Change is a notable feature of our time. Indeed, we expect that the world we live in will soon be significantly different, as will our lives and the lives of the communities we belong to. Because of technology, because of environmental degradation and, last but not least, because of the influence of rising powers on the world economy and the rules-based international order, the adaptation required at all levels is of unprecedented magnitude. The vastness of the task can be translated into effective decision-making by organizations of various sorts, from states to companies, only if all of them engage change, make sense of phenomena that spawn innovation, and anticipate the often-multidimensional impact of those phenomena. In-depth understanding of relevant global issues and knowledge-based foresight are key to steering change according to one’s worldview, mission and broader, long-term aims.

East Asia is an impressive source of change and one that offers many insights into the nature and potential reverberations of the innovation the present world harbours. Reckoning with the various drivers of change the region presents, for Europe and the US especially, involves finally facing the all-round implications of the “power shift” from West to East that entered common parlance from the start of the Great Recession, in 2007-2008.^[1]

As the contributors to this study convey, the drivers they have singled out mostly originate from China’s policies and in particular from its regional projection. Acknowledging this fact, however, should by no means lead us to draw a simplistic picture of the challenges they engender and possible responses. Various arguments, rather, suggest that it is sensible to do the opposite, appreciating the complications that lie ahead. The reasons to adopt a thoughtful posture are numerous. In terms of linearity, it is not safe to bet on steady change, especially since Beijing has shown considerable ability to adapt in order to seize new opportunities and downplay frictions caused by external constraints. Hence, we may expect fast-paced change that, at times, morphs into apparent continuity that also requires appropriate analysis. Secondly, each driver has both direct and indirect consequences, the latter being possibly the more interesting, albeit also more difficult to track down. The reason why it is indeed stimulating to focus on indirect consequences is that our attention is then concentrated on the ability of countries other than China, in Asia and beyond, to steer processes in which they turn out to be no lesser players. Finally, the domains and levels impacted by the different drivers are intertwined to such an extent that we may experience configurations of change so multifaceted that they are difficult to grasp and, for this very reason, extremely difficult to respond to in an effective manner.

Shaun Breslin’s opening reflections on Chinese Outward Foreign Direct Investments (COFDI), by singling out evolving state–market relations as a first key driver of global change, offer an interesting opportunity to get a sense of the scale and nature of the overall challenge that organizations of all sorts presently face. Beijing’s liberalizing reforms, which allowed and thus prompted^[2] Chinese firms to invest abroad, may well have the paradoxical effect of making Western economies less liberal – that is, less open and more subject to state policies devised to strengthen and protect national companies. This potential unintended development has sparked a heated debate in the West: some commentators hold that US–China competition has in fact already triggered “the retreat of market economics”,^[3] a development whose significance “goes well beyond economics. The international embrace of free markets and globalization in the 1990s went hand in hand with declining geopolitical tension. […] Now – Gideon Rachman maintains – the resurgence of geopolitical rivalry is driving the new fashion for state intervention in the economy”.^[4]

The revival of “old ideas” such as economic self-reliance and “strategic” investments – the argument goes – may easily spur a vicious circle that threatens international stability, while restricting the autonomy of the state and breeding problems in economic relations among Western countries themselves. Given this expected outcome, those who wish to keep the world economic system open and interconnected enough to foster viable international relations will reach the same conclusion: in order to respond in a structured fashion, decision-makers should recognize the all-round challenge that COFDI pose to countries or groupings and resort to improved, up- to-date knowledge on China. The fundamental aim behind such a burdensome undertaking would be to preserve one’s own right to live in the economic system deemed best suited to thrive.^[5]

