Why a U.S.-China ‘Grand Bargain’ in Asia Would Fail

Posted on August 9, 2012

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A new book argues for a ‘concert of powers’ to enhance stability while conceding to Beijing a ‘sphere of influence’. It would be a mistake.

Prominent Australian security thinker Hugh White has sounded the alarm over Asia’s strategic future with his provocative new book The China Choice.

Despite, or because of, its contentious recommendations, this work ought to inspire debate on the most critical question to the future of Indo-Pacific Asia and indeed all of global security. That is: how can the regional order incorporate a rising China and its interests without allow Beijing to become destabilizingly  dominant?

In often stark terms, Professor White outlines why the United States should share power with China to avoid rivalry, a new Cold War and potentially catastrophic conflict.

This experienced former senior defense official presents a taut warning about the dangers ahead if the United States does not radically reconsider its Asia policy in light of China’s rise.

Much of his diagnosis is hard to fault. Especially sharp is his dissection of America’s concept for taking on China in a so-called AirSea Battle which, weirdly, seems to wish away any risks of nuclear escalation.

And it is all to the good that White robustly questions the notion that diplomatic business as usual will be sufficient to accommodate China’s expanding interests and expectations.

Yet for all that, there remain troubling gaps in White’s recommendation – echoed this week by former Australian Prime Minister Paul Keating – that U.S. allies and other third countries should urge America to set new limits on how and where it pushes back against China.

It is one thing to counsel Washington towards a supposedly new way of thinking in which it accepts clear limits to its interests and influence in Asia to help ensure peace. It is entirely another to nominate where the line should be drawn. This is the harder task, yet The China Choice is frustratingly guarded on this score.

At the heart of the book is an argument that the United States should partner with China in maintaining Asia’s stability through an exclusive ‘concert of powers’, and that this would include conceding to China a sphere of influence.

The dangerous alternative, says White, is that Washington will refuse to give up its quest to sustain military and strategic dominance in Asia, resulting in confrontation and quite possibly war. He fully agrees that U.S. pre-eminence long kept the peace, but says in effect that these days are over as China grows more confident in staring down American deterrence.

He works through many of the states in Asia – from South Korea to Japan to Southeast Asia and India – suggesting reasons why America would not wish to risk war by fully backing them up in a crisis, and why they themselves would be unlikely to join America in somebody else’s fight with China.  If solidarity is really so thin, then China can cease fretting about perceived American strategies of encirclement.

This line of analysis also seems somewhat at odds with another of the book’s judgments: that even if the United States withdrew from Asia, Chinese dominance would be impossible because the rest of Asia collectively could balance against Beijing.  If most Asian nations genuinely see the risks outweighing the benefits in helping America balance against China now, what would change their minds in the even more fragile setting of American retrenchment?

The real problem, though, with The China Choice is also one of its virtues: the sheer neatness of its argument.

It calls for a new order in which China’s authority and influence grow enough to satisfy the Chinese, while America’s role remains large enough to ensure China’s power is not misused.

This elegant formula downplays the realities faced by the many other nations across Indo-Pacific Asia that place as much premium as China does on their own security and national dignity.

To be fair, White does not deny that it will be exceptionally hard for America and China to negotiate mutually acceptable limits that would make their power-sharing arrangement possible or stable.

Conscious that his idea is vulnerable to being caricatured as something like appeasement, he underscores that Washington would need to be absolutely firm and clear to China about these boundaries.  Otherwise, there would be real risks – as he acknowledges – of initial American concessions giving China the false expectation of more, and leading potentially to war through miscalculation.

So far, so good. But what might those limits be? It may be unreasonable to expect one author to have all the answers on what Chinese and American spheres of influence would look like in a changed Asia. After all, this is not purely about drawing lines on a map but also about fine judgment regarding permissible Chinese and American policies towards third parties and their domestic affairs.

Still, it is disappointing that, having identified some sort of Chinese sphere of influence as necessary for great-power peace, the book devotes just a few paragraphs to the “complex and delicate question” — some would say the crucial question — of what this space would look like.

A workable sphere of influence, we are told, cannot directly affect the vital interests of other great powers. Most Asian countries are not named as candidates for being within the sphere. The potential status of the Koreas and Burma, for instance, is not made clear.  Japan is explicitly excluded, since trying to include one great power in another’s sphere of influence would void the whole concert idea and lead to dangerous instability.

