The Economist

The Pacific Age

Under American leadership the Pacific has become the engine room of world trade. But the balance of power is shifting, writes Henry Tricks

Nov 15th 2014 | From the print edition

Audio @ http://www.economist.com/news/special-report/21631795-under-american-leadership-pacific-has-become-engine-room-world-trade

WILLIAM HENRY SEWARD was no misty-eyed dreamer. It was whaling, or what he eulogised as “the chase of the whale over his broad range of the universal ocean”, that first drew his attention to the Pacific. He was a visionary, though. The man who became Abraham Lincoln’s secretary of state in 1861 and bought Alaska from tsarist Russia in 1867 knew what America had to do to take advantage of the opening of the Pacific. It needed to build on the Gold Rush spirit in California; finish a transcontinental railway to carry people and freight from one side of America to the other; dig a waterway through Central America for ships to pass through; and acquire Pacific territories like Hawaii and Midway as maritime hubs of trade and security. All this was done either within his lifetime or within a few decades of it.

He was also itching to wield America’s nascent power and saw the Pacific as the place to do it. In a speech to Congress in 1852 he predicted that the Europe-centred Atlantic would decline in importance “while the Pacific Ocean, its shores, its islands and the vast regions beyond, will become the chief theatre of events in the world’s great hereafter”. Commerce, he added, would be the “great agent of this movement” and would flourish between America and China.

The Pacific evokes that kind of enthusiasm. It is a 64m square mile (165m square km) blank on the map (except for a plethora of small islands), bigger than the world’s entire landmass. Still, at times it seemed as though its destiny would never arrive. The refrain, “The Mediterranean is the ocean of the past, the Atlantic is the ocean of the present and the Pacific is the ocean of the future,” first heard more than 100 years ago, is still repeated today. Yet exactly half a century after Japan “rejoined the world” (in the phrase of Ian Buruma, a writer) by hosting the Olympics in 1964, the Pacific Age has now clearly arrived. Japan’s economic power may have peaked 25 years ago, but it produced a trans-Pacific competition that now has America and China vying with each other for the title of the world’s largest economy (at purchasing-power parity). All three Pacific nations trade vigorously with one another.

At the same time trade has surged into the farthest reaches of the Pacific (see charts). Since the 1970s trade across the Pacific has far outrun the Atlantic sort. China, for instance, has taken its hunger for high-protein food and raw materials to Latin America and become the biggest trading partner of distant Chile. By one estimate, in 2010 it promised more loans to Latin America than the World Bank, the Inter-American Development Bank and the United States Export-Import Bank combined.

Such connections have made the developing rim of the Pacific a growth factory. Whereas the United States’ economy grew by an average of 1.6% a year over the past decade and the European Union’s by 1.7%, Latin America’s expanded by 4.6%, East Asia by 5.4% and South-East Asia by 5.9%. The 21 economies of the largest trans-Pacific grouping, Asia-Pacific Economic Co-operation (APEC), account for nearly half of global trade. This special report will refer to them as “the Pacific”, though they exclude the tropical Oceanian economies. “The region comprises not only the world’s ‘factory floor’ but also its most important sources of services, technology and investment, and final-goods markets,” writes Peter Petri, an international-trade economist.

It has also seen an astounding increase in prosperity. In poorer parts of Asia the size of the middle classes—those living on $2-$20 a day—has increased sevenfold since the turn of the millennium. In Latin America it has doubled. Parts of Malaysia have become so bourgeois that taxi drivers moonlight as salesmen of smart apartments overlooking the Strait of Malacca, one of the world’s busiest trade routes.

Both America and China know how important it is to keep this economic engine running, so in public they generally use moderate language about each other. In 2011 Hillary Clinton, then America’s secretary of state, explained President Barack Obama’s “pivot” to Asia in an article in Foreign Policy: “We all know that fears and misconceptions linger on both sides of the Pacific. Some in our country see China’s progress as a threat to the United States; some in China worry that America seeks to constrain China’s growth. We reject both those views.” China’s president, Xi Jinping, at a meeting with Mr Obama in California last year, responded in kind: “The vast Pacific Ocean has enough space for the two large countries of China and the United States.”

Choppy waters

Yet just when the Pacific Age should be celebrating its half-century, the region is showing signs of strain, from increased rivalry between the superpowers and emerging nationalism in Japan, China and elsewhere to sudden squalls in places like Hong Kong, Thailand and, as ever, North Korea. “The shifting landscape in the Asia-Pacific and associated risks are about as challenging as they’ve been since APEC was established in 1989,” says Alan Bollard, the organisation’s executive director.

There are complex counter-currents. Many East Asian countries worry that America’s commitment to the region could be put at risk by more immediate threats in the Middle East and Ukraine. At the same time they do not want America to provoke China by becoming too involved. The rhetoric has recently been turned up. Chuck Hagel, America’s defence secretary, wagged a finger at China when he told a gathering of military chiefs at the Shangri-La dialogue in Singapore in May: “One of the most critical tests facing the region is whether nations will choose to resolve disputes through diplomacy and well-established international rules and norms or through intimidation and coercion. Nowhere is this more evident than in the South China Sea.” In his own speech a day later, Lieutenant-General Wang Guanzhong, head of the Chinese delegation, retorted: “Assertiveness has come from the joint actions of the United States and Japan, not China.”

Recently the tensions have spread to the economic sphere, too. China has interrupted investment and trade with neighbours who stand up to its territorial assertiveness, such as Japan, the Philippines and Vietnam. China and America each have their own plans for turning the Pacific into a giant free-trade area that both see as a test of their influence in the region—and in the wider world. The Obama administration says it wants to forge a trade pact with the world’s most sophisticated rules in the Pacific: the Trans-Pacific Partnership. It characterises China as wanting to perpetuate a model of state capitalism.

Fred Bergsten of the Peterson Institute for International Economics in Washington describes the overlapping commercial and strategic concerns as a juggling tournament. “We’re in the middle of an historic transformation of the economic architecture of the whole Pacific region. There are competing models and high politics. It’s a very complex set of balls in the air,” he says.

Pacific history—an underdeveloped field of study compared with that of the Atlantic, as its scholars dolefully note—is awash with big-power rivalries (see next article). For centuries European powers were carving it into monopolistic trading enclaves that they defended ruthlessly. The only free-traders were pirates. The risks of history repeating itself are palpable.

Many argue that the ocean’s most vulnerable spot is its lack of robust institutions to ensure fair play. They point to the Atlantic Charter, forged in 1941 in the heat of war by Winston Churchill and Franklin Roosevelt, that laid down rules to prevent territorial aggression, reduce trade restrictions and ensure freedom of the seas. All of these are live issues in the western Pacific today.

Mr Bergsten says the “obvious cultural affinities” across the Atlantic that produced the charter, and institutions such as NATO, are “of a different order” from those across the Pacific, or even within East Asia. “Having a beach on the Pacific does not make you a member of a community,” snorts Robert Manning of the Atlantic Council, a Washington think-tank. Some say that the only shared ideology in East Asia is nationalism and a sense of historical grievance against each other.

Four reasons for optimism

Yet this special report will argue that even when values clash, shared interests in the region tend to prevail. East Asia, like America, is a place where power is judged first and foremost by wealth. “In East Asia, with the exception of North Korea, growth far more than any abstract political theory is the primary means by which governments legitimate their rule,” says Bilahari Kausikan, Singapore’s ambassador-at-large. “This does not guarantee peace. But East Asian governments at least have a strong self-interest to minimise actions that would disrupt growth.”

