India’s shock trade deal exit makes economic reforms more urgent


Photo:AP

Sixteen nations met recently at a trade summit in Bangkok, Thailand, hoping to iron out the terms of a regional trade deal covering nearly half the world’s population. Then India, after seven years of negotiations, decided to pull out.

As India’s economy continues to slow, regional integration held the promise of a new source of growth. India now faces a stark choice – either strengthen domestic economic reforms or risk being left behind as trade migrates to lower-tariff trade zones throughout Asia.

Real reforms will not be easy, despite Indian Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) winning national elections in May. The economy has not been the focus since Modi’s re-election. Instead, nationalistic and sectarian politics have defined the first six months of Modi’s new term and a strong coalition government has still not been formed.


The full op-ed in The South China Morning Post is available HERE.

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World Leaders Weary of Trump’s Foreign Policy Mood Swings

G7 Summit, Biarritz, France. Source:AFP

This op-ed first appeared on the SCMP website 9/2/19.


First he says he will, then he says he won’t, though in the end he might. Welcome to another dizzying episode of Trumplandia, featuring an array of contradictory policy announcements from the mercurial US president.First he raised China tariffs, then had second thoughts which morphed into wishing he’d raised them even more, all the while calling Chinese President Xi Jinping an “enemy”, and then wanting a deal.

After 2½ difficult years, world leaders appear increasingly weary of Donald Trump’s on-again, off-again approach, which poses significant problems for US foreign policy and global affairs, as countries increasingly avoid the US in pursuit of their own short-term gains.

First he says he will, then he says he won’t, though in the end he might. Welcome to another dizzying episode of Trumplandia, featuring an array of contradictory policy announcements from the mercurial US president.First he raised China tariffs, then had second thoughts which morphed into wishing he’d raised them even more, all the while calling Chinese President Xi Jinping an “enemy”, and then wanting a deal.

After 2½ difficult years, world leaders appear increasingly weary of Donald Trump’s on-again, off-again approach, which poses significant problems for US foreign policy and global affairs, as countries increasingly avoid the US in pursuit of their own short-term gains.

US companies face an increasingly difficult business environment in China. European firms stand to gain from their lost market share.

As world leaders adapt to Trump’s confusion-as-negotiating tactic, three broad strategies have emerged to deal with the chaos he creates – ambivalence, confrontation and appeasement. Each has worked to varying degrees, yet none will lead to lasting agreements.Strategic patience may give way to greater policy volatility, which will do nothing to help calm jitters over a possible global recession, avoid potential military conflict, or stem a rising nationalistic tide that threatens peace and prosperity.

Beijing, at one end of the spectrum, is going toe-to-toe with Washington in escalating tensions – tariffs for tariffs, entity list for entity list.

Add a savvy public affairs campaign to counter every appearance of a Trump gain with one of their own, and the trade war shows no signs of ending soon.Negotiations have reached the point where there is not even agreement on whether a phone call was made. Trump said China called US officials, citing Chinese Vice-Premier Liu He’s remarks, and China said it had no idea what he was talking about.


Markets have become hostage to Trump’s Twitter feed


The strong resistance from President Xi and his team appears to have surprised Trump, who has resorted to often nonsensical, self-defeating policy changes.

He continues to strike with a closed fist and then quickly offer up a welcoming hand. This signals neither strength nor strategy to China, which seems increasingly content to wait out the short-term pain for brighter days ahead without Trump.

Japan, at the other extreme, has gone to great lengths to avoid any affronts to Trump, giving him the full palace treatment during his May visit and studiously avoiding any negative comments about the US prevaricator-in-chief. This has certainly paid short-term dividends.

Japan, along with Britain, which showered Trump with similar royal treatment during his London visit last month, has largely avoided his most acidic ire, usually expressed first through schoolyard taunts and name-calling, and then, if he does not get his way, threats.

Still, Japanese Prime Minister Shinzo Abe’s approach has not solved any of the thorny bilateral issues that plague the relationship.Even the recent announcement of a highly anticipated trade deal that will offer tariff reductions does not include the one main Tokyo ask – a firm commitment that Washington will not impose or increase sanctions on Japanese cars. Not much of a win for Abe to take home.

