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East Asia Forum

Mongolia’s ‘third neighbour’ policy and its impact on foreign investment

Author: Julian Dierkes, University of British Columbia Justin Li’s 2 February 2011 post is welcome in that it attempts to analyse the economic development of Mongolia in its political context. It is also significant in that it raises an important aspect of China’s perceived rise in standing and its newly assertive foreign policy, namely that this has a very specific impact on regional (security) dynamics and popular perceptions. Li’s essay mainly focuses on the extent to which politics and populism have got mixed up (I assume that’s how he might see it) with investment decisions. This ignores another political arena entirely: foreign policy. The Mongolian parliament is currently debating an updated foreign policy vision, so this particular point may well shift significantly in the coming weeks/months. Up until now the dominant stated theme of Mongolian foreign policy has been the so-called ‘third neighbour’ policy; that is, attempts by successive Mongolian administrations to build closer ties with partners other than Russia and China, its dominant neighbours. The most prominent third neighbours have been Canada, the EU (as a whole or individual countries, especially Germany and the UK, though they are both currently involved in an extradition case involving Mongolia’s spy chief, Khurts ), Japan, South Korea and the US (built to some extent on the Bush administration’s gratitude for the deployment of Mongolian troops in Iraq and Afghanistan). Mongolia has also pursued strong relations with India, Kazakhstan and Turkey. This third neighbour policy has met with some success, far from the ‘geopolitical nightmare for its leaders’ that Li describes. Japan and Korea are clearly very engaged in Mongolia (beyond the Mongolian invasion of sumo ranks, and the large number of Mongolians working in industrial jobs in Korea). Canada’s first resident ambassador, Anna Biolik, took up her post in 2008 and has since been succeeded by Greg Goldhawk. The US-Mongolia relationship seems to have weathered the transition to the Obama administration. Much of what Li describes in his essay could be interpreted as an investment policy based on this third neighbour precept. It is thus quite rational as long as one accepts the aims of the third neighbour policy. Given that Li’s post focuses on the Oyu Tolgoi project in particular, it may not be surprising, given parliament’s involvement in that decision, that the eventual investment agreement for that project involves third neighbours Australia, Canada and the UK. Sticking with a focus on economics, as Li mentions, China has been the largest investor in Mongolia for over ten years casting doubt on his assertion of irrational and imprudent resentment against Chinese investment in Mongolia. Anti-Chinese sentiment in Mongolia has indeed been stirred up by populist politicians in this period, but it is not clear that it is on the rise, rather than representing an on-going undercurrent. Li implies an upsurge of anti-Chinese sentiment with terms such as ‘rapidly capturing’ or ‘increased fear a hundred-fold,’ yet there is scant evidence that this is really a sudden increase in hostility. The fact that Chinese corporations will quite naturally be the biggest customers of any natural resource projects that are developed in Mongolia does not imply that there are incentives for the Mongolian government that these projects should also be Chinese-owned. The government has no obvious interest in creating integrated supply chains for Chinese corporations. In representing the interests of the Mongolian people, the government may be much better off in keeping initial production of raw materials separate from their sales in order to create opportunities to levy taxes and enforce environmental regulation. As to Mongolian decisions regarding railroad construction, Li might enjoy reading Asia Pacific Memo #11 on ‘Broad Gauge versus Narrow Gauge: The Politics of Dimension in Mongolia’s Railroad System’ by Jargalsaikhan Mendee or my own discussion of shifts in the political landscape in Mongolia just this month. I would, finally, take issue with Li’s use of the term ‘racism.’ Without getting into a fruitless discussion of the racial origins or make-up of different populations, it would seem more appropriate for the anti-Chinese sentiment in Mongolia to be referred to as just that, ‘anti-Chinese sentiment,’ or perhaps xenophobia, rather than ‘racism,’ as Li implies. Julian Dierkes holds the Keidanren Chair in Japanese Research, Institute of Asian Research, University of British Columbia where he also coordinates the Program on Inner Asia. Chinese investment in Mongolia: An uneasy courtship between Goliath and David Getting foreign investment policy and China right How do Australia’s foreign investment rules apply to China?

