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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. 


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

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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

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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

A Plan to Save the East China Sea from Disaster

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Editor's Note: Please see Stewart Taggart's previous article - A Plan to Save the South China Sea from Disaster. 

Disputed islands. Air identification zones. Incidents at sea. Arguments over history. These ongoing headlines obscure the real challenges of the East China Sea. These include increasing energy security, limiting climate change and enhancing economic prosperity.

But there could be a way to move towards a resolution (see the graph above). The model here is the Internet.

In the past 25 years, the Internet has dissolved borders, increased trade and spawned innovation in every field. In the next 25 years, an ‘Internet of Energy’ can link Northeast Asia’s neighboring economies -- creating powerful new constituencies for diplomatic stability.

Amid all the claims to water, sky and rocks in the East China Sea, we don’t hear similar claims being to the subsea fiber optic cables. The South China Sea and East China Sea now host two of the densest meshes of sea-bottom fiber optic cables anywhere in the world. These now generate more economic wealth each day than any stretch of open water or uninhabited rock ever will.

This, of course, underscores the large gains to be had from multilateral, ‘positive sum’ thinking.

China, Japan and South Korea have a collective annual economic output roughly $16 trillion -- or about one quarter of global GDP. Interconnecting their power grid, gas pipeline and fiber optic systems across the East China Sea makes more sense than anywhere else in Asia.

In the East China Sea, a gas pipeline already stretches halfway from China to Japan. It connects Shanghai to the Pinghu Field. This means both fiber optics and natural gas pipelines already extend halfway across the South China Sea between China and Japan. Power lines could follow, using Chinese HVDC technology. A number of proposals already have been along these lines.

One possible topology would be to lay the infrastructure along the geographic ‘median line’ equidistant from each country’s mainland shorelines. This line already has been used by China, Japan and South Korea to agree on the boundaries of two Joint Development Areas. To date, unfortunately, neither has developed very far.

Progress on the China-Japan JDA stopped in late 2010 after a collision between a Chinese fishing boat and a Japanese Coast Guard vessel. Meanwhile, progress on Japan and South Korea’s JDA has been slowed by mistrust. But these should be surmountable if the prize is wealth-creating economic growth in which all share.

Meshing China’s infrastructure-building expertise with Japanese advanced technology and South Korean selective excellence in areas like tidal energy can create a winning situation all around. This is particularly so given the expansion of funding entities for future infrastructure investment. These range from China’s proposed Asian Infrastructure Investment Bank, the so-called BRICS Bank, and the South Korea-based Green Climate Fund. Multilateral meetings later this year in Asia such as APEC and the G20, also offer opportunity.

Finally, Joint Development Areas provide an avenue for China’s, South Korea’s and Japan’s navies to work more closely together on collective security initiatives that could reduce territorial tensions.

Examples of this include joint East China Sea drills held by Japan and South Korea late last year, China’s recent participation in multilateral naval exercises off Hawaii, and plans for US, Chinese and Australian soldiers to participate in joint maneuvers in October in Northern Australia.

Applying this model to the East China Sea, the navies of China, Japan and South Korea could cooperate in providing security to key subsea and surface infrastructure. This could be done by dispatching ships as needed from Shanghai as well as South Korea’s Pusan naval base and Japan’s Sasebo naval base in Fukuoka.

An example of the benefits of such cooperation occurred after the devastating 2011 Fukushima earthquake. This damaged important subsea-fiber optic cables off Japan that carried data from Asia to North America were severed off Japan. A regionally-based telecommunications salvage vessel dispatched out of Shanghai repaired the cable. The same model could apply to energy infrastructure.

All of this points to the powerful economic impetus created by networks, and the potential they have to encourage growth, battle climate change and reduce tension. What’s needed now is to mesh this vision into those for investing in infrastructure and economic reform.

Stewart Taggart is principal of Grenatec, a research organization studying the viability of a Pan-Asian Energy Infrastructure of high-capacity power lines, natural gas pipelines and fiber optic cables stretching from Australia to China, Japan and South Korea.

