The Future Is Asian

by Parag Khanna

  Together, a unified Korea would go from being the historical kingdom “in between” China and Japan to an even more industrious economic power, rich in agriculture and minerals and with a low-cost labor force to produce Hyundai cars and Samsung phones as technology pours into its special economic zones. Air China flights from Beijing to Pyongyang are full of business opportunists. Both China and Russia have been building the country’s ice-free port of Rason. Russia opened a ferry service to Rason in 2017, and China is laying a railway line to it. Even more ambitious, Russia would like to extend the Trans-Siberian Railway from Vladivostok through North Korea’s capital, Pyongyang, to South Korea’s capital, Seoul. Together, Russia and South Korea are planning gas pipelines, electricity grids, and other projects for North Korea as well. Singaporean urban planners have been consulted on how to resurrect the North’s crumbling cities.

  The new Asian diplomatic formations will require the United States to update its outdated bureaucratic cartography. Presently, the Pentagon divides Asia between Central Command and Pacific Command (or “Indo-Pacific Command”) right along the border between India and Pakistan, but the Belt and Road Initiative and associated pan-Asian linkages render meaningless such arbitrary administrative divisions. The State Department, meanwhile, has at least three separate regional bureaus that cover various parts of Asia: Europe and Eurasian Affairs, Near Eastern Affairs, and East Asian and Pacific Affairs. These silos were not known for robust coordination even before being gutted by the Trump administration. The most progressive US strategists have talked about the need to balance “heartland” (meaning core inner-Asian) and “rimland” (meaning Pacific maritime) strategies to avoid being overly China-centric, but no single policy move to back this up has been implemented.

  Overall, the United States’ financial position is weakening as Asians expand local currency borrowing and regional trade rather than depend on the US dollar and US markets. At the same time, the United States’ energy and technology position is robust and growing. US oil and liqufied natural gas exports are major contributors to energy security for East Asian countries, while US military hardware and computing software are in high demand as well. US strategic influence in Asia is thus declining even as its economic dependence on Asia is growing. In the age of Asianization, Asia will shape the United States more than the reverse.

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  Asia-nomics

  China watchers have often been polarized between two views: either China will devour the world or it is on the brink of collapse. Neither view is correct. Despite nonstop observation of China’s inner political and economic workings, most outsiders lack a good understanding of China’s political economy. Some predicted China’s economic free fall after the Western financial crisis, failing to notice that its growing trade with other Asian nations and Europe cushioned it from such a fate. Others warned about its excessive credit to state-owned enterprises, ignoring the government’s restructuring efforts and even investor demand to buy up shares in those firms. And those who criticized China for its excess steel capacity failed to catch its move to shift the supply onto its neighbors through the Belt and Road Initiative (BRI). These examples demonstrate that China is not a giant island floating above Asia. Rather, with more neighbors than any other country, it is deeply embedded in the Asian economic system in mutually dependent and beneficial ways. The future is Asian—even for China.

  Asia’s Third Growth Wave

  China’s gradual economic deceleration is not a cooling of the Asian story. As China decelerates, others are accelerating. We are entering the third wave of modern Asian growth that began with postwar Japan and South Korea, followed by greater China (Taiwan and Hong Kong first, then the mainland), and now propelled by South and Southeast Asia. Each wave corresponds to a new set of countries in the demographic sweet spot of economic output, and each represents an ever larger share of Asia’s enormous population. In the 1960s and 1970s, Japan and South Korea together had a combined population of less than 150 million. China in the 1990s had just over 1 billion people. Today the swath of high-growth economies from Pakistan through Indonesia encompasses 2.5 billion people, with another 300 million people in West Asia’s growth zone spanning the Turkey–Saudi Arabia–Iran triangle. Asia’s 5 billion people have an even longer—and larger—growth wave ahead than what they have experienced to date.

