Amid escalating tensions between the United States and China and as the U.S. government is exploring how to further limit China's access to U.S. technology, discussions about the possibility of decoupling between the two countries have intensified. As businesses operating in China grapple with the potential consequences of decoupling, APARC’s China Program hosted a panel of executives across industries from tech, retail, and finance currently engaged in reshaping their China businesses to provide a view from the ground and consider the future of decoupling with China.

The event was the second installment in a special series celebrating APARC’s 40th anniversary. Titled Asia in 2030, APARC@40, the series highlights core areas of the center’s expertise, examines Asia’s transformation over the past four decades, and considers the drivers and shapers of the region’s future.

The panel featured Dan Brody, the managing director of Tencent Investments, who is responsible for the company’s overseas investments; Frits Van Paasschen, a change management expert, former CEO of Starwood Hotels and Resorts, and former president of EMEA at Nike; and Stuart Schonberger, a founding partner of CDH Investments, one of the leading China-focused alternative asset managers. China Program Director Jean Oi chaired the panel.

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Risks and Opportunities

Van Paasschen described his extensive experience developing strategies for expanding licensing and retail in China, which involved navigating the country's infrastructure and legal framework and, as CEO of Starwood Hotels, overseeing the construction of over 100 hotels. He ascribed his success in the country to his recognition of China’s strengths and weaknesses and his finding ways to interact positively with Chinese stakeholders.

The term decoupling is an oversimplification of the relationship between the complex Chinese and U.S. economies, said Van Paasschen. He noted that retailers in many cases are looking to sources from alternative markets to China, but that he believes there are still opportunities for investment in and co-development with China that remain unaffected by current frictions. He highlighted in this context the interplay between the U.S. and Chinese travel and tourism industries before the COVID-19 pandemic.

Schonberger, who also challenged the notion of decoupling as a misleading shorthand, emphasized the need for cognitive empathy between the world’s two great powers and understanding the motivation behind China's actions. He noted that the challenges facing China today are complex, including debt problems, real estate slowdown, and productivity stagnation, but said these are "known knowns" that the Chinese government is actively working to correct.

Schonberger sees two distinct issues facing institutional equity investors worried about China: government policies that negatively affect growth and corporate prospects, and longer-term risks arising from China's geopolitical position. For private investors who are focused on total return and can tolerate overt political pressures, China remains investable, as Chinese stocks have been some of the best performers on the public markets recently, said Schonberger. The challenges are greater, however, for public entities and bond investors who are more affected by political risk in their decisions. While the risks are higher, Schonberger's firm continues to invest in Chinese companies in multiple sectors.

Changes Underway

Brody said that China remains a key player in the global economy. As a personal anecdote, he noted that, while he makes fewer trips to the United States, he is traveling more frequently to Europe, India, Japan, and Southeast Asia. According to Brody, the extent to which the Chinese economy would be affected by international fluctuations is unclear, but he expects the country to continue its economic growth and attract foreign investors. He stated that a huge amount of value in the tech sector is still being created in America, so economically driven foreign investors in the tech sector still pay close attention to developments in Silicon Valley.

Van Paasschen, by contrast, pointed out that by decoupling with China, the United States would miss out on a generational opportunity for development and could potentially lose out to other countries. China still presents an enormous opportunity for businesses, he said, particularly in the hotel industry, given the country’s rate of urbanization. He reminded the audience that every country and region presents its own set of challenges and risks for investors. The imperative is to ensure Beijing and Washington maintain a dialogue and businesses are willing to take risks to invest in China.

Van Paasschen went on to describe how the U.S.-China political tensions are affecting business operations in various sectors. For instance, in the biotechnology sector, companies might consider protecting intellectual property and ensuring sustainability in their supply chain. In the apparel business, there is a growing concern about human rights and the opacity of the cotton supply chain. Overall, Van Paasschen sees a transition underway from a bilateral and straightforward approach to trade to a much more nuanced and complicated approach.

When asked if political tensions would affect some sectors more than others, Van Paasschen responded affirmatively. He gave the example of a sovereign wealth fund that refused to support investments in Chinese hotels because of the uncertainty zero-COVID policies had created. He also said that further uncertainty could arise from countries' reactions to China’s foreign policy stance, such as China's support of Russia in Ukraine.

What advice would the three business experts give Washington?

