From: alert@stratfor.com Date: Sun, 11 Apr 1999 22:36:34 -0500 (CDT) Subject: Weekly Analysis -- April 12, 1999 ______________________________________ Stratfor's FREE Kosovo Crisis Center - http://www.stratfor.com/kosovo/crisis/ The most comprehensive coverage of the Kosovo Crisis anywhere on the Internet ____________________________________ STRATFOR's Global Intelligence Update April 12, 1999 Weekly Analysis: Asia in the Global System Summary: There were more important things going on than Kosovo last week. The U.S.-Chinese summit turns our attention to core global issues, such as the relationship between the United States on one hand and the two great Eurasian powers, Russia and China, on the other hand. The prognosis is not good. Analysis: As the war in Kosovo lurches on, there remain broader and more lasting issues to consider than the mysteries of NATO policy making. More important matters were being dealt with in Washington as President Clinton met with Chinese Premier Zhu Rongji. Beyond the question of U.S.-Chinese relations, the entire issue of Asia's status in the world system was on the table. To be sure, there was a fundamental connection between the events in Kosovo and the summit in Washington. The fate of Kosovo province is, from a broad perspective, quite unimportant. What is most significant about Kosovo is that it is the occasion of the first, sharp disagreement between the United States and Russia since the collapse of the Soviet Union. As U.S.-Russian relations deteriorate, U.S.-Chinese relations necessarily improve. Russia and China are in the process of entering into what they call a "strategic alliance" whose primary purpose, in our opinion, is to limit the power of the United States globally, and particularly in Eurasia. Indeed, depending on how far this relationship goes, we could be seeing the reemergence of the Eurasian pact that seemed to be in place from 1948 until about 1962. We have spent a great deal of time recently discussing the evolution of events in Russia, but relatively little discussing Asia. Zhu's visit is an opportunity to consider the other part of the Eurasian geopolitical equation and, more importantly, the role of Asia. 1998 was very much the year of Asia and economics. It was as if the entire globe was obsessed with one issue: how bad will the Asian meltdown be and how badly will it affect the rest of the world? In a sense, the obsession has died down because we have the answer. The Asian meltdown is extremely serious, but it is more serious for some countries than others. From a global perspective, it has been a depressant, but not a terrible depressant. Neither Europe nor the United States has been dragged into recession by the decline in Asia and it appears that if recession is in the cards for either, the causes will be cyclical and internal, rather than of Asian origin. In other words, Asia turned out to be much more important to Asia than to the global economy. No doubt many sectors in the United States and Europe were badly hurt by the Asian depression, but there is no escaping the fact that, taken as a whole, the broad claims of global interdependence did not bear up to empirical or historical scrutiny. This logically reduces the importance of Asia to the world, at least on the economic level. We have seen Asia collapse in extreme and unexpected ways, and the consequences to the rest of the world were simply not that important, when taken as a whole. With that information integrated into the global knowledge base, it was inevitable that Asia, understood in primarily economic terms, would be relegated to a secondary role. Whether Asia recovers and to what extent, is an important issue, but not an earth shaking one. The earth will do quite well under any circumstances. Now, there is no question but that Asia has bottomed out for the short-term. What is less clear is whether the bottoming is merely the beginning of a cyclical upturn in a general downtrend or whether it represents a historical bottom from which new heights will be reached. In our view it is likely the former rather than the latter. Japan, far more than China, remains the engine driving the Asian economy. Japan has not made serious strides to solve its problems. Indeed, it has been moving in the opposite direction by reducing Bank of Japan rates to absurdly low levels in a desperate attempt to stabilize the banking system. As a consequence of this strategy, Japan deals with a short-term problem at the expense of exacerbating the long-term problem. Japan's fundamental problem remains extraordinary economic inefficiency as reflected in unsupportable rates of return on capital. The inefficiency of Japan's economy means both that its ability to generate investment capital internally is severely limited and that its ability to utilize what investment capital it has available is similarly limited. As a result, Japan is like a bird that just can't get off the ground. Japan is now in a historical bind, which means that it will continue to fall behind. It is in a downward spiral in which there is always an uptick that can be confused with a recovery, but it is more an optical illusion than a reality. There are some economies that are having stronger upticks than others and, in general, most of Asia appears to be bottoming for now. But, rather than gaining momentum, the recoveries appear to be straining against gravity. The term malaise still applies to most of East and Southeast Asia. China is the most difficult to read for several reasons. One is the extraordinarily unreliable nature of its statistics. First, there is the legacy of communism, in which statistics were understood to be political weapons. Second, there is the more recent heritage of a non-transparent banking system. Finally, there are genuinely different definitions of things, such as the meaning of growth. Whatever is happening in China, it is clear from Chinese actions that the internal pressure of economic problems and of dislocations has already led to substantial shifts in political and social policy. In other words, we have seen the consequences of an economic downturn even if the public statistics remain ambiguous. Which brings us to the crux of the matter and a point we have been making for several months. The degradation in the region's economic life has pushed economic factors to the back burner, and elevated political factors to the front burner. There are two reasons for this. First, during a roaring expansion, the fascination with economics makes political questions appear trivial and even irrelevant. Second, during an economic downturn, dividing the economic pie becomes a much more difficult and politicized task than dividing an expanding one. When there isn't enough to go around, or where there is simply less than there was before, the question becomes "who is the loser," where previously the question was the much easier, "who wins the most?" We can see this in the internal politics of every country. But what is now emerging are not the ongoing internal tensions from Indonesia to Japan, but the less expected and in many ways more important tensions between nations. Nonsense about borders no longer mattering can be sustained during periods of tremendous prosperity, when the flow of investment capital