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The new world order and China’s role in it

Attila Marjan

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Thirty years ago China’s share of world trade hovered below 1% but has increased more than tenfold since. Every year since the turn of the millennium, China has provided a quarter of the international economy’s annual growth.

China’s entering the mainstream of the global economy was symbolically completed when it became a member of the World Trade Organization (WTO) in 2001. This added 800 million workers to the international labor force. China is now the biggest market and the biggest economy in the world. The West’s economy and political elite are forced to ride the shock waves caused by China’s rise. Western retailers source most of their stock from China. Millions of blue-collar workers have lost their jobs in the West as production is relocated to the Far East, and China’s huge untapped rural labor reserve will not run out in the coming decade. The entry of China and India into the global labor market reduced the global capital to labor ratio by 55 to 60%. This is the single most important ratio explaining the phenomenon we call globalization. The development of Chinese capitalism is fundamentally different from the previous British or American models though, where the technological innovations of their own inventors fuelled progress. China, on the other hand, imported ready-made solutions from the more developed parts of the world. China is also becoming an international financial power. It has become the leading holder of US Treasury debt and thus is now officially the American government’s largest foreign creditor. China has also accumulated the largest foreign currency reserves in the world.

In 1820, China and India combined accounted for about half of the world output, while Europe only accounted for 24% and the US only 2% (!). China only exported, the West – primarily Britain, the hegemonic power of the 19th century – imported. A huge global trade imbalance was accumulated to China’s advantage and China held an incredible amount of British silver. Today’s situation is surprisingly similar. In the 19th century this led to the opium wars and to the end of the once mighty Chinese empire. In 1978 China accounted for less than 1% of global GDP. What the West sees now is indeed the re-emergence of China in an incredibly fast way.

China’s middle class is expanding at an unheard of speed, and its wealthy few are becoming the wealthy many. Chinese society is undergoing rapid transformation, which alters people’s self-identity as well. A poll published by the Chicago Council on Global Affairs[1] already in 2007 indicated that the Chinese believed that, in ten years’ time, their country will be just as powerful and influential in the world as the United States. At the same time the majority of Americans, Chinese, Indians and South Koreans polled were of the opinion that China would pull ahead of the US in the global race. Clearly China is no longer just an economic power but also a political force to be reckoned with, often flexing its muscles to further increase American unease.

The turn of the new millennium saw the emergence of new centers of gravity, often in the form of non-centralized conglomerates of states with large differences among them and without a single political will. The most important such center of gravity is South-East Asia, which has a growing influence on the global economy and world politics. With the boom in the Chinese economy, the slow but steady recovery of Japan’s economy, the reinvigoration of the “small tigers” and the strengthening regional roles of India and Australia, South and East Asia looks set to become the key focal point of the next world order. But with that role and power comes increased responsibility, in particular for the region’s leading country: China. Issues that have been considered domestic in nature — such as setting the yuan’s exchange rate, the efficient organization of the textile industry, health care reforms, better and more transparent governance or curbing corruption — will have a direct global impact.

As Asia rises, so does the West’s economic, demographic, political and military significance erode. The days of the global rules and institutions established by the West are numbered. Most Chinese researchers, politicians and even the man in the street are convinced that, things will soon be back to normal as China is becoming the world’s biggest economy just as it had always been until the beginning of the 19th century. (As late as the 18th century, China was the world’s largest trading nation, conducting one third of global trade, with India as runner up boasting one sixth of global trade.)

By 2015 the era of G7/G8 – in other words: the era of absolute Western domination with US hegemony – is over. The 21st century will refashion the global political order as well as the global financial world. The hegemony of the dollar — just as of the USA — will come to an end. International institutions need to be reformed. It is just absurd for Belgium to have greater voting weight in the International Monetary Fund than India. At the moment international organizations are functioning inefficiently and are on the decline, which is not surprising, as they are institutions of the post-war West-centered world.[2] We are living in an era of G20 but this seems only an interim solution. The question is what world order follows? Suggestions are plenty.

There is Robert Haass’s vision of a non-polar world order[3], more precisely a non-polar disorder, which is inevitably unstable in the long run. G3 is more of a Chinese idea. It is a multiple variable geometry in which different G3 setups can be envisaged (China, USA, Russia; China, EU, USA; China, Japan, USA) according to the needs of and relevance to the issue in question. G2 (a Sino-American tandem) seems for the time-being to be a weird animal to the Chinese. In 2009, some began talking about a G2 in the model of the G7, G8 or G20 and envisioned an Obama-Hu Jintao duo deciding the fate of the world. China was abashed by that talk of a G2 and was quick to deny any speculations about a bipolar USA-China world order. China has at least two problems with the G2 setup: for the time-being, it does not want to expose itself as a real global power nor wants it to be drawn too close to the US.

Chinese politicians and scholars treat the West’s loss of influence as granted, but there are people in China who worry about the possibility of America’s rapid decline. The more realistic observers in Beijing believe that America’s collapse (no matter how realistic this is anyway) would have disastrous implications, because China is not yet ready to build an alternative world order. Hence the objective should be to compel the USA to show more willingness to cooperate rather than bring it down.

