April 1, 2019 Reading Time: 6 minutes
Ellen L. Frost*
Four pillars have bolstered Asia’s impressive growth and stability: (1) a relatively open US market; (2) a functioning set of trade rules implemented through the World Trade Organization (WTO); (3) rapidly growing, market-fueled prosperity in a reform-minded China; and (4) credible US security guarantees backed by a substantial US military presence. All four are now at some risk.
Asian governments lack the power to reverse these risks, but they can mitigate them. One way would be to accept more funding from China. China’s Belt and Road Initiative (BRI) should not be opposed out of hand, but concerns about the quality of Chinese projects, the lack of transparency, and the build-up of unsustainable debt limit this option.
Fortunately, there are other ways for governments to cope with the riskier climate. To offset the Trump era protectionism, they can deepen and accelerate trade and investment liberalisation among themselves. They can acknowledge and address Washington’s legitimate concerns. They can join others to press for updating WTO rules to encompass State-Owned Enterprises (SOEs), intellectual property protection, and other problem areas while pursuing their own interests. They can benefit from China’s hardening political and economic climate by accelerating reforms to become more attractive to companies shifting operations out of China. They can pool resources and information to deal more effectively with traditional and non-traditional security threats in the region.
An additional way to cope with current risks is to revive and strengthen pre-colonial maritime connections in and around the Bay of Bengal. This step is a high priority of donors and governments, but it is moving too slowly and from a low baseline.
Seaborne trade and investment between South and Southeast Asia are lagging. South Asia itself is among the least integrated regions of the world; trade within the region accounts for only about 5% of world trade. Similarly, intraregional foreign direct investment (FDI) in South Asia accounts for less than 1% of global foreign direct investment (FDI).1 By contrast, Southeast Asia’s trade and investment are highly globalised and at least partially integrated. Since 1990, trade and investment between South and Southeast Asia have increased substantially, but this expansion started from a low base and is below its potential.
Closer connectivity can foster export-oriented regional value chains in agriculture, textiles, fisheries, and services. Modern ports can handle huge container ships, tankers and bulk cargo vessels. Efficient port communities also attract more cruise ships and facilitate local tourism, which would benefit small and medium enterprises and encourage local arts and crafts. Achieving closer maritime relations will require feeder roads, small airports, and services, all of which will boost jobs.
Conversely, doing nothing to improve the status quo poses security risks. Conflicting maritime boundaries can breed conflict. Overfishing, severe resource depletion, and loss of livelihoods can prompt desperate people to migrate or to engage in criminal activity at sea or on land.
For all of these reasons, most governments in the greater Bay of Bengal region are committed to the modernisation of ports and associated facilities. Improved political relations between India and Bangladesh are easing the way. The Asian Development Bank (ADB) is providing major encouragement and support,2 but governments have a way to go when it comes to a key player in connectivity initiatives – the private sector.
Private companies possess most of the technology, skills, and capital needed to expand complex maritime investments. Given the enormous scale of infrastructure initiatives connecting South and Southeast Asia, governments and development banks will be unable to supply more than a small fraction of the estimated USD 1.7 trillion annual funding that Asia needs. Even China’s grants and loans will not go very far.
Companies investing in the Bay of Bengal region face significant obstacles. According to the World Bank’s ‘Doing Business’ rankings, on a scale of zero to 100 (100 being the best), South Asia’s regional average is only 56.7. Sri Lanka, which has long been a stopping point for trading vessels and a key gateway to the Indian Ocean, weighs in at only 61.2. Out of the 190 countries surveyed, Sri Lanka ranks at 100. Even India, a notoriously frustrating place to do business, earns a higher score (67.2) and a better global ranking (77). The best performer in the Bay of Bengal region is Thailand, with a score of 78.45 and a global ranking of 27.3
The US government has long been constrained from financing large-scale ‘hard’ (physical) infrastructure projects, but US companies and individual experts are well qualified to supply ‘soft’ infrastructure in the form of services. US strengths include building and equipping service industries and training people to use them (abbreviated as ‘build, equip, train’ or BET). US companies are highly competitive in fields such as digital connectivity, logistics management, inventory control, insurance protocols, energy, and project design. Rather than opposing the BRI Initiative, the US and its regional partners could transform narrow, China-focused resource transportation corridors into dynamic economic communities facilitating trade and development more broadly.4
In the summer of 2018, Secretary of State Pompeo visited Asia and gave two speeches designed to reassure the nations of the Indo-Pacific that the Trump administration remained committed to their security and economic well-being. On 30 July 2018, he announced that USD 113 million would be allocated to support joint efforts in digital connectivity and cybersecurity, energy, and infrastructure. He described this paltry amount as a lever to attract private sector participation and more broadly as “a down payment on a new era in American economic commitment to a free and open Indo-Pacific.”5
In October 2018 President Trump signed into law the Better Utilization of Investments Leading to Development (BUILD) Act. Supported by both political parties, the Act establishes the US International Development Finance Corporation (IDFC), whose purpose is to mobilise private capital and skills. The new law lays out various kinds of US government support and authorises sizable increases in US funding for development.6 A separate bill, poignantly entitled the Asian Reassurance Initiative Act, authorises USD 1.5 billion over five years for a wide range of projects.7 Both laws have significant Congressional support.
