East Asia Forum http://www.eastasiaforum.org Economics, Politics and Public Policy in East Asia and the Pacific Sun, 24 May 2015 12:08:15 +0000 en-US hourly 1 Supporters of an Australian iron cartel have a monopoly on bad economics http://www.eastasiaforum.org/2015/05/24/supporters-of-an-australian-iron-cartel-have-a-monopoly-on-bad-economics/ http://www.eastasiaforum.org/2015/05/24/supporters-of-an-australian-iron-cartel-have-a-monopoly-on-bad-economics/#comments Sun, 24 May 2015 12:00:50 +0000 http://www.eastasiaforum.org/?p=46336 Author: Luke Hurst, ANU

As Australia moves away from a decade of resource-driven prosperity, it is even more important that it avoid mistakes that previously might have been papered over by the boom times. Yet there are loud voices calling for the mistakes of the past to be made again. One of the loudest is that of Australian mining company Fortescue’s non-executive chairman, Andrew ‘Twiggy’ Forrest.

Grab buckets unload imported iron ore on a quay at the Port of Rizhao in east China's Shandong province, 7 February 2015. (Photo: AAP).

One would think that Forrest shouldn’t have too much to complain about. Fortescue’s March quarterly update reported that the company had managed to cut its delivered operating costs to US$48 per dry metric ton (at 62 per cent ferric content), a stellar decrease from the US$107 reported a year earlier.

But the problem for the company is that the iron ore price has been falling faster than the cuts in operating costs. For seven of the first eight days of April the price of iron ore fell below Fortescue’s operating costs and the Australian budget assumes iron ore will trade at Fortescue’s US$48 per ton operating costs over 2015–16.

In 2013, Australia exported around 611 million tons of iron ore worth around AU$75.3 billion (US$61.2 billion). Last year, iron ore exports expanded by 23.5 per cent but the fall in ore prices saw total earnings down marginally, at AU$74 billion (US$60 billion). Some have labelled this immiserising growth, where output rises beyond the opportunity costs of resources used in producing it. For producers like Fortescue, who will struggle to cover costs at current prices, immiseration is reality. But for the big, intra-marginal, established suppliers — such as BHP Billiton, Rio Tinto and Vale — expanding supply delivers revenue above costs and continuing profit.

Any reprieve from sub-US$50-a-tonne prices for Fortescue is likely to be only temporary. Iron ore majors, Rio Tinto, BHP Billiton and Vale, are all planning to bring more low cost iron ore to the market.

The continued profitability of low cost expansion for BHP Billiton, Rio Tinto and Vale in the new iron ore price environment is not a good sign for Fortescue’s and other marginal producers’ long-run viability. Fortescue’s share price reflects this fact, decreasing from 6.02 cents on 21 February 2014 to 2.57 cents on 11 May 2015, after bottoming out at 1.82 cents on 10 April 2015.

In response to Fortescue’s crisis, Forrest has taken to the political hustings, hawking everything from a managed iron ore cartel to the government revoking the licenses of Rio Tinto and BHP Billiton. But Forrest’s proposed remedies are short sighted and would be in no one’s interests but his own. The nature and the history of Australia’s place in the international iron ore business suggest that the proposals would do serious damage to Australia’s longer-term economic interest.

Put simply, Forrest is effectively arguing for a managed cartel — where each Australian iron ore producer would export a pre-determined amount of product. Australia actually tried government imposed price intervention against Japanese iron ore buyers in the 1970s and got away with it, as you can — but only for a brief moment. Australia also traded on its monopoly power in the Japanese wool market in the 1930s, with less short-term success as Japanese buyers withdrew from the Australian market. Such intervention is certainly a strategy for cutting yourself out of valuable commodity markets in the medium to long term.

Protecting Forrest against his bad investment decisions by controlling supply is a loser’s game unless policymakers believe that they can take the world’s other major suppliers with them. That would be anti-competitive and potentially politically dangerous to the regime that is the foundation of reliable international markets. Australia’s Treasurer, senior economic ministers, opposition spokesman and industry associations, including the ACCC and the Minerals Council of Australia appear to understand that.

Over the longer run the iron ore market is highly contestable. An uncompetitive intervention in the market will have negative consequences for both Australia’s iron ore revenue and other sectors important to the transition away from iron ore-based prosperity.

Just as the iron ore pricing interventions by the Whitlam government in 1973 catalysed the development of Brazil’s rich iron ore endowments, and the 2009 intervention by China Iron and Steel Association in the benchmark price negotiations led to the collapse of benchmark negotiations (which we estimate cost Chinese buyers around US$290.7 million per month for their trouble), a new intervention could be catastrophic to Australia’s future prosperity.

Australia does not have a monopoly on iron ore supply to Asia. The drastic reduction that has taken place in bulk shipping costs means that Australia’s relative geographic advantage to the Asian market is also worth less than ever before.

Intervening in the market by establishing a cartel would be an ill-advised strategy. It might save Fortescue, but it would take the skin off the country. Any Australian iron ore market intervention will likely have a negative impact on demand for Australia’s iron ore and, more importantly, also damage its relationship with not just China, but also South Korea and Japan. These relationships are imperative to navigating the impending economic storm Australia faces as it weans itself off the red-dirt rents it has been so reliant on over the last decade.

Let’s hope that policy leaders of all stripes twig to Twiggy’s tricks, and show regional partners that Australia will be in business with them for the long haul.

Luke Hurst is a Research Fellow at the East Asian Bureau of Economic Research, Crawford School of Public Policy, The Australian National University.

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Australia lacks the inside support for outward integration http://www.eastasiaforum.org/2015/05/23/australia-lacks-the-inside-support-for-outward-integration/ http://www.eastasiaforum.org/2015/05/23/australia-lacks-the-inside-support-for-outward-integration/#comments Sat, 23 May 2015 12:00:47 +0000 http://www.eastasiaforum.org/?p=46328 Author: Annmarie Elijah, Hazel Moir and Andrew Willcocks, ANU

Australian federal government policymakers need to have broader and more robust consultations with business, consumers and state governments when it comes to trade treaties. As an open economy that is heavily dependent on trade for its wellbeing, it is important for Australia to get trade and economic integration right. 

Australian Trade Minister and Member of Parliament Andrew Robb, centre, speaks with Filipino businessmen during a forum on Australia's expanding trade with the Philippines Thursday, May 21, 2015. (Photo: AAP).

