The Américas and China – Alianza del Pacífico

Map of Alianza del Pacífico

La Alianza del Pacífico (Pacific Alliance)

The four countries of the Alianza del Pacífico formally established in June 2011 - México, Colombia, Chile and Perú - together account for 35pc of GDP in América Latina, 50pc of exports from the continent and together their population exceeds 200 million people which gives them a similar magnitude of scale to Brazil (located on the Atlantic side). It also means a new model of regional integration focusing on strengthening institutions to create a regionally integrated trade area, oriented towards the free movement of goods, capital, services and people towards the key markets in ASEAN countries and China. México, by far the largest of the four countries sees an opportunity to diversify its exports from the US to Asia. Currently México sends around 77pc of its exports to the US. But there are considerable opportunities for México's Agricultural-food, footwear and textile sectors to export to Asia. Costa Rica attends the Alianza del Pacífico as an observer, and it is highly possible that it will seek to become a full member in the foreseeable future. Panamá too has expressed interest in joining. In the last 15 years or so in América Latina, several trading blocs have been established from MERCOSUR to ALBA, but the Alianza del Pacífico is different, it is the first to see itself as a truely regional integration project.

Xi Jin Ping's习近平 First Visit to the Américas

On his way back from a trip to the Américas, the new Chinese President Xi Jin ping 习近平 will meet US President Barack Obama, in California on 7-8 June 2013. But first President Xi Jin Ping 习近平will spend a week from 31 May to 6 June visiting México and Costa Rica. It is no coincidence that the Alianza del Pacífico decision to seek further regional integration was formally agreed ahead of Xi Jin Ping's 习近平visit. This visit will provide México's President with the possibility to begin to re-balance the trade relationship with China. Interestingly Xi Jin Ping 习近平will also visit Costa Rica (another potential member of the Alianza del Pacífico) as well as Trinidad and Tobago. The visit to Trinidad and Tobago is significant as it will be the first visit of a President of China to the English-speaking Caribbean. Costa Rica is China 's second largest trading partner in Central America while China is the second largest trading partner of Costa Rica. In recent years, bilateral trade between the two countries has grown rapidly. In June 2007, China and Costa Rica established diplomatic relations. In November 2008, Chinese President Hu Jintao visited Costa Rica and announced the launch of China-Costa Rica free trade negotiations. The China-Costa Rica free trade agreement (FTA) came into force on 1 August 2011. 

Finally, when Xi Jin Ping 习近平 meets the US President, the meeting will not take place in Washington or on the Atlantic coast, instead the symbolism of the meeting taking place in California could not be clearer, it highlights the increasing importance of the Pacific over the Atlantic.

Nicaragua's proposed new canal between the Atlantic and the Pacific

The Nicaraguan government has recently stated publicly that it would like to construct a new canal with links between the Atlantic (Caribbean coast) and the Pacific Ocean. It has already started working with a Chinese company on a canal construction project. 

Map of the Proposed Nicaragua Canal Route

The idea is that the Nicaraguan canal would not be in competition with the Panamá canal, which is currently undergoing full expansion, instead, the Nicaraguan project would be focussed on receiving vessels up to 250,000 metric tons, the locks would be 460 meters big with a capacity to take boats with a depth greater than 20 meters. 

Detailed Map of possible routes for the Nicaragua Canal

The exact route of the Nicaragua canal is still to be determined but some experts believe that the project could be developed using the recommended routes of a multidisciplinary study presented in 2006 by the then President Enrique Bolaños. This study recommended the canal be built on the Caribbean coast of Nicaragua, near Bluefields Bay City, and then go along rivers within Nicaraguan territory and then through the Great Lake of Nicaragua, over a distance of 280km.

This is a mammoth project that will require considerable investment not only to build the Canal, but also in construction of port infrastructure, railway infrastructure and potentially airport runways too. The Nicaraguan government sees the canal as a pipeline for oil crossing from the Caribbean Sea to the Pacific across to the markets in Asia but it will be used for all trade.The Geo-Trade Blog will continue to follow closely developments on the new canal. 

