Lessons from the Frontline: The Burgeoning Security and Economic Race in the Indo-Pacific

Abstract

Democracies in the Indo-Pacific are facing an increasingly competitive and securitized environment, as China turns more assertive and the US-China rivalry escalates. Disruptions include uncertainty about the global economic order, technological decoupling, an arms race amidst intense hot spots, an economic security spiral, and larger systemic risks around climate change, AI governance, etc. Countries such as Japan and Korea are actively responding to these risks through a strategic approach to economic security and increased defense spending, active alliance development, and parallel continued investment in global institutions and dialogue. Canada must be jolted out of its-business-as-usual approach and take a cue from its closest partners in Asia. This includes investing rapidly in its security (2% of defense over GDP) and the creation of an economic security council under the Prime Minister. Canada should also join its key partners in effectively investing in key global institutions in times of crisis.

Asian democracies and middle powers find themselves increasingly drawn into the cauldron generated by China's growing power projection and the strong security pushback from the US, accompanied by a partial withdrawal from the liberal institutional project. How are democracies such as Japan, South Korea, Taiwan, and Indonesia responding to this dangerous geopolitical tightrope? How are they anticipating possible scenarios regarding the US trajectory and Chinese response after the November 2024 election? And what can Canada learn?

No middle power democracy can escape the intensifying US-China rivalry, radical shifts in the US approach to the global order, nor China's increasingly assertive and disruptive moves. Indeed, the current period has triggered a series of rapid changes, as middle players seek to anticipate, gain leverage, and act as rule-makers or stabilizers, rather than victims of chaos. Their strategic adjustment combines fast economic and security adjustments, new alliances and partnerships, and efforts to stabilize the regional order. They all combine dimensions of deterrence and hedging with elements of engagement and institution-building, albeit with variations. It is crucial for Canada to track these fast-moving strategic shifts and engage in its own rapid response.

As a result of the accelerating US-China confrontation and parallel systemic changes, middle power democracies in the Indo-Pacific face five types of rapid disruption. First, there is now broad uncertainty about the global economic order, due to the possibility of Trump becoming president again, with a possibility of the US withdrawing from global trading arrangements, and losing interest in G20 types of coordinating organizations. Nationalist measures taken by both China and the US generate momentum toward decoupling, without clear limits or guardrails. All countries face an unstable existence between fragmentation dynamics and established norms and institutions of economic integration.

Second, partial technological decoupling is also accelerating, including AI and digital technologies, as well as green technologies—the two leading sectors of the new industrial revolution.

Third, middle power countries now face an arms race led by China and the US, but involving all players in the region. Japan has just decided to jettison its seventy-year yardstick of 1 percent defence ratio relative to GDP and instead double it by 2027. That is a true revolution in the region. Taiwan, already at 2.5 percent of defence/GDP, has committed to move to 3.2 percent of GDP. High-tech missiles and equipment are being deployed all over China but also across the first island chain (especially the Japanese islands, Taiwan, and the Philippines). Navies and space forces are also developing quickly and are being deployed. The Taiwan question, the South China Sea (particularly the current confrontation at Second Thomas Shoal between illegal Chinese Navy actions against the Philippines), and the Korean Peninsula all present extremely dangerous hot spots that could trigger a widespread conflict. Given Trump's risky, mercurial style and confrontational approach to China, his return to power would usher in a period of high-stakes crises in the wider region. Something like a Cuban Missile Crisis could be just around the corner in the Pacific.

Fourth, the wider region is now the scene of a parallel economic security race. As countries start to question the reliability of global markets to provide key economic inputs produced by rivals, they issue non-market requirements to their corporations in order to reduce their risk. In particular, recent Chinese and US measures (set to accelerate under a possible Trump presidency) are massively reshaping the incentives and constraints for all in the region.

Fifth, countries must also now react to systemic risks generated by the parallel spread of AI technology, the worsening debt crisis, and the acceleration of the climate crisis, at a time when the ability of the global system to respond to them is eroding fast.

In response to this riskier environment, middle power democracies are deploying three main measures. First, they are quickly developing robust economic security measures to complement their continued belief in economic integration. Japan is a pioneer with its 2021 broad economic security law focusing on critical technologies, intellectual property, infrastructure, and sensitive land acquisitions. Since 2021 these measures have been complemented by the most far-reaching industrial policy programs since the 1970s, including massive subsidies for the semi-conductor and green technology industries. South Korea has focused a large part of its Indo-Pacific strategy (issued at the same time as Canada's in the fall of 2022) on the concept of economic security, along with the deployment of industrial policy tools. Taiwan has a similarly proactive economic security strategy, as do Indonesia, Vietnam, Malaysia, and India.

All countries now seek secure access to energy, key minerals, food, water, medicines, high-tech components (such as semi-conductors), key technologies, and resilient infrastructure. This generates larger cascade effects, as the economic security measures taken by one country present a security risk to others.

Second, middle power democracies are engaging in a vast game of new alliances and partnerships. Here, too, Japan has been a pioneer. Over the last two years, the country has deeply invested in its strategic partnership with the US (seeking to Trump-proof its profound anchoring in the US-Japan alliance), as well as its trilateral security and economic arrangements with Korea and the US, its US-Japan-Philippines arrangements, and its strategic relationship with Australia, India, and the UK as well as Canada. Japan is the most active and trusted G7 power within South East Asia and ASEAN, representing a huge asset for its partners. Korea, Taiwan, and the Philippines are also searching for leverage through partnerships with the ASEAN countries, India, the US, Europe, Japan, and to some extent Canada.

Third, a remarkable feature of Japan's and Korea's reactions to current risks and uncertainties is their continued commitment to the liberal rules-based order including via the UN, global economic organizations, and regional organizations. Both countries have been active in G20 activities, WHO pandemic treaty negotiations, and climate negotiations, as well as regional forums such as ASEAN, RCEP, or the trilateral China-Korea-Japan summit meeting in May 2024. In those forums, they engage with China and other partners fully in the hope of stabilizing relationships. Should the US under a Trump 2.0 administration choose to wreak havoc with global institutions, it is likely that middle power democracies would not go along. They would engage with the US on security measures to deter China but also would seek to generate a critical mass coalition to continue to invest in the global order.

What can Canada learn from its democratic partners in East Asia and South Asia? For one, it is similarly urgent for Ottawa to be jolted out of business-as-usual thinking. This is a time of great disruption, and the liberal international order is teetering on the brink; therefore, Canada should work on three fronts. First, Canada must increase its security capacity and resilience at home. This should include a more rapid move toward 2 percent of defense expenditures over GDP (with a focus on the Arctic, cyber security, and a rapid expansion of its navy) and the creation of an economic security strategic council under the prime minister, along with stronger capacity for defence against foreign infiltration and interference. The launch, on August 9, of public consultations on “potential new measures to advance and defend Canada’s economic security interests” is a good starting point. Second, Canada must be more intentional and active in the great game of new partnerships being formed in the Indo-Pacific region, with real leverage and tools (security, economic, and human). Third, Canada should join Japan, Korea, Singapore, Indonesia, Vietnam, Malaysia, Thailand, the Philippines, ASEAN, Australia, the UK, the EU, and others in managing global risks and investing in critical global public goods. When the storm comes in early 2025, Canada should be part of the cooperative response and not sitting on the sidelines.