Modern trade treaties go far beyond negotiations about actual trade. ‘Economic partnership’ or ‘comprehensive trade’ agreements deal as much in regulatory politics as in tariffs and quotas. Negotiators must better identify the national interest, which fully accounts for Australia’s domestic situation.

But Australian trade negotiators have enjoyed a period of substantial autonomy over the development of trade agreements. Low levels of public interest in trade policy and a multi-stakeholder business environment have allowed negotiators to pick and choose arguments in support of selective notions of the national interest.

The government’s grandiose economic promises to Australian businesses create expectations of tangible negotiating positions that support actual business activity. But business use of trade agreements is suboptimal. The Economist Intelligence Unit surveyed senior executives from 800 companies across eight economies in the Asia Pacific region. Only 19 per cent of Australian businesses reportedly used the various trade agreements. This is well below the regional average of 26 per cent.

The sole economic objective of trade negotiations is to increase net national welfare. This is measured by consumer-based aggregate wins and losses over the length of a deal. As a result of free trade, consumers receive lower prices due to reduced tariffs and improvements in the range of products available domestically. But free trade can also involve substantial changes to domestic regulations, such as intellectual property rights (IPR).

The USA and the European Union call for stronger IPR systems, which tilt the playing field in the interests of a small number of major corporations. These systems will not provide any benefit for Australia’s inventors, innovators and creators. IPR systems are not in Australia’s — or indeed the world’s — interest.

Australian consumers are also rarely consulted about the content of trade treaties. There is rarely public debate of the real issues and little evidence that any of the concerns have been taken on board by negotiators. When the Joint Standing Committee on Treaties delivered a report to the government on the Anti-Counterfeiting Trade Agreement, the response demonstrated an unwillingness to consider consumer and intermediary concerns.

Australian state governments are increasingly impacted by free trade agreements. The Australia–New Zealand economic cooperation program and the Singapore–Australian Free Trade Agreement are examples of extensive cooperation between the Commonwealth and states and territories. Internal reforms can be as difficult as the international commitments.

The Commonwealth–State Standing Committee on Treaties is one possible avenue for enhanced cooperation among Australian governments. But state trade ministers only meet on an ad hoc basis. Coordination in this area will be instrumental in pushing the internal work across the federation that may be required to agree and implement future trade deals.

Trade negotiators must consult more broadly to meet the needs of stakeholders. The national trading reality fails to correspond to the selective notion of the national interest recently pursued by Australian trade negotiators. There is a strong case for improved consultations with business towards a better focussed and more practical negotiating agenda.

Business use rates suggest that the agreements do not always meet industry needs. For their part, consumers have scant input into a process that will increasingly impact them directly. And unless current practice is revised, states and territories will find themselves implementing trade deals about which they were only superficially consulted.

As three of Australia’s leading economic commentators noted, the world could learn from Australia’s experience with the Productivity Commission and its predecessors. Bodies like the commission can manage effective trade consultations and agenda-setting processes separate to negotiations, and ensure improvements in net national welfare. It would be useful for Australia to follow its own advice better.

Broad consultation on complex and sensitive international economic integration agreements will be hard. But the implications of failing to consult — with business, consumers, civil society and within the federation — will be worse. Without an improved process, it is difficult to see how Australia can maximise its position in an increasingly complex world.

Annmarie Elijah is Associate Director of the Centre for European Studies, the Australian National University.

Hazel Moir is an Adjunct Associate Professor at the Centre for European Studies, the Australian National University.

Andrew Willcocks is an Australian lawyer and PhD Candidate at the Centre for European Studies, the Australian National University.

A longer version of this article is available here on the ANU Centre for European Studies website.


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Slow but steady for the ASEAN Economic Community http://www.eastasiaforum.org/2015/05/23/slow-but-steady-for-the-asean-economic-community/ http://www.eastasiaforum.org/2015/05/23/slow-but-steady-for-the-asean-economic-community/#comments Sat, 23 May 2015 00:00:54 +0000 http://www.eastasiaforum.org/?p=46324 Author: Sanchita Basu Das, ISEAS

As the ASEAN Economic Community’s (AEC) December 2015 deadline approaches, most observers feel that the initiative’s deliverables — an integrated production space with free movement of goods, services, and skilled labour — will not be achieved. This may be true. But the AEC should be seen as a work in progress. To simply say it will miss its deadline is to ignore other crucial facts about the AEC’s role and circumstances.

Thai office workers walk past advertising promoting the ASEAN Economic Community in Bangkok on 13 January 2013. The AEC is unlikely to be ready by its deadline. (Photo: AAP)

While lessons have been derived from the European Union, the AEC was not developed on the basis of this model. Since ASEAN’s inception, the sovereignty of nation-states and non-interference in domestic matters were key principles guiding the organisation. Economic cooperation was sought in areas where it was deemed necessary. This included allowing for economies of scale and multinationals doing business in Southeast Asia, and anchoring production networks that were already developing in the broader Asian region. Economic cooperation was seen as a gradual process, with long-term aspirations, rather than a mechanism in which strict rules apply irrespective of the nature of member economies and changing global conditions.

Although the AEC is a regional initiative, it is implemented by national economies. Domestic law and policy is required to do things like cut tariffs, remove non-tariff barriers and liberalise the services sector. This can be difficult because each initiative is not the sole preserve of any one body but involves multiple ministries and other agencies. That some domestic economic actors stand to gain or lose from integration means that the AEC generates proponents and opponents. And this slows down the pace of implementation further.

But the AEC is not the sole cause of increasing competition in domestic economies. The AEC vision was developed with an awareness of current global economic trends. The 10 ASEAN countries realised that their own WTO ascension would not lead to quick outcomes in a forum of 150 other countries at different stages of economic development. There the concerns and objections of small economies, like the ones in Southeast Asia, are not likely to be heard.

In contrast, ASEAN and the AEC are small enough to consider the interests of all and may also accord short-term flexibility. While this is likely to slow down the establishment of the AEC, advanced member countries — such as Singapore, Malaysia and Thailand — are not restricted to only this framework. All of them have pursued bilateral free trade agreements with their key trading partners. So, for any single country, heightened competition is a part of the globalisation process. And there are other frameworks — be they bilateral, regional or multilateral — that can further economic liberalisation.

