Geopolitics

Maritime Primacy, Network Externalities and Asymmetric Blocpolitik

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Map 1. Great power blocs, independent powers, contested zones.

In an interesting and contemplative article in the current issue of the National Interest, Michael Lind casts a fresh look at world politics. His approach is to reformulate economic and security alliances as carriers of joint information about the world economy and the global balance of power. This frame of reference allows Lind to go beyond both realism and international economics. The former sees military alliances as temporary and flexible outcomes of great power balancing. In the latter, trade agreements and economic partnerships are divorced from great power politics and geared towards purely economic ends. Neither approach captures the real geoeconomics of blocpolitik.

[In theory, a state] can join one set of security alliances for purposes of military protection, a different trade bloc for commercial purposes and a third set of international alliances, perhaps drawn together by political creed and social values. In the real world, this kaleidoscopic complexity does not exist.

By construction, the overwhelming overlap of international security and economic alliances cannot be explained by purely economic logics. Likewise, the survival of the US-led Atlantic and Pacific security alliances 25 years after the capitulation of the Soviet Union is a glaring anomaly of realism. These anomalies stem from mistakenly treating ‘security and trade policy as distinct realms, each with its own internal logic and unconnected to the other.’ Lind’s novel approach allows him to put both economics and international power politics at the center of the frame of reference. He also pays attention to the neocolonial aspects of blocpolitik.

For the hegemonic power that orchestrates a bloc, the bloc multiplies national military power and wealth by adding foreign populations and foreign resources to its own. Given low fertility rates and the difficulty of raising productivity levels by innovation, the quickest and most effective way to boost the overall GDP of a bloc is to add more countries to it. Needless to say, strength based on territorial expansion as well as internal growth was the strategy of past empires. In the modern era, based on the rules of national self-determination and popular sovereignty, incorporation of additional territories by conquest would be resisted as illegitimate. But blocs that are similar to informal empires can be built up by means of security alliances and trade deals, which may be hard to distinguish from de facto colonialism where one partner is a weak protectorate and the other a great or superpower.… [Emphasis mine.]

In a world economy divided among great-power blocs, industries with increasing returns to scale, like manufacturing, are likely to be most productive and dynamic in the blocs with the largest integrated markets—that is to say, the internal markets of populous nation-states and even more populous blocs. Technological and commercial efficiencies enabled by scale can, in turn, permit higher growth, higher per-capita income and the possibility of raising more taxes in absolute terms, even with lower rates of taxation—taxes to be spent on, among other things, the military. This is the successful strategy the larger and richer American bloc used to drive the smaller and poorer Soviet bloc into bankruptcy.

So it makes economic and strategic sense for great powers to expand their blocs and grow their retinue of protectorates. Small and weak nations too gain from admission into great-power blocs.

The exporters and importers of small nations can be guaranteed access to bloc-wide markets and suppliers, and incorporated into bloc-wide supply chains. As de facto protectorates of the bloc’s dominant nations, weak countries can engage in “free riding” when it comes to defense, spending relatively little on the military.

The reference frame immediately solves the mystery of the endurance of the Western alliance. Indeed, the end of the Cold War led not to a dismantling of Nato but rather an American bid to convert ‘hegemony within its Cold War bloc into universal hegemony—turning the entire planet into a single sphere of influence.’ This bid failed ‘thanks to Chinese and Russian resistance and the war-weariness of the American public.’

‘There is not the slightest chance,’ Lind insists correctly, ‘that Chinese and Russian regimes, of any character, no matter how liberal or democratic, will ever accept as legitimate a permanent U.S. military presence along their borders.’ Whether or not Russia’s near-abroad and the South China Sea are turned into contested zones of Cold War-style military standoffs, ‘the division of the world among regional blocs and spheres of influence—will have come to pass.’

There would be neither enduring, widely accepted U.S. global military hegemony nor a rule-governed global free market. Instead, there would be, at least in the short run, a version of the world envisioned by Burnham and Orwell: an American-led “Oceania,” a Chinese “Eastasia” bloc of some kind, and a Russia-centered “Eurasia” much smaller and weaker than the former USSR. Over time, India might join the United States and China as a leading military and economic power, perhaps as the center of its own bloc—let us call it “Southasia.” Populist nationalism within Europe will doom any attempt to turn the continent into a centralized, independent bloc capable of acting as a unit in world affairs. Instead, Europe may remain a U.S. protectorate, drift into neutrality or, in the worst-case scenario, become a “shatterbelt” for which external powers once again compete.

