East Asia Forum http://www.eastasiaforum.org Economics, Politics and Public Policy in East Asia and the Pacific Tue, 28 Apr 2015 12:00:43 +0000 en-US hourly 1 Carrot and stick tactics fail to calm China’s ethnic antagonism http://www.eastasiaforum.org/2015/04/28/carrot-and-stick-tactics-fail-to-calm-chinas-ethnic-antagonism/ http://www.eastasiaforum.org/2015/04/28/carrot-and-stick-tactics-fail-to-calm-chinas-ethnic-antagonism/#comments Tue, 28 Apr 2015 12:00:43 +0000 http://www.eastasiaforum.org/?p=46077 Author: James Leibold, La Trobe University

For centuries the Chinese state has governed its distant ethnic frontiers with both carrot and stick. In the past, emperors proffered ‘imperial grace’ (ēn) for those ‘barbarians’ willing to submit (at least nominally) to Chinese dominion, while reserving the right of ‘imperial might’ (wēi) for those who resisted. The ēn/wēi stratagem continues in the People’s Republic of China (PRC) today.
But recent unrest in the Tibetan Autonomous Region, the Xinjiang Uyghur Autonomous Region and elsewhere reminds us of the inherent limits of these tactics of paternalistic co-option and repression.

Over the past decade China has witnessed an ugly spate of ethnic protest and violence, leading some to prognosticate a ‘ticking time bomb’
 of inter-ethnic hostilities.

In 2008, Tibetan areas erupted in protest and
 a year later nearly 200 people were brutally murdered in a bloody street riot in the Xinjiang regional capital
 of Ürümqi. Since coming to power in 2012, President Xi Jinping has faced a troubling wave of ethnic and religious embedded violence that has left
 nearly a thousand people dead. More worrying for Chinese leaders, the bloodshed is now spreading into major urban areas in China proper. The 2013 suicide car bombing in Tiananmen Square and 2014 Kunming train station attack, in particular, brought these once distant concerns to the very centre of power and public attention.

Yet these incidents are more cyclical and anomalous than systemic and incendiary. The increased density of transport and communication links engenders new spaces for ethnic misunderstanding and conflict in today’s China, though it is impossible to say with any level of empirical certainty whether inter-ethnic relations are any worse (at a national level, at least) than they were a decade ago, let alone during the tumultuous Cultural Revolution.

In managing these ‘ethnic contradictions’, the ruling Chinese Communist Party (CCP) relies on the same carrot and stick tactics as previous Chinese regimes: co-opting minority elites, encouraging and monitoring compliance at the grassroots level while eradicating pockets of resistance with brute force.

Nearly 7 per cent of all ethnic minorities in China are members 
of the CCP and many more are directly employed by the state.
While most hold largely minor or ceremonial positions, some — such
 as the new director of the National Energy Agency, Nur Bekri, and the head of the Secretariat of the CCP Central Committee, Yang Jing — are in positions of real authority. Ordinary minorities enjoy a range of preferential state benefits, such as massive fiscal transfers and investment in minority regions; employment quotas in the public sector; bonus points on the university entrance exam; certain exemptions from family planning restrictions; and the right to preserve (within limits) their own cultures, languages and religions. Many minorities live in semi-autonomous administrative units and largely segregated ethnic communities.

Yet those that dare to openly
 resist CCP rule are efficiently
 and mercilessly silenced through
 the extensive domestic security apparatuses and judicial/extra-judicial legal system. China spends more on domestic security than it does on national defence. And the disparate punishments meted out to the Han intellectual Liu Xiaobo (11 years in prison for ‘inciting subversion 
of state power’) and the Uyghur economist Ilham Tohti (life in prison for ‘separatism’) highlight the different ethnic yardsticks for political loyalty in the PRC.

This structure of ethnic clientelism buys a begrudging acquiescence and conformity among most ethnic minorities, but the lack
 of social cohesion (especially in Tibet and Xinjiang) impedes multi-ethnic interactions, inter-ethnic trust and the sense of shared national belonging necessary for a healthy civil pluralism. The result is a vexing nest of ethnic antagonisms that continues to serve as a significant yet manageable irritant for party leaders. China’s ethnic troubles are nothing like those of Nigeria, Burma, Sri Lanka and other ‘severely divided societies’, where leading expert Donald Horowitz finds endemic ethnic conflict.

Despite their strategic distribution in resource-rich border regions, China’s ethnic minorities are far too small in number (about 114 million, or less than 9 per cent of the total population) and peripheral to the chief concerns of the party-state to pose an acute policy challenge. In fact, the divisions among those classified as part of the Han ethnic majority (along regional, cultural, linguistic, class and religious lines) pose a far more significant threat to CCP rule than the rift between the Han and non- Han minorities. The party-state might collapse one day but a USSR-style ethno-territorial implosion is highly unlikely.

Equally important, the coercive power and reach of the party-state ensures a level of stability that
 makes recent metaphors — Xinjiang as China’s Chechnya and Tibet as China’s Palestine — highly misleading. Like other multi-ethnic societies, China faces a range of challenges in managing ethnic diversity but nothing on the order of an ‘ethnic crisis’.

In the past, a mere 20,000 officials governed the vast Qing empire; today, over 85 million CCP members and a further 10 plus million security personnel patrol nearly all aspects of social life. This far more intrusive and panoptic form of governance keeps a fairly secure lid on any immediate sources of instability while patching over longer-term social and political fragilities.

At present, ethnic troubles are largely isolated to the remote and sparsely populated regions of Xinjiang and Tibet. Here inter-ethnic trust is in short supply, with a strong sense of ethnic, religious and physical difference. In the past, these regions experienced long periods outside 
the orb of Chinese influence. And today, many young Uyghurs and Tibetans struggle to adapt to a rapidly modernising society dominated by the Han Chinese language and culture.

In sum, the Chinese party-state expends considerable resources in an effort to engineer ‘ethnic harmony’.
 Its authoritarian controls, ironically, attenuates ethnic contradictions in the short term, even if they erupt from time to time. Yet the lack of genuine openness, equality and grassroots community building forestalls the conditions required for a robust, inclusive and enduring ethnic pluralism.

James Leibold is a Senior Lecturer in Politics and Asian Studies at La Trobe University. He is the author of Ethnic Policy in China: Is Reform Inevitable? (Honolulu: East-West Center, 2013). This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Asia’s Minorities‘.

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India’s renewed push into the Indian Ocean http://www.eastasiaforum.org/2015/04/28/indias-renewed-push-into-the-indian-ocean/ http://www.eastasiaforum.org/2015/04/28/indias-renewed-push-into-the-indian-ocean/#comments Tue, 28 Apr 2015 00:00:15 +0000 http://www.eastasiaforum.org/?p=46069 Author: Rupakjyoti Borah, India

Indian Prime Minister Narendra Modi’s recent visit to Seychelles, Mauritius and Sri Lanka reflects New Delhi’s changed foreign policy priorities. It signals that India is no longer willing to be outmanoeuvred in the Indian Ocean region — its strategic backyard.