Most interestingly, this mega project adds more evidence that world focus is increasingly moving away from the Atlantic and the focus in the 21st Century is on building the infrastructure and diplomatic ties with the Pacific.

New Trade Routes through the Arctic between Asia and Europe

 

Map of new shipping routes between Asia and Europe Source: The Economist

New Shipping routes between Asia and Europe 

The ice in the Artic is melting away at a record-breaking rate opening up new possibilities for shipping routes. Measurements taken in August 2012 found the levels of Arctic sea ice were at their lowest levels since satellites began measuring the ice in 1979. In 30 to 40 years, it is quite possible that there will not be no summer ice at all. This has led to an increased interest in shipping in the Arctic. New shipping routes opening up due to the melting ice could cut shipping times between Asian and European ports by up to a third. It is possible that the first commercial trade voyage could take place as early as summer 2013 led by China, and the potential value of goods travelling the new Arctic routes could become highly significant.

Xue Long 雪龙 expedition throught the Northern Sea Route 

China has been taking a strong interest in the region over the last decade, building a physical presence and using diplomacy and trade ties to engage in the region. The Chinese ship Xue Long (Snow Dragon) 雪龙 became the first ship to sail the Bering Sea after crushing the ice across the Arctic Ocean in August 2012. The icebreaker sailed all along the Northern Sea Route into the Barents Sea and returned by sailing a straight line from Iceland to the Bering Strait via the North Pole.

China has also set up a multidisciplinary research base with 18 researchers called the Yellow River Station on Svalbard the Norwegian archipelago (See map above) since 2004. The Xue Long 雪龙 voyage in summer 2012 was a culmination of China's research so far and a test of the Northern sea route to check out the feasibility of it becoming a new shipping route through the Artic that could link Asian and European ports. China has also recently commissioned a new 120m icebreaker ship to be built by a company in Finland to further its Arctic research. 

New Asian permanent observers on the Arctic Council in 2013 

The rules of the Arctic Council state that only countries with territories in the Arctic can become full members of the Artic Council. Nevertherless at the biennial meeting of the Council on 15 May 2012 in Sweden, 5 Asian countries: China, Japan, South Korea, Singapore, India and Italy became permanent observers. China, sees itself as a “near-Arctic state”, and had been seeking to become a permanent observer since 2006 (it had previously has its application rejected three times). But this time with Iceland's support and with the possibility of China and Iceland setting up a new Arctic forum, the members of the Arctic Council decided to widen the Council to include their Asian counterparts.

Interestingly, most of the new joiners were already observers on an ad hoc basis. The six new members will not have speaking or voting rights. But they will be able to influence decisions in the council’s six working groups with their expertise, research and potential funding of initiatives in the Arctic. China, for example, has led five marine expeditions in the Arctic since 1999, including the Xue Long 雪龙 voyage in summer 2012. Japan and South Korea may decide to conduct their research with their own icebreakers ships too. The new Asian observers will bring fresh new ideas to the Arctic region and advance the use of new faster trade routes between Asia and Europe over coming years. The Geo-Trade Blog will continue to follow developments in the Arctic.

Trade in the 21st century

Global Trade patterns in the 21st Century are changing

The trade bargains to be had

In an ideal world a big trade deal would be global. This is because gains such as dismantling trade barriers for all is much better than lowering them on a regional basis. But since the Doha round of multilateral trade talks collapsed in 2008, in its place have sprung up three possible regional deals to be done. The first two are of great significance for the future of global trade. The third is of lesser significance.

The Tran-Pacific Partnership (TPP) was launched in June 2005 between 11 Pacific countries, it includes the US, México, Canada, Chile, Perú, Singapore, Malaysia, Brunei, New Zealand and Australia. It is currently into its 16th round of negotiations and the approximate value of trade is around $US1.492bn. Japan and South Korea are not involved in these negotiations as yet but if they were to join the TPP countries would account for around 30pc of global trade in goods and services. Interestingly, the TPP has aspirations to do much more than cut tariffs. Its goal is to develop a far bigger joint rule book, from regulation to competition policy. One study estimated that a deal could raise the region's GDP by more than 1pc.

