Effectiveness of Economic Sanctions on Russia’s Economy

In early 2015, Western leaders thought they had Russia cornered.  A year earlier they imposed on Russia economic sanctions, which ranged from restrictions on access to Western capital markets to bans on the export of oil-production technology, to punish it for its role in dismembering Ukraine.  Those sanctions and the Russian boycotts that followed threw Russia’s economy into turmoil.  With some justification, President Barack Obama declared that “Russia is isolated with its economy in tatters” in January 2015.  But two years later, Russia has stabilized its economy, annexed Crimea, and kept its “little green men” in eastern Ukraine.  What went awry?

Peak Pain

In financial terms, Russia felt the most damaging impact of the West’s economic sanctions within the first year of their imposition.  Suddenly, Russian companies, holding dollar and euro-denominated debt, had to repay their loans without the ability to refinance them.  Russian banks targeted by Western sanctions saw their overseas assets frozen.  That created a cash crunch.  Many companies were forced to suspend operations and slash jobs; some even required government capital injections to survive.  But they did survive.

Commodity Price Stabilization

Unfortunately for Russia, the West’s economic sanctions coincided with a steep drop in global oil prices.  That, more than anything else, exacerbated Russia’s economic woes, since much of the country’s economy depends on the production of commodities, primarily oil.  Oil prices plummeted from over $100 per barrel to under $35 per barrel in late 2015.  But then they began to recover the following year.  So too did the prices of other major commodities that Russia produces, including iron, aluminum, and copper.  No doubt global economic growth, which boosted commodity prices, helped Russia to better ride out Western sanctions.

Floating Currency

But the stabilization of commodities prices did not save Russia’s economy.  With economic sanctions darkening the country’s outlook, the value of the Russian ruble was cut in half.  At first, Russia’s central bank tried to defend it, consuming $200 billion in foreign exchange reserves in the effort.  But ultimately, Russia’s central bank took a leaf from the International Monetary Fund’s market-based playbook and allowed the Russian ruble to float.  That freed Russia’s central bank from having to defend the ruble and prevented an even greater outflow of hard currency that would have further undermined Russia’s economy.

Moreover, since commodities are generally priced in dollars, the sharply devalued ruble meant that though Russian companies faced falling prices for their goods, the dollars they did receive could be converted into more rubles.  That softened the economic blow—enough so that Russian energy companies could continue to reinvest in their businesses.  As a result, despite the sanctions on oil-production technology, Russia is able to produce more oil today than it did before the sanctions were imposed.

Inflation Control

With shortages of imported goods and more rubles in circulation, inflation became a real threat.  Rising prices ate away at the purchasing power of ordinary Russians.  But rather than reflexively enact price controls, Russia’s central bank used another market-inspired lever.  It raised interest rates, up to 17 percent by December 2014.  Credit naturally dried up, further depressing the Russian economy.  But fortunately for Russia, inflation was quickly brought under control.  That allowed Russia’s central bank to gradually lower interest rates to 10 percent, giving Russian companies much-needed breathing room to recover.

Fiscal Discipline

In the depths of its economic recession, Moscow could have increased government spending to boost economic activity.  But with falling revenues from Russian oil production, a surge in spending would have pushed Russia’s government budget deep into the red and fueled a potential economic crisis.  Instead, Moscow exercised fiscal discipline.  It held its spending in check and ran a budget deficit of only 3 percent of Russia’s GDP last year.  When more funds were needed, Moscow raised taxes and dug into its two sovereign wealth funds, draining a third of their assets before oil prices stabilized.

Wavering Western Resolve

Meanwhile, European companies, particularly German ones, gave Moscow hope.  They were never keen on the economic sanctions against Russia.  From the start, they lobbied German Chancellor Angela Merkel to water them down.  After they were imposed in 2014, German direct investment into Russia evaporated.  But only a year later, German companies returned, investing $1.8 billion into Russia.  Last year, they invested another $2.1 billion, more than they had in the year before economic sanctions were imposed.  Such continued investments have encouraged Moscow to question the strength of Western resolve.

Conclusion

The West’s economic sanctions have bent but did not break the Russian economy, despite its structural vulnerabilities.  What steadied it was a combination of several factors, the most important of which were the stabilization of global commodity prices and the market-oriented policies implemented by Russian authorities.  They made Russia’s economy more resilient and prevented an even deeper recession.

Ultimately, economic sanctions can make countries more vulnerable to global economic forces.  But rarely do they deliver a knockout blow themselves.  Western economic sanctions against Russia have proven the rule, rather than the exception.  Ironically, the West’s success in spreading open-market ideas at Russia’s central bank may have inadvertently weakened the effectiveness of its own economic sanctions.  If so, the further spread of such ideas could make economic sanctions even less effective in the future.

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Japan’s Precarious Position in the Asia

Japanese destroyers in column formation

Over the last few years, Japan’s foreign policy gained a coherence rarely seen in decades.  No doubt pressure from Japan’s natural rivals in Asia—a rising China and a recalcitrant Russia—have helped to focus the minds of Japanese policymakers.  Certainly those closest to Japanese Prime Minister Shinzō Abe seemed convinced that Japan needed to improve its security situation.  By the beginning of 2016, it seemed as though Japan had done just that.

A Firmer Footing

While President Barack Obama’s “pivot to Asia” proved disappointing, Japanese policymakers saw value in Obama’s support for a “rules-based international order.”  In practical terms, what that meant was that Japan could at least count on the United States to remain engaged in Asia and underpin its security.  For much of 2016, that seemed likely to continue.  After all, Obama’s nominal successor, Hillary Clinton, led in the U.S. presidential election polls.  Though Clinton had renounced her earlier support for the Trans-Pacific Partnership (TPP), a free-trade agreement that Japan hoped would be the basis of Asia’s future economic architecture, most observers expected her to reverse herself again if she became president.