Modi’s visit was also part of the prime minister’s efforts to reach out to India’s neighbours. This started with his inauguration when he invited the heads of state of all the member nations of the South Asian Association for Regional Cooperation.

Modi was also scheduled to visit Maldives during this trip. But it was dropped from his itinerary in a not-so-gentle rebuke of the Maldivian government, which had arrested the former Maldivian President Mohammed Nasheed. New Delhi considers Nasheed to be pro-India. Nasheed has now been convicted on a terrorism charge and sentenced to 13 years in prison, showing the limits of India’s influence.

On the first leg of his trip to Seychelles, Modi unveiled the first Indian-built Coastal Surveillance Radar System. And, in a very significant move, Assumption Island in Seychelles was leased to India. In Mauritius, Modi commissioned an India-built offshore patrol vessel, Barracuda, into the Mauritian National Coast Guard. This will help Mauritius patrol its vast exclusive economic zone.

But it was on the last leg of his trip to Sri Lanka that Modi gained the most attention. It was no secret that under former president Mahinda Rajapaksa, Sri Lanka was titling towards Beijing. This has been exacerbated by the fact that no Indian prime minister had paid a visit to Sri Lanka in the last 28 years. But the India–Sri Lanka relationship has begun to change following the election of President Maithripala Sirisena.

Sirisena made India his first foreign destination after taking office. During his visit India and Sri Lanka signed a civilian nuclear deal.

During Modi’s visit to Sri Lanka, he announced that India would be providing a new US$318 million line of credit to Sri Lanka to upgrade its railway infrastructure. He also paid a historic visit to Jaffna city in Sri Lanka’s Tamil heartland. During the Sri Lankan civil war, India sent troops — the Indian Peace Keeping Force — to Sri Lanka and the Tamil heartland had seen heavy fighting.

In the past, central governments in India have found it difficult to articulate a clear foreign policy towards Sri Lanka. Shaky coalition governments in New Delhi have relied on support from political parties in the south Indian state of Tamil Nadu for their survival. They have therefore found it extremely difficult to take a strong stand on issues related to Sri Lanka, which is home to a significant Tamil minority. As Modi leads a majority government in New Delhi, he can afford to make strong decisions on Sri Lanka without succumbing to pressure from interest groups in Tamil Nadu.

One of the reasons why India has reached out to these Indian Ocean nations is China’s Maritime Silk Road initiative, which is seen by many in India as an attempt to undercut New Delhi’s influence in the Indian Ocean region. Beijing has aggressively courted countries like Sri Lanka, the Maldives and Seychelles in the past. The Maldives are viewed as having openly snubbed India. For example, the Maldivian government overturned a contract to expand its international airport in Male that had been awarded to an Indian infrastructure company and later gave the contract to a Chinese company.

While Modi’s visit has been successful, there is no denying that the Indian Ocean will be a new playground between New Delhi and Beijing. India will no longer have the luxury of being the unchallenged power in the region (with the sole exception of the United States). This will call for some nimble-footed diplomacy from New Delhi. Beijing has asked India to collaborate in the Maritime Silk Road initiative, a move that has put New Delhi on the diplomatic back foot.

But New Delhi’s problems do not seem to have ended. Many Indian Ocean nations are wary of aligning with either India or China and will therefore try to get the best out of both of these powers. India’s reticence in reaching out to these countries in the past led them to open up to Beijing. This trend will continue as Beijing, flush with both economic and military muscle, tries to secure sea-lanes to carry minerals and energy resources from the Middle East and Africa to China.

Rupakjyoti Borah is a former Visiting Research Fellow at the Japan Institute of International Affairs.

A version of this article was first published here by Global Asia.

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China needs to strengthen its AIIB balancing act http://www.eastasiaforum.org/2015/04/27/china-needs-to-strengthen-its-aiib-balancing-act/ http://www.eastasiaforum.org/2015/04/27/china-needs-to-strengthen-its-aiib-balancing-act/#comments Mon, 27 Apr 2015 13:02:39 +0000 http://www.eastasiaforum.org/?p=46064 Authors: Kai He, University of Copenhagen; and Huiyun Feng, DIIS.

The Asian Infrastructure Investment Bank (AIIB) has become part of Xi Jinping’s ‘Chinese Dream’ of national rejuvenation. The United States’ failure to block other developed economies from joining the AIIB seems to have brought this part of the ‘Chinese dream’ closer to its realisation. But it is way too early to celebrate. A bigger AIIB does not necessarily mean a better one. Beijing must prepare to play an institutional game with other members inside the AIIB.

More members — especially from developed countries — will dilute China’s influence inside the AIIB. China originally held 49 per cent of total capital, making its leadership undisputable. But as more developed economies join as founding members, China’s total capital share will decrease. This opens up the challenge of institutional balancing.

Institutional balancing refers to the diplomatic strategies that allow states to rely on institutions to constrain other members’ power and influence. There are two types of institutional balancing: exclusive institutional balancing and inclusive institutional balancing. The former refers to excluding a target state from the designated institution, and using institutional unity to alienate and pressure the target state. The latter refers to including the target state in the institution, but using the institution’s rules and norms to constrain and shape its behaviour.

The AIIB can be seen as China’s exclusive institutional balancing strategy against the United States. The success of the AIIB might not mean the end of US leadership but it will definitely steal the United States’ thunder in the global financial system. But China will face inclusive institutional balancing efforts from other countries, especially the UK, Germany, France and Australia.

China will not be the one who sets all the rules and norms in the AIIB. The UK joined as a founding member to ‘ensure that the AIIB operates in a transparent way’. It is prepared to say no if the AIIB governance does not meet the ‘high standards of the World Bank and the regional development banks’ — a concern the United States has openly expressed. There will likely be internal fighting between China and other developed countries over agenda-setting, rule-making and decision-making in the AIIB.

While institutional balancing and competition might not be a bad thing for the healthy development of AIIB in the long run, the short-run institutional challenges will test China’s capability for leadership in the global financial system.

The AIIB seems to be part of Xi’s new foreign policy of ‘striving for achievement’, which sets him apart from China’s previous ‘low profile’ policies. The AIIB is closely linked to China’s ‘one belt and one road’ development strategy. This refers to the New Silk Road Economic Belt, which links China with Europe through central and western Asia, and the 21st Century Maritime Silk Road, which connects China with Southeast Asia, Africa and Europe. China has pledged US$40 billion to a Silk Road Fund for the development of ‘one belt and one road’.

But China has not yet declared how the AIIB and the Silk Road Fund interact, nor how the AIIB will coordinate its relations with other multilateral financial institutions such as the Asian Development Bank and the World Bank. The intra-institutional difficulties coupled with potential inter-institutional conflicts might drag China into an endless game of negotiations, bargaining and compromises. This might eventually leave the AIIB inefficient and meaningless. And if the AIIB fails or remains stagnant, China will encounter both reputational damages and economic losses.

