As Reported by The Economic Times

The reported move by the Pakistan government to phase out major restrictions on trade with India by switching to the negative list, and doing away with that too by the end of the year, is wholly welcome. Normalising trade relations with India will help establish a template of wider normalization of mutual ties.

An indication of deep-rooted animosities and suspicions which have stymied that goal can be seen in the opposition from quarters within Pakistan to Islamabad’s declared – and logical – aim of granting India the World Trade Organization-compliant Most Favoured Nation status next year.

But the arrangement to separate commerce from thornier issues like Kashmir and Pakistan’s actions against those accused of terror attacks against India can lay a foundation for minimising mutual distrust. For New Delhi, this would be in keeping with the idea of engaging various power centres in Pakistan, given the fractured power structure in that country.

While being perfectly aware that policy on India, like in other areas deemed to be ‘strategic’ by the military, is mostly determined by the latter, the aim should be to defang and isolate hardline elements by positing the real and tangible benefits enhanced mutual trade can offer Pakistan.

And there certainly is ample scope to do that: direct Indo-Pak trade is less than 1% of their global trade; annual mutual trade was around $2.7 billion through March 2011, which, despite being up 50% from the previous year is still measly compared to, say, India’s $60 billion annual trade with China or the potential.

But a beginning has been made with Pakistani industry backing the new move, which, in turn, can help allay fears that Indian goods will swamp Pakistani markets. What will happen is the ending of trade routed through third countries (mostly Dubai).

Legitimate mutual trade can lead to both countries envisaging cooperation in a wider trading entity comprising Afghanistan and Central Asia, with obvious benefits for regional stability. This might sound utopian for now, but mutually-beneficial commerce does have a way of tempering hostilities.

Filed under: Afghanistan, China, Desi, India, Pakistan, Peace Tagged: Afghanistan, China, Dubai, India, India Pakistan Trade, MFN, Most Favored Nation, Pakistan, World Trade Organization

As Europe suffers a severe a cold snap, EU-Russian relations are experiencing a proverbial chill. The diplomatic cooling is the result of EU foreign policy chief Catherine Ashton’s criticism of Putin’s democratic credentials. The sharpness of Ashton’s critique was for many a somewhat surprising, yet desirable development. Indeed, the tough stance on the state of Russian democracy has provided Ashton with rare kudos from commentators and MEPs. Could these new tones be a sign of a more confrontational EU stance on Russia’s human rights record?

Among Ashton’s critique points was the government decision not to register Grigory Yavlinsky, leader of the opposition party Yabloko, for the March election, the intention of Putin and Medvedev to swap jobs (again!), and more generally a support of the Russian people’s desire to “rein in corruption and impunity, and to give more breathing space to democratic process.” Of course, Ashton also urged Russia to not veto the UN Security Council resolution on Syria.

Russian officials were quick to shoot back, accusing the EU of meddling in internal affairs, calling Ashton’s criticism “bewildering” and saying that it “overstepped the bounds of political correctness.” In the official Russian view, the EU and US are using the democracy movement as a pretext to leverage influence in Russia through utilization of the Organization for Security and Cooperation in Europe (OSCE), and pro-democracy organizations.

Needless to say, Russia and China disregarded all pressure and vetoed the Security Council’s Syria resolution. Russia and China have since been catching some well-deserved flak from the international community, not that that will have an immediate effect on the ground in Syria. But, in this context, it has had an effect on global opinion of Putin’s Russia and how to deal with it.

Arguably the EU is now finding a new more confrontational diplomatic footing, with more emphasis on supporting democratic developments in Russia. Some might say that it’s about time. But it seems fair to say that Putin’s current hardships were unforeseen by most, including the EU. Where Europe previously was preparing to deal long-term with a Russia like the one Putin took over in 2000, the game has now changed and the EU’s stance has changed with it.

For example, the December 2011 EU-Russia Summit was dominated by preexisting issues, such as visa-free travel and Russia joining the World Trade Organization. Although human rights and democracy issues were discussed at the summit, Ashton’s statements on these matters were deemed “weak” by Mikhail Kasyanov, leader of the opposition party Parnas. Human rights are now center stage, and Ashton statements have grown stronger.

