While the chance of outright conflict is at a long-time low, according to James Barnes, that doesn’t stop nationalistpopulism having deleterious economic effects

“Our temptation is still to look on the European stage as of first importance. It is no longer so. Undoubtedly the scene has shifted from Europe to the Far East and to the Pacific… The problems of the Pacific are, to my mind, the world problems of the next 50 years or more…”

That was uttered, not at some summit in Brussels last week, but in London on 21 June 1921 by Jan Christian Smuts, premier of South Africa. Trepidation over a waking giant in the east is hardly new, but recent concerns stem less from what might be, than from the sharply changed geo-political realities arising from China’s arrival on the world stage.

The growing political, financial and military heft of the world’s second-largest economy has heightened tensions in the region – in particular Sino-Japanese rivalry which remains subject to deep historical enmity. While the chance of full-scale military conflict in Asia-Pacific remains low, rising nationalism, resource competition, an escalating arms race and Beijing’s clear sense of manifest destiny means that tensions will likely escalate over the next decade. The US military ‘pivot’ to Asia, whereby military resources are shifted from Europe and the Middle East to the Pacific, is Washington’s attempt to assert authority in a region where great power competition is going to be most intense.

Inevitability of war?
There is no shortage of flashpoints in the region. The dispute between China and Japan over islands known as the Diaoyus or Senkakus has taken centre stage in recent months, but China also contests the control of the Spratley and Paracel Islands in the South China Sea with a number of nations. For their part, Korea and Japan dispute the ownership of the Liancourt Rocks, islets in the East Sea/Sea of Japan. Further afield, a long-running border dispute between India and China remains mostly unresolved. October 2012 was the 50th anniversary of the war when the two countries fought over the disputed territories. On the Korean peninsula, the Chinese-backed North and the America-allied South are still technically at war, almost 60 years after the ceasefire was signed.

And yet, despite all these potential flash-points, we would argue that the risk of conflict in Asia is probably at a 50-year low. Most of the contested territory is uninhabited rocks miles from anywhere, important mainly for nationalist bragging rights and potentially for mineral resources. The last major war in the region was in 1979 between China and Vietnam over the latter’s invasion of Cambodia. China failed to achieve its strategic goals through force; the Vietnamese remained in Cambodia until 1989. This setback, coupled with a strategic decision to focus more on domestic economic development, led China to use diplomacy and soft power as the primary policy tools to meet its objectives.

China has tried to reassure its neighbours that its growing power will not pose a threat to the peace and stability of Asia, and that all nations will benefit from its development. This effort has had limited success; many nations, fearing a stronger, more belligerent China, have forged closer military ties with the US. The effort to present a friendly face has also been undermined by more aggressive voices from within China, and signs of a more aggressive posture toward its neighbours in the long-running disputes in the South China
Sea and with Japan.

Two possible triggers for geopolitical strife in the region are growing resource competition, and nationalism. The recent quarrel between China and Japan over the Diaoyus/Senkakus reignited a quarrel that has been going on since 1972, when the islands reverted to Japanese control. The issue intensified with the discovery of large natural gas deposits in the vicinity. Subsequently, the ownership question has become a convenient lightning rod to channel anti-Japanese sentiment in China.

In the past 20 years the Chinese Communist Party effectively abandoned socialist ideology as a source of legitimacy for its rule. A bombastic nationalism, often relying on acute xenophobia, has filled the void. This nationalist genie, unfortunately, is very difficult to control once unleashed. The risk for China is that this sentiment can easily turn on its own government, if it is perceived as not being sufficiently patriotic in defence of the country’s interests.

But rising nationalism is not solely a Chinese phenomenon. The latest Sino-Japanese spat was sparked by the Japanese government purchasing the islands from their private owners to stop them falling into the hands of the nationalist Governor of Tokyo, Shintaro Ishihara. He had announced plans earlier in the year for the Tokyo municipality to buy and settle the islands. This move reflects a rising tide of populist nationalism in Japanese politics. The leader of the Liberal Democratic Party and likely future prime minister has recently visited the Yasukuni Shrine in Tokyo, a move that infuriates Beijing as it honours past Japanese military leaders.

The recent ‘pivot’ of US foreign policy toward Asia was hailed as a historic announcement, but it is not the first time that the US military has considered swinging to the Pacific. On the same day the South African premier Smuts was speaking in 1921, the secretary of the Navy in Washington published a plan to redirect the Navy’s most modern ships from the Atlantic to the Pacific.

The concern in the 1920s was an expansionist Japan. Today, the US fears a growing Chinese military. For the moment, however, that is where the historical analogy stops: US military power remains vastly superior and, at best, Beijing has the potential capability to deny US forces control of the seas surrounding China.

This mismatch will not last forever. China feels that it has no choice but to massively expand its military capability in order to safeguard its economy. China now imports much of its oil from the Middle East, where the US also shares a strategic interest in preventing outright conflict. But with a recent IEA report predicting US self-sufficiency in oil production by 2020, the incentive for the US to keep spending trillions of dollars to police the Middle East is waning. To guarantee free passage of the oil it needs, China needs a true blue-water navy that can project force anywhere on the planet. As China builds up those military capabilities, the temptation to use them to enforce other territorial claims will also grow.

Economic fallout
While the risk of war in the immediate future is low, economic damage through boycotts or rising protectionism is not. This has been seen already in the recent anti-Japanese protests in China. Rampaging mobs looted Japanese-branded department stores, burnt car dealerships and forced the closure of Japanese factories across China. Nearly two months after the protests ended, sales of Japanese-brand cars remain depressed: less than 100,000 units shifted in October, compared with over 200,000 vehicles sold as recently as August. With China-Japan trade estimated at $342bn last year, the hope is that the economic impact of the dispute will be temporary and that investment will bounce back, as it has done after past anti-Japanese protests. There are signs that this will be the case: Aeon, the owner of Jusco and other stores in China, last month announced plans to open more malls in China, and Uniqlo, a casual wear retailer, has reiterated its aggressive expansion plans in the country, despite having to shutter over 60 of its stores during the riots.

Yet with China’s government continuing to encourage anti-Japanese sentiment, it could become a long-term barrier to Japanese sales of cars, electronics and white goods.

Chinese consumers may choose to show their patriotism buy either buying Chinese brands or just avoiding Japanese ones (General Motors had a record month of car sales in China in October). This trend could well push Japanese firms to shift their investments out of China and into other Asian countries. However, this is already happening to some extent, mainly due to rising wages in China. Japan’s investments in South East Asia have been greater than its Chinese investments for the past two years.

While the current furore seems to have subsided, the persistence of nationalist sentiment and contention over natural resources could prevent Asia from reaching its full potential of economic integration and leave the region at increased risk of conflict.

James Barnes is based in Hong Kong with GaveKal, a global research provider specialising in China and Asia