Europe has trod down the middle, at times facing off with Trump, and so drawing barbed comments in return, targeting German Chancellor Angela Merkel on defence spending and threatening French wine with tariffs.At other times, they have seemed to just ignore him, with relatively little public condemnation of Trump’s unilateral approach to everything from Nato spending to a resurgence of Russian aggression.

At the recently concluded G7 summit in Biarritz, France, the big chillbetween the US and its strongest allies was on full display. When Trump failed to show up at a meeting with his counterparts on environmental crises no one batted an eyelid, not even at the glaring insult of sending a staff member in his place.

Similarly, Europe has not joined Trump’s trade war with China, which focuses on Beijing’s egregious violations of World Trade Organisation norms.

In fact, as US companies face an increasingly difficult business environment, European firms stand to gain from their lost market share. Beijing, too, would have a much harder time waiting Trump out if Europe and Japan were pressing equally hard on the trade front as the US.

Nothing in Trump’s hot-and-cold approach is going to change. Responding to questions post-summit, he said this is his negotiating style and it has served him well in the past. Whatever charms he thinks helped build his businesses with so many bankruptcies, they have won him few fans around the world and close to zero diplomatic victories.

In the run-up to the 2020 US presidential election, Trump’s desperation to rack up political wins will force him to press countries even harder. His rhetoric will become sharper, his inconsistencies more prevalent, and a fading sense of control more dangerous.

Since none of the strategies for dealing with Trump’s impulsiveness have worked particularly well, the attraction of mirroring his policy mood swings may increase. That could easily lead to disastrous results.

If that were to happen, Trump will have everyone where he wants them to be, at the centre of a storm of his creation that he can nuke at will, damn the fallout.


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Trump’s Diplomatic Reality Show Hits Summer Re-Run Season

Photo: AFP

This op-ed appears originally appeared on the SCMP website 7/5/19.


Last Sunday, US President Donald Trump crossed the guarded border in Panmunjom, a village in the demilitarised zone between North and South Korea. He smiled and shook hands with North Korean leader Kim Jong-un as photographers rushed to capture the history-making moment. This was, after all, the first time a sitting US president had set foot in reclusive North Korea.

What could have been a breakthrough meeting between the last cold war rivals instead devolved into yet another photo op for the White House family album.

Meanwhile, Trump gains little from giving away personal meetings like candy from a cheap dispenser.

A one-hour-plus Trump-Kim meeting followed without any discernible outcome, other than that the negotiators will get back to negotiating. So we end up where we started, sold on an empty victory as the Donald Trump diplomatic reality show goes into its summer rerun phase.

Under an administration that is obsessed with camera-ready events rather than serious strategy, the country’s credibility around the world continues to decline.

Imagine if this effort had gone into concluding a comprehensive treaty with the North, eliminating the missile and nuclear threat and establishing a durable peace on the Korean peninsula. Then this meeting might have been worth something.

Instead, Trump love-bombed Kim. This flattery may be Trump’s attempt to get the reclusive leader out into the world and impress him with the riches that could be his if he would give up his nukes – except that Kim is not that naive. To believe that Kim would succumb to Trump’s charms and miraculously give up weapons he thinks ensures his country’s survival shows a remarkable lack of sophistication on Trump’s part.

While the White House preoccupies itself with staging publicity stunts, North Korea keeps winning, the longer Kim holds out for a deal. Stringing Washington along is cost-free and gives the young leader larger international exposure and some semblance of overseas influence. Also, perhaps more importantly, it buys him time to continue developing his nuclear arsenal.

Meanwhile, Trump gains little from giving away personal meetings like candy from a cheap dispenser.

The administration’s preference for optics over policy is not limited to North Korea. Meeting Chinese President Xi Jinping at the Group of 20 summit in Osaka, Trump eased national-security restrictions on Chinese tech giant Huawei in exchange for a promise of increased Chinese imports of US goods. China was already buying large quantities of US agricultural products before he imposed tariffs – so yet again, we have an apparent development that just pushed the trade talks back to where they started.