Besides growth, the promise of the Pacific rests on three other fairly sturdy legs: trade, ideas and connectivity. Trade is part of the Pacific’s DNA. While values and ideals travelled across the Atlantic with the Pilgrim Fathers, goods were flowing across the Pacific: silver, silk, porcelain, spices, sandalwood, much of it beautifully crafted in China. Today much of the traffic is in silicon.

Trade moves with the times. Japan’s elegant “flying geese” model (with Japan leading industrialisation in Asia and the rest following in V-formation) brought manufacturing to the “miracle” economies of South-East Asia in the 1990s and even survived the abrupt intrusion of the Chinese dragon in the 2000s. But no one can glide complacently. America is becoming more competitive, thanks to fracking, its energy revolution of the past half-decade; so some Asian economies are likely to become more closely connected to and more dependent on it.

With trade come ideas. Kishore Mahbubani, a Singaporean writer, puts free-market economics at the head of a list of “seven pillars of wisdom” that Asia has imported from the West, along with science and technology, meritocracy, pragmatism, peace, rule of law and education. At the same time Pacific Latin American countries are looking to East Asia for economic models.

Even China’s “state capitalism” may be exaggerated. In a new book, “Markets over Mao”, Nicholas Lardy, an American economist, crunches the numbers to argue that the secret of China’s success is private business, not the state-owned giants. Private firms have become “the major source of economic growth, the sole source of job creation and the major contributor to China’s still-growing role as a global trader”, he writes.

Smaller countries around the Pacific, such as the Association of South-East Asian Nations (ASEAN), band together for strength in numbers against the big powers. There is a constant flow of people, across the Pacific to Silicon Valley and back again; and there are pop-culture excursions between three countries, China, Japan and South Korea, that are otherwise staunchly nationalist. The Pacific is where the 21st century’s habit of networking is most advanced. From Silicon Valley to Shanghai, the world’s biggest internet firms have flourished. Nirvikar Singh, co-editor of “The Oxford Handbook of the Economics of the Pacific Rim”, published earlier this year, says the ocean is becoming the world’s “digital playground”.

To be a playground rather than a battleground, however, it needs rules that govern trade and the sea routes across which commerce flows. Since the second world war these rules have been underpinned by an American security presence that has helped keep the peace in the Pacific—give or take self-inflicted wounds, such as the Vietnam war. Yet America is not the only arbiter. APEC’s Mr Bollard says the region has benefited from a set of “loose-tight” standards of behaviour—guidelines rather than hard-and-fast rules—that have helped the region muddle through Vietnam, the spread of communism, China’s cultural revolution and other periods of severe instability. A rising China, too, wants a say in setting the rules, especially in its own neighbourhood. Getting all sides to agree on what those rules should be is the challenge for the next half-century of the Pacific Age.

History

Galleons and gunships

Pacific history has been defined by bullies enforcing their rulesNov 15th 2014 | From the print edition

Video @ http://www.economist.com/news/special-report/21631796-pacific-history-has-been-defined-bullies-enforcing-their-rules-galleons-and-gunships

THE RUINS OF St Paul’s church on a hill in the Malaysian city of Malacca provide a good view of the vicissitudes of Pacific trade. Peer through the late-monsoon haze from its cobbled courtyard, and you can just about see container ships and oil tankers chugging through the blue-green waters of the Strait of Malacca. At least 70,000 ships pass on their way to and from the Pacific and Indian oceans each year, carrying a third of the world’s seaborne oil and many of its goods.

From its beginning, Malacca has been an entrepot between the Pacific and the rest of the world. Shortly after the city was founded in 1400, a Chinese Muslim from the Ming court, the eunuch Zheng He, used it as a base for his “treasure ships”. Hundreds of vessels bore 20,000 crewmen, passengers and horses through the western Pacific to take silk, porcelain and tea to countries as far away as east Africa.

But after 1433 China abruptly stopped trading missions to the outside world, and a much uglier form of trade emerged. This was the European version, laden with mercantilist and imperialist ambitions partly disguised as a mission to spread Christianity. St Paul’s, originally called Our Lady of the Hill, was built by the Portuguese after they blitzed Malacca in 1511, driving out the sultan. It was a staging post for undermining Venice’s monopoly over the trading of Asian spices through the Mediterranean. Portugal wanted its own monopoly, and got it.

One of the Portuguese victors at Malacca was Ferdinand Magellan. With an eye on establishing a rival trading route to the Spice Islands, he later defected to Spain, found a passage around Cape Horn and baptised the Pacific Ocean. His Spanish successors, sailing from Acapulco with galleons full of silver, used the Philippines (named after their king, Philip II) as a hub for trade with China between 1565 and 1815. The Pacific became a Spanish lake, defended by cannon from all manner of pirates.

In 1641 it was the turn of the Dutch to blast the Portuguese out of Malacca. They turned the church into a Protestant one and changed its name to St Paul’s. A nearby fort is engraved with the letters VOC, after the Dutch East India Company. The vast firm built its own monopoly in the Spice Islands. All clove and nutmeg trees apart from those belonging to the VOC were uprooted, and anyone unconnected to the company caught growing or selling cloves was executed.

In 1819 the British claimed Malacca from the Dutch, ran up a big Union Jack at St Paul’s, used the church as an ammunition dump and put a lighthouse in front. In the second world war Malacca was briefly overrun by the Japanese, but recently it has returned to the tranquillity of its birth.

When your correspondent visited, a muezzin’s call to Friday prayers floated up from a nearby mosque. Islam, too, first came to South-East Asia on Arab trading dhows. Its influence has been much more enduring than that of Christianity.

Economic integration

The flying factory

Asia has built a web of economic interdependence which China would be ill-advised to unravel

Nov 15th 2014 | From the print edition

IN 1999 ANDY CHAN, a middle-aged Hong Kong businessman, set up a company in Shenzhen, just over the border on the Chinese mainland, making pretty sets of bath soap to fill American Christmas stockings. They were sold at $10 apiece at retailers like Walmart. His firm made and shipped them, by the hundreds of thousands in each steel container, for just $4. In the first few years his firm made a bomb. He paid his workers a pittance, 290 yuan (then $35) a month, and imported his raw materials from Malaysia for next to nothing. But then China’s exchange rate soared, his workers’ wages rose almost tenfold, the authorities started enforcing overtime rules and competition turned brutal. The business collapsed. Now he is a taxi driver. “You can’t do this business in Shenzhen any more unless you break the law. You have to go to South-East Asia,” he says bitterly.

Hard as it is on Mr Chan, trade in East Asia is ruthlessly opportunistic. Since Japanese multinationals put the “Flying Geese” model of manufacturing into practice in the 1980s, Asian factories have migrated, via the continent’s “miracle” economies, to China and South-East Asia. Fuelled largely by foreign investment, they are on a permanent quest for cheaper labour and greater efficiency. As cities along China’s throbbing coastline are priced out of the market, inland locations such as Chongqing, or lower-wage countries like Vietnam and Cambodia, have become the new goslings.

But the image of flying geese is no longer as fitting as it once was, because the production apparatus has become more like a spider’s web, with components flitting in all directions and goods crossing and recrossing borders. Victor and William Fung, owners of Li and Fung, a Hong-Kong-based company that helps orchestrate these supply chains, have said that this network has “ripped the roof off the factory”. Suppliers can now be anywhere. In their book, “Competing in a Flat World” (written with Yoram Wind), the two Fungs use the example of a pair of shorts they made for an American retailer. The buttons came from China, the zips from Japan, the yarn was spun in Bangladesh and woven into fabric and dyed in China, and the garment was stitched together in Pakistan. “Yet every pair of shorts has to look as if it were made in one factory.”

