Political Risk Map 2021: Pandemic Recovery Complicates Risks for Asia-Pacific
Many countries in Asia-Pacific were adversely impacted in 2020. Particularly hard-hit were economies heavily dependent on textile and automotive supply industries. According to the IMF’s World Economic Outlook, regional growth for emerging market and developing economies in Asia and the Pacific contracted 1.1% in 2020 as the Asia-based workshops of the world sat idle.
Fears of reshoring due to COVID-19 have yet to come to fruition, despite economies and multinationals seeking to create more resilient supply chain mechanisms. Many car manufacturers and producers of physical goods are now building up inventories, driving up shipping rates and inflation. Some companies are adopting a China-plus-one strategy to bring more resilience and diversity to supply chains. Vietnam, with its low COVID-19 rates and open trade links, has been a big beneficiary, taking market share from China and other Asian rivals hit hard by the pandemic.
Asia-Pacific will serve as the theater of continued geopolitical tensions between the two largest populations on Earth. The China-India rivalry is anticipated to intensify over the coming years, as India’s population overtakes China’s — fueling resource competition and threats to supply chains vital to both. Over 70% of India’s trade value and 90% of its volume is linked to maritime exports. China’s Belt and Road Initiative has become a crucial facet of foreign policy for Beijing, demonstrated by the docking rights, ports, and bases it has secured along the Arabian Sea and Indian Ocean, stretching from Djibouti to Sri Lanka.
Strategic collaborations with international partners seeking to forge an economic coalition against China will be key for India. The Malacca Strait — one of the busiest shipping channels in the world, as the primary route between the Pacific and Indian Oceans — will become more vital for economic recovery in Asia-Pacific. This importance is underscored for China, as 80% of its hydrocarbon imports arrive via the strait. India’s plan for military expansion on the Malay archipelago will supplement its regional power projection, while adding to the risks that balance against China’s ambition of regional hegemony. The infrastructure plan is anticipated to be completed within the next 10 years, which should also strengthen India’s position in the Quadrilateral Security Dialogue (QSD). A militarized archipelago may trigger an arms race.
Climate change, alongside industrialization and urbanization, threaten water security across South and Southeast Asia. As China rolls out its hydropower policy for Tibet, water scarcity will become a genuine policy issue for the downstream nations over the medium to long term. This development and other factors will likely exacerbate the stress on water security. By 2025, the United Nations predicts water scarcity will affect 1.8 billion people, with Asia acutely impacted by water stress or outright shortages. China’s control over Tibet places it in a dominant position to control Asia’s water sources. This leverage may be exerted to steer the foreign policies of smaller neighbors over the coming years.
Following a collapse in first-quarter 2020, economic activity in China has normalized faster than expected. Effective pandemic control, strong policy support from Beijing, and resilient exports have helped. Even as early as the second quarter of 2020, China saw a rebound in exports, due to strong demand for personal protective equipment, medical supplies, and electronic goods in response to increased remote working arrangements adopted globally.
A key to global economic activity is trade with China, and the slowing of China’s economic engine is causing problems for its trading partners. As of December 2020, China fell well short of targets in its Phase One trade agreement with the United States, in which China agreed to buy more US goods and services in 2020 and 2021. It remains to be seen how US-China trade will play out under a new US administration, but early signs suggest a continued tough stance by the US to contain its formidable rival. In the meantime, China continues to invest in commodity partnerships in Latin America and Africa to shore up its access to strategic resources. Such resources are necessary for China to maintain its dominance in global manufacturing, as well as pursue its ambitious Belt and Road infrastructure development vision. Pre-COVID-19 geopolitical tensions, most notably persistent bilateral frictions with main trading partners over trade and technology, will pose continued risks to China’s sustained recovery and its growth prospects.
While Beijing is increasing the value of Chinese firms, their Taiwanese counterparts have stagnated. China has become a semiconductor producer and consumer, forming a vital component of Taiwan’s semiconductor export-led industry. Reducing the chasm in terms of technology has been a longstanding ambition for Beijing. Exploration of semiconductor manufacturing had been stifled by legislative action from both the US and Taiwan, which prevented the export of advanced semiconductor technology. Through extensive public financing, supplemented with the licensing of processing technology from external sources, China is trending toward capabilities that were classically unique to Taiwan. Domestic companies in China currently supply 10% of China’s semiconductor needs, indicating the scale of potential loss for foreign chip makers when China eventually acquires the knowledge to roll out domestic production of its own chips.
Taiwan is likely to be a primary beneficiary of an increased adherence to the China-plus-one strategy globally, as it is an eminent producer of electronics and semiconductors.3 Taiwan hosts the largest chip-making company in the world, though it is likely the government will increase efforts with the “Invest Taiwan” strategy, further making Taiwan a lucrative base for companies with operations in mainland China. Rising tensions with China in this regard may well result in the Tsai administration decoupling its economy from China.
Looking closely at the political and commercial risk angles, the new security law, alongside the trade war and accusations of human rights infringements in Xinjiang all served to increase multiple risk perils for China, indicative in the relatively high scores for contract agreement repudiation, at 5.5; expropriation, at 5.1; and strikes, riots, and civil commotion, at 5.0. The risk of war and civil war has increased, to 3.5 from 2 on the WRR for China, principally due to the social unrest in Hong Kong and flaring tensions with Taiwan.
China has spent seven decades damming most of the Tibetan Plateau’s waterways, displacing over 23 million people in the process. This heavy economic commitment has enabled the hydropower sector to grow twentyfold over the last four decades. As urbanization and industrialization rates rise in China, so too is the need for renewable energy. As such, state-owned companies are lobbying Beijing to permit hydropower ventures in Tibet, with 28 projects currently awaiting approval.
As China has approved three new projects on the Brahmaputra, India has raised concerns regarding the flow of water. As these dams become operational, the altered water flow is anticipated to damage agriculture and ecology and disrupt the lives of 1.3 billion people in downstream India and Bangladesh. Legally, there is no official agreement between China and any of the downstream countries over the use of shared river systems. However, new legislation to govern the transboundary Tibetan rivers has a low chance of coming to fruition as China will likely prioritize economic recovery and the ASEAN trade agreement over some strategic resources.