Washington, DC -- (ReleaseWire) -- 01/25/2017 --BENNETT: Michael Auslin is a resident scholar at the American Enterprise Institute and author of the new book, The End of the Asian Century: War, Stagnation, and the Risks to the World's Most Dynamic Region. In this book, he argues that Asia's future is increasingly uncertain because it is a fractured region threatened by stagnation and instability. Michael, welcome to Financial Myth Busting.
AUSLIN: Thank you.
BENNETT: Your new book argues that, contrary to conventional wisdom, the 21st century will not be Asia's century. In fact the 21st century could witness an Asian implosion. Trump argued throughout the campaign that China was stealing America's jobs and getting rich at our expense. Do you think he's mistaken?
AUSLIN: Well, I think that the danger is that we have gotten ourselves into a mindset where China is a 12-foot tall monster that can do no wrong when the reality is that the golden era of China's growth, as for almost all of Asia, is over. They've had an incredible run for a long time, but what they didn't do was resolve many of the fundamental structural problems in their economies, and so we're seeing a slowdown throughout the region. The bigger danger is that we're going to have to worry about a weak Asia and a weak China than we will about a strong one.
BENNETT: Interesting. Why do you think that?
AUSLIN: Again, one of the big problems has been the breakneck pace of economic growth really papered over so many of the deeper reforms that had to be undertaken. For example, financial strength. A lot of the financial systems throughout Asia are very weak; a massive debt problem. Problems in things we take for granted like innovation and research and development, that Asia's actually not very good at. There are labor problems all around the region, including China because of its One Child policy. And the state in many of these countries is just too involved, and that makes it too difficult for entrepreneurship and innovation and the like to take place.
BENNETT: So you think Trump is wrong, that they won't be stealing American jobs?
AUSLIN: Well, what they're going to steal is what they've been stealing all along, which is our trade secrets and our intellectual policy and the like. A lot of our jobs have already gone. The jobs have been leaching away from America for decades, and we've really already hollowed out our industries. Some of the things that Trump is against, for example the Trans-Pacific Partnership, really was designed to get us access to markets that had still a lot of barriers, like Japan, against American goods. It wasn't the case that TPP was going to see Japan steal American jobs. Those jobs left a long time ago.
BENNETT: Back in the 80s, Americans thought that Japan was taking over all of America, remember that? Since then, they've experienced almost three decades of stagnation thanks to some really poor management of their economy, some of which are the same things you just mentioned about China, and yet despite having failed to engineer growth through perma-low interest rates, they're still sticking with Keynesian central banking, as Prime Minister Abe began a campaign of inflating the yen to juice the Nikkei. Are you predicting rough seas ahead for Japan, and how would you relate this to China? Do you think China might go through its own form of correction but stay alive like Japan has managed to?
AUSLIN: That's a great question. There are a couple of big differences between Japan and China. First of all, Japan was a much wealthier nation when its slowdown hit, so that it was able to deal with it in better ways that didn't cause so much despair among the population. There were high standards of living and there were already social mechanisms in place and entitlements and the like. China doesn't have that, and China being still a developing nation that's fairly poor, it's going to be harder, in fact, for China to deal with its slowdown than it was for Japan. In Japan, it's been two and a half decades now, and they've really found a sort of modus vivendi, being able to deal with lower growth and yet maintain higher standards of living and the like, so I'm actually more bullish on Japan's ability to weather a continuing slowdown and an aging population.
BENNETT: You are predicting rough seas ahead for Japan, though. How are they going to survive this? They're in a similar situation to ours, with tremendous debt and a controlled or manipulated market. How are they going to survive this without going through some form of a major correction?
AUSLIN: Well, the big problem for Japan is literally survival, as you pointed out. It is the demographic decline that is going to really tax the government. It already is, but it's something where, being a wealthier nation, they're able to handle it. You know, Abe-nomics, which is the reform plan from the current Prime Minister, has already done everything it's going to do in terms of loosening up the economy, changing some of the rules on agriculture, and other things. We'll have to see if it really bites and improves competition and openness in Japan. Again, the bigger question is China. In Japan, you're able at least to have the accountability of a democratic government, the Japanese are able to change paths if they want and make their desires known. You don't have that in China, so China's reliance on cheap and easy money, which it has for a very long time, very arcane regulations and no transparency whatsoever. The world, I think, should brace for a much rougher ride from China going ahead than for any other Asian nation.
