-tion of many Chinese—including senior leaders—has been pro-foundly affected by the awareness that China has notparticipated in making the rules of the system.”

MrKausikan of the Singapore foreign ministry goes further.He says that all Chinese are aware of the 100 years of invasion byWestern powers and Japan that their country suffered before1949. “It was neververy realistic to expect China to be a ‘responsi-ble stakeholder’ in a regional and global order that it had no sayin establishing and which it holds responsible for a century ofhumiliation,” he says.

American officials acknowledge that China plays by manyglobal rules, especially the trade ones it signed up to when join-ing the World Trade Organisation in 2001. But especially in itsown neighbourhood, it is challenging rules and norms—includ-ing some it has explicitly agreed to—that have kept the seas safesince the second world war.

For instance, in 2002 it signed a treatywith itsneighbours inASEAN agreeing to settle maritime disputes in the South ChinaSea peacefully and according to international law, such as the1982 United Nations Convention on the Law of the Sea (UN-

Maritime power

Your rules or mine?

Trade depends on order at sea, but keeping it is farfrom straightforward

Vast, ungainly container ships, bearing China’s flag andname, plough along under the glorious Golden Gate Bridge

Centre, suggests that so far the American pivot has manifested it-self mainly as an extra 1,000 marines stationed in Australia.“Without TPP, all the pivot amounts to is a few extra boots on theground in Darwin,” she says.

Even members of America’s armed forces are worried. Asone senior serving officer in the Pacific puts it, “the TPP unitescountries that are committed to a trade-based future, transpa-rency and the rule of law. It is the model that the United Statesand Europe have advanced versus that advanced by China. It isan opportunity to move the arc of Chinese development, oridentify it as a non-participant.”�

et when Mr Obama mentions TPP, he talks mostly aboutprotecting American jobs rather than safeguarding America’splace in the world. The president has never fully put his backintoforcing a congressional vote on TPA. There is still time for himand Mr Abe to rescue the trade talks. But unless Mr Obama leadsfrom the front, America’s own leadership in the Pacific will seemless convincing than he has repeatedly promised.7


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CLOS). Yet it is in often tense disputes with ASEAN countries suchas Vietnam and the Philippines over control of three sets of is-lands and rocks in the South China Sea—the Paracel Islands, theSpratly Islands and Scarborough Shoal—and with Japan over theSenkaku/Diaoyu Islands. When the Philippines took its opposi-tion to China’s maritime claims to UNCLOS in March, Chinahuffily refused to accept the arbitration.

It has also sought to stop American naval and air-force ves-sels operating in its exclusive economic zone (EEZ), 200 nauticalmiles from its shoreline (see map), which America and many ofits allies consider a violation of UNCLOS. In August this year aChinese fighter intercepted an American Navy P-8 maritime pa-trol in international airspace about 135 miles (216km) off HainanIsland, which the Department of Defence described as “very,very close, very dangerous”.

This EEZ dispute could have profound implications for thestability of trans-Pacific sea routes, overseen for generations byAmerica’s navy. “It may sound arcane,” writes Bill Hayton, au-thor of “South China Sea: The Struggle for Power in Asia”, pub-lished earlier this year, “but the legal debate over what one coun-try’s military vessels can do in another country’s [EEZ] hasalready brought the United States and China to the edge of con-flict. It’s a battle between American demands for access to the‘global commons’ and China’s search for security. It’s a strugglethat will define the future ofAsia and possibly beyond.”

The South China Sea is where that struggle is most visible.On modern maps the reefs and shoals between Chin��ietnam,the Philippines, Taiwan and Malaysia are labelled “DangerousGround”—not because of their disputed ownership but becausethrough history they have been a mariner’s nightmare.