ASEAN economic cooperation is a top-down initiative and hence awareness among stakeholders is low and uneven. The association was instituted in 1967 to promote peace and stability. It took another decade for economic cooperation to make the agenda. But economic cooperation has become a form of diplomacy that is often carried out by foreign ministries in consultation with  commerce or trade ministries.

Some have observed that economic regionalism in Southeast Asia is the subject of political elites, with almost no involvement from other stakeholders. This has been accompanied by a low level of awareness of relevant economic cooperation measures, particularly among the final users.

But with the looming 2015 deadline, the private sector is now being listened to. And advocacy for trade initiatives by the private sector is not unanimous. It is often driven by the relative strength of particular firms that bring foreign direct investment into the country.

Finally, the AEC should not be seen in isolation from, but rather in conjunction with, the ASEAN Political-Security Community and ASEAN Socio-Cultural Community. A political security community works towards regional peace and stability, while a socio-cultural community encompasses regional cooperation in areas like environmental protection, limiting the spread of contagious diseases, transnational crime and cooperation when responding to natural disasters. It is hoped that, when combined, these initiatives will help to cultivate a sense of regional identity.

The AEC is a work in progress. Some promises have been met, but significant challenges also remain. Awareness among policymakers and final users is growing. ASEAN is often criticised for weak institutions, which has also made AEC implementation difficult. But only time will only tell how much of this can be changed. With the AEC and ASEAN Charter, the region has already evolved as a rules-based association.

Now is the time for ASEAN countries to come together to strengthen the economic community. The global economy has been in a constant state of flux since the 2008 economic crisis. While the AEC may not deliver on a fully integrated single market and production base for ASEAN stakeholders in 2015, it will help ASEAN members to withstand the next global crisis with confidence.

Sanchita Basu Das is an ISEAS Fellow and Lead Researcher on economic affairs at the ASEAN Studies Centre, ISEAS, Singapore.

A longer version of this article was published here as an ISEAS Perspective.

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Best to get the TPP done right, not done fast http://www.eastasiaforum.org/2015/05/22/best-to-get-the-tpp-done-right-not-done-fast/ http://www.eastasiaforum.org/2015/05/22/best-to-get-the-tpp-done-right-not-done-fast/#comments Fri, 22 May 2015 12:00:06 +0000 http://www.eastasiaforum.org/?p=46319 Author: Richard Katz, Oriental Economist Report

Unless the Trans-Pacific Partnership (TPP) trade talks are concluded soon, they risk dragging on interminably. If that happens, the United States’ capacity to function as a benign world hegemon will be diminished.

To avoid this, the White House is determined to get the pact signed and ratified by the end of 2015. This means persuading the US Congress to approve the Trade Promotion Authority (TPA) in June and its TPP negotiating partners to sign a deal just few weeks later.

A demonstrator protests against the legislation to give US President Barack Obama fast-track authority to advance trade deals, including the Trans-Pacific Partnership, during a protest march on Capitol Hill in Washington, DC, 21 May 2015.  (Photo: AAP)

The negotiating partners won’t conclude the negotiations without TPA approval. They have no reason to present their best offers if they fear that the US Congress will treat their concessions as a floor not a ceiling.

US TPP proponents condemn opponents in Congress or other countries for the delay. There is truth in that accusation; protectionism from America’s auto sector to Japan’s farmers has caused delays. But blame also lies with the posture taken by the TPP’s proponents in both the US government and the business sector. A delay of ratification until 2017 could be worth the risk if further negotiation results in a better TPP.

A major part of the US role as benign hegemon was to support free trade. World War II showed that the US is better off if other countries are more prosperous.

China, for instance, is far less dangerous internationally than it was under Mao Zedong. Much of that political evolution has occurred because China’s leaders know that economic interdependence fuels the rapid growth undergirding their rule. Bringing China into the TPP would further the trend.

But today the bipartisan US consensus supporting free trade has all but disappeared. That’s because of the unequal distribution of American income growth in the past few decades.

Labour unions blame international trade, but trade explains only 10–20 per cent of worsening inequality. More impact has come from a political system that has eroded the minimum wage, walked back progressive taxes, diminished labour unions, and cut budgets for public schools and student aid for college.

In the absence of broad support for free trade, US trade negotiators are often forced to placate narrow corporate interests in order to cobble together the razor-thin majority needed to get congressional ratification. And many short-sighted business groups unintentionally aid the anti-trade forces by resisting even woefully insufficient compensatory measures. Critics see negotiators as acting more like lawyers for special interests than champions of the national interest.

The new politics of trade has led the US toward some self-defeating negotiating tactics. A prime example is US insistence on using the Investor–State Dispute Settlement (ISDS) system, even though some TPP countries want to modify or eliminate it, as do some European Union countries in separate talks. Under ISDS, foreign corporations can sue governments in host countries for ‘loss of anticipated profits’ due to new regulations. The dispute is settled in special arbitration panels. Half of all ISDS arbitrators serve as lawyers for corporations in other ISDS cases, giving those arbitrators a financial incentive to see more merit in the corporations’ arguments.

Originally, ISDS was put in place to make sure that firms were compensated when their property was expropriated by some dictator. Today, it’s very different. R.J. Reynolds threatened to sue Canada on the grounds that a regulation compelling the firm to use plain wrapping on cigarettes was akin to expropriation. Canada backed down on the regulation. Philip Morris is suing Australia. And now, hedge funds, and other financiers, are fostering a new wave of ISDS cases by financing suits in return for 20–50 per cent of corporate winnings; they’ve even created a derivatives market in ISDS victories. This kind of profiteering is illegal in most domestic courts of OECD countries.

It is the thinness of the pro-trade majority in Congress that gives each narrow group the power to tip the balance. This lessens Washington’s ability to serve the national interest and increases the perception among other countries that the US is less a benign hegemon than a selfish one.

There is a way to restore broad support for free trade and with it White House leverage vis-à-vis special interests: the notion of ‘free trade plus compensation’. Although free trade is a win–win proposition for each nation as a whole, trade makes some citizens richer and others poorer. Fortunately, the gains for the winners are so big that some of them can potentially be redistributed so that every citizen is better off. Unfortunately, almost all of the 20th century measures used in the US to promote income equality and security are now under attack. Trade is unjustifiably scapegoated for the consequences of this whole system of policies.