Van Paasschen expressed his hope the United States finds ways to avoid being reactive. Schonberger, urging policymakers to keep working towards peaceful coexistence, emphasized it would be counter-productive to frame China as an enemy. He also highlighted the importance of redundancy and efficiency in trade relationships and cautioned against overlooking the cost of decoupling, reminding the audience that engagement with China has boosted global trade, lifted millions out of poverty, and created a vibrant society.

From Brody’s perspective, predictability is crucial for business, regardless of the country one is conducting business in. He also stressed that, from a personal perspective and regardless of one’s political stance on China, the reduction in people-to-people ties between China and the United States due to recent travel restrictions is unfortunate. Ultimately, these ties have always been a net positive, and it is important to recognize their value even in the midst of tensions between the two nations. While political leaders may grapple with complex geopolitical issues, the connections between ordinary citizens remain a vital foundation for maintaining a constructive relationship. By fostering personal exchanges, the United States and China can build bridges and promote mutual understanding, even in the face of challenging circumstances.

In February 1986, Scot Marciel was driving home after midnight and went past what he assumed was just another protest near military facilities in downtown Manila. The gathering, less than a year into his first overseas assignment with the Foreign Service, turned out to be the early days of the Philippine People Power revolution, leading to the end of the Ferdinand Marcos regime. This was just one of several times during his 35-year career in the State Department that Marciel would find himself witnessing historic moments in Southeast Asia and in the U.S. relationship with the countries of the region.

That illustrious career includes being the first U.S. diplomat to work in Hanoi since the end of the Vietnam War and serving as the first U.S. ambassador for ASEAN Affairs and as U.S. ambassador to Indonesia and Myanmar.

Marciel, Oksenberg-Rohlen Fellow at FSI and affiliated with APARC, has distilled his experiences and observations into his new book, Imperfect Partners: The United States and Southeast Asia (Shorenstein APARC/ Rowman & Littlefield, 2023). In it, he offers his on-the-ground account of the ups and downs of critical U.S. relationships in the region — focusing on the Philippines, Thailand, Vietnam, Cambodia, and Indonesia — and examines the role of ASEAN and China’s influence in Southeast Asia.

To mark the book’s release, we talked with Marciel about recent events in the region and his views on how the United States should approach Southeast Asian countries in the context of China’s efforts to sow closer ties with them. Watch the conversation:

A Return to the Philippines

The Philippines under President Ferdinand “Bong Bong” Marcos, Jr. is now allowing U.S. forces expanded access to four of its bases. Marciel, who first met Marcos, Jr. as the provincial governor of Ilocos Norte in 1985, expressed some surprise at the Philippine president’s rapid shift to strengthen the country’s alliance with the United States. He noted, however, that even in the last year of the Duterte presidency, which frequently was at odds with the United States, there was some recognition in the Philippines that the relationship with China wasn’t bearing the fruit that had been anticipated. Marciel also pointed out that the deal with the United States does not mean Marcos has abandoned China: he is still working on keeping the relationship with Beijing healthy and visiting Japan, another important partner.

Although there is some Philippine civil opposition to the renewed presence of U.S. forces, Marciel believes that the Enhanced Defense Cooperation Agreement (EDCA) will provide an opportunity for a “more modern and equal partnership,” and hopefully one that can supplant memories of the U.S. colonial history in the Philippines.

Southeast Asian Charm Competition?

As concern continues to rise about a possible invasion of Taiwan by the People’s Republic of China, some have questioned the effectiveness of the U.S. capability to compete with China, particularly in terms of a diplomatic offensive. Marciel responded to a recent New York Times article on U.S. and Chinese efforts to “woo” Indonesia. As China continues to seal trade deals in Southeast Asia, some of which are part of its Belt and Road Initiative, we asked whether the United States can compete with China’s free-flowing cash.

Marciel, taking a step back, cautions that “Indonesia is not a prize to be won,” and that we should not be “scoring diplomatic relations like a sporting event” when we look at improving ties with the countries of Southeast Asia. Indonesia, for example, has a long history with the Non-Aligned Movement, so while it attempts to attract foreign investment, it will resist aligning with any one major power. China tends to offer attractive investment packages with minimal conditions, but “you can’t always count on those investments to happen,” notes Marciel, and even when they do, there can be issues with corruption, as well as social and environmental consequences. The United States tries to put together investments that consider issues like labor and the environment, but Marciel believes that “sometimes we aim a little high” and the conditions make U.S. offerings less attractive.

