The Pandemic Depression
The Global Economy Will Never Be the Same
Chinese President Xi Jinping’s visit to Washington has had media outlets abuzz about cybertheft and sandcastles rising out of the South China Sea. But in many ways, these issues are side plots to a larger story: the New Great Game for influence in the Indo-Pacific, which has arisen at the confluence of three strategies, China’s Maritime Silk Road, India’s Act East Policy, and the United States’ Rebalance to Asia. It is possible for all three strategies to work together, but it won’t be easy—particularly for the United States.
India and China might struggle for political and commercial influence in the Indo-Pacific region, but both would do better to coordinate their policies, since as neighbors, their economic and political success depends on deepening engagement with each other and other countries in the region. At the moment, both recognize that there is little to be gained from proxy wars and have instead favored soft power diplomacy.
Huge stakes are involved. Trade, energy, and geostrategic imperatives are driving both Chinese and Indian ambitions. Between the Indian and Pacific Oceans lies the main choke point of world commerce, the Malacca Strait. Today, more than half of the world’s container traffic and one-third of all maritime traffic crosses the Indian Ocean and passes through this point and into the South China Sea. To understand the scale, consider that roughly two-thirds of South Korea’s energy supplies, nearly 60 percent of Japan’s energy supplies, and 80 percent of China’s crude oil imports arrive over this maritime route. Meanwhile, 75 percent of India’s energy supplies cross the Indian Ocean.
China has long felt trapped by what national strategists have termed the “Malacca Dilemma”—that China’s access to the greater Indo-Pacific is limited to one main pass and that, to reach that pass, its ships have to travel over the South China Sea, which is a mess of overlapping territorial claims from countries in the region. And so over the last decade, China has sought to secure its access to the critical sea lanes, including by creating artificial islands with airfields in the South China Sea and declaring an expansive and novel Exclusive Economic Zone—one that is far larger and includes far more prerogatives than permitted under The United Nations Convention on the Law of the Sea—over the area. From this perspective, Chinese Vice Admiral Yuan Yubai’s recent, and rather incendiary, declaration that the South China Sea “belongs to China” makes strategic sense: It is after all their path to the greater Indo-Pacific.
Plenty of ink has been spilled over the South China Sea, and appropriately so. But the South China Sea is just an example of a larger game that is already underway.
Along with creating routes to and around Malacca, China has provided soft loans to Bangladesh, Pakistan, Myanmar (also called Burma), and Sri Lanka for everything from highways, to power plants, to seaports. All of this has been part of China’s Maritime Silk Road strategy, which is meant to bind countries in the Bay of Bengal and the Indian Ocean closer to the Chinese economy as well as to build trade routes from China through their territory to the Indian Ocean, which would allow China to avoid the Malacca bottleneck. Yet this approach has been hurt by China’s more muscular activities in the South China Sea, which have scared the country’s smaller neighbors into closer alliances with India, Japan, and the United States.
India, which was the largest recipient of global foreign aid until the early 1990s, has started to dole money out.As China has become more assertive, India has focused on its own rapidly growing need for access to critical sea lines and opportunities for trade and investment. In 2011, maritime trade constituted close to 41 percent of India’s overall GDP; the figure reached 45 percent in 2015. India now imports about three-fourths of its oil through the Indian Ocean. India fears that China, relying on its alliance with Pakistan, might encircle India on land and at sea. For Indian strategists, it doesn’t seem far-fetched that China would use its increased maritime capability to create a zone of naval exclusion that stretches from the South China Sea to the Persian Gulf.
To counter such encroachment, India, which was the largest recipient of global foreign aid until the early 1990s, has started to dole money out. The country now has more than $12 billion in open lines of credit and dozens of major development projects in foreign countries. Although Indian aid equals just a fraction of Chinese aid in the region, India hopes to use its funding, increased trade focus, military diplomacy, and cultural ties—its so-called Act East policy—to maintain and expand its leverage over the Indian Ocean Rim states to preclude a more permanent Chinese presence in those waters.