To compete with the TPP is another regional trade agreement the Regional Comprehensive Economic Partnership (RCEC) that has just been launched in 2012, it includes the 10 ASEAN countries plus China, Japan, India, South Korea, New Zealand and Australia. This deal represents an approximate value of trade around $US1,412bn even without the US' involvement. Hence there are two competing Pacific regional deals to be done: One with China plus Pacific countries and one between Américas countries (US + Canada, México etc) and Asian countries. The risk here is that both these deals could split the world into competing regional blocks where each country would need to decide who the more important business partner is: China or the US. But this could be avoided by making sure that both deals are easily knitted together and easily opened to others by basing the deal on a similar template, avoiding unnecessarily restrictive prescriptions and by creating a set of rules that both China and the US can embrace.

Finally, there is a third smaller agreement on the horizon that is being pushed hard by Europe, called the Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU. It was announced in February 2013 but it has not been formally launched. It's estimated value of trade would be less than half of the other two Pacific deals estimated at around $US618bn. It is not entirely clear what the purpose of this deal would be as the US is already engaged in the TPP negotiations. It would appear that Europe is slightly displaced in the 21st Century and is seeking to counter the Pacific regional deals with an Atlantic deal but this sounds rather like wanting to turn the clock back to the 20th century rather than looking forward to the realities of the 21st century.

Why free trade is good

Since the failure of the Doha Round in 2008 the WTO has struggled to rebuild interest in trade liberalisation. But, interestingly, global trade has grown faster than world output since 2010. One of the biggest problems is that decades of talks and treaties in the 20th century have exhausted many of the easy targets of trade liberalisation with the consequence that no new grand achievements are possible without resolution of some of the stickiest of trade issues. Furthermore, protectionism that has been largely held at bay, so far, throughout the economic crisis is beginning to become apparent in some places in the US and Europe. The video below offers a 1951 view of global trade and illustrates why we need free trade agreements: 

 

China and the other BRICS

But the fundamental strain on the multilateral system is the shifting economic balance of power. Emerging markets came into their own early in the Doha round that started in 2001, by rejecting the unappealing offers from the US and Europe. In fact the BRICS have become much more active over the last decade so much so that China's new President Xi Jin Ping习近平 announced that as part of his first foreign trips abroad he would be attending the fifth BRICS Summit on March 26-27 in Durban, South Africa after visiting Russia, Tanzania, and the Republic of Congo. This re-enforced the importance that China is attributing to its relationship with fellow BRIC countries, placing it on on a similar par to its strategic relationships with Russia and Africa.

The main outcome of the BRICS' Leader's Summit was to endorse plans to create a joint foreign exchange reserves pool. This proposal underscores frustrations among the emerging market economies at having to rely on the World Bank and the International Monetary Fund which are seen as reflecting the interests of the US and Europe. The UN Development Programme Report 2013 highlights this point and suggests that emerging economies need their own institutions to support their growth. The Report goes so far as to say that 20th century institutions do not meet the teutonic changes taking place in the so called "South" in the 21st century.

Conclusion

Freer trade and open markets is how the world has always grown and become richer and more developed from ancient times, therefore in the 21st century with the lions' share of growth of middle classes in the emerging world, it is a no brainer for the US and Europe to break down barriers to enhance trade with the emerging economies of the world. In fact the tables have turned and the US and Europe, for the first time in a while, now need the emerging economies as much as the emerging economies once depended on the US and Europe.

