With the recent election win by the National League for Democracy (NLD), Myanmar needs to start looking at how to address two issues that threaten to tear the country apart. Whilst there is the issue of trying to heal ethnic minority fears, this article looks to the important foreign relations issue emerging, in particular with regards to engagement with China.
Whilst there has been relatively constructive engagement with China, particularly with regards to the Belt Road Initiative related infrastructure, there have been recent murmurings within local communities that the NLD has got too cosy with China. In an economic sense, it is understandable that China is seen in a positive light, after all it has the finance to fund the country. However, what is needed is a careful reassessment of the relationship with China as the global economy shifts to a focus on the Indo-Pacific region. So what is in this “label” that is changing the narrative?
Labels are important identifiers that assure that the recipient gets what has been asked or paid for. We tend to think of labels in simplistic terms, particularly in the purchase of consumer products. After all, if the label on the jar states that we are getting 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 goes to the semantics used around a label that differentiates one from the other, for example “reduced salt”.
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”, “homophobia” and the more political motivated 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 change in momentum is often associated with a greater understanding of the issues in play.
Consider the change in the climate debate. As the science and data became increasingly inept in predicting and substantiating the narrative for “Global Warming”, this label has now become “Climate Change”. The label change has flagged the new “recipe” with the debate now more inclusive as to what affects climate change. The new semantics reflect a greater understanding of what impacts on the planet’s climate.
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 the new label, comes changed semantics that reflects a new understanding of the issues.
The first move in “changing labels“ came from China with regards its initial global economic strategy. Initially labelled the “One Belt, One Road (OBOR)”, perceptions grew that the “one” in the strategy revealed China had a centric vision of dominating land and sea trade routes. In order to deflect this attention and to promote a “win-win and common human destiny vision“, the strategy was renamed and labelled the Belt Road Initiative (also referred to as Belt and Road Initiative). This is now the only accepted label descriptor in China, with any reference to OBOR deleted from official text.
Running in parallel there has been the subtle, but significant change in labels over the last couple of years, with the former “Asia – Pacific (APAC)” being replaced by that of the “Indo-Pacific” by western aligned economies.
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 “win-lose” 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 Germany (diversification school) and Australia (decoupling narrative).
Not only is this less aggressive but 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 USA as the focal point as the enemy of the Chinese.
Furthermore, by confining the narrative to the USA’s 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 internal civil society around an easily defined existential threat.
On the other hand, the shift from the APAC to Indo-Pacific has significant external geo-political and commercial ramifications for China. The Belt 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 the exponential economic growth and increasing influence of China 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 USA. 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 here contextualises this transformation by showing the USA stretching the APAC zone towards India, importantly overlapping with the BRI at the confluence of the maritime trade routes that incorporate the Taiwan Straits, 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 to China and why Myanmar’s geographical location makes it susceptible to these changed political settings.
The 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 Straits. The BRI was to provide land entry points into the Indian Ocean, in which Myanmar was to play an important role. In particular the Kyauk Phyu port and special economic zone together with ports with rail connectivity into China is a strategic element in which the Indian Ocean is seen as a key economic resource by China as it seeks an economic gateway for China’s west.
Complicating matters for China are the movements within the major economies of Europe 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 the Chinese Communist Party’s (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 a $176 billion in FDI in the region, they now define the new trade area of the Indo-Pacific as being 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 aims of this strategy is to diversify their trade by increasing FDI and trade outside of China and to other countries more aligned to their philosophy on democratic institutions based on rules 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 East, including the East Asia Summit.
So, 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 problematical 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 USA that has 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. Furthermore, this would impact on the investment attractiveness by non-Chinese investors – and foreign investment is needed to bring economic benefit to the country by commercialising the likes of Kyauk Phyu Port for fear that the cybersecurity risks would be too high.
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 2035 Digital Standards 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 Chinas commercial ambitions as this access is denied. Exacerbating the issues, we are witnessing several companies cutting ties with China in the ICT- cyberspace world. A recent example includes the Swedish Company, Micro Systemisation AB withdraw 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. 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 US$300 billion in computer chips every year, and with their SMIC being placed on a restricted trade list, the country will have great difficulty rolling out its digital plan. After all, it does not have the manufacturing capability to squeeze sufficient transmitters onto a piece of silicon. SMIC relies on over half of its equipment supply out of the USA.
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 analyses has turned 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?
It 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 Chinese SOE’s and the digital infrastructure is supplied by the like of Huawei. Will this investment be able to integrate into other infrastructure projects that are seen as 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 lower 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 and 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.
With 40% of the Chinese people 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 as access to international markets close.
What does this mean for Myanmar?
In simple terms, the current tensions between China and nations within the Indo-Pacific region, is escalating to one in which Myanmar is going to be forced to make choices as to how they engage with China. Whilst China was once a reliable strategic economic partner, current developments suggest that a new and confident Eurasian economic block is emerging that offers a more balanced and sustainable development pathway than currently on offer by China.
Myanmar should see itself as part of this new Eurasian block and realise that Asia is much more than China and that economic and commercial success will come by engaging with the newly defined Indo-Pacific region.