Anti-Mubarak protests in Malaysia: How Arab issues travel

Author: Farish A. Noor, RSIS The repercussions from the wave of unrest that has spread across Tunisia, Egypt, Jordan and Yemen have been felt in other countries with large Muslim populations. The effects have been felt as far as Southeast Asia with Islamists and pro-democracy activists in Malaysia taking the opportunity to join in the chorus of dissent to express their support for the protesters in Egypt. In the process, what began as an Arab concern has taken on a local meaning in the Malaysian context. On February 4, 2011, a large demonstration took place in Kuala Lumpur, where over 3,000 demonstrators took to the streets after performing their Friday prayers at two mosques close to the United States Embassy. After the prayers the crowds marched towards the embassy, which is a prominent landmark on Jalan Tun Razak — conspicuous by virtue of its size and the heavy security presence there. A memorandum was handed to American Embassy officials, calling on the United States to stop supporting Egyptian leader Hosni Mubarak and to allow for the transition to democracy in Egypt and the rest of the Arab world. Since the pro-Taliban rallies of 2002, the American Embassy has been the focal point of many anti-Western demonstrations in Malaysia, and the pattern of the demonstrations has been largely similar. In the latest incident, the anti-Mubarak demonstration led to the arrest of a small number of protesters and the use of water canons by the police to disperse the crowd. Several salient observations can be made about the 4 February demonstration in KL, which serves as an indicator of US-Malaysian relations at the moment and the level of anti-Americanism that may or may not be prevalent among Malaysians today. Firstly, many of the organisers of the demonstration came from the opposition parties of Malaysia, notably the Pan-Malaysian Islamic Party (PAS) and the Malaysian Socialist Party (PSM). A small representation of Anwar Ibrahim’s People’s Justice Party (PKR) was also at the scene. Notwithstanding the visible support of the PSM Socialists and the secular NGOs, an overwhelming majority of those who took part were Malay-Muslims. Many of the spokesmen and leaders of the demonstration were also leaders of PAS, with its leaders, Muhammad Sabu, Ridhuan Mohd Nor and Salahudin Ayub, the most prominent. Secondly, it is interesting to note that while a PKR divisional chief, Badrul Hisham Shaharin, was present, there were no major PKR figures at the demonstration. Local media reports remained silent over the question of whether members and leaders of the other opposition party, the Chinese-based Democratic Action Party (DAP), were present. Thirdly, there were relatively few arrests and no reports of extreme violence during or after the demonstration. Many of the slogans and banners used Arabic terms and phrases such as ‘ Yahya al-Sha’ab ’ (Long Live the People) and expressed solidarity with the Arabs of Egypt. As the Egyptian crisis escalated, Malaysian authorities seemed more concerned about the need to evacuate an estimated 11,000 Malaysian students studying there, most of whom had been sent to Egypt by the Malaysian government to pursue religious studies. This indicates the extent of contact between the two countries, and may account for how and why Malaysians seemed well-informed of developments in Egypt. The reaction of the Malaysian government has thus far been muted, with Prime Minister Najib Razak noting that it was and remains the right of the Egyptian people to determine their future and choose their respective leaders. The pro-government Malay press has taken a rather dim view of the developments across the Arab world, with the two most prominent pro-UMNO newspapers, Utusan Malaysia and Berita Harian , describing the demonstrations as ‘anti-government activities’ that jeopardise the security and stability of Egypt. The Malaysian opposition — notably the Islamists of PAS — have naturally taken the opposite view and have shown their support for the Egyptian protesters, particularly their compatriots in the Egyptian Islamist movement, Ikhwanul Muslimin (the Muslim Brotherhood). Prominent Malaysian religious leaders like the former Mufti of Perlis, Dr Asri Zainal Abidin, have also waded into the fray, condemning pro-government Egyptian ulama who have been supporting the beleaguered Egyptian leader. At this stage it is unlikely that the anti-Mubarak and anti-American protests in Malaysia will escalate any further (barring an escalation of violence in Cairo or elsewhere). But they serve as a convenient means to rally the opposition and to unite anti-government forces in a concerted effort to single out common opponents; in this case the US and its allies in the Arab world. But this does not necessarily suggest a heightened mood of anti-Americanism in Malaysia. Malaysian Islamists’ perception of the US has remained negative since 2001 and the invasion of Iraq and Afghanistan the following year. Prime Minister Najib has stated that Kuala Lumpur ‘would not allow anything [similar] to happen here.’ Significantly, the ruling coalition — as well as the mainstream media — has refrained from showing any unconditional support to the demonstrators in the Arab world. Farish A. Noor is a Senior Fellow at the S. Rajaratnam School of International Studies (RSIS) at the Nanyang Technological University, Singapore. This article was originally published  here , as RSIS Commentary 13/2011. Can Mubarak follow South Korea’s path? Malaysia: the political tide runs out Malaysia’s Hulu Salangor by-election and harbingers of reform

India’s seasons of inflation?