Only Indochina is held out as a demonstration of what might need to be on the table. The political autonomy of Laos, or part thereof, is given as an example of what might reasonably be conceded in the interests of avoiding U.S.-China rivalry.  This is hardly shocking news, being not far off a description of that country’s present status.

Next the question of Vietnam is raised and left unanswered. One suspects the Vietnamese would have their own answers and on this issue, at least, they get a vote.

Moving to the South China Sea, “to concede that would be to concede more than is compatible with the vital interests of other great powers”.  Agreed – but there is no sign of China’s abandoning or even being willing to negotiate its sweeping claims in those waters, reinforced of late by the establishment of an island city and garrison.

And if preventing coercion of other claimants in the South China Sea is in fact at the non-negotiable limit of American accommodation of China, then the grand bargain is already looking like a non-starter.

On China’s part, would it really settle for a sphere of influence amounting to not much more than a bit of Indochina? And if it would, then why all the fuss?

Of course a comprehensive attempt at defining workable boundaries for hypothetical U.S. and Chinese spheres of influence would require another whole book. And the impression from the present volume is that drawing these lines would be a job for American and Chinese statecraft.

But this means that for the time being we have to make do with an assumption, rather than proof, that some kind of stable demarcation of U.S. and Chinese spheres of influence in 21st century Asia will be possible. And if such an outcome proves elusive, then we are back to finding ways of managing the risks of the here and now.

One area where White’s conclusions are most challenging to the status quo is that most literal of China choices, the future of Taiwan. He points to the diminution of America’s credibility in being able militarily to defend Taiwan, thanks to China’s new maritime anti-access capabilities and the possibility of nuclear escalation. “The U.S. can no longer prevent China from seizing Taiwan by force,” he writes.

But what U.S. policy might replace it? The given answer is that the U.S. ought to encourage “eventual, peaceful, consensual reunification”. That may well where present trends of cross-strait economic and social links are headed. But relying solely on this prospect is as much a hope as a policy.

Turning to Japan, Professor White’s analysis and prescriptions hold a special and controversial place for North Asia’s second great power. Not only would Tokyo be outside a notional Chinese sphere of influence. Along with India, Japan would join China and America among the big four, a so-called concert of powers to set the rules of stability for everyone in the new Asian order.

To do so with confidence, though, Japan’s security posture would need drastic surgery. For the U.S. to durably share power with China without constantly having to manage Japanese anxieties, there would need to be a termination of the U.S.-Japan alliance, at least as we know it. Japan would then almost certainly need its own nuclear weapons to deter any possible future Chinese (or presumably North Korean) nuclear blackmail, though whether the Japanese polity could ever make such a radical shift is unclear.

Of course, how China, South Korea or the global non-proliferation regime might respond to that game-changer would be a whole new cascade of conundrum.  The end of the Washington-Tokyo alliance could also have large and unsettling consequences for other U.S. alliances in Asia and globally.

But returning to the concert of powers: White crafts a smart case for adapting this 19th century European invention to 21st century Asia.  This is not the first time the concert idea has been examined in the Asian security debate. White, however, has gone further than others in refining and boldly endorsing it as the least bad solution to Asia’s strategic ills.

What remains uncertain is how his concert of four might come into being.  From the original post-Napoleonic concert of powers in Europe to the 1945 victors’ club of the United Nations Security Council, such arrangements have coalesced only after cataclysmic war.

The standard criticism of a concert of powers is that it is a club of the powerful setting the rules for all in the name of stability, often at the expense of the rest. In short, it is not fair. White makes a strong case that this injustice is a reasonable price to avoid the kind of great-power war that in an interconnected world would bring grief to all. Since his and my own middle-power country Australia is one that would miss out on a seat at the concert table, his analytical detachment here is commendable.

But most nations would hardly embrace the idea with equanimity.  How might so many countries in Asia and beyond be persuaded to consent to the writ of just four? Would a non-interference pact among Washington, Beijing, New Delhi and Tokyo extend across their increasingly global interests? If so, what would be the downside for others, not least Europe and Russia? If not, how might the United States and China avoid clashes of interests in, say, the Middle East or Africa?

So many questions. It is to Hugh White’s credit that his book raises them. If it stirs its readers from silence, complacency or smugness about the policies of the moment, it will have done its work.

He is right of course that a changing Asia faces troubled times ahead. Regardless of whether peace will require grand and parsimonious diplomatic blueprints, it will certainly need much else that is in uneven supply, including smart statesmanship, dogged crisis-management and the kind of operational confidence-building measures that kept the Cold War cold.