According to MrHayton, the South China Sea itselfplays anhistoric role in the crafting of the rules in contention. In 1603 theDutch East India Company seized a Portuguese ship laden withraw silkand gold near the Strait ofMalacca and hired a Dutch ju-rist, Hugo Grotius, to defend its action. He wrote a book in Latin

called “Mare Liberum” (“The Free Sea”), arguing that the seaswere international territory and should be open to all. Over thefollowing centuries this was used by global powers as justifica-tion to sail merchant vessels where they liked, often with gun-boats sailing alongside to enforce their authority.

Go by the bookBuilt loosely on “Mare Liberum”, UNCLOS established the

EEZ concept which gave coastal nations exclusive rights over nat-ural resources within a 200 nautical-mile limit but allowed forfree navigation and overflights outside territorial waters extend-ing to 12 nautical miles from the coast. Ironically, China has rati-fied UNCLOS whereas the American Senate has not—though inpractice the American navy follows and attempts to enforce it.

But China’s interpretation (and that of a small group oflarge developing countries such as India and Brazil) differs fromthat ofmost states: it requires naval vessels to seek its permissionbefore entering its EEZ. In 2013 a Chinese navy ship cut directlyacross the path of the United States Navy cruiser Cowpens, forc-ing it to change course abruptly to avoid a collision. Such inci-dents are red rags to the Americans. Their navy still regularlysends spy ships into China’s EEZ.

If China were to decide to enforce its version of the rules,the risks would be severe. In his book, “Fire on the Water: China,America and the Future of the Pacific”, Robert Haddick said itcould mean the exclusion of foreign warships “from the Strait ofMalacca all the way to Japan’shome islands”. Even ifChina wereto keep the seas open to merchant shipping, the whole conceptof maritime security would be jeopardised. America might beforced to retaliate.

That isan alarmingscenario, though manysecurityspecial-ists say China does not seem to be spoiling for such a showdownwith America, at least not yet. Optimists reckon that the Chinesenavy, though growing fast, is ill-prepared for war with such adoughty opponent. Moreover, a defeat would be catastrophic forChina. Security analysts say the Communist Party would lose itslegitimacy and the trade-driven economy would collapse.

Pessimists argue that, even with good intentions on bothsides, miscalculation ormisunderstandingcould still lead to con-flagration. ChuckHagel, America’s defence secretary, says Amer-

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TO FIND OUT how much energy security has mattered inthe Pacific’s recent history, askthe Japanese. At the museum

of the Yasukuni Shrine in Tokyo, which honours the country’swar dead (sometimes controversially), an exhibit suggests, witha jarring note of self-justification, that an American naval block-ade against Japanese oil imports in 1941 triggered the Pacific war.

Seventyyears latera tsunami that swooshed in from the Pa-cific and knocked out the Fukushima Daiichi nuclear power sta-tion led to the closure of Japan’s 54 nuclear reactors. Parts of thecountry, which is a greedy consumerofelectricity, were left prac-tically powerless. Huge tankers full of natural gas, heading forterminals dotted along Japan’s Pacific coastline, eventually gotthe country up and running again. In 2012 Japan consumed 37%of the world’s liquefied natural gas (LNG).

The past few years have seen some upheavals in the bal-ance of energy security around the Pacific. America, which usedto be the world’s largest net oil importer, ceded that spot to Chinain 2013 (see chart 4). Thanks to shale oil and gas, this year it is setto become the world’s biggest producer of oil and liquid naturalgas. It is already the number one producer ofdry natural gas.

North American energy

Oil and water

North America’s energy revolution will have a rippleeffect around the Pacific

ica will oppose anyeffort to restrictoverflightor freedom ofnavi-gation. It will “not look the other way”, he told his defencecounterparts at the Shangri-La Dialogue in May.

In its island disputes, security analysts say China is pickingfights with American allies that test the United States’ commit-ment to upholding the law by proxy, in steps small enough tomake retaliation hard. But in the process it is gradually establish-ing “facts on the ground” in its own back pond. Euan Graham ofthe Singapore-based S. Rajaratnam School of International Stud-ies says that eventually these could enable it to thicken its EEZ

into a robust coastal buffer. He notes that Chinese history—suchas Britain’s shameful Opium wars of the 1840s and 1850s—makesthe country particularly sensitive to maritime threats.