In previous years, EU members states have by-and-large followed a policy of pursuing economic goals, while limiting their criticism of human rights abuses. The European Council on Foreign Relation’s European Foreign Policy Scorecard points to EU diplomacy being a result of an overriding wish for cooperation with Russia on a swath of issues, ranging from trade to global security and cooperation in the Russian/European neighborhood. Putin’s actions at home and abroad have damaged the assumptions that the policy of cooperation policy built on, i.e. that economic modernization and engagement would gradually bring about a more democratic Russia.

Naturally, there are limitations to the EU’s ability to influence Russia. Disagreements over ending frozen conflicts in Georgia and Kosovo are examples. And of course, cold snap and all, Russian natural gas has previously provided Putin with a stick with which to beat the Europeans. But limitations will always exist. The EU now has an opportunity to test these limitations.

Ashton’s critique of Putin’s Russia is a good thing. These days, how else is one to react but with support of those who come out in favor of democracy movements? And in this respect, Putin is certainly not looking stellar. Putin and Assad are all too easy to lump together as autocratic brothers-in-arms, each trying to retain their grip on power with the methods that happen to be at their disposal.

While not forgetting that Russian cooperation is necessary to solve the issues of the day, e.g. Russia’s role in negotiations with Iran, we must hope that the EU will maintain its pressure on Putin’s Russia. In an age where democratic reform is a rallying cry, Putin quiet possibly has made a big mistake throwing in his lot with the likes of Assad. This offers an opportunity that should not be left untried.

Last year was the Year of the Rabbit for the Chinese – promising among other things good luck!  However, China which came out of the global financial crisis almost unscathed (or at least better off than most major world economies) hit one too many ‘speed-bumps’ in 2011.  Last year’s inflation is threatening a significant slow-down of the Chinese economy, and the housing market is in such collapse that it could lead to real civil unrest.

Overall, in 2011 China assumed a more assertive role on the global stage.  China’s new posture was reflected in an aggressive trade agenda, a push for a larger role in international institutions, and provocative moves in the South and East China Seas.  These actions were both a reflection and a consequence of China’s growing economic prominence and resource needs, as well as China’s view that the United States is in decline while China is ascendant.

China continued the backsliding from market reforms in favor of an increased role of the state in the economy.  China continues to subsidize its state-owned enterprises to the detriment of both private Chinese firms and international competitors.  Despite promises by President Hu Jintao and other Chinese officials to ease a policy of discriminating against foreign companies in government procurement decisions; however, real change remains elusive, particularly among the provincial and local governments.

Currency Liberalization

China continued its aggressive capital controls during 2011, a policy which pegs the renminbi (RMB) to the dollar, restricts the flow of foreign capital in the domestic market, and investing foreign reserves in U.S. Treasury bonds.

By the end of 2011, China’s foreign exchange reserves are projected to be over $3.2 trillion, up nearly one trillion from $2.4 trillion back in January of 2010.  China’s foreign exchange reserves are now roughly three times greater than that of Japan, which has the second-highest foreign exchange reserves in the world.  Roughly two-thirds of China’s foreign exchange reserves are generally thought to be denominated in U.S. dollars, although the exact makeup of the reserves is unknown, because the Chinese government considers it to be a state secret.

Somewhat better known is the volume of China’s foreign exchange reserves that are made up of U.S. Treasury securities.  As of July 2011, the official estimate by the U.S. Treasury Department

stood at $1.2 trillion, up slightly from the same period one year before.  The real amount is considerably higher, since the $1.2 trillion does not take into account any purchases made on the secondary market nor does it factor in purchases made by intermediaries or made through tax havens, such as the Cayman Islands.

On the positive side, the Chinese government allowed the RMB to rise by roughly 6% in nominal terms over the last year, from 6.641 RMB per dollar at the beginning of the year, to 6.30 RMB per dollar by the end of December 2011.  This is the second-fastest rate of appreciation since the Chinese government eliminated its hard peg to the dollar in 2005.

The 12^th Five-Year-Plan

In March 2011, China ratified its 12th Five-Year Plan (2011– 2015), a government-directed industrial policy that focuses on the development and expansion of seven ‘‘strategic emerging industries.’’  The central and local governments will likely continue to combine targeted investment with preferential tax and procurement policies to ensure that Chinese firms emerge as global leaders, or ‘‘national champions,’’ in these industries within the next five years.