TopicsEast China Sea RegionsChina

Don’t Underestimate Putin’s Ambitions in Ukraine—Instead, Shape Them

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What are Vladimir Putin’s intentions towards Ukraine?  Is the Russian leader bent on annexing eastern portions of the country, or are his ambitions much more limited than his most ardent critics—including hawks in Washington—would suggest?  More to the point, how should leaders in western capitals respond to what they believe is being planned in Moscow?

There are those who believe that Putin’s goals in Eastern Europe are relatively circumscribed.  Harvard’s Stephen Walt, for example, recently posted on Twitter to ask whether there was any “hard evidence” that Putin wants anything more than to prevent Ukraine from drifting (further) into the orbit of the west.  Although posed as a “serious question,” Walt’s subsequent tweets seem to clarify that his true intention was to cast doubt upon the notion that Moscow is acting upon expansive revisionist designs.  “Don’t believe the hawks,” Walt was essentially saying.

Walt, of course, is a defensive realist.  His theory of international politics holds that states tend to want to preserve a balance of power between themselves and their adversaries.  As such, leaders usually keep a lid on the extent of their geopolitical ambition.  To do otherwise would be to risk incurring the negative repercussions of strategic overreach.  For Walt and others of his genre, offense is not always the best form of defense in the long run.

Like any good theory, Walt’s brand of realism makes some valuable contributions to our understanding of world politics—cautioning against exaggerating the threat posed by Russia and implying a set of policies that might be implemented to manage the geopolitical fallout of Putin’s meddling (as well highlighting the policies that ought to be avoided).  Yet no analytic perspective is without its costs; each obscures certain facets of reality even as it usefully brings others into sharp focus.

The drawback of presuming until proven otherwise that Putin harbors limited ambitions towards Ukraine is that such a presumption risks over-estimating the importance of leaders’ long-term intentions.  Even the best laid schemes in world politics rarely pan out as intended.  Events, both domestic and international, intervene to throw diplomacy into disarray and to present leaders with opportunity structures that they are ill prepared to navigate.  This inherent unpredictability of international relations has been markedly evident in Putin’s recent foreign policy moves.

Indeed, if Putin’s long-term intentions truly translated into foreign policy outcomes via anything even approximating a perfect conveyor belt then the current crisis in Ukraine would never even have materialized; Kiev never would have been allowed to entertain closer relations with the EU and NATO in the first place because Russia would years ago have nipped the attempted realignment in the bud.  Nor does it appear credible that Putin nurtured plans to annex Crimea before the opportunity presented itself in February-March of this year; that he ultimately decided to do so is not so much evidence of Putin’s long-term calculations as it is of ruthless pragmatism on his part.  In short, Putin is responding to events as well as playing a decisive role in shaping them.

While Walt and others may be right that Putin currently has no particular design on eastern Ukraine, then, it is important to recognize the limits of such a presumption.  If the present crisis has demonstrated anything about what drives foreign policy, it has shown that leaders respond to short-term factors and exigencies as much as (if not more than) they adhere to long-term strategic plans.  Like any self-interested political leader, Putin can be expected to devour low-hanging fruit and exploit opportunities as they present themselves, even if for no other reason than to improve his bargaining position vis-à-vis his detractors on the world stage.  It would thus be wrong to assume that Crimea was a one-off.

Putin’s intentions towards Ukraine are not fixed.  Politics, after all, is the art of the possible.  As the realm of possibility facing Putin expands and contracts, so too will his political ambition wax and wane.  The challenge for western leaders is to influence, even if not entirely manage, the extent of that ambition—not merely to gain an estimation of it.

Image: Office of the President, Russian Federation. 


Why Asia (and the World) Should be Worried: The Death of the Great Bargain

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In 1972, Nixon and Mao met in Beijing to begin the Great Asia Bargain. Nixon called it the week that changed the world. The Republican and the Revolutionary ushered in a glorious period.

Almost as an aside—a prelude to the geopolitical plotting—they launched an economic engagement that turned China into the phenomenon of the modern age. As the man who took the U.S. dollar off the gold standard, Nixon started a process that will see the Yuan become a global currency to equal the greenback. Talk about unintended consequences. And that was just an aside.