China needs to prepare for the potential challenges from other states inside the AIIB. It should invite experts from leading financial and economic institutions to set up agendas, rules, procedures and even norms according to mutually agreed international standards. Good governance and transparency is the key to the success of any financial institution. If the AIIB is designed to be an investment bank, China should let the market decide how it operates. China will gain more soft power if it respects the rules, norms and procedures negotiated with other members inside the AIIB.

China will not simply accept what other countries want for the AIIB lying down. But the real test for China’s future leadership in global governance is to find a balance of interests among different parties, especially between rich and poor countries. China should lead the AIIB to work with (rather than against) existing global institutions to enhance infrastructure and boost development in the Asia Pacific. This way, the AIIB will not only fulfil Xi’s ‘Chinese dream’, but also turn the first page of the ‘Asian century’.

Kai He is Associate Professor of Political Science at the University of Copenhagen. He is the author of Institutional Balancing in the Asia Pacific: Economic Interdependence and China’s Rise (2009).

Huiyun Feng is senior researcher at the Danish Institute for International Studies. She is the author of Chinese Strategic Culture and Foreign Policy Decision-Making: Confucianism, Leadership and War (2007).

Kai He and Huiyun Feng co-authored Prospect Theory and Foreign Policy Analysis in the Asia Pacific: Rational Leaders and Risky Behavior (2013).

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Mr Abe in Washington http://www.eastasiaforum.org/2015/04/27/mr-abe-in-washington/ http://www.eastasiaforum.org/2015/04/27/mr-abe-in-washington/#comments Mon, 27 Apr 2015 02:00:58 +0000 http://www.eastasiaforum.org/?p=46060 Author: Peter Drysdale, East Asia Forum

Japanese Prime Minister Shinzo Abe’s week-long visit to the United States this week and his speech on Wednesday to a joint session of the US Congress represent an unusual opportunity for Japan’s diplomacy. Abe is the first Japanese prime minister to address a joint meeting of Congress. His visit coincides with Washington’s ambition to deliver on the pivot to Asia, through enhanced security cooperation and the negotiation on a new trade pact, in both of which Japan is the key party, and the need for a closer alignment of strategy in responding to China’s growing influence in Asia. There is a powerful alignment of interests and opportunity.

Secretary of State John Kerry stands next to Japanese Prime Minister Shinzo Abe and Abe's wife Akie Abe for a photograph in front of Kerry's residence in Boston, 26 April 2015. Abe has arrived in the US for a week-long visit. (Photo: AAP).

The prospects for strong outcomes on most fronts now seem good, despite the high and uncertain drama unfolding in the lead-up to the visit in Washington and on this side of the Pacific. For one thing, the hearings on ‘fast track’ needed to give authority to President Obama in negotiating the conclusion of the Trans-Pacific Partnership deal have moved into high gear and, with strong (and unusual for Obama) Republican Party backing, are gathering momentum. Though unlikely to be ratified by Congress before Abe’s visit, the bill has easily passed its first committee hurdle. Japanese and US negotiators are signalling that bilateral negotiations are on the cusp of conclusion though Abe is not going to announce this prior to the completion of ‘fast track’ authority since it would open up the opportunity for more US congressional bargaining. For another, China–Japan relations have picked up, despite the most recent and egregious textbook scandal in Japan. And Abe met with President Xi Jinping of China on the sidelines of the Bandung Conference in Indonesia last week, in a meeting that further eases the tensions in the relations between the two Asian powers.

Many things could still go wrong.

It is the context of Abe’s visit, and its proper management, that is critical to success. This year is the 70th anniversary of Japan’s defeat in World War II and the success of the visit not only depends on how well the weighty contemporary interests in the relationship are managed but also on how Abe confronts the history of Japan’s wartime relations with its neighbours.

His speech to a joint sitting of the Australian parliament last year is said to be the model for how Abe might approach this delicate issue with the US Congress. On that occasion, early in the speech, Abe referred to Kokoda and Sandakan, two dark events in World War II in the eyes of his Australian audience. Kokoda was a brutal battle between Australian and Japanese forces in Papua New Guinea on Australia’s doorstep; only six among hundreds of Australians survived the death marches from Sandakan in Borneo.

Abe spoke (in English with a slightly different official Japanese text) of bright young futures cut short, offered his ‘sincere condolences’ and expressed gratitude for the forgiveness that had been extended by Australians to the people of Japan. There is a similar story that can be told to US Congress and Americans about Bataan, Guadalcanal and Pearl Harbour and a relationship of reconciliation.

Yet the Canberra model is far from adequate under scrutiny on the global stage in Washington where America has to shape its relations with China, South Korea and the rest of Asia, not just with Japan. The United States cannot afford, as Ben Ascione argues, to be held hostage across Northeast Asia to the Abe administration’s revisionist instincts. That is why critical observers, not only in Beijing and Seoul but also in Washington, will rightly be looking for something beyond the Canberra model. In this, the context of the impending anniversary of World War II is everything.

There are undoubtedly growing numbers of Japanese who subscribe to the view that is there is no apology for Japan’s wartime misdeeds that would satisfy China and South Korea. On this score, Americans and Australians are viewed in a somewhat different light. If Americans like Australians hear a sincere individual apology, this thinking goes, there needs to be less defensiveness by Japan in the 70th anniversary statement on 15 August.

This is a disingenuous perception of how Japan’s relations with its region play into American (and Australian) as well as broader Asia Pacific interests. If Abe’s remarks in Washington are cast only with his immediate American audience in mind, it will leave not only Japan but also the United States with substantial problems in framing US–Japanese security and economic cooperation in their broader Asian strategic context. Abe’s speech to Congress needs to provide a clear signal to his end-of-war commemorative statement if it is to lift Japan’s diplomacy beyond the congressional moment.

Just what is the issue over wartime apology between Japan and its neighbours, particularly China and South Korea?

Tessa Morris-Suzuki gets to the nub of it in her heuristic analysis of Japan’s apology burden in this week’s lead essay in which she explains that the anniversary for solemn reflection is ‘at risk of degenerating into a word game’.

‘Abe faces a dilemma’, Morris-Suzuki points out. ‘He is a fervent nationalist who has pledged to “restore Japan’s honour” and denounced what he and his allies term “masochistic” dwelling on wartime misdeeds. But he is also a passionate advocate of the alliance with the US and knows that he must satisfy a US administration deeply concerned about worsening relations between Japan and South Korea’. It should be added that the United States is also properly worried about unjustifiable provocation of China and broader regional destabilisation.

If Abe expresses ‘deep remorse’, and neighbouring countries like China and South Korea respond by condemning his words as inadequate and demanding further apologies, most of the English-speaking world will — understandably — ‘condemn China and South Korea for pig-headed refusal to let bygones be bygones’. But there is much more to it than that.