However, Trump’s sudden back-pedalling on Huawei – like his flip-flop on ZTE, another Chinese smartphone maker that had been banned from buying US components after breaking US sanctions against Iran – only adds to other countries’ concern. With Trump, everything is a commodity to be traded.

On Iran, the White House has shown a propensity for haphazard thinking. After repeatedly warning Tehran that shooting down a US drone and attacking ships in the Strait of Hormuz would result in decisive action, Trump suddenly reversed course. He said he was concerned about the loss of life. But it wasn’t a convincing excuse because military commanders could have easily offered other targets or options for retaliation if that was the major issue.

Impulsive and consensus-bending actions are now being emulated among US allies. Japan and South Korea have, in the past, worked in concert on economic and security issues. At the G20 summit in Osaka, both countries adopted a declaration to “realise a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, to keep our markets open”.

Yet, within days, Japan imposed restrictions on hi-tech exports to South Korea. The sudden action appeared to be in retaliation for a top Korean court ruling on Japanese compensation for wartime forced labour, an issue which Japan says it settled under a 1965 treaty.

The world will be worse off if this rot continues. Back in the US, domestic politics is also replacing substance with style and made-for-television flash. According to a Pew survey in June, an overwhelming majority of Americans – 85 per cent – believe that political discourse in the US has become worse, and 55 per cent blame Trump. Huge numbers believe that political debate has become less respectful, fact-based, and substantive.

Leadership has always had an element of stagecraft – grand settings for formal talks, the glare of press corps lights, red carpets. “Politics is show business for ugly people,” as the saying goes. But leaders have to be judged by what they actually accomplish.

So far, global leaders have willingly participated in Washington’s publicity stunts, but as the ties that bind nation to nation slowly unravel, international cooperation will become more difficult. Not only is the world less safe as a result, the preference for symbolic gestures over concrete action also encourages a rise in personality politics.

Even Trump admits in his book Trump: The Art of the Deal: “You can’t con people, at least not for long … if you don’t deliver the goods, people will eventually catch on.” The only question remaining is how much longer this con that has lasted 2½ years can keep going.


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White House Eagerness for a Deal Gives North Korea the Upper Hand


IN A MINUTE | Trump Loses Edge with North Korea

Agreeing to meet without deal gives Kim the advantage


Trump claimed in last weeks’s State of the Union address that if it weren’t for him, the U.S. would be at war right now with North Korea. His self-praise for merely engaging the North telegraphed an eagerness for a deal that will be hard to justify should talks not deliver full and irreversible North Korean denuclearization.

Many now argue that North Korea will never give up their weapons and the U.S. should just accept that and move on, but the stakes are high for U.S. allies South Korea and Japan, the most susceptible to a North Korean provocation. If North Korea keeps its nuclear capability, Japan, a U.S. treaty ally, will certainly move to counter that threat, triggering a regional arms race.

There’s been precious little indication that Kim is willing to give up anything for another meeting with the U.S. President, a completely predictable outcome when Trump showed so much eagerness to meet in Singapore without a major breakthrough in talks.

A presidential meeting should only come after an agreement has been reached, not the other way around.

During the lapse in diplomacy since last summer’s Singapore summit, North Korea has been expanding its weapons program, not decreasing it. Recent reports and commercial satellite imagery show that the DPRK not only continued to build missiles, but there have far more weapon sites than previously disclosed. 

While North Korea has not overtly tested a missile or engine system since talks began, even the most novice global affairs observer knows delays are not concessions. Kim can fire up a test whenever and wherever he wants. Blowing up wooden sheds and exploding a mountain entrance were, at best, window dressing.

Trump has been far more adept in his trade negotiations with China and refused to meet with Xi Jinping until more details are ironed out. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are headed to China soon.

By refusing to say he’ll meet with Xi until he finds out what happens in the latest round of negotiations he maintains his advantage. A presidential meeting should only come after an agreement has been reached, not the other way around.