Grafene - the new wonder substance for the 21st Century

Grafene - winner of Nobel Prize in 2010

Graphene is one of the finest, most flexible, strongest materials with very high conductivity that exists. It won the Nobel Prize in 2010 and it looks set to revolutionize the future, from major changes in telecommunications, chip manufacturing  and pharmaceuticals. Watch the videos below to get some idea of what Graphene could mean for the 21st Century:

Chinese renminbi 中国人民币 – the new currency of the 21st Century

Chinese renminbi 中国人民币

The Internationalisaltion of the 中国人民币

Before the 2013 Spring Festival 春节, the People's Bank of China named the Singapore branch of the Industrial and Commercial Bank of China the clearing bank for yuan in Singapore. China sees Singapore as its regional partner for the extension of yuan internationalisation. The aim is that the emergence of new offshore centers will expand the existing regime instead of creating competing systems.

So far, Hong Kong has had a good eight-year head start and remains the dominant offshore center of the Chinese currency, handling around 80pc of offshore trading.

Once the clearing mechanism is set up in Singapore, there will be greater transparency in the movement of yuan funds. Singapore will be the gateway for China in the Southeast Asia, which provides a platform for Beijing to facilitate wider use of yuan in trading with Southeast Asian nations.

London and the Chinese renminbi 中国人民币

At present, a cross-border trade settlement scheme is driving liquidity into 人民币 offshore markets. The size of the offshore 人民币 liquidity pool a financial centre can generate, therefore, largely rests on bilateral trading volume. Compared with Hong Kong, which had $283.5bn of bilateral trade with mainland China in 2011, the UK’s trade with China was only worth $58.7bn. Further, the 人民币 is barely used as a trade settlement currency in UK-China trade. 

London is therefore limited by liquidity concerns, even though it hosts deposits of 人民币109bn. This issue will remain a challenge until the 人民币 becomes fully convertible as an international currency. The City could perhaps attract a significant volume of 人民币 resources through its advantage in global foreign exchange trading. But, for as long as the cross-border trade settlement scheme remains the major pillar in China’s 人民币 strategy, the City will not be a become a big player. 

A second stumbling block is the technical difficulty caused by the 人民币 clearing system. In the offshore 人民币 market, up until now only Hong Kong has been thoroughly equipped with both the 人民币 real-time gross settlement system, which allows swift, large fund transactions, and with a人民币 clearing bank, Bank of China (Hong Kong). 

London is lacking this critical 人民币 settlement system. It also doesn’t have a local人民币 clearing bank. Even if the City is in a good position to gear up global demand, the majority of those offshore 人民币 transactions still have to be conducted via Hong Kong. As a result, market practitioners see less benefit in concentrating their 人民币 businesses in London. Multinational corporations can simply shift 人民币 deals to Hong Kong branches (or perhaps to Singapore). In other words, until London has the requisite financial infrastructure, it will struggle to be more competitive. 

Thirdly, and perhaps of most concern, is the differing understanding of Beijing’s 人民币 internationalisation strategy in the Bank of England and the UK Treasury. China’s 人民币 strategy is a policy-driven process, with deep public sector involvement. The most evident example is the role of bilateral currency swap agreements. In Beijing’s view, a bilateral agreement between central banks has profound implications beyond the intrinsic value of the swap itself. It represents a will to jointly develop 人民币 offshore business at the level of officialdom.

However, the Bank of England sees limited value in establishing a line in currency swaps. The 人民币 is not yet fully convertible, and the size of its global offshore market is neither large or liquid. The Bank insists that the private sector should take the initiative. It therefore remains reluctant to get involved in the swap issue. The UK Treasury, on the other hand, is making great efforts to initiate policy dialogue with Beijing and Hong Kong. It wants to push the City towards the front tier of the 人民币 offshore business, and thereby boost the economy through a closer relationship between China and the UK.

While the development of the offshore 人民币 market remains contingent upon China’s financial reform process, whether the Bank of England and the UK Treasury can take collective action will ultimately determine the City’s future in the 人民币 internationalisation game. The Geo-Trade Blog will continue to follow closely new developments on the internationalisaltion of the Chinese renminbi  中国人民币.