The trend, however, points in a different direction^[6] and Breslin elucidates why. Differentiating among COFDI is indeed meaningless if one assumes that, in the end, the rationale behind the decisions of any Chinese economic actor is the strengthening of China vis-à-vis the other members of the international community. The shared aim ascribed to the actions of Chinese public and private players, in this case, is a redefinition of the world hierarchy of power that will favour Beijing. If “the logic of an arms race is setting in”^[7] in economic relations involving Chinese players and Western countries, it is essentially because this assumption is widespread. Such an attitude is not unexpected since the security dilemma, which now extends to the economic domain, entails an inescapable precautionary logic that does not leave much room for manoeuvre: mutual ascription of hostile attitudes breeds rivalry and is an intrinsically escalating posture.^[8] After all, it is strategic distrust that turns out to be a formidable driver of global change in the present international system.^[9] This is a very interesting point that, once more and from a different angle, sheds light on the breadth of present challenges and the latitude of the response they require. In terms of the response, both current and future, shedding light on the key role that distrust plays in these economic and political dynamics is crucial. Besides changing Western economies in unintended ways and making world politics more conflict-prone, distrust of Beijing’s long-term aims may in fact explain the US’s and EU’s somewhat elusive China policies, which appear to be so frustrating for observers. A slower-than-advisable adjustment to the new reality of a “risen China”^[10] may, of course, be one reason behind the apparently uncertain stand, albeit not a reassuring one. The lack of consistency that many complain about, however, may be more convincingly explained by pointing to distrust.

Looking at Europe, in 2019 the EU defined China as “a systemic rival promoting alternative models of governance”, as well as a partner with whom to cooperate or negotiate, and an economic competitor.^[11] The Biden administration has suggested, in words and deeds, that it will pursue a similar articulated approach for the US. A China policy, whether European or American, would hence need to knit these three different postures together within a coherent discourse and set of policies, so that rivalry, competition and cooperation merge and jointly contribute to make respective relations with China viable and conducive to a working world order. The case of COFDI, however, shows that, because of mounting rivalry, the logic of the security dilemma currently influences, through securitization, the domains of competition and cooperation. Striking a sustainable balance between the three rationales is in fact impossible because, in a security-dilemma-like situation, the obligation of the state to protect its citizens is an absolute priority, leading rivalry to win out over competition and cooperation. In other words, it leads to a situation in which competition and cooperation are built on distrust, just like rivalry. If this argument is sound, any China policy is doomed to remain elusive for structural reasons.^[12]

Acknowledging the widespread uneasiness about such unresolved solutions to the “China policy issue”, some commentators have pointed out that the only viable alternative is to draw a few red lines and let them guide the specific decisions to be made day by day.^[13] This may be a practical way to set the course, but given the latitude that decision-makers would enjoy, decisions would still need to be based on up-to-date, fact-driven knowledge of China in order to prevent distrust from impeding the articulation of appropriate policies. The alternative is to let distrust become the key driver of much of the change we experience in the near future. Given this conclusion, it is not surprising that one relevant Asian player, Japan, is now strongly committed to relaunching the reflection on trust and governance, moving from its Data Free Flow with Trust (DFFT) initiative proposed at the World Economic Forum in 2019.^[14]

The case for an approach based on sound and timely knowledge in order to respond effectively to East Asian drivers of global change, reducing the impact of distrust, is strengthened by the insights shared by Gregory T. Chin. By showing how recent Western financial sanctions targeting China did not work, he highlights a very specific way in which China’s integration into financial markets turned out to be a game changer. Such integration was, overall, certainly well recognized, but possibly it was not fully appreciated as a driver of such broad and impactful change. In fact, as Chin underscores, this is another situation in which indirect and unintended consequences may be more significant than direct ones, especially since the effectiveness record of sanctions is quite uneven. Besides the modest effect of sanctions, which may paradoxically end up emboldening their target, the inability to influence China’s behaviour through the traditional tools – Chin maintains – may have a relevant political impact, undermining US’s standing in the global economic order of its own creation. The issue to be addressed by Western countries is thus how to ensure China achieves the desired change, while preserving the financial order that serves their interests too. In Chin’s account, East Asian countries, and Japan in particular, were more thoughtful in devising their responses to China’s conduct, even though their concerns were growing. It is difficult to tell whether they will become more successful by signalling their unease through other means with respect to Western countries. However, their posture suggests that keeping a working relationship with regional key players requires, on the part of non-regional players, the kind of subtlety that is made possible only by deep knowledge of and steady participation in regional politics.