As Morris-Suzuki explains, the problem is that Japanese, Chinese and South Korean audiences will not hear (or see in the official Japanese transcript) the word ‘remorse’. What they will hear (or see) instead is the actual Japanese word that Abe is expected to use: hansei, or its Chinese or Korean equivalents (fǎnshè/banseong). At a stretch that can translate to ‘remorse’ but it really means ‘reconsideration’ or ‘reflection on the past’, says Morris-Suzuki. The word that Abe needs alongside hansei is owabi or ‘apology’ from which former Prime Minister Tomiichi Murayama in his famous statement did not shrink. Most English speakers would not know what is being lost in translation, but there are enough in Washington, if not in Canberra, who do. And the difference is abundantly clear to Koreans or Chinese.

The structure that underpins regional stability is changing, given, as Ken Pyle recently remarked, the travails of the US-led order and the likelihood of a multipolar order emerging in its place. Abe’s long-term goals remain unclear as he has yet to articulate a vision of what role a more independent Japan would pursue. In recent months China has been cutting more slack for Japan, to guard its relationship with America. South Korea doesn’t have to.

But if Abe messes with his words in Washington and undercuts the substance of Japan as everyone’s indispensable post-war peace-constitution-abiding asset for stability in Asia and the Pacific, the region is likely to become much more complicated again.

Peter Drysdale is Editor of the East Asia Forum.

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Japanese war apologies lost in translation http://www.eastasiaforum.org/2015/04/26/japanese-war-apologies-lost-in-translation/ http://www.eastasiaforum.org/2015/04/26/japanese-war-apologies-lost-in-translation/#comments Sun, 26 Apr 2015 12:00:25 +0000 http://www.eastasiaforum.org/?p=46044 Author: Tessa Morris-Suzuki, ANU

15 August 2015 marks the 70th anniversary of the end of the Pacific War. It should be a solemn moment for reflection on a terrible episode that took many millions of lives, inflicted untold suffering and had consequences that still profoundly shape our world. But, instead, the anniversary is at risk of degenerating into a word game.

Japanese Emperor Akihito and Empress Michiko offer a flower wreath at a memorial for the US military as they offer prayers for war victims at Peleliu island in Palau on 9 April 2015. 15 August 2015 marks the 70th anniversary of the end of the Pacific War. (Photo: AAP).

Much of the present attention is focused on the words that Japan’s Prime Minister Shinzo Abe will use in his end-of-war commemorative statement. There will be a foretaste of this on 29 April, when Abe addresses a joint session of both houses of the US congress during his official visit to Washington.

Abe faces a dilemma. He is a fervent nationalist who has pledged to ‘restore Japan’s honour’ and denounced what he and his allies term ‘masochistic’ dwelling on wartime misdeeds. But he is also a passionate advocate of the alliance with the US and knows that he must satisfy a US administration deeply concerned about worsening relations between Japan and South Korea.

And that is where the language barrier becomes a handy diplomatic tool.

The messages leaking out from Tokyo suggest that Abe’s congressional and 70th anniversary statements will be ‘forward looking’, but they are also likely to express ‘deep remorse’ about the events of the war. If Abe expresses ‘deep remorse’, and then neighbouring countries like China and South Korea respond by condemning his words as inadequate and demanding further apologies, most of the English-speaking world will — understandably enough — condemn China and South Korea for pig-headed refusal to let bygones be bygones.

But the problem is that Japanese, Chinese and Korean audiences will not hear the word ‘remorse’. What they will hear instead is the actual Japanese word that Abe is expected to use: hansei, or its Chinese or Korean equivalents (fǎnshè/banseong). Hansei can, with a bit of a stretch, be translated as ‘remorse’, but its basic meaning is ‘reflection on’ or ‘reconsideration of’ the past. In Japan this word is used in common speech. If a company gets into trouble for dubious practices, one of its executives will appear on TV news to bow and express his deep hansei, and that is the last that is likely to be heard of the matter. If you are involved in running a conference or a sporting event, this will be followed by a ‘hansei meeting’, where you discuss what went well and what didn’t, and then probably all go off for drinks together.

Former prime minister Tomiichi Murayama’s 1995 statement commemorating the 50th anniversary of the end of the war also contained the word hansei, as did former prime minister Junichiro Koizumi’s statement on the 60th anniversary. But the great difference was that, in both statements, this was followed by the word owabi (apology). Murayama and Koizumi not only ‘reflected deeply’ by also, on the basis of that reflection, expressed their feelings of heartfelt apology. If Abe omits the word owabi (as the indications are that he will do), English-speaking audiences will hear the carefully constructed translation ‘remorse’, and think they are hearing a heartfelt apology. But Japanese, Chinese and Korean audiences will hear the resounding absence of the apology that Abe’s predecessors made but he did not.

In the recent rhetoric of the East Asian history wars, such use of semantics and flexible translations as a diplomatic tool has been elevated to an art form. Challenged on the contentious ‘comfort women’ issue — the issue of women recruited, in many cases by trickery or coercion, into wartime Japanese military brothels — Abe denied that such women were recruited ‘forcibly in the narrow sense of the word’. In his most recent public statement on this issue, for the benefit of the US media, Abe states: ‘When my thought goes to these [‘comfort women’], who have been victimised by human trafficking and gone through immeasurable pain and suffering beyond description, my heart aches’. Note the passive voice — ‘have been victimised’ — which conveniently allows ample space to deny that it was the Japanese military who did the victimising.

Meanwhile, Abe seeks to allay US concerns about the issue by insisting that his government continues to ‘uphold the Kono Statement’: the 1993 apology by former chief cabinet secretary Yohei Kono, which acknowledged that many women were recruited by coercion. But the term that Abe uses in Japanese is keisho suru. The literal translation of keisho suru is ‘to inherit’. What ‘inheriting the statement’ means is unclear, but it is evidently something different from ‘upholding’ it in the normal sense of the word.

In its most recent round of approvals of junior high school history textbooks, Japan’s Education Ministry insisted that the single brief reference to ‘comfort women’ must be accompanied by the words, ‘it is now the government’s position that no confirmed materials directly suggesting the forcible taking away of comfort women by military or officials have been found’. This can only be interpreted as a violation of the Kono Statement’s solemn promise that ‘we shall face squarely the historical facts as described above instead of evading them, and take them to heart as lessons of history. We hereby reiterate our firm determination never to repeat the same mistake by forever engraving such issues in our memories through the study and teaching of history’.

In the short run, word games and smart translations may slip past monolingual politicians and journalists. In the long run, equivocation and double-speak can only deepen the wounds of the past and the conflicts of the present. What is needed instead is real and deep acknowledgment, by all sides, of the terrible realities of the Pacific War, a willingness to face past wrongs and, on that basis, a renewed determination never to allow our region to slide into the abyss of such a conflict again.

