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China’s Central Asia Engagements

America’s entanglement in Middle East has given China the perfect ploy to increase its footprint in Asia. The much-hyped Asia Pivot is in doldrums, with no policy framework or strategy to manage China’s rise. China clearly senses that its power projection in the Pacific is limited by the vast US presence and its network of allies, but in Central Asia, a viable power vacuum gives it the opportunity to expand its presence and influence. Central Asia is critical for China in three sectors, mainly trade, energy supplies and the fight against terrorism emancipating from Xinjiang.

 Energy Heaven and Russia’s Backyard-

After the collapse of the Soviet Union, Chinese companies ran into Central Asia to chart out energy deals to secure China’s growing energy demands. Most of Oil and Gas Pipelines run through Caspian Sea, Central Asia and Xinjiang, deep into China. Russia continues to be the main geopolitical player in the region, with negligible US presence. But off late, it has been facing subtle yet stiff competition from China. With economic sanctions in place, it is becoming increasingly difficult for Russia to ward off China’s economic power play. China-Central Asia trade was valued at 50 billion dollars in 2014, a figure exceeding Russia’s for the first time. The China-Central Asia network of pipelines could supply up to 55 billion cubic meters of natural gas to China every year, or more than half of China’s total gas imports.

Xinjiang Factor-

Increasing terrorist activities in Xinjiang has put China on a high alert. Influx of the majority Han Chinese in the region termed as ‘Hanification’, and failure of developmental projects has angered the ethnic Muslim population to rise against Xi’s ‘Strike Hard’ campaign. Since most of the oil and natural gas pipelines pass through this region, China is concerned about the security of its investments, and has in recent years, tried to subvert the religious practices of the people in Xinjiang. Uyghur separatists used to move around the porous borders with other Central Asian states to reach Afghanistan, though in recent years their movements have been highly regulated due to increased Chinese clampdown. China’s domestic law enforcement agencies are coordinating with their counterparts in the region to capture the terrorists and bring them to justice. Stability and security is the buzzword in this region. China maintains a premium on stability, and will go at lengths to protect its trade interest in the region. After the killing of a Chinese hostage by ISIS, China has stepped up its counterterrorism efforts. Pakistan has also played a critical role in assisting China. Andrew Small’s ‘The China Pakistan Axis-Asia’s New Geopolitics’ provides a detailed description of their coordination on selective counterterrorism.

Trade-

Trade is a very important factor in China’s geoeconomic calculus in the region. President Xi Jinping unveiled the ‘One Belt, One Road’ initiative in 2013 to maximize trade and commerce between Europe and China, with Central Asia acting as a critical transit point. EU-China trade is worth around 580 billion dollars, with much of the trade traversing through Central Asia, a replica of the old Silk Road. During ancient times, China had become the most prosperous nation entirely out of trade with Europe and Middle East, and is using the old route to reemphasize its benefits to other nations. Furthermore, China wants to decrease its dependence on the lengthier sea route for trade with Europe, and hence has increased investment in infrastructure projects in the region. For this purpose, China has setup three institutions to fund the vast developmental projects in the region. AIIB, Silk Road Infrastructure Fund and New Development Bank will pool in a total of around 100 billion dollars, with the Silk Road Fund alone providing 40 billion dollars. They will mostly concentrate on connecting China to Europe through railway lines, roads and energy infrastructure. With slowing economic growth and output, OBOR is highly essential for China to succeed and provide the necessary impetus to bolster growth in coming years.

 

India is slowly engaging itself in Central Asia with oil deals and gas pipelines, the most notable being TAPI. But it continues to lag behind China in terms of investment and influence. India-Central Asia trade pegs at 800 million dollars, which would have been higher, if not for Pakistan. Lack of direct access to Central Asian region continues to be a hindrance in terms of trade, energy security etc for India. And as the Chinese say, India is still 2 decades behind them, more so in this region. Let’s see if India will be able to better engage itself in Central Asia, with its growing economic clout and energy demands. Prime Minister Modi visited all 5 Central Asian states in order to increase security cooperation and trade. As the TAPI pipeline finally materializes for India, another option for India is to let the pipelines pass from Xinjiang region through the disputed territory of Aksai Chin, though it is very less likely to get traction among policy makers on both sides. In choosing lesser of the two devils, China is a better option than Pakistan for energy trade.

Piyush Singh is Junior Research Associate at Takshashila Institution and a student of law at Hidayatullah National Law University, Raipur.He tweets at @Piyushs7

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Why is the economic power still with the west?

Economic activity has certainly shifted from the west to the east. However, it is a long road ahead before the economic power so to say shifts.