BENNETT: Let's look at it from a demographic point of view, populations. Countries like South Korea and Japan are facing steep demographic drops as the younger generation appears unusually uninterested in getting married and starting families. What's behind this cultural shift, and what does it mean for the economic future of those two countries versus China, of course, which has 1.3 billion people. Is that an advantage to China?
AUSLIN: First of all, these are choices, certainly in the case of Japan, that were made decades ago. Japan fell below replacement rate in its birth rates back in the 1970s, so they've had nearly half a century to figure out what to do with this, and the truth is, they haven't done anything. This is the central question facing the Japanese nation, is "What do you do?" Do you become a nation that depends more on robotics for production? Do you think about immigration? These are all questions that they're having to start struggling with. Same for South Korea, Taiwan, Hong Kong, all the advanced economies. Again, the difference between them and China is that they're wealthy and so they're able to deal with the demands of the population. China, because of the One Child policy for forty years, is also facing a demographic slowdown, and will in fact face a demographic dip in coming years. They got rid of the more stringent elements of the One Child program last year, but that's not enough. They're already going to have this demographic easing. So, the problem there is that older people without family or kinship networks are going to be demanding support from the government and that is something the Chinese government has never provided before. Really, the country to watch in terms of how to deal with this stability and politics and the like is China.
BENNETT: So China has the opposite problem, overpopulation, and the One Child policy has caused something of a retail boon as parents spend on their child and themselves. That must have actually helped the economy.
AUSLIN: I think in the short run that's worked, but in the long run it's going to mean more problems for a country that, again, has not attained middle-income status evenly throughout the country. In fact, one of the problems facing the Chinese economy and Chinese businesses today is that they have a growing labor shortage. They have basically absorbed all of the available labor, especially all of the skilled labor, and so wage prices have gone up dramatically. Again, at the micro level, in the short term, that's good for the worker and therefore the consumer, but in the long run it's bad for Chinese businesses because it makes their goods less competitive around the world. So you see other nations trying to step into that gap, like Vietnam and Malaysia and others, and offer quality lower-priced goods because they have lower wage levels.
BENNETT: Which is why Malaysia and Vietnam are doing so well.
AUSLIN: It's one reason, yeah. I mean, they all need reform. I think one of the themes of the book is that there is a failure of economic reform throughout the region in both democracies and autocracies. Vietnam, again, is a country that we've looked at as maybe the next great growth model, but it has major problems. It flirts with inflation up and down and still has a centralized economy with a big state-owned sector. And India, a free-wheeling democracy, still has in many parts a quasi-socialist economic system and an enormous labor problem, not because they have too little of it, but in essence too much. So wages are depressed and there is just not the intensified focus on innovation in India as you would have in other companies because you have so much cheap labor.
BENNETT: Let's move on to geopolitical issues. I think the biggest geopolitical issue in Asia, at least for many Americans, is the South China Sea, specifically the satellite islands China has built as a means to expand their territorial waters. China recently stole an underwater drone from the U.S. Navy from these waters. What do you think China's intent was, and how do you see these islands playing into their larger long-term strategy?
AUSLIN: That's a very good question. It's actually flummoxed American officials for a while, because they have tried to figure out why China is acting more assertive and more belligerent the wealthier it has become. Our assumption and hope was that as it became wealthier, it would in fact moderate its behavior and become more willing to cooperate and more willing to deal with international law and the like. And unfortunately, just the opposite has happened. These islands you mentioned are very significant, and what they've done is actually extended Chinese territory into the South China Sea, and China claims these islands now as sovereign pieces of territory: they have civilians on it and schools and post offices and the like. So, they're really claiming that these are now parts of China's national territory. And they are militarizing them, turning them into usable bases, which allows them to operate at much greater range throughout the South China Sea and the rest of Asia. What that does is it intimidates other nations in the region. It makes them more worried about their own security, their own territories, and really China's intent, as far as we can tell, is to get these nations to essentially accede to China's views on territorial disputes and rules such as freedom of navigation. This is going to be a major test for the Trump administration. This is not something that the Obama administration ever satisfactorily solved.