Peace will also be advanced by habits of mutual respect, open-mindedness about compromise and a focus on shared interests – features, incidentally, of President Obama’s early efforts to engage China, where White neglects to give due credit.

White is harsh on Obama, especially for moments of confrontational rhetoric which could be taken as denigrating the legitimacy of the Chinese system and its historic achievement in improving the welfare of so many people (“prosperity without freedom is another form of poverty”.)

But then The China Choice is all about fronting America with the kind of frank and unsolicited advice that only a friend can give and a democracy can take.

Rory Medcalf

Facing the truth about trade

In October 2010, the EU and South Korea celebrated conclusion of a bilateral Free Trade Agreement between themselves. This was widely hailed as another major step along the way to complete globalization, and American policy makers hurried to avoid losing out on trade goodies by quickly negotiating a similar deal that was just concluded in March, 2012.

But wait. Now it seems that the E.U.-Korean deal didn’t flatten the world after all. Reuters reported this week that France has asked EU officials to request that Korea give advanced warning of planned car exports to the European markets. This is the first step toward possible reintroduction of tariffs on car imports. It comes in the face of a contracting European auto market, rapidly rising European unemployment, an announcement by Peugot of major factory closing plans that will result in extensive layoffs of workers, and a 34 percent surge in imports from Korea in the wake of the Free Trade Agreement.

This is not really surprising. Anyone who thought the FTA would produce free trade in autos had to be daft. Look, the governments of both the EU and Korea have been heavily involved in the development and preservation of their auto industries from the beginning. At various times they have been investors in their auto industries. These industries are in the too big to fail category and are thus politically sensitive. For these and other reasons they will not have free trade no matter how much negotiators might wish that they will.

Yesterday, the Financial Times ran a full page article on the global aircraft industry, emphasizing that China’s fledgling aircraft industry might be the one that will eventually break the duopoly of Boeing and Airbus. The article cited two reasons for thinking that China’s Comac might succeed where so many others have failed. One was the willingness of the Chinese authorities to spend whatever is necessary to become a world class aircraft producer. The other was the fact that China itself will be the biggest single market for aircraft over the next decade or so and is likely to buy Chinese wherever possible.

Of course, China is a member of the World Trade Organization (WTO) and as such nominally committed to free trade – except where it’s not. Nor should we single out China. Boeing and Airbus did not result from some immaculate conception. Both have been and are the object of substantial government protection and assistance in a variety of ways.

The truth is that free trade is impossible in a wide variety of industries characterized by capital and technology intensity, economies of scale, oligopolistic structures, cross border investment, high costs of entry and exit, sensitivity to exchange rate fluctuations, and close connection to national security objectives and/or to national pride. It is impossible under these conditions because they violate all the key assumptions of neo-classical free trade doctrine.

We really need to stop peddling free trade fiction and start facing the truth about globalization.

Clyde Prestowitz

Aerospace: A dogfight for the duopoly

The makeshift 3D cinema erected at the Farnborough air show last month by Commercial Aircraft Corporation of China, the fledgling aircraft maker, was all but deserted. At lunchtime on the last day of the industry’s premier trade show, only three people were watching Comac’s film about its planned passenger jets. Two of them were fast asleep.

The apparent lack of interest was surprising – Comac is the most likely candidate to break the duopoly enjoyed by Airbus and Boeing in single- and twin-aisle passenger aircraft for the past 20 years.

As economic and industrial power shifts east, Comac is pursuing a commercial jet market worth an estimated $4.5tn globally over the next two decades. It should be guaranteed a healthy chunk of this market because China’s fast-growing airlines are expected to be the single biggest source of sales in the world, outpacing demand from the US. If Comac can secure significant orders outside China, it could put the aerospace industry’s profitability into a tailspin because it will probably secure international sales only by initially offering cut-price deals to airlines.

Comac’s exhibition stand at Farnborough was a testament to China’s ambition to become a force in the industry, although the company was only founded in 2008. There were pictures of Hu Jintao, China’s president, and Wen Jiabao, premier, visiting the Shanghai-based Comac, accompanied by a statement of intent: “The company…is determined to independently build large Chinese passenger aircraft that will soon be soaring through the blue skies.”

In truth, Airbus and Boeing are braced for three new competitors in the critical battle for single-aisle jets seating more than 100 passengers. The Airbus’ A320 and Boeing’s 737 have dominated this narrow-body market, but Canada’s Bombardier, China’s Comac and Russia’s United Aircraft Corporation are all planning single-aisle jets over the next five years.