Professor Tessa Morris-Suzuki is an ARC Laureate Fellow based at the School of Culture, History and Language, at the College of Asia and the Pacific at the Australian National University.

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The rights of the right as Abe strives for collective self-defence http://www.eastasiaforum.org/2015/04/25/the-rights-of-the-right-as-abe-strives-for-collective-self-defence/ http://www.eastasiaforum.org/2015/04/25/the-rights-of-the-right-as-abe-strives-for-collective-self-defence/#comments Sat, 25 Apr 2015 12:00:47 +0000 http://www.eastasiaforum.org/?p=46040 Author: Ben Ascione, ANU

Japanese Prime Minister Shinzo Abe and his Liberal Democratic Party (LDP) are negotiating with their coalition partner, Komeito, to introduce legislation recognising a limited exercise of collective self-defence. There is rising anxiety about how this endeavour is perceived by Japan’s neighbours and what effect this will have on regional stability, given the Abe cabinet’s right-wing revisionist views of Japan’s history.

What role for Japan’s Self-Defense Forces? Prime Minister Shinzo Abe with ground SDF chiefs at the force’s Asaka training ground in Tokyo. (Photo: AAP).

At face value, the exercise of collective self-defence (the use of force to come to the aid of an ally under attack) and historical revisionism may appear to be unrelated issues. But for Japan they are linked insofar as any Japanese government actions or statements that are perceived by its neighbours as whitewashing or denying the country’s wartime transgressions cast doubt on the government’s ultimate intentions about the character of Japan’s defence policy. This is particularly so when those changes will expand the roles and functions of Japan’s Self-Defense Forces (SDF). In this context, the historical revisionism of the Abe cabinet risks exacerbating the security dilemma in East Asia.

For countries such as the United States and Australia — which are eager to bolster their defence cooperation with Japan and encourage the SDF to increase its security burden-sharing roles — the situation raises a number of questions. How can the Abe cabinet be persuaded to dissociate itself from the historical revisionism that fuels regional distrust? And how can it be encouraged to engage in more active diplomacy to reassure China and South Korea that legitimate and limited upgrades of Japan’s defence policy will not encroach upon their security?

Mainstream public opinion in Japan recognises that the country’s wartime military did inflict grave wrongdoings and supports the apologies for wartime conduct. But, under the Abe government, right-wing revisionists continue to be significant because of the sympathy for their views among the cabinet.

Almost half of the current Abe cabinet are members of the Association of Diet Members for Worshipping at Yasukuni Shrine Together, while another three have during their time as ministers made visits to the contentious shrine where the souls of 14 Class-A war criminals are enshrined. Abe himself controversially visited Yasukuni on 26 December 2013, provoking criticism not only from China and South Korea, but also from the US which noted it was ‘disappointed’ by the move which will ‘exacerbate tensions’ with Japan’s neighbours.

More than three quarters of Abe’s cabinet are also members of Nippon Kaigi (Japan Conference): a grassroots organisation aimed at restoring a ‘beautiful Japan’ with a new constitution for a new era. Behind the flowery language, their view of history contends that Japanese war crimes, such as the Nanjing massacre, were exaggerated or fabricated. It also argues that Japan was liberating East Asia from Western colonialism and denies that the Japanese wartime military forcibly recruited ‘comfort women’. Their vision of a ‘correct’ Japan appears to see collective self-defence as a stepping stone to abolishing the Article 9 ‘peace clause’ of Japan’s Constitution.

The dominant revisionist views of the Abe cabinet have come to the fore recently with the kerfuffle surrounding Japanese demands to revise references to ‘comfort women’ in an American history textbook, and in Abe’s comments that Class-A war criminals are not criminals under Japanese law and that academics have yet to agree on the definition of ‘aggression’.

The questions of Japan’s right to exercise collective self-defence under international law, and the potential security benefits to Japan from passing legislation allowing collective self-defence under Japanese law, are in principle separate issues.

Collective self-defence would increase the deterrence capabilities of the US–Japan alliance. Without the right to exercise collective self-defence, Japan is not, for instance, permitted to shoot down a North Korean missile heading for the US. A limited exercise of collective self-defence to deal with such scenarios will help Japan to meet the demands of the contemporary security environment.

In terms of international law, Japan is well within its rights to exercise collective self-defence. It is a right that is guaranteed to all sovereign states under the UN charter and is the basis of NATO security, which deems an attack against one member-state to be an attack against all.

But any increased deterrence power that comes from Japan recognising the right to collective self-defence is highly likely to be offset when implemented by a government that is also espousing revisionist views of history. Irrespective of Japan’s democratic institutions and the brake applied on the LDP by its coalition partner, Komeito, and mainstream public opinion, any moves to reinterpret Article 9 by a government associated with historical revisionist views will fuel distrust of Japan. China and South Korea perceive this historical revisionism as evidence that Japan has neither faced up to nor regrets its wartime transgressions and that collective self-defence will be used as a stepping stone to further defence reforms that will negatively impinge on their own security.

Ultimately, therefore, this scenario risks undermining security in the region as China and South Korea may take countermeasures to bolster their security vis-a-vis Japan if they perceive Japan to be an increased threat. This, in turn, risks spiralling tensions and an arms race. Frictions over disputed territories could turn violent, tentative moves to repair Sino–Japanese relations could be undone, and hopes of promoting defence cooperation between Japan and South Korea as common US allies will be further complicated.

The US must be seen by all across Northeast Asia as seriously protesting against any revisionist views of history in the Abe cabinet. This is necessary to prevent Japanese politicians who advocate historical revisionism being further empowered, and to maintain America’s strong cooperation with China and South Korea.

Abe faces two key tests in the coming months: a speech in late April to the US Congress and a speech on 15 August to commemorate the 70th anniversary of the end of World War II. If in these speeches he unequivocally recognises the entire Murayama Statement — Japan’s 1995 apology to its Asian neighbours for harm caused during the war — Abe can create a platform to begin to dissociate his cabinet from historical revisionism. This will help him to realise the exercise of collective self-defence in a manner consistent with his proclaimed desire for Japan to make active contributions to peace and regional stability.

At the same time, a gradual expansion of the SDF’s roles and functions through collective self-defence, focused on maximising Japan’s security and bolstering the US–Japan alliance’s deterrence power, will serve to strengthen regional stability. But it will do so only if it is coupled with diplomacy to reassure Japan’s neighbours and is purged of links to revisionism.

A legal basis for implementing collective self-defence should sensibly be built upon the foundation of the exclusively defence-oriented security policy framework that has served Japan so well in the 70 years since World War II and has been a force for peace in the region.

Ben Ascione is a PhD candidate at the Crawford School of Public Policy, The Australian National University. He is Japan and Korea editor at East Asia Forum and a research associate of the Japan Center for International Exchange in Tokyo.