Look back at what Mao and Nixon wrought because of what Shinzo Abe’s is now doing. Making Japan a security power—even claiming Japan’s right to be a “superpower”—marks the demise of an important residual element of the Bargain.

Of course, much else disappeared long ago. The central driver of the Bargain was the primary threat from the Soviet Union. For both leaders, Russia was the number one danger. Kissinger judged that following military clashes along the Soviet–China border, Beijing moved beyond ideology to deal with the U.S. “Their peril had established the absolute primacy of geopolitics. They were in effect freeing one front by a tacit nonaggression treaty with us.” With that tacit treaty, China was aiming to use “one set of barbarians to balance another.”

Today China and the U.S. see each other as their greatest threat, the binary reality rendering the Bargain an artifact of history. Even so, as with the economic deal, security elements of the Bargain have continuing effects, often of major importance. Losing those lingering security deals after four decades tells us how much uncertainty now envelops Asia.

Beyond China–U.S. national self-interest, the Bargain rested on understandings about U.S. interests in Taiwan, Japan, and South Korea. The explicit understanding on South Korea also carried implications for what China would do to restrain North Korea—another area where the Bargain failed long ago.

Mao assured Nixon that Taiwan was not an important issue and China could show patience about its return to the motherland. Kissinger quoted Mao: “We can do without them [Taiwan] for the time being, and let it come after 100 years.” For all the push and shove since, that promise holds.

That long view on Taiwan was linked to acceptance of the U.S. alliance with Japan and a particular understanding of how the alliance should work. Kissinger quoted this from Mao: “Japan must not feel neglected by the U.S.; Japan was inherently insecure and sensitive. He would see to it that China did not force Tokyo to choose between the U.S. and China. That might polarize; it would surely enhance Japanese insecurity and might give rise to traditional nationalism.”

Kissinger wrote that China came to accept America’s argument that the U.S. alliance with Japan should be viewed “as a guarantee of America’s continued interest in the Western Pacific and a rein on Japanese unilateralism.”

The military balance in the Bargain was elegant. The U.S. would keep its troops in Japan to maintain a firm foot on Japan’s neck. China’s former occupier was not to return to any form of assertive nationalism, much less military power.

If Washington was to maintain boundaries on Japan, then Beijing should do the same to North Korea. Allowing North Korea to go nuclear rates as a major breach of Mao’s undertaking not to disturb Japan or South Korea.

All this is context for Japan’s Defense Minister, Itsunori Onodera, arguing Japan is more than just back. Japan, he says, is “drastically moving its security policy forward: because of “severe challenges” to Asia’s security order. Expanding defense cooperation with the U.S., Australia and Southeast Asia is normal: “It is natural for a great power like Japan to play a responsible role for the region based on the significance of the area and the increasingly acute regional security environment.”

That “great power” line led the Wall Street Journal to ponder Japan’s identity confusion and whether it is, indeed, a great power. The fascination in the piece was the link to Amy King’s analysis of Chinese writings, showing that Beijing certainly does not view Japan as a great power; that Great Bargain effect persists in Beijing, even if the U.S. and Japan have ditched it.

Asia has long outgrown the Bargain bequeathed by Mao and Nixon; I was going to say blessed rather than bequeathed, but that confers too much grace on a hard-eyed geopolitical compact. If the Republican and the Revolutionary—a pro and a tyrant—could do the deal, their successors should be as competent and as ambitious in seeking a new power-sharing order in Asia or a new responsibility-sharing order.​

Graeme Dobell is the ASPI journalist fellow. This article originally appeared in ASPI’s The Strategist website here.

Image: U.S. Navy Flickr. 

TopicsSecurity RegionsChina

Will Hamas Accept a Ceasefire?

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Nearly 800 Palestinian killed; 36 Israelis (the vast majority soldiers) lost in the line of fire; an estimated 150,000 Palestinian civilians in the Gaza Strip scurrying to safer places in order to protect themselves and their families from the fighting; hundreds of homes and buildings destroyed in strikes from the Israeli air force.  Operation Protective Edge, the code name for Israel’s latest military operation against Hamas militants in the sealed-off enclave, is now in its second week of combat.