The West is rich; the East remains comparatively poor, in spite of all the great recent economic achievements”. Asia has gained significant importance in the wider world economy today. Enormous growth of two major Asian economies – China and India in the past decade coupled with the slowdown of a number of advanced economies in the west only hints towards economic power shifting from the west to east. However, it is a long road ahead before the global economic order faces such a radical change. This is simply because developed countries have accumulated immense wealth and socio-economic infrastructure over the centuries which continue to give them an advantage in capacity as well as influence over the east.

The downward spiral of the west started with the global financial crisis of 2008. This was followed by notable failures of the European Union. Crisis in independent debt management, fragility in financial sector and problems due to weaknesses in their institutional design were the main characteristics of the advanced economies of the west. The downturn of United States coupled with the crisis in the European Union only acted as catalysts in the decline of the west.

At the same time, the east emerged in a number of areas. This emergence is attributed mainly to the demographics, rapid urbanisation, growing middle class and potential for increasing productivity. 60 percent of the world lives in emerging markets of Asia, however, only 20 percent fall under the consumption bracket. When this consumption increases, these emerging markets are going to become mega markets of the world. Growing trade among developing countries is regarded as one of the major driving force of these markets in Asia. Another interesting aspect to note is that for the first time, Asian economies are investing across the globe. This is in stark contrast to the fact that Asia has been the hub for global investment for many decades now. It is encouraging and worthy to observe the change in this trend.

Government, financial institutions and households are robust, healthy and growing in the emerging economies of Asia. However, they seem to have weakened greatly in the West. Asia has experienced commendable and significant structural changes in the past few years which have contributed towards the rapid growth of this region. It has grown faster than any other region around the world. This phenomenal growth has been termed as a super-cycle which is characterized by rising trade, high rates of investment, rapid urbanisation and technological innovation.

Among the emerging economies of Asia, China and India are regarded as the front runners that are experiencing massive expansion. While China had been the center of global manufacturing, India has become the international hub for global services industry. 60 percent of the GDP of Asia comes from just these two economies. The economic resurgence of the two economies has also made way for the emergence of a number of other Asian economies such as Thailand, Indonesia, Pakistan and Vietnam.

However, on the flipside, this excessive growth and improved structural transformation has been very uneven. A number of economies still need to come a long way to reach the standards of the front runners. Several countries have moved out of agricultural sector to industrial and service sector. Despite this, agriculture continues to employ a large portion of the workforce in Asia. There has been a shift from agriculture to low productive sub service sector. The exports basket has also become more diversified and refined, but only in the advanced economies of Asia.

Asian economies need to engage in inclusive growth and oppose all forms of trade protectionism to fuel economic growth. They must come together collectively and work towards policies which will further boost economic activity within Asia. Increasing importance is given to emerging economies by global organizations in order to consider their requirements towards integrating the global economy.

The emerging economies of Asia must take this to their advantage and ensure maximum assistance is received from global institutions.

Innovation is one major area where the west still dominates and the east has to catch up. They must also focus on structural transformation and direct labor towards highly productive sectors. Agriculture needs to be developed specifically in the low income economies by making modern and sophisticated methods available and implementing policies to increase productivity of this sector. These are some of the key areas that will drive employment and thereby contribute towards increasing wages in the sector which will thereby lead to increase in investments.

Emerging Asia has immense competitive advantage in manufacturing and service sector. Hence, looking forward, Asia most definitely appears to be better placed than the rest of the Global Economy. They must, however, work towards ensuring continuous innovations and build deep intellectual and institutional capital to have an edge over the already established west.

The Director General of World Trade Organization (WTO), Pascal Lamy, in September 2012, said “The rise of emerging economies was set in motion by the changes in technology, transportation costs and regulatory environment”. This swing in economic power has profound geopolitical consequences that will hardly be reversed in the foreseeable future.

However, while new economic and political trends have emerged, the rules and institutions governing multilateral cooperation have not kept pace with these changes. The difficulty in finding a new balance between advanced and emerging economies in a muted context has certainly played an important role in holding back meaningful progress.”

Asia has weathered the Global Financial crisis better than any other region. It has not only shown resilience and prompt recovery, but has also contributed largely towards the global economic recovery. However, despite the fact that the rapid economic growth of the developing countries has led to a more balanced distribution of economic power, they do not have much say in the global political and economic affairs. Many emerging countries are still way behind the developed countries in overall capacity, international outreach, institutional building and economic and social growth.

Economic activity has certainly shifted from the west to the east. However, it is a long road ahead before the economic power so to say shifts.

Varsha Ramachadran is a Research Associate at the Takshashila Institution.

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Looking beyond the debate of bilateralism versus multilateralism

by Varsha Ramachandran

It is important to not to look at bilateral and multilateral engagements as being mutually exclusive of one another. In fact, bilateralism is the first step towards broader economic integration.