  Asia’s collective resilience represents the cumulative success of five decades of integration driven by Japan, followed by the tiger economies and China. Now another transition is under way as Southeast Asia takes on the mantle of “factory of the world”—a process driven by Japanese, Korean, and even Chinese firms outsourcing to the region. Japan, Korea, and China are high-savings societies, but as their populations get older and spend their savings, their consumption levels are climbing. Much as Japan, Singapore, and South Korea were the largest non-Chinese investors during China’s rise, they—as well as China itself—remain the region’s most important capital exporters, upgrading developing Asian countries through infrastructure, industry, and technology. Though East Asia still attracts more than half the region’s total inbound investment, South and Southeast Asian economies such as India, Thailand, Vietnam, and Indonesia are climbing fast thanks to aging Asia investing in young Asia: South and Southeast Asian countries whose median age is under thirty. Asian growth is thus additive, not substitutive.

  MORE YOUNG THAN OLD: ASIA’S BALANCE OF YOUNG AND AGING SOCIETIES IS DRIVING ECONOMIC AND MIGRATION SHIFTS.

  The median age in most Asian countries is below thirty, with the exception of aging societies such as Japan, Thailand, South Korea, and China, whose median age is forty or higher. However, owing to its large population, China still has the largest number of people below its median age, giving it and India very large young workforces well into the future. Increased migration from younger to older Asian societies is bridging labor shortages.

  Asian wealth is also rising from one generation to the next. According to the HSBC’s former chairman Stuart Gulliver, “The American dream of the 21st century is becoming the Asian dream of the 21st: A house, a car, a smartphone, travel, banking services, health care—the prospect of unfettered upward social mobility for many more families.”1 With greater domestic production of goods and services, weaker currencies, low commodity prices, controlled inflation, and rising intraregional trade, Asians increasingly buy things in their own currencies at much lower prices than Westerners pay in US dollars or euros. Asians can have a good life without being rich in American terms. Indeed, most Asians are not going to catch up to Western per capita incomes. China’s per capita income is comparable to that of Russia or Brazil, not the United States or Britain. But that’s not the point. Asian societies are focused on maintaining high employment, keeping the cost of living manageable, and promoting access to basic services. Western critics convinced themselves that slower growth would bring down the Chinese regime, but Xi has rightly pivoted the national narrative toward quality growth.

  Twentieth-century material ambitions are represented by the American-invented statistical measure of GDP. But growth alone is insufficient to deliver overall well-being. In the twenty-first century, inclusive development has become a better measure of national progress. The recently devised Inclusive Development Index (IDI) takes into account not only economic size but also life expectancy, unemployment, median income, poverty level, inequality rate, household savings, carbon intensity, and other factors. In Asia, Australia and New Zealand rank highest, followed by South Korea and Israel, which rank in the top twenty as well. The next tier of emerging Asian countries is making substantial strides in most categories of inclusive development, including Azerbaijan, Malaysia, Kazakhstan, Turkey, Thailand, China, Iran, Vietnam, Indonesia, and the Philippines. Asia is also home to countries in the bottom tier such as Afghanistan, Pakistan, India, Bangladesh, Cambodia, Laos, and Yemen. According to the Asian Development Bank’s Social Protection Index (SPI), South Asia, Southeast Asia, and Central Asia still
only spend about half as much on assistance programs for the poor and unemployed as East Asians do. But as the Asian system grows together, so, too, will all its members learn how to pursue inclusive growth and help one another to achieve it.

  ASIA BY AIR: THE WORLD’S BUSIEST SKIES

  Nine of the ten busiest international airline routes are in Asia. While these are either within the Gulf Cooperation Council (GCC) or within East Asia, the number of daily long-distance connections between Asian subregions is growing rapidly each year.

  Fitting the Pieces Together

  Today the Asian megasystem is coming together like an enormous jigsaw puzzle of dozens of large and small pieces, with economic complementarities creating a whole much greater than the sum of its parts. Since the 1997–98 Asian financial crisis, Asian countries’ trade growth with one another advanced at a faster pace than the world economy as a whole. By the time of the 2007–08 Western financial crisis, intra-Asian trade was so robust that it cushioned the shock of falling exports to the United States and European Union. The “global financial crisis” was not actually global. In less than a decade since the crisis, Asia’s internal trade as a share of its total trade nearly doubled from 29 percent in 2009 to 57 percent in 2016—nearly the same level as in Europe. Over those two decades, West Asian oil and gas producers were rapidly drawn into this Asian economic system to provide the fuel for East and South Asia’s billions, first at high prices and now at lower prices, while also becoming a major market for East Asian goods and investment in their new manufacturing and logistics industries.

