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Chinese Assertiveness Has Asia on Edge: How to Respond

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A recent Pew Research Poll made clear that publics in East Asia are increasingly uneasy about the destabilizing effects of China’s maritime assertiveness. Among the eight countries surveyed—including China, Indonesia, Japan, Malaysia, Philippines, South Korea, Thailand, Vietnam—majorities in each country said they were concerned that territorial disputes between China and its neighboring countries could lead to a military conflict.

Rather than “China threat theory,” an oft-used phrase in Beijing to deride anxieties about China’s rise, it appears we’re now seeing “China threat reality.” 

Though difficult to poll with similar fidelity, there is little question that governments in the region are at least as concerned as their publics and have already begun taking measures to prepare for, and if necessary defend against, further Chinese attempts at economic, military and diplomatic coercion.

Strategies for responding to Chinese assertiveness certainly differ from capital to capital, but all can be characterized as portfolio strategies that simultaneously pursue multiple avenues to deal with a country that has overwhelming advantages in size and wealth. 

The principal elements of these portfolio strategies include the following:

1. Military modernization: Countries throughout the region are stepping up efforts to develop their militaries in ways that reflect growing concerns about Chinese assertiveness, as underscored by the Pew survey. Given rapid military modernization in China, a number of countries are garnering asymmetric capabilities to deal with China’s overall military advantage, as exemplified by Vietnam’s acquisition of six Kilo-class submarines from Russia. Japan is meanwhile developing greater amphibious capabilities to defend “remote islands” like the Senkakus. 

2. Enhanced cooperation with the United States: U.S. allies and partners are moving to deepen security cooperation with the United States in order to supplement weaker, and in some instances nonexistent, capabilities. Countries on the frontlines of China’s territorial disputes—including Japan, Malaysia, the Philippines and Vietnam—have all reached out to Washington in recent years for stronger military ties. 

3. Intra-Asian security partnerships: A critical trend in the Asian security landscape is the rise of bilateral security ties within the region. Given combined concerns about the rise of China and the durability of the U.S. commitment to the region, countries are increasingly working together on building capacity and developing joint strategies to manage the China challenge. Such efforts include Japan’s outreach to the Philippines, Australia and Vietnam, as well as among the South China Sea claimants—particularly Malaysia, Philippines and Vietnam—meeting more frequently to coordinate and devise joint responses. CNAS research has described how these intra-Asian cooperative arrangements are on balance beneficial to U.S. interests and regional stability.

4. Regional institutions and international law: Smaller ASEAN countries have at times appeared to internalize the mantra of “hang together or hang alone.” The point being that only as a collective can Southeast Asian states have sufficient economic and political heft to deal on equal terms with Beijing. Similarly, the Philippines has sought multilateral arbitration mechanisms in an attempt to move its maritime disputes with China from a deeply asymmetric bilateral dynamic to one that implicates international law and the international community. 

5. Engagement with China: Despite deep concerns about the potential for China to use coercive measures to settle political disputes, it is also the case that countries in the region, largely for economic reasons, are striving for stable, if not positive, relations with Beijing. This reflects the reality that, unlike the United States who can come and go as it pleases, China will remain a geographic reality in Asia. The result is that engagement with China has been a key feature of most Asian countries’ efforts to manage their concerns about China’s rise. 

While none of these approaches is, in and of itself, likely sufficient to shape China’s behavior, multifaceted portfolio strategies may harbor the potential to contribute to a more stable and peaceful region.

Ely Ratner (@elyratner) is senior fellow and deputy director of the Asia-Pacific Security Program at the Center for a New American Security (@CNASdc). The following article first appeared on the CNAS Blog: The Agenda here

Image: U.S. Navy Flickr. 

TopicsSecurity RegionsChina

How to Stop the Sale of France's Mistrals to Russia: NATO Should Buy Them

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Fast forward to November 1st of this year, just four days before US mid-term elections.  The top news story begins, “Just weeks after crash investigators determined that the Malaysian Airliner was shot down in Ukraine by a missile supplied by Russia, France has today delivered an advanced warship that will markedly increase Russia’s ability to threaten Ukraine, Georgia and other vulnerable countries.”  

Unfortunately, such an incredible scenario looks increasingly likely to materialize.  Cash-strapped France appears determined to go forward with its contracted sale of two Mistral class amphibious war ships to Russia.  If France delivers the first vessel, scheduled for just four months from now, this could mark a colossal foreign policy failure for the West.  Even if the other economic sanctions bite, the simple  act of a key NATO country conducting military business as usual with Russia will likely make a mockery of the attempt to fundamentally change Putin's decision calculus. 

It is imperative that the Obama Administration put on a full-court press to stop this deal – and there’s a way to do it, provided officials are willing to think outside the box.  NATO should buy the ships from France for its own long-term needs in Europe and around the world, acquiring useful capabilities while also cushioning the financial hit to France--and giving Paris diplomatic cover for a difficult decision as well.

To achieve such an outcome, President Obama has to make clear – publicly – to Congress and to our European allies that stopping this sale is an urgent priority for the US.  The President himself needs to point out the risks.  The sale of the Mistral is not only a symbolic disaster, vindicating Putin’s view of a West that is weak, unprincipled and just as venal as his cronies in Russia, it also provides Moscow with a critical boost to its military capabilities. 