One can quibble with Lind’s position on the European Union. The possibility of a great power based on the continent ought not to be so easily dismissed. But there are bigger issues with Lind’s prognosis.

My main beef is with Lind’s underemphasis on the extreme asymmetry of great power blocs. Russia’s sphere of influence in its near-abroad is a faint echo of the Warsaw alliance. China’s sphere is nearly non-existent. The only country firmly within the Chinese sphere is North Korea. Even Mongolia and the nations of the central Asian steppe are not yet in the Chinese sphere of influence. Meanwhile, the United States has a retinue of some sixty protectorates; including almost all the great industrial nations of the world—Japan, South Korea, Taiwan, Australia, Germany, France, Italy, Britain, and Canada. Moreover, the United States remains the preeminent foreign power in Central America, South America, Africa, Southwest Asia, and Southeast Asia. Even lesser powers that pursue stridently independent foreign policies from Washington—Vietnam, India, Iran, Cuba, Brazil and Venezuela—are likely to seek admission into the US bloc.

Instead of a world ‘divided among great-power blocs’ what we have is a near-unipolar configuration of global alignments. The US bloc militarily, economically, and technologically dwarfs the rest of the world combined. Due to the diffusion of reconnaissance-strike capabilities, the US can no longer impose primacy on China or Russia in their immediate neighborhoods. In particular, China is now in a position to hold all US surface assets in the Western Pacific at risk. In the event of a major confrontation, the US will no longer be able to send aircraft carrier groups to the Taiwan Straits to intimidate China. It will instead have to rely on less effective long-range and undersea platforms to project power.

As China closes the power gap, the exit from the unipolar world approaches. Even in a multipolar world, however, the US bloc would continue to enjoy decisive advantages. Above all, the United States would continue to enjoy maritime primacy until another great power becomes at least somewhat competitive in open ocean warfare. We are so far from that scenario that no other power has even contemplated mounting such a challenge. Because the plumbing of the world economy is sea-based, maritime preponderance gives the US bloc a decisive advantage against other blocs.

A second advantage that is no less decisive is that blocs enjoy network externalities. Beyond the economies of scale, blocs are also containers of technology and situated knowhow. To put it bluntly, the US bloc contains the entire tripolar core of the world economy. From an international politics perspective, these externalities generate a bandwagon effect whereby states outside face tremendous incentives to seek admission into the US bloc. This is why, for instance, Kerry got his opening in Myanmar.

So while I agree with Lind that international politics will become more contested as this century progresses, I seriously doubt that Russia or China will be able to forge a bloc even vaguely comparable to the US bloc. They will definitely try—China’s development bank and the New Silk Route are efforts in precisely this direction—but it will be uphill all the way. Blocpolitik is a useful frame of reference but we should not implicitly endow it with false symmetries.

 

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Markets

The Denouement: China Enters Lost Decade

You can download a pdf version of this research note here.

China’s asset price bubble is rapidly unraveling despite Beijing’s frantic efforts to stem the tide. Before long, China is likely to enter a full-scale financial panic; followed by secular stagnation that may last as long as Japan’s lost decade. The Chinese panic marks the third round of crises since 2007; the first being the panic of 2007-2008 centered at the US; the second, the eurozone crisis of 2010-2013. All three have been driven by the systematic unraveling of global imbalances.

We have previously argued that global imbalances are the result of the high-savings strategies pursued by Germany, Japan, and China. What is unfolding in China and global markets in the summer of 2015, is nothing short of the denouement of China’s high-savings strategy. In what follows, I will show why this is to be expected and argue that China is entering into its lost decade; with vast implications for global markets and the balance of power in Asia.

Theory of large open economies

In an isolated economy without a financial sector, equilibrium national income, {y_*}, is implicitly determined by equating desired saving and investment,

{\large I(y)=S(y)}

Introducing a money market, we obtain the familiar IS-LM equations with two endogenous variables: national income and the interest rate.