For a country to enhance its national power in the era of globalisation, it is important that it has strategic, yet unbiased economic agreements with countries across the globe. Taking this idea of economic integration further is the concept of one global economy which involves unification of economic policies, monetary policies, abolishing tariffs and taxes between various countries, and providing promising prospects of peaceful livelihood.

To engage internationally, a country can enter into several kinds of agreements. Such agreements can be classified into two categories based on the number of countries involved. Bilateral agreements are the ones that exist between only two countries, while multilateral agreements exist between several countries. Both these agreements can further be classified as Free Trade Agreements (FTAs), which does not involve any kind of tariff or non-tariff barriers to trade, or Preferential Trade Agreements (PTAs) which involves partial elimination of tariff or non-tariff barriers.

The debate on advantages and disadvantages of bilateral and multilateral trade agreements has existed for many decades in the field of international trade. Numerous studies have been conducted, using empirical data, to determine the success or failure of bilateralism and multilateralism. While the general consensus among economists is that multilateralism is more effective in the long run, this is sharply contrasted by the failure of the WTO multilateral agreements in the past few years and the success of multiple bilateral agreements instead. Economists who believe in multilateralism however point out that although bilateralism and regionalism increases trade, it harms the welfare of the world trade system.

The first half of nineteenth century saw a more closed global economy where nations engaged in bilateral agreements. Studies have noted that bilateralism contributed majorly towards harming the world trade during the inter war period. Economists argued that the highly discriminatory agreements made war inevitable. Similar opposition towards bilateral trade occurred post the Great Depression where it was argued that discriminatory agreements created vicious cycles of rising prices which further deepened economic depression.

The “Bandwagon Effect”, a situation where the non-trading partners will try to enter an existing bilateral agreement, thus rendering the original agreement less meaningful, is considered to be the biggest shortcoming in bilateralism. Creation of bilateral agreements can immensely complicate the trading environment due to creation of multiple rules. Most of these agreements have their own specific rules of origin which only complicate the production process and thus business and trade. At the same time, this also complicates the functioning of customs union as they have to assess same product differently for different countries. In the words of Professor Bhagawati, this is known as the “Spaghetti Bowl” phenomenon.

There is enough evidence to prove the failure of bilateral arrangements made way for openness among economies around the globe thereby leading to the formation of International Monetary Fund, World Bank, GATT, etc. Multilateralism soon gained popularity among policymakers as they started to explore the benefits of multilateral trade by removing stringent discriminations.

Though bilateralism allows countries to venture into different territories of similar interests, facilitate trade diversification and provides for simplified processes, multilateralism is often preferred because the risks and responsibilities associated with it get distributed among the members. Multilateralism acts as a central point to systematically deal with global concerns such as environment. Multiple countries can achieve better results than single countries working independently. Transaction costs reduce when nations pool in their resources. Multilateralism leads towards the realization of “one world, one law” with minimal complications and complete cooperation among all nations. It ensures that all nations participate in the management of global affairs.

Is multilateralism then the best option? Unfortunately, no!

The economic and geopolitical multilateral cooperation of eight countries of South Asia, SAARC, is a perfect example of the failure of a multilateral setup. Two of the largest economies of the SAARC, India and Pakistan have had inherent and long standing political tensions. The Indo-Pakistan dispute over Kashmir has proved to be one of the biggest impediments in the progress of SAARC. This shows that failure of a strong bilateral relationship between two countries will only cause a multilateral agreement including the same two countries to fail.

Economists have also pointed out some rather interesting shortcomings of multilateral arrangements. For instance, the United States was accused of having become increasingly dominant and inclined towards acting unilaterally, thus, making a number of developing nations question the very relevance of multilateralism. It is much more complicated and challenging as it involves many nations coming to a consensus which may become a tedious task. It may even happen that certain issues remain unresolved due to lack of cooperation among few countries.

Despite bilateralism and multilateralism, both, having strong drawbacks, bilateralism is believed to be here to stay. The fact is that bilateralism has always been around makes it very unreasonable to believe that it will cease to exist. The need of the hour is to identify how best bilateral trade can be used in the ultimate goal of reaching complete free trade. Practical ways of how integrate the two can be identified. For instance, a stronger multilateral system that has a bigger control over bilateral trade agreements, which are used to supplement the multilateral trading system by addressing issues that are more specific to countries and regions.

Multilateralism is necessary to reach a world of free trade. The first step towards multilateralism is, of course, bilateralism. Better regulation and a robust policy framework will educate nations engaged in bilateral agreements to expand their horizons and become part of multilateral trading blocs.

Varsha is an intern at the Takshashila Institution.

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