Control of the coastal regions of the Baltic and Black Seas is a strategic priority for Moscow and the versatile amphibious assault ship, which can carry up to 16 attack helicopters, increases Russia’s ability to carry out offensive operations along the coast of Ukraine, neighboring Georgia and other countries, including in the Middle East, that have exposure to seafaring Russian vessels.  It could, for example, deploy more "little green men" of the type that moved into eastern Ukraine this spring, to various places quickly and semi-stealthily.  The sale will only complicate the effort to get Europe to follow the US lead in toughening sanctions on Russia as businesses cite – with reason – the blatant hypocrisy of asking them to take a substantial financial hit while a major European power closes its lucrative deal with Moscow.

Some in Congress, notably Congressman Engel of New York, have called for NATO to purchase the vessels instead.  That is a good idea but it needs to go further.  It should be coupled with financial contributions from all NATO members, in keeping with the usual algorithms by which NATO buys modest amounts of equipment for general alliance purposes.  In order to get the attention of allies, the Administration must be able to show that it is willing to consider partial financing of an alternative.

NATO already owns certain assets for the general utility of the alliance as a whole.  The list includes military infrastructure at some bases, and specialized equipment such as AWACS aircraft needed to control the integrated aerial operations of many countries in the event of a major operation.

Amphibious ships have not previously been seen as candidates for NATO-wide acquisition because, to date, the alliance has relied on the generosity of individual members for possess these kinds of vessels.  Such countries, notably the United States and Britain and France, have the requisite capabilities should they be willing to employ them. But at a time when most of NATO's European members are shirking from their duties within the alliance and letting military budgets fall precipitously, it may no longer be prudent or appropriate just to count on a small number of member states to provide such assets.  They could have many important uses. Whether for military exercises to shore up the security and confidence of the alliance's easternmost members, or for humanitarian purposes in Africa, or for counterterrorism purposes in the broader Middle East, it would make good sense for the alliance to have its own organic capabilities to move about several hundred tactically mobile and logistically self-sustainable personnel.

France would of course have to do at least its own part in this, paying for a share of the Mistrals itself (or, alternatively, offering them to the alliance at a considerable discount).  It is only right that Paris accept its fair share of the burden for a sale that was questionable from the start--and that, frankly, should have been unilaterally canceled by France by now in light of the tragedies of the last few weeks and months in Ukraine that have resulted from Russian belligerence.

But we are where we are. Paris will not take such an honorable step without substantial compensation and help, it would appear.  So now is the time for NATO as a whole to step up. Doing so, at this juncture, would accomplish more than simply avoiding a major strategic mistake.  It would turn a crisis into an opportunity for the alliance to show resolve and, at the same time, gain important capabilities for its future regional responsibilities. 

Edward P. Joseph is Executive Director of the Institute of Current World Affairs​.

Michael O'Hanlon is a senior fellow with the Center for 21st Century Security and Intelligence and director of research for the Foreign Policy program at the Brookings Institution, where he specializes in U.S. defense strategy, the use of military force, and American foreign policy. 

Image: Wikicommons. 

TopicsRussia RegionsFrance

Australia's Future Submarine Strategy Presses Forward

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At the Defense and Industry conference this week, we got an official update on the status of the Future Submarine project (SEA1000) from the project head, RADM Greg Sammut and DMO’s General Manager of Submarines, David Gould. That’s welcome, as multi-billion dollar government projects should be exposed to public scrutiny to the extent possible consistent with commercial and security sensitivities. (I won’t comment on other rumors doing the rounds.)

In a recent ASPI paper, Mark and I summarized the thinking that was on display at ASPI’s conference in April. What we got this week showed encouraging progress in the three months since. I’ve been writing about the project for years now (like the F-35, it’s a gift that keeps giving) and have lamented the apparent lack of coherence in planning. So credit where it’s due; with a couple of exceptions, which I’ll come back to later, I think we’ve arrived at a sensible approach.

Firstly, RADM Sammut explained that the Integrated Project Team (IPT) in Adelaide is largely composed of industry representatives working in support of DMO’s project office. This “above the line” industry participation is vitally important if the Commonwealth is to be a smart buyer. Having relevant industry experience in-house will allow Navy/DMO to refine their requirements cognizant of their impact on project costs and risks.

A dramatic illustration of that—and a pretty newsworthy one in my books—is that there’s been a significant stepping back from the 2009 Defense White Paper’s wildly ambitious aims. There’s no conventional submarine in the world with the range and endurance of the Collins class, but the 2009 aim was a “significantly greater” performance. That led me (and others) to describe the projected submarine as a “conventionally-powered nuclear submarine” and to question the feasibility of the project.

This week we learned that the revised capability aims aren’t very different from Collins in terms of range, speed and endurance. Capability enhancements will instead focus on sensor capabilities and stealthiness, both of which will make the subs more effective and survivable in the decades to come.

Another sensible step is to take the existing Collins combat system (a highly modified derivative of the USN’s Virginia class system) and weapons into the new class, at least in the first instance. That will allow for a spiral development path, in which the new hulls, sensors and propulsion systems can be worked out without the concomitant risks of developing a new combat system. We tried that with Collins and it caused more grief than it was worth, so full marks there.

