2022: A geopolitical reckoning
2022 was a year of dramatic events and geopolitical shifts accelerated by the world’s decision to move on from the pandemic. For us in India it opened up new opportunities and challenges, particularly due to the changes in Asia. The paradox is that while geopolitical risk is rising in a world adrift between orders, so are the options for India. The only option that is not available is business as usual in a changing environment.
In terms of the international system as a whole, we are between orders, having transitioned from a bipolar Cold War world to a post-Cold War unipolar order dominated by the sole superpower, the USA, to today’s world adrift between orders. Economically, this is a multipolar world with three economic superpowers: the United States of America, China, and the European Union.
Militarily it is still unipolar. It is only the USA that can project power across the world where she wants and when she wants. China may have more warships than the USA, but American warships have twice as much tonnage. China is still a regional power in military terms, which is no comfort to those of us who are in what she thinks is her region. And politically, the world seems completely confused. There is thus a disconnect between economic multipolarity and the concentration of military power, a disconnect that in past history was settled by conflict and war. The world is in an anomalous position after globalization.
Some governments and scholars like to say that this is a multipolar world, for it flatters their ego to think they are one of the present or future poles. But in reality, as the war in Ukraine shows, countries other than the USA do not determine political and military outcomes outside their regions. They may count globally in economic terms but otherwise remain regional powers. While the ability to determine outcomes is limited to a few, in a globalized world the impact is widespread and affects all.
Today geopolitical risk is elevated because globalization and technology have made the world a single battlespace. That world is characterized by great power rivalry, where, unlike earlier decades after the Cold War, politics is now in command of economics. In England, markets overthrew a government in October, but that was the exception proving the rule that politics is now in command. In China, Xi Jinping’s carefully choreographed 20th Party Congress led to Chinese stocks losing trillions of dollars in value globally in one day, on 24 October 2022. There the government overthrew the markets. US restrictions on chip and semiconductor trade and transfers to China are politically driven too. Politics is in command where it matters. This heightens geopolitical risk for the entire international system. It also creates new crises which are can be opportunities for India.
Take the war in Ukraine as an example. If Russia had invaded Ukraine during the Cold War or earlier, it would have been a local political issue, a fight among Europeans about the European order. But in a globalized world it has significant second order political and economic effects on the rest of the world – a global energy crisis, a further spike in food prices, inflation, and so on. Russia’s invasion has enhanced western unity as demonstrated in the sanctions. Those same sanctions are tipping the West into a recession.
Western sanctions on Russia show that politics, not economics, is in command, and that the West is willing to pay an economic price for the political goal of isolating and degrading Russia. The global South pays a major price without having had a say in the sanctions. As for Europe itself, the prognosis must be a Europe preoccupied with its own order for some time to come. Whoever wins this war, or if neither side does, Europe will be unstable, with a powerful revisionist loser unsettling it for years to come, limiting the EU’s role outside NATO’s remit.
But the war in Ukraine has more long-term consequences: accelerating Russia’s long secular decline as a power, and strengthening the Russia-China alliance, both of which will affect the course of events in continental Eurasia. There are, however, limits to the effectiveness of this alliance of animus against the West, as China’s scrupulous observance of western sanctions on Russia shows. This is an alliance in which neither can do much for the other’s primary concerns: Taiwan, Asian predominance, reducing its dependence on the US for China; the Ukraine and European order for Russia, and their internal stress for both. Besides this, Russia’s failure to achieve significant gains and also the performance of Russia’s conscript army, are bad news for China, as is Russia’s weakening. For India, Russia’s ability to deliver secure military platforms to India has taken a hit, especially in sectors that require chips and electronics which Russia will now have to source from China. We need to make contingency plans accordingly.
The international order is fraying in critical respects. Russia’s war in Ukraine has highlighted the fraying of the international non-proliferation regime. There is now a real risk of structural financial de-globalization. We may also be witnessing the end of multilateralism as we knew it post-WWII. Organizations composed of member states like the United Nations, the World Health Organization, among others, work when the member states want them to work. Great power rivalry means they cannot agree to make them work, as we witnessed in the abject international response to Covid 19.
But what really matters for us in India is Asia, closer to home. What will determine the course of events here depends, to a great extent, on what happens between the USA and China, on China’s own trajectory, and on the reordering of Asia that is underway both economically and politically.
Today, China is more dependent on the USA than the USA is on China in important and strategically significant areas. China is tied in to the US dollar system (and has yet to succeed in moving away from US Treasuries to hold her reserves though she has been trying to since 2008). China also seeks to reduce her technological dependence on the USA and the West. Neither can be solved in a matter of days or months or even in a decade. Hence the difference in tone and actions that both sides are taking, with the initiative resting with the USA. The recent 20th Party Congress confirms that the party-state in China has concluded without doubt that the US is determined to prevent China from achieving her ‘rejuvenation.’ China will do all it can to change this situation, thereby promising continued, but managed, tension and strategic rivalry in the China-USA relationship.