China and US Shipping in the Inland Riverways in 21st Century

Yangtze River 长江, one of China's most important riverways

China has just expanded Yangtze River 长江 shipping capacity 

The shipping capacity of the Yangtze River 长江, China's longest river, has just been vastly expanded as a result of a decade-long effort to dredge and deepen the river. The river's main course whose shipping volume has just reached 1.78 billion tonnes in 2012,  four times the amount of 2003, has had an average annual growth rate of 10pc. 

Map of China's main riverways with Yangtze River 长江 below 
and Yellow River 黄河 above 

 

The revamped riverway now allows heavier ships to reach the upstream city of Chongqing 重庆, even during periods of dry weather. Furthermore, the depth of the river's 370-km Chongqing-Yibin stretch has been increased to 2.7 meters from the original 1.8 meters. Heavier ships will now be able to sail on the middle reaches of the river located between the cities of Yichang 宜昌 and Wuhan 武汉 in central China's Hubei Province. Heavy vessels will also be able to cruise on a downstream section of the river located in east China's Jiangsu Province.

But in the US...  

In New Orleans, the industrial Canal Lock connects two of America’s highest-tonnage waterways: the Mississippi River which handles more than 6,000 ocean vessels, 150,000 barges and 500m tonnes of cargo each year, as well as much of its grain, corn and soyabean production and the Gulf Intra-coastal Riverway, which runs from refinery-rich south-eastern Texas to Florida. Ships pass from one to the other via a lock that was built in 1921. Its replacement was authorised in 1956. Construction on the replacement was authorised in 1998, and then stalled by lawsuits. The most optimistic predictions of the Army Corps of Engineers, which maintains America’s inland riverways, see the new lock being completed in 2030.

Map of the inland Riverways in the Mississippi River Basin

As shipping to and from the US increases, so too will the use of these inland riverways, which are in most cases desperately in need of an upgrade.The American Society of Civil Engineers estimates that underinvestment in the US' inland waterways cost American businesses $33 billion in 2010, and that without significantly increased investment those costs could rise to $49 billion (in constant dollars) by 2020.

Geography and Demography are Destiny

Geographical view of the Américas

Geography is the backdrop of human history. The position of a country on a map is the first element that truely defines it, so much more than its government is able to. Geographical distortions can be as revealing of the long-range intentions of governments, for example, the melting of the Arctic, allows a glimpse of the possible future shipping routes between Asia and Europe and the geo-trade options that this could bring about.

Demography is destiny

The US is in the midst of a new demographic, cultural and political moment. Interestingly the extension of the US border southwards in the early 19th Century to incorporate newly won land from México into the US is now facing a seismic demographic change in the 21st century - in coming decades hispanos from the wider Américas will become more than a quarter of the US electorate. 

Hispanos currently represent 17pc of the US population, and hispanic population growth is set to turn the US into a country where fewer than half the population will be non-Hispanic whites within 20 years. This shift will create a new demographic reality in the US. This point was heavily illustrated in the messages of Obama's recent presidential inauguration speech. A Cuban-American became the first hispano to recite the official inaugural poem. Rev Luis León delivered an inaugural benediction with phrases spoken in Spanish. And Justice Sonia Sotomayor, the first hispanic on the Supreme Court, administered the oath of office to Vice President Joe Biden.

Geography and Economic Growth

The notion that Mexico offers only cheap labour no longer rings true in the 21st Century. México produces around 115,000 engineering students every year, almost three times as many as the US on an annual basis. Hence machine specialists are usually easier to find in Tijuana than in many big US cities. As are, accountants experienced in production economics and other highly skilled workers.

Today, in the 21st century, Tijuana is becoming to San Diego what Shenzhen is to Hong Kong. Travel between San Diego and Tijuana is around 20 minutes, with no passport required. Although a passport is needed to come back, but there are fast-track lanes for business people. Many employees commute across the border each day, good doctors are cheaper and easier to find in Tijuana, as are private schools. In some ways, the border feels more like the  borders between the members of the EU than a divide between two countries.

