China is seeking to capitalise on Asia’s changing geopolitical landscape to forge a trading bloc that’s already on the road to dominating the global economy, according to economists.
Leader Xi Jinping’s reassertion last month of China’s commitment to a free-trade pact with Japan and South Korea has the potential to create an economic powerhouse from a partnership that already accounts for a quarter of the world’s combined imports and exports. They’re laying aside deep historical and political grudges to ensure growth as the US’s retreat from multilateralism threatens to pull away a lynchpin of economic stability.

Deal That Makes Sense

A deal makes sense “given how China has grown significantly in the past 15 years to being a $13 trillion economy,” said Alex Wolf, emerging markets economist at Aberdeen Standard Investments in Hong Kong. “The Asian supply chain has developed in a sophisticated way.”
The riches to be had from the friction-less exchange of goods and services between the three are mind-boggling. According to an article written by former Federal Reserve and Organisation of Economic Cooperation and Development economist Michael Ivanovitch, they already run a combined surplus of $400 billion.
That figure is widely expected to surge, driven by growing investment among all three. In particular, a 22 percent surge in Japanese exports to China in the first half of this year and a 13 percent growth in direct investment indicates growing confidence in Chinese markets among Japan’s businesses, he wrote.

Regional ties are tightening in part thanks to China’s “One Belt, One Road” initiative, which has seen Chinese companies increase transport links and investment into Asia, Africa and Europe. A more important engine of inter-connectivity, however, has been a perceived waning of US influence in the region.
Xi’s reiteration of his support for a free trade zone — first proposed in 2012 — came after Asian leaders decided they’d press on with with a broader regional pact after the US pulled out of the Trans Pacific Partnership (TPP). It also followed an announcement in May that China, Japan and South Korea would resist any form of trade protectionism, a direct challenge to President Donald Trump’s policy of economic nationalism that has seen the US pull out of many other multilateral agreements, including the Paris Climate Accord.

China Filling Void Left by US

Experts say China is taking advantage of the US’s retreat; Asian nations once keen to keep the giant at arm’s length are now clamouring to sit at the table of what may soon be last remaining superpower in the region.
“When Prime Minister Shinzo Abe came to the US to speak with then President Obama about the strength of US involvement in the TPP, it was vitally important that the US be involved to ‘counterbalance’ China’s domination of trade,” said Professor Giacomo Santangelo, lecturer in economics at Fordham University in New York.
“It’s very interesting that China, South Korea and Japan are now joining forces as if Asian countries are trying to counteract the US — they’ve decided that since they can’t beat China they’re going to join it.”

Tensions Remain

While historical distrust between the three nations remains unresolved, investment between them has taken priority this year. The rising threat of military conflict on the Korean peninsula may have even provided an impetus to forge closer ties.
In the spirit of a stronger regional economy, each side has made compromises. China has relaxed economic sanctions imposed on South Korea for its hosting of a new generation of US missiles. And it’s opened the door to increased Japanese investment even though the landslide re-election of Abe in October gave greater control to a man Beijing admonishes for supporting remilitarisation. Together, all three have also worked to ensure warming trade ties have not been hurt by ongoing maritime territorial disputes and rows over cultural sleights.
“Those tensions are still underlying but the fact remains that their economies are naturally intertwined as trading partners,” said Wolf. “They’ve managed to take a secular view of their economic partnership that’s not related or burdened by the other political issues that they have with each other.”

Huge Economical Potential

Whether the new geopolitical alignment works or not is still up for debate, according to Santangelo. He’s doubtful, for example, that a TPP without the US can act as an effective bulwark against the US’ domination of world trade.
“I’m not sure what perceived benefit they’re going to get” out of continuing with the pact, he said.
But he concedes the potential is there. Meaningful change for China will not happen until it successfully transforms from a manufacturing-based economy to one built on consumption. While that won’t happen soon in an economy whose labour force is one-third rooted in agriculture, Santangelo says the day will come when that will change.
“And when it does, it will be huge,” he said. “At the moment, it’s the world’s second biggest economy but it’s very inefficient. Just imagine what it’s going to be like when it stops being inefficient.”