Tangled web

As a result, East Asia has become one of the most interconnected regions in the world. Trade among EU nations remains even more extensive, but they are part of a single market whereas East Asia has only a tangle of free-trade agreements. As Prema-chandra Athukorala, an economist based in Australia, points out, network trade has been the most dynamic part of world manufacturing exports since the 1990s. The share of East Asian developing countries increased from 14% in 1992-93 to over 30% in 2007-08, with China the main driving force (see chart 1).

Such is the pull of China within this new “Factory Asia” that the currencies of most countries in the region now track the Chinese renminbi more closely than they do the American dollar, reckon Arvind Subramanian and Martin Kessler, formerly of the Peterson Institute. Yet for all its power, China is still only a part of the spider’s web, not the centre of it. “What makes the region unique is that you have a tight fit between regional and global integration. The supply chain is linked to final-goods markets in the United States and the EU,” says Razeen Sally of the Lee Kuan Yew School of Public Policy in Singapore.

Global trade has slowed down in the past two years, and in 2012 East Asian trade with the rest of the world for the first time made no contribution to growth. Yet despite the lingering fallout from the 2008 global financial crisis the network effect is still going strong. Exports, especially to America, have shown signs of picking up this summer. Sudhir Shetty, the World Bank’s chief economist for East Asia and the Pacific region, expects the emerging countries in his area to grow by 7% this year, far faster than anywhere else in the developing world.

China’s slowing growth rate remains a concern, but the ten members of the Association of South-East Asian Nations (ASEAN), including Indonesia, the Philippines, Singapore and Vietnam, are trying to make their region more self-sustaining. Next year ASEAN plans to establish an “economic community”—a single market to make network trade more seamless.

But China’s assertiveness over disputed territories in the South and East China Seas has put it at loggerheads with important trading partners such as Vietnam and Japan. As yet the economic costs have been bearable, but the risks are high.

James Reilly of the University of Sydney thinks that China’s new posturing is a revival of an old practice known as economic statecraft, meaning it is deploying its wealth for strategic foreign-policy purposes. This practice involves both carrots and sticks. In Asia the carrots have included pipelines, railways and trunk roads that China has provided around the region, mainly to supply its own economy with raw materials, but with wider benefits, especially for its poorer neighbours.

But there is also coercion, even if this is often counterproductive. In 2012, for example, Chinese officials indirectly encouraged a consumer boycott of Japanese goods as Japan reasserted its claim to disputed islands it calls the Senkakus and the Chinese call the Diaoyus. Customs officials tightened up inspections of Japanese imports. Yet Japan did not back down. Instead, it got closer to neighbours in the region who also

objected to Chinese aggressiveness, says Mr Reilly. In the same year Chinese restrictions on banana imports from the Philippines led to a backlash among Filipinos that brought their country closer to America.

Last summer Chinese businesses in Vietnam were attacked by locals after a Chinese oil firm put a rig in contested waters

Bonnie Glaser of the Centre for Strategic and International Studies, a think-tank in Washington, says China may even be pursuing economic integration to strengthen its leverage. “China’s strategy is to weave together a network of economic interdependence. It is using the centrality of its power to persuade other nations that to challenge China on territorial issues is simply not worth it.” But its neighbours are not sitting placidly by. Last summer Chinese businesses in Vietnam were attacked by locals after a Chinese state-owned oil firm put an oil rig in waters that both countries lay claim to.

Since then, American officials say, its allies in the region have become somewhat keener to move into America’s economic orbit to keep China in check. Japanese investment in China fell to $9.1 billion in 2013, from $13.5 billion the year before. At the same time Japan’s investment in ASEAN more than doubled, to $23.6 billion. Myanmar, until recently a satrap of China, is opening up to the West.

Even in Singapore, which has a big ethnic Chinese community and sees itself as a cultural bridge between east and west, China’s conduct has raised eyebrows. Simon Tay, chairman of the Singapore Institute of International Affairs, says its treatment of countries such as Vietnam shows that political integration has failed to match the economic sort. “The post-war period has provided a sense of stability that has enabled Asians to mind their own business—literally the business of business,” he says. “There is unease about a China-centric region.”

Some economists say China’s assertive behaviour may also be a way of testing whether America’s economic power in the region is waning, as many of its leaders believe. They think that the Chinese may want to re-establish the old hierarchical system in which they were clearly in control but at the same time felt a sense of noblesse oblige.

Two striking hints of this came during Xi Jinping’s first visits as China’s president to ASEAN countries last year and to the Indian Ocean in September this year. On both tours he spoke of his desire to create a “maritime Silk Road” that would build port infrastructure and establish shipping co-operation with smaller, friendly nations like Cambodia and Sri Lanka along ancient trade routes established when China was the undisputed hegemonic power. He also announced the creation of the Asian Infrastructure Investment Bank, a rival to the Japan-driven Asian Development Bank but with deeper pockets—at least $50 billion in startup funds.

Yet for all its swagger, China is not impregnable. Its economic growth looks increasingly unsustainable, and most of its people are still relatively poor. Though there is a middle-class boom in coastal cities, the country’s average GDP per person is somewhere between that of the Philippines and Malaysia and still a long way from South Korea or Japan. The Communist Party knows that, to a large extent, its legitimacy rests on continuing to improve living standards.

From silk to services

That means taking economic reform further and increasing the value of goods and services produced in China, hoping to emulate the success of Singapore and Hong Kong, which generate far more value from services such as banking than from selling manufactured goods. Mr Xi has made reforms to the service sector a priority. He must also be casting a wary eye to North America where robotics, 3D printing, mass customisation and other new trends could put pressure on Asia’s factory model.

There are some promising alternatives to manufacturing. Last summer’s huge IPO of Alibaba, a Chinese e-commerce firm, underscores the potential of digital business. Tencent, another Chinese internet company, has more revenues and profits than Facebook. Lisa Hanson of Niko Partners, a Silicon Valley-based tech consultancy, says companies like Tencent have turned China into a world leader in online gaming.

One of the best tools for promoting economic reform is to use free trade and foreign competition to force overprotected service industries to modernise. Jiang Zemin, the president at the time, understood that when he took China into the World Trade Organisation in 2001. Japan’s prime minister, Shinzo Abe, has often made the same point when justifying his decision to join the Trans-Pacific Partnership, a free-trade grouping led by America. The big question is whether Messrs Xi and Abe are prepared to use Pacific-wide trade pacts to maintain that reformist zeal—and whether America has the political will to accommodate them.

Free-trade pacts

America’s big bet

America needs to push a free-trade pact in the Pacific more vigorouslyNov 15th 2014 | From the print edition

Sacred rice, and a trade treaty, in his hands

JAPAN TRIED TO negotiate the first trans-Pacific trade agreement exactly 400 years ago. It sent a robed samurai, Hasekura Tsunenaga, to Europe via Acapulco to request the right to trade directly with New Spain (today’s Mexico). Among other things, he needed permission from the pope. But because the shogun was slaughtering Catholics at the time, he did not get it.

Only in the past decade have such agreements finally started to flourish (see chart 3). But they are still dominated by interests that go beyond the nuts and bolts of trade and into the realm of geopolitics. America and China are pursuing three separate tracks towards trade pacts that would help define the future of trans-Pacific commerce. One of the three does not include China, another excludes the United States (see chart 2). The third is still pie in the sky.

