Asia Rising: The Increasing Relevance of East Asia in Foreign Policy

In late May, Putin and Xi Jinping signed a massive 400 billion dollar natural gas deal in Shanghai. For the next thirty years, new pipelines will pump trillions of cubic feet of natural gas from Russia’s Gazprom, the world’s largest natural gas extractor, to the China National Petroleum Company (CNPC). While the agreement certainly comes at a critical time for Putin strategically as he counters US and EU sanctions, it is representative of a larger global trend: an economic, political and defensive shift toward the East.

Putin has been pushing for an energy deal with China for nearly ten years, and rightfully so. China, and Asia more broadly, has a vast market for oil and natural gas with its megacities and booming economy. The deal between Gazprom and CNPC gives Russia a foot in the door of this profitable energy market. Providing up to 20% of China’s natural gas needs, the deal finally solidifies the Sino-Russian alliance that Putin has been advertising. What’s more, the two countries will be paying with their own currencies, the ruble and yuan, completely bypassing the American dollar, which is traditionally used in energy transactions. Although the dollar has long been the international reserve currency of choice, Russia’s VTB and the Bank of China’s decision to trade in domestic currencies stresses the exclusivity of the Eurasian trade deal; the US is not welcome. Although this alone does not significantly destabilize the petrodollar, it certainly undermines American relevance in the deal and indicates Putin’s increasing focus on relations with Asia.

Putin’s meeting with Xi Jinping also comes on the heels of Obama’s four-country Asia tour in April. After a canceled trip to Asia during the October government shutdown, Obama’s tour demonstrates the president’s desire to make good on his foreign policy goal to “pivot to Asia.” In his visit to Japan, South Korea, Malaysia and the Philippines, Obama focused on strengthening economic and military relationships. The trip resulted in increased numbers of American military personnel and equipment stationed in the region; yet, thus far, Obama’s plans for future economic partnerships have not been realized.

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President Obama is the first American president to visit Malaysia since Lyndon B. Johnson in 1966. 2014. (Flickr Creative Commons/The White House)

Neither the Malaysian nor Japanese leadership approved Obama’s Trans-Pacific Partnership (TPP) to increase connectivity between the Asian and American economies. Despite domestic backlash from Democratic Senators and Congressmen, Obama has continually pushed for more economic cooperation across the Pacific. Obama, like Putin, hopes to benefit from the expanding Asian markets; the TPP would eliminate tariffs between the US and several Latin American and Asian states. According to Don Emmerson, a political scientist at Stanford, “Americans cannot afford to deny themselves…the opportunities for trade and investment” present in Asia, but Asian leaders, however, seem less enthusiastic. In Japan, Abe refused to join the partnership due to the protected five sacred areas of Japanese agriculture. In Malaysia, political “sensitivities” and economic concerns also halted progress. The TPP has major implications for American and Asian economies (Japan is America’s biggest trading partner in Asia aside from China). Thus, although no agreement was reached during the tour, the American, Japanese and Malaysian leaders promised to continue negotiations. These promises give President Obama a glimmer of hope that soon the Asian governments will be more receptive to the partnership. It should be Obama’s mission, then, to adjust the TPP to be more beneficial for all states involved, especially those with heavily protected domestic industries.

TPP negotiations were also designed to reestablish American’s military presence in East Asia. The US military will continue to maintain operational control of the Demilitarized Zone between North and South Korea. This agreement gives the US command of South Korean troops in the event of war with North Korea. In Japan, Obama reassured Prime Minister Shinzo Abe that the Senkaku Islands (or the Diaoyu Islands, as they are known in China) would fall under American protection in the case of a threat. These uninhabited islands have long been disputed by Japan and China, who both claim ownership of them. Obama’s declaration of support for Japan’s sovereignty in the maritime dispute is a signal of disapproval to China, whose military actions in the East and South China Seas concern many Asian states. As expected, China was not pleased by Obama’s remarks.

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The Senkaku/Diaoyu Islands, located in between Japan and China. 2012. (Wikimedia Commons/Voice of America)

Obama’s actions in the Philippines were also bad news for China. The United States and the Philippines, which has experienced their own territorial disputes with China, responded with a 10-year defense treaty, the first since the 1990s. The treaty again serves as a counterweight to China. Yet, none of Obama’s military agreements should come as a surprise considering the staggering growth of China’s military budget. In 2014, China plans to spend $132 billion on defense, a 12.2% increase from 2013 – although most critics agree that the real number is significantly higher.

These figures make China impossible to ignore. Combine the country’s military expansion with its rapidly growing GNP and it becomes one of the greatest forces in the world today. China’s enormity and consequent impact on its neighbors, from Japan to the Philippines to Russia, have forced other world powers to readjust. Putin and Obama have played their hands, each trying to get ahead in the Asia-Pacific. Putin’s natural gas deal has created a buffer for conflicts in Europe and Obama’s efforts to increase economic cooperation and American military presence in Asia also indicate increased interest in Asia. It remains to be seen how other world leaders will react to the growing relevance of East Asia in global issues.

In early May, European Union (EU) leaders met with Shinzo Abe to reaffirm their positive relationship. At the meeting, the leaders discussed further economic and political ties, although no specific agreements were signed. The leaders of the EU and the Association of Southeast Asian Nations (ASEAN) will also hold a summit in October. Will Europe, like Russia, turn to China, Asia’s largest power, or invest in ties with other East Asian nations alongside President Obama? Regardless, it is clear that the “turn to Asia” is a legitimate and global phenomenon.