{\large I(r,y)=S(r,y)}

{\large L(r,y)=M(r,y)}

where L and M are the demand and supply of loanable funds. In other words, the LM curve, equation (3), shows the combinations of national income and the interest rate for which the money market clears. The simultaneous solution of equation (2) and equation (3) determines the equilibrium interest rate {r_*} and national income {y_*}.

The Mundell-Fleming model is an extension of the IS-LM model for a small open economy in an international order with perfect capital mobility; and hence, a single global interest rate. The economy is small in the sense that developments in the economy have no perceptible effect on the global interest rate. This assumption effectively means that the interest rate {r_w} is given exogenously. Assuming that there is a single currency in the national and international economy, one obtains the governing equation for national income,

{S(y) = I(y) + X(y),}

where {X(y)} is the net capital outflow (“net exports” or “excess savings”).

Now consider an isolated bipolar system consisting of two open economies trading with each other. Assume again for the sake of brevity that both use the same currency. We then have a set of three equations that determine the national incomes of the two poles as well as the global interest rate.

{\large S_{1}(r,y_{1},y_{2})=I_{1}(r,y_{1},y_{2}) + X_{1}(r,y_{1},y_{2}),}

{S_{2}(r,y_{1},y_{2})=I_{2}(r,y_{1},y_{2}) + X_{2}(r,y_{1},y_{2}),}

{\large 0=X_1(r,y_1,y_2)+X_2(r,y_1,y_2)}

where {y_{i}} is national income of country {i=1,2} and {r} is the global interest rate. The first two equations require the difference between domestic desired savings and investment to be equal to net exports of the country. The last follows from the balance of payments identity under the bipolar assumption.

Figure (1) displays the comparative statics of an exogeneous upward shift of the savings in one country (“China”) on the equilibrium interest rate and the balance of payments in the bipolar system described by the above equations. The left panel shows China’s saving and investment at given levels of the global interest rate; the middle one shows the saving and investment in the United States; and the right panel displays the excess savings of China and the United States trade deficit.

Savings Investment and Trade balance in a bipolar system

An outward shift of China’s savings curve is reflected in the balance of payments, the figure on the right. The savings shock pushes out China’s excess savings curve to the right. The new equilibrium features a larger current account surplus in China (equivalently, a larger current account deficit in the United States). The larger the shift, the large the trade imbalance. China has effectively pushed its unwanted savings out to the United States and imported demand. This is the essence of China’s high-savings strategy.

The equilibrium interest rate is determined by the intersection of the excess savings curves. The new equilibrium interest rate is lower than before the exogeneous savings shock. This is the source of Greenspan’s conundrum—the failure of long-term rates to rise despite monetary tightening—that Ben Bernanke called the “global savings glut.” The lowering of the global interest rate causes an expansion of investment in both the United States and China, both of which are higher than before the exogeneous savings shock.

China’s high-savings strategy

There is nothing particularly novel about China’s high-savings strategy. Other states, most notably Japan, have followed essentially the same strategy. Namely, push down consumption and channel the high savings into growth enhancing investments. The basic weapons in the underconsumptionist arsenal are financial repression, wage suppression, and underpricing of the national currency. Since 2000, Beijing has deployed all three with gusto.

China practices a strong form of financial repression. The People’s Bank of China (PBoC) administers ceilings for interest rates on deposits and floors for lending rates. This ensures comfortable interest rate spreads for banks and keeps the cost of capital low for firms. In 2000-2009, the average loan in China was taken out at 5.84 per cent, compared to 9.41 per cent in the nineties. The repression of interest rates is effectively a tax on households and a subsidy for borrowers—the state and state-backed firms, exporters, and real estate developers. The low rates have allowed an investment boom of unprecedented proportions.

China has a vast reserve army of workers, around 320 million strong, who are underemployed in the traditional sector. This has naturally kept wages from growing rapidly; in accordance with the familiar Lewis model. However, China’s wage supression is also the result of concious draconian policies. For example, migrant Chinese workers from the interior, who work illegally in the coastal areas, have no legal recourse against their employers. And Beijing is always quick to respond with police power at the first sign of labor unrest. The result is that real wages have grown slower than productivity.