Which begs the question, why did Trump commit to meeting Kim before his Special Envoy, Stephen Biegun, finished negotiating any of the numerous and contentious details? After Biegun returned from Pyongyang Trump officially announced his Feb. 27-28 visit to Hanoi, but preparations were already underway for that visit. One can only surmise that Kim understood he had the advantage.

Up for grabs are a litany of economic, political, and military gives including the minimal lifting of some U.S. sanctions, a declaration to formally end the Korea conflict, establishing an interest section or Embassy in Pyongyang, and at the extreme, a reduction in U.S. troops and/or weapons systems on the peninsula.

Additionally Trump has already said he wants a Nobel Peace Prize for his efforts, but his vanity should not drive what may amount to a bad deal.

For any of these U.S. concessions, Trump must insist on full, verifiable denuclearization. Otherwise the bait-and-switch game will just go on while North Korea continues to build its arsenal. Transparency has always been the problem, and so far Kim has shown no more propensity to open his reclusive nation than his father or grandfather before him.

That may change if Kim is more interested in massive personal wealth and global recognition that followed Chinese and Vietnamese reform and opening. If so, Trump must press hard on eliminating the North’s ability to make and weaponize fissile material.

The worst thing that could happen in a real estate deal gone bad is bankruptcy. But an impulsive approach to high-stakes diplomacy with North Korea could mean risking regional and U.S. national security.


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Asia Tensions Reach New Highs

North Korea’s rounds of provocation tempered with inaction continue to challenge regional powers. Sanctions appear to have had little affect on the new regime, but perhaps some additional pressure from China, one of their last remaining allies, has put the fear of complete isolation into the minds of Pyongyang’s leadership. Now that the new Kim has shown his father’s generals he’s no push over maybe he’ll move on to the real work at hand – the economy. After closing Kaesong (one of the few legitimate hard currency earners for the regime) the North now wants to talk with South Korea about re-opening the joint project.

Nothing coming out of the DPRK should be taken at face value, of course – the propaganda machine sounding war drums, or conciliatory economic gestures. The regime still has a horrible human rights record, continues to pursue a nuclear capability and remains a card carrying member of the pariah states club (including Iran and Syria), but in the world of international diplomacy, where there’s more gray than black and white, it’s high time for some serious talk. Bilateral, multilateral, whatever works. Talk is cheap and it isn’t a reward for rattling the region, but it may just create an opening for Kim to try out a new tactic – engagement. Missile firings along with the capture of an American citizen have failed to gain him the audience he wants, except for a repeat visit by Dennis Rodman scheduled for August.

China’s New Law of the Sea – but Might Still Doesn’t Makes Right

Meanwhile, China’s “take first, ask questions later” approach to territorial disputes in the shared waters of East and Southeast Asia continues to rankle its neighbors. We’ve reached a new low in regional relations. What started out as fishing boat bravado has escalated dramatically into full-scale military involvement. Now the cat and mouse game plays out around the Senkaku/Diaoyutai islands with Japan upping the ante, and military budget, to confront an increasingly aggressive Chinese navy. Southeast Asia hasn’t fared much better. No agreement has been reached, despite diplomatic overtures for two years running, on how to resolve overlapping claims now completely subsumed under China’s self-claimed control.

Risks of accidental firings aside its now clear to everyone in the region that China’s “peaceful rise” has given way to a long rumored, now actualized policy of regional dominance. It might not be the Cold War part 2, but it certainly looks a lot like back-to-the-future with a new Chinese imperial sense of historical retribution for past colonial ills. The rest of the world has since moved on. Perhaps the “China Dream” should include a broader vision of regional integration without any one country needing to dominate.

Unfortunately for Asia the moment for a regional security architecture passed decades ago (about when NATO was formed and former aggressor states like Germany sat down with Britain and France). Now it’s left to the U.S. and its Asia pivot to cobble together long historical “frenemies” into a semi-cohesive whole. That attempt runs head long into China’s economic leverage that so far successfully divides the region (and ASEAN in particular) by holding trade hostage (from Philippine fruit imports that suddenly show signs of infestation to rare earth metals vital to Japan’s high-tech industry).