One of the main objectives of the 12th Five-Year Plan is to redirect China’s economy to one more focused on domestic consumption and less on exports and investment.  The plan assumes that China’s growth would therefore be more balanced and sustainable.  The plan also emphasizes higher value-added production and increased government support for domestic high-tech industries.

Increasing household consumption, a major goal of the 12^th Five-Year Plan, and the subsequent emergence of a more assertive consumer class, may be in direct contradiction to the Chinese government’s policy of keeping economic power firmly in the hands of the state and may compromise lending to many vested interests, including SOEs and the export sector.

Analysts and foreign business leaders fear that the emphasis on industrial upgrading will lead to the introduction of new government subsidies, which in turn will disadvantage foreign competitors.

In particular, the government’s new growth model includes such goals as:

• Setting a GDP growth target of 7% (down from the current actual GDP growth rate of 10%).  To do that, the government will have to divert money away from construction and corporate subsidies, and instead use public funds to increase household incomes.
• Cutting import tariffs to reduce input-costs, while boosting consumer demand and reducing China’s reliance for growth on exports which generates trade surpluses and contributes to the global trade imbalance.
• Improving the income of farmers and migrant workers, who have benefited the least from China’s phenomenal economic growth, by increasing minimum wages.  In particular, provinces across China have announced a string of double-digit wage increases this year as part of the government desire to increase incomes among the rural regions and migrant workers in the cities.
• Increasing spending on healthcare and full nationwide social welfare insurance to reduce the need for “precautionary savings” and encourage more Chinese consumer spending.
• Raising the minimum threshold for personal income tax.  This could exempt hundreds of millions of people from having to pay taxes, and boost household spending.

The most important short-term priority for the government is to address increases in food price, which Beijing intends to do through price controls.  In order to control inflation, the government intends to keep using the tools and methods that it has been employing thus far: manage liquidity, use price controls, curb real-estate speculation, and “adjust and improve” property tax policies.  Furthermore, the budget for this year shows a 35% increase in spending on low-income housing.

(For more, read: China’s 12th Five-Year-Plan – Will It Help With the Global Trade Imbalance?)

Inflation

While China has taken an externally assertive posture, it faces many internal challenges. The Chinese Communist Party (CCP) relies on economic growth, combined with strict authoritarian rule, to maintain control over a factious and geographically vast nation.  Sharp increases in consumer prices, a pivotal factor in the early days of the student protests in Tiananmen Square in 1989, are once again a problem for the Chinese economy.

Inflation is the Achilles heal of the CCP; inflation is what precipitated the Tiananmen Square demonstrations back in 1989, is what fueled the Arab youth discontent for the status quo, and is what is caused by China’s undervalued currency and current account restrictions.  What was but a prospect of inflation in 2010, turned to a serious threat to the longevity of the Chinese economy in 2011, forcing the government to impose price controls to a number of goods.  The rise in property values during the year, led to fears of a bubble market, and a significant drop of values by the end of 2011.  In the middle of the year, inflation was as high as 6.5%; the second highest level in the past 10 years.

Property Bubble

Following a decade-long boom and nearly two years of attempts by the central government to cool the overheated sector, the housing market in China appears to have turned.  In order to cool the overheating residential-property market, the central government has restricted purchases of multiple homes, demanded larger down-payments and curtailed opportunities for speculators to “flip”, or quickly sell on, properties.  It has curbed developers’ access to bank lending and cut off credit from new trust companies.  It is also encouraging the use of property taxes like those introduced in Shanghai and Chongqing last year.

Taken together, these measures have certainly slowed down the market.  Price growth has been slowing since early 2010.  Analysts suggest that prices fell during December 2011 in 60 of the 100 cities it monitors.  Land prices are falling fast, too.

In 2010, property construction accounted for 13% of Chinas GDP, and for more than 25% of all investment in what is the most investment-dependent economy of the world.  Property directly accounts for 40% of Chinese steel use; the country itself produces more steel than the next 10 producing countries combined, making it by far the most important buyer of inputs such as iron ore.  Construction in China is also important for a host of other industries, from copper, cement and coal to power generation equipment.  Most analysts agree that the sector matters to an extraordinary degree for the overall Chinese growth, for commodity demand, household expenditures, external trade and underlying heavy industrial profitability.

