China Pivots to Delhi & Moscow as Silk Road Ambitions Take Hold

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CDE Op-Ed Commentary

With the new dynamics of a Trump-era Presidency upon us, the world’s Western media focus has been very much on the implications of this change of executive on global trade. However, American influence over global trade is becoming increasingly Spartan as the country concentrates on established orders at the expense of ignoring the new. With both Washington and Brussels focusing too much on the might of their respective economies, nuances and influence over what is developing elsewhere are being lost. While the US still soars away from its rivals as the world’s largest economy, an emerging picture tells of an Asia that is fast catching up with American and European fiscal might.

Below I illustrate the top five economies in both West and East:

2016 GDP tableThis indicates that of the top five economies in both East and West, the East has now achieved just over 75 percent of the total that Western economies are currently generating. That trend may reach parity or even see Eastern economies overtake those of the West fairly soon. A quick glance at 2016’s projected growth rates for these economies reveals the following:

2016 growth rate tableIf these figures were sustained over the next decade, Asia would overtake the West as the primary source of the world’s largest economies – and wealth. Of course that won’t happen in a literal sense, but as a guideline it’s not a bad rule of thumb. In fact if anything, Asian growth is likely to develop, even with a slowing Chinese economy, while for the present the West is in a rather muddled state of affairs, with the UK departing the European Union and the Trump presidency making the political environment somewhat uncertain.

However, what is also apparent is that both Western economic media and Western MNC global development strategists continue to place far too much emphasis on the United States and, to some extent, the EU as the primary global economic drivers. For years journalists have become entrenched with the concept of an all-powerful American economy, with the EU a second cousin. The sheer might and global impact of the American economy has become an unquestioned assumption. That is a dangerous position to blindly accept, and certainly when, as I have demonstrated, other economies are fast catching up. Global MNCs need to follow the money and if, as seems likely in the next ten years, only half of that is in the West, the importance of developing a strategy to capture the other 50 percent becomes paramount. But where?

Today, in our rather more unpredictable times, this means that Western businesses, and especially American and European ones, must now start to look beyond trade corridors between the US, EU, China tripolarity to sustain growth. We are in fact seeing the ushering in of the Age of the Adventurous Economist, one where true visionaries need to don their North Face fleeces, Timberland boots and some serious gear and get out and about to properly appreciate and turn into fiscal sense what is really happening out there. Designing global strategy by based exclusively in New York or London is no longer an option. The financial dynamics that are reshaping the world are simply not taking place in the United States or Europe. Instead, the US is more likely to deepen its relationship with Asia – for better or worse. The following are two examples of how this could play out:

China

Donald Trump plans to ‘get tough’ with China. On-shoring back to the US isn’t really an option due to wage differences, but a trade war over currency manipulation and underhand government subsidies may well be. Add to that a recent Congress Panel move to stop Chinese SOEs listing on Nasdaq or the NYSE, and it’s clear the next four years of US-China trade may well be rough and tough.

Russia 

The US is politically divided over Russia. However, the more recent administration’s negative foreign policy towards it doesn’t appear to have worked. Donald Trump looks set to try a more conciliatory approach, which may in turn lead to greater US-Russia trade, with an eye on Central Asia. That bumps into China’s Silk Road ambitions,  meaning an entry door into infrastructure developments and access to the huge volumes of Chinese ODI that this will bring can be obtained from either end, as well as in the middle – Moscow, Delhi, and Beijing.

Whichever way you look at the US equation, its destiny does appear to be linked to Asia. But how to access that? To answer this question, one needs to look at how China’s foreign policy impacting the region has out-maneuvered that of Washington.  Again, there has been the danger of assumptions being made and very little strategic thought being placed upon the real developments taking place. For example, much of the Western media, when commenting on the so-called “US Pivot to Asia”, write about the disputes in the South China Sea. This is partially due to the White House’s own foreign policy, which, when discussing the “Pivot to Asia”, manages to firstly limit it to Southeast Asia, then expand it to include the Pacific. Rather, it is more about influence over regional oceans, dressed up to appear as a pan-Asian policy.

The US instead appears to have forgotten about, or doesn’t appreciate, the land mass. What has happened overland are the huge diplomatic efforts to integrate and develop the entire region – including Southeast Asia and Central Asia – while reaching out to India and Iran. This includes four strategically and globally important economies: China, India, Iran, and Russia. Under the auspices of the Shanghai Co-Operation Organization, and together with the likes of Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan, this covers over 30 million square km of Eurasia and accounts for a quarter of the world’s population. The ASEAN and CIS nations are observers, as is Turkey.

The importance of the Moscow-Delhi-Beijing triad cannot be understated. Not only has the US been effectively frozen out of regional discussions (a request to join the SCO as an Observer nation was rejected by members), the body essentially controls the entire region. This is leading to additional infrastructure being created, such as a mooted Shanghai Co-Operation Organization Free Trade Area and Development Bank. 

This fits right in with China’s Silk Road plans, and opens up the potential for huge new trade corridors. This in turn opens up the potential for Western based businesses to participate, to invest in research, and work out strategies to compete.  If they do not, they will be left behind. The Russian economy is expected to come out of recession in 2017, and the development of increased Russian-China trade has already been planned for by the signing of a Russia-Hong Kong Double Tax Treaty that will link financiers in Moscow directly with Asian investors – and vice versa. Should US and EU sanctions be lifted, that corridor could become a hot conduit for international financial flows between Russia and Asian based traders. Opening up a door to the Silk Road and Eurasia via Moscow would be a smart move, and one welcomed by many European MNCs growing impatient at the manner in which the EU has tied itself into self-damaging political knots over the sanctions, and unable to do much except watch as Russia imports its infrastructure hardware, road and rail from China, Korea, and Japan, as they are banned from selling to Russia. Talk about handing lucrative contracts to China on a plate.

Yet even that will pale in comparison to the China-India Trade Corridor. As I stated last year, China wants Indian manufacturing capacity. It is not only an economic issue, it is a CCP political necessity as Beijing needs to keep its population happy by providing them with a sustainable source of inexpensive consumer goods. With Indian wages about 20 percent of those in Guangdong, this relocation is already happening. Chinese investment into India has doubled this year, and the “Dragon”, as so prominently portrayed in Indian media, is investing in Indian start ups as well. With Delhi’s involvement also critical in Central Asia, and with ties to Iran, India offers a gateway to the Silk Road and access to the dynamics of Central Asia, as well as the massive Indian subcontinent itself. India is poised to become one of the world’s largest retail markets by 2020, and will have a ready buyer in China. Any sensible China policy should now include India.

I commented on Chinese Overseas Direct Investment earlier this month, and it is increasingly clear that China’s pivot is towards Delhi and Moscow rather than Washington. When following Chinese money and investment flows, it is always wise to follow Chinese State Policy. With Asia now taking up a position to rival the West in terms of GDP value, and already overtaking it in terms of growth, the message is very clear: understanding where the new trade corridors are emerging is going to be key for Western based businesses to both survive and certainly prosper in the next twenty years. American and European MNCs must start to understand what is happening between Beijing, Delhi and Moscow, and should be looking at developing a strategy to take on and invest in what will become a real bona fide “Pivot to Asia”.


Chris Devonshire-Ellis
is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email china@dezshira.com or visit www.dezshira.com.

Chris can be followed on Twitter at @CDE_Asia.

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