Labels are important identifiers that assure that the recipient gets what has been asked or paid for. After all, if the label on the jar states “peanut butter”, well, we can be confident that we are getting what is stated. However, when looking beyond the label, we quickly come to realise that not all peanut butters are the same – the label has given the context, but there are differences in sugar content, preservatives, etc.
This approach has been translated into everyday socio-political activity where we find a propensity to fitting things or people into a label that is easy to identify. There are numerous labels, such as “racist”, “homophobic” and the more politically charged ones of “climate denier” and “fascist”. These labels are meant to give contextual meaning to a debate or narrative. It is therefore interesting, if not significant, that global engagement has seen a subtle shift in labels given to emerging trends and activity. Whilst this may be potential diversionary tactics, it is a clear signal that the debate on many topics is changing.
This trend in changing labels is also evident in the discussion around China and how to engage with a new and emerging China under Xi Jinping. With new labels come changed semantics that reflect a new understanding of the issues.
From the “Asia-Pacific” to the “Indo-Pacific”
The subtle, but significant change in labels over the last couple of years has been the change from the “Asia-Pacific” (APAC) to the “Indo-Pacific”. This new descriptor is having a profound impact on China’s global economic ambitions. In turn, it will translate into commercial impacts for businesses and supply chains that engage with China.
An example of such an impact is the move away from describing the move to reduce over-reliance on China for supply chains as “decoupling” to a softer “diversification” approach. It frames the debate around a softer claim of supply chain diversification, as opposed to the more aggressive decoupling call. This softer language has greater cut through with the Chinese domestic market as it incorporates a “win-win” engagement as opposed to the “zero-sum” position suggested under a decoupling narrative. Strategically, this nuanced change helps Xi Jinping in adopting a less assertive approach as he does not have to be seen taking strong action to restore Chinese pride because of a perceived external threat. This is an important consideration to consider if you want to maintain trade relations with China. Consider the difference in approach and response by China with regards to Germany (diversification school) and Australia (decoupling narrative).
Not only is this less aggressive but it reflects that China will remain an important participant in global trade. Soft diplomacy allows all parties to keep face and maintain trade relations. It also reflects a greater appreciation of how truly integrated the global economy has become.
It is interesting to note that China still encourages the use of the “APAC” geographic descriptor. It does so for two fundamental reasons. On the one hand, it wants to maintain this narrative that feeds into its domestic market by keeping the US as the focal point as China’s enemy. Furthermore, by confining the narrative to the US Western Pacific dominance, it justifies their approach to the South China Sea, and explains China’s creation of an outer island security zone. This outer island security and protection zone extends from Taiwan through to the Philippines, and Western Malaysia / Brunei. Essentially it helps galvanise the Chinese civil society around an easily defined existential threat.
On the other hand, the shift from “APAC” to “Indo-Pacific” has significant external geo-political and commercial ramifications for China. The Belt and Road Initiative (BRI) entry into the EU zone, coupled with China’s increasingly assertive approach to diplomacy and trade, has seen a re-alignment of strategic partnerships. Fundamentally, there has been a shift from the previous dominant focus on the Asia-Pacific trading region to a greater understanding that a new super-economic zone has emerged, as the BRI shifts trade from the Asia-Pacific axis.
The BRI has exposed China’s exponential economic growth and increasing influence over the last decade, so much so that China has come to be regarded as the only great power that could threaten the status of the US. China is now being described as a revisionist power that is striving for regional hegemony in the Eurasian trading zone. As such, issues are translating from being regionally-specific to those that have a global impact.
The map below contextualises this transformation by showing the US stretching the APAC zone towards India, importantly overlapping with the BRI at the confluence of the maritime trade routes that incorporate the Taiwan Strait, the South China Sea and entry into the Indian Ocean. It also gives an understanding of why the QUAD (USA, Japan, India, and Australia) is seen as a threat.
This map also highlights a key vulnerability for China, namely the maritime choke point in the region of overlap between the Indo-Pacific strategy and the BRI. One of the main drivers for the BRI was to enable China to keep its maritime routes secure and find a means by which it could bypass the likes of the Malacca Strait. The BRI was to provide land entry points into the Indian Ocean. The pairing of ports with rail connectivity is a strategic element in which the Indian Ocean is seen as a key economic resource in getting an economic gateway to China’s West.
Complicating matters for China is the movement within the major European economies to build an EU-wide strategy and approach to the Indo-Pacific. Essentially, what they have done is extend the Indo-Pacific map to incorporate Europe and the East coast of Africa. Whilst still in its infancy, it is taking shape with the likes of France creating the new position of “Ambassador to the Indo-Pacific” to counteract CCP growing influence in the region. Based in Paris, the ambassador’s role is to co-ordinate diplomatic activity in the region. With France having $176 billion in FDI in the region, they now define the new trade area of the Indo-Pacific as spanning from the coast of Africa to the Coral Sea, driven by an economic gravity shift from the Atlantic to the Pacific.