All three involve unwieldy acronyms, though whichever wins could one day become as familiar as NAFTA (the North American Free-Trade Agreement). The furthest advanced is the American-led Trans-Pacific Partnership (TPP), in which China plays no part. On a parallel track, though further behind, is the Regional Comprehensive Economic Partnership (RCEP), which covers only Asian countries and includes China, plus several countries that are also negotiating the TPP.

The distant dream is the Free-Trade Area of the Asia-Pacific (FTAAP), which would include both America and China, and possibly cobble together elements of both TPP and RCEP. China pushed the FTAAP ahead of the 21-country APEC summit in Beijing in November, giving a new lease of life to an old idea. Peter Petri and Ali Abdul-Raheem write in a new paper for the Pacific Economic Co-operation Council: “Nearly 50 years after it was first proposed, it is gaining traction due to the emergence of RCEP and TPP initiatives and the continuing stalemate in global trade negotiations.”

As trade experts see it, the TPP is the most ambitious in the short term. It is dominated by America and Japan and also includes Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Together these countries account for about 40% of global GDP, making it one of America’s biggest potential free-trade agreements (FTAs). The Obama administration hopes that it would be complemented by an even more ambitious agreement with the EU.

America, which already has FTAs with six other TPP countries, sees opening up Japan as the big prize. But the TPP is not just aimed at dismantling tariff barriers. It is also meant to tackle tough issues such as intellectual property, services, government procurement, labour and environmental standards. Since its members include economies such as Vietnam and Malaysia whose supply chains depend on cheap labour, negotiations were always likely to be tricky. When Japan, which likes to spoil its farmers, joined in 2013, they became even trickier. But after 19 rounds of negotiations, considerable progress has been made. There is a strong push to finish it by the end of this year, though a similar deadline last year was missed.

RCEP, which is led by ASEAN, has the unenviable task of bringing China and Japan to the same table. It is more focused than TPP on market access and on smoothing the way for supply chains. But it includes foot-dragging India, and may suffer from ASEAN’s softly-softly way of negotiating by consensus.

Aim higher

America’s trade representative says the TPP is about ensuring high labour standards, exposing state-owned enterprises to level competition with private enterprises and including digital activity “to ensure a free and open internet”. RCEP is likely to be weaker. Whereas the TPP is aiming to eliminate almost all tariffs, India is thought to be asking RCEP to keep the figure as low as 40%. China is somewhere in between apparently waiting to see where everyone else ends up.

Predictably, in the run-up to the 21-country APEC summit in Beijing this month, America and China have also been at odds over the FTAAP plan being promoted by the Chinese. Wang Shouwen, China’s deputy trade minister, has memorably described the TPP and the RCEP as “two wheels of a bicycle”, and the Obama administration has been heartened to find that the Chinese government no longer dismisses the TPP as an anti-China ploy. But APEC insiders say that American officials have opposed China’s plan for an FTAAP feasibility study, and they disagree over timing. As one official says, America is “dead set on achieving a breakthrough on TPP” and does not want to be distracted by FTAAP.

They also differ over which should be the FTAAP’s main building block. Eventually America would like to bring China into the TPP and use that as the basis for a highly sophisticated trans-Pacific FTA. But China will be reluctant to accept American rules on things like state-owned enterprises and internet access. Going down an RCEP route would give it more say.

Messrs Petri and Abdul-Raheem think that a trade agreement between America and China would bring big gains, whatever the route. But they reckon that a more rigorous TPP-style model would bring economic benefits worth almost $1 trillion more than one based on RCEP, though it would be much harder to persuade China to go along with it.

Crossing the Ts

Yet the TPP itself still has huge hurdles to overcome, mainly political rather than technical. The Obama administration’s main headache—some say self-inflicted—is another acronym, Trade Promotion Authority (TPA). This enables the American government to negotiate free-trade agreements without having them picked apart afterwards; Congress can only validate or reject en bloc what has been negotiated. Once called “fast track”, TPA lapsed for new trade agreements in 2007. Since 2012 the White House has been seeking renewal, but even its own Democrats on Capitol Hill have stonewalled.

Japan’s obstacles are more elegiac than TPA, but just as stubbornly entrenched. They have to do with rice and other “sacred” products of the land, such as wheat, beef and pork, dairy and sugar. Japanese farmers are few and far between, and most of them are getting on in years, but as guardians of the nation’s most cherished harvests they yield to no one. Backed by JA, a vast Tokyo-based farm lobby, they have spent their lives resisting efforts to lower tariffs on such products. Richard Katz, an economist, says that their rural toils produce just 0.8% of Japan’s GDP, yet they match America’s Congress in holding TPP hostage.

In September, just days after Mr Abe reiterated in America that TPP was crucial for raising Japan’s agricultural competitiveness and helping it adjust to an ageing society, TPP talks between the two countries abruptly broke down. Each side blamed the other, though Americans continue to suspect that the problem is not Mr Abe’s own commitment but the weight the farmers carry with his bureaucrats. The Japanese, for their part, realise that their best offer may never be good enough for Congress, so without TPA there is unlikely to be TPP.

Mr Froman, the trade tsar, puts TPP into a dauntingly ambitious context. He calls it central to America’s pivot to Asia, a chance to show the country’s commitment to creating institutions that moderate territorial disputes, and an opportunity to show emerging economies (meaning China) what economic rules the global economy should follow. “At a time when there is uncertainty about the direction of the global trading system, TPP can play a central role in setting rules of the road for a critical region in flux,” he says. The flipside of this is that failure becomes an even bigger risk, which Mr Froman acknowledges. Perhaps in an effort to prod a somnolent, introspective Congress into action, he makes the dramatic claim that failure could mean America “would forfeit its seat at the centre of the global economy”.

Many pundits in Washington agree that American leadership in Asia is on the table. Michael Green of the Centre for Strategic and International Studies says TPP failure would “undermine the impression of the United States as a Pacific power and look like an abdication of leadership”. It would also take pressure off Japan and China to reform their economies. Mireya Solís, a Japan expert at the Brookings Institution, says it would be a “devastating blow to the United States’ credibility”.

Those views are echoed in East Asia. Mr Tay in Singapore says TPP failure would be a disaster: “If the domestic issues of these two countries cannot be resolved, there is no sense that the US-Japan alliance can provide any kind of steerage for the region.” Deborah Elms, head of the Singapore-based Asian Trade Centre, suggests that so far the American pivot has manifested itself mainly as an extra 1,000 marines stationed in Australia. “Without TPP, all the pivot amounts to is a few extra boots on the ground in Darwin,” she says.

Even members of America’s armed forces are worried. As one senior serving officer in the Pacific puts it, “the TPP unites countries that are committed to a trade-based future, transparency and the rule of law. It is the model that the United States and Europe have advanced versus that advanced by China. It is an opportunity to move the arc of Chinese development, or identify it as a non-participant.”

Yet when Mr Obama mentions TPP, he talks mostly about protecting American jobs rather than safeguarding America’s place in the world. The president has never fully put his back into forcing a congressional vote on TPA. There is still time for him and Mr Abe to rescue the trade talks. But unless Mr Obama leads from the front, America’s own leadership in the Pacific will seem less convincing than he has repeatedly promised.

Maritime power

Your rules or mine?

Trade depends on order at sea, but keeping it is far from straightforwardNov 15th 2014 | From the print edition

Vast, ungainly container ships, bearing China’s flag and name, plough along under the glorious Golden Gate Bridge

COMMUTERS BETWEEN MARIN COUNTY and San Francisco in northern California are getting used to a new spectacle during rush hour. Vast, ungainly container ships, bearing China’s flag and name, plough along under the glorious Golden Gate Bridge. They are bringing goods into the Port of Oakland—and taking back America’s trade deficit. Any pleasure yachts zipping around the bay give them a wide berth.

