PacNet #38 – Why America opposes the Belt and Road Initiative (BRI)?—A second look

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As US-China relations decline to their worst state in over 50 years, it’s important that both sides understand fully the importance of their respective differences. US opposition to Xi Jinping’s signature Belt and Road Initiative (BRI) is commonly understood in China and elsewhere as a competition between the two powers for economic advantage and accompanying international influence. This line of assessment is valid as far as it goes but gives little attention to a wide range of factors in the BRI—and related Chinese statecraft employed in support of the initiative—that Americans deem seriously objectionable.

Some of these factors concern newly prominent unconventional Chinese actions and levers of influence abroad that were heretofore disguised, hidden, denied, or otherwise neglected or unappreciated by foreign specialists assessing Chinese foreign relations. The unconventional Chinese actions and levers of influence have been featured in investigations carried out by US and other government agencies and respected US and foreign think tanks. What the investigations show is that the BRI, despite Chinese rhetoric to the contrary, is part of a wide-ranging effort by the Chinese government to undermine the many interests of the United States and its allies and partners who stand in the way of China’s determined international ascendance, under the rubric of the BRI and other means.

Those interests include a) the rule of law; b) the rights of small nations seeking to avoid dominance in contested issues with large nations; c) transparent, free, and fair economic dealings in line with accountable governance; and d) popular political rights, religious freedom, and non-discrimination against minorities.

BRI challenges America

Legitimating China’s growth model, Huawei expansion—Beijing has succeeded in having the BRI widely endorsed by, among others, the UN secretary general, playing a prominent role in the two China-hosted international forums on the BRI in 2017 and 2019, and by Italy becoming the first of the G7 countries to join BRI in 2019. Meanwhile, the most important Chinese company associated with the BRI, Huawei, is advancing from a strong base among developed countries, seeking a leading global position.

Such endorsements of the BRI and advancement of Huawei are major problems for Americans who target China’s unfair economic practices. They aver that Beijing’s surplus capital for financing BRI deals has come as a result of China’s neo-mercantilist practices, marking the latest stage in a three-decade long effort using state-directed development polices which plunder foreign intellectual property rights and undermine international competitors. The profits flow into efforts to achieve dominance in major world industries, build military power, and support the BRI in order to secure China’s dominance in Asia and world leadership. They support companies like Huawei in their attempt to dominate international communications enterprises.

Broader international endorsement of the BRI and the expansion of Huawei would legitimate the longstanding negative Chinese economic practices. They would make it even harder for the United States to counter the many negative features of Chinese practices for US interests in the existing international economic order. That order is viewed as under serious threat coming from determined Chinese efforts to weaken and undermine restrictions on the egregiously mercantilist state-capitalism prevalent in China today.

BRI and corruption—The BRI is not a multilateral organization. Its basis is bilateral agreements between China—and Chinese firms—with various countries and their firms. These agreements are not transparent. Corruption is a serious problem in China, but it’s even worse in many developing countries. Chinese firms and supporting Chinese government representatives repeatedly work effectively with corrupt foreign leaders seeking mutual advantage, which comes at the expense of the country’s broad national interest.

A comprehensive study by the Asia Society of China’s BRI in Southeast Asia recalled the extraordinary scale of corruption in the Razak government in Malaysia making deals with enormous payoffs in very expensive Chinese projects in the country. It said the Malaysian case was an exception only in that corrupt practices were exposed, concluding “the pervasive use of bribery, cost padding, and kickbacks was also indicated in numerous other BRI projects in the region.” Studies by the International Republican Institute, the Center for American Progress, the Center for New American Security, the German Marshall Fund and many others came to the same conclusion in other parts of the world. Such practices undermine the international status quo, which have featured strong US-led efforts to reduce corrupt practices which weaken good governance and disadvantage the public interest.

The BRI supports authoritarian rule—Many corrupt cases in the BRI involve Chinese dealmakers and authoritarian “strong man” leaders seeking to advance authoritarian rule. Examples included Cambodia, Venezuela, many states in Central Asia and the Middle East, Sri Lanka, Montenegro, and arguably Serbia, the Maldives, Ecuador, the Philippines, and elsewhere. Such practices run against US interests in good governance with accountability to the people of the country. They promote an alternative international order that accommodates leaders who suppress the rights of their people for the sake of maintaining their power.

Authoritarian rulers often are keen on Huawei, Chinese communications and surveillance technologies and related equipment for use in controlling their populations. Some also adopt Chinese journalistic practices that serve to influence their people to support authoritarian rule. China in turn benefits from the sales, and Chinese representatives also gain much greater access to and a degree of control over the communications, surveillance, and media of the recipient country. The situation provides opportunities for Chinese espionage.

BRI fosters dependency, leverage and control—Beijing commonly uses BRI agreements to build economic dependence. The Chinese agreements often result in unsustainable borrowing. Debtor countries are more accommodating regarding Chinese demands for equity (e.g., land, ports, and airfields) and/or Chinese requests for access to military facilities or other favors. Salient examples are Cambodia, Djibouti, Ecuador, Ethiopia, Laos, Malaysia, the Maldives, Myanmar, Pakistan, Serbia, Sri Lanka, and Venezuela. The disadvantages for the United States are that Chinese actions foster a world order at odds with prevailing rules, with China free to manipulate vulnerable states for its own advantage, leading to economic stalling of these countries that will require costly intervention by existing international economic institutions.

Other Chinese BRI leverage disadvantageous for the United States comes as BRI participant states often rely heavily on trade with China. They are well-aware they need to defer to China on sensitive issues given Beijing’s long record of putting aside or manipulating WTO norms to use trade dependence as leverage in order to compel the country to meet China’s demands on a variety of policy issues. Meanwhile, Huawei and other firms’ expensive and complicated communications and surveillance systems along with Chinese provided hydro-electric dams and port operations cause recipient countries to rely ever more on Chinese businesses for management and maintenance. Such connections make the Chinese ties difficult and expensive to replace by another provider, adding to reasons for recipient states to defer to China on sensitive issues.

Conclusion

The US opposition to the BRI reflects a substantial set of differences with China, not just an issue of economic competition. Yet, there is no easy answer for the United States in countering the Chinese challenges as Beijing’s BRI advances its sway and finds welcome, notably from many authoritarian and/or corruptible leaders.

Robert Sutter (sutterr@gwu.edu) is Professor of Practice of International Affairs at George Washington University, USA. His most recent book is The United States and Asia: Regional Dynamics and Twenty-First Century Relations: Second Edition (Lanham MD: Rowman & Littlefield 2020).

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PacNet #35 – India: The Solution to Australia’s Reliance on China?

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An earlier version of this article was published by the Australian Institute for International Affairs.

Australia would benefit from an increase in both economic and strategic ties with India. Strong trade and closer ties with India would help ease Australia’s economic and political vulnerability to China. Indeed, Prime Minister Scott Morrison’s 2020 plan was initially to travel to India to revitalize negotiations for an Australia-India economic agreement, however the bushfire crisis put a halt to the trip. According to DFAT, two-way trade between Australia and India has grown in value from $13.6 billion in 2007 to $30.4 billion in 2018. Negotiations for a bilateral agreement between the two countries started in May 2011 and there have been nine rounds of negotiations so far, the latest of which was held in September 2015. While there are no concrete plans yet to reschedule the meeting between Morrison and Indian Prime Minister Narendra Modi, given the travel challenges presented by Covid-19, the governments should look to restart negotiations as soon as possible.