Countries are already trying to diversify their export markets and sourcing while the infinite promise of a large and expanding Chinese market comes under new strains. If cooler heads prevail, then the benefits of a cooperative future and greater regional integration will win out over a divisive re-playing of threats and counter-threats in the age-old struggle for power and control.

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Red Lines in the East China Sea

East China Sea[Short version on CNN GPS]

In many parts of the world the long curve of history continues dragging nations back to the brink of war. Take Northeast Asia where recent tensions between China and Japan risk erupting into conflict. The Senkaku/Diaoyu islands, home to rocky outcroppings and resource rich waters nearby has become the latest potential flashpoint.

What started as a manageable confrontation in the East China Sea between Chinese fishing vessels and Japanese Coast Guard cutters has now escalated well beyond natural resources. Chinese fighter jets have shadowed Japanese planes in the skies above. Japan has threatened to fire warning shots. A hawkish Chinese general has warned that would be their only shot while Beijing announced plans to formally survey the islands. The U.S. has weighed in against any unilateral action that challenges Japan’s administration of the area.

If there’s a red line where rhetoric and posturing turns into open conflict (intended or otherwise) we’re close to crossing it.

Neither side shows any signs of compromise with Shinzo Abe back as Japan’s Prime Minister, and Xi Jinping inheriting an increasingly nationalistic country in transition. In a January International Crisis Group report  Stephanie Kleine-Albrandt notes that:

“While neither Beijing nor Tokyo desires a major conflict, their tacit agreement to set aside the dispute has been broken and there is deepening pessimism on both sides over the prospects of a peaceful settlement.”

As Bill Bishop points out in his daily Sinocism report, stepping back from the brink becomes increasingly difficult.

“China’s relentless media campaign since the summer, the anti-Japanese teachings so prevalent in the Chinese education system and the imperative of any new leadership to not look weak, especially toward the Japanese, could mean that if an accident did occur, especially one that resulted in the death of a Chinese citizen, Beijing might have so painted itself into a corner that it would have respond with force…”

The spiral of escalation, once started, can be difficult to unwind including any real shots fired by the increasing number of naval ships (both Chinese and Japanese) now plying the nearby waters or jets flying overhead. Similarly if either side attempts to land on the islands the other side will counter with a landing of their own. Calls for retaliation will be hard, if not impossible, to resist.

Complicating this current territorial flare-up is a centuries old rivalry. An economically emboldened China, with a military budget to match, has begun reasserting itself as a regional power. For centuries it was the trading hub of the region and an imperial power coercing its neighbors into paying annual tribute for peace and security. To be fair, the long arc of Chinese history also includes imperial dynasties that eschewed regional intervention – a fact currently lost on current policymakers.

Schools to this day continuing painting the country as a weak, aggrieved nation. The lesson: China must defend itself against a mythical recurrence of exploitation at the hands of foreign powers. These slights of history dating back to early 1900’s treaty ports (a time of unequal trading relations) are re-lived as if they were yesterday. Yet, the more recent reign of Mao Tse Tung driving the country into devastating famine, financial ruin and global isolation gains barely a footnote.

The cognitive dissonance between present day reality: China as the world’s second largest economy, with one of the world’s largest militaries and more than equal inclusion in the global trading system; and views of a distant, weakened past continue influencing China’s foreign policy. In Japan as well, historical revisionists continue celebrating war criminals at Yasakuni Shrine. The current administration has also contemplated changing its account of the use of sex slaves during World War II.

On a limited but positive note Japan sent, and China received an official delegation to discuss the territorial dispute. Former Japanese Prime Minister Hatoyama visited China’s Nanjing Massacre memorial which marks Imperial Japan’s World War II atrocities. And U.S. Assistant Secretary of State for East Asia and the Pacific Kurt Campbell has been making the regional rounds calling for dialogue.

For now at least lines of communication remain open while both sides try to reign in their political extremes. Space for rational discussion, however continues shrinking under the pressure of nationalistic vitriol. If push comes to literal shove the damage to the region and international trade could be devastating.