Author: Mathew Joseph, ICRIER Food inflation is reaching new heights in India, petrol prices have seen a hike for the second time in a month and the crisis is now threatening to arrest the country’s growth momentum. But to put the blame on crop failure alone, as the government is trying to do, is erroneous. Food inflation crossed the 20 per cent mark in December 2009 and remained at that level for several months. Wholesale price inflation moved to double-digits in March 2010. The wholesale price inflation and food inflation did come down from July 2010. After respite for a few months, inflation went up again in December 2010 and indications are that it will remain at uncomfortable levels for some time. The normal monsoon and expectations of a rebound in agricultural output are not providing the usual dampening effect on prices this time. In India, inflation is usually triggered by a poor agricultural crop. And the two successive poor kharif (summer) crops in 2008 and 2009 are considered to be behind the current inflationary situation. But then why has the normal crop of this year failed to subdue the rate of inflation? During the low-inflationary first half of the 2000s, the year 2002–03 stands out. In that year a severe rain shortfall brought down foodgrain production by 18 per cent, leading to a drop in agricultural GDP by 7 per cent. Still, inflation hardly rose in 2002–03 and averaged at about 3–4 per cent, the same as in 2001–02. Why? The seeming anomaly of low inflation in 2002–03 coinciding with a sharp decline in food output is explained by the fact that the previous year had seen a bumper crop which helped replenish public-sector food stocks sufficiently for the government to intervene effectively to keep prices down. The government released adequate grains through the public distribution system as well as open market sales. By contrast, the monsoon failure in 2009–10 followed a subnormal kharif crop in 2008–09; food stocks with the government at the end of 2008–09, and public release of these stocks in 2008–09 and 2009–10, were lower than in 2002–03. Also in 2002–03, the government kept the procurement price the same as in the previous year, except that a special one-time drought relief of Rp20 for a quintal of paddy and Rp10 for a quintal of wheat were added to the existing price. The drought in 2009–10, in contrast, followed a period of continuous and substantial annual increases in procurement prices since 2006–07. It, therefore, added to the upward pressure on food prices. The experience of 2002–03 demolishes the thesis that high inflation is inevitable when there is a crop failure. The fact is that the crop failures in 2008–09 and 2009–10 with no absolute decline in agricultural GDP were much less serious than the drop in 2002–03, when there was a huge decline in output. What mattered was the difference in government procurement, pricing and distribution policies between then and now. The main difference, however, is the demand situation and that mattered more. Since 2002–03, the GDP growth broke all previous records and the economy grew by an average of nearly 9 per cent per annum in the next five years. This implied a rise in per capita income in real terms at nearly 7.5 per cent per annum. During this period the per capita availability of major food crops had been, on the contrary, either stagnating or declining. Thus, while the flare up in inflation from 2008–09 can be attributed to crop failures, the building up of inflationary pressures since 2006 is due to the rising food demand-supply gap during the period. As the global crisis hit the world, all countries followed ultra-loose fiscal and monetary policies in 2008 and 2009. The Indian economy recovered from the second quarter of 2009–10, showing an average year-on-year growth of 7.9 per cent in the last three quarters of 2009–10 against an average growth of 6.1 per cent in the previous three quarters. The growth rate picked up further to 8.9 per cent in the first two quarters of 2010–11. As the economy picked up inflation also rose. Food inflation rose to 17.1 per cent during the last three quarters of 2009–10 from 10.8 per cent in the previous three quarters and further up to 18.8 per cent in the first two quarters of 2010–11. Wholesale Price Index (WPI) inflation rose to 4.7 per cent in the last three quarters of 2009–10 and shot up further to 9.9 per cent in the first two quarters of 2010–11. The Reserve Bank of India (RBI) began its monetary tightening only from mid-February 2010 , initially by raising the cash reserve ratio of banks, and the rate tightening began later from mid-March 2010. Since March, the repo rate has been raised seven times, each time by 25 basis points. The very high food inflation (17.1 per cent) and the CPI(Industrial Workers) inflation (13.5 per cent) during the last three quarters of 2009–10 clearly required the RBI to act earlier . In the short term, the only option available is a harder monetary tightening. It should be difficult to purge out the inflationary expectations that have got entrenched by now. The consequent rise in interest rates is bound to reduce corporate profitability and bring growth down. This