The Economist The Pacific Age Under American leadership the Pacific has become the engine room of world trade. But the balance of power is shifting, writes Henry Tricks

Nov 15th 2014 | From the print edition

Audio @ http://www.economist.com/news/special-report/21631795-under-american-leadership-pacific-has-become-engine-room-world-trade

WILLIAM HENRY SEWARD was no misty-eyed dreamer. It was whaling, or what he eulogised as “the chase of the whale over his broad range of the universal ocean”, that first drew his attention to the Pacific. He was a visionary, though. The man who became Abraham Lincoln’s secretary of state in 1861 and bought Alaska from tsarist Russia in 1867 knew what America had to do to take advantage of the opening of the Pacific. It needed to build on the Gold Rush spirit in California; finish a transcontinental railway to carry people and freight from one side of America to the other; dig a waterway through Central America for ships to pass through; and acquire Pacific territories like Hawaii and Midway as maritime hubs of trade and security. All this was done either within his lifetime or within a few decades of it.

He was also itching to wield America’s nascent power and saw the Pacific as the place to do it. In a speech to Congress in 1852 he predicted that the Europe-centred Atlantic would decline in importance “while the Pacific Ocean, its shores, its islands and the vast regions beyond, will become the chief theatre of events in the world’s great hereafter”. Commerce, he added, would be the “great agent of this movement” and would flourish between America and China.

The Pacific evokes that kind of enthusiasm. It is a 64m square mile (165m square km) blank on the map (except for a plethora of small islands), bigger than the world’s entire landmass. Still, at times it seemed as though its destiny would never arrive. The refrain, “The Mediterranean is the ocean of the past, the Atlantic is the ocean of the present and the Pacific is the ocean of the future,” first heard more than 100 years ago, is still repeated today. Yet exactly half a century after Japan “rejoined the world” (in the phrase of Ian Buruma, a writer) by hosting the Olympics in 1964, the Pacific Age has now clearly arrived. Japan’s economic power may have peaked 25 years ago, but it produced a trans-Pacific competition that now has America and China vying with each other for the title of the world’s largest economy (at purchasing-power parity). All three Pacific nations trade vigorously with one another.

At the same time trade has surged into the farthest reaches of the Pacific (see charts). Since the 1970s trade across the Pacific has far outrun the Atlantic sort. China, for instance, has taken its hunger for high-protein food and raw materials to Latin America and become the biggest trading partner of distant Chile. By one estimate, in 2010 it promised more loans to Latin America than the World Bank, the Inter-American Development Bank and the United States Export-Import Bank combined.

It has also seen an astounding increase in prosperity. In poorer parts of Asia the size of the middle classes—those living on $2-$20 a day—has increased sevenfold since the turn of the millennium. In Latin America it has doubled. Parts of Malaysia have become so bourgeois that taxi drivers moonlight as salesmen of smart apartments overlooking the Strait of Malacca, one of the world’s busiest trade routes.

Both America and China know how important it is to keep this economic engine running, so in public they generally use moderate language about each other. In 2011 Hillary Clinton, then America’s secretary of state, explained President Barack Obama’s “pivot” to Asia in an article in Foreign Policy: “We all know that fears and misconceptions linger on both sides of the Pacific. Some in our country see China’s progress as a threat to the United States; some in China worry that America seeks to constrain China’s growth. We reject both those views.” China’s president, Xi Jinping, at a meeting with Mr Obama in California last year, responded in kind: “The vast Pacific Ocean has enough space for the two large countries of China and the United States.”

Choppy waters

Yet just when the Pacific Age should be celebrating its half-century, the region is showing signs of strain, from increased rivalry between the superpowers and emerging nationalism in Japan, China and elsewhere to sudden squalls in places like Hong Kong, Thailand and, as ever, North Korea. “The shifting landscape in the Asia-Pacific and associated risks are about as challenging as they’ve been since APEC was established in 1989,” says Alan Bollard, the organisation’s executive director.

There are complex counter-currents. Many East Asian countries worry that America’s commitment to the region could be put at risk by more immediate threats in the Middle East and Ukraine. At the same time they do not want America to provoke China by becoming too involved. The rhetoric has recently been turned up. Chuck Hagel, America’s defence secretary, wagged a finger at China when he told a gathering of military chiefs at the Shangri-La dialogue in Singapore in May: “One of the most critical tests facing the region is whether nations will choose to resolve disputes through diplomacy and well-established international rules and norms or through intimidation and coercion. Nowhere is this more evident than in the South China Sea.” In his own speech a day later, Lieutenant-General Wang Guanzhong, head of the Chinese delegation, retorted: “Assertiveness has come from the joint actions of the United States and Japan, not China.”