Hence, Abe had every reason to believe that his efforts to improve Japan’s security would be built on a reasonably solid foundation.  He tirelessly traveled throughout Asia cultivating new friendships, especially with the countries in Southeast Asia.  He encouraged Japanese companies to invest in them; he forged security relationships with them; and he even gave some of them Japanese-built patrol boats to monitor their maritime borders.  He also stepped in when Washington stumbled.  After relations between the United States and its long-time allies, Thailand and the Philippines, soured over their internal affairs, Abe quickly moved to strengthen Japan’s bilateral ties with both countries.

Japan also took more direct steps to strengthen its defense posture.  It modestly increased its defense budget.  It also laid the groundwork for new military installations in the Ryukyu Islands to watch over its East China Sea claims.  But possibly Japan’s biggest step was its new interpretation of its self-defense law.  Under the new guidelines, Japan’s Self-Defense Forces would be allowed to aid allies who come under attack.  While that may seem wholly non-controversial in most countries, it was anything but in pacifist Japan.  Some feared that Japan could be more easily drawn into future conflicts.  But the new guidelines would also enable Japan to form stronger security alliances that could prevent such conflicts from happening at all.

The string of good news for Japan’s security reached its zenith last July.  Under the auspices of the United Nations, the Permanent Court of Arbitration gave a boost to the “rules-based international order” when it judged that China’s “nine-dash line” claim in the South China Sea to be invalid.  With the judgment an international court at its back, a heartened Tokyo even considered filing its own case against China over their competing territorial claims in the East China Sea.

Shifting Sands

However, just then the ground beneath Japan’s feet shifted.  Rodrigo Duterte’s election as the president of the Philippines abruptly ended what some saw as Southeast Asia’s growing willingness to back an international order based on rules (or at least on ASEAN’s norms).  Having a personal animosity towards Obama and a general suspicion of American meddling, Duterte steadily moved the Philippines away from the United States.  Instead, he leaned toward China.  Abe’s meeting with Duterte in Tokyo failed to arrest that tilt.  Soon after, Malaysian Prime Minister Najib Razak, for his own reasons, began to lean the same way.  He even agreed to buy Chinese ships for the Malaysian navy.  On the other hand, Japan missed a golden opportunity to solidify its security relationship with Australia when a Japanese consortium lost a bid to build Australia’s next generation of submarines.

To top it all off, Donald Trump won the U.S. presidential election.  Throughout his campaign, he bashed not only the TPP, but also Japan for what he viewed as its inadequate support for the U.S. security presence in Asia.  Soon after his election, Trump confirmed that he would shelve the TPP when he became president.  Doubtlessly concerned, Abe hastily flew to New York to impress upon Trump the importance of a strong alliance between Japan and the United States.  But Abe received no public assurances.  The best news that Abe received from Trump probably came a month later when he announced his aim to expand the U.S. Navy.  If fully realized, that would at least put more substance behind America’s commitments to Asia (and to Japan), however strong they may be.

Troublesome Neighbors

China quickly capitalized on Japan’s reverses.  Given the likely demise of the TPP, China pushed harder for a Chinese-led free-trade pact, the Regional Comprehensive Economic Partnership, at the APEC summit last November.  Many believe the pact, if successful, would draw Asia’s economies closer into China’s orbit.

Russia also sensed Japan’s weakened position.  When Russian President Vladimir Putin met with Abe a month later, he offered Abe nothing new when they discussed how to settle their dispute over the southern Kuril Islands (or Northern Territories in Japan).  Putin simply reiterated Russia’s historic positions and insisted that any joint economic development on the islands must take place under Russian rules, an implicit recognition of Russian sovereignty over the islands.  Unsurprisingly, the meeting yielded little progress.

The Going Remains Tough

To make matters worse, Japan has yet to break free from a quarter century of economic stagnation.  Unless that changes, Japan will be hard pressed to devote substantially more resources to its security.  Through the TPP, Abe probably hoped to not only give Japan an economic boost, but also bind the United States more closely to Asia.  Unfortunately for Abe, the TPP’s negotiations dragged on for too long.  By the time they ended, it was politically impossible for the U.S. Senate to ratify it.  Even so, Abe has vowed to push TPP legislation through the Japanese Diet.

None of this is to say that Japanese policymakers have lost their way.  Abe is still focused on improving Japan’s security situation.  But for the moment, how much more he can do about it is not altogether clear.

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Revival of the Regional Comprehensive Economic Partnership

Countries Involved in the Regional Comprehensive Economic Partnership and the Trans-Pacific Partnership
Countries Involved in the Regional Comprehensive Economic Partnership and the Trans-Pacific Partnership

 

The Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP) are both free-trade agreements in Asia that have been under negotiation for a number of years.  Often seen as competitors, however, the former is led by China and the latter by the United States.  By February 2016, the RCEP had fallen behind the TPP, whose negotiators had already signed an agreement and returned it to their twelve member countries for ratification.  Their RCEP counterparts were still mired in talks.

 

Even so, the TPP’s negotiations were by no means a cake walk.  Concerns in Japan over agricultural issues and in Southeast Asia over the TPP’s “deep” standards repeatedly delayed an agreement.  Indeed, there had been too many delays.  By the time a deal was reached, the United States, the pact’s biggest member, had begun what turned out to be a particularly bitter presidential election and one in which the TPP became a lightning-rod issue.  Even the pact’s early advocates, like former Secretary of State Hillary Clinton, who was one of the presidential candidates, strongly disavowed it.  In such a political climate there was little chance the U.S. Senate would ratify it.