This is China as a Pacific power, a commercial rather than a naval one. According to statistics gathered by Michael McDevitt, a retired rear-admiral at America’s Centre for Naval Analyses, it is now the world’s largest shipbuilder; has the third-largest merchant marine, and by far the largest number of vessels flying its own flag; and boasts a 695,000-strong fishing fleet. It accounts for about a quarter of the world’s container trade. And almost all the steel boxes shipped on the world’s oceans are made in China, too.

Much of the security of that trade across the Pacific is the gift of America. China “free-rides” on the protection provided by the United States Pacific Fleet, based in Pearl Harbour, Hawaii, so it benefits from America’s enforcement of the rules of sea-based activity. But in the western Pacific China has behaved provocatively towards some staunch American allies, testing the bounds of international maritime law.

That implicit challenge comes up often in speeches by American officials. Whether civilian or military, they use an oddly terrestrial metaphor when discussing America’s leadership in the world’s biggest ocean. It is all about enforcing “the rules of the road”, they say. One set of those rules are those on trade, which, as discussed in the previous article, America hopes to modernise via the Trans-Pacific Partnership (TPP). Another is about maritime security, particularly in the sea lanes through disputed territorial waters in what China calls its “near seas”. America argues that to safeguard those vital routes of commerce, any territorial quarrels should be settled according to international law, not by force and intimidation. Otherwise, says Daniel Russel, assistant secretary of state for Asia-Pacific, it is a dangerous world where “might makes right.”

However, as Henry Kissinger writes in his new book, “World Order”, China does not necessarily see the rules the way America does: “When urged to adhere to the international system’s ‘rules of the game’ and ‘responsibilities’, the visceral reaction of many Chinese—including senior leaders—has been profoundly affected by the awareness that China has not participated in making the rules of the system.”

Mr Kausikan of the Singapore foreign ministry goes further. He says that all Chinese are aware of the 100 years of invasion by Western powers and Japan that their country suffered before 1949. “It was never very realistic to expect China to be a ‘responsible stakeholder’ in a regional and global order that it had no say in establishing and which it holds responsible for a century of humiliation,” he says.

American officials acknowledge that China plays by many global rules, especially the trade ones it signed up to when joining the World Trade Organisation in 2001. But especially in its own neighbourhood, it is challenging rules and norms—including some it has explicitly agreed to—that have kept the seas safe since the second world war.

For instance, in 2002 it signed a treaty with its neighbours in ASEAN agreeing to settle maritime disputes in the South China Sea peacefully and according to international law, such as the 1982 United Nations Convention on the Law of the Sea (UNCLOS). Yet it is in often tense disputes with ASEAN countries such as Vietnam and the Philippines over control of three sets of islands and rocks in the South China Sea—the Paracel Islands, the Spratly Islands and Scarborough Shoal—and with Japan over the Senkaku/Diaoyu Islands. When the Philippines took its opposition to China’s maritime claims to UNCLOS in March, China huffily refused to accept the arbitration.

It has also sought to stop American naval and air-force vessels operating in its exclusive economic zone (EEZ), 200 nautical miles from its shoreline (see map), which America and many of its allies consider a violation of UNCLOS. In August this year a Chinese fighter intercepted an American Navy P-8 maritime patrol in international airspace about 135 miles (216km) off Hainan Island, which the Department of Defence described as “very, very close, very dangerous”.

This EEZ dispute could have profound implications for the stability of trans-Pacific sea routes, overseen for generations by America’s navy. “It may sound arcane,” writes Bill Hayton, author of “South China Sea: The Struggle for Power in Asia”, published earlier this year, “but the legal debate over what one country’s military vessels can do in another country’s [EEZ] has already brought the United States and China to the edge of conflict. It’s a battle between American demands for access to the ‘global commons’ and China’s search for security. It’s a struggle that will define the future of Asia and possibly beyond.”

The South China Sea is where that struggle is most visible. On modern maps the reefs and shoals between China, Vietnam, the Philippines, Taiwan and Malaysia are labelled “Dangerous Ground”—not because of their disputed ownership but because through history they have been a mariner’s nightmare.

According to Mr Hayton, the South China Sea itself plays an historic role in the crafting of the rules in contention. In 1603 the Dutch East India Company seized a Portuguese ship laden with raw silk and gold near the Strait of Malacca and hired a Dutch jurist, Hugo Grotius, to defend its action. He wrote a book in Latin called “Mare Liberum” (“The Free Sea”), arguing that the seas were international territory and should be open to all. Over the following centuries this was used by global powers as justification to sail merchant vessels where they liked, often with gunboats sailing alongside to enforce their authority.

Go by the book

Built loosely on “Mare Liberum”, UNCLOS established the EEZ concept which gave coastal nations exclusive rights over natural resources within a 200 nautical-mile limit but allowed for free navigation and overflights outside territorial waters extending to 12 nautical miles from the coast. Ironically, China has ratified UNCLOS whereas the American Senate has not—though in practice the American navy follows and attempts to enforce it.

But China’s interpretation (and that of a small group of large developing countries such as India and Brazil) differs from that of most states: it requires naval vessels to seek its permission before entering its EEZ. In 2013 a Chinese navy ship cut directly across the path of the United States Navy cruiser Cowpens, forcing it to change course abruptly to avoid a collision. Such incidents are red rags to the Americans. Their navy still regularly sends spy ships into China’s EEZ.

If China were to decide to enforce its version of the rules, the risks would be severe. In his book, “Fire on the Water: China, America and the Future of the Pacific”, Robert Haddick said it could mean the exclusion of foreign warships “from the Strait of Malacca all the way to Japan’s home islands”. Even if China were to keep the seas open to merchant shipping, the whole concept of maritime security would be jeopardised. America might be forced to retaliate.

That is an alarming scenario, though many security specialists say China does not seem to be spoiling for such a showdown with America, at least not yet. Optimists reckon that the Chinese navy, though growing fast, is ill-prepared for war with such a doughty opponent. Moreover, a defeat would be catastrophic for China. Security analysts say the Communist Party would lose its legitimacy and the trade-driven economy would collapse.

Pessimists argue that, even with good intentions on both sides, miscalculation or misunderstanding could still lead to conflagration. Chuck Hagel, America’s defence secretary, says America will oppose any effort to restrict overflight or freedom of navigation. It will “not look the other way”, he told his defence counterparts at the Shangri-La Dialogue in May.

In its island disputes, security analysts say China is picking fights with American allies that test the United States’ commitment to upholding the law by proxy, in steps small enough to make retaliation hard. But in the process it is gradually establishing “facts on the ground” in its own back pond. Euan Graham of the Singapore-based S. Rajaratnam School of International Studies says that eventually these could enable it to thicken its EEZ into a robust coastal buffer. He notes that Chinese history—such as Britain’s shameful Opium wars of the 1840s and 1850s—makes the country particularly sensitive to maritime threats.

That dashed line

All the disputed territories fall within what China calls its nine-dash line, which covers virtually all of the South China Sea and more than half of its neighbours’ own EEZs. Since it took over Mischief Reef in 1995, China has quarrelled with Vietnam over the Spratly Islands and installed some garrisons. It also occupied Scarborough Shoals after a stand-off with the Philippines in 2012. This year drilling by a big Chinese oil firm in waters 120 nautical miles (222km) from the Vietnamese coast sparked anti-Chinese riots in Vietnam. Tensions over the Senkaku/Diaoyu islands have been hurting relations with Japan since 2010.

