As tensions rise, Asean countries will walk a fine line

opinion November 02, 2012 00:00

By Thanong Khanthong

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Yesterday, along with other panellists, I was invited by the Foreign Ministry to speak on "The Next Step for Thailand and the Region After the US Election". Here is a summary of my 20-minute presentation:

President Barack Obama is likely to win the election on November 6. According to Citi Research, a unit of Citibank, Obama now has 281 electoral college votes, compared to 257 for Mitt Romney. Winning the election requires the magical figure of 270 electoral-college votes. Still, Romney cannot be counted out. It ain’t over ’til it’s over.

Apart from domestic issues and the challenges facing the US economy, Obama and Romney focused their debate on the Middle East and China, sidestepping the euro-zone crisis. There are three hot spots in the world. First, Syria is engaging in sporadic clashes with Turkey. If Turkey were to go to war against Syria, Nato would be obliged to assist Turkey. 
Second, Israel and Iran are facing off in escalating tensions. If the two fight each other, the US will come to Israel’s side. Both Romney and Obama, to a lesser extent, are committed to backing Israel in any such conflict. 
Third, China has been at odds with Japan over territorial disputes in the East China Sea. Japan has a security treaty with the US. In the event of war with China, the US would come to Japan’s aid. This is not to mention the disputes in the South China Sea, where Vietnam, the Philippines and Singapore (with their strong alliances with the US) are pitted against China.
During the final debate with Romney, on foreign policy, Obama cited China’s rise as a reason for the US to make a comeback in this region, and he also sent a message to China that the US remains a Pacific power. Both Romney and Obama bashed China over trade disputes, the yuan management in a fixed exchange rate mechanism and the US’s determination to take on China more directly.
Against this political rhetoric, a currency war has already occurred between the US and China via the US Federal Reserve’s quantitative easing (QE), or money printing, which is flooding the world with massive liquidity. When a country adopts QE, it means its financial system is bankrupt. QE will weaken the US dollar and lead to further appreciation of the yuan and other emerging market currencies, including the baht and the currencies of the BRICS countries. This will hurt their exports and create economic and financial bubbles. The Bank of Japan is also launching QE to further weaken the yen and add to global liquidity in an era of monetary inflation
Shortly after the Obama-Romney debate, the Hong Kong dollar came under attack. Yesterday it was attacked for the seventh time in two weeks, with speculators trying to force the Hong Kong Monetary Authority to adjust the narrow trading band within the currency board. Hong Kong is a target because it is a window to China. It is not a surprise that the Singapore dollar is untouched.
The US’s “containment” of China is happening in earnest, with South Korea, Japan, Vietnam, the Philippines, Singapore and Australia as “allies”. The US is moving aircraft carriers as well as other military hardware to this part of the world. Thailand and Myanmar are being drawn into this game of superpower rivalries. There is no consensus yet as to how Thailand should conduct its foreign policy and international relations amid these geopolitical tensions.
The US and China both want influence over Southeast Asia. China is promoting the yuan as an international currency and challenging the US dollar’s supremacy. The Asean region, which is now a US-dollar bloc, will be weighing whether it should move to become part of a yuan bloc, because QE will destroy its wealth. The US will not allow China to float its yuan outright to challenge the dollar because that would put an end to the financing of its military empire – at a cost of US$1.4 trillion a year. The US is running a deficit of $1.2 trillion this year. This means that military spending comes 100 per cent from borrowing, made possible by the US dollar as the international reserve currency of choice.
After the change of guard in China on November 8, the new leadership is likely to focus on boosting domestic consumption because the euro zone is bankrupt and US consumption is losing steam. It will try to build up a new regional order based on the Shanghai Cooperation Organisation (SCO), whose members include Russia, India, Pakistan, Iran and the former Soviet states.
Asean is always in China’s mind for incorporation into the SCO, which will rise as an antithesis to the current world order under the auspices of the US, UK, UN, World Bank, IMF and other international agencies. If geopolitcal tensions rise further, China is likely to sell off its vast holdings of US Treasuries and float the yuan outright to create a new financial order.
Amid this impending seismic change, Thailand and the Asean countries will have to weigh carefully how they should react. They may have to walk a delicate line between the rival superpowers.