“The rise of China is granted by nature. In the last 2,000 years China has enjoyed superpower status several times…China’s decline is a historical mistake which should be corrected” — the political scientist Yuan Xuetong wrote[4] in the Journal of Contemporary China in 2001, the year when the image of the USA’s invincibility was shattered. “Isn’t it possible that China, like all rising powers of the past, including the United States, wants to reshape the international system to suit its own purposes, commensurate with its new power?” Robert Kagan asked four years later in the pages of the Washington Post.[5]

China is preparing itself, trying to identify the weaknesses and strengths of its rivals. Its vast administration, including the army and intelligence services, is busy calculating, analyzing, generating strategies, and suggesting dos and don’ts for China’s rise. Meanwhile, the Chinese economy is growing at breakneck speed and beginning to reshape the global market. Chinese foreign policy has restricted its attention to local, or at most regional affairs, but the isolationist, policy of the nineties is inappropriate in the 21st century. It is unclear whether China’s true character is soft power or hard power. They have been undecided for centuries, even though China has been involved in wars or armed conflicts with almost all of its neighbors. Chinese political leaders seem to be uncertain at this point how to define the future role of China in the emerging world order. It is indeed a major problem for the West that it does not see where China is headed; but it is even a bigger problem for the whole world that China itself does not know either. Having said this China is reinforcing its global security focus. Chinese President Xi Jinping already announced the setting up of the Chinese National Security Commission (CNSC). The CNSC has three major tasks.

– To advise the Politburo (which oversees the Communist Party) and the highest levels of the leadership on security strategy.

-To coordinate between different departments throughout the party, the government, the military, and society.

– To conduct crisis management and risk management, for both internal and external security threats.

In July 2015, the Chinese government passed a new national security law that will strengthen its role in China’s national security policy.[6] The Chinese Security Commission decided to establish high-level communication mechanisms with the US National Security Council as security issues between China and the US already affect the entire globe, and especially the Asia-Pacific region. The hotline proposed by China between the Chinese National Security Commission and the U.S. National Security Council is meant to handle emergency situations.

The transformation of the international order, the end of a hegemonic system, the appearance of a new power has often brought disaster in history. The only exception to this rule was the changeover of power between the British Empire and the United States in the 20th century, but this was a special case for two reasons. Firstly, the two nations were closely related culturally (in the broadest sense); secondly, that changeover happened during global wars in which the two Anglo-Saxon powers fought side by side. The map of the world is being redrawn again at the beginning of the 21st century. In a Huntingtonian world the birth of a new world order and the emergence of new global powers inevitably lead to a crisis or a global conflict. Zakaria and Khanna, two well-known analysts of current times are less pessimistic,[7] they talk about a world coming to terms with a natural multipolarity by the emergence of the second and the third world.

On a historical scale, America’s rise to global power status was extremely quick: on the eve of World War II the US Army was smaller than that of the Dutch but by 1944 America’s military output was double that of the Axis powers. The USA climbed to the top of the world with unprecedented speed and stayed there for a short century. In 2000 the United States was the strongest power in history, whose global supremacy was uncontested. Its budget showed a healthy surplus, its military might was unparalleled, its economic clout colossal. However, since 2001 the US’s global position weakened. There is a lot of discussion about the end of the US supremacy and also on why has America’s global dominance come to an end and how China found its way up? One obvious explanation is the dynamics of history: it is simply impossible to stop the emergence of new powers. If a civilization, culture, country or region can improve the efficiency of its economy, if it can put human, technological and financial resources at work in a massive way, and if the external environment is favorable, it will become successful. If this happens in a big enough country, it will become a world power. Another explanation is the mistakes committed by the United States: its misguided energy policy, its immensely expensive wars have not produced any tangible results but have emptied the federal coffers, eroded America’s international image and gave China the chance to build up its economy, diplomacy and military almost unnoticed by the hegemon. In the meantime the US economy has become dependent on China (and vice versa for that matter): what China produced the USA bought, and as a result China now holds trillions of dollars in US government bonds. The arrival of the turning point has been accelerated by the profound demographic and economic changes, the pace of globalization, 9/11, America’s military failures and the economic crisis. As the Japanese prime minister said at the end of an international summit in late 2008: “History teaches us that crises create new order.” The shift of geopolitical power towards Asia coincides with the end of a golden age of the West, which brought rapid growth, low inflation and considerable improvements in the standard of living, as well as with an economic crisis unseen in 60 years.

The American intelligence community[8] predicted a fundamental reshuffle of the world as we know it in the next few decades already a decade ago. The international order, as it was created in the wake of World War II, will be unrecognizable by 2025 — they say, adding that the pace at which wealth and political power will move from West to East is unprecedented in modern history. The world will become ever more dangerous, but richer at the same time, which does not mean that the majority of the Earth’s population will not face food and water shortages. Today’s oil powers may become tomorrow’s beggars, while developing countries and regions that build their economies on hard work will see stunning growth. The rise of the non-Western world, which began in the 1950s with Japan and continued in the ’60s with the Asian tigers, became a full-blown trend with the emergence of China, India and Brazil and will continue for decades.

It remains to be seen whether China’s rise will happen peacefully in the long run. The West is instinctively wary of geopolitical changes and knows also that dictatorships do not last long. Still, China needs peace in the world to be able to strengthen its economy, annex Taiwan at some stage and build an international order in which Asia and China play a central role. For the time being, China is not aiming at global hegemony or confrontation. Since the mid-nineties, China has been claiming to be a responsible, peaceful and cooperative partner of the West. A confrontation with America is unlikely to pay any dividends and is therefore not a realistic option. However it is encoded into Chinese culture that everything must have a counterbalance. A power without a counterbalance is unnatural and dangerous. Power must be balanced internationally without encroaching upon the independence or sovereignty of nation states. After the collapse of the Soviet Union the Chinese hoped that the Cold War era would be replaced by a multipolar world order, and were disappointed to see the dawn of total American hegemony. China was shocked by the US intervention in Kosovo in 1999; bilateral relations were all but frozen, and China was afraid that the USA would use Taiwan and Japan to keep China at bay. This was the general view held by Chinese politicians and defense analysts at the turn of the millenium. But the world has changed immensely since then. Niall Ferguson talked about the end of Chimerica[9] – a marriage between the US and China in a completely intertwined economy where America consumes and China produces, China lends, America borrows, China exports, America imports. This cooperation was obviously a pretty problematic one therefore did not last for long. Both USA and China maintain strong suspicions of each other’s intentions. Accordingly, both sides are hedging their bets and securing their positions should relations deteriorate. As long as the question of Taiwan is not resolved peacefully and definitively, hostility between China and the USA remains a realistic risk. Nonetheless, as long as the USA does not pose a threat to its vital national interests, China is willing to tolerate the current global framework but with an ever-growing determination to gradually change it from inside.