As of July 24, those are the raw numbers—a set of disturbing figures that will continue to go up if Israeli and Palestinian factions are unable to arrive at an arrangement that would calm the waters, stop the rockets from flying, and cease the pounding that has pummeled Gaza’s already terrible infrastructure for the past two and a half weeks. 

After nineteen months in the job, Secretary of State John Kerry has guaranteed himself the label of the planet’s most famous, recognizable, and tireless negotiator.  The discussions over Iran’s nuclear and uranium enrichment programs, Syria’s chemical weapons arsenal, Ukraine’s war against pro-Russian separatists, and the attempt to arrive at an Israeli-Palestinian peace agreement, however different they may appear, have one thing in common: Kerry is the middle of all of them.  The flare-up in violence between Hamas and Israel, however, has stretched Secretary Kerry and the Obama administration’s national security team to a breaking point.  Right now, getting the quiet restored along the Gaza-Israel border—and saving countless Israeli and Palestinian lives in the process—is a foreign policy priority at the very top of the administration’s “to-do” list.

John Kerry and his State Department team have been camped in the region since July 21 and are doing as much as they can to send home the message to Israel and Hamas that a cessation of hostilities is in both of their best interests.  John McCain, Lindsey Graham, Elliot Abrams, and the folks at the American Enterprise Institute may like to remind him of his failures over the past year and a half as America’s top diplomat, but what the critics cannot do is call Kerry passé or lazy.  Indeed, just as he sought earlier in the year to create and push forth a two-state framework that both Israel and the Palestinian Authority could accept (with reservations), Kerry is again choosing to sacrifice more of his diplomatic capital on the Israel/Palestine portfolio.  The only difference this time is that his efforts today are far more immediate and could be the difference between life and death for the tens of thousands of civilians in the middle of the conflict through no fault of their own.

The United States, of course, is not the only powerbroker in these ceasefire discussions.  Qatar, Turkey, the Palestinian Authority, Egypt, the Arab League, and the European Union are all involved and each party is talking with the other for precisely the same objective: a full and immediate stop to the violence.  Qatar and Turkey, two countries that have the best relations with the Muslim Brotherhood to which Hamas is technically a part, will be crucial in getting Khaled Meshal to sign on any dotted line.  The U.S. and Europe will serve the same function for the Israelis.  The Arab League, the United Nations, and Egypt are important as well: for any ceasefire to stick, it will be vital for all three of these actors to endorse the accord in full and provide guarantees that longer-term issues—a loosening of Israeli restrictions in Gaza, demilitarization of the territory, the opening of the Gaza’s borders, post-war economic reconstruction, international investment, political reform, etc.—are addressed to the fullest extent possible.

It reports are accurate that Secretary Kerry has drafted a new ceasefire proposal, the war that has filled the world’s television screens and newspapers for the past two and a half weeks is now at its most dramatic point.  An acceptance to the proposal could pave the way for a difficult but much needed discussion on the grievances that have driven Gaza into war three times over the past five years.  A rejection by Hamas, on the other hand, could persuade Israeli Prime Minister Benjamin Netanyahu and his security cabinet that expanding the Gaza ground operation, deploying more troops into the field, and setting more ambitious goals for the campaign is the only way to deal Hamas a heavy blow over the long-term. 

The onus is on Hamas.  John Kerry and the rest of the international community hopes that the group will wise up and make the right decision.

Image Credit: Israeli Defense Forces/Flickr.    


Westphalia with Chinese Characteristics

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What will be the future implications of China’s rise in power?  The towering political scientist Stephen Krasner has produced a lucid synopsis for the Hoover Institution.  One of the biggest take-away points is that the organization of global governance stands to undergo a significant overhaul if Beijing’s capabilities continue to expand vis-à-vis the United States.

In terms of the international economic order, Krasner notes that:

“[t]he existing trade and investment regimes more or less assume that corporations are independent of the state; this assumption is comfortable for the United States. It is not so comfortable for China: a more powerful China might press for principles, norms, and rules that were more accepting of state direction of the economy.”