Some European countries make sure that trade, technological progress and wages rise in tandem by spending as much as 1–2 per cent of GDP on ‘active labour measures’. These include retraining services and active efforts to help find new jobs for those displaced by trade or domestic changes in technology. The US spends the least among rich countries, just 0.1 per cent of GDP. This is penny wise and pound foolish for US growth, living standards, and the politics of trade.

Business, and its political allies that want free trade, must recognise the need for a grand bargain — free trade plus compensation — along a whole range of axes. Until the US restores bipartisan support for free trade, the White House will have increasing trouble securing any new trade agreements, and/or will have to pay a high price on other issues. For example, the more that US negotiators coddle special interests at home, the less international cooperation the US will get on other issues, including how to integrate a rising China. At the same time, labour unions and their Democratic Party allies need to recognise that TPP or no TPP, globalisation is going to continue. Rather than fight the inevitable, they too should focus on the grand bargain.

The White House should reconsider its stance that the TPP must be ratified this year. Given that the TPP will be the template for trade rules for years to come, that members hope to expand it to dozens of nations — including China — and that Washington needs to restore bipartisan support for free trade, getting the TPP right is better than getting it fast.

Richard Katz is Editor of the Oriental Economist Report.

This article was adapted from a longer version published here in Foreign Affairs and is reprinted with the permission of the ©2015 Council on Foreign Relations.

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The case for considering ‘climate refugees’ http://www.eastasiaforum.org/2015/05/22/the-case-for-considering-climate-refugees/ http://www.eastasiaforum.org/2015/05/22/the-case-for-considering-climate-refugees/#comments Fri, 22 May 2015 00:00:03 +0000 http://www.eastasiaforum.org/?p=46313 Author: Scott Leis, Maryland

Recently, two very powerful and damaging storms have wreaked havoc in the Western Pacific: Cyclone Pam and Typhoon Maysak. These were two of the most intense storms to impact this region in the past 15 years and, by some metrics, the worst ever recorded — and they occurred about a month apart. Climate change, once again, was said to have added to their intensity, which has many Pacific Islanders extremely worried.

 Villagers walk past damaged vegetation on Tanna Island, Vanuatu, 19 March 2015 after Cyclone Pam. (Photo: AAP)

The belief that climate change will force Pacific Islanders to leave their homes is not new. Currently, there is a pending appeal before the Supreme Court of New Zealand involving an I-Kiribati man who is requesting that he and his family be allowed to stay in New Zealand permanently due to the belief that the people of Kiribati face indirect persecution from human-induced global warming. There is no precedent for such action, so this case is really a challenge to international law based on the 1951 United Nations Convention Relating to the Status of Refugees. In order for the appeal to be successful, the Convention would need to be amended again to account for climate refugees — a classification that currently does not exist. However, if Pacific Islanders are recognised as a particular social group and more importantly — if it is recognised that climate change is the result of political persecution through the self-serving policies of the developed world — then they could be considered [climate] refugees under the terms of the 1951 UN Convention without it being amended.

What will happen in that particular case remains to be seen. But if it is accepted that climate change is a real, anthropocentric process, then it can hardly be denied that low-lying Pacific Island populations are victims of some form of persecution by larger industrialised countries.

A refugee, according to the 1951 Convention is ‘someone who is unable or unwilling to return to their country of origin owing to a well-founded fear of being persecuted for reasons of race, religion, nationality, membership of a particular social group, or political opinion’. According to most definitions of a social group, Pacific Islanders meet the criteria. They interact with one another (through institutions such as the Nauru Agreement and the Western and Central Pacific Fisheries Commission), share similar characteristics, have a sense of unity (as seen in the Pacific Unity Festival and the Pacific Games) and in many cases have kinship ties.

The argument against climate change refugees is that, ‘those fleeing disruption caused by climate change are not plausibly thought of as being persecuted’ and therefore cannot have a well-founded fear of persecution. But the more evidence that arises to support the anthropocentric origins of climate change, the less valid that argument becomes.

The difficulty is that in this case, the shift between indirect and direct persecution falls along an ill-defined spectrum. No single nation industrialised intentionally to persecute another nation through climate change, but this does not mean that some nations did not indirectly persecute others by refusing to change policies once it became known that they may be having dire consequences for isolated Pacific Island populations. And some nations are continuing to persecute, in this sense, this same social group now that there is overwhelming support for action against climate change and reliable knowledge of what causes it and how to mitigate it.

Faced with a cyclone, atoll-based Pacific Islanders cannot go to higher land to escape the surge and do not always have a shelter strong or large enough to protect everyone from ferocious winds. Aside from actual human-to-human violence, the conditions which exist after a cyclone are not unlike those that affect a war-torn country — loss of land, food and fresh water sources, disease, malnutrition, dehydration, weather exposure and displacement. The geographic isolation and restrictions associated with the physical size of many low-lying islands means that residents have no alternative but to suffer and to anticipate the next storm, thereby reliving their plight. Without help, residents of these islands cannot escape their war zones, and certainly have a well-founded fear of being persecuted from the effects of climate change. But their collective voice, like their collective land area, is tiny.

The relationship between location and coastal flooding is well understood and has shaped policies in the developed world. In the wake of Hurricane Katrina, the US Federal Emergency Management Agency (FEMA) identified areas along the Louisiana coast in which it ‘would not approve any new construction, including any temporary facilities or replacement projects’. In 2009, the US Army Corps of Engineers identified similar areas as buyout areas to eliminate the risk to people and assets. In 2012, after Hurricane Sandy, FEMA also identified buyout areas in New York and New Jersey.

The dangers facing low-lying Pacific Islands are no different than those facing coastal residents of New York, New Jersey or Louisiana. By refusing to ratify agreements such as the Kyoto Protocol, countries like the US are persecuting people living on low-lying islands.

The UN, the US and other world powers should offer Pacific Islanders a buyout of their ‘coastal’ areas. And Pacific Islanders should have the option to relocate, with international assistance, based on their well-founded fears of climate change and new status as climate refugees.

Scott Leis holds a Master of Arts in Geography from Kansas State University. He has lived in the Federated States of Micronesia and currently lives in Edgewater, Maryland.