According to government figures, which most analysts believe understate the reality, average housing prices more than doubled in the last four years nationwide, while in Beijing and some other regions the price increase was more like 150%.  Data are incomplete but analysts say the price of an average apartment in a Chinese city is now about 8-10 times the average annual income nationwide; in cities like Beijing and Shanghai the ratio is closer to 30 times.  Now, by some estimates, property prices might fall by as much as 25% in the near future, and by another similar amount in the following two to three years.

However, its impost to remember that before 1998 China did not have a residential real estate market to speak of.  In urban areas, all housing was built and allocated by the state through the ubiquitous “work unit”.  In the countryside, peasant farmers built their own homes on land allotted to them by the state or the collective.

The real estate market that now plays such an important part in China’s overall economy was born when the Communist party decided in the late 1990s to begin transferring ownership of the vast majority of housing to individuals.  It is easy to forget that the market is just over a decade old and, apart from a brief dip in the midst of the 2008 financial crisis when transactions dried up, most Chinese have only seen prices double every couple of years and never seen them fall.  Besides, China is a country where speculative bubbles have been a constant phenomenon since market-based reforms picked up pace in the 1980s.

(For more, read: China Property – A lofty ceiling reached)

WTO – 10 Year Anniversary

In December of 2011, China celebrated 10 years since its entry into the World Trade Organization (WTO).  Last year also marks the end of China’s probationary period, under the terms of its Accession Agreement to the WTO.  The probationary period required China to lower its tariffs to levels below those of many other developing countries.  But compared with most industrialized countries, China was allowed to impose considerably higher tariffs (on average around 25%, while U.S. tariffs are mostly under 5%) — tariffs China has retained even as its economy has subsequently grown to No. 2 in the world.

Practices such as forced technology transfer and the creation of joint venture companies as a condition to obtaining access to the Chinese market; the adoption of unique, Chinese-specific standards for high-tech equipment; and extensive intellectual property rights violations are among the faulty policies designed to help China achieve its economic and development goal, while blatantly violating the spirit and often the letter of WTO law.

In the ten years since China joined the World Trade Organization (WTO), China has maintained a steep growth trajectory, outpacing both Germany and Japan to become the second largest economy in the world. China’s gross domestic product (GDP) has grown from $1.32 trillion in 2001 to a projected $5.87 trillion in 2011 (an increase of more than 400%).  Concurrently, China has lifted 400 million of its citizens out of poverty and has experienced the largest rural-to-urban migration in history.

However, 2011 has been a particularly confrontation year in terms of trade disputes with the U.S., China’s most important trade partner.  The U.S. initiated consultations with the Chinese government on a number of cases (chicken products, subsidies, and internet restrictions), and China followed suite in the case of imports of U.S. cars.  Currently, three previous WTO cases involving U.S.-China trade are both open and active.  The Raw Materials case, which resulted in a decision favorable to the United States, is under appeal as of August 31, 2011.  The Flat-rolled Electrical Steel case and the Electronic Payments case have both advanced to formal dispute settlement, though no decision has been reached.

(For more, read: Sino-American Trade Relations – A heated exchange)

Soft Power – Climate Change

In December 2011, the World Climate Change Summit in Durban, South Africa, was considered a (at least very promising) success, thanks in part to the new found commitment of China to the cause.  More specifically, for the first time since the Kyoto agreement back in 1997, large emerging economic powers such as China, India and Brazil agreed to legal constraints on their emissions (unlike their previous resistance in 2007 and 2009, which clearly doomed past climate change efforts).

In the past, a familiar stalling point has been the refusal by emerging powerhouses such as China to agree to legal targets.  That has prompted others – most notably the US – to insist that they could not sign up to such pledges.  China, which in 2007 overtook the US to become the globe’s largest emitter, was one of the largest obstacles. However, China is still classed as a developing country under UN climate conventions and therefore not subject to legally binding constraints.

