Senator Yuen Pau Woo

This session was delivered at the 6th Global Strategy and Emerging Markets Conference, May 7-8, 2022. The conference was hosted by Simon Fraser University’s Jack Austin Centre for Asia Pacific Business Studies in partnership with Cornell University Emerging Markets Institute, Northeastern University Center for Emerging Markets, and The University of Texas at Dallas Center for Global Business with a theme of Geopolitics, Emerging Markets, and Global Strategies. 

Keynote speech by the Honourable Yuen Pau Woo, Senator for British Columbia and former President and CEO of the Asia Pacific Foundation of Canada:

Co-chairs Jing Li and Danny Shapiro, Dean Ujwal Kayande, Professor Lourdes Casanova, the Honourable Jack Austin, distinguished participants: Good morning. 

I am speaking to you from the nation’s capital Ottawa, which is located on the traditional territories of the Algonquin-Anishinaabe peoples.  I am honoured to be giving a keynote message to kick off your conference and only wish that I could deliver my speech in person, not least because of the opportunity to interact with participants who have come from near and far.

The theme for this conference – Geopolitics, Emerging Markets, and Global Strategy – could not be more timely and I am looking forward to listening in on some of the sessions to get insights from all of you, especially as they apply to Canada.

I am not an academic so I will not pretend to offer a scholarly assessment of this very broad topic.  But I have worked on emerging market issues all my life and have had a particular interest in the intersection of geopolitics and strategy.  I hope I can offer a few ideas and some stylized propositions to stimulate your discussions in the days to follow.

My life story is in a small way about the intersection of geopolitics, emerging markets, and global strategy.  I was born in post-colonial Malaysia, and grew up in Singapore, where I spent some years working for the central bank as an economist.

I am a product of the so-called East Asian miracle, at least the Singapore variety, that most economists would attribute to some version of an outward oriented, market-based development strategy. Per capita income in Singapore in the 1960s was about the same as Burma and Ceylon.  Today it is closer to US$60,000, which is higher than Canada.

The conventional wisdom of Singapore’s success story is one of enlightened leadership embracing a policy of radical openness to multinational investment at a time when many other developing countries saw foreign direct investment as an extension of colonialism and pursued more “self-reliant” economic development strategies.  There are other aspects to the story, such as the forced mobilization of domestic savings, public housing, massive investment in education, and a competent civil service – all made possible by an authoritarian state that did not shy from the suppression of political dissent in the interest of the “greater good”. 

But what we generally did not talk about was the favourable geopolitical context for Singapore’s “miracle” economic growth, one that was built on the crucial requirement of assured access to rich country markets, particularly the United States.  This was of course a period when open markets were increasingly seen by the global elite to be an objective good, and where trade barriers around the world were falling rapidly, partly because of the conclusion of the Uruguay Round in 1994, but also because of the unilateral trade liberalization that preceded it, especially in East Asia.  Between 1950 and 2008, global trade expanded 50-fold and global GDP more than 60-fold. 

In a sense, ANY developing country that chose an outward-oriented development strategy that was based on exports to rich country markets from the 70s through the early noughts could not have failed to increase welfare for its citizens

It is easy to forget, however, that there was a geopolitical context that allowed for the rapid expansion of global trade and investment.  It is that with the end of the second world war and the retreat of colonial powers such as Britain and France, a newly-ascendent United States saw fit to rebuild a global order based loosely on market principles and buttressed by security guarantees, especially in Europe and East Asia.  American support for open markets was not philanthropic since US businesses benefited greatly from access to fast growing economies, and US consumers enjoyed low-cost manufactured goods produced in developing regions of the world.  But ulterior motives aside, it is fair to say that for much of the second half of the 20^th century, there was a kind of Pax Americana which benefited countries that a) were aligned with the United States in its cold war against the Soviet Union, and b) pursued outward-oriented development strategies that could ride the wave of rapid global growth.

Until 1989, Pax Americana was regional rather than global. But after the collapse of the Berlin Wall and the subsequent implosion of the Soviet Union, there was a view that Pax Americana and the capitalist ideology that came with it would become a universal phenomenon.  This was dubbed the “unipolar moment” and it led to grandiose pronouncements such as “the end of history”.  Thus began a period of accelerated globalization, not just through the liberalization of trade in goods and services, but also in the free flow of capital and to a lesser extent, labour.  It was also a time when a particular view of markets became dominant, what we now call neo-liberal economics, which attributed powers of social improvement to Adam Smith’s invisible hand that would have made Adam Smith choke.  The point here is not to debate the merits of trade liberalization, globalization, or neo-liberal economics. Rather it is to say that these ideas were a product of a historical period that was underpinned by a particular configuration of global order -- under the leadership of the United States and, more importantly, with its consent.