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A sustainable South Korea should stick with nuclear http://www.eastasiaforum.org/2015/05/21/a-sustainable-south-korea-should-stick-with-nuclear/ http://www.eastasiaforum.org/2015/05/21/a-sustainable-south-korea-should-stick-with-nuclear/#comments Thu, 21 May 2015 12:00:18 +0000 http://www.eastasiaforum.org/?p=46307 Author: Sanghyun Hong, University of Adelaide

Since the 1970s, nuclear power has provided cheap, stable and clean electricity that has fuelled South Korea’s rapid economic growth. Currently, 23 nuclear power plants with a total capacity of 21 gigawatts of electric energy are generating 27 per cent of South Korea’s total electricity needs. The wholesale price of nuclear power, US$52 per megawatt hour (MWh) in 2014, is still cheaper than coal (US$61/MWh) without any form of carbon pricing. Nuclear power, which is a zero-emission source, also has limited greenhouse gas (GHG) emissions at below 500 kilograms per megawatt hour each year.

A fire drill is underway at the Weolseong Nuclear Power Complex in Gyeongju, North Gyeongsang Province, on 28 October 2014. (Photo: AAP)

Is renewable energy a viable alternative to coal and nuclear in South Korea? The simple answer is no. There are already no rivers in South Korea that flow to the ocean without passing through a hydropower station. Solar power is not feasible due to low levels of solar irradiance. And even if all South Korea’s wetlands were used for tidal power, all the terrestrial and marine natural parks were changed to wind farms and all buildings were covered by photovoltaic cells, the maximum electricity generation from renewables could not provide more than 30 per cent of total electricity consumed in 2010.

Since 2011 there have been a series of nuclear-related events that could change not only South Korea’s future nuclear policy, but also its environmental and economic sustainability. The Fukushima-Daiichi nuclear accident prompted aggressive anti-nuclear movements. This could have been a blow to South Korea’s nuclear industry, but there was practically no adverse impact.

A survey conducted a year after the accident found that about 90 per cent of respondents still understood the need for nuclear power and about 80 per cent agreed with maintaining or increasing the share of nuclear energy in South Korea. To safeguard public support for nuclear power, the government has spent US$1 billion on safety measures to improve technological systems, including higher seismic resistance design requirements that well exceed the strongest earthquake ever observed in South Korea.

But the South Korean government still decided to reduce the planned nuclear capacity share from 41 per cent to 29 per cent by 2035 after considering ‘public emotion’. This decision was not based on any scientific or economic reasoning and did not even match with the public consensus. Due to this decision, coal power capacity will increase by 85 per cent compared with 2012, while the current share of renewables will be maintained. This change does not align with the national climate change policy target of reducing GHG emissions by 30 per cent compared with ‘business as usual’ by 2035.

In fact, to reduce the electricity sector’s GHG emissions while maintaining cheap prices, the share of nuclear power capacity needs to increase by over 50 gigawatts — or more than 70 per cent of total electricity consumption — by 2035. Given the current construction trend of 1.4 gigawatts per year, this target is achievable. But financing the additional nuclear power plants would cost about $US55 billion.

Increasing the share of nuclear power could cause two additional problems: spent-fuel management and aged nuclear plants. By the end of 2014, overall accumulated spent-fuel in South Korea amounted to about 80 per cent of the total storage capacity. Between 2023 and 2029, 12 nuclear power plants with the capacity of 9.7 gigawatts will reach their expiration date.

At the end of April 2015, the US and South Korea signed a new US–South Korea Civil Nuclear Agreement. The details have not yet been fully revealed, but this agreement is regarded as the most important move so far in dealing with spent fuel in South Korea. Since South Korea imports all its nuclear fuel, pyro-processing — which is partly allowed by the agreement — would be the ideal approach for dealing with spent fuel while securing a stable nuclear fuel supply.

In the long term, new generation IV reactor technologies that will be available commercially before 2030 in South Korea could provide a technical solution for these issues. These technologies, coupled with full fuel recycling, can generate a huge amount of energy from spent fuel. The advanced reactors also have inherent passive safety features that do not require any external manipulation in the case of an emergency. But a delicate medium-term plan is also needed to extend the reactors’ lifespans. This plan should focus not only on technical issues but also on regaining public trust after widely publicised corruption scandals.

After the issue of forged evaluation documents was reported in 2012, installed service parts with fake certificates were re-evaluated and replaced, following an intense investigation. There is no simple, short-term answer to tackling the endemic transparency and corruption problems in South Korea. In the long term, a public body with fairness, like a nuclear safety commission, must be established to monitor nuclear power plants, alongside internal measures proposed and implemented by KHNP.

South Korea must embrace nuclear power for environmental and economic reasons. Contrary to the expectations of many ‘green’ organisations in Korea, a nuclear phase-out policy will not increase the share of renewables. Instead, it will increase coal power production to maintain the price of electricity, while abandoning the hope of a more sustainable future. The main issues surrounding nuclear power in South Korea are social and institutional problems, not technological issues. To ensure a sustainable future for South Korea, public trust must be regained and issues concerning the safe management of nuclear power plants must be resolved.

Sanghyun Hong received his PhD degree at the University of Adelaide.

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Northeast Asia must cast off the shackles of history http://www.eastasiaforum.org/2015/05/21/northeast-asia-must-cast-off-the-shackles-of-history/ http://www.eastasiaforum.org/2015/05/21/northeast-asia-must-cast-off-the-shackles-of-history/#comments Thu, 21 May 2015 00:00:38 +0000 http://www.eastasiaforum.org/?p=46302 Author: Tsuneo Akaha, MIIS

The 70th anniversary of the end of the World War II offers an opportunity for Northeast Asia to reflect on the lessons learnt from the past and to forge a vision for a peaceful and prosperous future.

The Northeast Asian countries should encourage domestic debate on the facts of history and their moral implications for today. Each nation has its own unique historical experiences that influence reflections on the past, and create heroes and villains in the present. But only free and open discussion of interpretations can give people a full and nuanced understanding of their history.

Some revelations — such as the ‘comfort women’ issue — are likely to expose complex legal consequences, demand difficult political choices and raise uncomfortable moral questions for contemporary leaders. But any attempt to conceal the facts of history or deflect moral responsibility for past events will only delay the necessary reconciliation within and between Northeast Asian countries.