According to Kissinger, the United States must be aware of its supremacy but act as if global security depended on all global actors. This strategy can divide the psychological burden of responsibility and will allow the principles of freedom and democracy to dominate international politics. In other words: share power to hold on to power. Kissinger believes that China, with four thousand years of history behind it, must know something about survival, hence the West should avoid being condescending. Kissinger is convinced that China’s rise will be the greatest challenge to the West as well as to China itself. Its political mentality, institutional culture and traditions do not predestine the US to accept easily the loss of its status as the world’s number one power and become one of many global actors. Also, for the US multilateralism has a different meaning and importance than to European countries and the EU. For America multilateralism is the means of achieving its end of a stable world order with the USA as the leading power. For Europe multilateralism is the end itself.

Having said all this, in 2015 US’s global military superiority is still beyond question. The US Navy commands a fleet bigger than the next 50 largest fleets together; America spends over a billion dollars a day on defense. The US economy is world leader not only in term of output but also in the use of cutting-edge technology. America’s intellectual and cultural impact — from Harvard through Hollywood to McDonald’s — is the biggest soft power in the world. Not to mention the fact that the USA is not a status quo power, America is not afraid of change. Apart from its unwavering faith in democracy and in its own specialness, its embrace of change is one of its key distinguishing features.[10]

The rise and reinforced international profile of China and Asia poses some inconvenient but crucial questions for the West. As Asia rises and Europe stagnates, an overhaul of international organizations naturally seems inevitable, however difficult that may be. The French president suggested that India should be given a permanent seat on the UN Security Council, but when the possibility of the EU being given a single seat on the Security Council (instead of the two currently held by France and the United Kingdom), he called it very unlikely that the EU — which has trouble agreeing on much less contentious issues — could find consensus on such a sensitive and crucial question.

What guaranteed the prosperity of the West, apart from its military might, was that the world order that emerged in the wake of World War II was shaped by Western ideas, rules and values. Global politics undergo seismic shifts the global order is realigned and the global value set might also be rearranged to a certain extent. This latter is much less talked about but equally important – in the long run, certainly. We are witnessing not only the competition of economies and military capabilities but of values as well. And what we experience is a new phenomenon: the rise of alternative values and institutions in the world in parallel with a certain level of democracy fatigue even in the West.

In parallel with the global power reshuffle new social models are appearing. These new societal models are not hybrids combining elements of Western society. They tend to be forms of state capitalism or non-liberal (pseudo) democracies, where elections are held regularly but a populist elite rules the country nonetheless. Many developing countries go through this stage in their development; the question is whether they will be able to move on and turn themselves into real democracies. At the same time Western liberal democracy shows signs of ageing and becoming rickety as cowardly political elites motivated only by polls discredit democracy altogether. Postmodern politics is drifting towards dim-witted media politics.

Does China’s rise really mean that the universal expansion of the Western world and of liberal democracy have come to a halt? When China broke with dogmatic communism and opened itself up to the world, it spent three decades adopting Western principles, particularly in the areas of foreign and economic policy. China is opening a new chapter: it wants to create a new model of its own, which can become an alternative to the Western model and will surely be popular in all countries that have a dislike for the American dominated Western world order. When the “Chinese model” crystallizes it can offer the developing world (Africa, Latin America and the Middle East) an alternative to the Western liberal model. The new China does not only rebuff the West-dominated present, it also rejects eurocentric historiography and the eurocentric worldview as false and distorted, because — it claims — these advocate the global supremacy of Greco-Roman culture and underplay the world’s oldest culture (i.e. that of China).

The fact that autocracy and state capitalism seem to prevail and flourish in the biggest country in the world is a powerful signal for many countries. There are speculations that the global system might soon have a viable Third Way (as opposed to the Western and the clear cut third world dictatorship models) which could be a desirable option for many Asian and African countries in the 21st century. It is not a certainty though. But if democracy is challenged by a strong and vivid alternative model on the global scale, remilitarization and old-school power politics could come back into fashion. China will have a responsibility as regards how to tackle these developments and their consequences in the long run.

Francis Fukuyama asks[11] in 2010 whether liberal democratic principles are really universal or have been revealed not to be. His answer is that they are universal – but this is not as sure as it was a decade ago. He asks what the democratic world can do with Putin’s transformation of Russia into an ”electoral authoritarian” state, the undermining of democratic institutions by Hugo Chavez in Venezuela, and the rise of China as a successful authoritarian modernizer. Are these systems true and viable alternatives of old-fashioned democracy? They are most probably not in the long run, but liberal democracy is not the only alternative to all-out dictatorship in worldwide politics anymore. As he puts it: “The next phase of global history will be a challenging one, as America and Europe stumble to get back their economic balance. It seems doubtful that either the US or Britain will achieve the degree of growth in the next generation that they did in the previous one. But one of the great advantages of democracy is that it does not depend for its legitimacy on continuing high levels of economic growth, as the Chinese system does. As we move forward, it is important to keep in mind the simple power of the idea of a government by, for, and of the people. We need to match those high ideals with unglamorous but steady investments in institution-building if liberal democracy is to deliver on its promises.”

