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US & East Asia: 'financial terror'
Published 03 October 2008
Mark Beeson looks at the precarious state of the US-East Asia relationship in the face of the current financial meltdown.
Asian markets are hanging in the balance
Recently it has become fashionable to argue that East Asia has become ‘decoupled’ from the US. America’s troubles, it was thought, would have little impact on a region that has largely recovered from its own crisis of a decade earlier. China’s seemingly unstoppable economic expansion and Japan’s steady recovery seemed to suggest that the 21st century would belong to Asia. It still might, but much of Asia remains highly exposed to and dependent on the American economy, and continuing, rapid economic development — and all the progressive political change that is assumed to accompany it — looks far from certain.
The bilateral relationship between China and the US is the biggest in the world and pivotal to the health of the global economy. Like the other Asian economies before it, China’s rise has been heavily reliant on access to American markets. Already there are signs that the US slowdown is having an impact on China, with overall growth slowing and orders for clothing and simple manufactures falling by 10 or 20 per cent. This is not all bad news, of course, as it cools the overheated Chinese economy — but there is a distinct danger that it may turn into too much of a good thing.
A number of the smaller East Asian economies like Malaysia and Thailand are also very vulnerable to any decline in America’s hitherto astonishing capacity to consume manufactured goods—primarily with money borrowed from Asia. This aspect of East Asia’s relationship with the US is novel and has the capacity to push the crisis in new, unpredictable directions.
America’s reliance on China and Japan to underwrite its overall economic position is an increasingly important but potentially destabilising aspect of the overall relationship between the US and East Asia.
If China and Japan were to stop recycling the dollars they accumulate from their enormous trade surpluses with America and lose their appetite for US Treasury bonds, interest rates in the US would rise and the US’s ability to finance normal government spending, let alone massive bailouts, would be much more difficult.
East Asia and the US are locked in what former US Treasury Secretary Lawrence Summers calls a ‘balance of financial terror’: neither side can afford to risk jeopardising a symbiotic relationship which has, until now, delivered benefits for both. But since China’s new sovereign wealth funds have lost money bailing out distressed US financial institutions, and as the dollar continues to decline, confidence in the long-term value of dollar denominated assets is starting to erode. East Asia’s political and economic elites know just how damaging and destabilising such a loss of confidence can be, and how expensive it is to be the last one to give up on a losing position.
While the impact of the crisis on economic relations between the US and East Asia has the potential to be serious and damaging for both sides, the most lasting consequences may be ideological and geopolitical. The US enthusiasm for neo-liberalism and Americans’ suspicion of big government was never shared in East Asia. The current crisis will enhance the credibility of those in the region who have long resisted what they see as the unwelcome imposition of market-oriented reform. The crisis is likely to deliver a fatal blow to the credibility of the Washington consensus. By contrast, the Beijing consensus, based on pragmatism, illiberalism and an interventionist state, may win even more admirers.
In short, the US influence over East Asia is likely to be further eroded as a consequence of recent events. The widely held belief—amongst American observers, at least — that the US is an indispensable force for stability in a region congenitally prone to instability looks increasingly threadbare. On the contrary, America’s authority and ability to promote its interests in East Asia is likely to be the principal casualty of the current crisis.
Mark Beeson is Professor of International Politics, University of Birmingham
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