Any country’s attempt to influence the history discourse in its neighbours, even if well intended, will be hazardous and counterproductive. The best that each nation can do is to share its understanding of its own history with its neighbours through bilateral and multilateral dialogue. No country needs to feel slighted, dishonoured or threatened during these conversations.

Tensions also rise from the many territorial disputes in the region. The disputes directly and immediately affect states’ sovereignty claims and may compromise the political credibility of contemporary leaders. While the disputes have an economic element, the symbolic and sentimental values that they represent are arguably more important. If one country’s prospects of recovering ‘lost territories’ are dashed because of their neighbour’s intransigence, or through brute force, this could fuel a sense of injustice.

Political leaders need to approach such disputes pragmatically and place them in a broader framework of international relations. They should consider ‘shelving’ territorial claims in favour of cooperative behaviour. Countries could jointly develop natural resources, establish an ecological park or conduct joint scientific research on and around disputed islands. But they should first declare the non-use of force and demilitarise the disputed areas, thereby reducing tensions and preventing accidental clashes.

Japanese leaders should also refrain from visiting Yasukuni Shrine while they are in office. As long as they are holding public office, the claim that visits to the shrine are ‘private affairs’ is simply not credible. Instead, the Japanese government should pay respects to the war dead at a public, non-religious facility.

Such services could also include prayers for non-Japanese who have suffered under Japanese imperialism and militarism. This way, they could provide an opportunity for Japanese leaders to offer public apologies, express their remorse and demonstrate their atonement for the nation’s past deeds. They could also appeal to the universal yearning for peace. At the same time, South Korean and Chinese leaders should accept any sincere remorse, contrition and apologies by Japanese leaders in such a venue for what they are.

But if past records are any indication of the likely reaction of Japan’s neighbours, expressions of atonement and offers of apologies by Japanese political leaders are probably not enough to gain the trust of their neighbours. Japan should engage actively in trust- and confidence-building efforts with its neighbours. Northeast Asia has much to learn from the successful experience of postwar Germany and Europe. This is often invoked when discussing Japan’s reconciliation — or lack thereof — with its neighbours.

Northeast Asia should also look to the example of reconciliation and cooperation in Southeast Asia. Once a conflict-ridden region, the ASEAN region is now on its way to becoming an economic community. ASEAN’s efforts to build mutual confidence since its establishment in 1967 have paid substantial peace dividends. ASEAN serves as the core institution upon which layers of multilateral cooperation have been built. Although there are doubts about its effectiveness, there is no question that the ASEAN-centred multilateral dialogue has been instrumental in building confidence, preventing conflict and expanding economic ties among the Southeast Asian countries and beyond.

Northeast Asian countries should take pride in the depth of economic integration they have achieved through their trade and investment activities. They have accomplished this feat without the top-down, politically guided regional scheme seen in Europe. Instead, market forces driven by corporate initiatives and individual entrepreneurship have guided integration. The resulting economic development and transnational economic linkages have fostered civil society development as well as cross-national social and cultural contacts.

Northeast Asian leaders should further nurture these developments. They need to make further progress on regional economic cooperation, by establishing bilateral and multilateral trade and investment regimes to accelerate the process of regional economic integration. If they continue to work together, Northeast Asian leaders can realise their hopes for the region’s future.

Tsuneo Akaha is Professor of International Policy Studies at the Middlebury Institute of International Studies at Monterey.

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China’s Hmong go uncounted http://www.eastasiaforum.org/2015/05/20/chinas-hmong-go-uncounted/ http://www.eastasiaforum.org/2015/05/20/chinas-hmong-go-uncounted/#comments Wed, 20 May 2015 12:00:06 +0000 http://www.eastasiaforum.org/?p=46294 Author: Sebastien Carrier, Stepping Stones China

In recent years Uyghur and Tibetan issues have captured most of the national and international attention granted to China’s minorities. Yet Uyghurs and Tibetans account for less than 15 per cent of China’s minority population of about 113 million. How have other large minority groups, such as the Hmong, fared politically, economically, and socially in the last decade? How well do the Chinese leadership’s strategies and policies address ethnic minority challenges?

Overall, there is a clear gap between what is promised and what is provided to the less demanding minorities.

At a highly anticipated conference on ethnic affairs in the fall of 2014, President Xi Jinping emphasised that the Regional Ethnic Autonomy Law (1984) remains the cornerstone of China’s ethnic policies. On paper, this law conforms closely to international human rights standards, guaranteeing numerous rights to minorities. They include self-government within designated areas, non-discriminatory rights, proportional representation, linguistic, cultural and religious rights, and the power to adapt central directives to local conditions.

China has 152 ethnic autonomous areas, including five autonomous regions, 30 autonomous prefectures and 117 autonomous counties, and more than 1090 ethnic townships. China’s household registration system records around 70 per cent of the total ethnic minority population as resident in one of these autonomous areas.

Top Chinese leaders have also stressed that the government has undertaken a series of ‘successful’ programs and affirmative action initiatives for minorities in the past 30 years. For example, minorities have gained such privileges as partial exemptions from the one-child policy and preferential admission to institutions of higher education. They have also increased their representation in the National People’s Congress, the government and the Chinese Communist Party (CCP).

The conference outlined two ways to further reduce ethnic discontent: economic development through increased investment in minority areas and a deeper campaign of ‘patriotic’ education. This simple solution proposed by Xi’s administration to ensure social harmony and prevent ethnic conflicts has been seen time and time again since the founding of the People’s Republic of China.

But though China legally protects the distinctiveness and rights of ethnic minorities, many observers argue that legitimate representation, protection, and autonomy have yet to be achieved in practice. There are several key reasons why the Regional Ethnic Autonomy Law has been inadequately implemented.

First, while the law requires that the government head of an autonomous area be a member of the minority that exercises autonomy, this requirement has not been applied to the CCP leadership. The government head of the autonomous area reports to a party secretary, who is not necessarily a member of the ethnic minority but who exercises the main decision-making power in the region.

Second, the law specifies clearly that the interests of the state as a whole have precedence over the interests of any individual, minority or nationality. The authority of the National People’s Congress in autonomous areas is thus limited to the drafting of regulations, which must support the country’s unity and respect
the Chinese constitution, and also require approval from higher-level institutions.