An extended version of this article appeared in the recent edition of the East Asia Forum Quarterly, ‘Asia’s Minorities’.

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Lessons of Tambora ignored, 200 years on http://www.eastasiaforum.org/2015/04/25/lessons-of-tambora-ignored-200-years-on/ http://www.eastasiaforum.org/2015/04/25/lessons-of-tambora-ignored-200-years-on/#comments Sat, 25 Apr 2015 00:00:07 +0000 http://www.eastasiaforum.org/?p=46036 Author: Anthony Reid, ANU

Today Australia will commemorate the centenary of the Gallipoli landing, which for many Australians symbolises one of the greatest man-made catastrophes. But there’s another anniversary this April that gives cause for reflection: the bicentenary of the eruption on 10 April 1815 of Tambora Mountain in southeastern Indonesia.

A giant cloud of ash and steam rises from the Sangeang Api volcano in Indonesia. The volcanic arc to the north of Australia poses the greatest risk to humanity. (Photo: AAP)

Tambora Mountain, on the island of Sumbawa midway between Jakarta and Darwin, was one of the highest in our region until 1815. It then exploded, sending an estimated 160 cubic kilometres of pyroclastic material into the atmosphere.

The explosion would certainly have been heard by the few inhabitants of northern Australia, since there were reports from Jakarta and more distant Sumatra. But the pyroclastic material was carried primarily westward by the prevailing winds, dropping mostly on the land and waters of Indonesia before carrying an ash cloud several times around the world.

Those directly killed by the explosion of gases and lava flows were mainly on the Tambora Peninsula of Sumbawa itself, where the explosion killed virtually everybody — thought to be 11,000 people. Speakers of the Tambora language were wiped out, eliminating what is now understood to have been by far the most westerly survival of a Papuan-type language.

At least 10 times as many died slowly of hunger and disease in the remainder of Sumbawa Island and in nearby Lombok and Bali, as agriculture was destroyed by ash deposits and lack of sunlight. The devastated population was then assailed by infestations of rats, which consumed much of the little food left.

In good times Bali was a major exporter of rice, but for two decades after 1815 its major export was slaves desperate to find food elsewhere. Only after 10–15 years of misery did the ecological curse turn again to a blessing as the ash was absorbed to fertilise Bali’s soils. Those who died of hunger in this way were not reported as victims of the volcano, any more than those who died as the ash cloud darkened skies and lowered temperatures in Europe and America.

The dearth of population figures anywhere in Indonesia before 1820 vitiates demographic attempts to calculate the loss. But using population figures to estimate the later, smaller eruptions of Krakatau (1883) and Kelut (1919) shows a missing agricultural population of a little under 100,000 from the former and well over that figure in the latter.

Why did Tambora remain so little known, despite ejecting at least four times as much material as Krakatau, the second biggest eruption of the modern era?

Krakatau was much closer to the European communication centres of Singapore and Batavia (Jakarta), while the introduction of the telegraph in mid-century had shrunk the world dramatically. Newspaper readers in Europe eagerly consumed descriptions and images of the Krakatau eruption, and some even linked it to strange weather conditions in Europe.

Tambora’s eruption was hardly reported in Europe. Only in the last 30 years have climatologists, geophysicists and historians worked out the relative scale of past eruptions through physical measurement of craters and ash deposit in polar ice cores. The dots were joined to point to Tambora’s impact on the climate.

The explosion is now understood to have lowered global temperatures by about a degree, and produced in 1816 the ‘year without summer’ in Western Europe and New England, with frosts and snowfalls in June and July. There were consequent famines in many parts of Europe, western China and North America, triggering the westward migration of New England farmers rendered desperate by the failure of their 1816 crops. J.M.W. Turner’s darkly yellow landscapes have been attributed to the Tambora eruption, and the ‘incessant rainfall’ induced Mary Shelley to stay indoors on a Swiss holiday and write her classic Frankenstein.

Although our Eurocentric memory continues to be better-informed about Vesuvius and Etna, the science now understands that it is the volcanic arc to the north of Australia that poses the greatest risk to humanity. Homo sapiens came closest to being wiped out, it is now believed, by the massive explosion in Sumatra that left the crater that is now Lake Toba, 74,000 years ago.

A fuller appreciation of the magnitude of Tambora’s effects 200 years ago would be likely to have healthier effects on our national priorities than the obsession with military anniversaries. Preparing for future mega-eruptions on the ‘ring of fire’ to Australia’s north would serve us better than feeding the insecurities that repeatedly send us off to fight other people’s wars on the false premise of an ‘insurance policy’.

It was another, smaller Indonesian volcanic eruption, Galunggang in 1982, which first alerted the airline industry to the danger of volcanic ash to passenger jets, two of which were forced to make emergency landings after engine failures caused by the ash. A mega-eruption on the scale of Tambora or Krakatau repeated in our age of mass air travel would have unimaginable consequences for global communication, isolating Australia for months if not years. There were two such mega-eruptions in the 19th century but none of equal size in the 20th.

All of this suggests that the last century and a half has been unusually fortunate for our region, but another mega-disaster of this kind should be expected in the century ahead. We may have failed to learn the lessons of Gallipoli, but 200 years should be enough to learn the lessons of Tambora and devote more of our defence budget to preparing for tectonic catastrophe.

Anthony Reid is an emeritus professor in the College of Asia and the Pacific, Australian National University.

A version of this article was first published in Asian Currents, the newsletter of the Asian Studies Association of Australia.

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China leading by example in South–South relations http://www.eastasiaforum.org/2015/04/24/china-leading-by-example-in-south-south-relations/ http://www.eastasiaforum.org/2015/04/24/china-leading-by-example-in-south-south-relations/#comments Fri, 24 Apr 2015 12:00:30 +0000 http://www.eastasiaforum.org/?p=46031 Author: Daniel Poon, UNCTAD

China’s revival of ‘South–South’ economic relations raises the opportunity of re-balancing global power. This could have profound implications for economic progress, including poverty reduction and structural change, in the developing world.

A pedestrian walks past an advertisement for The Export-Import Bank of China in Shanghai, China, 4 November 2014. (Photo: AAP)

China holds the economic heft of the BRICS countries (Brazil, Russia, India, China and South Africa). In 2012 it accounted for 67 per cent of total BRICS trade with the world, and 56 per cent of total  BRICS GDP (in current US$). China acts as the bilateral trading partner in 85 per cent of intra-BRICS trade flows. At a regional level, China surpassed the combined value of all other BRICS exports to Africa in 2007. Its merchandise goods represented 57 per cent of total BRICS exports to the African continent in 2012.