is the inevitable cost that has to be incurred for bringing inflation down. Fundamentally, India is confronting a binding food constraint to its growth beyond the 7–8 per cent rate. To avoid a return to the pre-2000 period of inflation, India has to remove all the constraints against a breakthrough in food production. This requires agricultural reforms. The earlier round of reforms carried out in the 1990s were focused on industry, foreign trade, foreign investment and the financial sector, bypassing agriculture. The next round of reforms that is needed for raising India’s potential growth rate beyond 7–8 per cent should essentially have agriculture as an important component. The persistence of high inflation is rooted in the inability to raise food production in step with the rise in demand arising from increasing population and per capita income growth. The present ‘subsidy-control regime’ in agriculture is strangling the farmer and preventing him from achieving a breakthrough in production. The input subsidies provided through low or no price for water, electricity and urea fertilisers not only lead to overuse and erosion of soil fertility, but also ensures inefficient production of these inputs by companies. Farmers can sell their products only through government markets which involve a large number of intermediaries and lower prices. Consumer subsidies administered through the public distribution system lead to low food prices which scarcely reach the consumers as large scale leakages take place. On the other hand, the government’s food procurement with periodical hiking of the procurement prices leads to market shortages and rising food prices. Agricultural reform is the key to controlling inflation. That should involve lifting of government controls on pricing of all inputs and outputs, abolition of the monopsony of government mandis and administering all subsidies through direct cash transfers to poor farmers (owning land below two hectares) and poor consumers (below the poverty line). Mathew Joseph is a Senior Consultant at the Indian Council for Research and International Economic Relations (ICRIER), New Delhi. India: Controlling inflation without hurting growth Indian monetary policy and the RBI – Let’s focus upon inflation India’s need for a counter-inflation subsidy

Rising Asia : development challenges, and high stake in global economic recovery

Author: Maria Monica Wihardja, CSIS, Indonesia The Asian Development Bank, along with Indonesian ministries, including the Trade Ministry and the National Development Planning Ministry, this month held a symposium on ‘Asia’s Development Agenda in Regional and International Fora’ and a consultation meeting on ‘Asia 2050.’ These themes are timely; despite its growth miracles, Asia continues to face development challenges, and its stake in the global economic recovery is high. Asia’s success is not pre-ordained, according to Shigeo Katsu, a senior associate of the Centennial Group, at the Asia 2050 meeting. He suggests that the worst possible scenario for Asia by 2050 would see India and China become trapped as middle-income countries with poor institutions and governance, and growing inequality. At the middle level of development, information networks that sustain small economic activities in non-contractual and relation-based societies would no longer be able to support contract enforcements in large economies. Although state institutions are needed, the scale of activity is not yet large enough to justify the cost of establishing them, rendering the formation of contractual and rules-based societies a failure. Moreover, there are political obstacles associated with people who have sunk stakes in the old system, preventing the establishment of a new system. Emil Salim, chairman of Indonesia’s Presidential Board of Advisors, foresees an unbalanced Asia in 2050 between the  Asia 8 — India, Indonesia, Japan, Malaysia, China, South Korea, Thailand and Vietnam — and the rest of Asia, as dictated by market-based economies. Growing inequality within the countries — between a highly developed urban-based West Indonesia and an underdeveloped East Indonesia; the rapidly modernised coastal areas of east China and poverty-stricken western-most region of China ; and among Indian States with strikingly diverse poverty rates — is also foreseeable. So, is Asia moving in the wrong direction? Or should Asia look more to an equitable and sustainable trajectory? We also see ‘two faces of Asia’ on elements other than economic growth — the first face consists of Newly Industrialised Economies (including Hong Kong, South Korea, Malaysia, Singapore, Taipei and Thailand) plus China and India, while the second face consists of resource-rich, low-income, and less developed countries as well as the small states of Asia. The ‘Asia’s Development Agenda’ symposium stressed three agendas to bring more equitable development between the two faces of Asia, and within country: AID for Trade, Financial Inclusion, and the Social Safety Net. The critical issues for a rising Asia are institutional issues: social norms and culture — issues that are downplayed by many economists. Kaushik Basu, in his new book, Beyond the Invisible Hand (2010) , argues that social norms and culture are as important as law. This can be easily understood if we accept the fact that human beings are social beings — we react to what others do and most of the things we do are shaped by the cultural and social environment in which we live. ‘Equilibrium differences’ are greater than ‘innate differences.’ This is why Asia’s jewels — China, Indonesia and India — may be trapped in a ‘low equilibrium,’ with poor social attitudes reinforcing people’s behaviour, shackling their rise as market-based countries because of poor institutions, governance and political environments. The threat of a ‘middle-income trap’ is real. One other important issue is the regional and global cooperation required to build a more equitable and sustainable Asia . The foreign policies of China, India and Indonesia have been outward-looking and the stakes are high: India hosted leaders from all five permanent members of the United Nations Security Councils last year; Indonesia will host the first expanded East Asian Summit this year with two new members, Russia and the US, and with a possibility of hosting the G20 Finance Ministerial and Central Bank Governors’ Meeting in 2013; and Chinese  President Hu Jintao’s 2011 visit to the U S has set the basis for the coming decades of a bilateral relationship, the stability of which is of global importance. ‘Soft-power’ policies from the region are a priority. Mahendra Siregar, Indonesian deputy Minister of Trade and the Indonesian G20 Sherpa, reminds us that Asia’s outward looking strategies should be geared toward reorienting our focus to how Asia can contribute to the global economic recovery, and not vice versa. Without these elements a ‘rising Asia,’ hidden behind high economic growth figures, will be merely a chimera. Maria Monica Wihardja is a researcher at the Centre for Strategic and International Studies, Indonesia and is a lecturer at the Department of Economics, University of Indonesia. A version of this article was published in The Jakarta Post on 2 February 2010. Obama in Asia Wisdom of an Asia rising Indonesia and the BRICs

Understanding the Chinese-EU investment relationship

Author: Hinrich Voss and L. Jeremy Clegg, Leeds University Since China embarked on its ambitious opening and reform process, its commercial relationship with the European Union has flourished. Although bilateral trade growth has been an important part of this, European multinational enterprises (MNEs) have been swift to  target China for foreign direct investment (FDI). With the path blazed by large MNEs, increasingly smaller firms are following in the footsteps of the European majors such as the carmaker Volkswagen, or the chemical firm BASF, to use FDI to get a foothold in the Chinese market. Now the roles are shifting as Chinese investors descend on Europe. Reportedly, Chinese firms have been willing to acquire any ailing European firm, and are lining up to make major new large-scale investments. These perceptions are fuelled by acquisitions like Nanjing Automobile Corporation’s and Shanghai Automobile Industry Corporation’s acquisition of UK-based MG Rover in 2004–5, by Geely of Swedish-based Volvo in 2010, or of business units belonging to Thomson and Alcatel by TCL in 2004–5. These developments have caused two types of reactions. European governments and regional institutions have started to court Chinese companies and quarrel about who has been most successful in doing so. In some countries investment attraction has been nationally orchestrated to more effectively increase Chinese FDI, as in the case of the United Kingdom, with its government-run UK Trade & Investment network within China reaching out to Chinese firms. This network has been supported within the UK by regional investment promotion agencies. Other European countries have followed suit, by establishing their own networks within China. Cautionary voices have argued that, if the enterprise sector in the EU is bought out by China, the EU will risk losing its domestically-owned industrial capabilities and technological leadership. This has led to a call to  monitor and screen investments into the EU, in particular from China and other emerging markets, for their fit with European objectives. Both stances — positive and apprehensive — toward Chinese FDI need to be put into perspective, and understood in terms of the motives of the Chinese investors themselves. Broadly speaking, there are two types of Chinese investor. Large state-owned firms with favourable access to government capital seek to diversify their portfolios of real assets, and thereby the wealth portfolio of the Chinese state, through the acquisition of western assets. In contrast, investors originating in the vibrant Chinese domestic private sector are seeking profitable investment opportunities to upgrade their industrial capabilities and to grow their business. For these firms the purchase of strategic assets is made on the basis of fit with their corporate industrial strategy. However, for private firms, the opportunities offered by Chinese domestic market growth reduce the pull of markets abroad, which