It warrants pointing out that China’s preferences for statism in economic affairs are not simply because of its communist leadership.  Rather, developing economies in general tend to rely upon government intervention for growth.  This was true of the so-called Asian Tigers in the 1970s and is certainly true of China and the other BRICS nations today, all of which blend an appreciation for markets with a dyed in the wool commitment to a form of dirigisme.

The difference between the newly industrialized countries (NICs) of the 1970s and the BRICS of today, of course, is that the latter entertain hopes of refashioning the international economic architecture to better suit their particular interests.  Hong Kong, Singapore, South Korea and Taiwan never aspired to global leadership.  Whether the BRICS will succeed in their bid any time soon is far from certain; as yet, the BRICS lack the cohesion, the will and the means actually to lead a new global order.  Nevertheless, their dissatisfaction and rise in power do combine to produce a long-term potential threat to the western-made status quo.

China’s rise might also portend implications for how states engage with each other politically and diplomatically.  “China’s internal divisions make it one of the strongest proponents of the sanctity of sovereigntist principles that totally reject external interference in the internal affairs of other states,” Krasner points out. “The United States as a proponent of human rights, and as target for transnational terrorist, has a much weaker commitment to non-intervention.”

There is some irony to this mismatch in attitudes.  Sovereignty, territorial integrity and non-intervention are the cornerstones of the Westphalian system, a model of international relations that emphasizes the centrality of state actors to global politics and which is supposed the epitomize the western approach to international organization.  Yet Krasner is correct that the U.S. and Europe have been at the forefront of enervating Westphalia over the past several decades while China has emerged as a champion of Westphalian principles.

Just as the Westphalian ideal has been at times convenient for western powers and inconvenient (and ignored) at other times—a system of “organized hypocrisy” in Krasner’s own words—so too are Westphalian norms a valuable (and pliable) resource for China’s leadership.  As Stephen Hopgood argues in his book The Endtimes of Human Rights, the logic of Westphalia affords Beijing a rationale for maintaining authoritarian rule at home and opposing the imposition of western influence abroad (including, recently, in Syria).

Westphalia can also be applied by China to legitimize its actions, at least rhetorically, regarding its various territorial and sovereignty disputes: from Xinjiang and Tibet to Taiwan and the islands of the East and South China Seas.  All of this means that Westphalia can probably be expected to remain firmly in place as a core tenet of international order under Chinese leadership, even if the application of Westphalian norms will look cynical and opportunistic to observers in the west.

If China does reassert sovereignty as an inviolable cornerstone of international organization then it will be a hammer blow to western interventionists on both the right and left.  This is partly what Krasner means when he concludes that “the world would be a very different place than it is now if an autocratic China became the indispensable nation.”

Not everybody in the west would be sad to see a reduction in of overseas interventions, of course, but if it takes Chinese preponderance to curtail the west’s adventurism then this might leave a bitter taste—especially if it comes accompanied by other changes to international order.  An uncertain future impends.

TopicsSecurity RegionsChina

Asia's Next China Worry: Xi Jinping's Growing Power

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Since Mao Zedong died in 1976, power in China has slowly decentralized. Deng Xiaoping’s reforms promoted the lifting of the hand of the state from the economy while ultimate authority within the Chinese Communist Party has become more dispersed. Part of this process is generational: no Chinese leader has enjoyed the authority of either Mao or Deng and in its place collective rule has become the norm.

The ascendance of Xi Jinping to the top position in China has challenged those trajectories. During his short period in office, Xi has brought back executive authority, serving as secretary general of the Chinese Communist Party, president of the PRC, chairman of the Central Military Commission, and as an ex officio member of the Standing Committee of the Politboro. If that resume wasn’t impressive enough, he has also claimed the chairs of two groups established at the Third Plenum of the CCP, held last fall: the National Security Commission and the Central Leading Group for Comprehensively Deepening Reforms. Those gavels go along with the two older Leading Small Groups he also chairs, one on Foreign Affairs and the other on Taiwan Affairs. He is chairing yet another new group to oversee military reform. Observers see Xi’s hand in economic affairs as well, usurping in many ways the role traditionally held by the prime minister. Xinhua reported that he chaired a leading group of financial and economic affairs, and described him as its director, a position usually held by the premier.

