Update Country Report Maldives 23 Sep 2021

• AUKUS boosts the US's reach in the region, to the detriment of China's strategic position. EIU expects China to respond through a mix of economic diplomacy and military development, including with an eye on security partnerships of its own.
• US allies in Asia have welcomed the pact, but will have questions of where they stand in an increasingly tiered set of US relationships in the region. Some South-east Asian countries feel bypassed by AUKUS and have concerns about its impact on regional stability.
• The strategic fault lines emerging in Asia are set to create new costs and challenges for businesses. Increasingly, filtering business decisions through a US-China geopolitical risk lens will be required.

Australia and the US are long-standing allies, but the signing of AUKUS still represents a step change in their relationship that has broad implications for the strategic environment in Asia. The inclusion of the UK in the partnership adds to the sense that external powers are becoming more active in Asia, as they recognise the region's economic centrality and how China's development is shifting the balance of power.

China: anger and a dose of self-reflection

China's reaction to AUKUS was predictably hostile. Through the partnership, the US will be in a position to project military power more effectively in the Pacific and Indian oceans, to the detriment of China's strategic planning. Australia's acquisition of nuclear-powered submarines will provide that country with a more effective deterrence capability, but does not necessarily have a significant impact on China, which already operates a dozen such vessels. The bigger cause for concern for China will be that AUKUS paves a path for the US to expand its access and presence in Australia, including more frequent military rotations and air and maritime basing arrangements.

There will be questions in China about how AUKUS came to pass. Despite Australia's export reliance on China, it has chosen to ally more firmly with the US out of concerns about China's intentions in the region (the coercive economic diplomacy that China has adopted towards Australia since 2018 will not have helped). Part of China's response is therefore likely to involve easing up on aggressive "wolf warrior" rhetoric and emphasising economic co-operation; the hastening of its application for membership to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) hints at such a course. The goal will be to dissuade other countries from following Australia and to drive a wedge among US allies.

A charm offensive does not mean wolf warrior diplomacy will disappear, especially when perceived core national interests are at stake. In addition, AUKUS is likely to strengthen advocates in China of the country's accelerated military modernisation, which includes the enhancement of its missile technology and expansion of its nuclear arsenal. Another consideration for China stemming from AUKUS will be whether it needs to develop its own alliance system, given that its only defence pact is with North Korea. Security co-operation has increased notably with Russia, which has interests in North-east Asia, but competition in Central Asia may stop the two countries from formalising ties.

North-east Asia: welcoming but also questions

AUKUS has been welcomed in North-east Asia as a sign of commitment from the US to its allies after the chaotic nature of the US withdrawal from Afghanistan. The partnership probably received its most enthusiastic welcome in Taiwan, where anxiety persists over the US stance in the event of a cross-Strait security crisis. This will be mixed with concerns that should China interpret AUKUS as diminishing its long-term strategic position, it could prompt moves in the short term to enforce its claim over Taiwan.

AUKUS will still prompt some questions about US alliances with Japan and South Korea. For Japan, it will likely intensify US pressure to develop its own defence capabilities. Meanwhile, for South Korea, there could be pressure to adjust its approach on economic ties with China; it is notable, for example, that although the US has granted Australia access to its nuclear submarine technology, South Korea has been refused on several occasions. In theory, changes in these areas could see Japan and South Korea integrated into AUKUS; in the meantime, "tiers" in the US alliance system in Asia will become evident.

North Korea was alone in North-east Asia in criticising AUKUS, saying that it made clear that the US was the "chief culprit" in damaging the international nuclear non-proliferation regime. Certainly, even with the caveat that nuclear submarines are to be provided to Australia on an exceptional basis, it will make talks with North Korea over nuclear disarmament significantly tougher.

South-east Asia: divided again

AUKUS is set to be another source of division within the Association of South-East Asian Nations (ASEAN), which is struggling to bridge disunity caused by geopolitical tensions in the region and internal developments, such as the crisis in Myanmar. The Philippines, a long-standing US ally engaged in a territorial dispute with China, has welcomed the partnership as helping to provide "balance", and Singapore has also been positive. However, other ASEAN members have been guarded and some openly critical. Indonesia and Malaysia have said that AUKUS will fuel a regional arms race to which South-east Asia-the geographical heart of the South China Sea region-is highly exposed.

More broadly, AUKUS adds to the impression that US-China competition is pushing ASEAN into strategic irrelevance. With the body divided, external parties will bypass it increasingly in pursuit of their interests, despite rhetoric around "ASEAN centrality". Previously, there had been hopes that Australia would seek to enhance its security through tighter relations with South-east Asia, but it has instead felt compelled to fall back on long-standing Western ties.

Elsewhere in Asia, the reaction to AUKUS can be described as watchful. Although New Zealand had been moving rhetorically closer to the US on strategic matters, AUKUS confirms that it will take a different path to neighbouring Australia in relations with the US and China. It will want reassurance that AUKUS will not diminish ANZUS-a collective security pact between Australia, New Zealand and the US-or dilute intelligence co-operation under the Five Eyes grouping, of which it is part of. For India, the main cause for concern will be how AUKUS interacts with emerging co-operation under the Quad grouping-as a substitute for it or as a supplement.

Asia's emerging fault lines

The mixed reactions in Asia highlight the emerging geopolitical fault lines that will shape the region. AUKUS will be central in US efforts to protect its primacy in the region and craft an alliance system capable of deterring-even containing-a rising China. Meanwhile China will look to deepen ties where it can, assisted by its economic heft. Rival poles of influence will increase pressure on Asian countries to choose sides, absent a concerted effort to develop a non-aligned grouping. Regional defence spending will probably accelerate, as national security concerns come to the fore.

These big geopolitical shifts will have an impact on companies. Business choices will need filtering through a US-China geopolitical risk lens, potentially shaping choices over everything from investment locations to sourcing operations in Asia. This will add to costs and time. Alongside, firms will need advance plans should tensions intensify over major flashpoints in the region, given the likely significant implications for supply chains.