China’s prominence in South–South relations is closely linked to its use of unorthodox policy tools: capital controls, stable and competitive exchange rates, low interest rates, state banks and enterprises, and sector-specific industrial policies. China has tilted the economy toward high rates of domestic investment since the 1980s and rapid export growth since the 1990s, which was crucial in driving structural change. Harvard University’s Michael Porter once dubbed this the ‘investment-driven stage’ of development. Competitive advantage had not yet reached the innovation-driven stage, and was based on the willingness and ability of the nation and its firms to invest aggressively. Others simply call this China’s ‘invest first, consume later’ development model.

China embarked on its ‘going out’ strategy in the early 2000s. Its aggressive foreign investment (and lending) has been increasingly felt around the world. China’s outward investment outflows are often in the form of tied infrastructure financing packages (with a share of goods and services that must be sourced from Chinese suppliers). Overseas lending has been coordinated with a longer-term strategy to expand, diversify and upgrade domestic Chinese firms internationally. The goal is to stimulate demand for Chinese value-added manufactures in sectors such as machinery, electrical appliances, vehicles, telecommunications and renewable energy equipment.

China’s ‘new wave’ of exports is driven more by domestic firms and production chains. Having gained capacities to produce cranes, cement trucks and pumps, Chinese firms have since evolved to also compete in the  earth-moving equipment — a market segment dominated by American, South Korean and Japanese companies. China’s export of self-propelled bulldozers and excavators reached US$4.9 billion in 2012, of which only 10.8 per cent was destined for OECD markets. Overall, China’s global export market share of earth-moving equipment has increased from 0.7 per cent to 9.4 per cent from 2001 to 2012. This rapid growth has mainly come at the expense of OECD exporters, who saw their share fall sharply from 93.5 per cent to 80.4 per cent. Aside from Brazil, with a share of 4.2 per cent in 2012, all other emerging economies held export shares of less than 0.5 per cent.

According to the OECD, downward pressure on the relative price of capital goods created by Chinese (and Indian) producers could prove to be a major boost for global economic growth, ‘especially for low-income countries where prices for capital goods have historically been excessively high’.

China’s production capacities have greatly improved, but its lofty industrial policy ambitions remain a work in progress. Other developing countries may leverage their overall bargaining power by recognising the heightened competition between their respective bilateral partners (China and the US or EU). Developing countries may take advantage of China’s current stage of development and sharpen demands for enhanced domestic productive investment and technological learning opportunities. These can in turn be leveraged against other foreign investors to the benefit of developing countries. Such tactics are not dissimilar from China’s own strategic approach to foreign investment.

Incidentally, developing countries may be moved to re-think their own development model and utilise unorthodox policy instruments that have been partially legitimised by China’s impressive growth experience. As Nigeria’s finance minister asked when discussing the way emerging economies have commonly deployed industrial policies: ‘Why is it OK if some of the countries we admire today like South Korea, India or Brazil use these policies, but if Nigeria wants to use them it suddenly becomes a problem?’

Industrial policy tools remain pivotal to the process of structural change for developing countries.  China’s dynamic growth model may serve as a pragmatic impetus for selectively reviving them.

Daniel Poon is an economist with the United Nations Conference on Trade and Development (UNCTAD). This article is drawn from a longer UNCTAD Discussion Paper entitled China’s Development Trajectory: A Strategic Opening for Industrial Policy in the South.

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How Indonesia reformed its risky financial sector http://www.eastasiaforum.org/2015/04/24/how-indonesia-reformed-its-risky-financial-sector/ http://www.eastasiaforum.org/2015/04/24/how-indonesia-reformed-its-risky-financial-sector/#comments Fri, 24 Apr 2015 00:00:54 +0000 http://www.eastasiaforum.org/?p=46027 Author: Anwar Nasution, University of Indonesia

Reforms of the financial sector in Indonesia since 1997 have mitigated the key risk factors that caused the economic crisis of 1997. The first of these was structural weaknesses in the financial sector, particularly the banking system. The second was heavy borrowing by both the banking system and the corporate sector from foreign sources.  Indonesia's Central Bank had warned that the risk of losses due to the currency exchange rate of private and state-owned companies' foreign debts are still high and continue to haunt throughout 2015. (Photo: AAP)

In 1997, Indonesia’s budget was almost balanced. This was the result of tight fiscal and debt rules, as the entire budget deficit was financed by overseas development assistance from a consortium of Indonesia’s Western creditors. The current account deficit was also manageable at around 3–4 per cent of GDP. But this did not prevent the crisis.

The banking sector is the core of the financial industry in Indonesia and the main source of external financing for the corporate sector. In January–February 1998 the banking system collapsed. Bank runs and capital flight drained foreign exchange reserves. Not even Bank Indonesia (BI), the central bank, could provide loans of more than a few months maturity. Interest rates rose to over 80 per cent in 1997. Inflation rose to 58 per cent in 1998 and the economy shrank by over 13.1 per cent.

Four weaknesses in the financial system explain Indonesia’s capitulation to crisis. First, the undercapitalisation of the banking system left it open to risk. Second, there was substandard regulation and supervision, particularly in enforcing compliance with capital adequacy ratios and legal lending limits, and vigilance about foreign exchange exposure and derivatives. Third, a lack of inter-bank competition. Public sector wealth (including that of state-owned enterprises) was exclusively deposited with a group of state-owned banks, which controlled over 60 per cent of the market. Fourth, the availability of cheap credit from state-owned banks with low risk provided no incentive for the corporate sector to raise funds in the capital and bond markets.

BI records foreign borrowings of banks, but regulations on borrowing were generally violated. Foreign borrowings of the corporate sector were not recorded. Nearly all corporate foreign borrowings were short term and unhedged but were used to finance long-term projects in non-traded sectors of the economy. These were mainly land-based industries that only generate income in rupiah. This caused double maturity mismatches, namely: currency and maturity.

The crisis ended the financial repression that had been practised during the 32-year rule of President Suharto. Under Suharto the government set specific credit ceilings concerning the use of credit, which were applicable by economic sector, class of customer and individual borrowers. Interest rates were set below inflation rates and credit risks were assumed by Askrindo, the state-owned credit insurance company, BI and the Ministry of Finance.

Between 1997 and 2013, the Indonesian government adopted a number of policies to rebuild and modernise Indonesia’s financial sector.

The first policy was to provide emergency liquidity and purchase sovereign bonds to restore capital adequacy of financially distressed banks. Non-viable banks were immediately closed or restructured. To clean up their books, sour assets of the viable banks were also restructured, while their foreign liabilities were taken over by the government.

The second policy was to create a banking safety net through a deposit guarantee. This restored public confidence in the banking system and stopped destabilising bank runs in 1997.

The third strategy was to overhaul regulatory oversight by adopting risk-oriented banking supervision according to Basel principles and by reforming the accounting system. Modelled after the Financial Sector Authority of the UK, the OJK (Otoritas Jasa Keuangan, Financial Services Authority) was established in 2010 to regulate and supervise all financial sectors. BI focuses on macroeconomic prudential policies to guard against systemic risk. The Financial Stability Forum was also created in 2007 to facilitate cooperation, coordination and exchange of information between the Ministry of Finance, BI and the state-owned Credit Insurance Company (LPS) to better maintain financial stability. But institutions and the legal system remain weak as they cannot properly protect private property rights or enforce business contracts.