If Europe and the US do not engage appropriately, the driver of change highlighted by T.J. Pempel – that regionalization leads to a decoupling of Asia from the global economic and trade order – may turn out to be irresistible. This observation first of all underscores the relevance of the economic dimension in world politics today. Secondly, it attracts attention to regional dynamics in Asia that the Western reader may overlook, due to the fact that public discourse and the media tend to concentrate on the complicated relationship between China and the US or Europe. In fact, Asia is experiencing regional developments that could severely impact the global economic system, in particular making it more and more difficult for Western companies to be players in major emerging markets. Some countries – Pempel stresses – are working towards keeping the region integrated with the global rules-based order, but to be successful their engagement must be supported by non-Asian partners who share the same outlook and interests. Unfortunately, as Carla Freeman points out, American tactical multilateralism and new Indo-Pacific discourses seem to be working in the opposite direction and may well erode the region’s institutional architecture, on which stability has long depended. Again, the impact of this specific driver depends very much on the response it will elicit; this is a good reason to try to raise awareness of this very important development, in particular considering Asian countries’ greater sense of agency and belief that they can shape their own future.

A clear example of the global impact of China’s innovation can be found in the monetary order, which has been centred on the US dollar since the end of World War II. In his contribution, Christopher A. McNally shows how the People’s Bank of China’s embrace of digital money could well signal the dawn of a new push towards the internationalization of the renminbi. Due to the increasing “weaponization” of financial payment networks and systems by the US,^[15] Russia, China and – to some extent – the EU have in fact been looking at possible alternative configurations in monetary affairs, with the aim of “dethroning the dollar”.^[16] However, many argue that a basic economic rule – the Mundell–Fleming trilemma – prevents the yuan from becoming an international currency because China is not willing to fully liberalize capital movements, since that would mean giving up either on the management of the exchange rate or on the autonomy of monetary policy. Instead, McNally shows how the technology behind China’s new digital currency will give the People’s Bank of China complete oversight of monetary transactions, allowing monetary authorities more flexibility to selectively relax – in case of need – capital controls. In turn, this would mean creating more room for the internationalization of the renminbi, reducing dependence on the US dollar and generating a more diffused monetary order. While the American monetary authorities have been sceptical of a technological evolution that will give governments enormous power to track and control transactions, the European Central Bank has taken note of the advantage China has as a first mover in this realm and is actively working on the project of a digital euro.^[17]

China does not innovate only as a first mover, but also in reaction to Western reproval, as in the case of development finance. As China is now becoming a significant donor in the developing world, it is building a new paradigm in development finance, which nonetheless – as argued by Gong Xue – partially takes into account Western criticism. Beijing’s increasing presence in development projects and infrastructures through the Belt and Road Initiative (BRI) – from a port in Sri Lanka to a motorway in Montenegro, to name just two of the most controversial Chinese ventures – has generated widespread criticism. Many have argued that these projects are unsustainable and cannot be paid back by recipient governments, raising suspicions that this could all be part of China’s “debt-trap diplomacy”. Gong outlines how the recent White Paper on China’s international development cooperation seems to have responded to these negative feedbacks by stressing the need to improve transparency, ownership and efficiency. This does not mean that Beijing has completely integrated global standards in its development policy, but shows how China seems able to adapt its policies to address justified international concerns while at the same time defending its capacity to generate rules more in tune with its national conditions and interests. In the twenty-first century’s global political economy, competition about setting standards will be a constant feature, as great powers are “steering the order” in different directions.^[18] And even when China – as in the case of the establishment of the Asian Infrastructure Investment Bank – has accepted global rules, Beijing could still implement and interpret them in a creative way.^[19]