When a central bank intervenes to keep the currency undervalued, it accumulates the reserve currency. China’s stupendous pile of 4 trillion dollars in official reserves attests to the scale of the PBoC’s efforts to keep the renminbi down. The appreciation of the renminbi is no more than what would be natural of a developing country—the so called Balassa-Samuelson effect. Because the PBoC has not allowed the renminbi to appreciate at anywhere near the market-clearing pace, China has continued to accumulate foreign exchange reserves at a rapid clip.

China’s high savings strategy has driven its consumption rate down to a mind-boggling 36 per cent of GDP, if the World Bank numbers for 2013 are to be believed. By comparison, the United States consumes 69 per cent of GDP; while Germany and Japan, both high-savings countries, consume 56 per cent and 61 per cent of GDP respectively. Meanwhile, China’s gross investment rate is 48 per cent of GDP; another record. The gross investment rate in the United States is 19 per cent, while the German investment rate is 19 per cent and the Japanese is 21 per cent. However, unlike the other poles in the center of the world economy, China is a developing country. Its rate of investment ought to be higher. Still, a country investing nearly half its national income is likely to be misallocating capital on a massive scale. This is indeed the case, as we shall see presently.

The bottomline is that China’s savings rate far exceeds its investment rate. This means that China has been pushing its unwanted savings onto its trade partners—the United States above all—and importing demand; in accordance with the theoretical analysis of the previous section. This crucial observation means that while China’s growth model may be called export-led or investment-led, in terms of its impact on the global economy, it is more properly called a high-savings strategy.

Denouement

The collapse of global demand in the aftermath of the Western financial crises meant that China could no longer rely on importing demand from its major trade partners; especially Europe. Beijing’s immediate response was to cut interest rates and launch a six-hundred billion dollar stimulus channeled through state-owned enterprises (SOEs). Money poured into infrastructure and housing; exacerbating the overinvestment in these sectors. While the fiscal stimulus may have been enough to buoy up investment demand in the short run, a one-off injection was always unlikely to solve China’s demand deficit problem even in the medium term.

The real solution hit upon by China—and here again it was following in Japan’s footsteps—was to expand debt. Between 2007 and 2014, China’s overall debt grew from 158 per cent to 282 per cent of GDP, or about 28 trillion dollars. An estimated 30 per cent of it is held by shadow banks. Lending by shadow banks has grown at 36 per cent since 2007; compared to 18 per cent for bank lending. Meanwhile private debt-to-GDP ratio rose from 100 per cent to 180 per cent. By comparison, US private debt-to-GDP peaked at 170 per cent in the depths of the Great Recession. The unprecedented expansion of debt yielded a supermassive asset price bubble; most especially in real estate. More than half of China’s ballooning debt, about 45 per cent, is tied to property.

Before the Chinese financial panic began this summer, China’s stock market had more than doubled in value in the preceding twelve months. The Shanghai Composite Index rose from around 2,000 in July 2014, to above 5,000 in June 2015. But the real bubble was not in the stock market—it was centered on real estate. Since 2008, land prices have increased fivefold. In 2013 alone, real estate prices rose 27 per cent. The scale of overinvestment in China’s real estate is truly stupendous. In just two calendar years, 2011 and 2012, China produced more cement than the United States did in the entire twentieth century. China has 75 billion square feet—five years’ worth of annual demand—of new property coming online. With demand falling instead of rising, the real estate bubble began to pop at the beginning of 2015. Proceeds from land sales plunged 30 per cent compared to the year before. New home prices fell for four straight months and are down 6 per cent year on year.

In China, unlike in all other polar economies, the government owns almost all the land and two-thirds of its productive assets. Local governments enjoy a monopoly over the supply of land by controlling the opening of agricultural land to urban development. Proceeds from land sales account for the bulk of the revenues of local governments. For instance, land sales accounted for 46 per cent of local government revenues in 2013. But most of the cash in the coffers of local governments comes from loans secured through shell companies using public land as collateral. There is an obvious limit to debt expansion on the backs of overvalued marginal land: It can only go on so long as the real estate bubble keeps inflating.

Once land prices started falling, local government borrowing and debt settlement became difficult; to put it mildly. Beijing’s response was to push a massive debt swap. Local governments would issue nearly half-a-trillion-dollars worth of long-term bonds and retire an equivalent amount of risky short-term debt. While this is a step in the right direction, the scale of the toxic debt hidden in opaque off-balance sheet vehicles is unknown.