That dashed lineAll the disputed territories fall within what China calls its

nine-dash line, which covers virtually all of the South China Seaand more than half of its neighbours’ own EEZs. Since it tookover Mischief Reef in 1995, China has quarrelled wi

��ietnam

over the Spratly Islands and installed some garrisons. It also oc-cupied Scarborough Shoals after a stand-offwith the Philippinesin 2012. This year drilling by a big Chinese oil firm in waters 120nautical miles (222km) fr��ietnamese coast sparked anti-Chinese riots��ietnam. Tensions over the Senkaku/Diaoyu is-lands have been hurting relations with Japan since 2010.

Mr Haddick refers to China’s tactic of gradually enforcingthese island claims as “salami-slicing”. It is “the slow accumula-tion of small changes, none of which in isolation amounts to acasus belli, but which can add up over time to a significant strate-gic change”. Ronald O’Rourke, a naval analyst for the UnitedStates Congressional Research Service, says Chinese officialshave called it a “cabbage strategy”. The islands are wrapped, cab-bage-like, in successive layers of protection formed by fishingboats, Chinese coast guard ships and finally naval vessels. Chinararely deploys its armed forces in these creeping encroachments.Instead, says Ian Storey of the Institute ofSouth-East Asian Stud-ies, it uses maritime law-enforcement agencies. “Even the nameimplies China already feels it has jurisdiction.”

The tactic makes it harder for any claimant to launch a mil-itary response without appearing to raise the ante. “The Chineseare pursuing a pretty clever strategy and the rest ofus haven’t fig-ured out a good response,” says Admiral Dennis Blair, formerhead of America’s forces in the Pacific and now chairman of theSasakawa Peace Foundation USA. He reckons that countriesthreatened by China’s “administrative aggression” should settletheir territorial disputes with each other first and then present aunited front to China. MrRussel says“it isa good thingthat Chinais not deploying the People’s Liberation Army’s navy.” But hepoints out that “whatever is driving the behaviour, the point isthat it risks escalation and confrontation, so the exercise of re-straint is necessary.”

In late September more than 18,000 American army, navy,air force and marine corps personnel took part in an unprece-dented joint exercise off the Pacific island of Guam. Without ex-plicitly saying so, it was aimed at testing responses to the sort of“sea-denial” strategy (missiles, submarines and cyber-attacks)that American military planners think China has developed tocounter naval threats. According to Rear-Admiral Mark Mont-gomery, a Seventh Fleet commander, a Chinese auxiliary shipwas spotted observing the exercises in America’s EEZ. That wasthe second time this year a Chinese vessel was seen snooping inAmerican waters during war games. The Americans chose totreat it as a possible sign that China was exploring the benefits oftheir version of the UNCLOS rules.

Earlier this year naval chiefs from China, America and

many other countries pulled off a surprise by signing the Codefor Unplanned Encounters at Sea, which provides guidelines fornaval ships or aircraft when they unexpectedly come close toeach other. It offers a measure of potential damage control but itis not legally binding, nor does it apply in a country’s territorialwaters, so it may be interpreted as subjectively as UNCLOS.

ForChina, the bigquestion as it seeks to become a maritimepower is how much it wants to project that status into the wideroceans beyond its neighbourhood. Singapore’s Mr Kausikanasks whetherChina will support a system that has benefited it orcontinue to be a “global free-rider”. That question is loominglarger in the maritime sphere. As America becomes less relianton Middle Eastern oil, thanks to its shale revolution, will Chinahelp to protect the sea lanes across the Indian and Pacific oceansfor everyone’s benefit? 7


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ABOUTFOUR CENTURIES ago Latin America became cen-tral to the trans-Pacific economy, according to “Pacific

Worlds”, a book by Matt Matsuda, an historian. Silver from Bo-livia travelled by galleon from Acapulco to Manila, where it wastrans-shipped to China and became a vital substitute for its de-based currency. Backcame silks, porcelain and slaves. One, an In-dian noblewoman sentbyslavers to NewSpain, became famousfor her long darkbraids and colourful clothes. She was known asLa China Poblana. Her dress sense, influenced by her Asian heri-tage, is now considered the epitome of traditional Mexican style.