Conflict has never been pre-ordained. It is the result of decisions, by people, to follow a course into crisis. New histories can and have been forged. Consider the U.S.-Vietnam relationship of today versus forty years ago. Trade has replaced hostilities and Americans travel to tourist destinations in straw hats rather than as soldiers in helmets. The past should not be forgotten, but neither should it be allowed to replay itself in an endless, self-destructive loop. Hopefully that’s not a lesson lost on Beijing and Tokyo in 2013.

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Down but Not Out – Japan’s Economy in Recession

Down but Not Out – Japan’s Economy in Recession

While Europe’s troubles continue making headlines Japan’s economy slipped back into recession in late 2012 with barely a mention. Why the difference? Perhaps the island economy shows no hope of recovery after twenty plus years of stagnation, its quiet fade into economic history a near certainty. That would be a decidedly misguided interpretation.

After the go-go years of the “Japan that could say no” (it never really did) and buying sprees in the U.S. including Rockefeller Center sold at a loss several years later, the land of the rising sun entered a period of relative economic darkness. That didn’t mean there wasn’t a ton of money circulating within and increasingly from Japan. Growth stalled but the country itself remained rich. Japan, still the world’s third largest economy  is expected to keep its strong position with a solid $6 trillion in estimated GDP according to the IMF.

Economic stagnation is hardly news for Japan, but coverage has steadily declined largely eclipsed by China’s seemingly unending rise. Add to that the Kabuki-esque political drama where Prime Ministers enter and exit the stage with alarming speed (roughly every 1-2 years) and government paralysis casts a long dark shadow over growth. The latest major economic debate centered on a consumption tax while government debt has risen to over 200% of GDP.

Demographics don’t help either. Alexandra Harney in the New York Times details Japan’s rapidly aging population and its effect on  future economic trajectory (spoiler alert – it doesn’t look good.) Unless there’s a baby boom, immigration increases dramatically to make up for the worker gap or productivity rises there will be a skills shortage.

An increasingly insular Japan also means robust debate has stagnated. In decades past the number of Japanese studying abroad rose considerably. These days it has been reduced to a trickle. Life, it turns out, isn’t so bad in declining Japan. Crime rates are low. The food is good, and public services abundant. A culture of perfectionism keeps the subways running on time and the streets clean. You’d be hard pressed to find more efficiently running cities anywhere else.

Japan’s middle class though has taken the slowdown exceptionally hard over the last several decades. Life-time employment, at one point an unbreakable social contract, has almost ceased to exist with replacement contract work yielding lower salaries and little to no benefits. Housing costs remain high and most singles, even well into their thirties, live at home with their parents to save on rent.

All this might change if a culture of entrepreneurship and an end to the slavish demands of late night corporate culture spreads.

A glimmer of sunlight  has emerged with Rakuten’s founder Mikitani Hiroshi’s creation of an alternate industry lobbying group made up entirely of new economy companies. The Japanese Association of New Economy (abbreviated in Japanese to Shinkeiren) aims to bring innovative policy solutions focusing on the needs of small fast-growing companies. This is a marked departure from the strategy of Japan’s biggest, and most powerful business lobbying group Keidanren representing the country’s conglomerates.

Time will tell if the new group gains any traction with national level policies. If past is prologue they’ll need deep pockets to influence Diet members mostly concerned about occupying seats rather than planning for a brighter future.

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Photo: Tokyo in spring time. BK.

Asia Integration Leaves U.S. Behind

Asia Integration Leaves U.S. Behind

You can’t blame them for trying. U.S. trade negotiators have been at it for years but conclusion of the Trans-Pacific Partnership (TPP) keeps receding over the horizon. A June deadline was floated and then passed quietly by. The end of 2012 came next (here and almost gone). Japan and possibly even Korea thought of joining when news broke that Mexico and Canada, already NAFTA members with the U.S., were signing up. Neither has committed.

Meanwhile, Asia is moving ahead with its own far less stringent version of free trade in two proposals: the Regional Comprehensive Economic Partnership (RCEP) launched at the annual ASEAN gathering in late November; and a trilateral China-Japan-South Korea free trade agreement announced in May (negotiations started in November.)