Mr Haddick refers to China’s tactic of gradually enforcing these island claims as “salami-slicing”. It is “the slow accumulation of small changes, none of which in isolation amounts to a casus belli, but which can add up over time to a significant strategic change”. Ronald O’Rourke, a naval analyst for the United States Congressional Research Service, says Chinese officials have called it a “cabbage strategy”. The islands are wrapped, cabbage-like, in successive layers of protection formed by fishing boats, Chinese coast guard ships and finally naval vessels. China rarely deploys its armed forces in these creeping encroachments. Instead, says Ian Storey of the Institute of South-East Asian Studies, it uses maritime law-enforcement agencies. “Even the name implies China already feels it has jurisdiction.”

The tactic makes it harder for any claimant to launch a military response without appearing to raise the ante. “The Chinese are pursuing a pretty clever strategy and the rest of us haven’t figured out a good response,” says Admiral Dennis Blair, former head of America’s forces in the Pacific and now chairman of the Sasakawa Peace Foundation USA. He reckons that countries threatened by China’s “administrative aggression” should settle their territorial disputes with each other first and then present a united front to China. Mr Russel says “it is a good thing that China is not deploying the People’s Liberation Army’s navy.” But he points out that “whatever is driving the behaviour, the point is that it risks escalation and confrontation, so the exercise of restraint is necessary.”

In late September more than 18,000 American army, navy, air force and marine corps personnel took part in an unprecedented joint exercise off the Pacific island of Guam. Without explicitly saying so, it was aimed at testing responses to the sort of “sea-denial” strategy (missiles, submarines and cyber-attacks) that American military planners think China has developed to counter naval threats. According to Rear-Admiral Mark Montgomery, a Seventh Fleet commander, a Chinese auxiliary ship was spotted observing the exercises in America’s EEZ. That was the second time this year a Chinese vessel was seen snooping in American waters during war games. The Americans chose to treat it as a possible sign that China was exploring the benefits of their version of the UNCLOS rules.

Earlier this year naval chiefs from China, America and many other countries pulled off a surprise by signing the Code for Unplanned Encounters at Sea, which provides guidelines for naval ships or aircraft when they unexpectedly come close to each other. It offers a measure of potential damage control but it is not legally binding, nor does it apply in a country’s territorial waters, so it may be interpreted as subjectively as UNCLOS.

For China, the big question as it seeks to become a maritime power is how much it wants to project that status into the wider oceans beyond its neighbourhood. Singapore’s Mr Kausikan asks whether China will support a system that has benefited it or continue to be a “global free-rider”. That question is looming larger in the maritime sphere. As America becomes less reliant on Middle Eastern oil, thanks to its shale revolution, will China help to protect the sea lanes across the Indian and Pacific oceans for everyone’s benefit?

North American energy

Oil and water

North America’s energy revolution will have a ripple effect around the PacificNov 15th 2014 | From the print edition

TO FIND OUT how much energy security has mattered in the Pacific’s recent history, ask the Japanese. At the museum of the Yasukuni Shrine in Tokyo, which honours the country’s war dead (sometimes controversially), an exhibit suggests, with a jarring note of self-justification, that an American naval blockade against Japanese oil imports in 1941 triggered the Pacific war.

Seventy years later a tsunami that swooshed in from the Pacific and knocked out the Fukushima Daiichi nuclear power station led to the closure of Japan’s 54 nuclear reactors. Parts of the country, which is a greedy consumer of electricity, were left practically powerless. Huge tankers full of natural gas, heading for terminals dotted along Japan’s Pacific coastline, eventually got the country up and running again. In 2012 Japan consumed 37% of the world’s liquefied natural gas (LNG).

The past few years have seen some upheavals in the balance of energy security around the Pacific. America, which used to be the world’s largest net oil importer, ceded that spot to China in 2013 (see chart 4). Thanks to shale oil and gas, this year it is set to become the world’s biggest producer of oil and liquid natural gas. It is already the number one producer of dry natural gas.

That highlights the prospect of huge trans-Pacific complementarities. China is reducing the dominance of dirty coal in its energy mix, Japan and South Korea are denuclearising, and fast-developing countries like Indonesia are turning from LNG exporters to importers. Yet to date there is next to no trans-Pacific trade in oil, gas or coal in either direction; in 2011 the Singapore-based Pacific Economic Co-operation Council (PECC) said it added up to only 1.4% of global trade in those products.

According to statistics from BP, a global energy firm, North America gets most of its crude-oil imports from Canada or via its east coast from Latin America, the Middle East and west Africa. Asia receives the vast majority from the Middle East via the South China Sea. The Pacific is a big blank. But that may be about to change, with potentially big implications for the economic interdependence and geopolitics of the Pacific region.

Time to share the bonanza

The epicentre of the change is North America, whose huge gas discoveries are about to turn it into a global LNG power. In Canada Asian-owned companies plan to build the first export terminals on the coast of British Columbia in the next few years to ship LNG across the Pacific. In the United States the government has recently approved the construction of four terminals to liquefy gas and ship it west via the Panama Canal.

One of those, Dominion Energy’s Cove Point, near Washington, DC, built as an LNG import terminal in the 1970s, had been mothballed for much of the following three decades. Not long after it resumed receiving LNG imports in 2003, American natural-gas prices plummeted in response to the shale revolution, putting the terminal out of business again. So in 2011 Dominion switched to marketing Cove Point to foreign LNG customers as a potential export facility. On September 29th this year the Federal Regulatory Energy Commission finally approved construction of an export terminal. Those LNG exports will benefit from a $5.3 billion expansion of the Panama Canal. Due to be completed (after several delays) in 2016, this will make the canal big enough to accommodate nine-tenths of the world’s LNG fleet, potentially cutting at least 11 days off shipping times between the Gulf of Mexico and East Asia.

The implications of this new trade on both sides of the Pacific could be substantial. According to Jane Nakano, of the Centre for Strategic and International Studies (CSIS) in Washington, as of last year Japan had contracted to buy about a fifth of its LNG imports from America once it gets the necessary permissions.

Currently dry gas in America costs $4-5 per million British thermal units (MBTUs). Even allowing for another $6 or so to liquefy the gas and transport it to Asia (and far less from Canada’s west coast), the price would still be a lot lower than the $15-18 per MBTU that LNG currently fetches in Japan. Cheaper energy would make Japan’s economy more competitive, and America would see a much-needed improvement in its trade balance.

For American exporters, that scenario involves risks. Australia, one of the world’s two biggest LNG exporters, is ramping up its output over the next five years, much of it destined for Asia. China, another big potential buyer, appears to be avoiding American LNG. This year it signed a $400 billion deal with Russia to import natural gas from there for the next three decades.

But the energy markets of China and North America are warily intertwining in other ways, mainly through Chinese investment in oil. North America has received a flood of investment from Chinese oil companies since the global financial crisis. In 2012 CNOOC, one of China’s state-owned energy behemoths, bought Canada’s Nexen for $15 billion, seven years after its bid for America’s Unocal was scuppered by opposition in Washington. The welcome is not always open-armed. After the Canadian deal the prime minister, Stephen Harper, put a financial limit on further acquisitions: “Canadians have not spent years reducing the ownership of sectors of the economy by our own governments only to see them bought and controlled by foreign governments instead,” he said.

