Political flashpoints could hurt Southeast Asia

There are 16 months to go before Americans actually vote for a president and new Congress. The political class is already campaigning, however, with Trump in particular focused like a laser on consolidating his political base. The tinge of nastiness that has hung over politics in the US will get worse, as recent controversies such as Trump’s attacks on non-white opposition politicians show. This may seem far remote from us in the region but, unfortunately, there are also many ways in which this nastiness could hurt our region:

• There is some talk that Trump’s election strategists feel that a quick settlement of the trade dispute with China will not help him but in fact might expose him to Democrat accusations that he had been too soft on China. The Chinese side is also in no mood to bend over backwards to placate Trump. So, we could see more twists and turns in US-China trade tensions that will cause tremors in financial markets while also hurting business confidence. Without an agreement between the two giants, business uncertainty will continue to hang over the region’s economies;

• Trump, in his quest to demonstrate his toughness, could also choose a new battle­field, the currency markets. He has accused major trading partners such as Europe and Japan of cheapening their currencies. Within this region, Vietnam, Malaysia and Singapore have been accused of currency manipulation. Fears are growing that his administration might retaliate by directly intervening in currency markets to bring down the value of the US dollar — something the US has not done for decades. But that would cause other trading nations to also intervene to depreciate their currencies, setting off damaging fluctuations in currency markets; and

• To show its toughness with China, a sure vote winner in the coming elections, the Trump administration has also approved a large sale of high-tech defence equipment to Taiwan in what appears to be the most substantial American contribution to Taiwan’s defence capacity since 1992. Hawks in the US are pressing Trump to do more to strengthen the strategic relationship with Taiwan. This has angered China, which is sure to find ways to penalise Taiwan.

Is Hong Kong playing with fire?

Many observers around the world sympathise with the Hong Kong people’s desire to maintain their unique identity within China. But, ultimately, it is the Beijing leadership that calls the shots in Hong Kong. What worries us is that the growing defiance in the city and the provocations by a small minority of protesters in Hong Kong could stretch Beijing’s tolerance to breaking point. The Chinese leadership cannot be happy that the Hong Kong government is in some disarray. Neither can they be happy that there is now yet another occasion when their chosen leader in Hong Kong has been forced to back down on legislation or policies they favour, this time on the extradition bill. They would fear that a precedent has been set for even more defiance. Already, the Hong Kong government had been forced to back off security legislation in 2003 and the proposed patriotic education curriculum in 2014.

Yet, the protesters appear determined to push even harder against the local government. Another major protest has been set for July 27. But, this time, the Hong Kong police are warning that they may have to block the protest, fearing a recurrence of the violence that broke out recently, when protestors rallied against mainland Chinese visitors to Hong Kong who engaged in parallel trading. There are also signs that pro-Beijing elements in Hong Kong are becoming more assertive in pushing back against the anti-China protesters: a recent exchange between the two groups ended in cans and water bottles being thrown at each other and people being punched.

There is now a clear risk that growing vio­lence could cause the Beijing authorities to decide that the time has come to put a stop to all this. Chinese leaders must also be concerned about how defiance in Hong Kong is emboldening Taiwan’s current independence-leaning leaders to become even more assertive in the run-up to Taiwan’s elections in January 2020. Thus, Beijing could well instruct the Hong Kong police to make sweeping arrests of protest leaders and to use force to stop the continuing wave of protests. Chinese leaders could well calculate that a calibrated assertion of authority, using the Hong Kong police rather than the People’s Liberation Army, would not result in blood being shed but would allow them to regain the initiative. Nevertheless, any kind of crackdown would create political reverberations throughout the region.

Watch the Persian Gulf as well

The US and Iran seem to be in a careful dance with each other, gingerly escalating measures to hurt each other but avoiding a direct clash that could spiral out of control. Iran, whose economy is withering under crippling US sanctions, probably feels that it has no other option but to raise the cost to the US and its allies of the US’ strategy to undermine Iran.