are growing at a slower pace. This certainly applies to EU market growth, with the exception of the high growth (but generally small) economies of the twelve countries joining in 2004 and 2007. The implications of this Chinese investment behaviour are visible across the EU. The EU-27 has collectively played only a very minor part in China’s outward investment strategy. Less than 3 per cent of China’s global investment stock was located in the EU in 2009. However, discounting the  entrepôt and investment hub Luxembourg, of this investment the 12 newly acceded countries attracted over 10 per cent of the EU’s total. This is a greater proportion than their share of EU GDP, and suggests that Chinese investment decisions are driven primarily by growth. If we were to characterise the spatial distribution of Chinese FDI within the EU, it might be said to mirror that of South Korean investment, rather than Japanese, which favours the larger economies. However, Chinese investment in the EU is still at a level where a clear pattern is yet to be established; over the last decade there is little evidence of a continuous and focused investment strategy in particular countries. While the EU has been of limited importance in China’s outward investment strategy, Chinese investment has equally  kept a low profile within the EU . The numbers of Chinese affiliates are low across the Union, and Eurostat figures show that their contribution to employment is minor — it should be noted that individual member states can report significantly higher values for selected FDI data than Eurostat does. Can we expect Chinese investments in the EU to grow? Chinese investments in Hungary, Poland and Romania have recently picked up. These transition economies have been especially attractive to Chinese firms, largely because they offer growth and are coupled with deep privatisation and liberalisation (Hungary), a large market (Poland) and a favourable business environment in the eyes of Chinese investors (Romania). The recent increase in Chinese investments in Central and Eastern European countries may also reflect a change in Chinese investment strategies towards targeting lower production cost sites within the EU, as a means of expanding market shares across the EU via export. Another development that could lead to an increase of Chinese investment over the coming years is the Treaty of Lisbon. Following this Treaty, as with Trade, one commissioner represents the EU in the sphere of FDI and is responsible for investment liberalisation. Now the authority for FDI policy resides at the EU level, it can have a single, united voice when dealing with China. This should make it easier for the EU as a whole to articulate its policy towards China, and to bring some coherence to the bewildering range of diverse institutional systems within the EU that are faced by the much sought after Chinese investor. Hinrich Voss is Roberts Fellow at the Centre for International Business at Leeds University Business School. L. Jeremy Clegg is Jean Monnet Professor of European Integration and International Business Management at Leeds University Business School. Europe needs to screen Chinese investment Traps for Chinese investment overseas Chinese investment in Australian resources

Hu visit ends any dream of a US-China duopoly

Author: Amitav Acharya, American University The US-China relationship is often touted as the most important for the world’s future, but bilateral tensions between the two powers over domestic politics will prevent a US-China duopoly from being a global problem-solver. The silver lining is that this leaves room for others to play a more meaningful international role. No one should be disappointed by the outcome of the US-China summit in Washington on 19 January, because nothing much was expected from it. For Hu, it was a ‘legacy’ visit, his swansong as the head of the world’s most populous and potentially most powerful nation before stepping down as the leader of the Communist Party of China in 2012. The Obama White House obliged by allowing him to make the first state visit to the White House since a state visit by Jiang Zemin in 1997. This too is not surprising. During the past year, China’s image and soft power have taken a battering, especially in the Asia Pacific, where it rekindled mistrust by asserting claims over the South China Sea, refusing to condemn North Korea for its aggressive tactics towards the South and restricting exports of rare earth elements. The US has gained considerable mileage out of these Chinese missteps, despite the Chinese snub to Obama at the Copenhagen climate talks in December 2009 , and Beijing’s harsh condemnation of the $6.4 billion US arms sale to Taiwan and the Dalai Lama visit to the White House. As fears of China are rekindled in Asia by Beijing’s own assertiveness, there is a new recognition of America’s role in the region’s security . The Obama administration could thus afford to look generous and reward China for taking some conciliatory steps in the months leading up to the Hu visit — like letting its currency appreciate a bit, and hosting a visit to China by Defence Secretary Robert Gates. But for those who