The Continuing Crisis in Myanmar

We spoke with Marciel just after the second anniversary of the 2021 coup in Myanmar. He began his term as U.S. ambassador to that country in 2016, just before Aung Sang Suu Kyi’s new government was about to take office. As he puts it, it was a time of “euphoria,” not only in Myanmar but also in terms of U.S. hopes for democracy there. It turned out to be a difficult four years for Myanmar and Marciel, as the Rohingya crisis repeatedly erupted and the Myanmar military reacted with violent operations that drove hundreds of thousands of Rohingya out of Myanmar. As Marciel relates in his book, he soon found that even using the word “Rohingya” in U.S. embassy statements could create a diplomatic crisis.

Even with the horrific Rohingya genocide, Marciel cautiously notes that by 2020, when he left the country, most people in Myanmar had more opportunity and freedom under four years of a democratically elected government—the Rohingya themselves being the obvious exception. But in 2021, the “military coup basically eliminated that hope and opportunity.”

Marciel doesn’t hold much hope for an end to the coup anytime soon, but he does see at least one “positive development” over the last two years. During the worst of the Rohingya crisis, many in the majority Bamar community did not believe the reports of massacres, or even worse, did not care. But now, after two years of military rule, “more and more Myanmar people are explicitly recognizing the legitimate grievances and the suffering of many of the ethnic minority populations, including the Rohingya, over the past years, and [there is] some recognition that they were fed a lot of propaganda for a long time about what was really happening.”

Establishing Relations with Vietnam

One of Marciel’s great success stories is the normalization of U.S. ties with Vietnam. It was an improbable success with any number of obstacles likely to prevent it from happening, not the least being the debate about the fate of U.S. prisoners of war and servicemen reported as missing in action. Saigon fell in 1975, and yet in 1995, just 20 years later, diplomatic relations were restored and the U.S. embassy opened in Hanoi.

According to Marciel, it took patience, pragmatism, but also the collapse of the Soviet Union and the end of the Cold War. No longer able to rely on Soviet help for their economy, the Vietnamese became more open to work with the United States, particularly on POW-MIA issues, allowing Vietnamese imprisoned in re-education camps to flee the country, and withdrawing Vietnamese forces from Cambodia.

Marciel sees the U.S.-Vietnam relationship today as a “good-news story” that shows the degree of progress that can be attained when two countries are willing to be rational and work together. The United States still has significant concerns about human rights in Vietnam yet “both sides have agreed to talk about that issue, but not let it define or limit the relationship excessively.”

How the United States Can Improve Relations in Southeast Asia

When pressed for a prescription on what the United States can do to further improve its relationships with the countries in the region, Marciel said, “In brief, show up and engage consistently, with humility, and with a focus on the countries that we’re talking to, not on China, because what they’re looking for, for the most part is, ‘Can we count on the United States being a long-term partner?’”

By ensuring the reliability of the partnership, countries in Southeast Asia have more freedom of maneuver, and they can, if necessary, be more capable to “make decisions China might not like.” The flip side of that—the failure to show up at presidential and high governmental levels, like what happened during the Trump administration—means “you’ve undone all the good that you had done in previous years by investing in those relationships.” The price of isolationism, of neglecting U.S. diplomatic relations in Southeast Asia, is that those countries lose confidence in the United States as a reliable partner. 

On April 26, 2023, in recognition of the 70th anniversary of the U.S.-Korea alliance, President Joe Biden will host President Yoon Suk Yeol for a State Visit to the United States. According to Ambassador Jung-Seung Shin, the fact that Yoon received the second such invitation of the Biden administration is a testimony to the centrality of the Korea-U.S. alliance to the peace and stability of the East Asian regions, especially at a time when the frayed U.S.-China relationship continues to degrade into a new Cold War, with a potential Taiwan contingency looming on the horizon. 

Shin, former South Korea's ambassador to China and former director general of the Asia Pacific Affairs Bureau at the South Korean Ministry of Foreign Affairs and Trade, is the Winter 2023 Payne Distinguished Fellow at the Freeman Spogli Institute for International Studies (FSI) and a visiting scholar at APARC. He headlined this quarter’s Payne Lecture, speaking to an audience that gathered on March 1 for a timely discussion titled Sino-U.S. Relations and South Korea, co-hosted by APARC and FSI.