BENNETT: I don't think they had a lot of respect for Obama. You can tell that by how they treated him when he went for meetings, or even when he took pictures. He was always with the wives.
AUSLIN: I think that's right. They knew that he was hesitant to challenge them, as other presidents have been. They've all been worried about harming the economic relationship. They're very worried about President Trump, you know, he talked very harshly about China during the campaign and then of course the policy of taking the Taiwan call after the election, and then talking about upending the One China policy. I would say for the first time since normalization of relations, which is over forty years ago, that the Chinese are actually really worried. They're worried that their's going to be an American president who either will stand up strongly to them, or maybe over-react. So this is a time, I think, when you can be concerned about how the Trump administration will put together its China policy, but we are overdue for a re-evaluation of it.
BENNETT: Let's talk about Trump's noisy start in that regard, when he had that phone call with the President of Taiwan, which no American leader has done since Nixon created the One China policy. What are you thoughts on that? Was this smart or ill-considered?
AUSLIN: Let me start by saying that it is undoubtedly true that we should be supporting Taiwan more. It is a vibrant democracy. It is a Chinese democracy, so anyone that argues that the Chinese can't have democracy only needs to go to Taiwan. My concerns about the call were that it was so abrupt, and then President Trump sort of doubled down during the period between the election and the inauguration. And he hasn't been able to have a full policy review. It's one thing to change your policy when you've had the input of the entire government, when you've walked through all the scenarios and you've really decided carefully what you're going to do. I do think we need to be stronger vis-a-vis China, but when you're saying it more out of an understanding of what you feel is wrong, but you haven't had that full review, then it's harder, I think, to calibrate your position and also figure out how you're going to respond to things that the Chinese do. They have been slowly ramping up the pressure on U.S. allies, and certainly warning very strongly against going down this path.
BENNETT: No conversation about Asia in the 21st century is complete without talking about North Korea. Kim Jong Un appears to be even more bellicose than his father, and he's now claiming to be close to having nuclear-tipped ICBMs capable of striking the U.S. How seriously should we take him, and longer-term do you foresee an eventual re-unification with South Korea? How much longer do you think the Hermit Kingdom can hang on?
AUSLIN: Well, I think we have to start by acknowledging the failures of previous administrations, both Democratic and Republican, that have put us into a position where, quite honestly, there are no good answers for dealing with North Korea. We should be very worried about them because of the nature of this regime, the things that it has done, its track record, and the fact that, as you say, it is becoming a nuclear and ballistic missile capable power. The one thing the North Korean regime wants above all is to survive, so there is from that perspective, I think, an element of rationality. What they have figured out, though, is that everyone is so worried about what they might do that they can get away with almost anything so far, whether it is sinking a South Korean ship or kidnapping Japanese citizens, or launching cyber attacks, let alone all the illicit activities they undertake. So, they've figured out that they have us in a box. This is a major challenge for the Trump administration, and I think to some degree we have to give them a little bit of slack, because they're inheriting what is just simply an American failure. The Obama administration did nothing about North Korea for eight years, except for one ill-conceived agreement that was broken by the North Koreans right away. That doesn't excuse the Trump administration from trying to figure out how to really target this regime with serious sanctions that effect the family, how do you work even more closely with our allies, and basically, decide how far you want to go in punishing North Korea if it undertakes any other type of provocation and aggression. Otherwise it's going to keep doing it and keeping us all on tenterhooks.
BENNETT: Do you see them ever re-unifying with their brethren in South Korea?
AUSLIN: That is a very, very difficult situation. First of all, a lot of young South Koreans don't want reunification. It's simply too expensive, they don't feel the connection to North Korea that their elders do. There's actually less support in South Korea for reunification than there was ten years ago.
BENNETT: Michael, thank you for being on the show.
AUSLIN: Thank you.
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