Third, the government holds
 to its firm stance that China is composed of 56 official nationalities. The implication is that no other nationalities could ever be recognised, a stance reiterated at the 2014 conference. With a population of approximately three million people scattered throughout the rural areas of Sichuan, Guizhou and Yunnan, the Hmong of China is one of the larger ethno-linguistic groups that have
not been officially recognised as a nationality.

This omission may seem surprising since the Hmong are not only numerous but one of the few Chinese ethnic groups that has an extensive population living in countries outside of China. They are recognised as an ethnic minority by many countries, including Thailand, Laos, Vietnam and the United States.

In China the Hmong have been lumped into the Miao nationality, together with other ethnic groups linked more or less linguistically and historically to each other. Yet the Hmong have their own language, which is mostly unintelligible to other Miao. Despite this, there is little hope of official recognition among Chinese Hmong, whether by choice or because they sense the unwillingness of the government to reconsider its minority classification.

A growing number of Hmong seem to fully embrace the Miao identity 
in their relations with other Chinese and the state. Indeed, according to many Hmong elites, the fact that
 the Miao nationality is the fifth largest ‘nationality’ of China — with 
a population of over nine million — entitles them to a more favourable national status than would otherwise be the case.

In comparison with Uyghurs and Tibetans, discontent among the Hmong population has not led to a secession movement. Overall, the Hmong’s level of discontent is relatively low and comparable to that among rural Han Chinese. Their main criticisms are the lack of economic development within their areas, poor access to health services and low-quality education. The Hmong are still among the poorest and the least educated minorities in China.

In spite of their low socioeconomic status, the Hmong have not yet politically expressed a desire for self-governance. Throughout history they have never been united politically, which partially explains their lack of territorial ambitions. Furthermore, in most of the around 150 Hmong areas that are currently designated as Miao townships or autonomous areas, they coexist with other nationalities, complicating minority-related decisions.

The Hmong’s main struggle involves the protection and the promotion
 of their own language and culture.
The linguistic issues are twofold. Firstly, Hmong have rarely had access to government services in their
 own language, even though this is guaranteed by law. Therefore, with
 a Chinese illiteracy rate among the highest in the nation, Hmong of the older generations are de facto excluded from political and administrative spheres. Secondly, with a few exceptions, the Hmong language has not been used in primary and middle schools in Hmong areas. As a result, use of the language is declining among the young.

In the broader context of Southwest China, these linguistic issues demonstrate the differential application of China’s ethnic policies. While Beijing guarantees language and cultural rights for minorities 
that jeopardise national security, 
it often disregards these rights for less organised or less threatening minorities. Southwest China’s minorities also have yet to experience the right to self-governance or
 the opportunity to develop their territories. For now, better access to a quality education seems to be the only available means to improve their situation.

Sebastien Carrier is Senior Programme Manager at Stepping Stones China. This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Asia’s Minorities.

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Economic reform in Jokowi’s Indonesia http://www.eastasiaforum.org/2015/05/20/economic-reform-in-jokowis-indonesia/ http://www.eastasiaforum.org/2015/05/20/economic-reform-in-jokowis-indonesia/#comments Wed, 20 May 2015 00:00:36 +0000 http://www.eastasiaforum.org/?p=46290 Authors: Creina Day, ANU and Yose R. Damuri, CSIS Jakarta

The first 100 days of President Joko Widodo (Jokowi) and his government have been distinguished by historic reforms to fuel subsidies, social assistance to the poor, streamlined investment licensing and virtually no new restrictive regulations on foreign trade. Fuel subsidy reform has given the government fiscal space for infrastructure development. But if Indonesia is to attract greater foreign investment, there is still scope to promote openness and regional integration in what is a critical year for Indonesia’s involvement in international trade agreements.

Jokowi overhauled fuel subsidies amid fortuitously tumbling world oil prices. On 17 November 2014, the government increased subsidised fuel prices by 31 per cent for gasoline and 36 per cent for diesel. On 1 January 2015, subsidies for premium gasoline were essentially removed. The price of gasoline is now adjusted monthly by the government in line with the international crude oil price. A fixed subsidy of 1000 rupiah per litre for diesel and kerosene replaces a fixed price. This overhaul marks an important step towards a market-based price mechanism. But the scheduled monthly adjustment could still be undone. The real test will come when oil prices rise again.

In the lead-up to fuel-subsidy reform, the government took steps to mitigate the impact of higher transport and food prices on vulnerable households. This included providing 15.5 million disadvantaged households with 200,000 rupiah per month in November and December, as well as expanding publicly funded education and health care. Importantly, cash assistance was provided as electronic money, which is expected to help address Indonesia’s low financial literacy.

Lower world oil prices were a double-edged sword for the revised budget, approved by parliament in February 2015. While natural-resource revenues fell, the fuel subsidy overhaul reduced government expenditure. The budget is still in deficit. But reduced expenditure on subsidies has enabled the government to earmark increased funding for infrastructure that will improve connectivity, both on land and at sea, and upgrade irrigation and machinery in agriculture.

Jokowi and his government have much to do to improve the country’s trade performance. They inherited a number of protectionist policies from the previous Susilo Bambang Yudhoyono (SBY) administration, which now inhibit trade performance and restrict foreign investment. The average tariff rate fell during SBY’s second term, but the use of disguised non-tariff barriers increased.

In late 2013, for example, the SBY government launched a new, more restrictive negative investment list. This list was followed by Law 7/2014 on Trade, which provided direction on regulating trade activities and, if necessary, using more protectionist policies. The SBY government also passed Law 20/2014 on Standardisation and Conformity Assessment, which supports the application of national standards to manufactured products. Some domestic businesses have already used it to defend against imports.

The question is whether Indonesia’s past protectionist attitude will change under Jokowi. Indonesia’s National Medium-Term Development Plan 2015–19 sets the international trade objectives of increasing non-oil-and-gas exports by 11.6 per cent and raising the services trade-to-GDP ratio to 3.5 per cent by 2019. The plan includes using trade diplomacy more effectively and increasing Indonesia’s participation in global value chains. This suggests that Indonesia may be willing to pursue a more open trade policy. Yet it also includes a plan to review existing trade agreements and to better manage imports as a way of increasing the competitiveness of Indonesia’s exports.