Australia’s China Vulnerability: How India Can Help

Australia’s economy is heavily reliant on China, which continues to be Australia’s largest two-way trading partner, accounting for around a quarter of total trade. While Australia has benefitted from Chinese demand, such large dependency has also left it in a vulnerable position. Whenever China is negatively impacted by a global economic shock, Australia is exposed to such impact.

This became evident with the ongoing US-China trade war. In August 2019, the Australian stock market slumped because of the trade war. Even though Australia was not involved, it still felt the effects of the trade war. It should be noted however, that at times the Australian economy has been able to benefit in certain areas from the ongoing battle. Nonetheless, this is only a short-term benefit, in comparison with the more serious long-term consequences to come. Former senior economic officials from both Australia and the US believe that the Australian economy will further have to suffer because of the trade hostilities.

Politically, the economic dependency also puts Australia in an awkward position in confronting the US-China dilemma. Australia is forced to take sides between economic and defensive dependency, in which both choices alone present considerable disadvantages. Australia must balance its relationships with a country on which it is heavily reliant economically for crucial exports (China) and a country on which it has relied for security and defense since the fall of Singapore in 1942 (the US). Both security and economic wellbeing are vital components of a state’s survival, so being forced to choose one inevitably means missing out on the other.

To counter this, Australia needs to increase its competitiveness by expanding its export market opportunities. Currently, Australian trade relies on a minimal number of commodities to a small number of critical trading partners. Australia needs to diversify its trade partners and expand its export base, which is where India can help.

India is currently Australia’s fifth largest export partner and presents a lucrative option for Australian exporters to diversify. By 2027, India’s population is projected to overtake China’s. By 2030, India is expected to become the world’s third largest economy, and the second largest by 2050. At the end of this decade, India and China will be on par when it comes to potential export markets.

While Australian trade with India has grown steadily, there is much more potential for export market access. However, India has notably high trade barriers and low ease of doing business, especially in areas such as contract enforcement and property registration. An economic agreement would help to reduce obstacles for Australian exporters.

Strategic Benefits of Closer Ties with India

Economic relations aside, closer ties also present strategic political benefits. India shares more in common with Australia than China. India and Australia are federal democracies, former British colonies, and English is the primary language of both foreign ministries. These similarities go a long way in ensuring smooth diplomatic communication between both governments, something which has been an obstacle in the Australia-China relationship.

India has a strong relationship with the US, as was evident in the recent state visits by Modi to the US and President Trump to India. Australia wouldn’t have to worry about taking sides should India be in the picture. Instead Australia could use this to their advantage and work in a collaborative relationship with both countries.

Despite the clear importance of India to Australia, Australia is still very much focused on China. China accounts for over 30% of Australian exports, whereas India accounts for just 5. China was mentioned 112 times and had its own sub-chapter in the 2017 Foreign Policy White Paper. By comparison, India was mentioned just 60 times. The Australian foreign policy community commonly cites the “Rise of China” but India too should be viewed in the same way. India is experiencing a geopolitical rise in the Indo-Pacific. Similar to the increase in Chinese influence within Pacific Island countries, Australia tends to forget India too is playing this game with other countries in region, much to the displeasure from Beijing.

The decade ahead will see increased importance in the space race and cyber-security, both of which India looks to play an active role. India has demonstrated its similarity with China in terms of its rising power status and strategic importance. Australia has yet to recognize this and its low prioritization of India, in favor of China, is not in Australia’s strategic interest. India’s global rise presents Australia a pivotal opportunity to change economic and strategic dependence for the better.

Adil Cader (adilacn1@gmail.com) is a Pacific Forum young leader and is on the Perth US Consul General’s alliance managers committee. He has previously worked at the Australian Mission to the UN in New York and has been involved with various think tanks. He holds two masters degrees in international relations and international law from UWA. His interests are Australian foreign policy and the impact of soft-power diplomacy.

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PacNet #32 – China’s Post-Covid Geopolitical “Either/Or”

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An earlier version of this article was published in the Nikkei Asian Review.

As the coronavirus crisis continues to reshape geopolitical contours and dynamics, the rivalry between China and the United States has deteriorated markedly. Divisions over China’s re-emergence as the first-in and first-out of the Covid-19 ward have thereby deepened. At issue is whether China’s virus-fighting assistance and its post-Covid position in the world is accepted or resisted. The either/or proposition of whether “you are with us or against us,” not long ago admonished by Washington, is increasingly coming from Beijing.

Three distinct phases have characterized the ongoing Covid-19 pandemic. The first was whether other countries suffered “with” or “against” China. As the world watched with shock and awe in January and February, and while the Chinese government boldly locked down swathes of its vast territory like a turnkey operation, some governments imposed early travel restrictions on China, led by Australia and the US. For Southeast Asia, a critical battleground in the China-US faceoff, Singapore, Indonesia, and Vietnam tightened travel rules quickly, whereas Cambodia, Laos, Myanmar, and Thailand maintained road and air transport routes with China well into March. These four countries in mainland Southeast Asia have depended on China for tourism, trade, investment, and superpower support in the face of Western criticisms against human rights and authoritarian proclivities.

A similar pro- and anti-China wedge has been evident in the West. As China exerted and stabilized virus control from mid-March, the pandemic went on a rampage in Europe and the US. Global coronavirus tallies became a league table of sorts, not only for public health management but also the ability of each afflicted country to overcome an external enemy. China began at top spot but soon gave way to the US and European countries.

This second stage was about whether other pandemic-ravaged countries accepted China’s assistance and advice through its so-called “coronavirus diplomacy,” as Beijing began to export its medical equipment, expertise, experience, and largesse. To date, more than a hundred countries around the world have received China’s anti-virus overtures with varying degrees of enthusiasm. European countries that are participants in China’s Belt and Road Initiative, such as Italy, took in Chinese aid. Southeast Asian governments have broadly welcomed Chinese medical gear and advice but more so among the mainland countries, especially Cambodia and Laos.

But some countries have pushed back hard. Spain and the Netherlands, for example, declined what they deemed “defective” Chinese test kits and face masks. Sweden, with its own approach of building “herd immunity,” closed the last of China’s Confucius Institutes. On the other hand, President Trump labeled Covid-19 the “Chinese virus,” questioned Beijing over virus misinformation, and suspended the US budget contribution to the World Health Organization, which is accused of conniving with Chinese authorities. Australia went a step further and called for an independent investigation into China’s virus mismanagement and the WHO’s role in it.

As partial re-openings take place in various countries from May, the third phase comes into play. The sharp economic contraction around the world will bite all economies hard but China’s centralized rule and large domestic market may give the country some additional room to maneuver. If the weaknesses of the US and Europe in the 2008-09 Global Financial Crisis enabled China’s launch to superpower status, the 2020-21 period could lead to solidification should China’s economy rebound quickly. Even though its growth this year will be much lower than forecast, China may come out of Covid-19 more intact than the other established major powers because it has suffered earlier and recovered faster.

China’s new phase of ascendancy will line up the international community between those nations that recognize China’s pre-eminence and others that resist it. In an ideal world, the coronavirus crisis would have galvanized international cooperation, led by China and the US, to fight against a common enemy. But instead, the virus has worsened pre-existing geopolitical tensions.