The implications of the US and the EU being norm-setters in global value chains are the focus of Helen E.S. Nesadurai’s reflection. She looks at how socio- environmental standards adopted and promoted by the West are impacting economies in Southeast Asia (SEA). For all the mainstream hyperbole about China dominating trade in the region, SEA countries’ trade with Europe and America is still significant, meaning that their access to global markets is essential for their economic security. In the beginning, governments overlooked socio-environmental standards, since critiques of unfair treatment of workers or the excessive exploitation of natural resources were mainly coming from non-profit organizations, leaving individual companies with the burden of responding and adjusting, in order to avoid boycotts by Western consumers.^[20] Now, compliance with these standards is required by public authorities as well as by private industry associations and a myriad of other actors. Consequently, companies need to restructure their businesses on a more sustainable basis – a trend strengthened by the effects of the Covid-19 pandemic. This necessary exercise is not a simple one, as multiple “nodes” of production can be affected in various and often unexpected ways,^[21] necessitating a thorough assessment of the governance and location of a company’s global value chains. A less- than-careful approach by governments and businesses would lead to economic insecurity in SEA, a region whose stability today is even more crucial for the rest of the world in the light of current Sino-American tension.

Economic security in the region is also being negatively impacted by climate change, an issue analysed in Katherine Morton’s and Karin Costa Vazquez’s respective papers. Both contributions in this section reveal another aspect of today’s international system that often emerges in the essays of this collection, namely the blurring of the distinction between domestic and foreign policies. Indeed, in a globalized world they are strictly interrelated, thereby complicating governments’ efforts to elaborate coherent and cohesive action plans. Morton starts from Xi Jinping’s claim in 2020 that China will reach carbon neutrality by 2060, looking at the potential contradictions between Beijing’s domestic energy transition and its support of fossil-fuel-related investments abroad, especially along the BRI. In fact, China is at the same time both the world’s top consumer of coal and the world’s largest sponsor of coal-fired power stations. While the internal energy transition has clearly started (China is also the largest producer of renewables), a structural change in overseas energy investments is not yet in full view. This contradictory behaviour raises doubts about China’s global climate leadership, and for international cooperation to be strengthened – Morton argues – China must also address the security aspects of climate change, and not only regard the latter as a mere development issue. In relation to the energy sector, Vazquez underlines how Beijing’s decarbonization plans compel countries to redefine not only their bilateral trade and investment relations with China, but also require them to adapt their domestic energy mix. In particular, the consequences of Beijing’s commitment will affect all energy-supplying economies, but in different ways, depending on the stage and pace of their own energy transition plans, as well as the composition and pattern of their energy exports to China. Once again, as in Nesadurai’s analysis of global value chains, it is vital for governments to respond to economic and institutional innovations, unless they are willing to put at risk companies’ viability and – in the end – the economic security of their own countries.

However, a collective response in a multilateral context is best suited to addressing common challenges characterized by non-traditional security aspects. Many issues could be mentioned in this regard, but of course the Covid-19 pandemic is the first that comes to mind. Since it has prompted recognition that global health is a public good, it should be kept separate from great power rivalry, but to do so a great deal of strategic trust is needed, as argued by Zha Daojiong. Global health security should be decoupled from parochial national interest, in recognition that a common effort to make technical standards for medicines and health-related products more uniform would help resolve the security dilemma and improve the global response to the pandemic. Particularly relevant in addressing the critical issues of our time is Nicholas Farrelly’s reflection on SEA’s next crisis response, highlighting the challenge for Western partners in the region to offer alternative (to China’s) but effective solutions without giving up on democratic values. In fact, ASEAN seems to be more effective in dealing with natural disasters and pandemics (Covid-19 being a case in point) than with humanitarian crises that result from political upheavals, such as the shattering ongoing situation in post-coup Myanmar. On the one hand, ASEAN member states defend the organization’s centrality, with a balancing function between China and the US, but on the other hand its founding principle of non-interference in internal affairs could be a recipe for future irrelevance. In a sense, we could argue that the EU’s recent announcement of its own soon-to-be-published Indo-Pacific strategy is indicative of a European response to ASEAN’s perceived stalemate, which does not bode well for future regional crisis management.^[22]