Recently there has been much talk of war or conflict between the USA and China, with Taiwan being suggested as the proximate cause. No one can be certain of the outcome of a military move on Taiwan, hence the uneasy peace at present. China used the Pelosi visit in August 2022 to display her military capacity to blockade Taiwan, when unopposed. I saw no urgency in Xi’s statements on Taiwan at the 20th Party Congress. It is in the interest of militaries and some politicians on both sides to create a sense of crisis to strengthen demand for their leadership, to rally the troops and friends, and to divert attention from pressing, maybe insoluble, internal issues. If at all there are attempts to change the status quo around Taiwan, scenarios short of a full invasion or war such as a boycott or blockade, pressure on offshore islands, or economic sanctions against the Taiwanese in China, seem more likely.
Logically, direct conflict seems not to serve the interest of either side. However, states and leaders are not the pure rational actors beloved of economists and IR theorists. If they were, we should be able to predict their future actions. While nothing can be ruled out, I believe the probability of direct conflict between the great powers is not that high. This belief does not preclude mistakes, proxy wars, great power involvement in civil and other conflicts, and increasing friction in the international system.
China’s own internal trajectory seems to be at an inflection point. Prediction is made more difficult by her history of great successes and failures, ranging from the Great Leap Forward to the one-child policy, to ‘zero covid’, to ‘wolf warrior diplomacy’ and foreign policy assertiveness since 2008, to some of her commitments under the Belt and Road Initiative. As a result of forty years of reform and an open door policy, China finds herself powerful but dependent on the world for the first time in her history. She appears to be entering an adjustment period after her growth spurt. Other east Asian miracle economies – Japan, Korea, Taiwan – also went through a period of economic adjustment after approximately thirty years of very rapid growth. In each case the adjustment was more difficult than expected.
In all the other miracle economies the economic adjustment provoked a reworking of the social and political contract. It brought democracy to Taiwan and Korea, which seems unlikely in China. But we see before our eyes a reworking of China’s political and social order under Xi Jinping, of building a hard security state as one means to keep the Chinese Communist Party (CCP) in power and avoid the fate of the Communist Party of the Soviet Union (CPSU). China stopped publishing data on ‘mass incidents’ (protests involving more than 100 people) when they crossed 200,000 a year in 2013. China today spends more on internal security than on the military and national defence and has built an unprecedented surveillance state, further tightened during the pandemic, to give early warning and increase social control. Her surveillance technologies and data integration tools have also been exported to at least 80 countries as of 2019.
The 20th Party Congress in October reinforced the securitization of policy across the board. The combination of pushback by the USA and other powers to China’s rise, and the internal course that China is following, suggests the prospect of a powerful but frustrated China – hard, brittle and touchy. Longer term drivers of policy like her demography, an economy reverting to mean, and internal stresses, reinforce this conclusion. We are also likely to see Chinese foreign policy driven increasingly by domestic compulsions. It is hard to explain ‘wolf warrior diplomacy’ in any other way.
In 2022, there was also an increased risk of structural financial deglobalization. The expropriation of Russian reserves along with Russia unable to use Swift to clear payments internationally, surging inflation and debt and currency depreciation in developing countries and their debt crisis, and a real prospect of recession in the West, resulted in stressed economies everywhere. It would be natural for countries to seek to build alternate payment systems now that they have witnessed the use of the dollar being restricted for political reasons.
We could also see more barriers to cross-border capital flows. But there is no alternative in sight to the dollar as a store of value in the foreseeable future. In Asia, the Regional Comprehensive Economic Partnership (RCEP), the Belt and Road Initiative (BRI), and institutions like the Asian Infrastructure and Investment Bank (AIIB), are creating a new economic order, largely centred on China. The alternatives – Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and Indo-Pacific Economic Forum (IPEF) – are weak and incoherent. Most of the world today seeks alternatives and choices rather than being forced to choose one pole or another, economically or politically, or to be boxed into fragmented local orders.
For India-China relations, which have steadily deteriorated since 2008, the prospect ahead is not reassuring. The border is, and will likely remain live, since China now frames it as a sovereignty issue that is non-negotiable, only manageable, but neither country has engaged politically to do so since the sanguinary clashes in 2020. Modi and Xi, who met eighteen times between 2014 and 2019, have not met or spoken since the border clashes in mid-2020, except to shake hands on the sidelines at Bali G-20 in November. Both countries are building strength and infrastructure on the border to create a new military equilibrium, and this promises an expensive escalatory spiral.