The result of rapidly expanding global trade and investment was faster economic growth in most parts of the world, especially those places which embraced economic openness and American leadership.  Even those countries that were not in the US camp, but which nevertheless signed up for the global division of labour, benefited from the rapid expansion of trade and output of the 80s, 90s, and 2000s.  Think of Vietnam, which fought a bitter war against America, and, above all, China, which didn’t even open its economy until the 1980s.  The world is better off today because of globalization, not just for rich cosmopolitans, but also for citizens of most countries in the bottom half of the global income distribution.  Inter-country income inequality has narrowed because of globalization, which is of course what economic theory would predict, and what economists like to call “convergence”.

But narrowing income inequality among nations has masked growing inequality within countries, especially industrialized economies and notably the United States.  You will recognize this as the Branko Milanovic story, which goes on to suggest that there is a connection between the improvement of global inequality and the worsening of inequality within countries.  There is ongoing debate about the relative importance of import competition and technological change for the de-industrialization of rich countries, but I think it is safe to say that US politicians are placing their bets on the former, which is why we are witnessing the rise of protectionism in the US and the effort to “bring back manufacturing” to the American heartland.  The $1.2t Infrastructure Investment and Jobs Act is an example of legislation that is as much about protection against foreign competition through a variety of “Buy America” provisions in the bill as it is about building new infrastructure.

Other industrialized countries are also trying to address income inequality through redistributive measures such as wealth taxes, funding for “left behind” regions, and income support for disadvantaged segments of the population, all of which are sensible policies. But the temptation to shield the country from foreign competition is often too great for politicians to resist, and we are likely to see more and more of these policies, whether dressed up as “national security” (sensitive sectors), “resilience” (PPEs), or  “buy local”.

To this extent, the revenge of geopolitics is not just about war and peace, a la Ukraine, but it is also about the grubby nature of domestic politics in industrialized countries and the pressure on politicians to address public discontent due to the uneven distribution of the benefits of globalization. While the Russian invasion of Ukraine will add a fresh dimension to the impact of geopolitics on the prospects for emerging markets, the seeds of a geopolitical reversal were sowed much earlier and had already begun to produce weeds before the Ukraine war.

The pointy end of our new geopolitical reality is of course China, or more specifically, US-China strategic rivalry.  You will have deduced from my preceding remarks that I view the rivalry primarily through the lens of economic competition rather than that of a military threat or the notion of democracies versus autocracies – regardless of the rhetoric employed by politicians.  China embraced the global division of labour in the 1980s and carved a niche in global supply chains that allowed it to embark on a policy of massive rural-urban migration that lifted hundreds of millions of its citizens out of poverty. 

As Milanovich reminds us, the dramatic improvement in global income distribution over the last 40 years is largely because of China.  But the corollary is that the worsening position of people in the middle to upper quadrant of the global income distribution curve (the downward descending part of Milanovich’s “elephant trunk”), are the left-behind citizens of rich countries, particularly the United States.  In this sense, no one should be surprised that the domestic politics of income inequality in the US is playing out as the geopolitics of Sino-US rivalry.

China has become a problem for the United States because she is perceived to be a peer competitor in a number of economic and military domains.  The awkward fact is that China become a peer or near-peer competitor on the back of Pax Americana’s twin pillars – open trade and investment, and the maintenance of peace and security in the region.  Both corporate and main street America have benefited massively from China’s rise, not least through three decades of low inflation made possible by Chinese workers exploiting themselves to manufacture consumer goods for rich countries, and more recently by the addition to global aggregate demand that is the US$18 trillion Chinese economy.  China did all of that without embracing the American order or challenging it.  China was, in effect, a free rider, and the United States was happy for the extra vessel in a flotilla led by USS Globalization.  In the last decade and a half, however, USS Globalization has sailed in a different direction, and it is not clear that Washington DC still wants a Chinese vessel in its wake. 

The reason has as much to do with China as it has to do with the United States.  Since the advent of Xi Jinping in 2012, China has become more assertive in a number of ways, most of which are well known to all of you, so I won’t spend much time on them:

1. Actively seeking to move up the value chain by raising the relative cost of labour to force higher value- added production, buying foreign companies, creating brand recognition, and registering intellectual property
2. Developing intellectual property, investing in 4^th industrial revolution industries (Made in China 2025)
3. Creating new markets in developing regions through FDI and infrastructure investment, including the Belt and Road Strategy
4. Demanding a greater say in existing regional and global governance institutions, and creating new institutions (AIIB)
5. Projecting its security interests in the region by expanding its naval capabilities and claiming islands in the South China Sea, as well as striking quasi-military deals with South Asian and Pacific Island Nations
6. “Wolf warrior” and hostage diplomacy
7. State and non-state led media campaigns that are a mixture of public diplomacy, nationalist pride, jingoism, and propaganda.