Latin America

Pacific pumas

In America’s backyard, the Pacific economies arelearning from East Asia

That highlights the prospect of huge trans-Pacific comple-mentarities. China is reducing the dominance of dirty coal in itsenergy mix, Japan and South Korea are denuclearising, and fast-developing countries like Indonesia are turning from LNG ex-porters to importers. Yet to date there is next to no trans-Pacifictrade in oil, gas or coal in either direction; in 2011 the Singapore-based Pacific Economic Co-operation Council (PECC) said it add-ed up to only1.4% ofglobal trade in those products.

According to statistics from BP, a global energy firm, NorthAmerica gets most of its crude-oil imports from Canada or via itseast coast from Latin America, the Middle East and west Africa.Asia receives the vast majority from the Middle East via theSouth China Sea. The Pacific is a big blank. But that may be aboutto change, with potentially big implications for the economic in-terdependence and geopolitics of the Pacific region.

Time to share the bonanzaThe epicentre of the change is North America, whose huge

gas discoveries are about to turn it into a global LNG power. InCanada Asian-owned companies plan to build the first exportterminals on the coast of British Columbia in the next few yearsto ship LNG across the Pacific. In the United States the govern-ment has recently approved the construction offour terminals toliquefy gas and ship it west via the Panama Canal.

One of those, Dominion Energy’s Cove Point, near Wash-ington, DC, built as an LNG import terminal in the 1970s, hadbeen mothballed for much of the following three decades. Notlong after it resumed receiving LNG imports in 2003, Americannatural-gas prices plummeted in response to the shale revolu-tion, putting the terminal out of business again. So in 2011Domi-nion switched to marketingCove Point to foreign LNG customersas a potential export facility. On September 29th this year theFederal Regulatory Energy Commission finally approved con-struction of an export terminal. Those LNG exports will benefitfrom a $5.3 billion expansion of the Panama Canal. Due to becompleted (after several delays) in 2016, this will make the canalbigenough to accommodate nine-tenthsofthe world’sLNG fleet,potentially cutting at least11days offshipping times between theGulfofMexico and East Asia.

The implications of this new trade on both sides of the Pa-cific could be substantial. According to Jane Nakano, of the Cen-tre for Strategic and International Studies (CSIS) in Washington,as of last year Japan had contracted to buy about a fifth of its LNG

imports from America once it gets the necessary permissions.Currently dry gas in America costs $4-5 per million British

thermal units (MBTUs). Even allowing for another $6 or so toliquefy the gas and transport it to Asia (and far less from Cana-da’s west coast), the price would still be a lot lower than the $15-18per MBTU that LNG currently fetches in Japan. Cheaper energywould make Japan’s economy more competitive, and Americawould see a much-needed improvement in its trade balance.

For American exporters, that scenario involves risks. Aus-tralia, one of the world’s two biggest LNG exporters, is rampingup itsoutputover the nextfive years, much ofitdestined forAsia.China, another big potential buyer, appears to be avoidingAmerican LNG. This year it signed a $400 billion deal with Rus-sia to import natural gas from there for the next three decades.

But the energy markets of China and North America arewarily intertwining in other ways, mainly through Chinese in-vestment in oil. North America has received a flood of invest-ment from Chinese oil companies since the global financial cri-sis. In 2012 CNOOC, one of China’s state-owned energybehemoths, bought Canada’s Nexen for $15 billion, seven yearsafter its bid for America’s Unocal was scuppered by oppositionin Washington. The welcome is not always open-armed. After

the Canadian deal the prime minister, Stephen Harper, put a fi-nancial limit on further acquisitions: “Canadians have not spentyears reducing the ownership of sectors of the economy by ourown governments only to see them bought and controlled byforeign governments instead,” he said.