A second speech by Secretary Pompeo, on 4 August 2018, signalled comparable support for Indo-Pacific security. In it he declared that USD 300 million would be allocated to improve maritime domain awareness and counter transnational threats. Also included was a pledge to improve search and rescue capabilities for countries responding to natural disasters.8
Most of these security initiatives are not new. For example, Washington has long cooperated with regional governments to strengthen coastal defences and crack down on piracy and illegal trafficking at sea. Although no country in the Indo-Pacific region is among the top ten recipients of US security assistance, many countries have long benefited from US programs such as military education and training, joint military exercises, sales of military equipment, and the provision of coast guard vessels and equipment.9
What was new in the 4 August speech was the explicit focus on the Bay of Bengal. Citing current maritime cooperation with India, Secretary Pompeo pledged to step up cooperation with others, including Sri Lanka.10
As an island state in a key geographic location, Sri Lanka can play a leadership role in the greater Bay of Bengal community. As the new Chair of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), it can promote the goals of the Kathmandu Declaration of 2018 by adding weight and momentum to BIMSTEC’s “Transport and Communications (Connectivity)” mandate.11 Following the subregional example set by the BBIN grouping (Bhutan-Bangladesh-India-Nepal) and the “P-4,” (Four small and medium-size nations – Singapore, Chile, Brunei, and New Zealand, known as the “P-4” – formed what became the Transpacific Partnership (TPP) it can form an united front with two or three like-minded partners. It can respond positively to Secretary Pompeo’s offers without offending China and others. As a small state, it can serve as a broker to resolve conflicts without arousing animosity from larger players. One example is Sri Lanka’s high-level conference held on 11-12 October 2018 to support a rules-based order in the Indian Ocean.
The time is ripe to restore centuries-old connections around and across the Bay of Bengal. All national and local governments recognise the enormous benefit of closer integration. What is needed now is domestic economic reforms and incentives to the private sector. Sri Lanka and the United States have an opportunity to lead this promising transition, each in their own way.
1World Bank. (2019). One South Asia. [online] Available at: http://www.worldbank.org/en/programs/south-asia-regional-integration [Accessed 18 Feb. 2019].
2Asian Development Bank and the Asian Development Bank Institute. (2015). Connecting South Asia to Southeast Asia: Cross-Border Infrastructure Investments. [Online] Tokyo: Asian Development Bank Institute. Available at: https://www.adb.org/sites/default/files/publication/156338/adbi-wp483.pdf [Accessed 20 Jan 2019].
3The World Bank. (2019). Doing Business in Sri Lanka. [Online] Doing Business. Available at: http://www.doingbusiness.org/en/data/exploreeconomies/sri-lanka# [Accessed 15 Jan 2019].
4Friedhoff, K. (2018). BET on Southeast Asia: Bending BRI to US Advantage Pacific Forum. [Online] PacNet. Available at: https://www.pacforum.org/analysis/pacnet-50-bet-southeast-asia-bending-bri-us-advantage [Accessed 15 Jan 2019].
5Pompeo, M.R. (2018). America’s Indo-Pacific Economic Vision. [Online] U.S.Department of State. Available at: https://www.state.gov/secretary/remarks/2018/07/284722.htm [Accessed 15 Jan 2019].
6Committee of Foreign Affairs (2018). BETTER UTILIZATION OF INVESTMENTS LEADING TO DEVELOPMENT ACT OF 2018. [Online]. Available at: https://www.congress.gov/115/crpt/hrpt814/CRPT-115hrpt814.pdf [Accessed 15 Jan 2019].
7Panda, A. (2019). Trump Signs Asia Reassurance Initiative Act Into Law. [Online] The Diplomat. Available at: https://thediplomat.com/2019/01/trump-signs-asia-reassurance-initiative-act-into-law [Accessed 16 Jan 2019].
8Share America (2018). Pompeo outlines Indo-Pacific security initiatives. [Online] Available at: https://share.america.gov/pompeo-outlines-indo-pacific-security-initiatives/ [Accessed 16 Jan 2019].
9Congressional Research Service (2018) U.S. Security Assistance and Security Cooperation Programs: Overview of Funding Trends. [Online] Available at: https://crsreports.congress.gov/product/pdf/R/R45091 [Accessed 16 Jan 2019].
10 U.S.Department of State (2018) U.S. Security Cooperation in the Indo-Pacific Region. [Online] Available at: https://www.state.gov/r/pa/prs/ps/2018/08/284927.htm [Accessed 15 Jan 2019].
11Ministry of Foreign Affairs Nepal (2018) Fourth BIMSTEC Summit Declaration, Kathmandu, Nepal (August 30-31, 2018). [Online] Available at: https://mofa.gov.np/wp-content/uploads/2018/08/Fourth-BIMSTEC-Summit-Declaration-final.pdf [Accessed 15 Jan 2019]
*Dr. Ellen L. Frost is a Senior Advisor and Fellow at the East-West Center’s Washington office and a Visiting Distinguished Research Fellow at the National Defense University. The opinions expressed in this article are the author’s own and not the institutional views of LKI, nor do they necessarily reflect the official policy or position of the National Defense University, the Department of Defense, or the US government. This article was originally published in the Daily FT.