Germany has also moved from shaping its Asian strategy around China and announced it will now focus on building stronger relationships with the likes of Japan, Korea, India, and Vietnam. It hopes to have a comprehensive Indo-Pacific strategy in place by 2022. The aim of this strategy is to diversify trade by increasing FDI and trade outside of China, to other countries more aligned to their philosophy on democratic institutions based on the rule of law and cooperation, and not the law of the strong and powerful. They set their first Indo-Pacific guidelines in September this year with a focus on inclusivity, wanting to carve out a more active role for the EU in the Far East, including the East Asia Summit.
What are the potential repercussions of this label change?
These are already being felt, particularly in cybersecurity and associated digital platforms. Huawei and its 5G platform have become problematic, with countries that had previously accepted Huawei 5G as part of their networks now replacing it with Ericsson or some other alternative. It is not just the US that have banned Huawei 5G, but also Australia, Japan, Germany, Sweden, and Canada. This will present significant trade challenges for those wanting to engage with BRI projects. With supply chains working towards digital integration to create smart systems, and Huawei being the 5G network provider, there will be parallel trading systems as the respective digital platforms do not communicate with each other. This would add extra cost as two digital platforms will have to be managed.
Furthermore, the emerging digital divide has exposed weaknesses in China’s ambitions to be the global leader in the technology space. In particular, China expected economic growth through its Digital Standards 2035 plan that would set global standards for IoT, AI and 5G. Whilst China has shown leadership in the digital space, it has relied on access to Western-supplied intellectual property. This could derail China’s commercial ambitions as this access is denied. Exacerbating the issues, we are witnessing several companies cutting ties with China in the ICT and cyberspace world. A recent example includes the Swedish company Micro Systemisation AB’s withdrawal from tenders to supply security and surveillance software to China. Other companies in the same position include X-Ways Software Technology AG in Germany and Blackrainbow Ltd from the UK.
The issue of “smart trading systems” in which China can participate in global trade is looking increasingly problematic too. There is a realisation that China has a fundamental weakness in semi-conductor manufacture. China may well build phones and computers, but it imports the chip brains. It imports approximately $300bn in computer chips every year, and with their supplier SMIC being placed on a restricted trade list, the country will have greater difficulty rolling out its digital plan. It does not have the manufacturing capability to squeeze sufficient transmitters onto a piece of silicon. After all, SMIC itself relies on the US for over half of its equipment supply.
Perhaps this explains why China has recently asserted its claims over Taiwan. Taiwan Semi-Conductor Manufacturing is a leader in this important technology but has taken steps to move manufacturing into Vietnam rather than China. Their Universal Global Technology Division is moving the electronic board manufacturing and assembly plant to Haiphong – the home for both Samsung and Intel manufacturing plants. Also moving into this Vietnamese enclave is Taiwan’s Pegatron, a manufacturer of electronic and communication equipment, electronic components and circuit boards for Lenovo, Apple, Microsoft, and Sony.
What is also clear is that the evolving Indo-Pacific has turned its attention to preserving economic relations with China through a range of targeted mitigation measures. Just as China has a “white list” that determines what industries are open to FDI, the EU is developing its own “green list”. This list will identify what industries are safe and those that would require mitigation measures. Essentially, industries that pose security risks are not on the “green list” of safe investments. This analysis reveals that 46% of current Chinese FDI into Europe do not make it onto the green list as these have a deemed risk around sensitive individual data, strategic infrastructure, and digital intellectual property. Interestingly, just over 80% of EU investment into China is regarded as benign, highlighting an imbalance in trade profile.
What does this mean for business?
This is creating a real dilemma for those wishing to invest in BRI projects as there is a greater need for deep dive analysis of what the investment target is. The questions that need to be asked, include: who am I really investing with – a private entity or a Chinese SOE that is not on the green list? For example, participating in a smart city project around a port in which the port and infrastructure is owned by a Chinese SOE and the digital infrastructure is supplied by the like of Huawei: will this investment be able to integrate into other infrastructure projects that are deemed safe?
It is creating significant dilemmas for those businesses in the aerospace, technology, and construction markets.
What does this mean for China?
The BRI is seen as having a key role in supporting China’s domestic economy, particularly in providing supply side structural reform. It is aimed at supplying structural adjustments by correcting distortions in production allocation, the objective of which was to move away from debt-stimulated growth to consumption growth. Remember this economic policy was to cut excess industrial capacity and lowering the cost for business…
Whilst China projects that this change in geo-strategic direction will not harm its economic recovery and points to the current GDP growth figures, it is trying to mask the fact that the economic recovery is not even. Growth is driven by three main coastal centres, namely Beijing, Shanghai ad Guangdong. The public image of queues to buy luxury items in Shanghai is more a false start than a sustainable recovery. The lingering structural weakness in consumption outside of these centres complicates Xi Jinping’s push to curb the country’s dependence on overseas markets, hence the brand new “dual-circulation” concept.
With 40% of the country’s active population earning less than 1,000 yuan a month, the changed “label” with its new “recipe” for engagement with China may well create a more circumspect China or may well be the catalyst for domestic social unrest as employment opportunities dry up while access to international markets close.
Picture credits: MonkeyLearn.com / map: bilaterals.org
Be First to Comment