Of course, putting new sensors into the future boats will require them to be integrated into the combat system. Planning for that eventuality, we were told that Australian software developers were being contracted for “out of cycle” software-development work (ie not in the U.S. Navy development cycle). Getting Australian industry into the high value-add end of systems integration, where competing in global markets is entirely possible, is also a welcome development.

David Gould described the next step of finding an industry design partner that’ll take the design brief provided by the IPT and produce a detailed design. It wasn’t 100% clear if the design partner would automatically become the build partner, but that would make sense, allowing for the transition from design to production engineering to flow with lower risk of things being “lost in translation.” Mark and I had a fair bit to say about how this might work in the recent paper, so I won’t labor the point here, other than to note that such an approach might have avoided some of the problems the AWD project had.

Lest I seem uncharacteristically charitable, let me point out a couple of things that didn’t sound quite right. As Manager of Submarines, David Gould has to worry about the existing fleet as well as the future one, and he noted that both types would be in service together for a considerable time. He explained that his preference was to have a single support contract to cover both. Presumably the thinking is that having in-house understanding of both designs would allow for a single support arrangement. I’m not totally convinced; unless the same design house is behind both (in practice meaning a Swedish choice), it seems to add complication in managing intellectual property—a significant problem in the past.

Finally, there were hints in the presentation about the possibility of offshore builds, but no discussion of how (or where) that might happen. It’s fair enough to be looking at foreign builds, as the costs and benefits of all options should be diligently explored. But then we were told that a local build (including the first of class) was important for knowledge transfer needed for future support. The mixed signals had some of the industry reps scratching their heads.

All in all, there were more steps forwards than backwards. It might be several years later than would’ve been optimal, but real progress is being made.

Andrew Davies is senior analyst for defense capability and director of research at ASPI. This article first appeared in ASPI's The Strategist here

TopicsSecurity RegionsAustralia

Mikheil Saakashvili: Medford's Most Wanted

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One of the more enduring and resilient neoconservative myths--what the sociologist Karl Jaspers would have recognized as a “life sustaining lie”--is the notion that Russian President Vladimir Putin was entirely to blame for the outbreak of hostilities between Russia and Georgia on August 7, 2008. As the story goes, Mr. Putin, an aggressive geopolitical revanchist, went to war against his tiny southern neighbor that summer using a similar pretext that he is said to be using now is Ukraine - to protect Russian nationals outside of Russia’s borders – in order to prevent Georgia from launching on its predestined trajectory West.

No less a personage than former Georgian President turned Tuft’s University “Senior Statesman” Mikheil Saakashvili is a frequent proponent of this view. In a recent op-ed in the New York Times, the former president expressed his continuing puzzlement as to why Russia invaded Georgia:

When Russia was bidding to be host of the Olympics, it had enthusiastic Georgian support, as we believed holding the Games in Sochi would enhance chances for peace and improve relations. Instead, several months after the Kremlin won its bid to host the Olympics, Russia invaded Georgia.

Now Misha, as he is commonly known, is back in the headlines. This time it is not as an object of the adulation he no doubt believes is his due, but rather as the subject of criminal charges that have been filed against him by Georgia’s general prosecutor for the “violent dispersal of demonstrators” in November 2007 as well as for attempting to seize an independent television station, Imedi.

These charges have caused a good amount of consternation among his Washington fan base. Senators John McCain and Ben Cardin, along with two Senators, Jeanne Shaheen and Jim Risch, neither previously noted for their expertise in Caucasian affairs, released a statement decrying the charges as politically motivated. The Senators began by conceding that “President Saakashvili and his government were not faultless…”

That is only too true. Leaving aside that during the brief 2008 conflict, both Human Rights Watch and Amnesty International documented numerous cases of Georgian forces targeting civilians and using cluster bombs in violation of international law; subsequently, evidence surfaced that Saakashvili and his government imprisoned and tortured political prisoners as a matter of course during his years in office. Even as recently as the 2012 Georgian elections, State Department veteran John Kornblum noted the “ruthless oppression of freedom and violence against [opposition] campaign workers.”

Undeterred, the Senators continued their unasked-for lecture to the Prosecutor General:

…the pursuit of justice should not become a tool of political retribution…We and others have urged Prime Minister Garibashvili and other Georgian leaders to focus on the future, not the past and to help move their country forward, not take it backward.

In other words: hands off Misha.

The reaction in Kutaisi to the Senator’s statement was swift. Tedo Japaridze, chairman of the parliament’s foreign relations committee, struck back in statement released yesterday, noting that:

In line with the principle of the autonomy of justice, I will refrain from commenting on the substance of the case made by the Chief Prosecutor’s Office. The very same principle should also constrain our friends in the US Senate.

He continued:

Democratic consolidation, ultimately, requires confidence in due process, that is, a deep conviction that no one is above or beyond the law.

This is an important point. Indeed, the irony is that McCain is a champion of promoting democracy abroad. Yet when it suits his purposes he apparently thinks that justice--the foundation, after all, of any democracy--should be jettisoned to protect his foreign friend. Not surprisingly, the Georgian government is taking a different view. Another irony is that Russia is currently moving toward imposing sanctions on Georgia to retaliate for its embrace of the European Union. McCain and Co. appear to be inadvertently finding themselves in bed with Putin when it comes to hectoring Georgia.