 

The election of Donald Trump as the next American president sealed the fate of the TPP in the United States.  Soon after, President Barack Obama abandoned his efforts to ratify the pact.  Trump himself declared that the United States would withdraw from it after he is sworn in as president.  That threw the future of the TPP into turmoil.  It also breathed new life into the RCEP.  Capitalizing on the TPP’s disarray, Chinese President Xi Jinping reassured participants at the Asia Pacific Economic Cooperation summit in late November that China would renew its efforts to conclude the RCEP.

 

RCEP vs. TPP

Why does that matter?  What, apart from some of their member countries, is the difference between the two free-trade agreements?  Traditionally, countries conclude free-trade agreements to lower or eliminate tariffs, and thus encourage trade.  While that has generally spurred economic growth in developing countries, it has also tended to hollow out legacy industries in developed countries.

 

Consequently, developed countries, like the United States, have sought a new approach to free trade.  Embodied in the TPP (and its sister free-trade agreement, the Transatlantic Trade and Investment Partnership), that approach requires member countries to adopt domestic policies that would “raise labor and environmental standards, impose disciplines on government-owned corporations, strengthen intellectual property rights enforcement, [and] maintain a free and open internet.”[1]  In that way, developed countries argue, trade would be not only freer, but fairer too.  Indeed, some in the Obama administration even saw the TPP as part of a grander vision for a “rules-based international order.”

 

Naturally, developing countries feared what impact such policies would have on their protected companies and industries.  For example, the TPP would require them to end their preferential treatment of state-owned enterprises in government procurement, something they were reluctant to do.  Nevertheless, developing countries were ultimately persuaded to join the pact because of the added benefits they could gain from greater access to the markets of developed countries.

 

On the other hand, the RCEP is a far more traditional free-trade agreement.  It does not share the lofty ambitions of the TPP.  It does not concern itself with “behind the border issues,” like the preferential treatment in government procurement.  Rather, it simply focuses on reducing and eliminating tariffs.  Countries can limit competition wherever they see fit.  On the surface, that sort of pact would appear easier to negotiate.  But developing countries must carefully consider the terms of such a pact, because they can lock countries into being part of regional supply chains whose ultimate benefits accrue elsewhere.  Given that there are thousands of categories and subcategories of goods to consider (not mentioning the fact that many of those are shuttled between countries before they are assembled into a final product), negotiations are bound to be complex.

 

Impact of RCEP

Still, the RCEP is back on center stage.  If successfully concluded, it could change the structure of Asian trade in ways that would put China firmly at the center of commerce in the region.  That, some worry, would accrue even more political as well as economic power to China.  But given the prevailing sluggish global economy, what matters to most developing countries is reaping the immediate benefits from freer trade.  Unsurprisingly, a couple of countries at the APEC summit quickly seconded China’s interest in reviving the RCEP’s negotiations.  It is now up to China to make it happen.

 

[1] John Lyons, Mark Magnier, and William Mauldin, “China Steps In As U.S. Retreats on Trade,” Wall Street Journal, Nov. 23, 2016, pp. A1, A6.

 

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GI Go Home, Again: The Philippines-U.S. Alliance Weakens

On Tuesday, Philippine President Rodrigo Duterte abruptly demanded that American military advisors on the southern Philippine island of Mindanao “have to go.”  His stated concern was that the presence of American troops on Mindanao antagonized local Muslims and that the troops could become targets of Abu Sayyaf, an extremist Islamic group, for kidnapping and ransom.

The American military advisors were once part of the U.S. Joint Special Operations Task Force-Philippines operating under the authorities of Operation Enduring Freedom-Philippines, headquartered at an airbase near Zamboanga.  The task force had been deployed there for a decade as part of a program to train and support elements of the Philippine military in its efforts to combat Islamic militants throughout the region.  Last year, that program was wound down and most of the American troops left.  But a small detachment of military advisors remained behind.

Precisely why Duterte chose to make his remarks is unclear.  They might have been intended to strengthen his hand in peace talks that he reopened with the Philippines’ largest Muslim rebel group, the Moro Islamic Liberation Front (MILF), in August.  Those talks had been stalled for over a year after a botched anti-terror raid against Islamic militants, including the MILF, resulted in the deaths of 44 Philippine police commandos.  The raid derailed his predecessor’s attempt to fulfill an accord reached in 2014 under which the rebels agreed to lay down their arms in return for the passage of a law turning a large part of Mindanao into an autonomous region.  How successful Duterte’s peace talks will be remains to be seen.  In early September, Islamic militants bombed a night market in Davao City, where Duterte was once mayor.  The blast killed 14 people and wounded 70 more.

Back in Manila, Philippine Foreign Minister Perfecto Yasay, Jr. downplayed the impact of Duterte’s remarks.  According to Yasay, the larger defense relationship between the Philippines and the United States remained “rock solid.”  The removal of a “token” number of American military advisors from Mindanao would not affect that relationship or the Enhanced Defense Cooperation Agreement that the two countries signed in 2014.

But Duterte’s remarks come at an awkward time in relations between the Philippines and the United States.  Only a week ago, at the ASEAN summit in Laos, a meeting between Duterte and President Barack Obama was cancelled after Duterte chided Obama for his criticism of Duterte’s anti-drug campaign in the Philippines.  While the two men eventually met, the incident amplified doubts over how Duterte’s administration would work with Washington.