But Mexico, which in 2013 changed its constitution to allowforeign investment in its oil industry for the first time in 75 years,would welcome China with open arms if it wanted to invest inits energy sector, according to Ildefonso Guajardo, its economyminister. Tellingly, in the past two years Mexico’s president, En-rique Peña Nieto, has had four meetings with his Chinese coun-terpart, Xi Jinping—the same number as with President Obama.

The benefits of this new North American energy glut go farbeyond the oil industry. For a start, it is making North Americanmanufacturing more competitive. The combination of cheaperenergy and rising Chinese wages could make Mexico a more at-tractive factoryfloor. But it isalso sendingtwo powerful geopolit-ical signals: one to America’s close allies, such as Japan andSouth Korea, that the friendship can now also help underpintheir energy security; the other, to the wider Asian region, thatNorth America hasbounced backfrom the global financial crisis.In time, such symbolsofeconomic revival could resonate strong-ly on the other side of the Pacific. Eduardo Pedrosa, the Singa-pore-based secretary-general of PECC, calls it a tectonic shift inAmerican competitiveness. “I don’t think anyone over here real-ises how massive this shale revolution is for the US economy.” 7

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A FEW YEARS ago some Chinese oenologistswith almost no Spanish arrived in one ofChile’s most prestigious wine regions, theColchagua Valley, to buy a vineyard. Theywere from Cofco, a big state-owned Chinesefood and drink manufacturer whose GreatWall wines are quaffed by the country’saspirant middle classes. In 2010 Cofco spent$18m on a large swathe of Bisquertt, one ofthe valley’s most upmarket brands. Itchanged its name to an easier-on-the-tongue Santa Andrea, and after some trialand error put the wine into mass production.Its price plunged, but wine exports fromChile to China have soared. Many ofthem come in two-litre bottles,which suggests they are notaimed at the most discerningof Chinese palates.

Chile is about as faraway from China as you canget on the globe, yet in recentyears China has overtaken theUnited States as the Andeannation’s biggest trading partner,accounting for more than a fifth of

its imports and exports. Most of those ex-ports are of copper, but food and drink arealso on the menu. Andrés Rebolledo, theChilean government’s head of internationaltrade, says his country is now producingsalmon for sale in Asia. Getting it there inperfect condition forms part of Chile’sefforts to develop the logistical skills neededto add value to its farm exports.

Demand for copper may wax and wanewith the strength of China’s economy, butthere are compelling reasons why east-westtrans-Pacific food trade should grow, ac-

cording to a joint study by theInter-American Development

Bank and the Asian Devel-opment Bank in 2012.

Asia, particularly China,lacks agricultural landand water, whereasLatin America hasplenty of both.

The study notesthat between 1975 and

2009 China lost 20% of itsfarmland to urbanisation and

¡Salud!

Food and drink draw two regions together

desertification, yet as its population be-comes richer it demands more high-protein,high-calorie food. Among Latin America’sten biggest exports to Asia are poultry,sugar beet, soya oil, vegetable oils andsoybeans. Some of that goes to feed a bigfavourite in the modern Chinese diet, pork.

Agricultural tariffs in Asia remainprohibitively high, and Latin America im-ports lots of electric-power plant and carparts from Asia, which explains why theregion’s trade is alarmingly lopsided. Butlessons from history should encourage Chinato nurture its agricultural relationship withLatin America.

A1972 book by Alfred Crosby, “TheColumbian Exchange”, explained how afterthe discovery of the Americas sweet pota-toes, corn, peanuts, tobacco and chili pep-pers travelled across the Pacific to China forthe first time. Then as now, China had a largepopulation and not enough fertile land. TheAmerican crops thrived in poor soil, and sodid those who ate them. Now the region thatput the spice into Szechuan food is providingthe wine to wash it down.



