End of the Kissinger Order in Asia

Interpretations of reports from the financial market swing up and down. China let its currency fall under the symbolic 7-yuan mark yesterday. The Financial Times wrote in an editorial that China had shown its power and courage. They say it’s a new step in the U.S.-China trade war – and the drop in Chinese currency is, according to the daily, an apparent reaction to the new 10% tariffs on Chinese goods which President Donald Trump just announced.

According to FT, the weakening of the yuan signals neither Chinese economic weakness nor the declaration of a new Chinese monetary policy. China, they say, merely wanted to indicate its readiness to use currency as a weapon if the trade war drags on.

But such courage didn’t last long. The U.S. immediately labeled China a “currency manipulator,” and within a couple of hours, China declared it would stop weakening its currency and refrain from using the exchange rate to gain a competitive advantage for exports. The Chinese government announced that it would issue new bonds denominated in yuan, and the currency immediately strengthened. So how about that power and courage?

Czech industrial manufacturing, namely automobile manufacturing, is weakening, as the news announced this morning. It’s said to be mainly a reaction to an economic slowdown in Germany, where expectations are that the economy will show a second-quarter decline.

But that doesn’t fit with today’s morning report of German statistics. German factory orders grew in July – much more than expected. The growth amounts to 2.5%, whereas only 0.5 % was expected. Perhaps the threat of a German recession is not so acute, although one still can’t identify a trend from a single figure.

Gideon Rachman, writing today in a column for FT, points to a disintegration of the strategic order currently underway in East Asia. Toward the end of life, a person suffers various, apparently unrelated, illnesses: fever, pains here and tightness there, stumbling, falling, and so forth. Something similar happens when a strategic order comes to an end.

In the past month, East Asia has been witness to a whole string of incidents. The first Sino-Russian air force exercise took place, and South Korean planes had to fire hundreds of warning shots. South Korea’s relations with Japan have worsened, and Japan has even imposed trade restrictions on South Korea over a dispute that has roots in World War II.

Then there are other hotbeds of controversy and conflict. American warships sailed around Taiwan, and China has rebuked Taiwan for putting itself on the road to independence, saying it wishes to provoke a military response. China is building bases in the South China Sea, and Chinese vessels have sailed into Vietnamese and Filipino waters. China is building a base in Cambodia, and protests in Hong Kong are growing to such an extent that China is considering military intervention. The U.S. will deploy more missiles – partly a result of withdrawing from the Intermediate-Range Nuclear Forces Treaty.

All these things may seem unrelated on the surface. But they demonstrate that the regional strategic order is falling apart. One can no longer count on American military domination and diplomatic predictability so easily and so readily. China is no longer willing to accept a secondary role in the East-Asian security order. And other countries, such as Russia, Japan and North Korea, are testing the rules.

The past 40 years of order and unprecedented growth and prosperity throughout East Asia has transformed the region and even the global economy. Its starting point was peace and stability. Those conditions were established in the 1970s, following the end of the war in Vietnam and the realignment of Sino-American relations. The U.S. tolerated – even helped arrange – the rise of China. In exchange, China accepted the fact that America would remain the dominant military force in the Asia-Pacific region.

That Kissinger arrangement is now coming to an end. Neither the American nor the Chinese president accepts its fundamental principles any longer.