Robert Kagan says that ideology still matters in geopolitics, and one should add perception as well to ideology. China’s strength comes partly from the fact that the world sees it as strong, the future great power. At the same time, part of America’s weakness stems from the fact that it sees itself as a declining power[12]. A change in these perceptions could cause significant shifts in times of uncertainty and global transition. Is China potentially an even bigger a power than we imagine or – as Ari Van Assche puts it – does the West only make a dragon out of a dragonfly[13]?

China is changing geopolitics, surely. Is China going to change the rules of the game? It is doubtful, but this is still a puzzle to the Chinese themselves. China might as well be much less powerful as it seems, based on a shaky “Leninist corporatism” whose development is completely based on stealing know-how and institutions from the West as Will Hutton points out.[14]   But there is a high probability that reality will prove otherwise.


[1]Chicago Council on Global Affairs: World Public opinion, 2007.

[2]Zhao Kejin concludes that “today it seems that EU states are taking a case-by-case approach toward China’s initiatives to constructively reform the Bretton Woods system. They tend to support reform of the international monetary order, thus accepting RMB’s inclusion in the SDR, yet they are not committed to sharing governance of the old institutions, as this would limit European influence and prestige.” In: China’s National Security Commission. Carnegie-Tsinghua Center for Global Policy. July 14, 2015.

[3]Robert N. Haass: The age of non-polarity – What will follow US dominance. Foreign Affairs. May/June, 2008.

[4]Yan Xuetong: The rise of China in the Chinese eyes, Journal of Contemporary China, 2001, Vol. 10.

[5]Kagan, Robert: The Illusion of managing China. Washington Post, 15 May 2005,.

[6]Kejin, Zhao: China’s National Security Commission. Carnegie-Tsinghua Center for Global Policy. July 14, 2015.

[7]See more in Khanna, Parag: The second world – empires and influence in the new global order. Random House, New York, 2008. and in: Zakaria, Fareed: The post-American world. W. W. Norton & Co, New York, 2008.

[8]According to the Global Trends 2025 report.

[9]Ferguson, Niall – Schularick, Moritz: “Chimerica and global asset markets”. 2007. and “The end of Chimerica”. 2009. Harvard Business School. Working Paper 10-037.

[10]A small note: things in the balance of the international order can change unnoticed and sometimes scholars and politicians got carried away by perceptions of visible trends while obviously disregarding the ones less obvious. One good example is the surprise at the collapse of the Soviet Union. In his book (My Country, My People) published in the US in 1935 Lin Yutang described China as a tired old man (in comparison with the dynamic, youthful West.) Some seventy years later my book on the future of Europe bore the subtitle: “The Old Lady and the Bull” (a reference to ancient Greek mythology) describing Europe as an old lady instead of the young girl who she used to be when she had been taken by Zeus disguised as a bull. Probably both of us were right at a certain moment in time, but the lifespan of truths in geopolitics seems to get shorter and shorter.

[11]Is the Age of Democracy Over? Spectator. February 10, 2010.

[12]An example: According to a 2009 survey by Penn, Schoen and Berland Associates, 81% of Chinese think the USA will stay ahead of China in innovation, while 41% of Americans think so. (in Newsweek, 28 November 2009.)

[13]Van Assche, Ari: Are We Making a Dragon out of a Dragonfly? – Understanding China’s Role in Global Production Networks. Burgundy Report, CIRANO Network, 2009RB – 03. January 2009.

[14]Hutton, Will: The Writing on the Wall: Why We Must Embrace China as a Partner or Face it as an Enemy. Free Press/Little, Brown.

Hungarian economist, PhD in international relations. Based in Brussels for fourteen years as diplomat and member of EU commissioners’ cabinets. Two times visiting fellow of Wilson Center in Washington DC. University professor and author of books on EU affairs and geopolitics. Head of department, National University of Public Administration, Budapest.

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East Asia

China & Nepal working towards a genuine good-neighbour tie

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Authors: Himal Neupane & Jamal Ait Laadam

Although China and Nepal are very different in terms of each territorial size, population, economic capacity, technological prowess and above all military power, the bilateral relations between them have been undergone consistently and significantly. Since 1955 when China and Nepal formally recognized each with, their bilateral relationship has been characterized by equality, harmonious coexistence, everlasting friendship and overall cooperation. Particularly during the past over 40 years, China and Nepal have undergone substantial developments in view of mutual understandings. For example, in 1996 the two sides for the first time agreed to build up a good-neighbour partnership of the 21st century.

In line with this spirit of mutual respect and equality, Chinese President Xi Jinping paid a state visit to Nepal on October 12-13, during which the heads of the two states formally announced that they elevated the China-Nepal Comprehensive Partnership of Cooperation to Strategic Partnership of Cooperation in light of their many common values to enhance cooperation It is reported that President Xi frankly said Nepal wouldn’t be a landlocked country in the future as the trans-Himalayan connectivity network ultimately will support sustainable development and stability of the entire South Asia region. This is not only a promise from a large neighbor, but also a sort of responsibility from a rising major power of the world, which aims along with other parties, either large or small,  to create an international community of shared future.