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After a long interlude, once again aroaring trade has developed betweenAsia and Latin America. It has quadru-pled since 2004. Asia has overtaken theEuropean Union as Latin America’s sec-ond-biggest trading partner after the Un-ited States. Latin America’s share ofAsiantrade is less impressive but has still dou-bled (see chart 5, previous page). Chinahas the biggest share, swamping the re-gion with its own products and gobblingup Latin America’s natural resources (seebox). Two-way trade grew more than 20-fold in the ten years to 2013, and China hasovertaken the United States as the biggesttrade partner ofBrazil, Chile and Peru.

Chinese investment in Latin Ameri-ca has increased, too, though the figuresare murky because China parks much ofits capital in tax havens in the British Vir-gin Islands and Cayman Islands before investing it. According tothe UN’s Economic Commission for Latin America and the Ca-ribbean, since 2010 China has been investing about $10 billion ayear in the region. Thomson-Reuters, a data firm, says that since2000 Chinese firms have announced more acquisitions in LatinAmerica than in Africa or South-East Asia. Much of the invest-ment has been energy-related. In contrast, Japan, the biggestAsian investor in Latin America, puts most of its money intomanufacturing facilities to make things such as cars.

In the past few years Latin American exports across the Pa-

cific have slowed as China’s economy has become less dynamicand commodity prices have dropped. The growing trade gap hasgiven rise to two worries: that the region is relying too heavily onbasic exports again and succumbing to a “natural-resourcecurse”, as it has done before; and that it will take the wrong les-son from China and embrace state capitalism. Leftist govern-ments on Latin America’s Atlantic coast, such as those in Brazil,Venezuela and Argentina, which privatised heavily in the 1990s,have since moved strategically and in some cases ideologicallycloser to China.

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CURIOUSLY ENOUGH, AN American company called At-lantic has spent the past 30 years doing thriving business

across the Pacific. Based in California, it sends orders to Chinesefactories to produce small items of furniture. Its founder andCEO, Leo Dardashti, is sticking with China as a manufacturingbase despite rising costs because of the mutual trust betweenhim and his factory owners there. Buthe also believesChina andAmerica make a unique fit: “There isno country in the world thathas the buying power of the United States and no country thathas the production power of China.” If he needs 400,000 itemswithin a few months to sell in stores across America, only Chinahas the scale to provide them, he says.

He travels to China frequently, sometimesasoften as once amonth. The friendships he has established with the people whomake his goods are the foundations of his business, he says. It isnot just eye contact and smiles. “As I sit in their factory, I’m a rela-tively big buyer, but I have to be careful how I play that game. Ihave to make them like me, tell them what my values and goalsare, offer them a good deal. It’s all about negotiation.” Negotia-tion is an art he believes the leaders in Washington and Beijingshould develop in their dealings with each other, too.

Instead, they appear to be drifting further apart. As the Chi-nese see it, America is becoming increasingly bossy, and as theAmericans see it, China is becoming a bully with its neighbours,some of whom are loyal American allies. Singapore is a goodplace from which to observe this tension. It wants a strong Amer-ican presence in the region as a counterweight to China but alsotries to see things from China’s perspective. Singaporean schol-ars say one of the main difficulties with the United States is the

The future of the region

Merchants ormissionaries? The big powers in the Pacific need to be pragmatic, notdogmatic

The question is why Latin America has failed to match thesuccess of the East Asian model. Augusto de la Torre, the WorldBanks’s chief economist for Latin America, explains: “After thesecond world war the East Asian economies linked up to Japan,and in the process of getting connected they created the ‘AsianFactory’. It became a virtuous circle. The better they connected tothe world, the better they connected to each other.” Latin Ameri-

ca’s post-war experience has been the reverse: “We were con-nected to the most important growth centre, the United States.But instead of the ‘Latin American Factory’, we got dependencytheory, structural adjustment and a lot ofdisappointment.”