Having been blamed for wrecking the 2009 Copenhagen talks, Beijing went to Durban eager to promote its green credentials.  In a series of side events, its delegates boasted of China’s rising dominance of renewable energy markets and a five-year plan that for the first time includes plans for emissions trading and carbon intensity reduction targets.

There is still a lot of follow-up needed to make these new commitments real, but it seems that climate change (and the profitable side of this issue: development and marketing of green energy sources) is one area where China is willing to ‘play ball’ with the rest of the world and stretch its ‘soft power’ muscles.

(For more, read: Climate Change – The great regrouping)

Taiwan Strait

Despite the continuing improvement in economic and diplomatic relations across the Taiwan Strait, China deploys some 1,200 short-range ballistic missiles against the island.  In 2011 we saw the sale by the U.S. to Taiwan of a new $5.8 billion package of upgrades to its aging fleet of F–16 fighter jets.  In response to that, China indicated that it might suspend a series of military-to-military engagements.

However, as much as military build-up and confrontation across the Taiwan Strait will always define the China-Taiwan relationship, the upcoming Taiwanese Presidential election overshadowed developments at the end of last year.  China’s strategic planners are very alarmed by the uncertainty over the outcome of this month’s presidential election in Taiwan.

President Ma Ying-jeou, the Beijing government’s preferred candidate who has steered a path of warmer ties and direct economic links with the mainland, is suddenly in a tough race for reelection.  Ma’s chief opponent is Tsai Ing-wen, chairwoman of the Democratic Progressive Party, which officially backs the independence of Taiwan.  Tsai has raised the Beijing government’s ire for her refusal to publicly support an informal, unwritten, 20-year-old agreement between the two sides stipulating that there is just “one China.”

For months, the election was expected to hand an easy reelection victory to Ma, from the ­Kuomintang, or Nationalist Party, after he steered the island through the worst of the global recession and secured a new trade deal with China.  But the race became more unpredictable with the entry of a third candidate, James Soong, a former Nationalist Party stalwart who founded the People First Party.

For China, a victory by the DPP will be considered a setback to cross-strait relations, and could lead to an military escalation as China is preparing for its own leadership transition.

China in South-East Asia

To the consternation of its neighbors, China asserts its expansive territorial claims in the South and East China Seas.  China is increasingly capable of pursuing its own interests at the expense of regional, perhaps even global, stability.  David Gordon of the Eurasia Group recently argued that China has overplayed its hand in Asia, and its rapid growth and aggressive posturing (both economic and military) “is inadvertently driving Asian states to build closer economic and strategic ties with the U.S. and each other.”

Over the past 18 months China has taken a very aggressive tone towards territorial disputes in the South China Sea and elsewhere.  Mr. Gordon further argues that Beijing has miscalculated its ability to cater to nationalist feelings domestically without alarming its neighbors, and is now (inadvertently) driving Asian nations to build closer economic and strategic ties with the U.S. and each other.

The Chinese leadership is very concerned with developments with the Trans-Pacific Partnership, a U.S. led effort for freer trade among Pacific economies which the Chinese press often casts it as an aggressive U.S.-led ploy to squeeze China out of South East Asia.  During the fall, the U.S. formally accede to the East Asia Summit (the ASEAN+3 – just like China did back in 2005), a move that the other SE Asian nations welcome, as they hope that the U.S. could provide a counterweight to China in the region.

Last but not Least – Domestic Unrest

Every year, China experiences some kind of public unrest, be it because of food product contamination that was not handled properly by the authorities, or some natural disaster that was not remedies properly afterword’s, or some transportation accident that could have been averted.  Last year was no different.  However, what happened during the fall in a couple of rural places could have greater ramifications for this year.

In the Southern village of Wukan, protests began on 21–23 September 2011 after officials sold land to real estate developers without properly compensating the villagers.  Several hundred to several thousand people protested in front of and then attacked a Chinese Communist Party building, a police station and an industrial park.  Residents of Wukan had previously petitioned the national government in 2009 and 2010 over the land disputes.

In an apparent attempt to ease tensions, authorities allowed villagers to select 13 representatives to engage in negotiations.  Security agents abducted five of the representatives and took them into custody in early December.  The protests strengthened after one of the village representatives, Xue Jinbo, died in police custody in suspicious circumstances.  The villagers forced all Communist Party officials and police to flee the village, which came back with reinforcements and laid siege to the village, preventing food and goods from entering the village.