And it’s not just Tijuana. To the east, in Juárez, Dell computers are built by Foxconn, the company that manufactures more than 40pc of the world’s electronics (including Apple’s iPhone and iPad). To the south, in Querétaro, a factory builds the transmissions that General Motors installs in its Corvettes. The design of General Electric’s GEnx turbine jet engine and the production of interior elements of Boeing’s 787 Dreamliner also happen in México. In fact, manufactured goods are the country’s chief export, with private investment in this sector among the highest in the world.

Once again geography is destiny too, the shorter and more nimble a supply chain is, the better. Hence México is benefiting from its proximity to the US to feed the demand for just-in-time manufacturing. And the demographics of producing the right mix of highly-skilled workers have combined with it to create growth and prosperity in the 21st Century. 

Values in the 21st Century - Europe, US and China

围棋 based on encircling your opponent on the Board provides an insight into Chinese values

Max Weber and Karl Marx, the founders of modern sociology, underestimated the importance of the way people in power think, behave and persuade others of the supremacy of their values. 

The Soldier, the Merchant and the Sage

Throughout most of history three groups, the soldier, the merchant and the sage, have struggled to gain predominance over a fourth group, the greater populous. When one of these groups achieves unchallenged control over the others the result has culminated in an imbalance of values leading to war, economic disaster or revolution.

Interestingly, most societies are based on an informal alliance between two of these three groups. For example, early agrarian societies were often led by aristocrats with warrior and landowner values (soldiers) in close alliance with priests (sages), who provided a spiritual justification for their rule. The merchant was usually tolerated for bringing wealth through trade, but was also resented for being cleverer and often richer than traditional elites.

During the 17th century, the merchant's power increased and decreased always dependent on protection from the soldier group. But it was not until the late 17th century that merchants first began to emerge as the dominant group in Europe. 

 

During the 19th century the rise of “soft" merchant values really took off. The British used their growing empire as a force for promoting free trade and globalisation in the so called interests of all. Nevertheless their competitors regarded these imperial projects as less benign. By the mid-19th century, the world of merchants was becoming one of competing business cartels, increasingly backed by the might of Nation States. But no country adopted the values of the “warrior-hard merchant” with more vigour than Bismarckian Germany, where repression at home and brutal zero-sum commercial competition with other rising industrial powers became the order of the day. The first world war was largely a consequence of the limits of allowing  merchant values to become the dominant group of values.

After the first world war, the US emerged as the wealthiest nation and dominant exporter of capital. This led to the spread of a new form of merchant power across much of the developed world in the form of debt-fuelled consumer capitalism. Yet the massive financial and trade imbalances that resulted again brought the dominance of merchant values to an end with the  Depression in the early 1930s.

The second world war ultimately inspired a new alliance of “sagely technocrats” and “soft merchants”. They were determined to learn the lessons of the past, this partnership worked to create a new world order of prosperity and social harmony. The early fruit of the combination of these values was the Bretton Woods monetary system, which established the rules governing commercial relations between the developed industrial nations.

 

Interestingly, the collapse of the Bretton Woods System in 1971, heralded a new renaissance of the dominance of hard merchant values. This period was led by the Anglosphere and was characterised by the so-called Washington consensus and "Davos Man". It launched a renewed age of the dominance of merchant values without the sagely values to reign it in. This age still continues today. To understand the banking and sovereign-debt crisis that has taken hold since 2007/08, the Geo-Trade Blog believes the US and Europe are paying the price for succumbing to the values of merchants, who believe in the justice of the market, and prize the pursuit of short-term profit fuelled by credit and risk. 

 

But perhaps there is a much broader problem. Modern democratic governments in the US and Europe play a much larger role in the economy than any governments in the ancient Greek democracies could ever have imagined, therefore, this in turn makes political leaders a huge source of patronage, in the form of business contracts, social benefits, jobs and tax breaks.

What are China's中国 values ?

Perhaps a more interesting question in the 21st century is, which of these three groups, the soldier, the merchant and the sage will gain dominance in a China led world? China owes its re-emergence to its embrace of the contemporary US and European model of modernisation – to a large extent driven by hard merchant values that put the country on its current path more than three decades ago. But the question of values remains unanswered.

