Economy & Politics

Monday May 24, 2021

The Breath of the Dragon - May 2021

Speaker: Adit Jain, IMA India May 2021

Three months ago, the USS John McCain, a guided missile destroyer based in Japan, sailed through the Straits of Taiwan. The United States Navy, in a statement, declared that the ship’s transit was intended to demonstrate its commitment to a free and open Indo-Pacific. This was the first time in the administration of President Joe Biden that the US military had traversed through waters, which China claims as its backyard. The message was clear. The freedom of navigation through international territory would continue, despite what China might want. The Biden presidency would stand by an international rules-based order.

When measured by military spending as the yardstick, it would be true to suggest that America outspends the rest of the top ten countries put together. In 2020, the United States defence budget aggregated to USD 788 billion, which constituted 40% of global defence spending. Consequently, it would seem valid to suggest that its military might far exceeds that of China. However, the reality is not as reassuring. A dollar spent in China goes much further than a dollar spent in America. Goods are cheaper to produce and wages much lower. At market exchange rates, China's defence budget is about a third of America's; however in terms of purchasing power parity, it jumps to two thirds. Clearly, China appears to be catching up quickly.

The great rise; dependencies and disputes

When Chinese President Xi Jinping spoke of the Great Rise of the Chinese nation, he referred to many things. However, the most important of these was a powerful China which, after centuries of domination and alleged humiliation by the West and Japan, would occupy its rightful place in the community of nations. Under his rule, China has adopted an assertive stance with its neighbours. This not only includes India but also Taiwan, together with a number of Southeast Asian countries that have conflicting claims on islands and territorial waters in the South China Sea. China argues, on the basis of some highly disputed ancient maps, that that the entire waters of the sea are its sovereign territory. Consequently, it has disputes with the Philippines, Thailand, Indonesia, Vietnam and Brunei. Its fishing fleets, accompanied by the People's Navy, bully other vessels in the waters, which several Asian nations assert are theirs. It set up oil rigs in waters along the coast of Vietnam, occupied land claimed by Bhutan and intruded upon Indian territory by force. It exerts strong claims on the Senkaku Islands, controlled by Japan. China, consequently, has quarrels with most countries within the Asian region, but it is also their most important trade and investment partner. The prosperity of many countries depends on their economic linkages with the Middle Kingdom. This creates a dilemma. So far the strategy assumed by most countries is simply to kick the can further, without precipitating a confrontation.

Chinese efforts to create global domination and dependencies have, more recently, been through the Belt and Road Initiative. This involves vast investments in dozens of countries by Chinese authorities, through state owned enterprises. Trade with China is perhaps the most important prop for these economies and, consequently, they have a submissive posture towards Beijing. And its intent is clear. It seeks to be the only superpower in the Indo-Pacific region, where it intends to deal with regional governments on its own terms. As a Chinese Foreign Minister, speaking at a regional conference in Singapore remarked to his Vietnamese counterpart, “China is a large country, Vietnam is a small country and that is a fact of life”.