In 2013, China announced that private investors may take minority positions in the roughly one hundred and fifty thousand state-backed firms. This has exacerbated the distortion of the economy in favor of the inefficient state sector. The borrowing costs of state-backed firms is significantly lower than private firms so that they have cornered the capital that would otherwise flow to the more productive counterparts in the private sector.

Beijing’s trilemma

Beijing wants to avoid a full-blown financial crisis, rebalance the economy away from dependence on exports, and keep up growth rates. The hard truth is that there is no way to achieve all three objectives. Indeed, Beijing will be hard-pressed to accomplish even one of the above.

The immediate problem facing policymakers in Beijing is the slow-motion bursting of the asset price bubble. Beijing has already tried direct intervention in the stock market. Less well-known is the manipulation of land prices by local governments—by getting pairs of state-backed firms to buy and sell at inflated prices. Both efforts have largely failed so far. Even if these and other measures do succeed in propping up asset prices, they will exacerbate the deeper problems facing the economy—the build-up of toxic debt in the shadow banking system, the massive overinvestment in property, and the misallocation of resources with the attendant slowdown in productivity—which will further lower growth rates.

Many observers suggest that China has enough firepower—4 trillion dollars—to hold the tide in a financial panic. However, China cannot deploy its reserves at any appreciable scale without considerably strengthening the renminbi and absorbing a large negative demand shock through the external account. As the panic continues to built this autumn, Beijing might very well be forced to take this route. A massive appreciation of the renminbi would indeed accomplish a rebalancing and perhaps even avoid a full-blown financial crisis. But it would be do so at a considerable cost: Growth rates under this scenario will be sharply lower; perhaps even negative.

Some have argued that Beijing has demonstrated considerable skill in managing economic shocks. The central government has indeed moved deftly to deal with demand shocks. As a rule, this has been accomplished by directing state banks to expand lending and pushing state-backed firms and local governments to expand investment. But expanding investment is not a solution to a crisis of overinvestment. All that can hope to accomplish is to perhaps postpone the day of reckoning. And when the crash finally comes, it would be even bigger than otherwise.

Maintaining high growth rates in the medium term will be especially hard. The chief obstacle to maintaining high growth rates is the considerable misallocation of resources. The overinvestment in property is likely to take years to work itself out. State-backed firms have cornered the lion’s share of resources at the expense of more efficient private firms. This distortion is unlikely to unwind by itself due to the backing of the state. Indeed, it is getting worse as of writing. Both of these distortions will have to reverse for growth prospects in the medium term to brighten. Growth will also be harder to maintain unless the build-up of toxic debt is taken care of. This is best done in one fell swoop. It would require Beijing to transfer these debts onto its own balance sheet. The central government debt is thereofore likely to balloon—yet again, following in Japan’s footsteps.

The 800-pound gorilla in the room is of course rebalancing the economy away from its dependence on external demand. This would require an unwinding of China’s high savings strategy. As argued in Section 2, China’s high savings are the result of financial repression, wage supression, and an undervalued exchange rate. In order to rebalance the economy, China must liberalize interest rates, raise wages, and let the renminbi appreciate. Rebalancing would significantly reduce growth rates down to perhaps 3 per cent per annum. But on the bright side, real household income would rise at a faster clip; leaving people actually better off despite the slowdown in the economy. 

The ideal strategy for Beijing is to therefore to avoid a full-blown financial panic and rebalance the economy at the expense of growth rates. However, it is hard to see policymakers in Beijing pursuing this strategy for the simple reason that all the heavy-weights in the Party have very close ties to the beneficiaries of China’s high savings strategy. The rank and file of the Party is also unlikely to be anywhere close to being enthusiastic about a strategy that promises a growth rate of 3 per cent per annum. Beijing’s policy response is therefore likely to be muddled and rudderless.

China is unlikely to sustain high growth rates for the foreseeable future. Given the weight of China in the world economy, the implications for global markets are dire. The ride ahead will be bumpy. Despite the recovery in the United States, the Fed will find it impossible to exit the zero lower bound in September and perhaps even December. US primacy in Asia will endure for much longer than expected hitherto. The party is officially over.

