Getting it right

 

US-china trade needs to improve as much as their bilateral relationship deserves much better, but not at the present rate.

Auto ambition: With limited competition abroad but hypercompetition at home, China’s EV industry has powered ahead. — AFP

T

HE constant stream of major global events can be disorienting, particularly when their consequences spin off to produce secondary effects.

Worse, self-interested politics enters as a disabling narrative to make factual understanding more difficult. How to make sense of all this?

One way is to identify the root causes and critically analyse how they develop and proceed. Factual accuracy in descriptions and definitions always helps, while imprecision makes everything more difficult.

Much relates to a rising China and the state of US-China relations. With the world’s biggest economies, theirs is the most critical bilateral relationship for the world and also the most politically fraught. 

In 2004 China displaced the US as Japan’s main trade partner. The following year it displaced the US as the world’s biggest consumer market.

In 2006 the EU became China’s biggest trade partner while China became the EU’s second-biggest. In 2009 China displaced the US as Africa’s main trade partner, and in 2010 it beat Japan as the world’s second-largest economy.

China’s external trade covered a wide range of goods and services as its productive forces gained critical mass. In the process, industrial clout came not simply from resources and scale but also strong production ecosystems and supply chains, including a skilled workforce.

China quickly developed as the “world’s factory” with the Global North’s industries choosing to relocate production there. They flocked to establish factories in China offering the best returns on investment.

But while foreign companies retained older technology like internal combustion engines (ICE), China prioritised electric vehicles (EVs) to cut air pollution and dependence on imported oil. There was no domestic oil lobby to derail EV development, only government encouragement instead.

With limited competition abroad but hypercompetition at home, China’s EV industry powered ahead. That meant a quick and considerable lead in technology and marketing overseas.

In 2009 China surpassed the US as the world’s largest automobile market. This spanned both ICE vehicles and EVs, with a muted but growing market for the latter.

In 2020 China displaced the US as the EU’s top trading partner. That same year it acquired the world’s largest foreign exchange reserves, developed the finest fintech, and had the most companies listed in the Fortune Global 500.

China’s auto production was booming, exploding into a global market hungry for sophisticated yet affordable vehicles. China fulfilled that need better than any other country.

In 2021 Chinese auto exports surpassed South Korea’s, and the following year it displaced Germany as the world’s second-biggest exporter. Within months China beat Japan as the world’s top auto exporter.

Much the same is happening with other sectors, if at different growth rates. China continues rising through the rapid development of multiple industries, particularly when several foreign markets remain unexplored or under-served.

Western automobile manufacturers in China felt a need to work more with Chinese companies, particularly on EVs and hybrids. They prefer joint ventures to discriminatory tariffs or sanctions on Chinese vehicles from their governments.

Yet last April US Treasury Secretary Janet Yellen visited China to complain about “excess capacity” and “overproduction”. It was more a political point than an economic argument.

Excess capacity is surplus productive capability over and above what is needed or appropriate. Overproduction is the additional goods produced and left idle because of insufficient demand.

As the world’s factory with regional markets still untapped, China has no excess capacity or overproduction. High Western tariffs to stifle demand may create a semblance of either, but artificially inducing a situation to accuse Chinese industry of it is dishonest.

Sometimes dumping happens with a specific commodity temporarily, typically for an intermediate or upstream item. But that is different.

After Joe Biden’s administration acted against Chinese EVs, batteries and solar panels, they shifted to markets in Russia, Latin America, Central Asia, Africa and South-East Asia. China is a global producer, and since there is no global overcapacity or overproduction, it is not engaging in either.

Chinese industry’s ultra-competitiveness seriously challenges US industry, notably in the latter’s obsolete business models. Regaining US global competitiveness requires extensive retooling, not distorted narratives.

From 2011, China has consistently been the world’s top patent applicant country. Each year it graduates more STEM students than the US population has in total, having produced the most STEM PhDs every year since 2007.

In 2021 China beat the US in its national share of published high-impact AI papers. In the same year it also displaced the US with the highest national net worth.

Such data from established Western sources also noted in 2023 that China had seven of the world’s top 10 universities conducting leading scientific research. Last year China had six of the world’s top 10 STEM institutions.

The US is now denying students from China study visas. America would be greater in training more American students without restraining others who pay to be there.

By Bunn Nagar,  Director and Senior Fellow of the BRI Caucus (Asia-Pacific), and Honorary Fellow at the Perak Academy. The views expressed here are solely the writer’s own.

Engagement is vital

 

Chinese Coast Guard vessels fire water cannons towards a Philippine resupply vessel Unaizah May 4 on its way to a resupply mission at Second Thomas Shoal in the South China Sea in March. — Reuters

THE South China Sea is a bustling waterway with growing freight and naval passages, combining widespread commercial and military interests.

More than 80% of world trade exceeding US$5 trillion (RM21.67 trillion) in value traverses these much-contested waters each year, fusing high economics with heated geopolitics.

Not least, the South China Sea sees a convergence of intemperate conduct by some claimant countries alongside some hard-nosed commonsensical prudence. Most claimants to these waters including Malaysia opt for the latter approach.