makes it appear that borders are irrelevant. However, in periods of capital shortage, when nations compete for every dollar or yen, who gets what and when they get it, can become matters of terrible urgency. We are now in a period where interdependence is real, but it leads to political friction. Low-friction and interdependence exist when a win-win situations is possible. That situation exists when economies are growing quickly. When economies are stable or contracting, interdependence creates win-lose relationships. And when that happens, nations compete. More important, nations tend to interfere in the internal affairs of other nations. For example, in a growth economy, economic decisions made by one country may have consequences for another, but those consequences are subsumed in a general expansionary environment. In declining economies, economic decisions that affect other nations are not covered up, and therefore nations tend to interfere directly in each other's decision-making process, through means ranging from interference in internal politics to generating countervailing policies. As a result, national interdependence increases frictions and expands the scope of political competition from the purely economic as nations seek levers with which to control each other. The most dangerous situation is one in which there exists what might be called asymmetric vulnerability. That has emerged in U.S.-Chinese relations and U.S.-Japanese relations. The economic downturns in both countries have made them extremely vulnerable to shifts in U.S. economic policy. There is no reciprocal relationship, however. Shifts in Chinese and Japanese policy do not affect the United States in an equivalent fashion because of the booming American economy. This creates a situation in which U.S. actions irritate China and Japan without giving them countervailing levers. American behavior is not circumscribed by a fear of retribution and the United States proceeds oblivious to the consequences. The result is that the weaker country, unable to compete in purely economic terms, seeks extra-economic levers with which to control the behavior of the other. Consider U.S.-Chinese relations and the manner in which political considerations have supplanted economic relations. China's economic downturn has forced the Chinese government to deal with social unrest by political means. One manifestation of this, and not necessarily the most important, has been the repression of democratic activists. Washington, for its own political reasons, is highly sensitive to those questions, particularly when there are few economic consequences to bear for their concern. In China's reduced circumstances, Washington is not particularly afraid of economic repercussions and therefore is free to attack China's human rights policies. Now China, unable to retaliate economically, is forced to look for countervailing power. That countervailing power is geopolitical in nature. What we have seen, over the last few months, is China shifting its focus from using economic tools to manage its relationship with the United States and other countries, to using geopolitical tools. Thus, China's relationship with Russia, a subject that has been regarded as both archaic and trivial over the past generation, has now moved to the forefront, although most observers don't recognize the sea change yet. When the Chinese speak to the Americans now, it is no longer in terms of economic opportunities and joint ventures as an offset to American pressure on a variety of issues. Rather, it is the geopolitical pressure that comes to the fore. That is why relations between China and the United States will remind people of pre-1972 relations more than post-1972. We are not talking about Maoism or the Cultural Revolution. Rather, we are talking about a reversal of the anti-Soviet alignment between the United States and China that took place in 1972. China is reminding the United States constantly of the geopolitical consequences of American economic and political pressure. Indeed, as this progresses, the military dimension joins the political as purely economic considerations take second place. This is true throughout Asia. Where previously something such as Mitsubishi's new joint venture in Indonesia dominated sophisticated conversation in Asia, today the geopolitical question of whether Indonesia can survive as an integrated nation takes the fore. Likewise, the military balance between China and Taiwan has become critical. In addition, Japan's military stance toward North Korea has emerged. And, the Spratly Island controversy is on the front burner. And so on. Throughout Asia, the agenda is no longer economic. Both in internal and external policies, the primary issues are now political and they will, over time, become military. The next quarter will see intensifying tension within the region and between some countries in the region and the United States. Increasingly this will be expressed in politico-military terms rather than economic terms. We are continually struck by how much more important Japan's politico-military relationship has become to Japan today, than it was only ten years ago. Simply put, there are consequences to economic downturns that go beyond economics. If we accept the idea that Asia has entered a long-term period of economic malaise, then it follows that that malaise will have critical consequences beyond politics. The dramatic deterioration in relations between the United States and China is one critical manifestation of that, but it is not the last. The entire relationship between the United States and Eurasia is being dramatically redefined. We believe increasingly that a Sino-Russian entente designed to limit American power is already growing beyond its embryonic state. This poses an interesting question for an Asia unused to posing its questions in geopolitical rather than economic terms. As tensions between Russia and China on one side and the United States on the other side grow, how will the rest of Asia respond? During the Cold War, the answer was easy. The United States offered allies membership in its trading bloc, which was an enormously beneficial relationship. It was the foundation of Asian prosperity and its benefits far outweighed the politico- military risks. The world has changed and economic relations with the United States, on terms the United States is prepared to tolerate, are far less openhanded. What is the relationship of the rest of Asia, and in particular Japan, to the competition between North America and Eurasia? Each Asian nation will have to walk through a political mine field in order to preserve their economic relations. The age of economics is being replaced once more by the more permanent geopolitical relationships. ___________________________________________________ To receive free daily Global Intelligence Updates, sign up on the web at: http://www.stratfor.com/services/giu/subscribe.asp or send your name, organization, position, mailing address, phone number, and e-mail address to alert@stratfor.com ___________________________________________________ STRATFOR, Inc. 504 Lavaca, Suite 1100 Austin, TX 78701 Phone: 512-583-5000 Fax: 512-583-5025 Internet: http://www.stratfor.com/ Email: info@stratfor.com