More broadly, Duterte’s remarks reflected the deep ambivalence many Filipinos on the political left feel about the United States.  They would prefer it if the Philippines distanced itself from its one-time colonial ruler.  Indeed, Duterte already put a halt to the joint Philippine-American naval patrols in the South China Sea.  And, recently, he stated that he would favor buying weapons from China and Russia, rather than the United States.

Unfortunately, the Philippines needs the United States, at least until the Philippine armed forces can build up a credible external deterrent.  The last time Manila ordered American forces to leave the Philippines was in the early 1990s.  Soon thereafter, China took advantage of the weakened alliance to seize Philippine-claimed Mischief Reef.  Today China has not only fortified the reef, but also reclaimed enough land there to build an airfield on it.  Duterte’s remarks give China another opportunity.  Duterte may believe he can reach an accommodation with China without the United States.  But that accommodation will likely be on Chinese terms.

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U.S. Foreign Policy Aspirations and the Trans-Pacific Partnership: Economic Integration and Political Alignment?

At times, it seemed as though the negotiations over the Trans-Pacific Partnership (TPP) would go on interminably.  Begun in 2010, the TPP evolved from the four-country Trans-Pacific Strategic Economic Partnership Agreement to encompass twelve Asia-Pacific countries, including the United States.  It would eventually take five years for the trade representatives from those countries to hammer out an agreement, the final terms of which were settled on Monday morning.

Trans-Pacific Partnership Member Countries

Over the coming months, much will be said, both for and against, the possible economic and social implications of the TPP as it is debated in the legislatures of its twelve member countries before it can be enacted.  But the TPP also carries with it strategic implications—not only for its smaller members, but also for its largest, the United States.  American interest in the TPP began during the last year of President George W. Bush’s tenure.  But it was the administration of President Barack Obama that moved the TPP to the forefront of U.S. foreign policy in the Asia-Pacific.  So important has the TPP become that Obama persuaded his political opponents in the U.S. Congress to award him “fast-track” trade promotion authority, so that American trade representatives could assure their counterparts from other countries that the U.S. legislative body would not tinker with the specific terms of the trade agreement once it was reached.

Strategically, the United States has come to see the TPP as critical to its long-term security in the Asia-Pacific.  It helps to ensure that, even with China’s rise, countries around the rim of the Pacific Ocean would have economic incentives to pursue strong relationships with the United States.  As that line of thinking goes, the more closely the trade interests of the TPP’s twelve member countries are aligned, the more closely their economies will integrate and, ultimately, the more likely their political outlooks will align.  Perhaps unsurprisingly, the United States is also pursuing a trade agreement similar to the TPP with the countries of Europe called the Transatlantic Trade and Investment Partnership or TTIP.

That line of thinking is not lost on either China or Russia.  While China chose not to participate in the TPP to avoid more pressure to remove its many trade barriers, it pushed for another (less onerous) trade agreement called the Regional Comprehensive Economic Partnership or RCEP, which did not include the United States.  China has also championed its own form of economic integration, called the “One Belt, One Road” initiative (tying together China’s land-based “Silk Road Economic Belt” and sea-based “Maritime Silk Road” efforts).  That initiative has sought to knit together the various economies along the ancient Silk Road between China and Europe.  Beijing even created the Asian Infrastructure Investment Bank earlier this year, in part, to support the construction of the trade infrastructure needed to facilitate that integration.

For its part, Russia has tried to cobble together the Eurasian Economic Union (EEU) from the countries that were once parts of the Soviet Union.  Russia has pursued the economic integration of the former Soviet republics as a way to not only expand its market space, but also strengthen its sphere of influence over them.  While most of the former Soviet republics could not ignore the economic potential of the EEU, they have been cautious about their participation in it.  Even Kazakhstan, an early supporter of the EEU, has repeatedly stressed that the EEU should remain an economic, rather than a political, grouping.  As can be expected, most former Soviet republics are protective of their new-found sovereignty.  And so, they are keenly sensitive to any Russian scheme that may absorb them into a reconstituted empire, particularly in light of what has happened to Ukraine’s Crimea and Donetsk provinces.

But lest we are to believe that closer trade and economic ties will inevitably lead to closer political alignment, history provides plenty of examples where that failed to happen.  One cannot say that closer economic integration between the European Union and Russia has brought the two to a more closely aligned political outlook.  Instead, they have used their respective trade dependencies on one another as weapons against one another in their political clash over Ukraine.

In the Asia-Pacific, one needs to look no further than the experience of China and Japan.  In the 1990s, Japanese companies led the multinational charge to set up outsourced factories and develop new markets in China.  In 1999 the two countries did $66 billion in bilateral trade.  By 2011 that figure climbed to $345 billion.  The two economies became increasingly integrated, with China more reliant on Japan for industrial machinery and Japan more reliant on China for consumer goods.  But then tensions over the Senkaku Islands, which began in late 2010, boiled over in 2012 and sparked anti-Japanese riots in China.  Tensions have run high ever since, cooling their economic relationship.  Every year after 2011 trade between the two countries has fallen.  Last year their bilateral trade slipped to $309 billion; the trade figures for August 2015 suggest that this year’s total will be lower still (indeed it is on track for a steep decline).  Rising costs in China and a stagnant Japanese economy surely contributed too, but they cannot fully explain the drop, given China’s continued, albeit slower, economic growth.

China Japan Bilateral Trade in Goods

The causal logic that closer trade and economic ties will lead to closer political alignment could be turned on its head.  One could argue that it is when political outlooks are aligned that closer economic integration often seems desirable (and also that when political outlooks are in conflict that economic integration often seems dangerous).  That is not to say that the TPP is not a worthy accomplishment; it is.  But the United States should be wary of relying too heavily on the TPP to ensure its security in the Asia-Pacific.  Even if the U.S. Senate ratifies the trade agreement, the United States should continue to actively pursue other strategic initiatives in the region with equal verve.