As the coronavirus blame game between the US and China intensifies, an open conflict between the two superpowers is more plausible than at any time in recent decades. China, for example, has expanded its claims in the South China Sea by setting up administrative regions in the face of Vietnam’s opposition, while the US and others are preoccupied by the pandemic. Nine plaintiffs so far in the US, including the state of Missouri, have filed lawsuits against China for its role in not preventing the spread of the coronavirus, and the Trump administration is alarmingly fingering China as the culprit for America’s woes, charges that can degenerate into a “casus belli” if conditions take turn for the worst.

Naturally, China is defensive regarding what it sees as a global scapegoating and a concerted drag on its geopolitical position. Moreover, China’s economic slowdown also will put President Xi Jinping under pressure at home ahead of the Chinese Communist Party’s centennial anniversary next year, while Trump faces election-year challenges. Both leaders will have incentives to boost nationalist inclinations and domestic popularity by finding outsiders to blame for internal problems.

Profound crises, such as imposed by the coronavirus, often lead to cathartic changes. Instead of more tension and potential conflict, Covid-19 may also force structural reforms and adjustments at home in both the US and China in a way that realigns their interests abroad. For example, Trump could lose the election this year, while Xi could be forced out or pressured by CCP cadres to take a different tack, resulting in changes away from confrontation towards peaceful co-existence and a revamped international order that satisfies both, with a bigger space for China and enough of a role for the US. While such a scenario and others based on shifting domestic dynamics that lead to more international cooperation may seem farfetched, the alternatives of untenable tension and geopolitical showdown are infinitely more detrimental to all parties involved.

Thitinan Pongsudhirak (Thitinan.P@chula.ac.th) teaches at Chulalongkorn University’s Faculty of Political Science in Bangkok and directs its Institute of Security and International Studies.

PacNet commentaries and responses represent the views of the respective authors. Alternative viewpoints are always welcomed and encouraged. Click here to request a PacNet subscription.

PacNet #29 – Post Covid-19, the US-China Rivalry Will Only Get Worse

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A version of this was originally published as one of a series of regional commentaries commissioned by the Australian Committee of CSCAP on Asialink Insights (University of Melbourne).

While it’s become commonplace to say that the Covid-19 crisis will lead to a “new normal” in international affairs, it’s not at all clear what that means or indeed what “normal” has been in recent years. Some commentators are seeing the crisis as a “game-changer,” but that is far from certain—the tendency once the crisis has past may well be to simply lapse back into old habits and patterns.

In some areas, patterns and attitudes that are already evident will be accentuated. To take one example, those who have been suspicious of China will have even more reason to be suspicious, while those who have been excusing China and overlooking its negatives will have even more excuses to offer.

Some trends that were already underway will be accelerated. This is so regarding US-China trade. US business was already turning away from China. Xi Jinping’s policies have been discouraging Americans. China’s business culture is increasingly one in which “rule by law” is prevailing over “rule of law,” and anyway market forces have been working against China—it is becoming more expensive. This trend away from China towards other markets and suppliers is likely to be accentuated as China looks less attractive in the wake of the pandemic and others, like Vietnam, where the business culture at this stage is a lot better, become more attractive. In fact, I have been saying for a while now that “China is the present, Vietnam is the future.”

There is an argument to be made that in the commercial world globalisation will be eroded, and it has been in some ways. It is likely, for instance, that as a result of the pandemic the stock-piling of goods judged to be strategically important will become more common at both the national and business levels, and it is likely that more of these sorts of goods will be manufactured at home rather than imported. But at the end of the day business will go where it’s cheapest, and this is likely to lead to more manufacturing opportunities not just for Vietnam but also for Bangladesh, Indonesia, and (for the US) South America as more companies pull out of China.

It’s hard to see the US-China relationship going any way but backwards. This is usually the case in an American election year. This year, with China’s failings more evident and with the pandemic hitting the US so badly, the political class will focus even more on China and in particular the administration will want to blame China.

As to the future of American foreign policy, a lot depends on the result of November’s presidential election. Historically it has been said that US foreign policy is defined more by continuity than change, but that rule will not apply this year: the policies of the two candidates in this election are very different. The pundits are of course making their predictions and many see Trump being re-elected, but this is only April and November is a long way away.

It is important here to understand the context of current US policy making in respect of China. Two distinct views are in play. President Trump sees the relationship almost exclusively in economic terms, transactionally, and seeks instant gratification from it. It doesn’t matter to him that the ruling party in China is communist. Secretary of State Mike Pompeo, on the other hand, takes an ideological view: his concern is no longer just about China’s behaviour, it is much more about the fact that the regime is communist. Reflecting this, US embassies have been instructed to stress in all their dealings with their hosts that China is being ruled by a Communist Party. This can turn a struggle for influence into a new ideological Cold War with little opportunity for compromise or cooperation.

Some of China’s diplomacy has been effective as the crisis has developed, extending as it has as far afield as Europe, Africa, and the South Pacific. But it is also being seen for what it is – an attempt to offset the cost of China’s early failings as the pandemic developed. As well, some of what China has done has not gone well—for example, ventilators sent abroad didn’t work. And of course the claim that the US military brought the virus to Hubei was not only silly in itself but triggered a “blame game” from which no one is benefiting.

While it is too early to pick “winners” and “losers” among those responding to the pandemic, it is worth noting that Taiwan has done well in managing the crisis—and as a result its stocks have improved further in Washington. The Moon Jae-in administration in South Korea is also seen to have done well, which has already paid dividends domestically. Japan is now facing a second wave, but will probably emerge quite well. ASEAN has been a useful “club” with some notable economic achievements over the years, but it has offered nothing in this particular crisis. There has been no “ASEAN response” to the pandemic; each country has acted on its own.

As to multilateral institutions generally, there is a continuing need for bodies like the WHO, but the Covid-19 crisis has been a timely reminder that many of them—especially the WHO—need serious reform. The extent to which the US plays a part in this will depend, again, on what happens in November.

Ralph Cossa (Ralph@pacforum.org) is Pacific Forum president emeritus and WSD-Handa Chair in Peace Studies.

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PacNet #24R – Response to PacNet #24, “The destruction of North Korean agriculture: We need to rethink UN sanctions”

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James A. Kelly replies:

Professor Hazel Smith has long been respected for her economic analysis of North Korea. Her recent PacNet 24 shows the possibility of serious outcomes but is incomplete in both economic and geopolitical terms.

The United Nations Security Council of 2017 and 2018 imposed sanctions after serious deliberation amid a climate of frustration. North Korea had tested nuclear weapons even more destructive than the devices leading to earlier sanctions. Many of those previous sanctions were aimed—with scant visible success—at North Korean elites. Major new, long-range missiles were introduced and tested, making targets of millions more people, theoretically including all of the United States. The Security Council—correctly believing that war is not the answer and must not be fought—hammered out new sanctions with the participation of China and Russia. The offense was great, and the sanctions were intended to be harsh. But would they motivate Kim Jong-un and his prosperous acolytes?

Prof. Smith, using published sources, notes possible serious effects on North Korea’s agriculture. She notes the primary responsibility—of North Korea’s government—even though that government only exists under the tolerance of the ruling Workers’ Party of Korea, its leader, his relatives, and their chosen elites.