There are many ways to criticize these actions, from accusations of stolen intellectual property to stalking horse investments, debt diplomacy to the disregard of international law, and more. But taken as a whole, China’s newfound assertiveness internationally is consistent with that of a rising superpower and, in historical terms, not unlike earlier periods of imperial or capitalist ascendency.

Nevertheless, Chinese assertiveness runs counter to US interests, not necessarily because these are new threats as such, but because China is seen as a peer competitor and not just any old competitor.  More to the point, China is seen as a peer competitor that does not accept US hegemony, especially in the form of American forward deployment of military assets on the periphery of the Chinese mainland.

To grossly simplify the rivalry, it is my sense that Washington’s great fear is of a China that will overtake the US and impose its priorities and standards on the world.  Conversely, the great fear in Beijing is that China will NOT catch up with the US and will, at best, be stalled as a “moderately prosperous society” (小康社会) – and that in turn will endanger the survival of the Chinese Communist Party. My own guess is that China will not be able to comprehensively catch up to the US because of internal governance challenges, but that it will be a formidable competitor in selected technological, economic, and military domains. The easy phase of Chinese economic expansion is over and further growth will have to rely on extracting productivity gains from factor inputs rather than relying on “unlimited surplus labour”.  In other words, China is in what has been termed a “middle-income trap”, from which only a small number of economies have been able to escape in the post-war period. It is for this reason that I interpret Beijing’s greater assertiveness in recent years not as a measure of China becoming ever more powerful, but as a reflection of a China that worries it is starting to plateau. 

But even if China never achieves the level of per capita wealth of the industrialized west, it has already crossed a threshold where its sheer size has a significant impact on the world.  In this sense, the danger is not that China will overtake the West; it is that in pursuing a policy that is seen to be preventing China’s further rise, the West will foster a resentment and hostility on the part of Beijing that will turn the current geopolitical joisting into a serious geopolitical conflict – perhaps even war.

Which brings us to the war that is currently underway in the Ukraine and what it means for other emerging markets.  A few weeks ago, it was widely reported in Canada that western country representatives at the G20 Finance Ministers Meeting walked out when the Russian Finance Minister began speaking.  What was not reported was that at least half of the other members did not walk out.  They included China, India, Brazil, South Africa, Indonesia, Mexico and of course Russia.  Do you recognize this list?  Well, it is the famous BRIICSAM – here I add an additional I for Indonesia – an acronym that is shorthand for the most promising emerging markets, which is of course what all of you are experts on.

What does it say for the prospects of the BRIICSAM countries that they are not aligned with the industrialized north on some aspects of the war in the Ukraine, particularly sanctions against Russia?  Let’s set aside the general supply and price effects of the war, especially on food and energy products, which were already stressed before the war and will be even more stressed in the months and perhaps years to come – but which will hurt rich and poor countries alike.

The unique stresses that will be felt by emerging markets are those that have to do with industrialized country market access for manufactured goods and services from, and capital flows to, the South.  The war will add political pressure for industrialized countries to restrict market access for developing country exports, in the name of national security, job creation, or in the form of sanctions based on “values”. I have already discussed how the seeds of anti-globalization were sowed even as globalization flourished in the last 40 years.  The kinetic war in the Ukraine will exacerbate this trend by providing a fresh impetus for industrialized country political leaders to wage economic war against a broader set of rivals and adversaries.

Of course, not all emerging markets will fare the same, and there will be varying degrees of freedom for each to manage their participation in regional or global economic groupings. Mexico, for example, is positioning itself as the location for low-cost production INSIDE fortress North America, and it may just pull it off.  Emerging markets on the European periphery (that is non-members of the EU) may also get a pass in terms of preferred access to the common market – for security as much as economic reasons.  But Africa and Latin America will find it more challenging, and will have to redouble their efforts at regional economic integration.  And while East and South East Asia could further deepen their already very high level of economic integration (rivaling that of North American and the EU), the countries of the region are increasingly pressed to choose between China and the United States, while American and other western multinationals are pressured to re-shore to their home countries.  

Setting aside whatever military lessons the BRIICSAM countries are taking from the Ukraine war, I can assure you that they are paying very close attention to the unprecedented use of economic warfare that the United States has unleased on Russia, and wondering if they could be next. If there was anything sacrosanct about globalization, it was trust in the financial and payments system that made globalization work.  That trust is now broken.

From an international development point of view, the question is whether the promise of convergence is dead, or to put it differently, whether the middle-income trap is designed to be just that -- a trap.  Will developing countries be able to climb the ladder of economic success, which was promised to them, in exchange for conformity to the post-war international order? Or will the ladder be kicked from under them just as they reach the upper rungs?  This is not just a question of business strategy, which is the focus of your conference, but also of global welfare and fairness, which should concern all of us.

I thank the organizers again for inviting me and wish all of you a very fruitful conference.