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Geopolitics

War Strategies in Asia

south-china-sea

A variety of political developments could lead to a military confrontation between the United States and China. What would a war between the two colossi look like? The intensity, duration, and course of a war in Asia depend on the war strategies pursued by both adversaries. Talking about the war strategy of only one combatant is only half the story: the enemy gets a vote. In particular, prospects for escalation and intrawar deterrence require consistency between the war strategies of the combatants.

American and Chinese strategists are choosing from a small menu of three or four basic strategies. For the US: ‘distant blockade’, ‘maritime denial’, and ‘deep strike’; for China: ‘near-seas defense’, ‘regional bid’, and ‘hegemonic bid’. All of these terms are cartographic. We shall now make them more precise.

US war strategies

The US war strategy distant blockade means that in the event of a confrontation, rather than engaging directly with Chinese forces, the United States would use its control over the Strait of Malacca to impose a naval blockade. The cumulative economic pressure applied on China would be harsh but slow and steady thus greatly limiting the potential for escalation. 

Maritime denial is a more aggressive war strategy that seeks to deny China access to Asian waters. With the Chinese navy locked up in the near seas, the US and its allies would be able use the maritime zone outside the first island chain for communication and shipping. China’s marginal seas would become a ‘zone-of-fire’, where access is denied to both by the adversary’s ability sink all surface assets at will. 

Archipelagic defense is a variant of maritime denial which relies on placing US ground forces on islands off the Chinese mainland to bolster the US navy’s efforts to deny China access to Asian waters. In either variant, the punishment would be severe whilst still limiting the risk of escalation since China’s second-strike capability would not be undermined.

Deep strike is the most aggressive of the three war strategies being considered by US planners. It evolved from strategic concepts developed in the eighties by Pentagon planners concerned with thwarting a Russian land invasion of Europe under conditions of mutual nuclear deterrence and an American monopoly on precision strike. Known as the concept of AirLand battle in the late eighties, it was reformulated as AirSea battle for the defense of maritime Asia, especially Taiwan, against Chinese aggression.

Deep strike seeks to cripple the adversary’s ability to project its power. Deep strike calls for a wholesale destruction of China’s ‘reconnaissance-strike complex’. The US would seek to destroy targets deep in mainland China in a bid to cripple China’s anti-access, area denial capabilities. Mainland targets would include command and control facilities, air and anti-air installations, space and anti-satellite equipment, radars and surveillance infrastructure, and missile launch platforms. But deafening and blinding China and destroying its ability to launch missiles undermines China’s second-strike capability. China’s government may then face a ‘use it or lose it’ situation. Deep strike thus poses significant risks of escalation.

first island chain

Chinese war strategies

Now consider the military strategies available to China. For the sake of brevity, although the US would likely be fighting shoulder to shoulder with regional allies, we will refer to China’s adversaries in such a contest in the singular; simply as the US.

Near-seas defense seeks to deny the US military access to China’s marginal seas. An initial barrage of missiles and airstrikes would target all air, surface, and undersea assets of the US within the China seas. In particular, China would not attack US military bases in maritime Asia outside the near seas, such as those in Japan, the Philippines, and Guam. It would then establish a naval defense perimeter along the ‘first island chain’. This military strategy would leave China exposed to a local counterattack by US forces in the western Pacific, but sharply limit the probability of escalation.

A more aggressive variant of near-seas defense would have the initial barrage of strikes target all US military assets and bases in the western Pacific, whilst still maintaining China’s naval perimeter along the ‘first island chain’. Given US’ force posture of forward deploying only a fraction of its strength, even a ‘splendid first-strike’ on US assets in the western Pacific would not seriously cripple the United States’ ability to mount a counterattack. And far from limiting the war, it would guarantee a prolonged campaign as the US seeks to regain its position in the region. A splendid first-strike on US military assets in the western Pacific is thus unlikely to accompany a near-seas defense. Note that the threat of a splendid first-strike is much more serious when mounted against an American strategy of archipelagic defense.