Those elites are, even now, making choices that make agricultural failure even more likely. They ignore primary—or any—responsibility. The coronavirus pandemic has caused North Korea to take action—action taken often before and for many reasons—to close off the country. There are credible reports of thousands of tons of cargo sitting in Chinese depots, not moving, perhaps because of North Korea’s border closings. Various Western NGOs have offered to help and are being rejected or ignored. And South Korea’s newly re-empowered President Moon Jae-in—who has gone far beyond any other South Korean leader to help North Korea—has tried and tried and received rebuff after rebuff.

Furthermore, if a new crisis of mass hunger begins, the effects are likely to be less serious than the terrible days of the 1990s. The total failure of the collective farms and the food distribution system of that period has empowered—despite party efforts—hundreds of vibrant local markets to take root and for thousands of small private agricultural plots to emerge and endure. These efforts rarely appear in statistics—such as they are from Pyongyang—but are substantial.

Prof. Smith notes twice that North Korea is a poor country—even very poor—and contrasts it with countries with broad poverty. There is an important difference. North Korea has education and technology far greater than countries such as Nepal or many of the African states with large populations that have always been poor. No country with North Korea’s levels of development has ever experienced the kind of famine that took place in the 1990s. The starvation was because of the choices made by the leadership, whose ruthless suppression restrains outside help and prohibits prosperity among those deemed politically unreliable.

The Security Council should—each year—review its sanctions. It should seek to avoid punishing those who have done no wrong. But these sanctions were imposed for valid reasons and—as we have seen in recent weeks—North Korea does not want tensions to ease. So, it closes its borders to the pandemic but tests new missiles.

Hazel Smith responds to James A. Kelly:

I start by welcoming Assistant Secretary of State Kelly’s response to my recent PacNet commentary that called for a re-think on UN energy sanctions on North Korea. I have enormous respect for Secretary Kelly’s considerable achievements in public service and as a distinguished representative of his country. I admire particularly his diplomatic leadership in negotiations with the DPRK in the face of what was at the time an extraordinarily difficult negotiating environment. Given the space available, my comments necessarily focus on the differences between us; that should not be taken to imply disagreement on more fundamental goals which I take to be of supporting the goal of material prosperity and political freedoms for the North Korean population and a peaceful, stable, denuclearized peninsula.

On the specifics, it might be useful if I first correct a factual misunderstanding in Secretary Kelly’s piece; secondly, if I restate my core ethical question, which remains unanswered; and, thirdly, summarize the outstanding policy dilemma.

There are two aspects to food security: food availability and food accessibility. In any country, food availability comes from only two sources; domestic production and food imports. Markets do not increase food availability; they provide food accessibility through their function as allocators and distributors of what food is available. Nor has total food availability in North Korea been greatly enhanced by production on private plots and unregulated expansion into mountain and forest lands. In agricultural marketing year 2016-17, prior to the implementation of recent sanctions, garden and slope production was estimated at about 300,000 tons, compared to about 5 million tons produced on the big farms, mostly in the breadbasket plains of the country, in the same year. Those proportions would be about the same even were North Korea to change its economic system. As in the US and all agriculturally productive countries, small farms can provide added value in niche sectors, but it is the large agro-industrial farms that today provide for mass populations.

Reorganized systems likely would improve productivity but only if they can first access the imported oil-based inputs essential for the production of fertilizer and pesticides, the operation of farm equipment, including irrigation facilities and threshing machines, and the transport of equipment, crops and labor. No matter whether agriculture is organized around efficient capitalist methods or inefficient command economy mechanisms, crop production everywhere in the world is dependent on to oil-based inputs, which increase yields and therefore output. Given the DPRK has no indigenous oil and natural gas, that means North Korean farmers are wholly dependent on imports. These essential imports are, however, banned or severely curtailed by the 2017 sanctions.

Secretary Kelly is quite right that markets are the primary source of food for North Koreans. Providing one has money to sell and buy, markets have provided nimble distribution networks that the government could not and did not provide in the famine years of the 1990s. Market distribution still requires, however, food to distribute.

Then there is the ethical question. There is a global consensus that North Korea’s government, which, as Secretary Kelly is again correct to emphasize, primarily represents the families that constitute the political elite, violates numerous international laws and represses its population. Irrespective of the wrongdoing of a government, however, it remains unethical and illegal (the UN has the legal “responsibility to protect”) to impose sanctions that disproportionately harm innocents. This is where the analogy to the Geneva Conventions is useful. The targeting of food production and food supply to a population in enemy territory is specifically forbidden. It seems perverse to think that such activities in peacetime should be permitted.

And, finally, the policy issue.

So far there is no road map, no impact study and no study of the potential impact of UN sanctions on the population of the DPRK. This is perhaps because we are constantly told, by commentary that is often itself speculative, ill-informed, or amounts to not much more than personal opinion, that there is no reliable factual basis to assess this country. True, we don’t know much about, for example, internal Kim family dynamics, but we do know a lot about the energy, agricultural, and nutrition sectors. On the former we have robust data and sophisticated analysis from, among others, Peter Hayes of the Nautilus Institute and, on the latter, substantive, data-rich studies from the Korea Development Institute, the Rural Development Commission in South Korea, and several UN agencies—including the Food and Agricultural Organization, World Food Program, UNICEF, United Nations Development Program, World Health Organization, United Nations Population Fund, and UN Environment Program—that have operated inside North Korea for now over two decades.

It’s difficult for honorable people who are justifiably angry with a government that represses its people and refuses to adhere to international law, to acknowledge that not all actions against such a bad actor are ethically justified. My view is that it’s necessary to distinguish between the government and the population. Drawing from my time working and living in North Korea, in nurseries, schools, orphanages, flood rehabilitation works, farms, hospitals, and local communities, I saw many, many unselfish and compassionate actions by North Koreans just trying to do their best for the communities they served in the face of an out of touch and unaccountable government. These people don’t deserve to be punished twice; once from their government and again by the outside world.

In democracies, unlike in North Korea, we have the privilege of and therefore the responsibility to hold our governments to account for actions they take in our name. Given the impact on food security, we need to know how precisely do UN policymakers envisage that sanctions on the civilian economy will lead to the desired political outcome of denuclearization? And, if UN energy sanctions are to continue, the UN and the member states need to own the policy and be up-front about its consequences for millions of innocents.

NB: For those interested in the data and analysis underpinning my observations in these PacNet commentaries, please see Hazel Smith, ‘The ethics of United Nations sanctions on North Korea: Effectiveness, necessity and proportionality’, Critical Asian Studies, forthcoming 2020.

James A. Kelly (kellypacf@aol.com) is chairman of the Pacific Forum Board of Directors, and the former US Assistant Secretary of State for East Asian and Pacific Affairs.

Hazel Smith (hs50@soas.ac.uk) PhD FRSA is Professorial Research Associate at the School of Oriental and African Studies (SOAS), University of London; Professor Emerita of International Security, Cranfield University, UK; Member Global Futures Council on Korea World Economic Forum and Fellow, Wilson Center, Washington DC.

PacNet commentaries and responses represent the views of the respective authors. Alternative viewpoints are always welcomed and encouraged. Click here to request a PacNet subscription.