The Payne Lectureship at FSI, named for Frank E. Payne and Arthur W. Payne, aims to raise public understanding of the complex policy issues facing the global community and advance international cooperation. The lectureship brings to Stanford internationally esteemed leaders from academia and the policy world who combine visionary thinking and a broad, practical grasp of their fields with the capacity to provide insights into pressing challenges of global concern. Throughout the 2022-23 academic year, the Payne Lectureship hosts experts from Asia who examine crucial questions in U.S.-China relations.

Ambassador Shin is uniquely qualified to offer insight into South Korea's response to the pressures created by the U.S.-China rivalry, said APARC Director Gi-Wook Shin, who chaired the event that included a discussion with Center Fellow Oriana Skylar Mastro, an expert on Chinese military and Asia security.

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China’s Dreams

Painting a picture of Chinese ambitions, Ambassador Shin enumerated China’s goals and the steps it has taken to achieve them. “The Chinese dream,” he said, “is to regain the colonial behavior of the Qing Dynasty, when China was a great power with about one-third of the global GDP.” To achieve this dream, China's leaders have pushed for its continued economic development while arousing patriotism and nationalism domestically. Through its military modernization campaign, China has rapidly shown its ambition to become the top-rated global military power by 2049, the centennial of the establishment of the People's Republic of China, he noted.

Ambassador Shin indicated that China has prepared for a long-term competition with the U.S. in the economic arena, as Xi Jinping introduced the dual circulation economic policy, which aims to reorient the country's economy by prioritizing domestic consumption while remaining open to international trade and investment. This policy, Shin argues, “is designed, in part, to make the [Chinese] economy less affected by external factors including the supply chain reset of the U.S.” As such, China has stressed the importance of innovation and has made massive investments in science and technology to reduce its reliance on Western economies. Moreover, China has promoted the Belt and Road Initiative (BRI) to expand its political and economic influence.

“China became the second largest economic power and began to show assertiveness in its foreign policy, particularly by emphasizing the safeguarding of Chinese interests, namely, sovereignty and territorial integrity, state security and development interest,” stated Shin. To achieve these goals, “Chinese diplomats have voiced their arguments in an abrasive style, ‘Wolf Warrior diplomacy’ as it is called by Westerners.” This form of proactive engagement with the rest of the world has resulted in an intensifying strategic competition between the U.S. and China, which has made it increasingly difficult for South Korea to maintain simultaneous ties with both great powers.

No Longer on the Fence

Shin noted that “The strategic distrust and intensifying rivalry between the U.S. and China have put substantial pressure on South Korea…and South Korea's long-term policy to make a Korea-U.S. alliance compatible with its partnership with China is becoming more difficult.” In recent years, South Korea has moved even closer to the U.S.

The joint communique issued when President Moon Jae-in visited Washington two years ago, already showed South Korea’s tilt toward the U.S. At the time, heightened tensions on the Korean peninsula by the North Korean nuclear and missile provocation necessitated the alliance. Now, an ascendant China, “together with the lessons of Ukraine, have made South Korean people pay close attention to the importance of the Korea-U.S. alliance,” stated Shin, noting that both nations openly stress the importance of freedom, democracy, and rule-based order. South Korea has become enthusiastic about tripartite cooperation among South Korea, the U.S., and Japan, in tune with American policies. 

On the other hand, China warned South Korea to respect China's core interests while expressing its concerns on several strategic issues. Shin stated that “China began to demand the Yoon government to continue the three policy positions of the previous government, namely, no more deployment of Terminal High Altitude Area Defense (THAAD), no participation in the American missile defense system, and no military alliance among Korea, Japan, and the U.S.” However, the current Foreign Minister Park Jin made it clear to the Chinese Foreign Minister Wang that the policy positions of the previous government do not bind the new government, Shin indicated.
 

The Taiwan Contingency

Shin indicated the precarious nature of the contingency, stating, “South Korea has no intention of challenging the One China claim. However, the peace and stability of Taiwan Strait are also very important for South Korea, as the security situation of the Taiwan Strait is connected to the Korean peninsula.” Indeed, a military collision in the Taiwan Strait would be impossible to contain locally. “The U.S. and Japan are supposed to immediately help Taiwan to repel China’s military attack, and American bases are located in South Korea and Japan, including Okinawa,” he said.

Therefore, military conflict in the Taiwan Strait is likely to escalate to Northeast Asia, and a certain portion of American forces in South Korea could move to the Taiwan Strait in the contingency according to the strategic flexibility of forces, “which might induce North Korea's misjudgment to invade South Korea,” Shin predicted.
 