Trade Minister Rachmat Gobel indicated in October that one way for Indonesia to improve its competitiveness would be to safeguard its domestic markets. A similar strategy failed during Indonesia’s policy of import substitution in the 1970s and early 1980s. Indonesia would be better off liberalising its goods, services and investments, as it did in the mid-1980s and 1990s.

Jokowi’s own statements have provided little clarity on the direction of Indonesia’s trade policy. During the APEC CEO Summit in Beijing on 10 November 2014, Jokowi urged APEC business leaders to support economic development in Indonesia and expressed his country’s need for foreign investment. Yet, during the following APEC Economic Leaders’ Meeting, he suggested that Indonesia would be careful in opening its economy further and in conducting trade negotiations.

We do know that the Jokowi administration has not introduced any truly restrictive regulations, aside from plans to require commodities exporters to place their export revenues in the domestic banking system. But the administration is strictly enforcing existing import regulations. In December 2014, more than 2100 registered importers had their licences suspended for not providing written quarterly reports on their import activities.

2015 is a critical year for Indonesia’s position in ASEAN. The ASEAN Economic Community will launch on 31 December, but Indonesia may struggle to meet all of its commitments as part of this community. Indonesia is having difficulty negotiating the details of ASEAN’s Regional Comprehensive Economic Partnership, which seeks to harmonise the six current free-trade agreements between ASEAN and its trading partners. Indonesia should endorse this economic partnership as its success would benefit the region.

Indonesia has also yet to recommence trade negotiations with South Korea, the European Free Trade Association and the European Union, which were postponed in 2014. Competitiveness goes hand in hand with competition. Competition encourages producers to work efficiently and eliminates rent-seeking. What lies ahead for Indonesia is to welcome foreign participants and make the most of their presence.

Creina Day is Fellow at the Arndt-Corden Department of Economics, Crawford School of Public Policy, the Australian National University.

Yose Damuri is Head of the Department of Economics at the Centre for Strategic and International Studies, Jakarta.

This article is based on their recent publication in the April 2015 issue of the Bulletin of Indonesian Economic Studies.

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Dialogue the key to resolving comfort women history wars http://www.eastasiaforum.org/2015/05/19/dialogue-the-key-to-resolving-comfort-women-history-wars/ http://www.eastasiaforum.org/2015/05/19/dialogue-the-key-to-resolving-comfort-women-history-wars/#comments Tue, 19 May 2015 12:27:41 +0000 http://www.eastasiaforum.org/?p=46287 Author: Mary M. McCarthy, Drake University

On 29 April 2015, Shinzo Abe became the first Japanese prime minister to speak before a joint session of the US Congress. Japan watchers listened closely, hoping to hear a preview of his upcoming statement on the 70th anniversary of the end of World War II. Of particular concern is whether the prime minister will take a step back from the historic apologies of the 1995 Murayama Statement and the 1993 Kono Statement.

In anticipation of Abe’s visit, US Congressman Mike Honda led 24 members of the House of Representatives in presenting a letter to the Japanese ambassador that expressed firm support for both Statements. Some of the signees subsequently articulated their views on the ‘comfort women’ issue to various media outlets. This included an op-ed by Charles Rangel in the national newspaper USA Today and a press release by Honda that called Abe’s failure to mention the ‘comfort women’ in his speech to Congress ‘shocking and shameful’.

Although the victims of Japan’s wartime ‘comfort women’ system were predominately women and girls from across Asia, with the majority coming from the Korean peninsula, US politicians have become actively involved in this issue. This was most apparent in 2007 with the passage of House Resolution 121, which called on Japan to acknowledge and apologise for the ‘coercion of young women into sexual slavery’ during the 1930s and 1940s. Similar motions or resolutions have been passed by legislatures in Canada, the Netherlands and the European Union. And the UN Special Rapporteur on Violence Against Women included the ‘comfort women’ issue in her 1996 report.

The concerted efforts of Japanese and South Korean NGOs, who felt that their governments had not responded adequately to the issue, as well as the willingness of former ‘comfort women’ to publicly tell their stories, has been a major force behind this global recognition. But it also reflects normative changes in the field of human rights and women’s rights over the past half-century. Worldwide acceptance of women’s rights as human rights has increased attention to the particular dangers facing women and girls in conflict-ridden areas and advanced global campaigns to combat sex trafficking.

Domestic factors, such as democratisation in South Korea and the death of Japan’s wartime emperor Hirohito in 1989, have encouraged local advocacy efforts for historical justice. The spread of the Korean diaspora has further ensured that the stories of ‘comfort women’ enter the domestic discourse in other countries.

These international and domestic pressures culminated in the 1993 Kono Statement by then chief cabinet secretary Yohei Kono. The Kono Statement included an admission of military culpability, a government apology and a commitment to educate future generations about this tragedy. Two years later, the Asian Women’s Fund, a public-private joint initiative intended to illustrate an acceptance of moral responsibility through apology and compensation, began operation.

Many hoped these steps would resolve the ‘comfort women’ issue, but in reality it was only the beginning of a debate over what really happened and what should be done about it. This debate has ebbed and flowed over the past three decades, often gaining steam from some statement by a Japanese government official that questions a conventionally accepted aspect of the narrative — be it the extent to which ‘comfort women’ were coerced or the degree of responsibility of the Japanese government.

Such comments, along with the active and polarising discussion within Japan that always follows, are due to the fact that there continues to be no national consensus in Japan on the issue. This is in stark contrast to the international scene, where a general consensus does exist.

The situation has been made even more difficult by the fact that the Japanese domestic and international discussions have tended to occur in parallel, rather than in intimate interaction with each other. Each has evolved in its own political and normative context.

The biggest challenge today is that Japanese government and society are at a stage in their own domestic discourse that hinders their ability to enter into dialogue with the rest of the world on this issue. What many Japanese officials, scholars, and members of the public view as clarifying the record comes across globally as denial or obfuscation. While many foreign actors view the international normative changes described above as conducive to reconciliation, many Japanese actors see the application of such norms to this historical case as an impediment.

Dialogue is a necessary prerequisite for a lasting settlement and all parties should be seeking avenues to achieve it. The only chance for true dialogue comes from greater comprehension, on all sides, of the reality of the debate both in Japan and internationally, as well as the political and normative contexts that shape those debates. Vilification will never lead to open exchange, but mutual understanding and tolerance may.

Mary M. McCarthy is Associate Professor of Political Science at Drake University.

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