For too long Saakashvili’s friends on Capitol Hill have – with great success – managed to obscure their champion’s true record, which is one of abject criminality reflecting the predilections of a rather debased personality. The lesson policymakers should (but of course will not) take away from their decade long infatuation with Misha is that unstinting and unquestioning support for anti-Russian proxies and client states – even when they claim, like Saakashvili, to be honest-to-goodness democrats – is a recipe for trouble and all too often results in the further degradation of America’s reputation abroad.

James W. Carden is a contributing editor of The American Conservative.

Image: Wikicommons/Chatham House. 

TopicsSecurity RegionsGeorgia

China's Real Goal: Destroy the Regional Order in East Asia?

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Hugh White and others are right to worry about a drift toward antagonism among Asia’s great powers. China’s recent assertiveness in local maritime disputes should moreover disabuse anyone of the comforting conceit that China will forever meekly accept the meager consolation of being an also-ran great power.

But China’s options for challenging the East Asian regional order are in fact profoundly constrained. In debating Australia’s “China choice,” we must keep in mind the reality of China’s own limited room for meaningful choice in a more contested Asia.

China cannot and will not directly challenge America for regional hegemony in the foreseeable future. That’s partly because of the great economic gains China continues to derive from American incumbency. But it’s also because today’s East Asian order is underpinned by a broad based constituency for American engagement, among American treaty allies, but also increasingly among potent non-traditional security partners, such as Vietnam.

More fundamentally, as Evelyn Goh has masterfully demonstrated, today’s order isn’t merely “made in America,” but bears the imprint of multiple authors, including smaller and middle powers anxious to enmesh both the United States and China in a region wide multilateral security architecture. Talk-shops like the ASEAN Regional Forum (ARF) are of course limited in their capacity to socialize and pacify great powers. But the proliferation of those architectures nevertheless reflects the real depth of regional resolve to uphold the status quo.

Even though China may chafe at American primacy, then, it cannot directly challenge that primacy without also challenging the densely institutionalized and increasingly polycentric regional order American primacy supports. For that reason, a direct full-spectrum Chinese challenge to the existing order is likely to remain a non-starter.

If China can’t directly overthrow the existing order, an alternative might be to hollow it out and eventually revise it from within, precisely by embracing Rod Lyon’s call for a “responsible” Beijing, more willing to shoulder its share of great-power obligations. In the security realm, a greater Chinese commitment to Humanitarian and Disaster Relief (HADR) operations could potentially prove a plausible mechanism of regional reassurance. Economically, meanwhile, the BRICS’ establishment last week of a New Development Bank (to be headquartered in Shanghai) may be read as a leading-edge indicator of China’s new willingness to outbid the United States in the provision of collective goods, at a global as well as a regional level.

Hypothetically, that “responsible” path to revisionism could challenge the existing order incrementally, by providing an alternative source of collective international goods not tied to American hegemony. For the moment, though, this strategy also remains practically beyond China’s reach. Beijing’s late and lackluster response to Typhoon Haiyan in November 2013 dramatized a deficit of political will and logistical capabilities which together constrain a more systematic Chinese embrace of HADR as a lever of regional “soft power.” Similarly, China’s own internal development needs limit its capacity to displace the United States and its OECD allies as a development financier and source of foreign direct investment, much less as a provider of an alternative global reserve currency.

A more ‘responsible’ China—more willing to shoulder the burdens of managing Asia’s and the world’s increasingly complex governance challenges—would be welcome. But shouldering such responsibilities will not thereby equip China with a Trojan horse capable of effectively undermining either American hegemony or the East Asian regional order from within.

Bill Tow’s intervention reminds us that China—traditionally a continental power—is now eagerly embracing a “go-west” strategy of integrating Eurasian “spokes” into a China-centered “hub” via growing investments in pipelines and transportation infrastructure. In contrast to the Cold War, China neighbors a now-diminished but still vehemently anti-Western Russia, which is increasingly dependent on China as a market for its energy exports. Similarly, China counts as its Shanghai Cooperation Organization (SCO) partners a penumbra of energy-rich rentier-state autocracies, which are far less likely to resist Chinese leadership aspirations than China’s feisty East and Southeast Asian neighbors. That raises a third possibility: if China can neither smash the existing order in East Asia nor subvert it from within, might it eventually be able to secede from it?

The idea of an autocratic China—engorged with Central Asian resources and paramount over continental eastern Eurasia—revives a Mackinderian spectre that has haunted Western strategists for over a century. Fortunately, this option of a Chinese “re-balance” to Eurasia and away from littoral East Asia also lacks credibility. Inevitably, as China continues to grow, it’ll assert more influence over its resource-rich Eurasian hinterland. But even as China’s
“go-west” strategy matures, its manufacturing sector—the key to China’s continuing rise—will remain hard-wired into regional production networks centered on littoral East Asia. Likewise, the countries to China’s West are unable to provide ready substitutes for either the Japanese capital goods, or the massive American consumer market, on which China’s manufacturing success still depends.

We are undoubtedly entering a more contested era in Asia, and must accordingly be wary of blithe assurances that we can effortlessly extrapolate from Asia’s peaceful recent past to anticipate its future. And a more multipolar Asia will undoubtedly pose real challenges for Australia, which since European settlement has almost only ever known an international order sponsored by its Anglo-American kin. But acknowledging those challenges should not blind us to the reality of China’s limited bandwidth of choice in the current regional order, which remains easy to join, but infinitely harder to smash, subvert or secede from.