This, in a nutshell, is the New Great Game.
BUILDUP IN BANGLADESH
Competition in the Indian Ocean begins in Bangladesh, a country that is currently the second-largest recipient of Chinese assistance in the region. Over the last decade, two-thirds of Chinese assistance has gone to the transportation sector, since, China believes, new port and rail links from China to Bangladesh can serve as a pressure valve for the Malacca Strait. China has spent significant capital upgrading Bangladesh’s port infrastructure: Bejing is a major donor to the Chittagong Port project and had agreed to build a deep-sea port at Sonadia before the plans were shelved when India, Japan, and the United States voiced concerns. Now Beijing is eyeing another deep-sea port project at Paira.
Bangladesh is also one of India’s largest recipients of foreign aid, and like China, New Delhi has focused the majority of its assistance on the transportation sector, which it views as central to its Act East policy. India has already extended $800 million in lines of credit for water, rail, and road transportation and has proposed another $1 billion more. It also submitted bids to build the deep-sea port at Paira.
Meanwhile, India has actively worked to solve remaining border disputes with Dhaka. Over the summer, the two countries finally came to an agreement on the enclaves dispute—trading 160 small land enclaves along the Indo–Bangladesh border that belonged to one country but were located in the other—and thus removed a political wedge that has limited cooperation between the two countries for 70 years. In a noticeably different tone than that of China in the South China Sea, the Narendra Modi government accepted an international ruling regarding the allocation of territorial waters between India and Bangladesh in the Bay of Bengal. India hopes that a more “neighborly” approach, which looks to smooth local frictions to boost cooperation, will help it turn back China’s influence of China in India’s near abroad while also boosting trade and connectivity in South Asia.
TANGLE OVER MYANMAR
China has invested heavily in Bangladesh’s next-door neighbor Myanmar. Beijing stayed friendly with the military regime in Naypyidaw during the regime’s decades of isolation to cultivate an ally for trade and access to raw materials. From 1988 to 2013, China built ports, dams, and oil and gas pipelines throughout the country, accounting for 42 percent of the foreign investment in Myanmar. The Kyaukphyu Port became the cornerstone of Beijing’s strategy in the country, as it provides valuable land-based access to the Indian Ocean. In 2013, the countries inaugurated a gas pipeline from Kyaukphyu to China, which is scheduled to begin moving crude oil later this year.
China’s relationship with the ruling military junta has provoked opposition in Myanmar. Violence and anti-China protests in the north of the country have caused delays in the oil project, and opportunity India has taken to reinvigorate its own transport project at Kaladan, which will connect the Indian city of Kolkata with the Sittwe Port by sea, then link through Myanmar back to the Indian state of Mizoram. The link back matters, since Sittwe Port represents a crucial part of India’s sweeping plan to connect eastern India with Myanmar and, by extension, the rest of the region via sea, inland waterways, and highways.
India’s moves have extended beyond development cooperation. Taking advantage of a May 2014 border and security cooperation agreement, in June 2015, Indian Special Forces launched a raid on an insurgent camp in Myanmar. The move relieved pressure on Naypyidaw’s forces, which were then stretched thin battling anti-state militants in three other regions of the country. Previously in 2013, India agreed to build four Offshore Patrol Vehicles for Myanmar’s navy and to train more of Myanmar’s military officers. In turn, Myanmar, long a client state of Beijing, has started pivoting away from China. The first major blow to the relationship was the suspension of the Chinese-backed Myitsone Dam project on the Irrawaddy River in 2011; after the Myanmar military junta dissolved in 2010, the new government caved to public pressure against the dam. The second was China’s authorization of live-fire drills along the Burmese border in June 2015. In China’s strategic loss, India is the big winner—a pattern that has replicated itself across several Southeast Asian countries.