[1] Japan External Trade Organization, Japanese Trade and Investment Statistics, 1999-2015.

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Wanting It Both Ways, Principled and Practical: U.S. Policy toward Thailand

The increased strain between the United States and Thailand, longtime allies in Southeast Asia, was evident during their 34th annual Cobra Gold military exercise last week.  The size of the U.S. contingent was noticeably smaller than a year earlier and the scope of the exercise was limited to humanitarian assistance and disaster relief (normally it includes an amphibious landing component).  At the exercise’s opening ceremony, the U.S. representative directly commented on the “challenging” times that “has necessitated a modified Cobra Gold.”[1]

The reason for that strain was the American reaction to the Thai military’s coup d’état, which overthrew Thailand’s democratically-elected civilian government in May 2014.  From its perspective, the Thai military believed that it had little choice but to do so.  The civilian government was, at best, emptying the national coffers with an ill-conceived rice-payment scheme and, at worst, allowing (or even encouraging) the political paralysis that had already gripped the country for six months to continue.  Washington responded to the coup by suspending a symbolic $4.7 million in military aid and cancelling a number of joint military and law enforcement activities.

Southeast Asia Kunming Bangkok Singapore Railways

What made the American reaction all the more awkward was that the United States had been trying to bolster its relationship with Thailand.  Just a few years ago, former Secretary of State Hillary Clinton envisioned that Thailand would be at the core of her Lower Mekong Initiative—a bid to boost American engagement with continental Southeast Asia.  Add to that the fact that those in Thailand who backed the coup (including most of its urban middle class and business elites) represent some of the country’s most pro-Western elements.  During the Cold War, the Thai military supported U.S. efforts to counter communism in Southeast Asia (when it was decidedly unpopular to do so) and even hosted 27,000 U.S. military personnel at seven of its bases—from which the U.S. air force flew strategic bombing missions over Vietnam.  Afterwards, the Thai military cooperated with the United States in its campaigns against drug smuggling and human trafficking in the region.

Hence, these elements of Thai society have seen the American sanctions, regardless of their size, as an affront.  They also bristled at the pointed criticism made by U.S. Assistant Secretary of State Daniel Russel as an attempt to interfere with the internal affairs of Thailand.[2]  Despite earlier Thai military coups, the United States had not treated Thailand this way before.

China has been happy to capitalize on that Thai sentiment.  A month after the coup, China assured Bangkok that it would continue to support Thailand’s development and hosted a delegation of senior Thai military officials in Beijing.  China Mobile followed with a $900 million investment in a Bangkok telecommunications company.  But more importantly, China won approval for a new railway that will connect Kunming and Bangkok, through northeastern Thailand.  Once completed, that railway will tie Thailand’s economy (and interests) more closely to China, just as Thailand’s seaports had moved the country closer to the West in an earlier time.  Late last year, Thai Prime Minister Prayuth Chan-o-cha, the former army chief who led the coup, urged Thais to “stop bickering” and look to China for inspiration.  In February 2015, he agreed to strengthen Thailand’s military ties with China over the next five years.[3]

Of course, Prayuth may simply be making the point to the United States that it should not take Thailand for granted.  Still, he has opened the door for China to make real inroads into Thailand’s economy and politics.  Concerned about growing Chinese influence in Southeast Asia, Japan appears to have rushed into the breach opened by the United States.  Japanese Prime Minister Shinzō Abe flew to Bangkok early last week to emphasize Japan’s continued interest in Thailand and pledge Japanese support in developing the country’s rail networks and promoting its joint venture with Myanmar, the Dawei Special Economic Zone.[4]

The clarity of Japan’s approach to Thailand stands in contrast to the awkwardness of U.S. policy toward the country.  To some extent, that was unavoidable.  Washington wants it both ways.  It wants to preserve its practical interests in the region.  But it also wants to make a principled stand for democracy.  The problem for the United States is that its principled stand may come at the expense of its practical interests, particularly its strategic ones (as happened in Egypt during the Arab Spring).

Ultimately, Washington hopes that Thailand’s military will restore the country’s democracy; and American relations with Bangkok can return to what they were before the coup.  But doing so essentially leaves the future direction of U.S. policy in the hands of Thai military leaders.  Plus, the longer it takes them to restore Thailand’s democracy, the more opportunity China will have to change the facts on the ground.  With new trade routes already being built through Laos and Cambodia, the direction of Thai trade (and interests) have already begun to be drawn away from its southern ports to the West towards its northern roads (and future railways) to China.

By levying some minor sanctions against Thailand but carrying on with a scaled-down Cobra Gold exercise, Washington might have believed that it struck the right balance between promoting democratic principles and preserving practical American interests.  Perhaps there were few better ways to reconcile the two in this case.  But it does demonstrate to Southeast Asia how unreliable the United States can be as a long-term partner.  Making principled stands regardless of their practical consequences are a luxury.  The United States could afford to make such stands in the unipolar world of the 1990s.  But it is less wise to do so today, especially if they leave the United States beholden to events beyond its control or leave it in a weakened state.

[1] “Cobra Gold 2015 Opening Remarks by W. Patrick Murphy, Chargé d’affaires,” U.S. Embassy, Bangkok, Feb. 9, 2015, http://bangkok.usembassy.gov/020915_cda_cg15remarks.html.

