In a world of depressing news headlines, how is the Southeast Asian region faring? An examination of the risk environment leads us to a few key assessments.
First, being one of the main arenas for US-China contestation, this region is exposed to potentially nasty scenarios if big power frictions escalate. Still, we think that the chances of extreme scenarios such as an outright military clash have receded. Second, domestic political situations have become more settled, although the sad exception is Myanmar where an ugly turn is possible. Third, there are potential perils in international trade which could compromise this trade-dependent region’s long-term prospects. Nevertheless, overall, and certainly relative to other regions, it strikes us that Southeast Asia is not doing too badly.
Geopolitical risks have been contained, for now
There are two flashpoints which could turn into a hot war in this region or close enough to the region to hurt us — the South China Sea disputes and Taiwan. Although unpleasant incidents are possible, our sense is that the possibility of serious military conflicts has diminished of late. The critical factor here is a more settled US-China relationship. The two big powers continue to vie with each other for position but they are doing so within a framework of conduct that reduces the likelihood of outright clashes occurring.
This is clear in the frequency of meetings between senior US and Chinese leaders, just in the past month alone. These exchanges help to establish a better appreciation within the leaderships of each country of their rival’s points of sensitivity. What is also encouraging is that multiple channels of communication have now been set up that can be used to defuse tensions. Thus, “guard rails” have been put in place that will reduce the risks of conflict between the two.
In early April, Chinese President Xi Jinping and US President Joe Biden held a telephone conversation, their first exchange since they met last November. On the surface, nothing ground-breaking seemed to have been achieved. Each leader repeated their country’s demands of, and complaints against, the other. But they did agree to resume defence minister-level talks soon, a clear step forward. And, even as they complained about the other, each leader tried to provide some balance and inject some positivity. For example, while Xi spoke out against American efforts to “suppress” China’s technological development, he also noted that there had been progress in the relations between the two countries. In concrete terms, China has also been cooperating with the US to limit the flow of ingredients used to produce the fentanyl that has sparked an epidemic of deaths in the US.
The presidential exchange was buttressed by a series of other high-level meetings. US Treasury Secretary Janet Yellen spent a whole week in China while China’s Vice Commerce Minister, Wang Shouwen, met in Washington with the US Under Secretary of Commerce for International Trade, Marisa Lago. The economic talks were amicable despite many areas of differences. It is noteworthy that China’s resentment at American and European accusations of Chinese over-capacity and dumping of goods on global markets, Chinese Vice-Premier He Lifeng still agreed to formal “intensive exchanges on balanced growth in the domestic and global economies”.
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On April 24, US Secretary of State Antony Blinken arrived in China for talks with his counterparts as well as with business leaders. The US and China have fundamental differences in current global hot spots such as Ukraine. Blinken’s visit will not resolve these but the face-to-face contact will help each side better understand where the other stands and help find ways where they might constructively cooperate. For example, Blinken is keen to get China to desist from providing military support to Russia. China will almost certainly publicly rebuff the US on this matter. But, as it has done with financial flows to Russia, it may become more judicious in how far it goes with military assistance to Russia.
The really important point that emerges from these frequent high-level meetings is that the US and China are now committed to a diplomatic process to manage their points of difference. Now that military-to-military talks are to start, there are channels of dialogue that encompass all the major dimensions of the two powers’ relationship. We understand, moreover, that each of these dialogues is underpinned by several working groups which means that exchanges continue regularly even when the most-senior officials are not meeting. The resulting more nuanced understanding of each other will help diminish the kind of misjudgements that lead to conflict. It will also provide channels of communication that can quickly resolve an emerging point of friction before it escalates.
Separately, the US has also succeeded in bolstering its network of alliances in Asia in recent months. Its decades-old security treaty with Japan has been vastly strengthened by joint cooperation in the production of defence equipment and collaboration in defence-related R&D. The tripartite alliance involving the US, the UK and Australia is being widened to include cooperation with countries such as Japan and New Zealand. The US, Japan and the Philippines also held a trilateral summit meeting where they embarked on ground-breaking security cooperation. With these successes, the US hopes to persuade China not to push its agenda in the region too aggressively.
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So long as this is the case, we do not see the Taiwan issue or disputes in the South China Sea escalating into a broad conflict. As the two big powers prioritise avoidance of conflict, they will ensure that occasional points of friction or accidental clashes will be contained before they escalate into a nastier clash.
Domestic political situations are mostly more settled now
Over most of Southeast Asia, domestic political risks appear to have cooled:
Presidential and legislative elections in Indonesia were carried out peacefully. The clear winner in the presidential election, President-elect Prabowo Subianto will forge a coalition among friends and former rivals by the time he is installed formally in October. He has pledged continuity in policies and has reached out to his opponents as part of a consensus-building approach.
