The Asia Group operates on a core premise: the Asia-Pacific is today the most economically and politically important region in the world and will be for the rest of the 21st century. Home to 60 percent of the world’s population and accounting for more than one-third of the world’s gross domestic product, Asia is the manufacturing and commercial engine of the world and the most consequential arena for a new era of global security competition.
But for all of the opportunity that Asia presents, the region is in flux. Geopolitical, nationalist, economic, and regulatory developments stand to dramatically change the Indo-Pacific and test individual countries and companies within the region. The following ten trends are ones that we believe will have an outsized impact on Asia in the near future. We hope our report provokes new thinking about these forces and we look forward to hearing from you.
Dr. Kurt M. Campbell
Chairman and CEO
Dr. Siddharth Mohandas
Director of Research
The election of U.S. President Donald Trump has forced Asia to grapple with a new reality, as Washington appears poised to turn its back on the post-World War II international system. In the first two years of Trump’s presidency, Asian leaders have had to adjust to his inflammatory rhetoric and tweets. Regional confidence in the president remains low, as countries continue to adjust their economic and security strategies in response to Trump’s “America First” doctrine. After the departure of U.S. Defense Secretary Jim Mattis, few guardrails remain to prevent Trump from advancing policies that could undermine traditional alliances and norms. What to Watch: Japan’s and South Korea’s relations with China, challenges in U.S. bilateral defense and trade agreements with allies, greater intra-Asian cooperation.
After decades of movement toward freer trade and more-open markets, the region is adjusting to a more protectionist landscape. As a candidate, President Trump vowed to reverse U.S. trade policies, blaming trade deficits for souring U.S. economic growth and harming domestic manufacturers. In 2018, Trump made good on longstanding threats to impose tariffs against economic competitors and partners alike, but so far, he has failed to deliver on a new, integrated trade vision for the Indo-Pacific region following U.S. withdrawal from the Trans-Pacific Partnership (TPP). Instead, the Trump administration has sought to conduct trade relations on a bilateral basis and has placed significant pressure on India, Japan, and especially China to find ways to reduce their bilateral trade surpluses with the United States. To date, Washington has not succeeded in reducing its global trade deficit, possibly portending further punitive measures in 2019. What to Watch: new bilateral trade agreements, Asian trade deals that exclude the United States, additional U.S. trade measures targeted at certain sectors (e.g., technology).
Donald Trump’s election in 2016 stunned Chinese officials, forcing Beijing to deal with a U.S. president who promised during his electoral campaign that he would aggressively crack down on China. Despite multiple summit meetings since Trump’s inauguration, Chinese President Xi Jinping and Trump remain deeply at odds on key aspects of the relationship. Both leaders have turned to trusted lieutenants to manage relations, yet many of these senior officials have walked away from meetings with little progress to show and their own credibility questioned. But as tensions rise, both Trump and Xi will have to play an active role in managing bilateral engagements. The fate of the U.S.-China relationship will depend on whether the two presidents can work together to avert crisis, even as they both advocate for their respective priorities. What to Watch: whether Trump continues to praise Xi, outcomes from new summits, whether hawkish advisors on both sides gain prominence.
Since the U.S. opening to China in 1972, the prevailing view in Washington policy circles has been that Beijing could be transformed into a responsible global stakeholder through inclusion in international institutions. Today, U.S. officials and legislators on both sides of the aisle are reassessing China’s willingness to step into that role. The rise of Xi Jinping and his policies are leading officials to acknowledge that China may not be on a path to greater liberalization. While 2018 brought significant attention to U.S.-China trade imbalances, Washington’s problems with Beijing run much deeper. As U.S. Vice President Mike Pence outlined in a speech last October, China’s behavior has led U.S. officials to reconsider the longstanding consensus, with some officials now preferring policies akin to containment. What to Watch: additional restrictions on technology trade and investment, growing U.S. defense expenditures focused on China, increased attention on Chinese influence in the United States.
Around the Indo-Pacific, countries have invested heavily in enhancing military capabilities. Particularly as China demonstrates its strength in the region, other powers have begun considering how they will defend themselves in a new geostrategic environment. Geopolitical hotspots from the East and South China Seas to the India-China border have the potential to burst into conflict if not effectively managed. But even absent conflict in one of these consequential regions, growing defense expenditures across Asia will heighten tensions. In 2018, countries across the Indo-Pacific spent a combined estimated total of USD 450 billion on defense. Within 10 years, the region is expected to surpass North America as the world’s largest purchaser of military weaponry. By 2035, half of the world’s submarines are expected to patrol waters around the region. Governments and businesses must be ready to embrace opportunities and consider challenges that accompany an increasingly militarized Asia. What to Watch: flaring of tension in hotspots, defense acquisitions focused on power projection, more frequent and increasingly complex multilateral military exercises.
Several of the largest Asian economies showed signs of weakness in 2018, posing challenges to their governments’ reform agendas in 2019. Global trade tensions have exacerbated economic difficulties in China, Japan, South Korea, and India, reducing regional and global growth prospects. Additionally, larger trends in the global economy are threatening economic stability. An economic downturn in China, aggravated by a trade war with Washington, could further damage elements of the regional economy. What to Watch: deleveraging vs. stimulus in China, populist spending in India, government popularity in South Korea, monetary policy in Japan.
In 2018, President Trump engaged in unprecedented diplomacy with North Korean leader Kim Jong-un. Despite months of harsh rhetoric between the two sides, with Trump at one point calling Kim “Rocket Man” and threatening North Korea with nuclear annihilation, the new détente, brokered and encouraged by South Korean President Moon Jae-in, represented a marked change. Though Trump and Kim have pursued personal diplomacy, the situation remains volatile. Both sides expect the other to initiate the first major move, with Pyongyang demanding sanctions relief before denuclearization, while Washington remains hesitant to provide full relief until Kim gives up significant elements of his nuclear arsenal. Trump may feel the need to redefine what “success” means, especially if he realizes that denuclearization is not realistic. The result is a still dangerous Korean peninsula ripe for conflict. What to Watch: whether North Korea’s arsenal grows or slows, Pyongyang’s cooperation with international inspections, the extent of U.S. sanctions relief.
New and disruptive technologies are rapidly changing the business landscape across the Indo-Pacific and reconfiguring the way governments, businesses, and consumers engage with one another. Governments in the region have sought to keep up with these changes by unveiling new regulatory regimes aimed at addressing concerns around privacy, security, unemployment, and sovereignty. New policies will continue to be implemented as governments work to respond to the rapid pace of innovation in an environment of heightened anxiety and uncertainty. What to Watch: demands for data localization, expanded regulation of internet content, increasing antitrust scrutiny.
Amid increasing trade tensions and rising labor costs, existing supply chains are poised to undergo a significant structural shift, presenting opportunities and challenges for corporations and governments in the region. The U.S.-China trade dispute has challenged firms from both countries to reevaluate their current operations. Southeast Asia and India appear set to become the primary beneficiaries of market shifts, especially given their lower wages relative to China. What to Watch: foreign businesses leaving China, manufacturing growing in Southeast Asia, changing prices of intermediate goods.
Asian leaders are increasingly aware of the very real effects of climate change and the costs that their countries may incur as they continue to burn fossil fuels. But growing energy demand has made it difficult to reduce the region’s reliance on polluting energy sources. Additionally, increased economic uncertainty has threatened ambitious plans to halt emissions. Emblematic of this dichotomy, Asia is both the largest consumer of coal and the largest investor in renewables – and the region also stands to face the most challenges due to climate change. What to Watch: coal and oil consumption, investments in renewables, climate change mitigation measures across the region.
Images from Reuters