Andrew Phillips is an Australian Research Council Discovery Early Career Research Award Fellow and senior lecturer in International Relations and Strategy in the School of Political Science and International Studies at the University of Queensland. This article first appeared in ASPI’s The Strategist here

TopicsSecurity RegionsChina

A Delicate Dance: China, Taiwan, America and the Sunflower Movement

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Editor's Note: The following is a "Letter to the Editor" from Thalia Lin, an Executive Officer in the Taipei Economic and Cultural Representative Office (TECRO) in the U.S.

In his July 22 essay, titled “How to Deal with America’s China Problem: Target Beijing’s Vulnerabilities,” Robert Sutter correctly considers the relationship between mainland China and Taiwan to be an essential part of the United States’ calculus vis-à-vis U.S.-mainland China relations. Unfortunately, Professor Sutter’s analysis lacks the nuance one needs to properly address the delicate relationship between Taiwan, the U.S., and mainland China.

To start, however, it is necessary to give credit where it’s due. As Professor Sutter indicates, the United States should authorize the sales of advanced weaponry that have long been requested by Taiwan’s government, as they are essential to maintain Taiwan’s self-defense capability. This is all in accordance with the Taiwan Relations Act, which celebrates its 35th anniversary this year and directs the U.S. “to provide Taiwan with arms of a defensive character.”

Where Professor Sutter misses the mark is his assessment that the United States should shift to “a more active U.S. posture in support of Taiwanese free expression and identity represented by the so-called Sunflower Movement on the island.” As Taiwan is a free country, its free expression and identity is represented in its robust democracy. It is Taiwan’s very system of government, so opposite of that of mainland China’s in every way, that allows and even embraces demonstrations such as the Sunflower Movement as an exercise of the spirit of the country.

The Sunflower Movement ended in peace, and the government has pledged to establish a supervisory mechanism to monitor cross-Strait agreements. However, students’ weeks-long occupation of the Legislative Yuan paralyzed the lawmaking process, preventing it from achieving anything concrete. This is why Assistant Secretary of State Daniel Russel, when answering a question about the protests during a hearing of the Senate Foreign Relations Committee in early April, stated that “the United States very much hopes that the students and demonstrators will use that freedom responsibly, that they will behave in a civil and in a peaceful manner and certainly to avoid violence.”

In any event, the Sunflower Movement is acting in opposition to the Cross-Strait Trade in Services Agreement, which is essential for securing Taiwan’s economic future. It is not about integrating with mainland China, as some would suggest, but rather liberalizing Taiwan’s economy in order to be a part of the region’s ongoing economic integration. Besides economic agreements with mainland China, Taiwan has also signed trade liberalization agreements with Singapore and New Zealand, both of which are taking part in Trans Pacific Partnership negotiations. Additionally, as South Korea is expected to sign a free-trade agreement with mainland China by the end of this year, Taiwan is facing increasing economic competition in the region. The trade in services agreement with mainland China is only a logical step toward making Taiwan a significantly more attractive prospect for the TPP and other critical regional and international trade agreements.

Professor Sutter writes that “China would face costly and difficult reevaluation of its reasonably successful policy toward Taiwan.” However, we must point out that President Ma’s policy toward mainland China has been reasonably successful and widely praised by U.S. government officials. In the same testimony mentioned above, Assistant Secretary of State Russel noted that “[the United States] very much welcome and applaud the extraordinary progress that has occurred in cross-Strait relations under the Ma administration.” 

Image: Flickr. 

TopicsSecurity RegionsTaiwan

Why Hoarding Isn’t Always a Bad Thing for GDP

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Hoarders beware; the latest GDP print will put you to shame. According the Bureau of Economic Analysis, in the second quarter the US increased inventories at an annual rate of nearly $93 billion dollars. For some perspective, the US economy grew at a 4 percent annualized rate, but the inventory build-up in—called “change in private inventories” or “CIPI”—alone contributed 1.66 percent. More than 40 percent of the growth in the economy was attributable to CIPI.  And that is not great news. Inventories build when the economy produces stuff it does not sell. Granted, there were some bright spots in the report—exports rose and the consumer began to spend again—but not nearly the magnitude that implied by the headline GDP growth rate. Granted, isolating the second quarter as an outlier may well be unfair. After all, the first quarter of this year witnessed inventory destocking drag it down 1.16 percent of its 2.1 percent decline. But the 4 percent growth rate was indisputably deceiving on the surface.

Distortions happen somewhat frequently. In the aftermath of the Great Recession, economic growth in the fourth quarter of 2009 was entirely due to inventory growth. CIPI contributed 4.4 percent and GDP increased only 3.9 percent. Other than increasing inventories, the economy shrank. It works in reverse as well. In the fourth quarter of 2012, the economy only grew 0.1 percent, but CIPI stripped 1.80 percent from the headline. The fundamentals of the economy was performing fine—growing nearly 2 percent, but inventories distorted away the growth.

