The Present and Future of the Indo-Pacific

At this moment in history, two nations are at the center of the Indo-Pacific dynamic, with many other nations pivoting around them: China and the United States. China is the world’s leading exporter. The United States is the world’s leading importer. This is the foundation of tension in the region.

China has depended on exports since about 1980 to grow its economy. Growing low-cost and high-profit exports created the capital needed for China to drive its economy. At the early stages of this process, Chinese products were welcomed by importers. As China’s export flow increased, competition within other countries increased, causing economic and social problems. As the leading importer, the United States felt this pressure, and for over a decade demanded that China allow greater imports from the United States and stop manipulating its currency to favor Chinese products.

China was still in the stage of capital formation and transitioning to a more advanced stage of production. The United States ultimately responded with the normal measures: imposing tariffs on Chinese products. China could not accommodate the U.S. but had to head off further tariffs.  China’s need for capital to stabilize an overheated economy made accommodation impossible.

China therefore shifted the tension from being an economic conflict to posing a military threat.  The United States was the dominant power in the Pacific. As an exporting powerhouse, China depends on shipping from ports on its east coast. Its products must pass unmolested through the South China Sea, and then through the choke points between the island nations that ring the Sea of Japan. If the U.S. Navy cut off those ports with mines, submarines or missiles -or if it blocked the relatively narrow choke points leading into the Pacific, or closed the straits of Malacca through which Beijing receives most of its energy imports – China would not be able to export enough to sustain its economy and would thus face an existential crisis.

The U.S. was increasingly alarmed by the growing Chinese exports. China was increasingly concerned that U.S. alarm would turn into military action. Unable to cede on economics, the Chinese sought to force the U.S. out of its area by attempting to persuade the U.S. that China had the military capability of undermining its naval dominance.

Part of China’s problem is that many of the nations that surround it, stretching from near the Aleutians to the Indian Ocean, are either formally allied with the United States or have an informal relationship. Working with the United States and against China is Japan, South Korea, Taiwan, the Philippines, Indonesia, Vietnam, Singapore, Australia and India. The formation of the Quad – the United States, India, Australia and Japan – has created a powerful force to block China. China, on the other hand, has good relationships with Cambodia and Laos, and a formal relationship with Pakistan.

The future of the Indo-Pacific region rests in large part in the nations in this structure. China will remain a very significant part of the future, but cannot dominate it. The limits to Chinese economic growth has for an extended period been reached. Its military power is limited by geography. Leadership of this region will shift away from China. It will always be present, but it will have to share power.

Among these nations is a single, inherently powerful country: Japan. Japan is the world’s third largest economy, with a per capita GDP much higher than that of China. Japan has a nearly homogenous and highly disciplined work force and an advanced technological basis. It also has a good relationship with the United States.

If China loses its dynamism, it is merely a country divided ethnically and socially, with a vast impoverished hinterland. Japan has none of these weaknesses. At this point, Japan has not militarized to the extent it could. With U.S. security guarantees, it never had to. But as the U.S. limits its exposure, and as China remains inward-looking and somewhat diminished, it is Japan that will emerge as the dominant power, not on the Asian mainland but in the vital waters to the east of China. This will make many countries such as South Korea and the Philippines uneasy, given their historical memory of Japanese behavior. But the facts remain that Japan is the largest economy if China slips, and the largest potential military power if it chooses the role, which it will have to.

India ought to be Japan’s economic and political partner in the Indian Ocean, but it has serious problems. The most important are the tensions between various national groups that constitute it. Disagreements and rivalries have limited the ability of India to emulate China as many expected it to, and has limited its growth as a military power. Japan will certainly partner with India, but it will not be a partnership of equals.

Perhaps the most important development will be the economic surge of a region in which Japan will be a dominant force. China sucked up capital.  Japan has surplus capital plus the ability to generate foreign capital. It will be in Japan’s interest to build this region’s economy. Nations like the Philippines and Indonesia are also promising future actors in the region. Neither of them has ever fully realized its potential.

It is normal that nations shift position. The U.S. will shift its focus. China will struggle with economic problems and Japan will try its turn once more at making history.

George Friedman is Founder and Chairman of Geopolitical Futures.