The World Bank says that East Asia’s poorer countries,whose GDP per person in the 1960s was a third of Latin Ameri-ca’s, have almost caught up. Between the 1960s and the late2000s their productivity growth averaged more than 2% a year,whereas in Latin America it was only just above zero. Mr de laTorre points to lackof investment as one ofLatin America’s mainproblems. Average investment rateshave been stuckaround 20%of GDP for decades, whereas in East Asia in the 1990s they aver-aged over35% ofGDP, so electricityand transportnetworks thereare now far denser. East Asia has also made huge strides in edu-cation, which has improved the quality of its workers.

Antoni Estevadeordal of the Inter-American DevelopmentBank (IDB) says the poor infrastructure has impeded trade with-in Latin America as well as the creation of inter-regional supplychains. In a recent report the IDB heretically suggested LatinAmerican policymakers should lookto EastAsia and emulate as-pects of its industrial policy, considered unthinkable in the“Washington Consensus” 1990s.

Not coincidentally, such lessons are being absorbed mostquickly along Latin America’s Pacific coastline. Four relativelyopen economies, Chile, Colombia, Mexico and Peru, in Februarysigned a landmark trade pact, the Pacific Alliance, to strengtheneconomic ties to Asia. Their combined population is 212m andthey conduct half of Latin America’s trade. They are already themost Asia-oriented in the region. Since 2004 they have signed orstarted work on at least a dozen free-trade agreements withAsian countries, with Chile leading the way.

Once Colombia has ratified the Pacific Alliance, more thannine-tenths of tariffs will be abolished and common rules of ori-gin will help encourage the development of regional supplychains, says Andrés Rebolledo, head of Chile’s internationaltrade division. The first priority is regional integration: the coun-tries hope to improve air and maritime connections and courtforeign investment to improve infrastructure links. They have al-ready united their stockmarkets.

A hard act to followBut they will struggle to match Asia’s success. East Asia’s

economic integration started organically, with copious invest-ment from Japan, and free-trade agreements came only after thenuts and bolts of commerce had been established. So far thereare few signs that big multinational investors are rushing to takeadvantage of the Pacific promise. Geography—a long, stragglingSouth American coastline versus a circle of trade around theSouth China Sea—may also be putting the pact at a disadvantage.

But other bold steps may help. Mexico, for example, hasnoted the galling failure ofNAFTA to create a manufacturing hub

anything like as vibrant as East Asia’s. It is suffering from an on-slaught of Chinese imports, including industrial componentsthat go into its own exports, so the government of Enrique PeñaNieto has embarked on far-reaching reforms to modernise theeconomy. They include measures to bolster competition wheremonopolies and oligopolies have dominated until now, such asin energy, telecommunications and broadcasting. One of the

aims is to bring down electricity costs, im-proving Mexico’s cost advantage overChina in manufacturing.

Japan has seized on Mexico’s pro-mise. Last year Nissan opened a new $2billion factory in Aguascalientes, its sec-ond in the state. New cars whirr off the

production lines at the rate of almost two every minute. Mexicohas overtaken Brazil to become the world’s seventh-largest car-maker and now exports not just to the United States but to SouthAmerica too.

But Enrique Dussel Peters, a China expert at Mexico’s Na-tional Autonomous University, says the main lesson from Asia isthat Latin American governments are not ambitious enough. Henotes that only a decade ago China was making the same num-berofcars as Mexico is producing today, but now it churns out al-most six times as many. 7

So far there are few signs that big multinationalinvestors in Latin America are rushing to takeadvantage of the Pacific promise

SPECIAL REPOR T

and interconnections. That con-nectivity has become strongeron both sides of the ocean,partly because smaller coun-tries need to link up to provide acounterweight to the bigpowersin their regions, and partly be-cause they need to tie their for-tunes to their big neighbours inorder to become indispensableto them. That is as true of South-East Asia and China as it is ofparts of Latin America and theUnited States.