  Trade has always been heavily regional even as it has globalized. By 2016, Europe still accounted for 30 percent of global trade due to its dense internal market, followed by Northeast Asia with 25 percent, North America with just under 20 percent, Southeast Asia with about 10 percent, and the rest of the world with just over 10 percent.2 What is new is the extent to which non-Western regions have advanced their trade ties with one another, diminishing their dependence on exports to the United States and European Union. Over the past two decades, Asia’s subregions (particularly Northeast Asia, Southeast Asia, South Asia, and West Asia) have gained the greatest share of global trade growth—with North America losing the greatest share. One of the biggest debates in global trade is whether or not developing regions can “decouple” from their historical dependence on the West as a source of investment and a destination for exports. The answer, increasingly, is yes. Asian economies are sufficiently diverse, supplying both mass-produced and high-end goods and services, and have great enough income disparities, that they have the most to gain simply from focusing on meeting one another’s growing needs. The trade volumes between any pair of Asian subregions—Southwest Asia, South Asia, Central Asia, Southeast Asia, Northeast Asia—continue to grow faster than the average rate of global trade growth.3 With major Asian trading nations such as China, India, and South Korea in the Trump administration’s crosshairs, Asian countries are collectively accelerating their efforts to boost trade with one another. Indeed, with twenty-eight of the forty-four free-trade agreements proposed since 2013 being between Asian nations, all dyads of intraregional trade are set to expand further.

  For several decades, Northeast Asia has formed Asia’s main industrial conveyor belt, with a three-way division of labor between Japan, South Korea, and China.4 Today still, East Asia’s main five exporters—China, Taiwan, Hong Kong, Japan, and South Korea (just three countries, technically)5—account for $4.2 trillion in annual exports, almost the same as the European Union and North America combined. Taiwan’s Foxconn was ranked as the third largest technology company in the world by revenue in 2015 and assembles 70 percent of all the world’s iPhones, while the same country’s Pegatron and Wistron do most of the rest. As China moves aggressively into high-tech areas, it is displacing some Japanese and Korean components with its own. In 2000, China accounted for less than 10 percent of Asia’s tech exports; by 2014 it represented 44 percent.6 Huawei, Lenovo, Haier, and BYD Automobile Company all rank ahead of their Asian peers and Western rivals in categories such as telecom equipment, laptops, appliances, and electric cars. But all three countries remain highly integrated, with China still importing large volumes of Korean and Japanese semiconductors7 and South Korea still leading in the production of LED displays and memory chips. China is reducing the large deficit it has with both Japan and South Korea, yet all three are keen on passing a trilateral free-trade agreement as the trade volumes between them continue to climb.

  Whereas this highly productive Northeast Asian triangle used to export mostly to the West, it is now providing ever more high-quality, low-cost electronics to the rest of Asia. What few outside Asia appreciate is something millions of ordinary Asians realize every day: that importing cheaper goods from China and exporting to China have raised productivity and competitiveness—so much so that Japan and South Korea have shifted huge volumes of their electronics manufacturing to the lower-wage Southeast Asia, allowing them to cut costs while diversifying into another huge high-growth market. An average Chinese factory worker earns nearly $30 per day, whereas in Indonesia and Vietnam workers still earn less than $10 per day. Japan has been the lead sponsor of ASEAN’s industrialization since the 1970s and in recent years has doubled its annual foreign direct investment (FDI) into Southeast Asia to more than $20 billion, fully aware that it is the future market for Nissan’s electric and flex-fuel (ethanol and other biofuel) vehicles. South Korea has further catapulted Southeast Asia into the top league of manufacturing by offshoring a broad range of electronics and automotive assembly work. Trade between South Korea and Vietnam is expected to reach $70 billion by 2020, and Samsung alone has $18 billion worth of investments in Vietnam from which its chip output will account for half the company’s exports to China. More than 100,000 South Koreans now live in Vietnam. As part of Thailand’s Eastern Economic Corridor (EEC) program initiated to boost industries in a historically underdeveloped region, Alibaba in 2018 committed $350 million to establish efficient logistics operations both in Thailand and across its borders with Laos and Cambodia.

