When Balance of Power fights Market Power

The new Lowy Asia Power Index reveals political power shifts, but may understate the unwillingness of Big Business to toe the line.

Shifts in state power, political scientists tell us, are early warning signs of interstate conflict. Keeping up with the Joneses, in a geopolitical sense, means fearing that a neighbour’s rise in wealth will show itself not in a bright, shiny new car but missiles, jet fighters and menacing warships. 

Yet keeping up with the Joneses comes at a cost. With the power that Big Business exercises in particularly Asian state economies, what role will they play in the power shifts of the region? 

The Lowy Institute’s new Asia Power Index is a useful guide to the competition between the regional Joneses. Like the very valuable Pacific Aid Map, which has highlighted some of New Zealand’s and Australia’s fears of Chinese power projection, Lowy’s new report throws a light on whose power and influence is shaping our neighbourhood. 

With the U.S. now spending $858 billion on defence, and rumoured to increase this to over 1 trillion this year, there is no question who is the most worried about shifts in power. China, on the other hand, while not far behind the U.S in economic might, has still a way to go before catching up to it as a military rival. 

One of the most telling indicators in the Lowy index is in regional investment ties. China, who is the number one trading partner for most of the Indo-Pacific states (and indeed the world) is trending downwards. The U.S., Singapore and Taiwan are the only three trending up. It is too early to tell whether the Biden Administration is making inroads into Asia’s trade, and it is possible that some of Lowy’s economic calculations illustrate only temporary ‘post’-Covid blips for the U.S, Singapore and Taiwan, and the economic effect of the long lockdown in China. 

Overall, global foreign direct investment (FDI) had grown to 1.9 trillion in 2021 but by last year UNCTAD were pessimistic about the future, saying greenfields investment was already down 21 percent and likely to decrease further. The real money over 2021 had been made in mergers and acquisitions, not new factories or farms.

While multi-nationals had been enjoying good profits, by early 2022 they were being told to leave Russia and many Indo-Pacific states were recommending businesses diversify away from China.   

Two of the largest spikes in foreign direct investment (FDI) in 2021 were inflows to Hong Kong (35.8%) and the Baltics: Latvia (13.3%) and Estonia (19.2%). That enthusiasm is likely to have dampened as the effects of the war in Ukraine began to be felt, energy costs soared, and Beijing hinted they would help prop up Moscow after heavy sanctions and being increasingly shunned by the global economic system. 

Russia, as the Lowy index shows, is neither an economic power nor a major concern for multi-nationals. (Its ranking falls below South Korea and Singapore.) Few countries do enough trade with Russia to be concerned about losing it.

Those companies that left Moscow after the Ukraine invasion, like McDonalds, may have left enough infrastructure behind to be able to return some day and replace the look-alike branding back to the original golden arches. Yet it was telling how many of Japan’s conglomerates were reluctant to divest, even when Russia accounts for no more than 0.7% of total Japanese FDI.  They stayed, despite sanctions being imposed on Moscow by Tokyo, and the memory of Toshiba being punished by the U.S. for Soviet sales in 1987. According to a Yale University watchdog, those companies include: Itochu, an oil and gas exploration company; TEPCO, an oil importer; Nippon Telegraph and Telephone; and industrial heavyweights Mitsubishi, Mitsui, Kawasaki, Yamaha and Makita. Japan has a history of being dominated by a few mega-corporations. Big Business has reportedly stymied Japan’s policy efforts in other areas, like climate change. 

The big question is what will happen if these same multi-nationals are asked to decouple from China. Japan invested $10 billion into China in 2021, second only to Singapore at $18 billion. It may be difficult for Big Business to exit if called upon. McDonalds projected a $1.2-1.4 billion loss by leaving Russia. Other companies reported large write downs: Adidas ($498m), H&M ($183m), Ford ($122m), Nissan ($687m), CitiGroup ($170m) and AP Moeller-Maersk ($718m). Getting out is not as simple as it sounds. 

Just last week the Biden Administration moved to restrict U.S. investment firms from putting money into Chinese technology companies, after all but choking semi-conductor exports to the Middle Kingdom in October 2022. U.S. companies had spent about $11 billion that year buying or investing in Chinese companies. Many businesses did so at a time when Washington was encouraging closer economic ties with Beijing. They were not happy to learn the Administration had shifted its thinking again. 

New Zealand has been chewing over the issue of diversifying away from China, a success story that may become problematic as we become more and more dependent on the PRC for income. With the FTA upgraded in April 2022, exports have continued to grow overall, rising from NZ$18 billion to NZ$21 billion in 2022, with a trade surplus of $4 billion. In December 2022, Trade Minister Damien O’Connor told Kiwi businesses not to put all their eggs in one basket, but as far as opportunities outside China were concerned, it was "up to the exporters to choose where they take those up."

This laissez-faire approach belies the fact that many Kiwi businesses may find diversifying difficult. For example, almost half of Māori authority exports go to China, which accounts for nearly all of kaimoana sales. It may be even more difficult for Kiwi business with bricks and mortar in China to move. Fonterra, which has reportedly invested $1 billion in China, took an $880 million hit when it sold down its stake in Chinese dairy farms in 2021, to pay back debt. Economist Economist John Ballingall has claimed that diversification “is a nice thing to say [but] it is really hard to do in practice.” Covid-19 not only interrupted supply lines to China, it also put pressure on diplomatic progress. The Lowy report says New Zealand slipped back two places (behind Thailand and Malaysia) for diplomatic influence, while our power gap (an index which calculates resources-influence in Asia) was half what it was in 2021. 

Decoupling or diversifying may become more urgent requirements for those Indo-Pacific state worried about China’s use of power. But it has real costs to businesses, and knock-on effects to domestic markets who may have to absorb FDI losses. The balance of power might discover therefore that the greatest pushback comes from market power. It is one thing for states to play keeping up with the Joneses against rival neighbours, it is another if the financiers look at your plan for world influence and say no.

- Asia Media Centre