NO COMPETITION IN PAKISTAN
China is a clear winner in one theater, though, and that is Pakistan. No Chinese move has produced greater anxiety in New Delhi than Beijing’s burgeoning alliance with Islamabad. China funded Pakistan’s Gwadar Port, through which Beijing intends to move oil and gas from the Arabian Sea, and into China’s restive Xinjiang province. The port cost $1.16 billion, but China got its money's worth by signing a 40-year management lease. And that’s just a drop in the bucket compared to the recently signed $46 billion investment in an almost 2,000-mile economic corridor that will link Gwadar through the disputed region of Kashmir to China. Already, China’s naval engagement with Pakistan has increased dramatically, with the Chinese navy going so far as to dock in Karachi. According to some media reports, there are even plans in place for China to provide destroyers and other combat ships to Pakistan in the coming years. All of this gives China the capability to project hard power in the Arabian Sea littorals, which surround the world’s densest deposits of oil and natural gas.
Not to be outdone, India has launched its own port project in Iran as part of a strategy to access Afghanistan and Central Asia while bypassing Pakistan. Signed in 2002, the Chabahar Port deal was delayed by international sanctions on Iran. Now that the P5+1 have signed a nuclear accord, though, the project could take off. India has already spent $100 million to build a road in Afghanistan that links up to Chabahar port. Modi recently signed an $85 million deal to lease and convert two berths at Chabahar port into a container terminal by the end of 2016, and the government has offered to invest over $15 billion in Iran, including the full-scale development of Chabahar into a larger deep-sea port, in exchange for cheaper gas. When the expanded Chabahar system is operational, India will have a way to siphon Iran and Central Asia’s vast oil and natural gas reserves south, away from western China’s hungry energy markets.
STRUGGLE FOR SRI LANKA
A final case study makes the nature of the growing rivalry between China and India abundantly clear. Under the previous government, India ceded influence in Sri Lanka to China because China had provided the previous Sri Lankan government with the military hardware and diplomatic cover that enabled it to win its 25-year-old civil war against the Tamil Tigers. The funding was something neither India nor Western countries were willing to provide due to fears of human rights violations.
And so China built Hambantota Port in southern Sri Lanka, which, when the third phase of construction is completed this year, will be South Asia’s largest port. China also started building a $1.4 billion port project near Colombo. The agreement will last for 99 years and gives Beijing jurisdiction over 50 acres of land. Indeed, the Colombo Port City Project, as its name suggests, will be a city under Chinese lease, replete with apartment buildings, shopping malls, and golf courses. In times of conflict, China would likely be able to make military use of the facilities. Indeed, in 2014, Sri Lanka granted a form of privileged access to China, permitting Beijing to dock its submarines at the Colombo South Container Terminal—a deep-water facility built and managed by Chinese firms—instead of at the Sri Lanka Port Authority, which is mandated to host military vessels. The Sri Lankan government then attempted to keep the media in the dark on the matter, in contrast to its usual vocal pronouncements when other countries made port calls in the country.
But in February 2015, Sri Lanka’s newly elected president, Maithripala Sirisena, whose campaign focused on charges of corruption in the Chinese investments in Sri Lanka, changed course. He made his first foreign trip to India, signing a broad range of agreements to strengthen strategic and economic ties, including on civil nuclear cooperation. Sirisena has now put the Colombo port project on hold, although Beijing is using all its leverage to restart it. During Indian Prime Minister Narenda Modi’s visit to Sri Lanka, the first by an Indian premier in 28 years, India agreed to deepen strategic, economic, and defense ties with the country. Modi extended a $318 million line of credit to Colombo for the expansion of its railway sector, and the two countries struck agreements to jointly develop Sri Lanka’s coal and petroleum sectors and launch a joint task force on the ocean economy.