But Mexico, which in 2013 changed its constitution to allow foreign investment in its oil industry for the first time in 75 years, would welcome China with open arms if it wanted to invest in its energy sector, according to Ildefonso Guajardo, its economy minister. Tellingly, in the past two years Mexico’s president, Enrique Peña Nieto, has had four meetings with his Chinese counterpart, Xi Jinping—the same number as with President Obama.

The benefits of this new North American energy glut go far beyond the oil industry. For a start, it is making North American manufacturing more competitive. The combination of cheaper energy and rising Chinese wages could make Mexico a more attractive factory floor. But it is also sending two powerful geopolitical signals: one to America’s close allies, such as Japan and South Korea, that the friendship can now also help underpin their energy security; the other, to the wider Asian region, that North America has bounced back from the global financial crisis. In time, such symbols of economic revival could resonate strongly on the other side of the Pacific. Eduardo Pedrosa, the Singapore-based secretary-general of PECC, calls it a tectonic shift in American competitiveness. “I don’t think anyone over here realises how massive this shale revolution is for the US economy.”

Latin America

Pacific pumas

In America’s backyard, the Pacific economies are learning from East AsiaNov 15th 2014 | From the print edition

Waiting for the new Panama Canal

ABOUT FOUR CENTURIES ago Latin America became central to the trans-Pacific economy, according to “Pacific Worlds”, a book by Matt Matsuda, an historian. Silver from Bolivia travelled by galleon from Acapulco to Manila, where it was trans-shipped to China and became a vital substitute for its debased currency. Back came silks, porcelain and slaves. One, an Indian noblewoman sent by slavers to New Spain, became famous for her long dark braids and colourful clothes. She was known as La China Poblana. Her dress sense, influenced by her Asian heritage, is now considered the epitome of traditional Mexican style.

After a long interlude, once again a roaring trade has developed between Asia and Latin America. It has quadrupled since 2004. Asia has overtaken the European Union as Latin America’s second-biggest trading partner after the United States. Latin America’s share of Asian trade is less impressive but has still doubled (see chart 5). China has the biggest share, swamping the region with its own products and gobbling up Latin America’s natural resources (see article). Two-way trade grew more than 20-fold in the ten years to 2013, and China has overtaken the United States as the biggest trade partner of Brazil, Chile and Peru.

Chinese investment in Latin America has increased, too, though the figures are murky because China parks much of its capital in tax havens in the British Virgin Islands and Cayman Islands before investing it. According to the UN’s Economic Commission for Latin America and the Caribbean, since 2010 China has been investing about $10 billion a year in the region. Thomson-Reuters, a data firm, says that since 2000 Chinese firms have announced more acquisitions in Latin America than in Africa or South-East Asia. Much of the investment has been energy-related. In contrast, Japan, the biggest Asian investor in Latin America, puts most of its money into manufacturing facilities to make things such as cars.

In the past few years Latin American exports across the Pacific have slowed as China’s economy has become less dynamic and commodity prices have dropped. The growing trade gap has given rise to two worries: that the region is relying too heavily on basic exports again and succumbing to a “natural-resource curse”, as it has done before; and that it will take the wrong lesson from China and embrace state capitalism. Leftist governments on Latin America’s Atlantic coast, such as those in Brazil, Venezuela and Argentina, which privatised heavily in the 1990s, have since moved strategically and in some cases ideologically closer to China.

The question is why Latin America has failed to match the success of the East Asian model. Augusto de la Torre, the World Banks’s chief economist for Latin America, explains: “After the second world war the East Asian economies linked up to Japan, and in the process of getting connected they created the ‘Asian Factory’. It became a virtuous circle. The better they connected to the world, the better they connected to each other.” Latin America’s post-war experience has been the reverse: “We were connected to the most important growth centre, the United States. But instead of the ‘Latin American Factory’, we got dependency theory, structural adjustment and a lot of disappointment.”

The World Bank says that East Asia’s poorer countries, whose GDP per person in the 1960s was a third of Latin America’s, have almost caught up. Between the 1960s and the late 2000s their productivity growth averaged more than 2% a year, whereas in Latin America it was only just above zero. Mr de la Torre points to lack of investment as one of Latin America’s main problems. Average investment rates have been stuck around 20% of GDP for decades, whereas in East Asia in the 1990s they averaged over 35% of GDP, so electricity and transport networks there are now far denser. East Asia has also made huge strides in education, which has improved the quality of its workers.

Antoni Estevadeordal of the Inter-American Development Bank (IDB) says the poor infrastructure has impeded trade within Latin America as well as the creation of inter-regional supply chains. In a recent report the IDB heretically suggested Latin American policymakers should look to East Asia and emulate aspects of its industrial policy, considered unthinkable in the “Washington Consensus” 1990s.

So far there are few signs that big multinational investors in Latin America are rushing to take advantage of the Pacific promise

Not coincidentally, such lessons are being absorbed most quickly along Latin America’s Pacific coastline. Four relatively open economies, Chile, Colombia, Mexico and Peru, in February signed a landmark trade pact, the Pacific Alliance, to strengthen economic ties to Asia. Their combined population is 212m and they conduct half of Latin America’s trade. They are already the most Asia-oriented in the region. Since 2004 they have signed or started work on at least a dozen free-trade agreements with Asian countries, with Chile leading the way.

Once Colombia has ratified the Pacific Alliance, more than nine-tenths of tariffs will be abolished and common rules of origin will help encourage the development of regional supply chains, says Andrés Rebolledo, head of Chile’s international trade division. The first priority is regional integration: the countries hope to improve air and maritime connections and court foreign investment to improve infrastructure links. They have already united their stockmarkets.

A hard act to follow

But they will struggle to match Asia’s success. East Asia’s economic integration started organically, with copious investment from Japan, and free-trade agreements came only after the nuts and bolts of commerce had been established. So far there are few signs that big multinational investors are rushing to take advantage of the Pacific promise. Geography—a long, straggling South American coastline versus a circle of trade around the South China Sea—may also be putting the pact at a disadvantage.

But other bold steps may help. Mexico, for example, has noted the galling failure of NAFTA to create a manufacturing hub anything like as vibrant as East Asia’s. It is suffering from an onslaught of Chinese imports, including industrial components that go into its own exports, so the government of Enrique Peña Nieto has embarked on far-reaching reforms to modernise the economy. They include measures to bolster competition where monopolies and oligopolies have dominated until now, such as in energy, telecommunications and broadcasting. One of the aims is to bring down electricity costs, improving Mexico’s cost advantage over China in manufacturing.

Japan has seized on Mexico’s promise. Last year Nissan opened a new $2 billion factory in Aguascalientes, its second in the state. New cars whirr off the production lines at the rate of almost two every minute. Mexico has overtaken Brazil to become the world’s seventh-largest carmaker and now exports not just to the United States but to South America too.

But Enrique Dussel Peters, a China expert at Mexico’s National Autonomous University, says the main lesson from Asia is that Latin American governments are not ambitious enough. He notes that only a decade ago China was making the same number of cars as Mexico is producing today, but now it churns out almost six times as many.

Chile and China

¡Salud!

Food and drink draw two regions togetherNov 15th 2014 | From the print edition

A FEW YEARS ago some Chinese oenologists with almost no Spanish arrived in one of Chile’s most prestigious wine regions, the Colchagua Valley, to buy a vineyard. They were from Cofco, a big state-owned Chinese food and drink manufacturer whose Great Wall wines are quaffed by the country’s aspirant middle classes. In 2010 Cofco spent $18m on a large swathe of Bisquertt, one of the valley’s most upmarket brands. It changed its name to an easier-on-the-tongue Santa Andrea, and after some trial and error put the wine into mass production. Its price plunged, but wine exports from Chile to China have soared. Many of them come in two-litre bottles, which suggests they are not aimed at the most discerning of Chinese palates.