Looking to National Identity

The Cost of Deterrence

Preventing Overextension

Overextension represents one of the largest limits on U.S. power projection. According to Mastro, one of the primary reasons that the Biden administration has not been talking about North Korea significantly, is the fact that the U.S. cannot fight a war on the Korean Peninsula and compete effectively with China.

Thus, Mastro proposes that the South Koreans play a greater role in their defense, a topic that comes up with NATO partners and allies in Europe as well. More specifically, Mastro suggests that the U.S. transfer operational command to South Korean forces, and that the South Korean military should allow the U.S. to practice greater strategic flexibility, to use its forces on the Korean Peninsula for operations or contingencies that are off the peninsula. Up until this point, that permission has been denied, but Mastro contends that it would be useful and could enhance deterrence. 

“If the South Koreans, along with their statements about wanting a Free and Open Indo-Pacific, also explicitly allowed for that strategic flexibility to take place to say that they understand that the role of U.S. forces on the Korean peninsula is primarily to deter and defend South Korea against North Korea, that could also play a potential role in wider contingencies,” she said.

Furthermore, Mastro believes that South Korea must play a greater role in the production and provision of certain types of munitions. “This is an area where the U.S. has struggled with its own manufacturing base that is considering licensing production and potentially doing it elsewhere. So the question is whether the U.S. could count on South Korea for some critical supplies during a conflict that could reduce the U.S. logistical burden,” she speculated.

South Korea is a small country, and it has limited resources, but it also has the second-largest reserve force and paramilitary force in the world, and the eighth-largest active duty force in the world. According to Mastro, “The South Korean military is technically 20 times larger than that of Japan's…it has punched above its own weight, like the Australian military has.”

It remains to be seen whether the U.S.-South Korea alliance will need to be tested in the coming years, but tensions with China will likely continue to define the two nation’s foreign policies. A potential Taiwan contingency remains one of the largest looming threats to the status quo and the most probable pathway to regional escalation, which, in Shin’s view, could draw North Korea and its nuclear arsenal into the fold.

The Payne Lectureship will return in the spring quarter, continuing with the theme of Asian perspectives on the U.S.-China relationship. We will be joined by Kokubun Ryosei, professor emeritus at Keio University and adjunct adviser at the Fujitsu Future Studies Center.

Although Japan’s approach to economic diplomacy under the Fukuda Doctrine initially was subject to criticism because of its stance on non-interference in domestic affairs, now some are in retrospect lauding the approach, according to Kiyoteru Tsutsui, deputy director at Shorenstein APARC and director of the Japan Program, and co-editor of the recent book The Courteous Power: Japan and Southeast Asia in the Indo-Pacific Era. This reevaluation comes after consideration of relatively unsuccessful attempts by the United States to “push” democracy onto Southeast Asian countries. 

The better approach is to focus on advancing the rule of law, which the Japanese have done by investing resources in establishing legal infrastructure in the region, Tsutsui tells Shorenstein APARC Visiting Scholar Gita Wirjawan, host of the popular Endgame video podcast. “Liberal democracy in the sense of the rule of law is a good sort of marketing ploy to sell to Southeast Asian countries because that leads to economic benefits, which is critical to making liberal democracy attractive,” he says.

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Tsutsui joined Wirjawan for an Endgame conversation about Japan’s approaches to foreign direct investment (FDI) in Southeast Asia and other topics. One issue that both scholars agreed upon is the difficulty in getting Americans to focus on Southeast Asia, which has been long recognized as a critical region by the Japanese. Part of the problem is proximity, of course, but the region also tends to be overshadowed in American eyes by East Asian countries. 

The conversation also turned to the demographic issue Japan and other Asian countries are facing as populations age and economic growth stagnates. Tsutsui pointed out that, before 1945, the Japanese Empire saw itself as multi-ethnic; it was only after WWII that the nation was perceived as homogenous, a viewpoint bolstered by Japan’s great economic success in the 1960s and 70s. Now, however, Tsutsui says there is no choice: “Japan has to become more heterogenous,” and even conservative voices acknowledge that women need a larger role in the labor force and that immigrant labor will be essential to combat the demographic crisis.

This discussion with Tsutsui is part of an "Endgame" interview series Wirjawan is recording with Stanford experts during his residency at APARC.