Accordingly, on October 12, Nepal and China signed 18 memorandums of understanding and two letters of exchange. The priority was laid down with a focus on the implementation of signed agreements and acknowledged policies. Besides, they also reaffirmed the commitment to broaden the level of cooperation under the spirit of the Belt and Road Initiative (BRI). Moreover, China and Nepal have agreed to enhance connectivity through ports, railways, roads, aviation and communications within the broad framework of the BRI and the Trans-Himalayan Multi-Dimensional Connectivity Network which are of strategic significance. As Chinese President Xi put it, “our two peoples have shared weal and woe, and set an example of friendly exchanges between neighboring countries, and we would act to carry forward the traditional friendship and take the bilateral relationship to a new and higher level via his state visit to Nepal.

For sure, nothing is free in the realm of international politics as the realists argue what China and Nepal need from each other are their common geopolitical and geo-economical interests? This kind of inquiry is sensible and also cynical. In fact, historically China and Nepal had been at good terms for a few centuries, and during the British colonial era, Nepal actually acted as a natural buffer state between imperial China and colonial India. Since 1949 when the People’s Republic of China was founded soon after the independence of India, Nepal ended its isolation and forged amicable ties with India and other countries. Initially, Nepal had close ties to India in terms of culture, ethnics and even military affair, but it never accepts external domination. In 1955 Nepal formally recognized Beijing as the legitimate government of China and since then, it has consistently supported China in foreign affairs. Meanwhile, China has offered economic aid to Nepali reconstruction in a gradual way.

However, since the 1980s, China has steadily transformed itself into the second largest economy of the world with its alarming manufacturing capability and progressive technologies. Due to this, China has provided more assistances to Nepal and other neighbours to share Chinese public goods, especially in terms of the infrastructure projects and alleviation of poverty. For example, President Xi announced in 2018, “In the coming three years, China will provide assistance worth RMB 60 billion to developing countries and international organizations participating in the Belt and Road Initiative, and contributing an additional RMB 100 billion to the Silk Road Fund.” As a developing country nestled in the heart of the Himalaya, Nepal surely needs to expand its infrastructure through involving itself into the BRI with the view to exploring and finally harnessing its huge potential sources —hydropower—for export.

Strategically speaking, China needs to maintain its border areas peaceful and stable in light of its “NEWS strategy” that means while China tries to consolidate its entente partnership with Russia on the North and pacifying its East coast, it necessarily aims to sustain the BRI projects to the West and the maritime silk route to the South. This is the core of the NEWS strategy initiated by the Chinese elite since President Xi took power. Consider Nepal’s strategic location and political stability, China is sure to promote the bilateral ties as the two previous MOUs were signed in Beijing including to rebuild Chinese—Nepali transit road network agreements. It will help northern Himalayan areas get an alternative transit route and also facilitate the local economics, as much important part of the BRI as the economic corridor between China and Pakistan. Moreover, since 2016, a freight rail line was even completed linking Lanzhou, a heavy industrial city in the West of China through Xigaze in Tibet, down to the capital of Nepal. This is a truly strategic pivot of the grand BRI project.

To that end, President Xi revealed to his Nepali counterpart Bidhya Devi Bhandari that the two sides should work closely to carry out the construction of a trans-Himalayan connectivity network, and expand exchanges and cooperation in various fields. For her part, Nepali President Bhandari graciously welcomed Xi’s state visit to Nepal and stressed that the rise of China backed up by its modernization drive will help bring benefits to Nepal and promote regional peace and prosperity. In light of this cordiality, the two governments issued a joint statement on Oct. 13, agreeing on more practical cooperation in the new phase of bilateral relations. For a few key points serve to inllustrate that first, the two sides agreed to take the BRI as an opportunity to deepen mutual benefits in arious fields including the Kathmandu-Pokhara-Lumbini Railway Project. Furthermore, cooperation will cover the Zhangmu/Khasa port, the Lizi/Nechung port, and the three North-South corridors in Nepal. Second, the two sides will hold comprehensive discussions to strengthen trade relations, including to take positive measures to increase Nepal’s exports to China and to facilitate Chinese banks to open their branches and other financial services in Nepal. Last, China promises to help Nepal shake off the status of being a least developed country and achieve the sustainable development goals in the next two decades.

Since states are committed to each other by the nature of the world in which they exist, any close cooperation between China and Nepal is never bilateral only, that means there is always local, regional and international concerns, suspicions and even hostilities towards either China or Nepal or both. Geopolitically, India is the first power, understandably, to feel uncomfortable if not angry. This is the reason why President Xi made his first trip to India prior to his state visit to Nepal, and held comprehensive talks with Indian Prime Minister Modi. Second, China and Nepal also need to coordinate each other deftly to convince other neighbours such as Sri Lanka and Bangladesh that any sort of their cooperation would never be exclusive but inclusive and open all others in the South Asia. Geo-economically, China has reiterated that it would not seek to use its economic or financial leverages to “dictate” the local affairs of the recipient countries. Meanwhile, Chinese companies also need to move in prudently and read the local laws and political norms before jumping into the businesses.

Xi has frequently said, China is the largest developing country and also a learning country all the time. In order to promote China’s strategy to link the countries involved, mutual respect and equality are the prior condition to the long-term cooperation. In light of this, it is expected that Xi’s state visit to Nepal, the first one by a president of China over the past 26 years, will unlock new strategic opportunities for bilateral relations, as well as positively promote their ties with India by understanding the prospects for trilateral cooperation. It is clear that Chinese-Nepali economic integration through BRI is unstoppable, so it is sensible for India and the others in the region to take the opportunity to extend the proposed high-speed railway between those two all the way south to the nearby West Bengal port of Kolkata to more closely tie the three together in a system of complex economic interdependence. This is a balanced approach to prevent an open rivalry between the key member states of the BRICS and the SCO over their common neighbors. Given this, Xi’s visit to both India and Nepal might be the very time to enhance the trilateral understanding among Nepal with its giant neighbor. To that end, Nepal, though a much smaller state compared to China and India, could play positively a role as the bridge for building a more trust-based relationship across this region.