Holding a press conference and successfully completing negotiations are, of course, two very different animals. No doubt recent regional tensions over disputed islands in the East and South China Seas involving mostly China, Japan, Vietnam and the Philippines make any agreement extremely difficult to achieve. Still, all countries involved appear to be forging ahead despite the obstacles in their way.

Asia has taken a decidedly different approach regarding free trade in the region from the U.S. Starting with the lowest common denominators (goods) and through successive agreements working their way up the value-added ladder (limited, then expanded services, broader non-tariff barriers to trade, rules of origin, etc.) This incremental approach, especially when economies at significantly different levels of development are involved, has worked especially well for both China and South Korea in their agreements throughout the region.

The U.S. on the other hand seeks “high standard” agreements encompassing a variety of non-tariff barriers to trade, intellectual property rights protections and labor and environmental standards, all in one comprehensive Free Trade Agreement (FTA).

These are noble goals and of particular interest to U.S. companies who have an enormous number of laws regulating their business at home and abroad. For many with extensive intellectual property to protect the graveyard of international business is littered with the remains of products that have been copied and sold at lower prices. To truly level the playing field they need the additional protections offered in high-standard FTAs.

The problem lies in strategy, not substance. This all-or-nothing approach leaves potential deals on the table while U.S.-based firms continue losing out to their counterparts based in Asia. U.S multi-nationals are increasingly incentivized to locate production overseas where they can source and sell within a tariff-free zone. Even a few percentage points off duties can have a tremendous effect on profitability.

No solution to this problem is in sight. U.S. trade policy has focused almost exclusively on the TPP and purely defensive measures (e.g. WTO cases to remedy unfair trade practices). Asia meanwhile forges ahead. When RCEP comes to fruition India, China, Japan, South Korea, Australia, New Zealand and the ten countries of ASEAN would become one integrated free trade zone. If current strategy doesn’t change soon (or the TPP keeps being delayed) the U.S. won’t even be on the map.

 

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Photo: Yang Shan Deep Water Port, China.

Asia by the Numbers

Asia by the Numbers

(UPDATE 10/8/12: Both the World Bank and Asian Development Bank have lowered 2012 growth forecasts for China and Asia.)

Remember those halcyon days of unending Asia growth and the re-birth of a Silk Road century? Cherish the memories.

Nothing but negative news keeps flowing out of regional giants these days. Expert debates rage on about China’s hard vs soft landing while recent data just keep disappointing. HSBC China Manufacturing Purchasing Manager’s Index wallowed below the critical 50 threshold again. Political intrigue aside, China’s next generation of leaders are facing significant economic headwinds and challenges unknown to their predecessors.

From the September 29th HSBC Purchasing Manager’s IndexTM:

 

“Data in September signalled a stronger decline in Chinese manufacturing output, as the volume of new orders fell for the eleventh consecutive month. New export orders declined at the sharpest rate in 42 months amid reports of weak international demand…”

 

 

Historical numbers show a long decline since late 2010 (and a wild ride starting with the 2008 U.S.-led financial crisis).

Japan’s Tankan business sentiment survey showed more general weakness (negative views of business for the past 12 months and worsening in the last quarter). Unsurprising considering the weak overseas demand, yen troubles making exports more expensive and now troubles with China over the East China Sea. ANA airlines reported 40,000 cancelled flight reservations for September through November sparked by dueling territorial claims and violence on the mainland targeting Japanese factories, stores and restaurants.

Add to that Australia’s struggles with shrinking exports and a surprise Reserve Bank of Australia rate cut to 3.25% (Philippine’s central bank has cut rates as well), Vietnam’s slowdown, and rising South Korean consumer debt.

With the U.S. caught in a “slow-growth” trap of its own making and greater Europe still flirting with renewed recession, trade is now a back seat driver for most of Asia. The slowdown in China is especially concerning for southeast Asia’s and Australia’s resource-intensive exports since China became their main market over the past several years.

Prospects aren’t all negative of course, though finding bright spots in an increasingly overcast night’s sky is tough. Indonesia keeps generating solid six plus percent growth. High investment and sustained consumer demand (accounting for over 32.9% of GDP last quarter ending in June) are driving economic expansion.