[2] Prangthong Jitcharoenkul, “Foreign Ministry summons US over visiting diplomat’s comments,” Bangkok Post, Jan. 28, 2015, http://www.bangkokpost.com/news/politics/461168/foreign-ministry-summons-us-over-visiting-diplomat-comments; Amy Sawitta Lefevre, “Thailand warns U.S. to mind its own business over politics,” Reuters, Jan. 28, 2015.

[3] Amy Sawitta Lefevre, “Thailand boosts military ties with China amid U.S. spat,” Reuters, Feb. 6, 2015.

[4] Masaaki Kameda, “Abe, Thai junta leader agree to cooperate on railway development, special economic zone,” Japan Times, Feb. 9, 2015.

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China and the Islamic State

The Islamic State in Iraq and Syria might seem far removed from China.  But the spread of its sort of Islamic militancy knows few boundaries.  On Monday, Indonesian authorities arrested seven men who had sought to meet Indonesia’s most-wanted Islamic terrorist.  Four of them, travelling on forged Turkish passports, turned out to be Chinese Uighurs.  Jakarta is now investigating whether the men are linked to the Islamic State.  That follows comments made this summer by the Islamic State’s leader, Abu Bakr al-Baghdadi, that a number of Chinese fill his ranks, and images that surfaced two weeks ago of a Chinese national who was captured while fighting for the Islamic State.

To be sure, Beijing has long been concerned about Islamic militants, particularly those in its far western province of Xinjiang.  Over the last two decades, there have been periodic episodes of violence by the province’s Muslim Uighur ethnic group against local Han Chinese (often followed by equally violent reprisals by the latter against the former).  Historically, however, those episodes have been mainly driven by specific grievances rather than jihadist fervor.  Most cases of unrest occurred after some perceived injustice, such as the detention of an imam or other local leader.  But in recent years, Uighur attacks have become more frequent and ranged far beyond the borders of Xinjiang.  Three major attacks occurred so far this year.  In March, knife-wielding assailants attacked a train station in Kunming, in central China, leaving 31 dead and 140 wounded.  Then in May and August, two more attacks occurred in Xinjiang.  Those attacks left another 127 dead and scores of wounded.

For years, Chinese authorities have tried to prevent such unrest with a three-pronged approach: boost the economic development of Xinjiang; encourage Han Chinese to migrate there; and tighten security across the province.  They largely succeeded on all three counts, but failed to end the unrest.  The biggest beneficiaries of Xinjiang’s economic growth turned out to be the Han Chinese migrants, not the native Uighurs.  That left the Uighurs feeling not only relatively poorer, but also brushed aside by the influx of Han Chinese.  Meanwhile, tighter security meant that Chinese police and security forces had been set on a hair trigger to react to any suspicion of Uighur unrest.  That led to routine security sweeps which have alienated even more Uighurs.

But whatever the internal situation, Beijing has always been quick to accuse exile Uighur groups for fomenting or supporting acts of terror within Xinjiang, particularly the East Turkestan Islamic Movement (ETIM).  While that may be true in some cases, most exile Uighur organizations were in no position to foment or support much of anything in Xinjiang.  Indeed, the activities of the ETIM have likely been exaggerated by not only Chinese authorities, but also the ETIM to aggrandize itself.  The well-funded Islamic State would be a far bigger danger should it ever reach China’s door.

But even before the Islamic State’s rise, China had begun to seek ways to keep militant Islam as far away as possible.  That was one of the key reasons behind why it, Russia, and four Central Asian countries created the Shanghai Cooperation Organization (SCO) in 2001.  Today, China sees its support for the SCO as a bulwark against the advance of militant Islam towards its borders and the Islamic State should it try to establish itself in Central Asia.  Last Friday, Chinese President Xi Jinping attended this year’s SCO conference in Tajikistan.  There, he urged SCO’s other leaders to do their utmost to prevent Islamic extremism.  He also elevated China’s ties with Tajikistan to that of a “strategic partner” and promoted China’s “New Silk Road” concept.  Earlier this summer, the SCO held its largest military exercise since the early 2000s.  About 7,000 troops participated in the exercise, with China providing the majority of them.

The advent of the Islamic State in areas where China has commercial interests had already endangered Chinese citizens.  Beijing evacuated over a thousand Chinese workers from Iraq in June, when Islamic State forces marched on Baghdad.  That evacuation followed others from Libya and Syria after conflicts consumed those countries.  While China has been so far unwilling to directly confront Islamic militants, China did agree to deploy a 700-man infantry battalion to a United Nations peacekeeping mission in South Sudan in September.  The battalion will be used to protect oilfields that are operated by China National Petroleum Corporation and threatened by civil strife.

All this may sound like the common concern over the Islamic State might have given China an incentive to work with the West, if only to protect itself and its economic interests in the Middle East.  But that is not quite the case.  Just because they agree on who is a threat does not mean they can agree on what to do about it.  The two sides still hold different visions of how the world should work.  That much was clear in China’s official response to U.S. President Barack Obama’s call for an international coalition to fight the Islamic State in Iraq and Syria.  Chinese Foreign Ministry’s spokesperson agreed that “The international community should jointly combat terrorism.”  But, she added, China would want to ensure the respect of the “relevant countries’ sovereignty, independence and territorial integrity in the international fight against terrorism.”  So, unless Syrian President Bashar al-Assad—a leader reviled in the West—approves of American-led air strikes against the Islamic State in Syria, China would not support such actions there.  (Russia holds the same position.)