Chile is about as far away from China as you can get on the globe, yet in recent years China has overtaken the United States as the Andean nation’s biggest trading partner, accounting for more than a fifth of its imports and exports. Most of those exports are of copper, but food and drink are also on the menu. Andrés Rebolledo, the Chilean government’s head of international trade, says his country is now producing salmon for sale in Asia. Getting it there in perfect condition forms part of Chile’s efforts to develop the logistical skills needed to add value to its farm exports.

Demand for copper may wax and wane with the strength of China’s economy, but there are compelling reasons why east-west trans-Pacific food trade should grow, according to a joint study by the Inter-American Development Bank and the Asian Development Bank in 2012. Asia, particularly China, lacks agricultural land and water, whereas Latin America has plenty of both.

The study notes that between 1975 and 2009 China lost 20% of its farmland to urbanisation and desertification, yet as its population becomes richer it demands more high-protein, high-calorie food. Among Latin America’s ten biggest exports to Asia are poultry, sugar beet, soya oil, vegetable oils and soybeans. Some of that goes to feed a big favourite in the modern Chinese diet, pork.

Agricultural tariffs in Asia remain prohibitively high, and Latin America imports lots of electric-power plant and car parts from Asia, which explains why the region’s trade is alarmingly lopsided. But lessons from history should encourage China to nurture its agricultural relationship with Latin America.

A 1972 book by Alfred Crosby, “The Columbian Exchange”, explained how after the discovery of the Americas sweet potatoes, corn, peanuts, tobacco and chili peppers travelled across the Pacific to China for the first time. Then as now, China had a large population and not enough fertile land. The American crops thrived in poor soil, and so did those who ate them. Now the region that put the spice into Szechuan food is providing the wine to wash it down.

The future of the region

Merchants or missionaries?

The big powers in the Pacific need to be pragmatic, not dogmaticNov 15th 2014 | From the print edition

They need each other

CURIOUSLY ENOUGH, AN American company called Atlantic has spent the past 30 years doing thriving business across the Pacific. Based in California, it sends orders to Chinese factories to produce small items of furniture. Its founder and CEO, Leo Dardashti, is sticking with China as a manufacturing base despite rising costs because of the mutual trust between him and his factory owners there. But he also believes China and America make a unique fit: “There is no country in the world that has the buying power of the United States and no country that has the production power of China.” If he needs 400,000 items within a few months to sell in stores across America, only China has the scale to provide them, he says.

He travels to China frequently, sometimes as often as once a month. The friendships he has established with the people who make his goods are the foundations of his business, he says. It is not just eye contact and smiles. “As I sit in their factory, I’m a relatively big buyer, but I have to be careful how I play that game. I have to make them like me, tell them what my values and goals are, offer them a good deal. It’s all

about negotiation.” Negotiation is an art he believes the leaders in Washington and Beijing should develop in their dealings with each other, too.

Instead, they appear to be drifting further apart. As the Chinese see it, America is becoming increasingly bossy, and as the Americans see it, China is becoming a bully with its neighbours, some of whom are loyal American allies. Singapore is a good place from which to observe this tension. It wants a strong American presence in the region as a counterweight to China but also tries to see things from China’s perspective. Singaporean scholars say one of the main difficulties with the United States is the “universality” of its belief system—the idea that there are universal values such as human rights. With China the problem is its history, which stretches back so far it also comes close to being seen as a universal truth.

Wang Gungwu, chairman of Singapore’s Lee Kuan Yew School of Public Policy, says China is particularly irritated by America’s sense of the immutability of its superpower status, especially in a region that China has historically considered its own sphere of influence. He acknowledges that America freed the region from Japanese imperialism and stopped the spread of communism, but in China’s eyes that does not entitle it to an eternal hegemony in its backyard. It would like its own status as a rising power to be registered. “The idea of the status quo for ever and ever is so alien to the Chinese way of thinking. Throughout their history the only norm is change.”

Another source of tension is rules. For China and other parts of Asia the idea that Western rules on issues like freedom of the seas, democracy and human rights are set in stone is anathema, says Mr Wang. “Nothing is absolute, everything is negotiable.” The region’s history, with imperialists and missionaries arriving on the same ships, has made it wary of absolute values. “We understand that the Western idea of rules stems from a long legal tradition, but practical people recognise that laws change,” he explains. In his view, America’s businessmen understand this; its “political missionaries” do not.

Dream or nightmare?

Yet China is just as dogmatic, especially in its political system, and also in its treatment of its neighbours. Mr Kausikan, Singapore’s ambassador-at-large, attempts to justify China’s “grave suspicion” about Western attitudes to universality, explaining that its government is attempting to maintain internal stability at a time of unstable public opinion. For the rulers, that means keeping the Chinese Communist Party in power.

Mr Kausikan also accuses China of projecting a “virulent nationalism” based on supposed historical claims that is causing alarm in its neighbourhood. He asks whether China will pursue sovereignty through commonly agreed norms or by use of force. “It is this, more than any other single factor, that will determine whether the ‘China dream’ will become the region’s nightmare. The record is mixed and China has not behaved consistently. Great powers have a responsibility to reassure that China has only partly fulfilled.”

As this report has argued, the Pacific is a place of networks and interconnections. That connectivity has become stronger on both sides of the ocean, partly because smaller countries need to link up to provide a counterweight to the big powers in their regions, and partly because they need to tie their fortunes to their big neighbours in order to become indispensable to them. That is as true of South-East Asia and China as it is of parts of Latin America and the United States.

In the next decade or two, these linkages are likely to become more trans-Pacific in nature, partly because the Chinese growth engine is slowing. East Asian investment in the Americas will increase in a bid to get closer to the big market of the United States. Japan and South Korea may be keen to diversify their trading relationships to become less dependent on China. A China concerned about its economic future could behave belligerently. But given its interest in maintaining domestic stability, it is more likely to see trade agreements with its Pacific neighbours as a way of securing that stability, much as the European Coal and

Steel Community of 1951, which brought together Germany and France, two old antagonists, laid the foundations for the European Union.

America and China are also bound together by a mutual dependence. In fact, as Mr Kausikan points out, that may deepen the strategic distrust between them. Taken to its extreme, it could be the Pacific’s economic equivalent of the mutually assured destruction in the Atlantic that helped prevent the cold war from turning into a hot one. But it is less grim. China, for all is assertiveness, shares elements of the Western market model that the Soviet Union did not. America and China hold strategic dialogues on economic and military matters. They are negotiating a bilateral investment treaty that American officials say is economically ambitious for China. According to a recent poll of opinion leaders around Asia by the CSIS, 83% of the Chinese ones think America will still be their country’s most important economic partner in ten years’ time.

If America wants to nudge China towards becoming a “responsible stakeholder” in the world, helping shore up the system that guarantees free trade and free seas, it may also have to accept that its own relative power in the Pacific region is in decline. This may mean taking potentially risky strategic decisions; for example, allowing its post-war security alliances with Japan and South Korea to mature into more equal partnerships. It could also mean allowing regional security alliances to prosper without America as the hub around which they revolve. If these include China, so much the better.

As in all successful negotiations, both America and China need to engage in give and take. With such a spirit, the Pacific age could create new rules and institutions fit for the 21st century. As Mr Dardashti pragmatically puts it: “We need those guys, and they need us.”