The greatest interest is focused on Comac’s C919 aircraft, seating 158 to 174 passengers and scheduled for launch in 2016. Aircraft programmes are expensive – development costs typically run to at least $10bn – and involve setbacks along the way, so analysts reckon state-controlled Comac is best-placed among the new breed of challengers to Airbus and Boeing.

Russian safety in focus after jungle crash

Russia’s ambitions to become a global player in the passenger jet market received a serious blow in May when a Sukhoi Superjet 100 crashed into the side of an Indonesian mountain.

All 45 people on board Russia’s first commercial passenger aircraft since the end of the Soviet Union were killed when the demonstration jet hit Mount Salak.

An initial investigation found that “technical problems haven’t caused the [jet] crash”, says Mikhail Pogosyan, president of United Aircraft Corporation, parent of Sukhoi.

Indonesia’s national transportation safety committee has not reached final conclusions but, in a report in June, it said Sukhoi should review its procedures for demonstration flights, and arrange additional training for flight crews, especially in mountainous regions.

Vladimir Putin, during his first tenure as Russian president, created state-controlled UAC in 2006 to bring together several of Russia’s aerospace companies that date back to the former USSR – including Sukhoi.

The group is embarking on the highly ambitious task of trying to replicate Russia’s success producing fighter jets in the commercial aircraft market.

In a break from Soviet-era aerospace projects, UAC is relying heavily on western technology and support.

Boeing was a consultant on the 95-passenger Sukhoi Superjet 100. Its engines are being supplied by a joint venture with France’s Snecma, part of Safran.

The jet was launched in 2011, more than two years behind schedule.

There are orders for 174 aircraft, with many coming from carriers and leasing companies in the Commonwealth of Independent States.

Finmeccanica, which has a 25 per cent stake in the Sukhoi company making the Superjet, is responsible for selling the aircraft on western markets – where it will compete with similar regional jets by Bombardier and Embraer.

The Superjet is due to be followed in 2017 by the MC-21 narrow-body jet by Irkut, another UAC subsidiary.

The MC-21, seating up to 212 passengers, is supposed to go head-to-head with the dominant single-aisle workhorses – the Airbus’ A320 and Boeing’s 737.

Fabrice Brégier, Airbus’s new chief executive, acknowledged the potential scale of the threat posed by Comac when he said at Farnborough: “We know…this market of over 100 seats will open to new competitors, so we need to be prepared to be competitive…We take the C919 as a very serious development, managed by a very serious company.”

Another person close to Airbus says: “Of all the newcomers [Comac] will be the strongest – not because they have the best skill base today, but because they have more financial firepower than anybody else. They can sink billions into [aircraft] projects without any concern for [the] bottom line.”

The consolation for Airbus and Boeing is that their efforts to keep the new competitors at bay are working – so far. The European and US manufacturers are notching up large orders for planned new versions of their existing narrow-body workhorses featuring more fuel-efficient engines, in effect shutting Bombardier, Comac and UAC out of much of the market during this decade.

However, aerospace is a highly cyclical industry and there is a very real risk that Boeing and Airbus could swamp the market with unwanted aircraft over the coming years. Amid the eurozone crisis, the possibility of the US being plunged back into recession by its looming “fiscal cliff” of deep spending cuts, and slowing economic growth in several developing countries including China and India, some airlines are going bust, while others are cancelling aircraft orders or postponing the time when they take delivery of new jets.

Should the trickle of recent order cancellations and delivery postponements become a flood, it could wreak havoc for Airbus and Boeing.

In the second half of the last decade, Airbus and Boeing were nervously mulling the case for brand new narrow-body aircraft. Both were scarred by delays and cost-overruns on new wide-body jets – Airbus’s A380 superjumbo and Boeing’s 787 – so were cautious about committing to new single-aisle aircraft.

Then in July 2008, Bombardier set alarm bells ringing at its larger rivals by announcing plans to use a new generation engine developed by Pratt & Whitney – called a geared turbofan and offering a step change in fuel savings – on its planned two new narrow-body aircraft.

As the oil price lurched to a record $147 a barrel, Bombardier was able to claim that these engines would enable its new aircraft – called the CSeries – to burn 20 per cent less fuel than current generation of jets by Airbus and Boeing.

Airbus responded in December 2010 by ditching the case for a new aircraft and instead announcing plans for a tweaked version of its existing narrow-body jet – featuring similar Pratt & Whitney engines to Bombardier’s CSeries or alternative ones by CFM International, the joint venture involving General Electric of the US and France’s Safran.

