Asian 'pivot' losing its edge

LEADERS in the region worry US domestic crises may be creating a power vacuum.

US government shutdown

THESE are disconcerting days for friends of the US - who include a strong quorum of the 20 other leaders attending the APEC summit in Bali.

They are doing their best to present a public position that US Secretary of State John Kerry is an adequate substitute for President Barack Obama, and that the US government shutdown, now entering its eighth day, is just a local difficulty.

But it's hard. The true situation is considerably more worrying.

The global financial crisis was triggered from the US; Obama has missed two other important meetings in Asia since 2010 because of domestic stand-offs; and Congress doesn't look to be in the mood for giving the government any more money, for trade opening, or for increased global involvement in general.

The shale miracle is the best news on the horizon, reducing US dependence on imported (meaning Middle East) energy, and cutting business costs at home.

But that won't be enough to restore economic ascendancy or the influence that is ebbing away, despite the immense goodwill towards US principles from much of the global community.

Within Asia, this death of a thousand budget cuts is particularly troubling.

The "pivot" towards Asia that Obama announced two years ago was widely welcomed.

Japan - now economically resurgent under can-do Prime Minister Shinzo Abe - looks to the US to back it in its row with China over the Senkaku/Diaoyu islands.

South Korea needs US military backing as a failsafe against a North Korean assault.

Southeast Asian countries look to the US Seventh Fleet to deter China from pursuing a more aggressive role in the South China Sea.

These countries are concerned about where US strategic capacity is heading. And all of Asia - including, especially, China itself - is anxious to see the US economy regain its energy, and especially its appetite for imports.

The 12 nations negotiating the Trans-Pacific Partnership trade agreement are all members of APEC. The US has been leading the charge. Obama has put his prestige on the line to get the deal done by the end of the year.

They will meet in Bali today, but the absence of Obama diminishes the impetus towards the TPP.

Australian economist Peter Drysdale says: "The goings on in Washington make the TPP look suspiciously more and more like a dead cat that no one in Congress will want to pick up any time soon."

Meanwhile, China's President Xi Jinping and Premier Li Keqiang have been flying busily around southeast Asia over the past week, blowing added wind into the sails of the rival Regional Comprehensive Economic Partnership that revolves around ASEAN and its north Asian associates, though with Australia also involved.

Kerry has put a brave face on events, saying the government shutdown is just "political silliness", and urging "all of our friends and foes watching around the world not to mistake this momentary episode in American politics for anything more".

However, it is arguable whether having "silliness" bring such a great nation to a partial halt provides much relief to those friends and foes.

Kerry has struggled to break sufficiently free of the continuing Middle East imbroglios - including Syria, Egypt and Israel/Palestine - to pursue the "pivot".

Indonesia's ambassador to Washington, Dino Djalal, asked recently: "Is the pivot to Asia in the second-term Obama government sustainable with all the attention to the Middle East? Our relations are still below our potential."

Tim Harcourt, the JW Nevile Fellow in economics at the University of NSW business school, says the US has too many shoppers and not enough shippers, and Asia - especially China - suffers the reverse.

This is starting to balance out, he says, but the latest episode in the stand-off between the White House and Congress is accelerating the global economic shift towards Asian nations as both shippers and shoppers - producers and consumers.

"If all your political capital is taken up bargaining with rogue Republicans, you won't have the time or energy to reach out towards Asia," he says. "It's quite a dangerous time. China sights a bit of a leadership vacuum, and they are grabbing it."

University of Sydney US Studies Centre chief executive Bates Gill agrees the Washington shutdown "is unfolding in a larger context of structural changes in the balance of power and influence around the world".

A chain of events including the Syrian conflict, he says, "strengthens the perception of dysfunction and weakness" in the West.

He is more confident, however, of the pivot towards Asia being maintained, and having a lasting impact.

"This current episode will slow things down," he says, but won't end the pivot, with its diplomatic and economic as well as security and military elements.

