Is geo-political turbulence really so bad for our region?

One of the defining developments of our time is the increasingly fractious relationship between the US and China. No one should under-estimate the dangers posed by two nuclear-armed big powers pushing and shoving against each other. That is all the more the case for Southeast Asia which will be one of the principal arenas for that big power contest. However, before we get too alarmed, we need to assess the likelihood of outright hostilities in the first place. If that risk turns out to be fairly low –which is our base case – then what we should be looking at are the political and economic consequences of a scenario of intense competition between the big power relations that falls short of war. Such a setting is not ideal but we find that Southeast Asia could weather it relatively well and even enjoy a number of advantages.

Outright military confrontation cannot be ruled out but not the most likely scenario

As the crisis in Ukraine shows, one can never dismiss the risks of war. But, we would argue that there are several reasons why war between the US and China is unlikely in the coming few years (anything beyond that is inherently unpredictable and beyond analysis).

First, the interests of the big powers and of their leaders militate against an intentional war – if they remain rational, they will calculate that they can best achieve their goals through means that fall short of war.

The one flashpoint which could trigger a US-China war is Taiwan. Chinese leaders have insisted that the reunification of Taiwan with the mainland is not something that can be continuously kicked down the road. Some American military commanders have worried that by sometime around 2027, China’s People’s Liberation Army would have enough wherewithal to pull off a successful invasion of Taiwan even if the US intervened. But capacity and actual intention are two different things. All kinds of things can go wrong when mounting an invasion across 180 kilometres of rough waters against an island that will resist with strong American and Japanese support. A failed invasion would almost certainly cause the top leaders their jobs – the stakes are very high. China can better achieve its objective through a strategy of sabotage and emasculation – cutting off Taiwan’s economic lifelines to the mainland and elsewhere through embargos and blockades, engineering subversion within Taiwan and other grey zone tactics. Why would China’s leaders order an invasion that will almost certainly lead to war with the US when other alternatives are available?

Second, it is possible that we could suffer an accidental war. For instance, both the Chinese and the American conduct naval and air operations in the South China Sea. There already have been some close encounters that could have become unintended clashes. However, since neither China nor the US has an appetite for full-scale war, a military accident will almost certainly see the hot lines ringing and feverish behind-the-scenes actions to prevent an escalation. That still leaves the possibility of a war triggered by irrational behaviour or gross miscalculation similar to the one made by Russia in invading Ukraine. But precisely because Ukraine has just happened, its harsh lessons are fresh in the
minds of the leaders concerned.

Moreover, even though there are hotheads on both sides, the ultimate decision makers on issues of war and peace are the respective Presidents of the two countries and their inner circles. Their behaviour over the past two years reveals that it is the adults who are in charge. These leaders and officials will push ahead with measures to contain and constrain the other side but they will be careful to do so in ways that do not trigger war. That’s why, despite the many incidents and misunderstandings, the two sides continue to meet. For instance, China’s point man on foreign policy, Wang Yi met US National Security Advisor Jake Sullivan for talks over two days earlier in May. Following the talks, President Biden hinted that a thaw in relations was forthcoming. Each side also knows that they cannot win the bigger contest without allies and friends. The need to bring along allies with its strategy is also why the US has shifted from talking about “decoupling” itself from China to the more couched “de-risking” its supply chains – Europe had made it clear that they wanted a less aggressive approach.

In other words, it is unlikely that we will see a war over Taiwan or a war caused by clashes in the South China Sea any time in the next few years. The more likely outcome is for a period of intense contestation between the two big powers. What are the consequences of such a scenario?

Intense big power competition will unsettle the region …

There are many downsides from this scenario.

There will be a price to pay in terms of regional security. Southeast Asia straddles the critically important sea lanes of communications such as the Straits of Malacca and the South China Sea, which both big powers covet. China has occupied reefs and atolls claimed by Vietnam and the Philippines and built military facilities on them. Determined not to cede the area to China, the US and its allies are deploying more and more military assets in the region and are stepping up their patrols and exercises in the waters around us, with China trying to outmatch them.