It is obvious CIPI poses a problem to understanding what is going on in the underlying economy.—even the BEA admits it is incredibly volatile. This makes CIPI difficult to predict, and can contribute to false signals on the economy, like those mentioned above. A similar situation to the Consumer Price index (CPI), where economists look at the “core” which excludes the unstable changes in food and energy, to understand its underlying movements. To get a better look at the underlying economy, the BEA does the natural thing: drop CIPI from GDP.

The “Real Final Sales of Domestic Product”, or Final Sales, figure strips out the effect of CIPI on GDP. In many ways, this resembles more of a “core” GDP than the headline number. The number moves around in much the same way as GDP, but tends to be less wild in its movements. For example, Final Sales is estimated to be -1 percent in the first quarter and 2.3 percent for the second quarter. While not necessarily a more accurate gauge of economic activity, Final Sales provides more clarity into what the economy is actually doing.

The ease with which most economic data can be misunderstood is astounding. But it is not be too difficult to more clearly understand the health of the economy. A less volatile measure of the growth of the economy is desperately needed, and US data watchers and policymakers should place more weight on a “Core” GDP.

Image: Flickr. 

TopicsEconomics

The Next Cuban Missile Crisis: The Showdown in Ukraine?

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The window of opportunity for multilateral talks to end the violence in the Ukraine is closing fast.  The EU's fears of imposing stronger economic sanctions against Russia has fallen away in response to its outrage over the MH17 tragedy and evidence that Russia continues to supply heavy weapons to Ukrainian separatists.  The US is expected within days to follow with even more crippling sanctions. 

The positions held by all parties to the conflict - Ukraine, the pro-Russian separatists, Russia, EU and the US - are solidifying to a point where opportunities are becoming fewer for starting negotiations to reduce tensions and prevent future miscalculations like the MH17 disaster that could push Russia and Ukraine closer to war.

During the Cold War, the Soviets and the Western Alliance were implacable enemies.  Still, these foes understood the limits of a confrontation in order to avoid miscalculations that could lead to war.  During the 1962 Cuban Missile Crisis, Kennedy and Khrushchev chose flexibility over hardened positions to avoid a military confrontation that could have started World War III, and afterwards installed the hotline between the US White House and the Kremlin to help prevent future crises. 

In 2014, the stakes for the global community on the worsening situation in Ukraine are not as high as they were in the waters off the coast of Cuba in 1962.  But there is little doubt that all parties to the crisis in Ukraine have become vested in the correctness of their national viewpoint and have little room, if any, for compromise.

All sides share some of the blame.  In Russia, President Putin enjoys record high public support for his position on the Ukrainian separatists, annexing Crimea and reclaiming Russia's role as a global power.  Polling data and anecdotal findings shows a majority of Russians across all age groups are sympathetic to this view. 

In the US, a rigorous national policy debate over the crisis in Ukraine and Russia is long overdue.  The Cold War rhetoric and the demonizing of Russia and President Putin in the media and by several members of the U.S. Congress is driving the policy debate toward knee jerk reactions and away from thoughtful deliberations to forge a consistent long-term Russia policy.  Thomas Graham and Jeffrey Mankoff presented compelling arguments in this publication for such a reexamination of policy. 

Europe was brutally awakened by the MH17 tragedy.  Europe's economic dependency on Russia played a role in its disjointed response to the crisis in Ukraine and factored into Russia's cost-benefit analysis on Crimea and Eastern Ukraine.  Europe must act on developing a Russia policy with a long-term view to reduce its economic dependency on Russia, especially for energy.

The outlook from the Ukraine is not promising.  Attempts by the pro-Russian separatists and the Ukrainian government to find common grounds for negotiations have failed.  Calls for multilateral negotiations have floundered due to a lack of trust on both sides.  A dangerous stalemate is emerging. 

Who will blink first?  Russia?  Maybe, but don't count on it.  While capital flight is at record highs, financing and international investors have virtually disappeared in Russia, the price of a barrel of oil remains at over $100.  Russia withstood the deprivations from a revolution, an existential threat from Nazi Germany and the chaos of the post-Soviet era, and is not likely to give in to the consequences of economic sanctions.  The US?  Not if it develops a long-term and consistent Russia strategy and policy framework, as other crises develop in the Middle East and Asia and draw policymaker's attention.  The EU?  Not if it takes steps to reduce its energy dependence on Russia.

In the meantime, it would be helpful for all sides to reflect on the Cuban Missile Crisis.  Kennedy and Khrushchev learned about the importance of being transactional to avoid letting strongly held positions dictate strategic decisions in the heat of a crisis.

Tom Thomson is the Principal of T. Thomson & Associates, LLC, an international strategy advisory firm, which counsels international companies on business and communications strategies in Russia and Eurasia.  He was based in Moscow for over a decade.  

Image: Public Domain. 

TopicsSecurity RegionsUkraine

Three Reasons Iran Won't Give up Its Nuclear Program

The Buzz

From his 2009 inaugural address to the unprecedented Nowruz greeting, Barack Obama made clear early in his tenure that cutting a deal with Iran over its nuclear program was one of his top foreign policy priorities.  Despite the President’s meticulous attention to details from cyber warfare to sanctions relief, the skeptics are right: Iran is not going to give up its nuclear program. Here are a few reasons as to why:

1.  States that (could) have had nuclear weapons programs and gave them up had close ties to the U.S.

Most states with close military and economic ties to the U.S. forego the pursuit of nuclear weapons in the first place.  Their leaders are savvy enough to realize that a nuclear weapons program would jeopardize their ties with America.  Many of the U.S.’ allies benefit from unhindered access to the global economy.  Furthermore, each of these states hides behind America’s nuclear umbrella.  In exchange for free riding on the U.S.’ extended deterrent guarantees, these states agree to forego nuclear weapons programs.