The views expressed by the author do not necessarily reflect those of the Glimpse from the Globe staff and editorial board.

Xiaomi’s Expansion and the Test of Chinese Soft Power

Xiaomi is outselling Apple in the Chinese smartphone market, and recently announced its plans to expand globally. You may be asking: “Xiao-who?” Well, here is an introduction to the hottest tech company in China, their blueprint for expansion, and what this means for China’s growing “soft power” – a construct that emphasizes a state’s economic and cultural influence.

Xiaomi Founder at the Fortune Global Forum 2013. (via flickr: Fortune Live Media/ Creative Commons some rights reserved)

Xiaomi Founder at the Fortune Global Forum 2013. (via flickr: Fortune Live Media/ Creative Commons some rights reserved)

Ascent to Stardom

Xiaomi Inc. is an Internet service and consumer electronics company founded in April 2010 by Steve Job’s Asian twin, Lei Jun (see photo). Selling high-end smartphones at near production costs, Xiaomi has challenged Asia’s top smartphone providers in the Chinese, Taiwanese, and Hong Kong markets. In the second quarter of 2013, Xiaomi became the fifth-largest supplier of handsets in Mainland China. In August, Lei poached top Google executive Hugo Barra to orchestrate Xiaomi’s global expansion. And shortly thereafter, a “flash sale” of 100,000 Hongmi-model smartphones ($135 compared to the $750+ iPhone) sold out in 90 seconds. In October, Xiaomi sold 100,000 of the luxury Mi3-model smartphones ($327 for 16GB or $410 for 32GB) in 83 seconds. Less than four years after incorporation, Xiaomi has gained Apple-like popularity and a market valuation at $10 billion (equal to Lenovo or double that of Blackberry). Xiaomi executives project smartphone sales in the neighborhood of 20 million units by year’s end.

International Expansion

But they aren’t satisfied. At a recent media event in Taiwan, Lei and Barra announced their expansion into the Southeast Asian market, specifically Singapore and Malaysia. Why? Singapore and Malaysia have the necessary technological (network coverage) and regulatory (welcoming governmental and legal institutions) infrastructure for Xiaomi’s entry. Further, the people of Singapore and Malaysia are smartphone fanatics. Smartphone penetration in Singapore and Malaysia is at 87% and 80% respectively. Comparatively, the United States is at 60%.

Xiaomi may succeed in its initial expansion—despite entering a saturated market—for four reasons:

  1. Fandom: “Flash sales,” and the social media blitzkrieg surrounding these events, have generated frenzy among middle-class shoppers eager for the newest smartphone. Further, Xiaomi allows its customers to actively shape its software platform. Miui, a spinoff of Google Android software, is updated nearly every week based on the suggestions of its 5.1 million members. Client-customer collaboration has boosted Xiaomi’s popularity in China and promises to do the same in Southeast Asia.
  2. Increased competition: Samsung has run a near monopoly in the Southeast Asian smartphone market. But three Asian companies, Huawei, Lenovo and LG, are challenging its dominance and eating away at its market share each successive quarter. Xiaomi could benefit from an increasingly diverse market.
  3. Subsidies: Singaporean and Malaysian telecom operators offer smartphone subsidies. Thus, Xiaomi phones could be free with the purchase of a contract—an enticing offer for those who disheartened by the larger sticker price of a Samsung or Apple handset.
  4.  Apps: Singaporeans and Malaysians love apps. In fact, they score highly (Singapore at number one) in the World Mobile Readiness Index, a metric that calculates a population’s willingness to pay for mobile apps. Singaporeans’ and Malaysians’ willingness to pay for apps perfectly accommodates Xiaomi’s business model. Xiaomi has razor-thin profits on smartphones (compared to a company like Apple that has a 55% profit margin on the iPhone) and therefore relies on apps and accessories to generate profit.

Litmus Test

Xiaomi’s success in Singapore and Malaysia will be indicative of its potential success outside the Chinese mainland. Xiaomi has thrived in the Chinese market where Apple holds less than 5% market share and Google Play (Google’s “App Store”) is not officially available. How Xiaomi competes in areas where Apple and Google have a stronger grip will be telling. If unsuccessful, Xiaomi will likely retreat to China. If successful, look for Lei and Barra to deepen expansion in Southeast Asia, particularly in the Philippines—a country with a higher Mobile Readiness score than Malaysia and Hong Kong yet with only 15% smartphone penetration. The Filipino market would be wide open to an injection of Xiaomi products.

China’s difficulty in accumulating soft power has been well documented. However, much to the chagrin of some Americans, China’s soft power, particularly its global economic influence, is on the rise. A burgeoning tech market has begun to stimulate international growth for a number of Chinese companies (think Lenovo, Baidu, and Haier). Xiaomi’s success in Southeast Asia could demonstrate or precipitate greater success of Chinese companies in foreign markets. As a result, Chinese communication technology may attain the “cool factor” of Apple or Samsung products—which are widely regarded as fashionable and reliable. In short, Xiaomi may trigger consumers of Chinese tech products around the world to begin prizing the “Made in China” tag rather than associating it with mediocrity. And such a rise in economic influence is a necessary characteristic of any great power.