China has showed its willingness to share with Nepal its development experiences, practices and inclusive economic governance approaches. In doing so, geopolitical factors should never be the obstacles for China-Nepal cooperation. Rather, Nepal could serve as a dynamic bridge between China and India, and China and South Asia.

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Semiconductor War between Japan and South Korea

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Authors: Gleb Toropchin and Anastasia Tolstukhina

In the summer of 2019, a trade conflict broke out between Tokyo and Seoul and the matter is about more than the history between the two countries. The two developed economies have long been locked in a competition on the global cutting-edge technologies market. At the same time, they are links in the same technological chain.

At first glance, the exchange of trade restrictions that is taking place against the background of mutual accusations is nobody’s business but Tokyo and Seoul’s. Nonetheless, the consequences of the confrontation between the two countries have a global nature. The present article analyses the causes of the disagreements and looks at how the situation may develop

Introducing Restrictions and Removal from the “White List”

Despite the events of the colonial past [1], as well as the current territorial disputes that are so typical of Asia’s international politics [2], South Korea is one of Japan’s three largest trade partners. Japan exports into South Korea up to $54 billion in goodsThe key commodities include semiconductors and materials for their manufacture

The dependence of South Korean companies on imports of fluorinated polyimides and photoresists exceeds 90 percent, and their dependence on imports of hydrogen fluoride is around 44 percent (although this figure has fallen gradually from 72 percent in 2010)

However, on July 1, 2019, the Government of Japan announced restrictions on the export of commodities to South Korea that are of critical importance for microelectronics, and on July 4, the changes to the procedure came into force

Given the long-established delivery mechanism, such a political step was a surprise for many. The restrictions mainly affected three key materials for the microelectronics industry: fluorinated polyimides, hydrogen fluoride, and photoresists (these materials are used in the manufacturing of semiconductors and display panels). This measure does not mean that deliveries of these materials to South Korea have been completely stopped; however, from now on, it may take up to 90 days to approve transactions. Additionally, Japan said it would be taking South Korea off its “white list” of trade partners. The list includes states that are believed to be safe from the point of view of exporting strategic commodities and that are granted trade preferences

Let us try to understand why the Government of Japan took such steps

Pressure from Taiwanese and South Korean competitors

In 1986, an agreement was signed between Tokyo and Washington that prohibited Japan from undercutting global semiconductor prices. This step was initially intended to make the United States more competitive. However, even in those circumstances, Japan managed to take a significant chunk of the global semiconductor market from the United States in the late 20th century and retain its high positions until the 2010s. However, as early as 2012, experts noted that pressure from Taiwanese and South Korean competitors resulted in semiconductor sales of Japan’s four chip-makers, Toshiba, Renesas, Sony and Fujitsu taking a marked dip

Samsung Electronics succeeded in mastering the subtleties of developing technologies just at the right time, while Japan began to lag behind in R&D due to problems with formal education, and its revenues from global sales of microelectronics were falling against the backdrop of falling prices and the high exchange rate of the Japanese yen. Among other causes of this phenomenon, Japanese experts cite the desire to create hi-tech goods without account for high costs, and lack of innovative ideas

Today, South Korea is the leading manufacturer of memory microchips. Samsung Electronics and SK Hynix hold two-thirds of the global market. Additionally, both the United States’ Apple and China’s Huawei depend on the products produced by South Korean companies. Integrated circuit units account for 17 percent of South Korea’s exports (the entire microelectronics sector accounts for nearly a quarter of its exports), compared to less than 4 percent for Japan

An analysis of the global microelectronics market demonstrates that, currently, the market particularly values dynamic random-access memory semiconductors (DRAMS) that hold tremendous significance for such cutting-edge technologies as artificial intelligence, the Internet of Things and robotics. South Korea holds impressive positions in this area as well: Samsung and SK Hynix control 72.8 percent of the DRAMS market and 46.8 percent of the global flash memory market

Reasons for Introducing Restrictive Measures

The East Asia Forum reports that Japan’s strategy of opposing Seoul was developed jointly by the country’s Ministry of Economy, Trade and Industry, Ministry of Foreign Affairs and Ministry of Agriculture, Forestry and Fisheries. The Cabinet of Ministers subsequently supported these measures, thereby making the key decision to transfer the issue into the political realm

It appears that Japan’s decision to impose restrictive measures was prompted by the fact that the country has clearly fallen behind technologically on the global microelectronic market, which negatively affects both the country’s economic indicators and its national security

According to the expert June Park, the Government of Japan decided to institute the restrictive measures out of concern for national security, since, in exporting rare materials to South Korea, Tokyo cannot be certain they will be used properly

The Japan Times notes that Tokyo justifies the introduction of increasingly strict export requirements by claiming that confidence in South Korea has been undermined. In particular, some media outlets report that between 2015 and March 2019, no fewer than 156 materials, including hydrogen fluoride, were smuggled out of South Korea. There were also reports of hydrogen fluoride being exported to countries that are under international sanctions (Iran, Syria and even North Korea). Another reason for the restrictions is Tokyo’s concerns that South Korea violates intellectual property rights