A regional bid would indeed begin with a massive first-strike on US positions in the western Pacific, including Guam and perhaps Japan; crippling America’s ability to mount a local defense. China would then repeat Japan’s World War II strategy of establishing a secure naval perimeter along the entire western Pacific. The United States would be forced to rebuild its supply lines; and in the meanwhile, rely on ineffective long range platforms to attack China.

Once China succeeds in kicking US forces out of Asia, it would still be exposed to a distant blockade. China would lose access to Western markets and gulf energy. There are only three ways out of the ‘Malacca dilemma’. First, growth in Asian markets coupled with a shale revolution in China could take the bite out of a potential blockade. Second, China could build up its maritime power enough to defeat the United States in open ocean combat. Third, a combination of secure land access to Caspian Sea energy and growth in Asian markets could make a blockade less painful.

Given that Asia is likely to grow into at least as big a market at Europe, the Malacca dilemma calls for a western-oriented strategy that leverages China’s land power. China could seek to deny the US military access to the Caspian Sea region to ensure its access to the region’s significant energy deposits. It would be extraordinarily difficult for the United States to project power in Central Asia, given that the region is far from the open ocean. At best, the US could use long-range cruise missiles to disrupt Chinese supply lines. But these missiles would have to be launched either from bases in the Middle East or from naval platforms in the gulf. Both would be vulnerable to counter-force strikes by the Chinese.

While access to energy supplies may be critical to China’s war effort, the western theater will be secondary to the maritime zone where the regional bid will play out. Rather than being an alternative, a western-oriented land strategy complements China’s regional bid.

Hegemonic bid is a war strategy suitable for a Chinese bid for the highest stakes. China would seek to engage and defeat US forces operating in the open ocean. The minimal goal of this war strategy would be for China to replace the United States as the dominant naval power in the Indo-Pacific: from Suez to Hawaii. More expansively, China could seek to replace the United States as the global maritime hegemon. Hegemonic bid will only become available to China once it has mastered open ocean warfare.

War in Asia

Since the 1996 Taiwan crisis, when the United States intimidated China by sending three aircraft carriers to the Taiwan Strait, China has sought to build what the Pentagon calls anti-access, area denial capabilities. The centerpiece of this strategy has been a reconnaissance-strike complex that allows China to credibly threaten US naval assets that approach China’s near seas. Twenty years of effort has borne fruit. China now enjoys the capability to hold US surface assets in the western Pacific at risk.

While it has managed to gain some mastery over precision strike, China has not yet developed significant power projection capabilities. The Chinese navy’s ability to operate in contested environments and on the high seas is still rudimentary. China’s economy is growing fast along with its military budget. There is no reason to believe that China will not be able to dramatically increase its naval power in the coming decades.

If war comes within the next decade, China will have no option but to rely on near-seas defense as the other two war strategies will be simply unavailable. By 2030, the growth in Chinese naval power should be sufficient to make regional bid a viable option. And by mid-century, China should be in a position to consider a hegemonic bid as well.

The United States enjoys a very strong geostrategic position. The US homeland is protected against all but the longest range platforms of its potential adversaries. Regional allies both add to US strength and provide stepping stones to bring its power to bear in the western Pacific. In the 2000s, deep strike was a viable war strategy for the United States. The rise of China’s reconnaissance-strike complex, together with uncertainty about its nuclear posture means that deep strike is no longer viable. At the present juncture, maritime denial is still a viable war strategy for the United States. 

The US is in a good position to deter China from seeking to forcibly upend the regional territorial status quo ante in the near future. As China grows more powerful, at some point, perhaps within a decade, maritime denial would no longer be on the menu for the United States. And in the more distant future, say by mid-century, the United States would lose the ability to mount a distant blockade as well. 

The contours of a potential war in Asia thus depend critically on when it is fought in ‘system time’.