As the contributions to this Asia Prospects network reflection show, Asia is indeed a source of substantial change in today’s world. While most scholars concentrate on issues related to the workings of the global political economy, it is by now clear that the impact of most economic dynamics goes well beyond the economic realm, with the political and security domains having in turn a significant influence on economic relations too. For many, this is what global politics is about: phenomena blurring most of the lines that, in the past, helped observers make sense of relevant developments, but which today appear insufficient to establish clarity in a much more complicated picture. New instruments of analysis are needed in order to devise effective responses.

Change is happening at a fast pace. It is also multifaceted and multilayered. It must be addressed by governments through appropriate public policies at national or regional level, but private organizations, such as companies, also need to develop tools to navigate these largely uncharted waters. A better general understanding of the innovations we are experiencing is in fact essential if we are to grasp the whole array of consequences, both direct and indirect, that they are generating. The drivers of change that have been brought to our attention by the contributors are characterized by considerable breadth: they include Chinese foreign direct investments and the response they have engendered, unveiling the role played by strategic distrust; China’s integration into financial markets, with its impact on the effectiveness of traditional tools such as sanctions, requiring innovation on the part of those who wish to influence China’s conduct; China’s initiative to revolutionize money through digital currency electronic payments, eliciting great attention from monetary authorities in the EU and the US, and brought to public attention by the media; and the decoupling of Asian regional trade and the Asian financial order from the global order, the consequences of which may impact Western companies significantly if governments do not address this process constructively in a context characterized by Asian countries’ greater sense of agency and their belief that they can shape their own future – a driver of change in itself. Another driver is China’s standard- setting as “whole of nation” goal, but so is, symmetrically, the impact on global value chains and Asian producers of the EU’s position as a standard-setter. China’s ambition on climate change, seen in terms of global leadership, is another potential driver of change with implications that must be considered carefully. The Covid-19 pandemic has also prompted China and the West to view each other as less reliable hence the suggestion that conceiving of global health as a public good might offer a way out of the stalemate in bilateral relations. Finally, resistance and resilience of Asian regionalism peculiarity, made even more resilient by China’s neighbourhood policies, should encourage a careful analysis of the reality of regional evolution and its consequences for global partners.

Responding to this vast array of transformational challenges originating in East Asia is the task of our time, and it requires a considerable level of skill and access to in-depth and up-to-date knowledge. The Asia Prospects network is opening the conversation.

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References

[1] Cf. Layne, C. (2012) “The global power shift from West to East”, The National Interest, 119: 21-31. Layne’s argument is summarized by the journal as follows: “Pax Americana and the age of Western dominance are fading. Washington can manage this decline, but first it must acknowledge its reality. History moves forward with a crushing force and does not wait for the unprepared.”

[2] Whether liberalization allowed or prompted Chinese economic actors to engage in activity abroad depends on whether one subscribes to the Economic Statecraft understanding of the motives behind Beijing’s decision to open up, Breslin argues.

[3] Rachman, G. (2021) “US–China rivalry drives the retreat of market economics”, Financial Times, 10 May, available online. The paradox is, of course, that the uneasy engagement with China, on the part of the West, was meant to socialize it into market economics and integrate it into the global economic system on Western terms. Today we are interrogating ourselves on who is changing who.

[4] Ibid.

[5] Rachman (2021) argues that the retreat of market economics reflects changing attitudes not only in the US and China but also in the EU, the UK and India, a country historically inclined towards self-reliance.