PacNet #25 – China’s Eight Arguments Against Western ‘Hubris’ and Why They Fail

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The poor performance of Western Europe and the United States during the pandemic has revived Western declinism. A recent example is an essay by Zhou Bo of the Center of China-American Defense Relations, Academy of Military Science of the Chinese People’s Liberation Army. Zhou’s assertions are important, but also mainly wrong, and therefore call for a critique. Below I will summarize Zhou’s arguments before refuting them.

1) The West is “falling apart,” and in a “nadir of its self-confidence,” based on the observation that Europe does not have a coordinated response to the pandemic.

Europe is a collection of sovereign governments with very limited merged sovereignty. Each still has its own policies in most areas, including pandemic response. Similarly, China and its Northeast Asian neighbors Japan, North Korea, South Korea, Mongolia, and Taiwan each had separate national policy responses to the pandemic. That does not indicate that any of the states in Northeast Asia is suffering a crisis of confidence in its own political system.

2) China successfully implemented emergency counter-measures now “being emulated around the world.”

The Chinese government did relatively quickly take the drastic measures that are relatively easy for an authoritarian state with untrammeled police powers. But the West will not seek to “emulate” other aspects of China’s performance that Zhou does not mention: the Chinese government treated initial reports of the disease as criminal rumor-mongering, suppressed information about the outbreak in the crucial early days, hoarded supplies of medical equipment purchased by importers abroad while China had shortages, demanded that other countries lift their restrictions against Chinese travelers while itself excluding and scapegoating foreigners, attempted to re-write the story of China’s role in the pandemic, and concealed the actual numbers of China’s sick and dead.

3) The pandemic suggests the United States will lose its declared strategic competition with China and Russia because the United States needs medical equipment from China and, aside from the pandemic, relies on China for drugs.

The US need for imported medical equipment is temporary and rectifiable; it will not limit US ability to strategically compete with China. The pandemic is, however, accelerating the trend of American diversification away from China for vital supplies, even if China is the cheapest producer. Chinese commentators such as Zhou who crow about this US over-dependence on China are unintentionally doing Americans a favor.

4) “China and Europe will inevitably get closer” because “a divided Europe will naturally look east” and because Europe, like China, wants “multilateralism” in “global trade,” climate change, and “the role of international institutions” while the United States is opposed.

First, it does not logically follow that less commitment to European integration among individual Western European countries causes them to “naturally” move to China. Zhou would have to make the case that individual European countries want to trade more or align themselves more tightly with China but have been prevented by their membership in the EU or by now-absent US leadership. But Zhou doesn’t go there.

Secondly, it is over-simplistic and misleading for Zhou to say that China and Europe see eye-to-eye on “multilateralism” in a way that leaves America out. In keeping with decades of previous US policy, Washington continues to support NATO, advocates for human rights and democracy worldwide, and is the EU’s top trading partner.

Beijing, on the other hand, routinely violates or disavows international law when it clashes with Chinese self-interests, often sides with outlaw states, and opposes attempts by international organizations to champion liberal principles. China’s idea of multilateral trade is other countries being open to Chinese imports and technology extraction while China maintains protectionism and predatory policies against Western direct investment in China. European political leaders have been much like Trump administration officials in their recent criticism of China over various issues.

It’s questionable that the desire of European states for a relationship with China extends beyond wanting their share of the possible economic benefits.

5) Americans want the EU to view China as an enemy, but will fail because “the creation of the EU is meant, in part, to avoid great power competition.”

This seems to be a reference to US attempts to discourage security partners from contracting Chinese corporation Huawei to build their advanced data network infrastructure. The EU was founded on what began as Western Europe’s common interest not in “avoiding great power competition,” but rather protecting themselves by banding together against a threatening great power. China is a long way from being their new Soviet Union, but is getting some negative attention, which is why some European governments have reservations about using Huawei systems.

6) As the US economically decouples from China, Europe will gain “a greater flow of goods, capital, personnel and technology from China.”

Are Chinese exports to Europe currently limited by China choosing to sell to the US rather than Europe? In any case, the US interest in decoupling is driven by American concerns about economic dependence on China. Western Europeans share those concerns, which means they may not want everything China offers.

7) The pandemic “can become a turning point for the country to provide more public goods to the world,” as shown by China providing medical supplies to many virus-hit countries.

Selling previously hoarded medical supplies is not providing public goods. Zhou is correct that China has the capacity to be a global “Good Samaritan” by quickly producing a large amount of certain items for which there might be a desperate foreign demand during a humanitarian crisis. China fulfilling such a role would be welcome. This, however, is a relatively low level of providing public goods. A higher level is something like intervening in a failed state to deliver food and other aid while under hostile fire, as the US and other countries did in Somalia in 1993-94. Beijing avoids operations such as this because they are difficult and controversial, but meaningful international leadership is inherently difficult and controversial.

8) What matters is not whether states are democratic or authoritarian, but the government’s performance. China, Japan, South Korea, and Singapore proved during the pandemic that a “strong and decisive” state is necessary and that the Western model of limited government cannot cope with crises.

By admitting that multiparty democracies like Japan and South Korea handled the pandemic well, Zhou fatally undercuts his implied argument that the lack of civil and political liberties in China is justified by superior government performance. Politically, Japan and South Korea are more similar to Western Europe than to China. Furthermore, Zhou neglects to mention the two countries most praised for their pandemic responses: New Zealand, a transplanted Western European country; and Taiwan, another liberal democracy. By ignoring Taiwan, Zhou silently reminds us that the China Model overly empowers a regime to prioritize its own survival, leading to unconstrained ruthlessness and vindictiveness even at the expense of its own and international society.

Europeans want to profit from China, but will not see the China Model as politically or culturally inspirational or attractive as long as China is ruled by a regime with objectives and policies so deeply at odds with Western Europe’s liberal traditions.

Denny Roy (RoyD@EastWestCenter.org) is a senior fellow at the East-West Center, Honolulu.  He specializes in strategic and international security issues in the Asia-Pacific region.

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PacNet #24 – The destruction of North Korean agriculture: We need to rethink UN sanctions

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In 2016 and 2017, in response to North Korea’s continued nuclear testing, the United Nations Security Council (UNSC) expanded sanctions that had previously been targeted at commodities, individuals, and institutions linked to the nuclear and missile sector to sanctions measures that no longer differentiated between the civilian and the military sectors. The 2017 UNSC sanctions included a ban on the import of natural gas and condensates; a cap on crude oil imports to 4 million barrels a year and refined oil product imports, which includes diesel and kerosene, to half a million barrels a year. Military sector oil imports, including rocket fuel, were already prohibited by the Wassenaar Arrangement, prior UN sanctions and bilateral Chinese export controls, so the impact of the UN oil sanctions fell disproportionately on the civilian economy.

North Korea has no indigenous sources of oil and natural gas and therefore depends on imported energy inputs to produce fertilizer and pesticides, to fuel irrigation equipment and agricultural machinery and to transport agricultural inputs including seeds, crops, equipment, spare parts, and labor. Given the UN prohibitions on essential energy imports, it should be no surprise that in 2018 North Korea’s agricultural production collapsed to levels similar to those of the famine years of the 1990s.