  Since 2014, as US, European, and even Chinese companies have joined Japan and Korea in outsourcing to ASEAN nations, the region has attracted more annual investment than China.8 ASEAN’s total annual trade amounts to nearly $2.2 trillion, one-quarter of which is within ASEAN, 15 percent with China, and 10 percent with Japan. Since the ASEAN-China Free Trade Area (ACFTA) went into effect in 2000—creating the largest free-trade agreement in the world by population—ASEAN has become China’s third largest trading partner with $400 billion in annual trade. Overall, more than 60 percent of ASEAN’s trade is within Asia.9 As highly populous but poorer Asian subregions such as South and Southeast Asia—with a combined population of 2.5 billion people—attain higher incomes, they will take up an ever greater share of East Asian exports and displace Europe and North America as the primary destinations of East Asian goods.

  India has bolted itself onto the East Asian growth story. Under Prime Minister Modi, India has embarked on a serious revival of its “Look East” policy—now called “Act East”—sending commercial delegations to Northeast and Southeast Asia. India’s trade with China has grown to $80 billion per year, though it imports six times as much from China as it exports to China. India’s trade with ASEAN is growing far faster, projected to double from the present $70 billion annually within the next half decade. India also has nearly $20 billion in trade each with South Korea and Japan, with Modi and Shinzo Abe declaring the bilateral trade in technology goods to be a top priority. India’s big push to renew its infrastructure, industries, and cities has spread business activity from traditional centers such as Mumbai, elevating second-tier cities such as Pune and Hyderabad into high-tech and manufacturing hubs. More than one dozen new port projects on India’s coasts serve to boost Indian industry’s efficient reach to West Asia and Southeast Asia.

  AGING INTO COMPLEXITY: AS ASIAN SOCIETIES BECOME OLDER AND WEALTHIER, THEIR E
CONOMIES CLIMB THE VALUE CHAIN.

  Asia’s wealthy and aging societies of Japan, South Korea, and Singapore also have the most complex economies in terms of the value added to their exports. Through their growing wealth and industrial policies, China, Thailand, and Malaysia are rapidly catching up.

  Asia’s rapidly modernizing cities are also driving the region’s accelerating connectivity. Each subregion of Asia has a growing number of thriving urban hubs: Abu Dhabi, Dubai, Riyadh, and Doha in the Gulf region; Istanbul, Tel Aviv, and Tehran in West Asia; Karachi, Mumbai, Bangalore, and Chennai in South Asia; and all of East Asia and Southeast Asia’s metropolises from Tokyo and Shanghai to Bangkok and Ho Chi Minh City to Manila and Jakarta. Additionally, special economic zones from Vietnam to Oman serve as the designated entry and exit points for intermediate and finished goods. Like holes in a weaving board, these nodes enable the threads of commerce that tie Asians closer together from one end of the area to the other. Nine of the ten busiest international flight connections in the world are between Asian cities, with only the pairing of New York and Toronto in North America making it onto the list.10

  All across Asia, one finds that Asians are now among the most prominent if not the very largest investors.11 Since 2001, more than half of the $510 billion in foreign investment in Asia has originated within the region. Japan has caught up to and is overtaking Europe as the largest investor in ASEAN, and its investments in India have been doubling annually since 2015, now amounting to $4 billion per year and soon to surpass the United States’. Singapore leads all investors into India with $14 billion in annual FDI. China, too, has become a major investor in India into power, telecom, construction, and other sectors. Though China still lags behind Japan in total investment stock in Asia, it is catching up quickly—especially as it reduces its investments in the United States and raises its commitments in Asia.12