Pursuing a nuclear weapon is certainly a time intensive affair. It would automatically trigger sanctions, isolating them from the American hegemon upon which they depend for domestic prosperity and international security.  States like Japan, South Korea and Taiwan could have pursued the bomb after China crossed the nuclear rubicon but didn’t because it would have endangered their access to world markets and American protection.

Since 1979, America has not guaranteed Iran’s safety from external aggression, nor has Tehran sought access to the global economy. According to Trita Parsi in, A Single Throw of The Dice, for some mullahs a rapprochement with the U.S. could undermine the legitimacy of the regime.

2.  Once a nuclear program is in motion it tends to stay in motion

States pursue nuclear weapons for a variety of reasons: insecurity, prestige, bureaucratic politics, and easy access to sensitive materials.  However, once a nuclear program has been started, absent regime change, it is hard to unwind.   

Nuclear programs are rich sources of budgetary rents.  These rents are narrowly concentrated among a small number of well-connected lobbies. They will often inflate foreign threats and pick fights for no other reason than to keep open their source of pork.  These groups (such as the Pasdaran) will logroll with other narrowly concentrated interests to maintain the status quo at the public’s expense.  The pro-nuclear cartels tend to win because the general public has an organizational disadvantage.

3.  Both sides have commitment problems:

Because of their historical mistrust, both sides fear being exploited by the other. If a deal is struck with Iran, it is going to be difficult to enforce.  Like any other proliferator, Tehran can renege on the deal unilaterally and secretly.  The Iranians have learned the lessons of Osiraq better than anyone. Their program is so ubiquitously dispersed that even the most intrusive inspections cannot uncover every component of their nuclear program. Unlike territorial disputes, where we can use satellites and third-party monitors to see whether one side violates a ceasefire, we cannot see what Iran is doing in every inch of its own territory, behind (or under) every mountain, or inside of every laboratory.

The U.S. and the rest of the P5+1 fear getting the “sucker’s payoff.”  Many hawks in the U.S. and France in particular have warned that Iran will play for time until it regains access to world markets.  It will then restart its economy and its nuclear program. Any malfeasance on the Iranians’ part will be impossible to punish. Companies that benefit from trading with Iran will hinder efforts to reassemble any multilateral coalition to put the sanctions regime back into place.

However, the P5+1 faces a commitment problem of its own.  For a time a popular saying in Iran was, “Better to be North Korea than Iraq.”  Iraq gave up the bomb but its regime was overthrown and the country was occupied; North Korea kept the bomb and thumbs its nose at America.  The Iranian leadership needs to send costly signals demonstrating that they are moderates.  However, such concessions weaken Iran’s bargaining position vis-à-vis their longstanding rivals in the West and in the Middle East- starting with Israel and Saudi Arabia.  These allowances do not tie the hands of the P5+1, Israel or the Gulf states, preventing them from attacking Iran or making additional demands upon it after it has been denuclearized.

While it is better to jaw-jaw than to war-war, Iran is not going to give up its pursuit of nuclear weapons because it has too much to lose.

Dr. Albert B. Wolf is an Israel Institute Fellow with the Leonard Davis Institute for International Relations at The Hebrew University of Jerusalem.  He is currently writing a book examining the effectiveness of coercive diplomacy in curbing nuclear proliferation.

Image: Office of the President, Iran. 

TopicsNuclear Weapons RegionsIran

The MH17 Disaster: Australia's Shallow Foreign Policy On Display

The Buzz

Generous commentators discern a wider strategy in Australia's mission to the MH17 crash site in eastern Ukraine - a heartening sign of the government's willingness to engage, hard-headed, with the world, wherever Australia's interests demand it.

Today, though, the Australian Federal Police's (AFP) Ukraine Operation is looking more and more like the charge of the light brigade: gallant, but not bright.

For the third day running, the AFP has failed to reach the crash site. The Federal Government has said they could wait for up to three weeks on the outskirts of Donetsk, in the middle of a civil war whose deeper geopolitical issues the Government has by its own admission little interest in.

This isn't the AFP's fault. But those who sent them there appear to have been misled about the conditions they would find.

In place of the ceasefire supposedly provided for by last week's Australian-sponsored Security Council Resolution 2166, the crash site is a battleground as the Ukrainian army attempts to drive a wedge between the rebels and the Russian border. (See, for instance, this New York Times report.)

Indeed, the AFP's Ukrainian hosts stand in breach of a cardinal provision of SC/2166, "that all military activities, including by armed groups, be immediately ceased in the immediate area surrounding the crash site to allow for security and safety of the international investigation."

This puts Australian Foreign Minister Julie Bishop, now back in Kiev, and Australia in an awkward situation. Ukrainian president Petro Poroshenko has every right to feel put upon by Australia's SC/2166: though welcome when it comes to the rebels, it's an obvious burden when it curtails the army's ability to suppress a rebellion on national territory. Certainly, it's a concession of sovereign rights it's hard to imagine any Australian government being prepared to make.