South Korea denies all accusations. Its arguments are logical: Iran and Syria are friends of North Korea, therefore, Seoul has no reasons to help their regimes. President of South Korea Moon Jae-in called for the differences to be resolved by diplomatic means. However, the talks held on July 12, 2019, in Tokyo did not yield any results. Consequently, Moon Jae-in instructed the relevant agencies to develop reciprocal measures. At about the same time, there were reports of South Korea possibly filing a grievance with the World Trade Organization. As a result, hearings on the issue were launched in Geneva on July 24, 2019

In late July 2019, news broke that Tokyo was considering further restrictions since Japan believes the re-selling of strategic materials by Seoul to be a violation of the non-proliferation regimes regarding both weapons of mass destruction and conventional weapons. In this case, the restrictions would extend to other types of commodities and materials. On August 2, the Cabinet of Japan approved the decision to take South Korea off its “white list” (where the Republic of Korea was the only Asian state), thereby depriving it of trade preferences in regard to the materials mentioned above. The full list exceeds 1100 items

Despite these events, several deliveries of these materials from Japan to South Korea were made in August. However, they did not result in a thaw in bilateral relations. Seoul reciprocated by putting Japan on a restrictive trade list and terminating the military intelligence-sharing pact with Tokyo

“Wu Wei” American Style

China holds leading positions in deposits of rare-earth metals. Moreover, approximately 90 percent of the world’s rare-earth magnets are manufactured in China. Japanese companies use China’s raw materials to manufacture fluorinated polyimides, hydrogen fluoride and photoresists that are subsequently supplied to South Korea, Taiwan and other countries to be used in manufacturing chips, displays, etc. The circle is complete when these commodities go back to China to be used in the manufacture of finished products (such as smartphones and tablets), creating a sort of a closed-loop. Thus, the manufacture of competitive hi-tech products today is impossible within a single economy, and Chinese companies depend on parts coming from other Asian countries

Tracing the entire technological chain, we can assume that the Japan–South Korea conflict is closely linked to the trade war between China and the United States. South Korea’s Samsung Electronics is hindered by the restrictions on deliveries of Huawei memory chips since the latter is under U.S. sanctions. In turn, interrupting the chain of semiconductors delivery from South Korea will slow down the development of artificial intelligence in China. And who benefits from this? This is a rhetorical question

It would seem that the United States should be interested in cordial relations between their allies in the region, allies that form a sort of counterbalance to China and are ideological antagonists to North Korea. The White House, however, intentionally or unintentionally, demonstrates adherence to the Taoist principle of inaction, or “wu wei” (无为 in simplified Chinese), which entails a conscious refusal to act and the assumption of a contemplative stance. From the outset of the confrontation in July 2019, the United States announced it would not interfere in the conflict. Despite individual experts calling upon the United States to act as an intermediary between the two Asian states, Washington did not change its position

We should also note here that the Japanese company Toshiba announced the construction of a facility for the production of NAND-type (from the English NOT-AND, that is, a binary logical element) flash memory devices in Iwate Prefecture in cooperation with U.S. chip manufacturer Western Digital. We can cautiously assume that the United States and Japan are progressing toward a “technological union” in order to defeat China in the race for domination of the semiconductor industry

Public Opinion

Speaking of the impact that the conflict has on public opinion in both countries, we can quote a survey conducted by Japan’s Asahi Shimbun in mid-September 2019. Overall, slightly less than one third (29 per cent) of respondents admitted that they had a negative opinion of South Korea. This was far more pronounced among older people, which can be linked to their conservative views and the “proximity aberration” phenomenon (put simply, the older generations remember the events of the 20th century well)

As for South Korea, an anti-Japanese “grassroots” campaign has been launched in addition to the “top-down” process. In the second half of the summer of 2019, slogans『 가지않습니다 사지않습니다 』 (Korean for “Do not visit, do not buy”) calling for boycotting trips to Japan and Japanese goods spread on Korean social networks. And it looks like they were successful to a degree. For instance, the Yonhap News Agency reports that the number of South Koreans travelling to Japan in August fell by 60 per cent compared to the same period last year

In the run-up to the 2020 Summer Olympics in Tokyo, the trade conflict has become a reason for manipulating public opinion in South Korea. Additionally, we cannot rule out the possibility that populists use the disagreements between Japan and South Korea to advance their domestic agenda on the eve of the elections to South Korea’s unicameral parliament scheduled for April 15, 2020

Forecast: Cloudy in the East

Losses from the Japan–South Korea trade war may exceed $80 billion. There has already been a drop in sales of South Korean semiconductors manufactured by Samsung Electronics and SK Hynix. Moreover, the conflict threatens to disrupt the entire global technological production chain in microelectronics. The expert Robert Farley described this conflict (and the U.S.–China trade war) as “weaponizing interdependence.” One of the analysts with The Economist Intelligence Unit called this situation “mutually assured destruction.”