Brunei, China, Malaysia, Philippines, Taiwan and Vietnam are the contending claimants to part or all of the Spratlys, a group of rocks, reefs, shoals and other maritime features in the South China Sea.

Indonesia and China have rival claims to the Natuna Islands at the southern end of the sea, on the cusp of the Natuna Sea. Indonesia has renamed the area the North Natuna Sea, but whether that helps solidify its stake is unclear.

Among Malaysia’s claims are Luconia Shoals, at the mid-point between Sarawak’s shore and the fullest extent of Malaysia’s Exclusive Economic Zone (EEZ) 200 nautical miles from shore.

On August 29, the Philippine Daily Inquirer newspaper reported that China had sent a diplomatic note to the Malaysian Embassy in Beijing protesting Malaysia’s oil exploration activities at Luconia Shoals.

Such official notes between governments are nothing new, but always confidential or classified. How it leaked for the Inquirer to expose it to the world should be investigated, and Malaysia is doing that.

Context can help explain the newspaper’s motivation. Among all the claimant parties, the Philippines backed by its US ally’s military forces is the most assertive in trying to face down China on the high seas.

Until the first half of this year, Vietnam seemed to be an informal partner of the Philippines in confronting China over its claims. Then after an abrupt change of President and a Deputy Prime Minister, Vietnam warmed to China again and the Philippines was left without an Asean partner.

Exploiting the release of China’s diplomatic note could provoke Malaysia, or some Malaysians, to seek a tougher line with Beijing.

The news report described China’s mild note to Malaysia as a “warning”, just when China and Malaysia are on the best of terms marking the 50th anniversary of their diplomatic relations this year.

Rival claims between China, Taiwan, Vietnam and the Philippines are more conflated with one another than with Malaysia’s and Brunei’s limited claims further south. Philippine claims may be more troubling for Malaysia because of its on-off claims to Sabah and the implications on maritime territory off Borneo’s north coast.

On Dec 12, 2019, Malaysia filed its claim to an extended continental shelf with the UN Commission on the Limits of the Continental Shelf off northern Sabah. Both China and the Philippines were upset, but Manila displayed far more drama.

Beijing sent a delegation to Kuala Lumpur to seek clarification. In an unofficial capacity, I explained that Malaysia’s act was consistent with the UN Convention on the Law of the Sea (Unclos), which China and Malaysia had signed and ratified.

The delegation asked follow-up questions, took notes, and left without any complaint, argument or “warning”. The Philippines was particularly stung because Malaysia’s move undermined its claim to the entire Kalayaan Island Group between northern Sabah and southern Mindanao, and to Sabah itself, both of which Malaysia rejects.

The Marcos Jr government is not pressing Manila’s claim to Sabah, relegating it to a “private matter” among Sulu claimants. However, as long as their illegitimate claim to Sabah is not fully revoked and annulled, Philippine-Malaysia relations will remain constrained and their rival claims in the South China Sea will stay complicated.

Manila’s confrontational approach towards China is unlikely to gain traction from other Asean nations favouring pragmatism on at least five key issues.

First, the South China Sea disputes should see a conclusive resolution sooner or later, but preferably sooner rather than later.

Second, that resolution must be political and diplomatic, not military. There can be no military “solution” of any kind, so posturing on the high seas makes any resolution harder or impossible to achieve.

Third, naval brinkmanship begets naval brinkmanship. Residual goodwill, if any, disappears while the prospect of a peaceful settlement diminishes.

Fourth, avoiding force and confrontation in seeking a solution does not mean abandoning the search for solutions. Instead it reflects a thoughtful maturity enabling real solutions to be reached jointly, fully consistent with Asean’s Treaty of Amity and Cooperation that claimant parties already accept.

Fifth, talking to another claimant is to engage the other party in meaningful discussion. It does not imply accepting the other party’s rival claims unconditionally.

China’s nine-dash line in the South China Sea began as an 11-dash line of a 1947 official map by the Nationalist Government under Chiang Kai-shek’s Kuomintang Party. It lost the 1949 civil war and escaped to Taiwan, whose 11-dash line today still claims virtually all the South China Sea.

In 1952 Vietnam negotiated with China to remove two of the 11 dashes close to its coast. Later Taiwan’s provocations resulted in Beijing declaring a 10th-dash line off the island’s east coast but not in the South China Sea.

China’s nine-dash line claim covers such features as banks, cays, reefs and shoals in the area but not the international waters between them. Two important lessons from these developments are clear.

One, peaceful negotiations can result in a revision of the precise scope of China’s maritime claims. The Taiwan Strait and Taiwan, which claims more of the South China Sea than China, are “more core” to Beijing than the legacy claims of lines whose exact coordinates Chinese cartographers themselves are uncertain about.

Two, confrontations are much more likely to worsen the situation. In the headlong rush into military posturing threatening a war with no winners, the choice of which is the better, saner approach is obvious enough.

 Bunn Nagara is BRI director and senior fellow as well as Perak Academy honorary fellow. The views expressed here are solely his own.

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