But at the same time India and China are structurally linked economically. India-China trade set records in 2021, reaching $125.6 billion, and is likely do so again in 2022. China is India’s biggest source of imports and third largest export market. Today China is increasingly active in the subcontinent and this is a source of friction since it often affects India’s security. Even if India and China were to come to an understanding, which appears unlikely, the present situation would require a clear understanding among all those involved of the red lines that affect India’s core interests. India-China relations, our greatest strategic challenge today, are at an impasse with little sign of a lessening of risk or of an improvement in the predictability of the relationship in 2023.
Fespite this listing of heightened risks, the present situation does offer opportunities for a country like India. The geopolitical churn and Sino-USA contention itself creates balancing opportunities, as the Cold War did for non-alignment, or the Ukraine war did with Russian oil for India. There is a broad geopolitical opportunity for India. An immediate beneficiary of worsening India-China tension has been India’s relationship with the USA. India and America today do many of the things that allies do in defence, security and intelligence, all without a formal alliance commitment to each other’s defence. For India, the US is not just a balancer to China, though that adds weight to the growing congruence of views and approaches to politics and security in maritime Asia reflected in the Quad. For India the USA is an essential partner in the transformation of India and if we want to deal successfully with a world in transition.
Does that mean that we should be allies? Not in the sense of defending each other – we must be able to look after ourselves 75 years after independence. Besides, as a global power, the interests of the USA are not identical with those of India. Where they are similar, as in the maritime Indo-Pacific, and by and large, relating to China, we work very closely together. The China-USA rivalry has changed the nature of American interest in India. It has also enhanced the balancing potential for others now that this is the main contradiction in today’s geopolitics. The USA is a key element of the balance everywhere. No other power is.
The other opportunity that the present situation throws open for India is within the subcontinent. Economically, if we were to use the crisis to do what we find difficult in normal times like enhancing regional connectivity and cooperation, we would have found opportunity in crisis. Connectivity is key: rail, road, power, digital and other forms. Payment systems could be aligned. Energy, particularly green energy, offers another area with potential. We have the successful example of what we have done with Bangladesh in the last fifteen years. In today’s situation, when politics is in command of economics, we in South Asian need to work together not just on our economic links but also to protect ourselves from transnational and other security threats, thereby creating a stable island of growth and develop-ment in the subcontinent.
For instance, if we wish to secure the seas
around us which are essential to our livelihoods, trade, and exports, we should
be stepping up what India and Sri Lanka started in 2011 – working with partners
in the Indian Ocean Region (IOR) to improve maritime domain awareness, safety,
to humanitarian disasters, and ensuring the security of our sea lanes. The same is true of other aspects of human security such as food and energy, all of which will not resolve if Asian politics is polarized. Tense India-China relations have led to increased Indian attention to smaller neighbours. This is where one can expect much greater initiative from India.
At the same time, India will have to adjust to new economic realities. We need an external economic policy to cope with the reorganization of the Asian and world economy. For India to walk away from the Regional Comprehensive Economic Partnership (RCEP), in the economically most dynamic region in the world, and stay away from the trade leg of the Indo-Pacific Economic Forum (IPEF), makes little strategic sense.
A new economic order is forming around us with the globalized economy breaking up into subregional trading blocs like the North American Free Trade Agreement (NAFTA), Trans-Pacific Partnership (TPP) and RCEP, and with new standards being imposed by the USA and others. The USA had devised and managed a global free trade and open investment system of which India and China were the greatest beneficiaries in the two decades before the 2008 global economic and financial crisis. Today, however, the liberal economic and free trade consensus is broken in the USA and the West. The Brexit vote, the US withdrawal from the Trans-Pacific Policy (TPP), and Trump’s positions, all reflect fear and a lack of confidence. Our decision to stay away from RCEP suggests that we share that fear of change and the future.
India has a chance to compete with China economically, even as a global manufacturing centre, but that would require integrating the Indian economy into global supply chains. If we find protectionism and international trade too difficult to cope with, we should look at making IPEF into an Organization for Economic Cooperation and Development (OECD) equivalent in Asia, setting standards and creating an enabling environment for our economic transformation. For the last five years India has raised customs duties, raising average effective tariff rates, already among the highest in the region, from 12 per cent to almost 18 per cent, well above Southeast Asian and East Asian levels. This deters the investors India is trying to attract away from China.
We are cutting ourselves off from the world rather than integrating with it. This contradicts the stated goals of the Production Linked Incentive Scheme (PLI) to promote exports and manufacturing in India. It also makes it harder to integrate India into global value chains. Over the last five years global manufacturing value chains have been shortening as both China and the USA attempt to onshore production. Global value chains in services, on the other hand, have been lengthening, thus opening up an opportunity for India.
All in all, despite considerable external risk in the international system, particularly in our relationship with China, there is an opportunity for India in this time of change in a world adrift where politics is in command. India’s essential choices are domestic, not foreign. If we can deal with our domestic challenges, we can deal with the external environment. In the present situation, the exercise of agency requires acceptance of risk (and some inconsistency). Sometimes the biggest risk is to try to avoid all risk.