This consolidation of power is impressive but Xi’s authority is also being boosted by his anti-corruption campaign. Record numbers of party members – tens of thousands – are being disciplined and prosecuted for misconduct. Senior officials, referred to as “tigers” in the media, are being hunted as well, including senior PLA figures previously thought untouchable. The country waits with baited breath to see if Xi will take down a former Politboro Standing Committee member, a position long considered immune from investigation.

The drive to purge the party of its corruption cancer at its core – and the fear that the initiative is as much aimed at political opponents as corrupt party members – has prompted many bureaucrats and officials to lower their heads and withdraw from decision making in an attempt to ensure that they don’t attract attention. There is a marked increase in suicides among officials. In this environment, such an activist leader can be even more assertive and Xi seems to relish the opportunity.

The desire to centralize authority is also evident in the government’s pursuit of advocates of transparency. Rather than seeing them as erstwhile allies in the anti-corruption effort, the government has gone after them as doggedly as it has corrupt officials. Plainly, Xi wants to retain control of the anti-corruption campaign, in particular who it targets.

This is consistent with the effort to assert tighter control over the media, both in broadcast and print, and the internet. Analysts speak of unprecedented censorship and oversight in the last year.  It may not be a coincidence that Xi also chairs a new small group that oversees internet security.

Some argue that Xi’s “new authoritarianism” is a prerequisite to economic reform: he has to shore up his left flank from attacks by the old guard.  Others worry about an old-fashioned power grab, in which Xi isolates, marginalizes, and ultimately crushes any challenge to his authority.

Whatever his ultimate aim, Xi’s support for reform has very clear limits. Cleaning up the party is intended to rehabilitate and legitimate the CCP, not loosen its grip on China’s politics. 

How should outsiders feel about what is happening in China?

Elements of Xi’s program might improve governance in China.  In principle, the anti-corruption campaign could lighten the burden imposed on the Chinese people resulting from unjust treatment by avaricious officials.  It reflects a degree of increased, if indirect, accountability of the ruling party to the public.  And if Xi uses his accumulated power to break through the resistance of special interest groups and successfully transform China's economy (which former Premier Wen Jiabao called “unstable, unbalanced, uncoordinated, and unsustainable”) to a stable and sustainable maturity with more reliance on domestic consumption rather than exports, then  he would bless both his people and the global economy.

However, Xi does not seem interested in promoting the liberal values that Americans and many friends in the region believe are conducive to justice, prosperity, and peace.  His accumulation of power represents a step back toward the dictatorial paramount leadership of the Mao era – ironically, an inclination that got Bo Xilai in trouble. Still, there is little danger of a return to a cult of personality in China and events as calamitous as the Cultural Revolution are extremely unlikely. China has changed too much. The appropriate analog for Xi is more Putin than Mao.

A selective purge of corrupt officials, combined with continued crackdowns on dissent, may not be enough to satisfy the demands of an increasingly empowered and savvy civil society, however.  The CCP’s domestic insecurity is likely to continue during Xi’s tenure, which means continued risk of Chinese overreaction to a perceived challenge to China's dignity by foreigners.

A relatively high concentration of power in a paramount leader might increase consistency and predictability in Chinese foreign policy-making, simplifying  the task of reaching agreement on how to achieve and maintain a stable peace as China becomes the region’s second great power.  There is only one guy we need talk to, Xi Jinping.  But any advantage is lost if he insists China’s vital interests require encroaching on other states’ vital interests.  And the likelihood of an intemperate foreign policy is greater if a smaller number of people are in charge, with a one-man dictatorship being the worst case (well exemplified by Pyongyang). 

If Xi’s foreign policy is an extension of his domestic political agenda, outsiders may be unqualified to judge whether it is successful.  Based on China's external interests, however, Xi seems to have walked China into the trap that Deng Xiaoping warned about: alarming neighbors into security cooperation against China before the difficult task of Chinese economic development is completed.

Brad Glosserman is executive director of Pacific Forum CSIS. Denny Roy is senior fellow at the East West Center in Honolulu. This article originally appeared in CSIS:PACNET newsletter here

Image: Flickr. 

TopicsDomestic Politics RegionsChina