So, we think Iran will continue finding ways to attack shipping through the Straits of Hormuz while its proxies around the region such as the Houthi rebels in Yemen could raise the ante by stepping up missile and drone attacks on Saudi Arabia, a key US ally. Iran could also step up enrichment of uranium to demonstrate it could eventually become a nuclear power.

It has even more potent options such as encouraging anti-Saudi activities in Saudi Arabia’s eastern province, where Shia Muslims who are sympathetic to Iran dominate. Iran would have seen Trump’s last-minute calling-off of a planned strike against Iran as evidence that he would avoid military confrontation, thus reducing the risks to them of such provocations.

This is a dangerous game and it would only take a small misjudgement or an accident of some kind to trigger off a wider clash. And, all this is happening in the context of a lot of other troubles in the Middle East, which could be aggravated by a US-Iran clash. Should there be a sharp escalation in tensions, there are two big risks for our part of the world:

• Oil price spike: Already the enhanced risk of disruptions to oil shipments from the Persian Gulf to markets, mainly in Asia, has caused oil prices to rise. Heightened military activities would cause oil prices to spike to damaging levels while also shredding business confidence — thus reinforcing the global slowdown; and

• Religious tensions in our region: Violent confrontations in the Middle East could also inflame religious passions in our region and/or encourage terrorists in the region to strike again.

In other words, the potential troubles in the Persian Gulf are not as remote from our region as we might think.

South China Sea hots up again

Closer to home, recent incidents show that the South China Sea territorial dispute is still a potential flashpoint. A Chinese missile launch from one of the artificial islands China created when it seized control of parts of the disputed sea has led the US to accuse China of breaking its own word that it would not militarise the region. This will strengthen the hand of hawks in the US who are pressing for more punitive measures against such Chinese behaviour. Aggressive conduct by a Chinese vessel that led to the sinking of a Filipino fishing vessel has caused outrage in the Philippines and pressure on pro-China President Rodrigo Duterte to take a tougher stance against China. The Chinese are also accused of harassing Vietnamese and Malaysian vessels operating in disputed waters, with the standoff between China and Vietnam in waters around the Vanguard Bank continuing today.

What does this mean for the region?

We could add even more items to the list above, such as the growing risk of a no-deal Brexit, which could cause convulsions in the European economy, still the single-largest commercial market in the world for exporting nations in Asia. But the picture is clear enough — there is a rising risk of dislocations caused by geopolitical stresses.

Governments in the region have to respond. We should expect the following:

First, policymakers have to prepare for more pressure from the Trump administration in areas such as trade, exchange rate management and even in areas such as how we deal with Chinese technology companies such as Huawei. Proactive measures such as the Monetary Authority of Singa­pore’s decision to disclose more data on interventions in currency markets should help, as will some liberalisation of imports and government procurement in countries such as Indonesia, Malaysia and Vietnam, which run surpluses with the US.

Second, since all these flashpoints will certainly further deter companies around the world from expanding capacity or making large new investments, policymakers must assume that the headwinds to economic growth can only strengthen. Anticipa­tory measures to boost domestic demand so as to support economic growth are therefore needed — not only interest rate cuts but also higher fiscal spending.

Third, it is becoming more urgent for the region to step up integration and the ability to speak with a more unified voice: The big powers are likely to be more assertive and only collective strength can help the region avoid being bullied into making concessions — whether on territorial disputes or in trade or currency arrangements.

Fourth, like it or not, countries in this region will have to significantly raise defence spending. The region has particularly underinvested in maritime surveillance and naval capacity, which exposes it to either being pressured by China or becoming excessively dependent on the US security umbrella. The region should also deepen its strategic alliances with middle powers such as Japan, India, South Korea and Australia.

In short, geopolitical issues will give the region a rough ride, forcing it to step up its responses to buffer the region against more shocks and stresses.

Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy

This story first appeared in The Edge Singapore (Issue 891, week of July 22) which is on sale now