It is interesting to note that Chinese traditional values are being replaced by what researchers have identified as an emphasis on material values - making money has become a major concern for most Chinese people. The new material values are expressed by a desire to buy apartments, cars and fashionable clothes. Showing external signs of wealth has become a basic social requirement.

The Chinese do not play chess, a game with a rather adversarial objective to eliminate your opponent from the board. Instead the Chinese invented 围棋 where the object of the game is to encircle your opponent and gain control of a larger total area of the board (see above picture). To some extent, this provides an insight into the different ways of thinking in Europe and the US compared with China 中国. 

In traditional Chinese culture, righteousness, or justice are perceived to be an important value. If democracy can protect an individual's political rights, it would seem the Chinese are sceptical as to whether it can ensure that people use their power to do the right thing. In Chinese culture, the legality and morality of procedure as well as the result are both just as important. Here in lies the eternal challenge that all democracies are forced to grapple with - what if the laws and democratic processes do produce “immoral” results, for example, an extreme-right wing party is able to win power in democratic elections or what of wars fought by a country that are not supported by its citizens.

In conclusion, it would seem that there is some commonality of horizon but the ways of thinking and framing problems remain different. It is still too soon to tell what combination of the Soldier, Sage and Merchant values will emerge in China 中国 as dominant but the Geo-Trade blog will continue to follow closely the new thinking on values emanating from China 中国 in the 21st Century.

A new Regional Comprehensive Economic Partnership (RCEP) for the Asia Pacific Region

Map of the new Regional Comprehensive Economic Partnership

The Regional Comprehensive Economic Partnership

China is set to commence negotiations to create a 16-nation trade bloc, known as the Regional Comprehensive Economic Partnership (RCEP), which has recently been announced at the ASEAN summit in Phnom Penh that concluded in late November 2012. The RCEP will include the 10 members of the Association of Southeast Asian Nations (ASEAN) plus China, India, Japan, South Korea, Australia and New Zealand, and will have the effect of lowering trade barriers and custom duties across the region by the end of 2015. ASEAN includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

In the Asia-Pacific region, economic alliance negotiations have mostly so far been conducted bilaterally.The six ASEAN partner countries, including China, Japan, Australia, India, South Korea and New Zealand, already have respective Free Trade Agreements (FTA) with the ASEAN nations. But the envisioned extensive FTA would be created by expanding the existing frameworks. The countries will beging to hold first-round talks with the aim of concluding the negotiations at the end of 2015. Nevertheless, this is not to say that the new FTA will be easily achieved, there are many challenging tasks to be accomplished before it can produce effective results.

China will become No. 1

The OECD believes that within 50 years China and India will have become the major economic powers of the world. The organisation that brings together the 32 most industrialised countries of the world maintains that these two countries will account for almost half of the world's wealth in 2060.

In a report entitled A Look at 2060: An overview of long-term growth, the OECD concluded that the global economy will grow at a rate of 3pc over the next 50 years. The OECD estimates that the current economic crisis will fade and the world economy will grow with consistency, but with a different pattern to the current. The Report identifies that emerging countries will behave with more vigor and growth, but gradually their evolution will slow and will go on to match the average of the current OECD countries.

This uneven pace of economic growth will lead to a radical change in the world balance. The combined GDP of China and India will soon overtake the European economies and exceed that of all current members of the OECD in 2060. In 2060, China will have economic growth of 4pc and will increase its specific share of the global economy from 17pc to 28pc of the total.

The euro area which now accounts for 17pc of the global economy, according to OECD projections in 50 years will only account for 9pc of the total. Furthermore, the US whose economy currently represents 23pc of the world economy will reduce its weight to 17pc in 2060.

Australia's place in the Asia-Pacific Region

At the end of October 2012, Australia published a policy white paper that looks at its role of being a European country in the Asia-Pacific region.

Australia has European cultural origins and other alignments which sometimes hamper its image in the Asia Pacific Region. But nevertheless it relies increasingly on Asian immigration, especially from China and India, to ensure its economy competitiveness and to meet the annual residence quota within its population policy.

