China-Japan Rift Triggers Charm Offensive for Southeast Asia

China’s growing assertiveness with Japan and the U.S. is helping bring a level of attention to Southeast Asia unseen since the Vietnam War, ushering billions of dollars of investment, wider access to trade and stepped-up military assistance.

A summit starting today between Southeast Asian leaders and Japanese Prime Minister Shinzo Abe, coupled with U.S. Secretary of State John Kerry’s visit to Vietnam and the Philippines from tomorrow, underscore the strategic and increasingly economic attraction of an area poised to benefit as the world’s top three economies -- the U.S., Japan and China -- vie for economic and political influence.

A steady stream of senior officials has visited Southeast Asia this year. Abe has been to all 10 members of the Association of Southeast Asian Nations, with Chinese President Xi Jinping going to Indonesia and Malaysia and Premier Li Keqiang to Vietnam. President Barack Obama plans a trip in April to make up for one he canceled in October, when Kerry and Defense Secretary Chuck Hagel both visited.

As Abe hosts the Asean summit, he will seek support for a united front against China’s new air defense zone in the East China Sea, which covers islands controlled by Japan. While calling for freedom of the sky and seas, Southeast Asian leaders reaping the benefits of China’s bid for closer ties may avoid taking Japan’s side in the dispute.

High Levels

“Engagement by China and Japan in Southeast Asia is certainly at high levels,” said Malcolm Cook, dean of the School of International Studies at Flinders University in Adelaide. “When great powers are interested in you, that can create opportunities. Southeast Asian nations are worried about the risk of having to make a choice between China and the Japan-U.S. alliance.”

The lure of Southeast Asia for the major powers is clear: The number of middle class households in Asean -- a grouping with 600 million people -- may double to 85 million from 40 million by the end of 2017, according to the Economist Corporate Network. The region’s economy is expected to expand 4.8 percent this year and 5.2 percent in 2014, according to the Asian Development Bank, with some impact from recent Thai political turmoil and the Philippine typhoon.

Another boon for Southeast Asia is increased access to Japan’s foreign-exchange reserves, the world’s second largest, in case of emergency. Japan will double the size of currency swap deals with Indonesia and the Philippines, and restart a swap deal with Singapore, Finance Minister Taro Aso told reporters today in Tokyo. It is also negotiating to restart deals with Malaysia and Thailand, according to two Japanese Finance Ministry officials who asked not to be named per ministry policy.

More Complex

“In Northeast Asia things are a lot more complex and this trust issue is still somewhat problematic,” Indonesia President Susilo Bambang Yudhoyono said in a speech in Tokyo today. “Without improving this trust factor, the security environment will continue to be stressful. This is pertinent for the rest of Asia, because most of us have strong relations with Northeast Asia.”

Japan will also announce $19.4 billion in assistance for the region over five years, public broadcaster NHK said on its website, without citing anyone. A joint communique after the summit will say Japan plans to host a meeting of defense ministers to discuss disaster recovery, NHK said.

New Markets

Japan’s big banks such as Bank of Tokyo-Mitsubishi UFJ are seeking new markets by investing in Vietnamese counterparts, while Japan agreed in May to give Myanmar 51 billion yen ($495.9 million) in development loans.

“It is important for Asean to work together in dealing with China,” Deputy Chief Cabinet Secretary Hiroshige Seko told reporters yesterday after Abe met Malaysia’s Prime Minister Najib Razak.

Japan’s government, which is finalizing the nation’s first national security strategy since World War II, has also pledged to provide 10 coast guard vessels to the Philippines, one of the countries at odds with China over waters in the South China Sea rich with oil, gas and fish, and through which some of the world’s busiest shipping lanes run.

“Japan wants to work with Asean and the U.S. to restrain China,” said Takashi Sekiyama, an associate professor at Meiji University in Tokyo and a former Foreign Ministry official. “But some countries within Asean are afraid to damage ties with China, so I don’t think Asean as a whole will become an ally of Japan, as Japan is hoping.”

Trade Partnership

While the U.S. seeks to pin down the Trans Pacific Partnership as part of a broader rebalance to Asia, Xi has also courted the region. On a visit to the region in October he said that China’s economic development will bring opportunities rather than threats, as China detailed $28.2 billion in investments for Indonesia industry. China expects trade with Asean nations to reach $1 trillion by 2020, he said.

Xi has also called for China to be a strong maritime force, and this year’s military budget is set to grow more than 10 percent. The announcement of the air defense zone over the East China Sea has raised questions on whether China may replicate the zone in the South China Sea.

Establishing a South China Sea zone would “provoke a strongly negative reaction from countries such as Vietnam and the Philippines,” said Ian Storey, senior fellow at Singapore’s Institute of Southeast Asian Studies.

Vietnam’s Prime Minister Nguyen Tan Dung said at a forum in Singapore in May that miscalculations over territorial spats in the area could disrupt “huge” trade flows. China has sought to defuse tensions, agreeing to talks on a code of conduct for the waters.

U.S. Pivot

“Beijing doesn’t wasn’t to create too many enemies,” said Jingdong Yuan, a University of Sydney professor specializing in Asia-Pacific security. “Clearly periphery diplomacy is very important for China. It wants to counter the U.S. pivot into the Asia-Pacific.”

The Philippines, which has tensions with China due to their dispute over the Scarborough Shoal and is sending six Cabinet members with President Benigno Aquino to the Japan summit, has said it wants to separate security and economic ties. China will probably overtake Japan and the U.S. to become the Philippines’ largest export market, Trade Secretary Gregory Domingo said in October.

Economic Links

The Asean-Japan summit will focus mostly on economic links, according to Clarita Carlos, a political science professor at the University of the Philippines. Asean officials are working to allow free movement of goods, services, investment, capital and skilled labor as part of a European Union-style integration plan. The Asean Economic Community is targeted for the end of 2015.

“If the region is not stable it will impact investment and trade,” said Xu Liping, senior fellow at the National Institute of International Strategy at the Chinese Academy of Social Sciences in Beijing. “Southeast Asia needs good relations with China and Japan. Choosing Japan or choosing China is not beneficial to their development.”

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