In Malaysia, Prime Minister Anwar Ibrahim has fended off major challenges. Occasional incidents that involve race and religion do flare up but these have been mostly kept under check. Barring unexpected shocks, Anwar should have a clear runway until the next general election in 2027.
In Thailand, the government of Srettha Thavisin has encountered challenges in implementing some of its policy agenda but there is little of the past rancour stemming from public antipathy to the previous military-dominated government. The understanding between the powerful military-royalist establishment and former Prime Minister Thaksin Shinawatra appears to be holding. Unresolved differences over the role of the military and monarchy linger under the surface but are not likely to erupt into disorderly protests for now.
The Philippines continues to enjoy political stability. While the jostling between the Marcos clan and the Duterte clan is causing ripples, President Marcos continues to get his way in terms of implementing his flagship policies including a closer strategic relationship with the US.
Vietnam has seen some turbulence in its leadership. Two presidents have been ousted in quick succession and there are rumours that the top leader, General Secretary of the Communist Party of Vietnam (CPV), Nguyen Phu Trong is ailing. Nevertheless, given the more decentralised nature of power in Vietnam, there is little doubt that the CPV’s main policy agendas will continue to be implemented and there is little risk that personnel changes will result in any dislocations.
Myanmar crisis could deepen
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That leaves Myanmar as the remaining concern and it is a big one. The military junta that seized power in February 2021 has lost control of many border areas since an alliance of rebel groups pushed junta troops out of the far northern border with China in October. Following that event, the junta’s forces have been losing ground, with the momentum turning against them, particularly in recent weeks. Much of the borderlands abutting Bangladesh, India, China and Thailand have been lost to an assortment of ethnic armed groups. But even in the heartland of Myanmar where the ethnic majority, the Bamars, live, there are signs that the armed resistance is making headway as seen in drone attacks on military positions in the capital Naypyidaw.
Thus, the conflict in Myanmar has reached a critical point, with fighting likely to increase in the heartland areas. First, the risk of Chinese intervention has grown as its direct strategic interest in the country is at risk. For example, rebel groups are close to the port of Kyaukphyu putting the gas and oil pipelines critical to China at risk. But should China feel it has little choice but to intervene, how would other countries such as India react? Second, the junta’s indiscriminate use of air and artillery power is causing large numbers of civilian casualties. This increases the risk of refugees pouring into Thailand, India and Bangladesh.
Watch out for a step increase in trade restrictions
While China and the US have made progress in strategic matters, there are signs that friction in the economic arena could worsen. The Biden administration has launched an investigation into Chinese practices in the shipbuilding and maritime logistics sectors, and there have been loud complaints about Chinese industrial over-capacity being dumped in America. The US Congress has passed legislation that is aimed at TikTok as well. With the US presidential election campaign heating up, there is every chance that China will be a big issue on which candidates will be eager to be seen as hawkish.
The problem for China is that Chinese export surges are angering many other countries, including several emerging economies. The Europeans have launched a subsidy investigation into Chinese wind turbine companies, adding to the February decision by the European Commission to launch a similar probe into Chinese state-owned company CRRC’s bid to supply trains in Bulgaria at half the price of a European competitor. Many emerging economies which otherwise seek to have good ties with China are also up in arms over Chinese exports — the list includes China’s allies in the Brics movement Brazil and South Africa while other Latin American countries such as Chile and Mexico also have their gripes. In our region, Vietnam, Thailand, Malaysia and Indonesia have all threatened action as well.
We fear it is highly likely that we will see a further series of US trade restrictions aimed at China. Other countries will also follow suit. That would mean a general rise in trade protectionism. The trouble for this region is that measures supposedly aimed at China can easily be used as a cloak for trade aggression against other successful exporting economies such as those in Southeast Asia.
In addition to outright protectionism, our region should also worry about the proliferation of inward-looking industrial policies that aim to bolster domestic production and deter imports. With the US leading the way with its Inflation Reduction Act which aims to re-industrialize the US, European leaders are calling for similar moves in Europe. Large emerging economies are also eager to follow the cue. The expansion in trade volumes, a critical ingredient in the globalisation that has benefitted this region, will slow and with that, the region could lose some of the synergies it used to enjoy from globalisation.
Conclusion
In the near future, the improved dynamics in the US-China relationship will reduce the risks of major geopolitical disturbances in our region. This is a major improvement in the risk picture. Domestic political stability is also largely getting better. So, it is the Myanmar crisis which could prove troublesome to Asean. Outside the political realm, the region needs to work harder at finding ways to deflect the rising threat of protectionism and inward-looking policies.
Manu Bhaskaran is CEO of Centennial Asia Advisors