Potential for escalation to all-out war

US/China Near-Seas defense Regional bid Hegemonic bid
Deep strike High High High
Maritime denial Medium Medium High
Distant blockade Low Low High

War zones

US/China Near-Seas defense Regional bid Hegemonic bid
Deep strike Mainland China Mainland China/Western Pacific Indo-Pacific
Maritime denial First island chain Western Pacific Indo-Pacific
Distant blockade Open ocean

A splendid first-strike in the Western Pacific

US/China Near-Seas defense Regional bid Hegemonic bid
Deep strike Likely Very likely Very likely
Maritime denial Unlikely Likely Very likely
Distant blockade Unlikely Unlikely Likely
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World Affairs

Strategic Realignment in Asia

It took merely the threat of ineffective sanctions from the West to prompt Herr Putin to deepen strategic ties with China. Under a $400 billion gas supply deal between the two great powers, Russia will supply the emerging giant with a trillion cubic metres of gas over thirty years. This marks a strategic realignment in Asia, and will make Washington’s task of containing China considerably more difficult in the decades ahead.

Of the three great powers in China’s strategic neighbourhood, Russia is the only one significantly exposed to Chinese land power. Japan is located off shore and protected by American naval might and nuclear weapons. India stands to lose only its northeastern periphery in the face of Chinese land power—a strategic penetration of India’s heartland again being ruled out by mutual deterrence. By contrast, three-quarters of Russian territory and a third of its population are located west of the Urals—Russia’s Asiatic periphery—and totally exposed to Chinese land power. When China becomes as strong as the United States, even an alliance with all the other great powers would not be able to protect Russian interests in Central Asia, Mongolia, and Siberia.

India China Russia

To put it bluntly, bandwagoning with China is Russia’s only viable option. This was probably going to happen sooner or later. The fact that it is happening now is the result of the Washington’s ham-handed response to the Ukrainian crisis. Imagine Washington’s response to Mexico becoming China’s junior geopolitical ally. And unlike the non-existent threat to the United States from the south, Russia has been repeatedly invaded from the west. Extending Nato all the way to the Russian border may have seemed like a good idea to proponents of American primacy when Russian power hit its nadir in the 1990s. With the Putin restoration, Russia has resumed its role as the dominant land power in Eurasia. Now, it only serves to sour Western relations with Russia, thereby pushing Russia prematurely into Chinese arms.

Alongside Russia, the Obama White House risks losing India as well. As the invitation extended to the leaders of India’s neighbours to attend his swearing in ceremony demonstrates, Mr. Modi has sound strategic instincts. He intends to preside over a decade of rapid modernization. Modi’s dream is for India’s great power status to be unambiguous: India ought to become powerful enough to deal with other great powers as equals. This is a tall order. But any significant increase in the war-making capabilities of the Indian state will open up hitherto unavailable strategic possibilities. Sensing Mr. Modi’s disconnect with Washington—which denied him a visa for a decade because he presided over a pogrom—the Chinese are hopeful for a strategic opening. Is a Sino-Indian alliance a real possibility? And even if the Chinese are open to it, does it make sense for India?

India’s geostrategic location is very favourable. It dominates the Indian Ocean and is protected in the north and the east by the Himalayas. If India were to become a naval power of the first rank, it would be in a position to impose naval supremacy on the entire Indian Ocean. It would then control all the sea-lanes between Suez, Singapore, and the Cape of Good Hope; which together account for half the world’s sea-borne commerce and energy. It cannot achieve this without a surrender of US’ global naval primacy. On the other hand, India’s only great power neighbour is China which is considerably stronger than India, and therefore, India’s biggest security concern. Geopolitical realism suggests an alliance with the United States against China. However, bandwagoning with its more powerful neighbour could also be a very attractive option, especially if it expects China to prevail against the United States. If India were to become a revisionist power—a real possibility after Mr. Modi’s election—it could conceivably fight on the Chinese side, with the understanding that once the Americans are kicked out, India and China would divvy up Asia into separate spheres of influence: China preponderant in the Western Pacific and India preponderant west of Singapore.

Such strategic possibilities will only open up if Mr. Modi is successful in catapulting India into great power status. India will not be a polar power—strong enough to decide the outcome of a war between the two most powerful states—so it would be well advised to either sit it out or join the winning coalition. Even so, it would be strong enough to affect the relative probabilities, thereby making it an attractive partner. This means that Mr. Modi has significant leverage against the Chinese and the Americans; leverage he ought to, and will, milk to secure advantageous trade agreements, technology transfers, diplomatic support, and arms deals. As India’s growth rates start climbing, Mr. Modi’s leverage will only increase.

The world is starting to look more and more like the late nineteenth century. That’s great. The policy tensor is bored of unipolarity.

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