Jakarta has so far managed to avoid the massive over-building in China which will drag down the middle kingdom for some time to come. The infrastructure needs throughout the island nation of over 200 million people, if well managed, might provide sustained growth for a while.

Prognosis: Substantial western growth isn’t coming back anytime soon. For Asia to prosper domestic demand (read: consumers) has to expand and that means further market liberalization and access to capital that has often been denied, mainly for political reasons.

The China model of controlled growth and U.S.-style unchecked market excess both have their discontents, but policies favoring middle class growth and expansion remain key. Balance will be the buzzword going into 2013.

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Occupy East China Sea – China, Japan Face Off Over Disputed Islands

Occupy East China Sea – China, Japan Face Off Over Disputed Islands

Chinese fishing fleets continue pressing their claims to the resources of a disputed island chain in the East China Sea while Japan considers what it can do with a Coast Guard fleet to protect their administrative control. The Senkaku/Diaoyu or Diaoyu/Senkaku island debate rages on with an occupy movement in full swing.

With the Japanese government’s decision to buy the islands from its private owner, rather than let right–leaning Tokyo governor Ishihara do the same (and escalate tensions further), a wave of anti-Japan protest spread in China. In addition to the anticipated demonstrations against Embassies and consulates, large crowds looted, set fires and attacked civilians (Japanese and Chinese, some in Japanese made cars).

The question over sovereignty of the islands has revolved around two main arguments from China –  historical precedent and geographical rights. Neither holds much sway in the international community of today rather than say several hundred years ago when imperial dynasties ruled.

For the history defense, China claims the islands were never Japanese territory and show up on several ancient maps of the region. History converges around 1895 after the Sino-Japanese war when the Japanese government began to control the islands. Han Yi-Shaw, guest writing in Nicholas Kristof’s New York Times opinion blog dives deep into the historical record and concludes:

“Collectively, these official documents leave no doubt that the Meiji government did not base its occupation of the islands following “on-site surveys time and again,” but instead annexed them as booty of war. This is the inconvenient truth that the Japanese government has conveniently evaded.”

Whatever the reasons espoused by Japan’s rulers at the time, war was (and in some places continues to be) the main arbiter of establishing control over physical territory. If history was the gauge to judge international decisions over territorial disputes Mongolia could claim rights over China, India and vast swathes of the Middle East and Europe. Iran would have overlapping claims from their Persian empire. Mexico re-gains the American Southwest, but perhaps Spain, France and Britain would like to carve out the rest of the U.S.

Historical precedent also shows Japan did administer them, unchallenged, then lost them in World War II to the U.S., and then re-gained them afterwards. If China doesn’t recognize the end of war agreements (to some of which they were not a signatory) then far more lies in question than just a few islands.

Geography also plays a weak role. China is looking to the UN Convention on the Law of the Sea (UNCLOS) to arbitrate a claim that the islands belong to their continental shelf. Since they lie outside of the standard 200 nautical mile limit the government is setting in motion a review to extend the range of the shelf.

While this is certainly better than waging war to win back the islands based on an over one hundred year old conflict UNCLOS doesn’t settle national sovereignty issues, it attempts to resolve conflict over exclusive economic zones.

Neither historical precedent nor length of continental shelf is going to ultimately win favor with the international community or gain the credibility China wants for its claims over these islands. Maintaining the status quo by both sides has been the accepted norm. Increased interest in potential natural resources, rising nationalism on both sides, and China’s rapid military expansion threaten that tentative peace. Japan’s purchase from a private citizen may appear to upend the status quo, but not necessarily. It largely prevented more hawkish factions from attempting to fire up nationalistic sentiments.

For now both sides will need to look strong domestically without crossing a red line into open conflict. As long as neither country builds on the island, begins drilling operations at sea or aggressively restricts access to fishing grounds, a tentative calm can be maintained. The only peaceful way to resolve the dispute is for both sides to negotiate directly. Otherwise we’re back to the days of might makes right in Asia, and that didn’t go well at all.

Photo: Wikimedia Commons