Eventually, the village representatives and provincial officials reached a peaceful agreement, satisfying the villager’s immediate requests.

During December, protests in the town of Haimen, of Guangdong province, which drew thousands of participants were ignited over plans to expand a coal-fired power plant in the town—a plan that residents opposed, arguing that existing coal-fired plants had caused environmental and health damage.  Demonstrations began on 20 December when thousands of residents barricaded a freeway and surrounded government offices in an attempt to block the project.

Riot police fired tear gas into the crowd and beat protesters with riot sticks.  Tensions cooled by 23 December, after Communist Party officials declared that the plant expansion plans would be temporarily suspended, and authorities agreed to release detained protesters.  Although the protests in Haimen were unrelated to demonstrations in nearby Wukan, Haimen residents told Reuters that they had followed developments in Wukan closely, regarding it as a good model of how citizens might negotiate with authorities.

This is not the beginning of China’s ‘Arab Spring’ moment.  China is a very large and very diverse country.  But when the people at the bottom of the ‘food chain’ can justify physical confrontation with the authority as the only viable way of ‘negotiating’ with the government, then everyone should be paying very close attention!

 

I wonder, what will the year of the Dragon bring…  more assertiveness by local people, or more resolve by the government in Beijing?

On May 2nd U.S. special forces entered deep inside Pakistan’s territory, effectively killing world’s most wanted terrorist, and leaving undetected. This raid by some is considered a breach of Pakistan’s national sovereignty. Although there are arguments which suggest that Pakistan’s sovereignty has already been compromised by the presence of Osama Bin Laden, banned organizations, and wanted terrorists. Making it a fair game for international forces to chase them inside Pakistan.

Also it is only considered a breach of sovereignty when there is a “use of force against the territorial integrity or political independence of any state,” according to the United Nations Charter. As far as the U.S. raid(s) in Pakistan are concerned, none of them were for the purpose of overthrow of Pakistan’s government, or to change Pakistan’s territorial borders.

If examined deeper, sovereignty seems to be a vague issue. Especially in today’s world it’s really a subjective and almost non existent argument. With rapidly growing influence of globalization in our societies and international treaties that are meant to eradicate borders and national sovereignty for greater global good, the importance of sovereignty has been replaced by the importance of peace and prosperity.

So when it comes to global world and greater interests no nation is truly sovereign. As we become increasingly globalized our interests are highly intertwined, we become highly dependent on one another. Each nation is no longer an independent sovereign nation, but rather a citizen of a global world. Being a global citizen comes with rights and responsibilities of citizenship. Some of which include protecting the environment that is shared by everyone and helping to keep the world safer and free of terrorism.

Organizations like United Nations, World Bank, World Trade Organization, International Monetary Fund, and treaties like NAFTA, EU, and Euro Zones are all a part of this decreasing national sovereignty and increasing interdependence. These treaties and contracts amongst nations are formed mainly to integrate their economies, but also to have regional and global political security and a deterrence against war.

When countries group together like the European Union, they not only integrate their economies but also enhance their political weight in the world. Many Europeans believed that after World War II the European nation-states were no longer large enough to hold their own world markets and world politics. There was a need for a united Europe to deal with the United States and the Soviet Union. Hence a union was formed, which not only became a world’s largest economic giant, but also a political power, and a prosperous war free region.

With the recent financial crises, unions like Euro Zone are looking towards more integration and less sovereignty, rather than independence and individuality. They are heading towards becoming a fiscal union rather than merely a monetary one. This sort of action would make them equivalent to the U.S. model.

As a member of United Nations Pakistan has also given up its sovereignty to the rules, regulations, and the decisions of the UN’s body. Pakistan as a member of UN has to comply with United Nation’s charter and follow its guidance on laws, especially when it relates to human rights issues. Hence Pakistan’s sovereignty doesn’t fully exist the way it’s thought to be by some commentators in Pakistan.

Same is true for Pakistan under the International Monetary Fund’s guidelines and World Trade Organization’s restrictions. Pakistan does not have the freedom to implement any sort of fiscal and monetary policy that isn’t approved by those organizations. This also puts restrictions on what Pakistan trades and how it trades with other nations.

