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Asia in 2011: China and North Korea will keep making headlines

By Eurasia Group's Asia practice

Next in our series of regional outlooks is Asia, where most economies not named Japan are enjoying quicker and stronger recoveries than in other regions. Asian states have also gained new weight within the G-20 and the Bretton Woods institutions. But traditional strategic rivalries persist, and China's growing economic clout and North Korean belligerence are likely to generate most of the headlines in 2011.

Across the region, Chinese demand is a central driver of other countries' economic growth, and for many Asian countries, China is the top trade partner. In the coming year, China will boost its role at the center of a growing web of economic and financial connections that are gradually, but inexorably, integrating East Asia. Beijing will also strengthen its economic ties across South Asia, notably in Pakistan, Sri Lanka, Bangladesh, and even India, with a focus on investment in infrastructure. China-centric free trade agreements have proliferated. Beijing has also adopted its own standards in some areas of information and communications technology and will try to have them adopted internationally. China will continue to try to reshape the region's trade and investment architecture, largely on a pan-Asian basis and without the United States.

But Beijing's long-term strategic intentions inspire deep anxiety, and its foreign and defense policies have rattled its neighbors. Beijing will suffer consequences in 2011, as India, South Korea, Japan, Indonesia, Vietnam, Malaysia, Australia, and others strengthen their defense ties to the United States. Joint exercises, drills at sea, and weapons sales will periodically raise tensions. So too will trade conflicts, as debates over China's industrial policies at home and investments abroad mix commercial worries with national security fears.

Traditional geopolitical risks in Asia, including China-Japan and India-Pakistan frictions, should be manageable in 2011, but North Korea remains a wildcard. Pyongyang continues to make succession arrangements for an ailing Kim Jong-il, and the regime has used military action in the past to bolster its domestic legitimacy.

Further North Korean provocations are highly likely. We could see a third nuclear test in 2011, but additional conventional attacks would rattle markets with greater force. Significant military escalation is unlikely, however, unless Pyongyang strikes U.S. assets -- like ships participating in joint exercises -- or launches conventional strikes at peninsular South Korea. The former would prompt U.S. retaliation. The latter could lead to counterstrikes on peninsular North Korea, though an innately conservative Seoul will try to modulate its response to avoid an escalation of violence.  

This post was written by analysts in Eurasia Group's Asia practice.

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