The region has thus become a major arena in which the big powers are increasingly active. That makes the smaller countries here feel insecure. They have been forced to raise defence spending as a result, diverting funds away from more productive uses. The countries also face the risk that a big power may want to create divisions within ASEAN as they woo particular countries to become their close allies. A less cohesive ASEAN will be a loss for the region as a whole. There is always the fear that as the competition between the US and China heats up, one or both of them may press individual nations to take sides. Finally, there is a chance that big powers may use more aggressive tactics to gain a strategic edge in particular countries by interfering in their domestic affairs – through influence operations that turn segments of the population against their leaders, perhaps.

On the economic side, the US and China are hurling all manner of restrictions against each other in trade, technology, and investments. American actions have been particularly restrictive in semiconductors and other high-tech electronics segments which the region is exposed to. Since Southeast Asian nations have large export sectors and trade heavily with both the US and China, these restrictions will hurt the region. After all, our manufacturing sectors are intricately linked with China’s through the supply chains that global corporations have created. So, for example, as the US steps up enforcement of its sanctions, it will become more intrusive in checking on regional exports, to see if China was bypassing sanctions by purchasing restricted materials through the region.

More broadly, the world economy enjoyed immense synergies from the boom in trade as China entered the global trading system after joining the World Trade Organisation more than 20 years ago. If some of those efficiency gains are lost, the whole world economy will lose out – and major trading nations such as those in Southeast Asia could be among the biggest losers.

… but this also offers smaller nations some leverage

Put simply, it is going to be a troubled political and economic environment which will test the leaderships of the region. So far, the region’s political leaders have begun to adapt and adjust to this difficult situation. They are making efforts to bolster their internal cohesion and are rehashing their policies to mitigate these risks. They will be helped by other positive political and economic factors.

At the political level, the region is being wooed assiduously by both the big powers as well as their respective allies. Rather than having one big power dominate and potentially bully the region, we have two powers competing for our affections. That gives the less powerful ASEAN countries some room for manoeuvre – by playing one big power off against the other, for instance.

In the economic context, too, there are some saving graces becoming evident.

First, there is clear evidence of supply chains being reconfigured – with some production being relocated from China to Southeast Asia. Vietnam has been a clear winner. Of late, there is mounting evidence of an accelerated pace of such production shifts, judging from company announcements of new plants in the region. It is also beginning to look like there is a broader set of beneficiaries from the supply chain reconfiguration. Indonesia, Thailand and Malaysia are also receiving more new plants as global corporations seek to diversify away from China.

Second, Chinese companies in the export business are also seeking refuge in Southeast Asia. Feedback from the recent Canton Trade Fair showed that buyers were cutting back on procuring directly from China, prompting Chinese producers to consider moving some manufacturing to locations where US trade restrictions were less likely. Where this happens, Southeast Asia is again the clear winner. Chinese businessmen feel more comfortable in the region because the region’s culture and business practices are not alien. Moreover, Chinese investors can always form partnerships with the large ethnic Chinese communities that have been in the region for decades.

Third, both big powers are likely to step up their efforts to win friends in the region in ways that will bring more capital and other forms of assistance. We believe that China will come out soon with a revamped Belt & Road Initiative to help the region build infrastructure and develop their economies.The US has come up with the Indo-Pacific Economic Framework in response – this is still taking shape but could bring American technology and funding as well.

Ultimately, the region’s future hinges on political leadership

So long as the big powers avoid an outright conflagration, Southeast Asia should be able to contain the major threats to its political and economic security. But several other things also need to fall in place.

First, astute political leadership in each country will be key. Diplomacy will have to be nimble enough to fend off pressures from the big powers without losing their friendship. Leaders will have to manage their domestic constituencies with greater care to prevent them from becoming influenced against their own governments.

Second, efforts need to be made to revitalise ASEAN. This regional organisation is often dismissed as a talking shop. But it is needed more than ever to ensure regional cohesiveness and a unified stand against outside powers.

Third, countries in the region will also need to reach out to likeminded allies outside the region as well so that the region has a broad set of friends. This should not be difficult as countries such as India, Japan and South Korea are keen to work with ASEAN.

Thus, even as the US-China tussles create political and economic headaches, all is not lost. These challenges can be met and the opportunities created can be exploited if we adopt the right strategies.