In the next decade or two,these linkages are likely to be-come more trans-Pacific in na-ture, partly because the Chinesegrowth engine is slowing. EastAsian investment in the Ameri-cas will increase in a bid to getcloser to the big market of theUnited States. Japan and SouthKorea may be keen to diversifytheir trading relationships to be-come less dependent on China.A China concerned about itseconomic future could behavebelligerently. But given its inter-est in maintaining domestic sta-bility, it ismore likely to see tradeagreements with its Pacificneighbours as a way of securing that stability, much as the Euro-pean Coal and Steel Community of1951, which brought togetherGermany and France, two old antagonists, laid the foundationsfor the European Union.

America and China are also bound together by a mutualdependence. In fact, as Mr Kausikan points out, that may deepenthe strategic distrust between them. Taken to its extreme, it couldbe the Pacific’s economic equivalent of the mutually assured de-struction in the Atlantic that helped prevent the cold war fromturning into a hotone. But it is lessgrim. China, for all is assertive-ness, shareselementsofthe Western marketmodel that the Sovi-et Union did not. America and China hold strategic dialogues oneconomic and military matters. They are negotiating a bilateralinvestment treaty that American officials say is economicallyambitious for China. According to a recent poll of opinion lead-ersaround Asia by the CSIS, 83% ofthe Chinese ones thinkAmer-ica will still be their country’s most important economic partnerin ten years’ time.

If America wants to nudge China towards becoming a “re-sponsible stakeholder” in the world, helpingshore up the systemthatguarantees free trade and free seas, itmayalso have to acceptthat its own relative power in the Pacific region is in decline. Thismay mean taking potentially risky strategic decisions; for exam-ple, allowing its post-war security alliances with Japan andSouth Korea to mature into more equal partnerships. It couldalso mean allowing regional security alliances to prosper with-out America as the hub around which they revolve. If these in-clude China, so much the better.

As in all successful negotiations, both America and Chinaneed to engage in give and take. With such a spirit, the Pacific agecould create new rules and institutions fit for the 21st century. AsMr Dardashti pragmatically puts it: “We need those guys, andthey need us.” 7



2 “universality” of its belief system—the idea that there are univer-sal values such as human rights. With China the problem is itshistory, which stretches back so far it also comes close to beingseen as a universal truth.

Wang Gungwu, chairman of Singapore’s Lee Ku��ewSchool of Public Policy, says China is particularly irritated byAmerica’s sense of the immutability of its superpower status, es-pecially in a region that China has historically considered itsown sphere of influence. He acknowledges that America freedthe region from Japanese imperialism and stopped the spread ofcommunism, but in China’seyes thatdoesnotentitle it to an eter-nal hegemony in its backyard. It would like its own status as a ris-ing power to be registered. “The idea of the status quo for everand ever is so alien to the Chinese way of thinking. Throughouttheir history the only norm is change.”

Another source of tension is rules. For China and otherpartsofAsia the idea thatWestern ruleson issues like freedom ofthe seas, democracy and human rights are set in stone is anathe-ma, says Mr Wang. “Nothing is absolute, everything is negotia-ble.” The region’s history, with imperialists and missionaries ar-riving on the same ships, has made it wary of absolute values.“We understand that the Western idea of rules stems from a longlegal tradition, but practical people recognise that laws change,”he explains. In his view, America’s businessmen understandthis; its “political missionaries” do not.

Dream or nightmare?�et China is just as dogmatic, especially in its political sys-

tem, and also in its treatment of its neighbours. MrKausikan, Sin-gapore’s ambassador-at-large, attempts to justify China’s “gravesuspicion” about Western attitudes to universality, explainingthat its government is attempting to maintain internal stability ata time of unstable public opinion. For the rulers, that meanskeeping the Chinese Communist Party in power.

Mr Kausikan also accuses China of projecting a “virulentnationalism” based on supposed historical claims that is causingalarm in its neighbourhood. He asks whether China will pursuesovereignty through commonly agreed norms or by use of force.“It is this, more than any other single factor, that will determinewhether the ‘China dream’ will become the region’s nightmare.The record is mixed and China has not behaved consistently.Great powers have a responsibility to reassure that China hasonly partly fulfilled.”

As this report has argued, the Pacific is a place of networks

They need each other

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