It has considerable security interests in its territory and maritime zones, but it only has a small population of 23 million. It is a US ally but it also has close economic and increasingly societal ties with China who has become its top trading partner in recent years.

Interestingly, Qantas, its national airline, has just re-positioned itself as a new regional hub-and-spoke network airline to service the Asia-Pacific region. It has abandoned its flights to Europe choosing instead to enter into a partnership agreement with Emirates flying its customers to the Dubai hub where they will be able to connect to other destinations outside the Asia-Pacific Region.

The Geo-Trade Blog will continue to follow closely how Australia continues to engage with the Asia-Pacific region and how it develops its strategic policy alignments with China and the US, particularly whether they will be governed by cultural affiliation with the US or by economic interests in the Asia Pacific Region.

The Pacific Century is getting underway

Map of the Asia Pacific Region

The US and the Pacific

Rarely has Rarotonga, the main city of the Cook Islands, seen so many important world leaders at its annual summit of the Pacific Islands Forum as at this year's event with the US Secretary of State in attendance. But this is indicative of the wider US' policy of the re-balancing of the US' strategic posture away from Europe and the Atlantic towards the Pacific. 

The competition for influence in the Pacific Islands recalls the days when they were more significant, both economically and strategically in the 19th Century when boats sailed readily from European countries in search of trading opportunities. In contrast, the 20th Century was very much an Atlantic Century dominated by the US and Europe.

Russia's Pacific Side

Russia has just inaugurated the longest cable bridge in the world, measuring 3,100 metres between Russky Island and Vladivostok. The bridge is quite spectacular, it is as tall as the Eiffel Tower and was built for the APEC Heads of State meeting. As such, the bridge is a symbol of Russia's plans to develop its Pacific side and strengthen its ties with its Pacific side, which in the words of Putin is "the most important geopolitical task" for the 21st century. 

Russia's new Vladivostok Bridge on its Pacific Coast

Europe is set to become the biggest loser

So far the impact of the shift in power from Europe to the Asia Pacific has been greatly underestimated by Europe. Interestingly, Asia has developed so fast that its population has not adjusted to their growth in prosperity by taking its foot off the throttle the way people have in Europe — opting for more leisure and higher levels of public spending. In Asia, people continue to work as hard as they did when they were much poorer.

For example, the average UK citizen works 1625 hours a year — a 35-hour week with four weeks’ holiday plus bank holidays. This compares with 2307 hours in Singapore and 2287 in Hong Kong. In economic terms, this means the Singaporean is working the equivalent of four months a year more than Europeans do. 

Add to that the top rate of income tax in Singapore is 20pc and in Hong Kong 15pc, and the net effect is that per capita GDP in Singapore is 30pc higher than in the UK, and in Hong Kong it is 50pc higher. The gap is widening as people in Asia show little sign of slackening off. Furthermore, life expectancy rates are also on the rise. 

Therefore, changes in Europe to compete with this blast of competition from Asia Pacific will have to be more fundamental and far-reaching than anything European politicians have yet dared suggest. The West has allowed its cost base to become bloated. Unless this is tackled, the future looks bleak, with many other countries going the way of Greece through stagnation to economic near-collapse with all the accompanying political implications that will test democracy.

Conclusion

The Geo-Trade Blog predicts that the next decade is going to see closer regional cooperation around the world – in América Latina, and in Asia too and maybe even in Africa. Basically if your neighbour’s house is on fire, then your house is on fire too, it makes sense to work together to prevent fires in the first place although the Geo-Trade Blog expects this to be a long and tortuous process.

Furthermore, the last few years have seen economics and politics pulling in opposite directions. The economics calls for more labour mobility; the politics argues for closed borders, particularly in Europe and the US. The economics calls for investment in the productive potential of the economy for 21st Century but  the politics is dominated by older voters in Europe and the US for whom the prime issue is the debt that society owes them for a lifetime of work. These two positions look very challenging to reconcile.