Instead of shouting itself hoarse about Chinese encroachments, India has focused on revitalizing its relationships in South Asia and expanding its contacts with potential partners from the Persian Gulf to the South China Sea. At the same time, it has directly challenged Chinese positions throughout the region. Speaking in front of the Sri Lankan parliament, Modi said that his vision of an “ideal neighborhood” was one in which “trade, investments, technology, ideas and people flow easily.” This vision matches with the United States’ own ambitions in the region, expressed in the “US-India Joint Strategic Vision for the Asia-Pacific and Indian Ocean Region” signed in January, and later in the U.S. Department of Defense’s “Asia-Pacific Maritime Strategy,” which specifically embraced India’s Act East policy.
Indian foreign policy acknowledges that smaller states seeking to develop their economies will accept Chinese assistance, whose deep pockets India cannot match. This will mean that India will lose some influence in those states, but such investments will also aid India’s grand strategy by developing its neighborhood, a region that is one of the least integrated in the world. But India also brings something else to the table: a shared sense of culture and values with many of its neighbors. And that is an asset that, for all its newfound wealth, China lacks.
The waters between the Indian Ocean and the disputed Spratly Islands in the South China Sea are shaping up to be the front lines of a new great game that will spread throughout the Asia-Pacific. The game is much more complex than that between the British and Russian Empires over control in Central Asia during the nineteenth century. The front lines won’t be distinct or impenetrable; instead warships will mingle with cargo freighters and oil tankers as great powers seek to balance one another in the sea lanes. The potential gains in this game will be much greater, but the competition will be much more difficult to manage.
China and India will continue to acquire new hard power in order to protect their economic interests in the region. In 2013 and 2014, India was the world’s largest importer of arms; China was the third largest in 2013 and fourth largest last year. That growth is reflective of a broader trend in the region: 12 of the top 15 arms importers in the world were scattered across the Indo-Pacific region. This is not to suggest that the two Asian giants are headed toward inevitable conflict. Indeed, competition has the potential to drive dramatic economic benefits to the region as countries soak up Chinese- and Indian-funded infrastructure. The resulting increase in trade infrastructure and connectivity would also benefit both China and India. Yet that positive outcome will require proactive management from all parties and a sustained commitment to balance competing interests.
And that is where the United States comes in. In order to secure shared prosperity, the three powers will need to be realistic about the legitimate security concerns of the others. Not surprisingly given Beijing’s provocations in the South China Sea, the United States has moved to strengthen bilateral relations with India while calling for greater Indian activism in the Indo-Pacific. The United States should continue maritime security and economic cooperation with India while also working with Australia, Japan, and other partners, particularly the Indian Ocean Rim states. This should include the creation of departments focusing on this region at the Departments of Defense and State. A strategic focus on the Indian Ocean as a whole, one that brings energy to a region where U.S. policy at best is reactive, will be an essential element of greater policy success.
The United States must also be seen in the region as a credible partner, but one also willing to ensure the adherence to international law and norms. It would be futile, indeed counterproductive, to attempt to prevent either China or India’s rise. The United States’ ineffective attempt to prevent key allies from joining the Chinese-led Asian Infrastructure Investment Bank made that abundantly clear. A lack of strategic thinking was also in evidence when U.S. intransigence on passing the 2010 International Monetary Fund’s voting rights reallocation directly motivated the formation of the New Development Bank, led by the BRICS countries. At the same time, what good are the diplomatic protests by the United States about the creation of artificial islands with airfields in the South China Sea, when the United States has to date not carried out any “freedom of navigation” flyovers or sail-throughs within the 12-mile territorial boundary of China’s freshly created islands?
Over the last several months, Modi has repeatedly told audiences, “Our destinies are linked by the currents of the Indian Ocean.”Washington must work with China and India, as well with as other countries in the region, to uphold freedom of navigation and to ensure that the most threatening behavior is curbed and international norms are upheld. In addition, policies aimed at fostering freedom of trade through free trade agreements should include the two main New Great Game players. Only by acting as a crucial partner in the Indo-Pacific, and when needed backing up its commitment with hard power, will the United States be able to bring the game to an end that is favorable for all. Over the last several months, Modi has repeatedly told audiences, “Our destinies are linked by the currents of the Indian Ocean.” He’s right—and it need not be a bad thing.