Principal Kevin Nealer is quoted in the New York Times

February 12, 2016

Principal Kevin Nealer is quoted in the New York Times, commenting on the growing relationship between Washington and ASEAN countries

US Drawing Southeast Asia Closer with California Summit

The New York Times- February 12, 2016

JAKARTA, Indonesia — When President Obama holds the first-ever American summit meeting with Southeast Asian leaders in California beginning Monday, an underlying goal involves a country that will not be represented there: China.

Since the Obama administration began its “pivot to Asia” in 2011, the United States has been in direct competition with China for economic power in Southeast Asia, and the political influence and security arrangements that frequently go with it.

“There may be a better term for it than ‘cold war,’ but there’s a lot of economic competition,” said Stuart Dean, a retired executive with General Electric who spent 24 years working in Southeast Asia. “It’s a commercial Olympics, as it were.”

As if to underline the subtext of the summit meeting, it will be held at the Sunnylands estate in Rancho Mirage, Calif., where Mr. Obama met with President Xi Jinping of China three years ago.

In meeting with the leaders of the 10 members of the Association of Southeast Asian Nations, or Asean, Mr. Obama will be addressing a group that represents a population of more than 620 million and a collective economy of around $2.4 trillion, the third largest in Asia behind those of China and Japan.

Geographically astride the world’s busiest and most strategic shipping lanes, the region is the fulcrum of the administration’s rebalancing toward Asia.

While the leaders will certainly discuss regional security issues, includingterritorial disputes in the South China SeaNorth Korea’s nuclear programand counterterrorism, they will devote equal time to economic issues, including the United States-led Trans-Pacific Partnership, policies aimed at promoting further growth and integration, and identifying ways to encourage more trade and investment through innovation and entrepreneurship.

American officials briefing reporters in Washington on Wednesday did not get into specifics, saying the meeting would not be tightly scripted.

“It is not a laboriously negotiated, strict, by-the-Roman-numerals agenda,” said Daniel R. Russel, assistant secretary of state for East Asian and Pacific affairs. “It is an open discussion among the leaders.”

While officials said the gathering was not an “anti-China” meeting, Washington is clearly trying to exert its leadership in Southeast Asia through investment, analysts said.

“China’s actions in the South China Sea have undermined its narrative of a peaceful rising and fostered new suspicions about its economic and geopolitical intentions in the region,” said Kevin G. Nealer, a China expert and a partner with the Scowcroft Group, based in Washington. “America’s most difficult relationships in the region are healthier and more high-functioning than China’s best relations, and the deep and consistent American investment there has created habits of cooperation and shared goals with Asean that trade alone doesn’t yield.”

China has been Asean’s largest trading partner since 2009, with two-way trade surpassing $366 billion in 2014, according to Asean trade data. The United States was fourth last year behind the European Union and Japan. Southeast Asia was also America’s fourth-largest export market that year.

However, America’s strategy has focused on direct investment, where it is far ahead of China. American companies poured $32.3 billion into Southeast Asia from 2012 to 2014, according to Asean data, compared with $21.3 billion from China.

From 2000 to 2014, the United States invested $226 billion in Southeast Asia, according to the United States Bureau of Economic Analysis, more than American investment in China, Japan and India combined.

The United States aims to maintain its dominance in investment while taking the lead in trade, according to analysts, and the Trans-Pacific Partnership is the chief weapon in that quest. Four of Asean’s 10 member states have already joined the pact, while three others — Indonesia, the Philippines and Thailand — have either declared their intention to join or said they were considering doing so.

Alexander C. Feldman, president and chief executive officer of the U.S.-Asean Business Council, said the summit meeting was the culmination of American economic strategy in the region dating back to Mr. Obama’s first weeks in office.

In early 2009, Hillary Clinton made her first overseas trip as secretary of state to Indonesia, a Group of 20 member that boasts Southeast Asia’s largest economy, and which is the unofficial leader of Asean.

“I think the strategy by the Obama administration has been a long-term one which reflects a whole vision of Asia and realizes that Asean is a critical piece of the puzzle often not focused on by past administrations,” Mr. Feldman said. “Since Day 1 they have focused on this region and understood that it was really the battleground for the future of Asia.

“It is not so much about containing China as it is about maintaining American leadership,” he added.

The region’s trade with China has been robust. Southeast Asia has been a huge source of raw materials and commodities to feed both China’s economic engine and its growing consumer class, supplying products like minerals and palm oil from Indonesia and Malaysia and electronics components from Singapore, Malaysia and Thailand, said Murray Hiebert, a Southeast Asia expert at the Center for Strategic and International Studies in Washington.

“China is also a big aid donor, particularly for infrastructure projects, an area in which U.S. companies have had trouble competing because Southeast Asian governments produce so few bankable projects that U.S. banks are willing to finance,” he said.

That said, China’s dependability as a trading partner is waning. While nearly 12 percent of total exports from Asean went to China in 2014, the most to any one country, exports to China slumped last year as commodity prices tumbled and are expected to fall further this year because of China’s economic slowdown.

The region’s leading economies, including Indonesia, will feel the pain, according to economists.

“The sensitivity of Indonesia to China’s economy is very large, and that’s also the case for Asean,” said Destry Damayanti, an economist and commissioner at the Indonesia Deposit Insurance Corporation who is based in Jakarta.

It remains to be seen whether the United States can profit from China’s downturn to increase its trade with the region.

But the American edge in direct investment may be the greater long-term benefit, said Mr. Dean, the retired General Electric executive.

“Our business progress and biggest deals have been driven by investing,” he said. “It ensures a long-term presence, builds long-term relationships and makes us a local company in each country where we invest.

“Trading is short term and can go away faster than investment, and China will always have a competitive advantage due to its proximity.”