These are the issues Pakistan needs to analyze further as a nation. Whether they want to live as an isolated nation or join the ranks of many in becoming a truly global country. This would mean toning down the rhetoric on sovereignty and becoming integrated in the global economies and politics.

There are two types of power evident in the study of international relations: hard power and soft power. The former is coercive, and is associated with a state’s use of military force or economic pressure in order to maximize its interests. Hard power is advocated by those who believe that relative gains are the most important facet of inter-state relations. The latter is cooperative, and is associated with diplomatic engagement and co-optation. Soft power is promoted by liberals who contend that the value of absolute gains will result in better inter-state relations. The conditions under which hard and soft power are employed by hegemons within their regional domains can be an interesting insight into how foreign policy is crafted at the state level, and how successful regional powers will be maintaining their influence over time.

There has been a lot of talk of China’s potential hegemony. It is clearly a state whose influence in the international arena is increasing: its economy continues to grow at an impressive rate which has consequently allowed it to improve and expand its military capacity. As a rising international power in the 21st century, it is interesting to discern whether China’s ascension to global supremacy will result in a more respectful nature of its neighbors and a commitment to cooperation or if it will resort to taking a hard line approach.

China’s military arsenal gives it a relative advantage over many of its Southeast Asian neighbors. Beijing has rapidly acquired and produced naval warships, has expanded development of its intelligence gathering techniques, and has held joint military exercises with fellow nuclear powers Pakistan and India. It is also trying to project a “more robust” military presence in the South China Sea — site of an ongoing territorial dispute — enabling China’s navy to conduct better surveillance, enforce strategic blockades, and control the high level of sea traffic which passes through the area, according to a U.S. Department of Defense report produced earlier this year.

However, rather than resort to military measures to aggressively halt the conflict in the Spratly Islands, China has shown remarkable restraint. In July 2011, China and Association of Southeast Asian Nations (ASEAN) member states began plans to implement the Declaration on the Conduct of Parties in the South China Sea, an agreement signed by the members back in 2002 but lacking any real bite. Article five of the declaration suggests several ways “in the spirit of cooperation and understanding, to build trust and confidence between and among” the parties.

a. holding dialogues and exchange of views as appropriate between their defense and military officials;

b. ensuring just and humane treatment of all persons who are either in danger or in distress;

c. notifying, on a voluntary basis, other Parties concerned of any impending joint/combined  military exercise; and

d. exchanging, on a voluntary basis, relevant information.

The declaration discourages unilateral action as well as attempts to resort to military means to resolve the dispute.It splits the sea into disputed and non-disputed areas, calling for the former to be demilitarized and subject to joint patrols and usage.  Building upon that minor success, China and Vietnam signed a six-point agreement in October 2011 which sought to end the maritime dispute and make the region a zone “of peace, friendship and cooperation.”

On monetary matters, China and Southeast Asia’s economic relationship is mutual. China’s incredible pace of industrialization has given Beijing the ability to manufacture scores of cheap goods, resulting in exceptional export numbers. Furthermore, the market for Chinese goods is particularly helped in Southeast Asia by the creation of the ASEAN-China Free Trade Agreement (ACFTA), which has resulted in greater integration between Beijing and ASEAN member states which can export the essential raw materials needed for industrial manufacturing in China. ACFTA went into effect on January 1^st, 2010 and is the largest free trade area in the world in terms of population. The agreement reduces 90 per cent of tariffs on imports and encourages the transnational exchange of goods and services with a minimum of regulation.

Moreover, Beijing’s decision to join the World trade Organization (WTO) in November 2001 has not harmed the ASEAN member states’ economic prosperity but in fact has strengthened it. Jose Tongzon has studied the effect China’s liberalization has had on the economic prospects of Southeast Asia and, despite initial apprehensions, his research shows that there have been net benefits and absolute gains realized by both China and ASEAN members.

In sum, it is my contention that China has excellent potential as a regional and, eventually, as a global hegemon because of its ability to pursue a multi-track approach to issues of vital interest, its profitable economic relationship with the nations of Southeast Asia, and its propensity to use soft power as a way of spreading its influence.