To fix the situation but in reality probably making it worse, Bishop wants Ukraine's parliament (which has not yet approved the Dutch-Australian mission) to approve the arming of the policemen Australia has deployed on its territory.

Yet the only thing worse than having unarmed personnel deployed in this particular warzone on the other side of the world is armed ones.

There are two simple reasons.

First, the Netherlands is a NATO country. Second, Australia is an American treaty ally.

Bishop will have to be very confident that both the Kremlin and the rebels will distinguish the inoffensive purposes of armed Australian personnel as clearly as we do.

That can't be taken for granted.

On Tuesday, the rebels accused the OSCE - the Organization for Security Cooperation in Europe, under whose auspices the mission has been arranged - of serving as a vehicle for American interests.

And from Russia's perspective, the whole point of this conflict is to stop the eastward expansion of Western-led organizations, such as NATO and the EU, which it perceives as a cover for spreading America's sphere of influence over the territories of the former Soviet Union.

Just a few months ago, this geopolitical contest was in earnest. With countries from the Baltic to the Black Seas facing the not implausible threat of Russian invasion, Europe was in the grip of its most serious great-power confrontation since the war-scare of 1983.

Such is the setting in which some are cheered to see the faces of Australian security and, possibly, defense personnel.

There's something of the spirit of 1914 in casting the AFP operation in Ukraine as a chance for Australia to prove, mainly to itself, that it matters on the world stage.

The counter view is that, as the Foreign Minister navigates the shoals of Ukrainian politics, Australia appears at sea in a place and conflict it doesn't understand or wish to - and which, its public statements seem to suggest, wouldn't concern it at all but for the tragic deaths of 38 Australian citizens and residents.

The Prime Minister, too, believes it possible to separate the humanitarian disaster of MH17 from the issue of "the geopolitics of Eastern Europe."

But freedom of maneuver in the space that such separation creates isn't an expectation we normally have when it comes to the unintended civilian victims of war - including the 800 or so civilians whom the United Nations has reported killed since mid-April by Ukrainian army shelling.

We know that our options for helping them are limited for a range of practical, political and military reasons.

Rather, it says a lot about the priorities of modern Australian foreign policy that the country should subordinate other relevant considerations to the exigencies of a consular case.

Of course, it's right for Australia to want to look after its own. But we mustn't exaggerate our ability to do so, whenever or wherever, just because, as Australians, we're fundamentally a good and democratic people with a right to a peaceful existence on earth.

International politics makes no such promises.

As Carl von Clausewitz timelessly observed, war, in eastern Ukraine as elsewhere, is the terrible, but not for that reason irrational, face of a political contest. When it comes to the crash site, it's one whose high stakes on the Ukrainian side as on the rebel don't easily permit of a truce - not even for the sake of a (grieving) third party that claims disinterest but can plausibly be presented as closer in sympathy to one side of the conflict than the other.

Rather than resolve, Canberra's lead-from-the-front attitude suggests a dangerous lack of respect for that political contest itself - and perhaps also for Australia's real strategic interests in it.

Similar complacency last year led the EU into a senseless confrontation with the Kremlin - and a patently high-risk gamble with the hopes and aspirations of the Ukrainian people: as Anatol Lieven, professor of war studies at King's College, London, has pointed out, because of its history, geography and the mixed sympathies of its people, Ukraine could never be asked to choose between Europe and Russia without tearing itself apart.

The West must bear part of the blame for the fact that it has. To the extent that it didn't raise with Brussels or Washington the risks involved, that might even include Australia.

This doesn't absolve the perpetrators of the attack on MH17 of their guilt for that crime. But it does mean that to work out a long-term strategy to guide our actions now, Australia, like other countries, needs to rely less on denouncing Putin and more on hard thinking about the country he leads. As Stephen Walt, professor of international relations at Harvard, has recently written:

Trying to understand what Russia or its separatist allies in Ukraine are doing does not require us to agree with their views or approve of their conduct, especially not now. But unless we make some effort to understand how Russia's leaders see the situation, and what their real motivations are, we are unlikely to formulate an effective policy to address the present crisis.

Those motivations are patently geopolitical and, ultimately, Australia's engagement - intellectual and diplomatic - with the crisis in Ukraine needs to move to that level too.

With the EU agreeing on a tougher regime of sanctions against the Kremlin, Australia probably has little choice but to jump aboard the Western bandwagon. But that doesn't mean Canberra should celebrate a breach in relations with Moscow.

On the contrary, a dispassionate assessment of Australia's long-term strategic interests in Eurasia would suggest that a good relationship with Russia ought to be as important an objective of Australian diplomacy as it ought to be of American diplomacy: the power that stands to gain most from the crisis in Ukraine is neither Russia nor America but China.

The so-called New Cold War between Russia and the West is fast providing the world's "loneliest emerging superpower" with its first great-power ally.

We've long believed that we have, proverbially, "no interests in Europe".

Turns out we do.

In the long run, anger, however righteous, isn't a substitute for doing our homework.

Matthew Dal Santo is a freelance writer and foreign affairs correspondent. He previously worked for the Department of Foreign Affairs and Trade. This article first appeared in ABC’s The Drum here.

Image: Tony Abbott/Flickr.

TopicsMH17 RegionsAustralia

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