see the US and China as leaders of the 21 st century global order, the summit holds an important lesson: while the uni-polar moment in international relations is over, it will not be replaced by a China-US duopoly, at least not an effective one that addresses the global challenges of our time. No one can deny the power shift , although the US President did try. At their joint press conference, Obama told the visitor (and more the American people perhaps): ‘What we have to remind ourselves is that the United States’ economy is still three times larger than China’s, despite having one-quarter of the population’. But just over a decade ago, in 2001, the US economy was more than seven times larger than China’s. To be sure, the US-China relationship is often touted as the most important relationship for the future of the world. But the Hu visit made two things very clear. First, America’s domestic politics would prevent the two sides from developing the trust needed for that, and, second, issues in the bilateral relationship take priority over tending to the problems of the world at large. Even as the White House prepared to welcome Hu, across the Mall the Congress fumed by holding a hearing on human rights in China and blaming it for the largest number of political prisoners in the world (allegedly ‘millions’). The newly anointed speaker of the House of Representatives, John Boehner, refused the invitation to the White House dinner. And in a show of bipartisanship that has all but vanished these days, Senate Majority leader Harry Reid called Hu a ‘dictator’. The thrust of the entire visit has been bilateral issues, America’s trade deficit, China’s currency manipulation and, of course, China’s abysmal human rights record . Hu seemed more conciliatory than usual on human rights, keeping in mind his visit to Congress later in the visit. After initially avoiding a question on the subject (because of a translation glitch) at his joint press conference with Obama, Hu conceded in a follow-up that: ‘A lot still needs to be done in China in terms of human rights. We will continue our efforts to improve the lives of the Chinese people, and we will continue our efforts to promote democracy and the rule of law in our country’. But he also asked ‘to take into account the different and national circumstances when it comes to the universal value of human rights.’ The joint statement noted ‘significant differences’ over the issue, especially the Chinese insistence that ‘there should be no interference in any country’s internal affairs’. Over global governance issues, Hu mentioned at the press conference China’s support for the G20 to play ‘a bigger role in international economic and financial affairs’, and to ‘work with the United States and other countries to effectively address global challenges’ such as climate change and terrorism. By all indications, the United States is coming to terms with the end of its ‘G1’ world, although it is still impolite to mention the ‘D word’ (decline). Although Secretary of State Hillary Clinton did talk about ‘the new American moment’ in international affairs, it was a call for sharing the burden with others, including emerging powers — China being one but not the only one of them. It also called for working through global and regional institutions to advance American interests. When the United States replaced Britain as the global hegemon after the end of World War II, it did not shy away from accepting international obligations and making sacrifices. Why is China not following the US path to global leadership, albeit a shared one with the US? When the US under the Bush administration was riding high in the uni-polar moment, China was (secretly) thrilled to be counted as the main challenger to US dominance. Many Chinese still do, but being a challenger is not the same as being a leader. Some blame it on Deng Xiaoping, China’s late paramount leader, who is supposed to have warned against China becoming a leader in the world. But this is a myth. Deng was more nuanced and qualified, and China today is far more powerful than during Deng’s time. The Chinese are scared of global leadership because they it see it as a ploy to force them into prematurely accepting responsibilities that will undercut their ‘ peaceful rise ‘. The idea of a joint leadership with the United States has been dismissed not because China does not want it, nor because they do not think they are up to it. They dismiss a ‘G2’ branding because it calls for sacrifices that they are unwilling to make, like accepting significant binding cuts in their carbon emissions. However, there is a silver lining here. If the burden of domestic politics and bilateral mistrust limits the ability of the US and China to jointly manage global issues, it leaves room for others — Canada, India, Europe and other G20 nations — to step in and have their say. This may not be such a bad thing. Amitav Acharya is Professor of International Relations, School of International Service, American University and Senior Fellow at the Asia Pacific Foundation of Canada. Clinton’s visit to Indonesia Anticipating Obama’s visit to Indonesia and Australia Obama goes to China