[6] Sanger, C., Edmondson, C., McCabe, D., Kaplan, T. (2021) “Senate poised to pass huge industrial policy bill to counter China”, The New York Times, 8 June, available online. The authors state that “faced with an urgent competitive threat from China, the Senate is poised to pass the most expansive industrial policy legislation in U.S. history, blowing past partisan divisions over government support for private industry. […] Beijing has become one of the few issues that can unite both political parties”. Even though specific situations may lead countries to see the issue in different terms: Parker, G. and Morris, S. (2021) “Sunak insists UK must bolster China ties as access to EU market declines”, Financial Times, 1 July, available online.

[7] Rachman, G. (2021). The approach comes out neatly in an article authored by J. Harris and J. Sullivan (National Security Advisor to President Biden): power is “increasingly measured and exercised in economic terms” and “authoritarian capitalism is challenging market democracy”, hence economics is now a crucial instrument of foreign policy. For this reason, “America needs a new economic philosophy” that prioritizes geopolitics (Harris, J. and Sullivan, J. (2020) “America needs a new economic philosophy”, Foreign Policy, 7 February, available online). The trigger of this whole dynamic is often spotted in the strategic plan “Made in China 2025”.

[8] Thompson, W.R. (2001) “Identifying rivals and rivalries in world politics”, International Studies Quarterly, 45(4): 557-586.

[9] Strategic distrust is defined as the “mutual distrust of long-term intentions”; cf. Lieberthal, K. and Wang, J. (2012) “Addressing U.S– China strategic distrust”, J.L. Thornton China Center Monograph Series no. 4, Washington DC, Brookings Institution. Of course, the present lack of trust is not exclusive to US–China relations, cf. Stephens, B., Ashford, E., Sestanovich, S. (2021) “The Biden–Putin summit: ‘This is not about trust’”, The New York Times, 16 June, available online

[10] Breslin, S. (2021) China Risen?, Bristol, Bristol University Press.

[11] European Commission and High Representative of the Union for Foreign Affairs and Security Policy (2019) “EU–China – A strategic outlook”, Joint Communication to the European Parliament, the European Council and the Council, JOIN, 12 March, available online

[12] Structural only within a realist conception of world politics, it must be noted, but this issue cannot be addressed here.

[13] Anonymous (2021) “The longer telegram. Toward a new American China strategy”, Atlantic Council Strategy Papers, Washington DC, available online

[14] World Economic Forum (2021) “Rebuilding trust and governance: towards Data Free Flow with Trust (DFFT)”, White Paper in cooperation with Hitachi and the Ministry of Economy, Trade and Industry of Japan, available online. In broader terms, see Chang, C. (2021) “Japan is the new leader of Asia’s liberal order”, Foreign Affairs, 24 February, available online

[15] Farrell, H. and Newman, A.L. (2019) “Weaponized interdependence: How global economic networks shape state coercion”, International Security, 44(1): 42–79.

[16] The Economist (2020) “Dethroning the dollar: America’s aggressive use of sanctions endangers the dollar’s reign”, 18 January, available online

[17] The Economist (2021) “What is the fuss over central-bank digital currencies?”, 16 February, available online

[18] Caffarena, A. and Gabusi, G. (2021) “Europe–China and the Third Way: Steering order in times of change. Evidence from the AIIB and WTO reform” in Li, X. China–EU relations at a crossroads: ‘Systemic rivalry’ or ‘strategic partnership’?, London, Routledge.

[19] Gabusi, G. (2019) “Global standards in the Asian Infrastructure Investment Bank: The contribution of the European members”, Global Policy, 10(4): 631–638.

[20] The progenitor of critical voices in this regard is surely Naomi Klein (1999) No logo: Taking aim at the brand bullies, New York, Picador.

[21] For a classification of different forms of governance in global value chains see Gereffi, G., Humphrey, J., Sturgeon, T. (2005) “The governance of global value chains”, Review of International Political Economy, 12(1): 78–104.

[22] European Union External Action Service (2021) “EU Strategy for Cooperation in the Indo-Pacific”, 19 April, available online.

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• Drivers of Global Change: Responding to East Asian Economic and Institutional Innovation