Fourth was to modernise the payment system by introducing real time gross settlements and modern communication technologies to ensure interbank transactions are timely and safe. This reduces the need for cash, excess reserves and overdrafts. Previously, under the Suharto administration, these technologies were only available to Bank Central Asia, which is jointly owned by Suharto’s family and business cronies.

The fifth strategy has been to restructure BI and the banking system. Modelled after the Bundesbank of Germany, BI was made into an independent institution in 1999 with a single objective: to achieve the target inflation rate.

The sixth policy was to partially privatise the state-owned banks, while keeping a controlling stake in state hands. Indonesia’s state-owned banks remain heavily protected and are public sector failures with weak governance.

Lastly, the government ended financial repression and floated sovereign bonds. This helped to both recapitalise the banking system and finance budget deficits that encouraged the development of capital and bond markets. The end of cheap credit with its subsidised interest rate and low credit risk provides an incentive for the corporate sector to raise funds in these markets. But Indonesia has no strong institutional investors to absorb sovereign bonds. At present, nearly 40 per cent of liquidity in domestic capital and bond markets is made up of volatile, short-term capital inflows.

It is through these policies that the Indonesian government has effectively reduced risks and moved Indonesia towards a modern financial system.

Anwar Nasution is Emeritus Professor of Economics at the University of Indonesia, Jakarta. He is the editor of the 2015 book Macroeconomic Policies in Indonesia: Indonesia economy since the Asian financial crisis of 1997, from which this article is digested.  

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Can trade agreements stop currency manipulation? http://www.eastasiaforum.org/2015/04/23/can-trade-agreements-stop-currency-manipulation/ http://www.eastasiaforum.org/2015/04/23/can-trade-agreements-stop-currency-manipulation/#comments Thu, 23 Apr 2015 12:00:05 +0000 http://www.eastasiaforum.org/?p=46022 Author: Kemal Derviş, Brookings Institution

It is impossible to deny that trade and exchange rates are closely linked. But does that mean that international trade agreements should include provisions governing national policies that affect currency values?

US Trade Representative Michael Froman is saluted by a guard while returning to the office for next negotiation with Japanese Economic and Fiscal Policy Minister Akira Amari in Tokyo, Japan, 20 April 2015.  (Photo: AAP)

Some economists certainly think so. Simon Johnson, for example, recently argued that mega-regional agreements like the Trans-Pacific Partnership should be used to discourage countries from intervening in the currency market to prevent exchange-rate appreciation; Fred Bergsten has made a similar argument. But the United States Treasury and the Office of the US Trade Representative continue to argue that macroeconomic issues should be kept separate from trade negotiations.

As it stands, the relevant international institutions — the World Trade Organization (WTO) and the International Monetary Fund (IMF) — are not organised to respond effectively to possible currency manipulation on their own. Incorporating macroeconomic policies affecting exchange rates into trade negotiations would require either that the WTO acquire the technical capacity (and mandate) to analyse and adjudicate relevant national policies or that the IMF join the dispute-settlement mechanisms that accompany trade treaties.

To be sure, since 2007, the IMF has prohibited ‘large-scale intervention in one direction in the exchange market’, in a decision on ‘bilateral surveillance’ that also identifies ‘large and prolonged’ current-account imbalances as a reason for review. But neither that decision nor later IMF policy papers on multilateral surveillance provide specific and comparative quantitative indicators that would eliminate the need for case-by-case judgment.

The situation is complicated by the multitude of mechanisms whereby treasuries and central banks can drive down their exchange rates to gain a competitive trade advantage. The most direct method is purchases of foreign assets. But, in a world of large short-term capital flows, central-banks’ policy interest rates — or even just announcements about likely future rates — also have a major impact. Moreover, quantitative easing affects exchange rates and trade, even if central banks purchase only domestic assets, as demonstrated by recent movements in the exchange rates of the dollar, euro and yen.

One could go even further. An income-tax hike will reduce private demand (unless one believes in perfect Ricardian equivalence), including demand for other countries’ exports. Other macroeconomic policies of all kinds influence the current-account balance.

In short, for ‘policies affecting the exchange rate’ to become part of trade agreements, monetary and fiscal policies would have to become part of trade agreements. In that case, there would be no trade agreements at all.

Consider the problem that would be posed by the eurozone — an economy that faces major challenges in reconciling its members’ divergent monetary, fiscal, and exchange-rate needs. Germany’s current-account surplus has stood near 7 per cent of GDP — bigger than China’s — for two years, and is likely to grow even larger, owing to the euro’s recent depreciation. Meanwhile, most other eurozone countries have lately been forced to tighten fiscal policy, thereby reducing or eliminating their current-account deficits.

As a result, the total eurozone trade surplus is now massive. Because individual eurozone members have no monetary-policy tools at their disposal, the only way that Germany can reduce its surplus while remaining in the eurozone is to conduct expansionary fiscal policy. The economist Stefan Kawalec has explicitly referred to the current policy mix in the eurozone as ‘currency manipulation’.

Trade negotiations are hard enough to conclude. The need to wrestle with macroeconomic-policy issues could easily cause talks to bog down — and give protectionist lobbies the political ammunition they need. That is why the Trade Representative is wisely trying not to add macroeconomic policy into the bargaining, despite demands from powerful voices in the US Congress.

None of this means that macroeconomic policies that affect exchange rates are not problematic. They are. But trade negotiations are not the right forum for discussing the causes and consequences of current-account imbalances and reaching agreements on macroeconomic-policy coordination; that is what the IMF and the G20 are for. In fact, the issue of large actual or potential discrepancies between aggregate savings and investment in countries or monetary zones, reflected in current-account imbalances, is at the heart of the IMF’s emerging multilateral surveillance role; it has been a focus of the G20 as well.

The G20 ‘mutual assessment process’ — established to analyse national economic policies’ effects on other countries and on global growth, with the goal of formulating individual adjustment commitments — has highlighted the difficulty of reaching agreement on macroeconomic policies with significant spill-over effects. Indeed, it is even more difficult than reaching trade agreements, which must cover issues like tariffs, quotas, quality standards, regulatory regimes for particular sectors, and relevant microeconomic issues. Merging all of these challenging topics into a single negotiation process is a recipe for deadlock.

A better approach would include strengthening the IMF’s multilateral surveillance role. Doing so would broaden discussions of macroeconomic policy to include employment issues — specifically, the potential impact of large foreign-trade surpluses on domestic jobs. And it would give trade negotiations a chance to succeed.

Kemal Derviş is a vice president of the Brookings Institution. He is a former minister of economic affairs of Turkey and former administrator of the United Nations Development Program.

This article was originally published here by Project Syndicate.

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