Simmering tensions

IFR Asia Awards 2012
8 min read

Asia’s emerging economies appear to be in an enviable position relative to much of Europe or the US, but another, potentially far more serious, risk is emerging. Recent tensions surrounding the ownership of islands, involving Japan, China and South Korea, have shown that aggressive nationalism is bubbling just below the surface – and cannot be ignored.

While Asia is clearly better positioned than most other regions of the world to weather the ongoing economic storm in Europe and the US, it is, of course, not immune. With growth rates in China, Japan and India reaching multi-year lows in 2012, most of Asia is feeling the pinch.

This economic distress, and the competition for natural resources, has exacerbated nationalist tendencies – always lurking beneath the surface, due to Asia’s diverse cultural, linguistic and religious mosaic. The result is an aggressive form of political and economic nationalism that is threatening the concept of Pan-Asianism and making foreign investors think twice about investing in some Asian countries.

Natural-resource nationalism is evident in a variety of countries and has manifested itself in a number of ways, ranging from more restrictive foreign-investment policies, to trade restrictions, to militarism.

For example, earlier this year, the Indonesian Government adopted new rules that sharply increased the costs of doing business in the mining sector. Foreign mining companies must, within 10 years of commencing production, cede majority control of their businesses to the government. Recent legislation also imposed a 20% tax on scores of unprocessed minerals. These actions are clearly designed to increase government control over the sector, at the expense of foreign investors.

Earlier this year, Australia passed a 30% tax on coal- and iron-ore-mining companies, designed to promote infrastructure development in the country. These measures send a distinctly anti-foreign-investment message, which will have a long-lasting negative impact.

The other major area of concern is a rising propensity towards militarism – both between regional powers, and on the grand global chess board between China and the US. The high-profile conflict between China and the Philippines over the Scarborough Shoal and, over the longer term, between China and five other Asian nations over the Spratly Islands is evidence of this, as is competition for superior blue-water military capabilities between China and India.

The stage is set for rising expenditure in support of superior military capabilities throughout the region, which will only heighten the propensity towards militarism and negatively impact already-strained national budgets.

Nationalism and militarism combined this year in a higher-stakes dispute between China and Japan over the Senkaku Islands (the Diaoyu Islands to the Chinese and the Tiaoyu Islets to the Taiwanese), and between Japan and South Korea over the Takeshima Islands (the Dokdo Islands to the Koreans).

In neither case does it appear that the spats will result in overt military action between the countries, but the economic costs will be high. Japan invested more than US$6bn in the PRC last year and, although China is Japan’s largest trading partner, trade between the two countries fell 1.8% in the first nine months of 2012. In September alone, China’s imports from Japan fell 14% year on year, having a profound impact on the Japanese economy.

Fanning the flames

None of the governments of these countries appear to have much interest in resolving the conflicts swiftly, preferring instead to fan the flames rather than pursue international arbitration.

One reason is that domestic politicians so often utilise nationalism to achieve their own objectives, and the average citizen is more likely to rally around the flag than consider thoughtfully the consequences of their governments’ actions in territorial disputes. Another reason is that so many Asian governments continue to be products of their own histories, and have little interest in moving past these with their neighbours – even though it would clearly be in their long-term interests to do so.

For instance, at some point in time, a Japanese Prime Minister will refuse to visit the Yasukuni Shrine simply because Asia is living in another era. However, until electorates choose to put into office enlightened leaders interested in putting history behind them, and until such symbolic gestures are openly embraced, rather than resisted, Asia seems incapable of moving on.

It does not help that the US has chosen to “pivot” awkwardly back towards Asia as China flexes its muscles. US allies, naturally, applaud the move, while the Obama administration flatly denies that the pivot has anything to do with China’s rise. It is hard, however, to think of anything more disingenuous. Would it not be better if the US simply admitted what the pivot was really all about; that China admits why its rise in military spending is occurring; that Japan admits why it is seeking to have offensive military capability for the first time since World War II; and that Manila be honest about why it is talking about inviting the Americans back to the Philippines. A little honesty can go a long way in international relations and may well be the first step towards genuine progress in diplomatic affairs.

The stage is set for rising expenditure in support of superior military capabilities throughout the region, which will only negatively impact already-strained national budgets.

Going forward, it is hard to imagine economic nationalism becoming less important in Asia in the short term. It is similarly difficult to fathom that militarism will become a less significant component of the Asian landscape in the medium to long term. Regrettably, these concepts are well entrenched in regional diplomatic lexicon, which Asians openly embrace. Since there does not appear to be a short-term resolution to any of the current conflicts, and there is unlikely to be a reduction in nationalist fervour in the near future, a substantive change in the dynamics at play appears unlikely any time soon.

Taken together, these trends run counter to the euphoria about Asia’s growth prospects in the medium and long term and raise concerns about the region’s ability either to lure foreign investment or remain peaceful.

The 2008 recession has proven that Asia is not immune to a global economic slowdown. Asia’s own financial crisis a decade earlier proved that foreign investment can disappear from the region. Also, numerous historical conflicts have shown that Asia remains a tinderbox of potential disputes between neighbours. To believe otherwise would be to assume that Asia is immune to the plethora of ills that plague the global landscape.

The coming months will, undoubtedly, be a litmus test on whether or not Asia can sustain high rates of growth in the face of sustained headwinds from the West, and whether or not the current Asian hotspots will remain conflict free.

Given the manner in which events appear to be unfolding in Europe, and the direction of Asian politics, it should not be too long before the region faces that test. Traders, investors, and lenders should adopt a cautious approach to doing business in the region – just as they should in any other part of the world.

*Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk consulting firm based in the US state of Connecticut, and author of the book “Managing Country Risk”.

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Simmering tensions