Under international law, the North Korean government has primary responsibility for the welfare of its population but that does not mean that outside actors like the UN do not also hold responsibilities. No government or international organization may use the excuse of the wrongdoing of governments to inflict further harm on innocents living in that government’s territory. In war time, the destruction of agriculture in an enemy territory is a war crime.

The Geneva Conventions state that it “is prohibited to attack, destroy, remove, or render useless objects indispensable to the survival of the civilian population, such as foodstuffs, agricultural areas for the production of foodstuffs, crops, livestock, drinking water installations and supplies, and irrigation works… whatever the motive.”

North Korea needs around 5 and a half million tons of cereal a year to feed its people, at subsistence levels. In the 1990s, between a third and two-thirds of a million people lost their lives in the midst of economic collapse and the devastation of North Korea’s agricultural sector. Crop production recovered to the extent that between 2012 and 2016, domestic food production, averaged around 5 million tons a year. The food gap was filled from a more or less even split between commercial imports and food aid. In total, recorded imports hovered at around half a million tonnes a year, increasing, after a reduced harvest in 2017, to an import requirement of just over three-quarters of a million tons for 2018, as sanctions tightened.

Improved agricultural production combined with a manageable food import requirement had been accompanied by significant improvements in child nutrition. By 2017, according to UNICEF, North Korean children, whether in terms of stunting (a sign of long term poor nutrition) or wasting (a sign of starvation conditions) on average were significantly and measurably better off than if they had lived in other poor Asian counties like Nepal or even some wealthier countries in Asia, like Pakistan, India, and the Philippines.

In 2018, after the implementation of energy sanctions, agricultural production fell to just over 4 million tonnes, leaving an enormous food deficit of 1 and a half million tonnes in 2019. Put another way, if the only food available in 2019 had been from domestic food production, only about two-thirds of the 25 million population could have received even a basic subsistence level ration. There was no humanitarian crisis in 2019 because China and Russia stepped up with massive food aid as well as fertilizer and pesticide support and, very likely, ignored sanctions limits on oil exports to the DPRK.

Even prior to UN energy sanctions, the North Korean economy was getting by with globally low levels of oil inputs; the 25 million population was second only to the Democratic People’s Republic of Congo as the lowest per capita consumers of oil in the world. The UNSC December 2017 limit on refined oil imports to 500,000 barrels a year is less than Australia, an oil producer itself and with a similar size population to the DPRK, imports in one day. Agriculture in North Korea is founded on hard physical labour, mainly by women, because of the nationwide lack of technology and farm equipment. Nevertheless, there is a limit to how much human labour can substitute for the diesel that is necessary to transport crops and labour from one place to another or the natural gas and oil products necessary to produce the fertilizer and pesticides to ensure adequate yields from insufficient land and inhospitable terrain.

Neither the United Nations nor the member states have a road map that sets out how the goal of DPRK denuclearization will be achieved by sanctions that target the civilian economy. Perhaps the UNSC assumption is that the people will rise up and overturn the government if conditions get tougher. Yet North Korea is, by almost any criteria, including GNI in total or per capita, one of the poorest countries in the world. In destroying agricultural production, the 2017 sanctions have made day-to-day life a literal struggle for the physical survival of families and communities, which does not leave time, opportunity, capacity, or motivation for individuals to also risk their lives by expressing political criticism of a security-focused authoritarian government.

In 2003 the UN had abandoned non-targeted sanctions because of the many well-attested reports from internationally respected health professionals that showed how non-targeted sanctions did not discriminate between innocents and wrong-doers and had caused the deaths of millions of children in Iraq and Haiti. The United Nations Security Council cannot excuse itself through a bureaucratic insertion of “humanitarian exemptions” in its resolutions. The loss of agricultural production destroys farmers’ capacity to grow food in future years. The scope and scale of North Korea’s food production losses could only be compensated by what would have to be the largest and most expensive food aid operation in the world. No member state is seriously proposing this as an option. Ethically, it is also a rather grotesque idea that the same organization that destroyed the population’s ability to feed itself should offer “humanitarian” aid as recompense.

In 2020 China and Russia face coronavirus. If the disease damages their own agricultural production cycle or if they decide they need to keep their oil and cereal stocks at home to protect against the economic uncertainties brought by the global pandemic then, while energy sanctions continue, the North Korean population will again face the threat of starvation. The UN’s own agencies that have been resident and working in North Korea for 25 years and more, especially the FAO and the WFP, have already documented how these new sanctions have brought back a level of food insecurity unknown since the famine years.

This is the start of the agricultural season in North Korea. At least until the UNSC has brought forward a detailed impact study of sanctions on food security, oil, and energy sanctions should be suspended.

Hazel Smith (hs50@soas.ac.uk) PhD FRSA is Professorial Research Associate at the School of Oriental and African Studies (SOAS), University of London; Professor Emerita of International Security, Cranfield University, UK; Member Global Futures Council on Korea World Economic Forum and Fellow, Wilson Center, Washington DC.

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PacNet #19 – Five Reasons Why Xi’s ‘Peking Model’ Will Struggle Post-Covid-19

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Xi Jinping’s model of governance—from an economically prosperous “Chinese dream” for its people to a “Community of Shared Future for Humanity” with China leading the way—has provided the reference points for Beijing’s diplomacy. That the Chinese political system can help build an equitable order favoring the developing world has been central to Xi’s international outreach.

The objective of such an order is to position China at the helm of a “Sino-centric” global order—a “Peking model.” The model not only promotes Xi as “globalizer in chief,” but also creates a wall of regulations between China and the world by controlling the flow of capital, ideas, and culture, ensuring regime sustainability for the Communist Party of China domestically. In the post Covid-19 order  this will not be easy for China, and Xi’s Peking model will come under serious challenges.

If Chairman Mao Zedong is credited with the establishment of the contemporary Chinese party-state, and Deng Xiaoping with bringing China onto the global map with economic reforms and an open-door foreign policy, then Xi has sought a “new era” foreign policy focused on promoting the “China brand” internationally. The Xi model of governance, known as the “modernisation of national governance,” was the fifth modernisation program, following Deng’s four-modernization policy introduced in 1979. While Deng’s program focused on agriculture, industry, technology, and the military, with the aim of building a stronger China “nationally,” Xi’s “modernization of national governance” was more internationally oriented, exemplifying the Communist Party’s global image as a new political model—a “Peking model” to be promoted abroad.

This model is now facing adversity, ironically, of Chinese origin: the Covid-19. As a global pandemic, the novel coronavirus has shaken the world, with tens of thousands of deaths and more than a million positive cases, prompting the question: is this the “Community of Shared Future for Humanity” Xi promised? Donald Trump calling the Covid-19 the “Chinese virus” will dent China’s image internationally. China will find it hard to dismiss the notion that the Covid-19 has revealed a poor governance structure that puts the entire world in danger, especially given the suppression of Dr. Li Wenliang’s early warning in Wuhan.

In a way, the Covid-19 has shown the international community how the trade, people-to-people contact, and connectivity China’s Belt and Road Initiative boasted of can export not only goods, but the dangers of a communist and authoritarian model based on suppression of news, information, and speech. The Wuhan episode exhibits how Xi’s model of centralized power slowed the decision-making process in the Chinese political system, leading to the paralysis of local governance. If anything, the pandemic reinforced the demand that China must promote freedom of speech and transparency, creating the following challenges.