For now, China can afford to walk that fine line.  It can expect that the United States and its allies will do their best to defeat the Islamic State or, at least, prevent its expansion.  But other dangers still lurk.  Already, China is concerned about the ramifications of the American withdrawal from Afghanistan.  Could Afghanistan or Pakistan’s tribal regions produce new Islamic militants who might incite even greater unrest in Xinjiang?  Hence, China continues to bolster its relationships with its Central Asian neighbors, in part, to create a buffer zone between it and whatever dangers lay beyond.  China’s “New Silk Road” fits nicely into that strategy.  Its economic benefits should help to cement the commitment of the elites from Central Asia’s countries as well as enable them to contain Islamic militancy in their countries.  But China should take care that its “New Silk Road” does not benefit those elites too much.  Not doing so could breed resentment against China among the rest of their populations.  Were that to happen, Beijing’s “New Silk Road” might also become a new path for Islamic militants to China.

 

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Obama’s Visit to Asia and U.S. Alliances

As foreign trips go, President Barack Obama’s visit to Asia in April 2014 was more important than most.  It was originally scheduled to coincide with the APEC summit in October 2013, but domestic problems prevented him from travelling at that time.  But even then, such a trip was needed.  Many in Asia already had become concerned over his administration’s commitment to its strategic “pivot” or “rebalancing” towards the region.  Both its economic and security legs had come to little.  Despite the administration’s goal to complete the Trans-Pacific Partnership (TPP) free trade talks in 2013, they were nowhere near a final agreement (and still are far from one).  Meanwhile, doubts emerged about the seriousness of the U.S. military rebalance.  A major part of that rebalance hinged on the U.S. Navy’s shift from a force that was equally balanced between the Atlantic and Pacific Oceans to one that would be tilted, 60 percent, toward the Pacific.  But given that the administration’s concurrent efforts would reduce the overall size of the U.S. Navy, many wondered whether its tilt would provide any boost to U.S. capabilities in the region.  And, more broadly, the United States still seemed more willing to engage itself in places like Libya and Syria, than in the East or South China Seas.

During the intervening six months, tensions in Asia have climbed even higher: from China’s declaration of an air defense identification zone over the East China Sea (November 2013) and its quasi-maritime blockade of the Philippine-held Second Thomas Shoal (March 2014) to Japan’s decision to build a new radar base on Yonaguni Island (April 2014) to North Korea’s artillery barrages and missile tests (March and April 2014).  Layered on top of all that has been the Ukraine crisis, in which the Obama administration has allowed Russia to violate Ukrainian sovereignty without any serious repercussions.  That itself follows Obama’s failure to act in 2013 after Syria crossed his “red line” on the use of chemical weapons.  Little wonder that such worrisome events have made U.S. allies in Asia nervous.

Such was the backdrop for Obama’s visit to Asia over the last week.  Without a doubt, his main objective was to reassure U.S. allies in the region.  Obama visited all three U.S. security treaty partners during his trip: Japan, South Korea, and the Philippines.

In Japan, Obama plainly stated that the U.S.-Japan Security Treaty would cover all territories administered by Japan.  That means the Senkaku Islands (or Diaoyu Islands in China) in the East China Sea would be defended, since they are administered by Japan (though his later reply to a press question as to whether his statement represented a “red line” in the East China Sea slightly muddied its impact).  Still, it was the first time that an American president directly addressed the issue.  That must have heartened Japanese Prime Minister Shinzō Abe.  And though there was no breakthrough in the bilateral TPP negotiations between Japan and the United States during Obama’s stay, some incremental progress was made in the days afterwards.

Obama then touched down in South Korea, where he warned Pyongyang against further military provocations.  Already this year, North Korea fired artillery into and short-range ballistic missiles over South Korean waters.  Now, there is the prospect of a North Korean nuclear test.  And so, Obama sought to do more warning.  He also worked to coax Japan and South Korea into overcoming their historical animosities.  Given that both countries and the United States must deal with the threat from North Korea (and perhaps China in the future), the administration hoped that America’s two security treaty allies could find a way to work together, rather than against each other.  Lastly, Obama’s presence in Seoul helped South Korean President Park Geun-hye demonstrate the strength of the U.S.-South Korean alliance to the Korean National Assembly.  That was important, since it soon will consider a major increase in its financial support of U.S. forces in South Korea, as part of a larger agreement reached seven years earlier in which wartime operational control of combined U.S.-South Korean forces would transition from an American general to a South Korean one.

Finally, just before Obama’s arrival in Manila, American and Philippine representatives signed a ten-year accord called the Enhanced Defense Cooperation Agreement.  Under negotiation for much of the last two years, that agreement was originally dubbed the Increased Rotational Presence Framework Agreement, largely because that was its intent: to enable U.S. forces to more regularly rotate through the Philippines in order to conduct joint exercises with the Philippine armed forces.  The final agreement also allows the United States to keep the equipment that it uses for those exercises at Philippine military bases.  The frequency of those exercises could be increased to the point at which there would be a near-continuous American military presence in the Philippines.  That would represent a meaningful change in U.S. force posture in the region and send a strong signal of American commitment to the Philippines.  The successful conclusion of the agreement was a victory for Philippine President Benigno Aquino III, who faced domestic opposition to it.  The agreement offers the Philippines some breathing space to rebuild its own external defense forces and pursue greater security cooperation with its Southeast Asian neighbors.

While in Southeast Asia, Obama also began to build new economic and security bridges to Malaysia, which had developed somewhat cozier relations with China than the United States since the 1990s.  Hence, it was notable that Obama and Prime Minister Najib Razak elevated their countries’ relationship to one of a “comprehensive partnership.”  (That matched the status which Malaysia conferred on China a year earlier.)  But little more was accomplished for the time being, due to popular resistance in Malaysia to the American-led TPP.

