Mon | Dec 18, 2017

Walter Molano | The next showdown

Published:Friday | September 15, 2017 | 12:00 AM
President of China Xi Jinping has been credited with personally directing the enlargement of China's presence in the South China Sea in what has been described as a 'mmaritime Great Wall'. (AP Photo/Kin Cheung, File)

Over the course of the last four decades, China has been on a steady path of ascendancy. The death of Mao Tse-tung in 1976 allowed the country to end its era of permanent revolution and embark on a process of global reintegration.

At first, Beijing focused on re-establishing political and diplomatic ties. However, in 2001, the country became a full member of the World Trade Organization.

This milestone triggered a tremendous economic transformation, allowing China to deploy its vast workforce and become the factory of the world. Wealth accumulated at lightning speed, and the government used its

new resources to educate its workforce, modernise its infrastructure and industrial base. International reserves soared, and China spread its economic muscle around the world. They acquired companies, developed trading relations and provided bilateral aid. Last of all, it modernised its armed forces and used them to project and protect its interests abroad.

Today, those interests are moving further afield.

To this end, Beijing has always been concerned about its ability to access global trade routes through its Pacific ports. The South China Sea is cordoned off by a chain of nations that are closely allied with the United States. The only way out is through one of the seven strategic waterways. Unfortunately, they can be easily closed off.

Beijing refers to these choke points as the seven-dash line. It is important to note that the US has always been obsessed with the Pacific Basin - and China in particular. The concept of Manifest Destiny was not just an expansionist quest to wrest the American western territories from the French, Spanish-Mexicans and indigenous North American tribes; it was a drive to become the dominant western power in the Pacific.

Under the command of Admiral Perry, the US Navy forced Japan to open its doors to western trade. Commodore Dewey's Asiatic Squadron shattered the Spanish fleet in Manila Bay, and put the US in charge of the huge archipelago. Less than four decades later, FDR imposed an oil and steel embargo on Japan to provoke the island nation into a war that would lead to its demise as a regional military power.

One Road/One Belt initiative

In the process, the US became the dominant western hegemon of the Pacific. After World War II, Washington constructed a set of economic and military alliances to protect its vast economic and political interests. Hence, Beijing sees itself at risk of losing access to the global marketplace.

This is what led to the One Road/One Belt initiative. It is nothing more than the reincarnation of the ancient Silk Road, a land bridge that traverses the Eurasian land mass. The modern initiative also includes a network of ports throughout the Indian Ocean, which also was a feature of the ancient trade route.

The US may control the South China Sea, but the Indian Ocean will soon become Beijing's domain. Unfortunately, this will light the fuse for the next superpower rivalry.

Thanks to the one-child rule, which was introduced in 1979, China's population has peaked and is rapidly declining. However, India never had such birth restrictions, and this will allow it to become the next global superstar. India's demographic momentum will soon transform its workforce into the largest on planet, and thus the next manufacturing centre of the world.

Like China, the increase in trade will allow India to become more prosperous and powerful. It is only natural that these two superpowers will become economic, political and military rivals. However, the One Belt/One Road initiative is threatening to accelerate the showdown.

One of the major initiatives of the Chinese programme is to use Pakistan as a corridor to access the Indian Ocean. It is building a series of train lines and highways that will connect Pakistani ports with China's new industrial heartland. In an effort to improve environmental conditions along the coast and spur economic development in the hinterland, China has been moving factories and industries to the far west. Many facilitates have been relocated to provinces such as Xinjiang and Yunnan.

However, there is a drawback. As the facilities move further inland, the costs of transporting goods to the ports increases. One way to keep a lid on the costs is to connect these regions with Pakistani ports, thus allowing them to use the ports of Gwadar and Karachi, which are much closer. This has brought the two countries together, and brought new life to the Pakistani economy.

Not surprisingly, spreads on Pakistani bonds have collapsed. At the same time, China is building a series of ports throughout the Indian Ocean, in Myanmar and Sri Lanka and Bangladesh, effectively encircling and threatening India.

Once perceived an Indian domain, China is also becoming the dominant superpower of the Indian Ocean. This means that military rivalry between the two superpowers will increase and that the locus of military tensions will shift westward, from the South China Sea to the Indian Ocean.

 - Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com