First is a loss of confidence in the Chinese-sponsored schemes. An anti-Chinese crusade may emerge in Europe and the US in which the Communist Party’s model of governance and its approach toward the international community will face severe scrutiny. Italy, Spain, France, and Germany —Europe’s four most severely affected countries—might lead this anti-Chinese crusade in Europe. More importantly, the Covid-19 outbreak has brought into focus many developing economies’ growing dependence on China. Even though the spread of the virus appears to have slowed in China, other parts of the world still struggle, and will fear any outward engagement with China for some time—this will mean a setback for Xi’s model.

Second, the Communist Party has long fought a defensive ideological battle against democratic norms, liberal ideas, human rights, and the principles of democracy. Though the party never directly spread its autocratic functioning beyond China, the People’s Liberation Army has expanded its strategic wings across the Indo-Pacific by building ports, stationing points, and overseas bases. The assertive Chinese posture in Xi’s model has been noticed, from the South China Sea to the East China Sea to the boundary dispute with India. Post-pandemic, such assertiveness will not go unquestioned, with the democratic world doubting China’s approach and its “Shared Future.”

Third, China has exhibited a leadership role in global affairs, but without a corresponding sense of responsibility and accountability. The Chinese government reprimanding Li for his early warnings about the Covid-19 in Wuhan is just one example. In retrospect, the Chinese president has tried to promote a model of governance through the “new type of political party system” represented by the Communist Party as an alternative to the Western model of democracy and liberalism. This might not be easy for China now. The comity of nations may build pressure on China to display signs of solidarity and empathy on critical global governance issues.

Fourth, the post Covid-19 order will promote a contest of power where “China Inc” must face “America first,” along with a coalition of voices emerging with the lead of Indo-Pacific powers, pushing Xi’s leadership into defensive mode. The post-Covid-19 order would not only witness heightened power competition, but also experience a strengthened tiff between US and China, beyond trade and the cyber domain. The Chinese aspiration for supremacy across Asia and beyond might also be questioned more vigorously by India, Japan, and other countries, particularly in Southeast Asia. Australia can be expected to pursue a similar stance too.

Lastly, and above all, the key to China’s economic and diplomatic clout comes from the fact that it is key to the global supply chain. China’s foreign policy gains its strength from the economic power it has built over the years by emerging as a manufacturing powerhouse. Whether it is an exporter or an importer, China’s role is critical in preventing the global economy from going into a slump—signs of which are already evident. Indeed, the Covid-19 crisis has forced many corporates to think about relocating their manufacturing bases and factory outlets out of China. Beijing will face a great challenge in convincing companies and investors to stay engaged with its industries and market.

Politically, too, restoring normality is paramount in China. The economic growth benefitting the majority of the population has been the one overriding factor propping its confidence and enabling it to ignore demands for political ref­orms. Beating the coronavirus and putting the country back on the track economically remains critical to China’s future. The earlier it happens, the better it will be for the Chinese leadership including Xi Jinping.

Dr. Jagannath Panda (jppjagannath@gmail.com) is a Research Fellow and Centre Coordinator for East Asia at the Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. He is also the Series Editor for “Routledge Studies on Think Asia”. Dr. Panda tweets @jppjagannath1.

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PacNet #16 – Covid-19: As China Recovers, Will Its Economy Follow?

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President Xi Jinping’s visit to the epicentre of the Covid-19 pandemic in Wuhan in mid-March should be understood as the end of the 1st-order problems associated with the outbreak. With the health crisis potentially under control, what lies ahead will further challenge the authoritarian regime as the 2nd– and 3rd-order problems associated with the mismanagement of the initial outbreak ensue and serious downstream consequences for China and the global economy emerge.

The draconian quarantining of Hubei Province, as well as nationwide measures to stem the spread of the elusive virus, have been costly. China’s exports plunged 17.2% in the January-February period compared with last year. Imports fell 4%. On March 6, the China Enterprise Confederation (CEC) released the results of another survey assessing the Q1 performance of 299 large manufacturers, and more than 95% of companies saw revenues drop, while more than 80% saw operational costs go up.

The purchasing managers’ index, which measures China’s service sector activity, fell by half last month and public transport in Beijing was at 15% capacity. Importantly, consumption fell significantly from 51.8 in January to 26.5 in February.

These are the 2nd-order effects of the Covid-19 pandemic. A significant drop in consumption in China, a slow return to the full functioning of the economy, and the slow return of migrants and other workers to manufacturing centres and cities mean one of the engines of global growth is running on half speed.

Beijing’s anxiety over the reputational costs associated with the Covid-19 pandemic continues to mount. It has launched a campaign of disinformation domestically and globally, insinuating that the virus originated in the US. It has also proactively nurtured a narrative that the CCP’s response to the outbreak has been comprehensive, effective, and systematic (unlike in the US and other states).

Disinformation tactics, such as disseminating fake news about chaotic Covid-19 responses in foreign countries have come hand-in-hand with efforts to silence prominent critics of Xi and the CCP response to the outbreak, for example, the recent disappearance of Chinese tycoon Ren Zhiqiang.

Prominent scholars such as Tsinghua University’s professor Xu Zhangrun have also disappeared from public life after releasing photos on social media (to avoid censors) of his hand-written critical essay “Viral Alarm: When Fury Overcomes Fear.”

Online censorship by the state has also tried to suppress the voices of Chinese citizens most effected by the Covid-19 outbreak by censoring key words on WeChat, like factual descriptions of the flu-like pneumonia disease, references to the name of the location considered the source of the novel virus, local government agencies in Wuhan, and discussions of the similarity between the outbreak in Wuhan and SARS.

Some of these voices have been translated and preserved in the Wuhan Diaries blog by the political cartoonist and human right activist Badiuchao, who has voluntarily translated diaries of Wuhanese in the locked-down mega-city. This has led to pursuit by the Chinese government.

These voices, critical of Xi and the party, suggest cracks are emerging in the Great Fire Wall and Chinese netizens are not content with the government’s response, nor with the lack of freedom to share life-saving information.

As 2nd-order economic issues continue to put downward pressure on the Chinese economy, the CCP’s bargain with its citizens, in which they retain political control in exchange for steady and stable economic growth, will become increasingly more difficult to sustain.

This is where the 3rd-order problems will aggravate domestic contradictions in the Chinese system.

Now that the Covid-19 virus has spread to North America and Europe, we see major economies around the world adopting social distancing measures. These measures have shocked stock markets and unleashed uncertainty related to global growth and to the extent the Covid-19 will spread, impacting the health and dynamism of economies.

Supply chains have also been negatively impacted by the Covid-19 outbreak in China and the crisis has exposed the dangers of overexposure to the Chinese market, resulting in calls to diversity supply chains. This is a wake-up call to states and businesses alike who have not built a diverse trade portfolio to insulate themselves from a shock in the China-centered global production network.

Perhaps more critically, now that Covid-19 has spread to rich, developed regions, China’s ability to provide steady economic growth for its citizens will be strained at best. Facing a demand shock, the question is not when the Chinese economy will be online again, but who it will sell its products to.

The demand shock and possibility of the virus’ reintroduction or re-emergence in China are 3rd-order problems the Chinese government will not be able to manage as effectively as its initial wave of quarantine efforts.