However, he says: "Perceptions matter, and the task facing the managers of east Asian policy is to overcome the perception of an absence, a lack of commitment. It's going to fall to them, to redouble their efforts.

"But we aren't seeing countries lining up to curry favour with Beijing, or saying they will adopt China's method of governance or economic or environmental policy. In many ways, and in the longer term, the fundamentals still favour the US's role and influence in the region - even though we have some problems right now, that's for sure."

Ralph Cossa, president of the Pacific Forum CSIS think-tank, says while "no one in Asia wakes up in the morning wishing that their government would treat them more like China treats its citizens, few look to the US as the model any more either.

"America's role as a global leader is being tarnished, perhaps irreparably. Even our most polished diplomats have trouble trying to persuade other nations that ... the US system is still worth emulating.

"When the President has to cancel his participation in two important meetings in Asia - APEC and the East Asia Summit - because we can't get our act together at home, it reinforces the image of US decline."

Jakarta Centre for Strategic and International Studies director Rizal Sukma isn't sure this presages a permanent decline, though: "For these two summits, yes, China will overshadow the US. But it is too early to say Washington's influence in the region has been undermined by Obama's absence."

Cossa says it became clear "the message is not being received or believed" when the first questions asked in Japan of the US State and Defence secretaries, visiting with an entourage filled with four-star military officers, was about the US's commitment to the region.

Bank of America Merrill Lynch Australia chief economist Saul Eslake says if the US shutdown is resolved before the debt ceiling is hit, "then I doubt that it would have a material impact on the speed with which the economic centre of gravity is moving to Asia.

"However, the fact that it's preventing Obama from attending APEC will serve to remind others in the region of the dysfunctional aspects of the US political system. Of course, if the Republicans refuse to raise the debt ceiling and the US does end up defaulting on an interest payment or a debt redemption, there could be much more drastic consequences - for US interest rates, the dollar, the stock market and the economy."

Eslake recalls reading a fortnight ago in Thomas Friedman's New York Times column, "the memorable remark that the US had a political system that 'had been devised by geniuses so that it could be run by idiots'. Very prescient."

It is inevitable anyway, he says, that the US's share of the global economy will continue to decline.

Roger Donnelly, chief economist of the Australian government's risk agency, the Export Finance and Insurance Corporation, says "even if there hadn't been a crisis, there would have been further shrinkage" in that share - "for all the well-understood structural reasons to do with catch-up and convergence of emerging economies on advanced ones.

"Add a temporary government shutdown into the mix and it is easy to foresee faster shrinkage. Dial things up to a lengthier shutdown plus a sovereign default, and you can see still faster shrinkage."

Until this fiscal crisis hammered Washington, Donnelly says, "the eastward shift of the world economy's centre of gravity was actually slowing down a little, because of a pick-up in growth this year among the North Atlantic economies and a slowdown among emerging economies, including in Asia". But the shutdown will soon act as a drag on the US recovery.

A credit default, he says, would shake "the bedrock assumption of world financial markets: that US Treasuries are risk-free".

At the margin, asset-holders would rebalance their portfolios out of US dollars and into other currencies, including yuan. This would reinforce voices within China and elsewhere urging a global reserve currency role for the RMB.

The decline is made palpable when visitors travel from east Asia to Western countries. They are often surprised by the poor levels of infrastructure they encounter: the shoddy airports, road systems and public transport, compared with the ultra-modern structures they enjoy back home.

Former Australian foreign minister Gareth Evans says it's time for the US to manage that decline, including by diminishing the use of words such as "dominance" and "primacy". Instead, he says, "we should be saying, and believing, that the real choice for America - as I once heard Bill Clinton put it privately, and I wish he would say it publicly - is not to stay top dog on the global block in perpetuity, but to use its enormous economic and military might to create a world in which it and its allies will be comfortable living when it is no longer top dog".

This means it is also an extraordinarily challenging time for the US's close ally, Australia.

Tony Abbott and Foreign Minister Julie Bishop have launched their new diplomatic roles with aplomb; they will need to maintain this surefootedness as the global balance of power is being shaken.