Upon Obama’s return to the United States, he can rightly claim that American allies in the region feel more reassured.  But American reassurances will ultimately need to be matched with American deeds.  Sadly, Obama’s reticence to persuade members of his own party to grant him “fast track” authority to streamline the TPP’s ratification process belies to some degree his own words of commitment.  An even bigger question is whether his words will impress China or North Korea.  No doubt, his words will be tested.  Questions about American commitments to its Asian allies were not fashioned overnight, nor will they be dispelled with a presidential visit.

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Diamond (Still) in the Rough: China’s New Charm Offensive in Southeast Asia

In early September, China hosted the 10th China-ASEAN Expo in southern Chinese city of Nanning.  There, Chinese Premier Li Keqiang glowingly characterized the last ten years as a “golden decade” of growing economic ties between China and the countries of Southeast Asia, all of which are members of the Association of Southeast Asian Nations (ASEAN).  He now foresaw that the next decade would be even better—a “diamond decade.”

Together with Chinese President Xi Jinping’s visits to Indonesia and Malaysia and his high-level meetings at the Asia-Pacific Economic Cooperation (APEC) forum that would soon follow, Li’s remarks appeared to mark the start of a new charm offensive in Southeast Asia.  China’s last charm offensive, despite Li’s depiction of a “golden decade,” had sputtered out at the end of that decade, overshadowed by China’s growing economic and political assertiveness on land and at sea.  Although China’s disputes with its maritime neighbors have drawn more attention, China also managed to irritate its neighbors across Indochina.  Its state-owned companies operating in the region have often been high-handed.  Their cavalier attitude towards displacing communities and destroying cultural relics contributed to Myanmar’s decision to halt the construction of the Myitsone dam in 2011—the first time any Southeast Asian country blocked a major Chinese-sponsored infrastructure project.  Meanwhile, China’s unrestrained hydroelectric development on its upstream stretch of the Mekong River has worried many downstream communities in Southeast Asia, even though their governments seldom voice their concerns.

Worse for China’s image is its maritime disputes with Southeast Asia, which were put under an international spotlight in 2010 when several ASEAN countries confronted China about its behavior in the South China Sea at the 17th ASEAN Regional Forum.  Regional concerns over Chinese intentions were further stoked by China’s increased interference of Vietnamese oil exploration ship; its months-long standoff with the Philippines over Scarborough Shoal in the spring of 2012; and its escalatory attitude toward Japan over the Senkaku/Diaoyu Islands since September of that year.  Finally, many believed that Chinese pressure directly contributed to rifts in ASEAN itself, when the 2012 ASEAN foreign ministers’ meeting failed to produce any progress on a multilateral code of conduct for the South China Sea or even issue a closing joint communiqué that mentioned one.  Surely such rising concerns have led the Philippines and Vietnam to accelerate the pace of their military buildups.

However, many Chinese believe they see the hand of the United States in China’s recently contentious relations with Southeast Asia.  They see American policy as either creating the environment that has allowed Southeast Asian countries to resist China’s interests or directly encouraging those countries to resist them.  In either case, they see the flare up of disagreements between China and its ASEAN neighbors as evidence of a larger American effort to contain China’s rise.  Hence, Beijing may believe that initiating a new charm offensive could not only capitalize on Southeast Asia’s continued view of China as a source of economic growth, but also diminish the effect of that American effort.  Whether Beijing’s new tack is momentary or longer lasting is too early to tell.

Yet China has already met with some success, perhaps enhanced as a result of President Barack Obama’s absence from the APEC meetings.  While it was not the first time an American president was absent, Obama’s absence came at a time when many Southeast Asians were looking for reassurance of American commitment.  At the very least, it allowed Xi to become the center of attention.  And Xi brought China’s “diamond decade” message with him.  He pointed out several areas of opportunity: upgrading China’s free-trade agreement with ASEAN, improving communications between China and Southeast Asian countries, strengthening financial cooperation across borders, developing maritime cooperation, and enhancing Chinese cultural exchanges with Southeast Asia.

Even before the APEC meetings, Xi visited Malaysia and Indonesia.  He heralded the advent of “strategic cooperative relationships” with those countries and was the first foreign leader to address the Indonesian parliament.  Then after the APEC meetings, Li arrived in Southeast Asia to continue China’s diplomatic efforts in Brunei, Thailand, and Vietnam.  In Brunei, Li discussed joint energy development.  In Thailand, he championed plans for a high-speed railway project connecting China to Singapore that has lain dormant for many years.  And in Vietnam—a country that has its share of maritime disputes with China—Li and his Vietnamese counterparts announced that the two countries would set up a joint maritime development working committee to ease the tensions in the South China Sea.

For their part, ASEAN countries seem to have responded positively (and possibly opportunistically).  Malaysia—perhaps sensing that the Philippines has, for the moment, halted China’s broader assertiveness in the South China Sea—may now view Chinese overtures as a chance to boost its own economy.  And while Thailand still sees the high-speed railway project as too expensive for it to undertake alone, it has encouraged China to contribute to the financing.

However, the one country in the region that China has not courted is the Philippines.  Instead, China seemed to go out of its way to isolate it.  Indeed, it is a strategy that some Chinese foreign policy scholars have advocated.  As if to underline the point, after China issued invitations to all the heads of state in Southeast Asia to attend the China-ASEAN Expo, it rescinded its invitation to Philippine President Benigno Aquino III.  And so, the Philippines was the only ASEAN country not represented at the event.  And so, even as China seeks to emphasize its kinder, gentler side, its steely side remains.  Relations between China and Southeast Asia may yet improve during the “diamond decade,” but mostly on Chinese terms.

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