The Yonhap News reports that the consequences of the trade conflict have had greater negative effect on the Japanese economy than on the South Korean economy. For instance, in July–August, South Korean exports to Japan have fallen by 3.5 per cent, while Japanese exports to South Korea have dropped 8.1 per cent

The South Korean economy has also suffered against the backdrop of these events. Here, Seoul has only two ways out of this predicament:

-Transitioning to domestic analogues, which LG Display and Samsung Electronics already did in September of this year. Additionally, the country earmarked 2.1 trillion South Korean won in the 2020 budget to overcome the dependence on the export of rare materials from Japan

-Searching for alternative sources of hydrogen fluoride and other rare materials for microelectronics. Media outlets have reported that Russia might be a potential supplier of high-purity hydrogen fluoride. The head of the Korea International Trade Association said that Moscow had offered to supply hydrogen fluoride to Seoul. However, it is not easy for South Korean companies to transition to Russian imports of this and other materials for microelectronics. The physical and chemical properties of the products must be tested for a rather lengthy period of time (upwards of six months)

Apparently, the status quo on the microelectronic market will continue in the short-term, and both parties will seek ways to minimize losses. And we can already see evidence of this. In September and October, the Government of Japan approved deliveries of hydrogen fluoride to Samsung Electronics and SK Hynix

At the same time, if Tokyo and Seoul fail to find common ground in the medium and long term, then the current global technological chain in microelectronics may be dismantled, which will, of course, negatively affect the growth rate of the global economy. However, so as not to end our study on a pessimistic note, let us note that, under the current circumstances, many hi-tech companies around the world, including those in Russia, now have the chance to become new links in the value chain and occupy its niche in microelectronics

From our partner RIAC

[1] In 1910, the Empire of Japan annexed the entire Korean peninsula. Korea essentially became a Japanese colony. The Japanese language and culture were forced onto the Korean people. Up to 200,000 ethnic Koreans served in the Imperial Japanese Army during World War II (including future president of South Korea and “father of the economic miracle” Park Chung-hee). Today, Japanese war crimes are a subject of talks between South Korea and Japan. In 2015, Minister of Foreign Affairs of Japan Fumio Kishida promised 1 billion yen to the victims of violence in compensation, and Prime Minister Shinzo Abe offered a public apology for Japan’s actions during the war.

[2] The dispute concerns the Liancourt Rocks, a group of small islets that the Koreans call Dokdo (“Solitary Islands”) and the Japanese call Takeshima (“Bamboo Islands”). Back in the early 20th century, Japan claimed sovereignty over these islands; however, following its defeat in World War II, it was forced to abandon its colonial acquisitions. On the other hand, the 1951 Treaty of San Francisco does not mention this territory, which gives Japan formal grounds to dispute the sovereignty of the islands where South Korea maintains military and civil infrastructure.

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East Asia

Future Trends of China’s Diplomacy

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This year 2019 marked the 70th anniversary of the founding of the People’s Republic of China (PRC), and China’s diplomacy has also gone through a journey of 70 years. The 70-year history of the PRC can be divided into the first 30 years after its founding and the second 40 years since opening and reform were initiated in 1978. The characteristic of china diplomacy is a responsible nation, rational behavior and the confidence of great power.

China had a clear break with the old diplomacy of humiliation; established a new kind of diplomatic relations with other countries on the basis of equality and mutual benefit; secured an equal position and dignity on the global stage; gained diplomatic independence by safeguarding and strengthening national independence, and protecting national security and territorial integrity; settled the border disputes left  over from history with most neighbors by peaceful means, creating a stable neighborhood in general; established strong friendships with the vast majority of developing countries through mutual support; and set up a new diplomatic contingent for seeking the diplomacy of independence. The following are the future expectations of China diplomacy:

Firstly, Deng Xiaoping’s directive, “Don’t seek for leadership,” stays powerful in China’s new diplomacy, so China’s future diplomacy will keep on emphasizing on the management of the crisis, economic diplomacy, multilateral diplomacy, cultural diplomacy, cooperation, and accommodation while protecting the main national interest. Solving problems and managing crises will stay an important characteristic of China’s diplomacy, particularly in its ties with other major powers. Meanwhile, in cooperation with other major powers, China will appear to be more active in managing fundamental global issues at the strategic level.

Secondly, The Chinese government has repeatedly said that China does not have a plan of challenging the international system and has focused on the importance of being a “responsible member” of the universal society. As of late, China has developed new concepts for its foreign policy orientation, just as (1) “new security” emphasizing shared and cooperative security, (2) “peaceful development” focusing on non-violence commitment, (3) “win-win” cooperation denying a zero-sum comprehension of international affairs, and (4) building a “harmonious world” that promoting harmony with diversity, solving conflict through dialogue, and democratization of world governmental issues.

As these concepts demonstrate, China has no desire of being revolutionary in the international system, rather, it intends to be a responsible member of world affairs. Economic diplomacy will remain to be emphasized by china. While trade will keep on being a fundamental diplomatic focus, energy security and energy diplomacy will be given additional accentuation. Energy supply, energy shipment, and energy-saving cooperation will be fields where the diplomacy of china will move forward.

Lastly, Multilateral diplomacy will take on an even greater role in the future diplomacy of China. China will become more involved at the global level and in regional affairs at the United Nations. As the identity of China is more globally and regionally established, the current concept of multilateralism in the overall diplomatic strategy of china can be re-defined to realize national interests, address thorny issues, and provide governance in a complex world. More attempts will be created to improve regional integration between the SCO and East Asian. Finally, various needed diplomatic attempts may need to be further reinforced. China will keep on being cooperative, however, it will likewise be more active. All things considered; cultural diplomacy will be a new attribute of China’s diplomacy. Confucianism, an extremely cosmopolitan doctrine that promotes harmony and peace through human relations, will be an important component of cultural diplomacy, both to strengthen China’s soft power and to reduce the negative result of the China threat theory.

China has accumulated a wealth of experience over the past 70 years, understanding that China cannot develop without the world and that without China the world cannot prosper. China’s future and fate have been closely linked to the rest of the world. What is certain is that China will adhere to the path of peaceful development and that the people of China will join the people from all other countries in working to realize the lofty dream of a harmonious world.

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