Crucially, Airbus’ A320neo – which stands for new engine option – is due to be launched in 2015, just two years after Bombardier’s CSeries.

If Airbus had opted for a new aircraft, it would have been unlikely to fly until well into the next decade. After some dithering, Boeing has adopted a similar strategy by putting new, more fuel efficient engines on its existing narrow-body jet, and calling it the 737 Max.

Following these decisions, single- aisle aircraft orders have mushroomed for Airbus and Boeing – minimising the sales opportunities in the short to medium term for the new breed of narrow-body jet makers.

The strength of Boeing and Airbus in the single-aisle market helps explain why Embraer, the Brazilian aircraft maker, baulked last year at the risk posed by building a jet bigger than its current 122-seat model.

“Can we do [a] 200-seater? Probably yes, but it would stretch the company and introduce risks we did not think were acceptable,” says Frederico Curado, Embraer’s chief executive.

The immediate threat to Airbus and Boeing is further reduced because some of the new aircraft makers are not focused – at least initially – on their main market. Japan’s Mitsubishi Aircraft Corporation is developinga narrow-body aircraft, but it will be a regional jet with 70 to 90 seats.

The most advanced threat to the duopoly comes from Bombardier, which has been making aircraft since 1986. But the surge of orders for the A320neo and 737 Max suggests the Canadian company’s planned new narrow-body jets are struggling to secure widespread support. So far, Bombardier has orders for 138 CSeries aircraft, which will have between 100 and 149 seats.

In an effort to improve its position, Bombardier in March signed an agreement with Comac under which the two companies will seek cost savings by collaborating on aspects of the CSeries and C919 programmes.

Bombardier is hoping the collaboration with Comac will give it bigger sales opportunities in China, which is expected to be the most valuable aircraft market in the world over the next 20 years. Airbus estimates China will need more than 4,000 aircraft worth $545bn.

Guy Hachey, head of Bombardier’s aerospace business, says the work with Comac “evens up the field” with Boeing and Airbus. “We’re a small company…that competes against two giants,” he adds. “They will do everything so that we don’t destabilise the duopoly.”

For Comac, the collaboration with Bombardier should help the Chinese aircraft maker’s capability, as well as provide some welcome credibility. Nick Cunningham, analyst at Agency Partners, a research firm, says the “major hurdle” that Comac has to overcome is demonstrating that its aircraft will be safe to fly.

“If a western airline bought Chinese aeroplanes and they proved to be unsafe that would be disastrous for the airline – [possibly] fatal,” he adds.

Comac is asserting that its aircraft are safe, partly by highlighting how they rely heavily on western technology – for example, the C919 is due to have similar CFM engines to those planned for the 737 Max.

Comac says it has orders and commitments by 12 customers to buy 280 C919 jets. Most of these orders are with Chinese airlines and aircraft leasing companies, and the domestic market is likely to be Comac’s main source of deals in the coming years.

Comac is attracting some foreign interest, however – Ryanair, the Irish low-cost carrier, last year agreed to collaborate with the company on the development of a 200-seat C919.

At Farnborough last month International Airlines Group, parent of British Airways and Iberia, raised the possibility of buying C919s by agreeing to provide information to Comac on what aircraft specifications it is seeking.

The increasing role of Chinese banks in aircraft financing – as some European banks retreat in this area – should also be a boost for Comac. “China’s emergence as a major player in aircraft financing increases the likelihood that the C919 will become a credible alternative to the Airbus A320 and Boeing 737,” says John Dowdy, director at McKinsey.

Given Airbus and Boeing have struggled to launch some of their new aircraft on time, it seems plausible that Comac’s C919 may not reach its first customer by the company’s target date of September 2016.

So Airbus and Boeing will probably not face a proper onslaught to their duopoly until after 2020, by which time they will be edging towards brand new narrow-body aircraft, possibly involving so-called unducted fan engines enabling another major leap in fuel efficiency.

However, such engines will probably be available to Comac as well as to Airbus and Boeing. The challenge will be putting them on aircraft made mainly out of lightweight carbon fibre reinforced plastic rather than aluminium alloy.

Jim Albaugh, until June head of Boeing’s commercial aircraft division, says he would not bet against Comac in the medium to long term because it has the resources to succeed. “Whether [the C919 is] a good aeroplane I don’t know, but eventually they’ll get it right.”

F.T.

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