Recently the tensions have spread to the economic sphere, too. China has interrupted investment and trade with neighbours who stand up to its territorial assertiveness, such as Japan, the Philippines and Vietnam. China and America each have their own plans for turning the Pacific into a giant free-trade area that both see as a test of their influence in the region—and in the wider world. The Obama administration says it wants to forge a trade pact with the world’s most sophisticated rules in the Pacific: the Trans-Pacific Partnership. It characterises China as wanting to perpetuate a model of state capitalism.

Fred Bergsten of the Peterson Institute for International Economics in Washington describes the overlapping commercial and strategic concerns as a juggling tournament. “We’re in the middle of an historic transformation of the economic architecture of the whole Pacific region. There are competing models and high politics. It’s a very complex set of balls in the air,” he says.

Pacific history—an underdeveloped field of study compared with that of the Atlantic, as its scholars dolefully note—is awash with big-power rivalries (see next article). For centuries European powers were carving it into monopolistic trading enclaves that they defended ruthlessly. The only free-traders were pirates. The risks of history repeating itself are palpable.

Many argue that the ocean’s most vulnerable spot is its lack of robust institutions to ensure fair play. They point to the Atlantic Charter, forged in 1941 in the heat of war by Winston Churchill and Franklin Roosevelt, that laid down rules to prevent territorial aggression, reduce trade restrictions and ensure freedom of the seas. All of these are live issues in the western Pacific today.

Mr Bergsten says the “obvious cultural affinities” across the Atlantic that produced the charter, and institutions such as NATO, are “of a different order” from those across the Pacific, or even within East Asia. “Having a beach on the Pacific does not make you a member of a community,” snorts Robert Manning of the Atlantic Council, a Washington think-tank. Some say that the only shared ideology in East Asia is nationalism and a sense of historical grievance against each other.

Four reasons for optimism

Yet this special report will argue that even when values clash, shared interests in the region tend to prevail. East Asia, like America, is a place where power is judged first and foremost by wealth. “In East Asia, with the exception of North Korea, growth far more than any abstract political theory is the primary means by which governments legitimate their rule,” says Bilahari Kausikan, Singapore’s ambassador-at-large. “This does not guarantee peace. But East Asian governments at least have a strong self-interest to minimise actions that would disrupt growth.”

Besides growth, the promise of the Pacific rests on three other fairly sturdy legs: trade, ideas and connectivity. Trade is part of the Pacific’s DNA. While values and ideals travelled across the Atlantic with the Pilgrim Fathers, goods were flowing across the Pacific: silver, silk, porcelain, spices, sandalwood, much of it beautifully crafted in China. Today much of the traffic is in silicon.

Trade moves with the times. Japan’s elegant “flying geese” model (with Japan leading industrialisation in Asia and the rest following in V-formation) brought manufacturing to the “miracle” economies of South-East Asia in the 1990s and even survived the abrupt intrusion of the Chinese dragon in the 2000s. But no one can glide complacently. America is becoming more competitive, thanks to fracking, its energy revolution of the past half-decade; so some Asian economies are likely to become more closely connected to and more dependent on it.

With trade come ideas. Kishore Mahbubani, a Singaporean writer, puts free-market economics at the head of a list of “seven pillars of wisdom” that Asia has imported from the West, along with science and technology, meritocracy, pragmatism, peace, rule of law and education. At the same time Pacific Latin American countries are looking to East Asia for economic models.

Even China’s “state capitalism” may be exaggerated. In a new book, “Markets over Mao”, Nicholas Lardy, an American economist, crunches the numbers to argue that the secret of China’s success is private business, not the state-owned giants. Private firms have become “the major source of economic growth, the sole source of job creation and the major contributor to China’s still-growing role as a global trader”, he writes.

Smaller countries around the Pacific, such as the Association of South-East Asian Nations (ASEAN), band together for strength in numbers against the big powers. There is a constant flow of people, across the Pacific to Silicon Valley and back again; and there are pop-culture excursions between three countries, China, Japan and South Korea, that are otherwise staunchly nationalist. The Pacific is where the 21st century’s habit of networking is most advanced. From Silicon Valley to Shanghai, the world’s biggest internet firms have flourished. Nirvikar Singh, co-editor of “The Oxford Handbook of the Economics of the Pacific Rim”, published earlier this year, says the ocean is becoming the world’s “digital playground”.

To be a playground rather than a battleground, however, it needs rules that govern trade and the sea routes across which commerce flows. Since the second world war these rules have been underpinned by an American security presence that has helped keep the peace in the Pacific—give or take self-inflicted wounds, such as the Vietnam war. Yet America is not the only arbiter. APEC’s Mr Bollard says the region has benefited from a set of “loose-tight” standards of behaviour—guidelines rather than hard-and-fast rules—that have helped the region muddle through Vietnam, the spread of communism, China’s cultural revolution and other periods of severe instability. A rising China, too, wants a say in setting the rules, especially in its own neighbourhood. Getting all sides to agree on what those rules should be is the challenge for the next half-century of the Pacific Age.