Demand will only increase if North America, Europe, Japan, and other wealthy states effectively halt the spread of the virus and quickly return to normal socio-economic activities. Initial estimates suggest that Europe and the US have done poorly compared to Japan, Hong Kong, Singapore, and South Korea, suggesting the demand side of growth will not return anytime soon.

Preventing the reintroduction or re-emergence of the virus in China may already be past the point of no return due to skepticism about data on the outbreak in China and because many Chinese citizens are returning home from abroad, based on the rationale that China has effectively contained the outbreak.

A return of Covid-19 in any form to China will accelerate the decoupling and deglobalization process beginning with President Donald Trump’s trade war with China. It will also inculcate more instability into US-China relations, the global economy, and the global community’s ability to deal with global issues such as climate change, transnational diseases, and the next Black Swan event.

How Xi and the CCP manage the ensuing 2nd– and 3rd-order problems associated with the Covid-19 pandemic will impact China, but also regional and global stability. Its initial reaction to the Covid-19 outbreak exposed the institutional challenges associated with calcifying authoritarian rule. It also demonstrated that its system can quickly martial resources to suppress viral transmission.

Whether it can negotiate the demand shock side of the Covid-19 pandemic, as well as another possible outbreak are questionable. The answer to these lines of inquiry are unknown, but the potential repercussions are several.

A successful response may solidify Xi’s and CCP rule in China and provide it domestic legitimacy, even increasing its political capital globally for effective governance.

While not impossible, this outcome is not likely, as China requires the global community to buy the goods produced in its export-based economy. With that in mind, the options for the Chinese leadership are narrowing and it will be increasingly difficult to maintain stable, sustainable economic growth.

More crucially, without sustainable economic growth, the CCP’s goals of “socialist modernization” by 2035 and a “modern socialist country that is strong, prosperous, democratic, culturally advanced, and harmonious” by 2049, are less likely than China finding itself in the middle-income trap. This may leave the party searching for a new source of legitimacy or purpose based on assertive nationalistic enterprises—such as forceful reunification with Taiwan—or other initiatives to maintain social cohesion under the guise of a nationalistic endeavour.

Dr. Stephen Nagy (nagy@icu.ac.jp) is a senior associate professor at the International Christian University in Tokyo; a distinguished fellow with Canada’s Asia Pacific Foundation; a fellow at the Canadian Global Affairs Institute (CGAI); and a visiting fellow with the Japan Institute for International Affairs (JIIA).

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PacNet #15 – Covid-19 and protests need not cripple tourism-heavy Hong Kong

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On April 3, 2019, the Hong Kong government introduced amendments to Hong Kong’s extradition bills that would enable criminal suspects to be sent to mainland China for trial. This decision sparked Hong Kong’s anti-extradition bill protests—the number of individuals going out to demonstrate peaked on June 16 at an estimated 2 million individuals. To date, more than 1,000 protesters have been arrested.

The continuing demonstrations, which have evolved into a call for democratic reforms and police accountability, have been a heavy blow to local tourism. The number of mainland Chinese visitors from late September until the end of 2019 dropped by some 60% year-on-year. Forward bookings for travel to Hong Kong from the mainland between September 24 to December 30 plummeted by 58.2% compared to the same period in 2018. Even during the week following China’s National Day last October, dubbed “Golden Week,” bookings for travel fell by 39.7% relative to 2018.

According to Jameson Wong, APAC business development director of ForwardKeys, “Mainland China is Hong Kong’s most important source market and the tourism industry offers 300,000 jobs in Hong Kong, [so] these numbers reveal that the demonstrations are delivering a devasting blow to the economy of Hong Kong.”

Impact of the outbreak

In January 2020, Hong Kong welcomed an average of 100,000 visitors daily, a 53% decline from the 200,000 daily arrivals recorded in the first half of 2019.  The outbreak of Covid-19 has compounded the loss of mainland Chinese visitors, as the Hong Kong government has restricted the flow of individuals between Hong Kong and the mainland. From late January onwards, the number of visitors in Hong Kong plunged to 65,000 per day, and the number further dropped in February to below 3,000 visitors per day. Of these, 75% were non-mainland visitors.

Hong Kong has more than 350 confirmed Covid-19 cases as March 20. Hong Kong’s Financial Secretary Paul Chan Mo-po argues the economic impact of the coronavirus outbreak could be more severe than that of 2003’s SARS ordeal. As he highlights, the city’s growing reliance on tourism and retail would put the occupational security of employees in these sectors at risk.

The contribution of travel and tourism to the city’s GDP was 17.4% in 2018, the year prior to the massive outbreak of socio-political unrest. For context, travel and tourism’s contribution to Hong Kong’s GDP was some 9.0% in 1998. The data demonstrate that Hong Kong has been growing overly dependent on tourism. In specific, Hong Kong’s economic growth has primarily relied on the influx of mainland tourists. Just before the crises occurred, 78% of arrivals were mainland visitors, ecas compared with 41% from 2002, the year before the outbreak of SARS.

Status quo

Due to the combination of socio-political and health crises, according to data from the Census and Statistics Department, the retail sales dropped 21.4 percent YoY to US$37.8 billion in January 2020, as compared to the retail performance in January 2019. The reduction in retail sales in this January marked the 12th consecutive month of decrease in the value of retail sales in Hong Kong.

In addition, several countries have issued travel bans or restrictions against Hong Kong nationals. The Philippines, for example, announced that arrivals from Hong Kong would be banned. Alternatively, the United Kingdom, Israel, Thailand, and other countries announced a 14-day self-quarantine order for all visitors coming from Hong Kong. International travel bans and restrictions on individuals coming from Hong Kong hint the city may become less appealing for visitors due to the widespread Covid-19, where local tourism and retail industries may be further hit in the coming months.

Recommended policies

In response to both socio-political and health crises, the Hong Kong government should increase the amount of one-time cash handouts distributed to local businesses within the retail industry as economic stimuli. These should even include local small and medium-sized businesses, such as Lung Mun Cafe and Fu Kee Noodles, that offer advantages to customers who support the anti-extradition bill demonstrations. These businesses have been hit the hardest in this critical period. The delivery of one-off economic stimuli, as an olive branch, is particularly conducive to the sustainability of small and medium sized retail businesses and minimization of anti-governmental sentiments among local entrepreneurs. In doing so, retail companies’ decisions to liquidate might decrease despite the financial hardship and uncertainty citywide. Fewer employees might therefore be laid off and the government’s subsidies to unemployed Hong Kong citizens could be minimized.

Moreover, the Hong Kong government should incentivize alternative business opportunities within the retail industry. Hong Kong’s revenue in the e-commerce market is projected to amount to $5.511 billion in 2020. Revenue is expected to show an annual growth rate of 6.8% from 2020 to 2024. The government should therefore lower the profit tax rates charged toward newly registered e-commerce businesses in this fiscal year. As a result, more retail companies are motivated to establish their online businesses, minimising the decline in sales revenues due to the plunge of the numbers among mainland and non-mainland visitors. In the long-term, the transition from in-store to online sales can benefit Hong Kong’s economic sustainability as the retail industry would be less dependent on the tourism performance.

Jason Hung (sociowriting@jasehung.com) is a visiting researcher at Stanford University and a Clinton Global Initiative University (CGI U) fellow at Clinton Foundation.

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