The picture of Presidents Xi and Obama, beaming as they shake hands after jointly announcing their ratification of the Paris Climate Agreement on the eve of the G20 summit, is even more striking when one considers just how far apart the two countries were on the issue of climate change as recently as 2012.

The Obama Administration deserves credit for its second-term diplomatic engagement with China on climate and energy issues, but by far the biggest contributors to China’s changed international stance on these issues are internal to China itself.

The picture of Presidents Xi and Obama, beaming as they shake hands after jointly announcing their ratification of the Paris Climate Agreement on the eve of the G20 summit, is even more striking when one considers just how far apart the two countries were on the issue of climate change as recently as 2012.

The Obama Administration deserves credit for its second-term diplomatic engagement with China on climate and energy issues, but by far the biggest contributors to China’s changed international stance on these issues are internal to China itself.

Profound changes in Chinese economic activity and government strategy, increasingly evident since around 2013, caused China’s coal consumption to fall significantly in 2015, and history will likely show that China’s coal use peaked in 2013–14. This marks a crucial turning point in China’s role in both contributing to and responding to global climate change. So what are these underlying changes and what do they mean for climate change mitigation in China?

Consider first the factors affecting energy demand. Chinese GDP growth is slowing for structural reasons. The ‘new normal’ model of Chinese economic growth involves a shift towards economic growth of a higher quality but lower rate. Officially, GDP growth has fallen from an average of 10.5 percent per annum over the period 2000–10 to between 6 and 7 percent in 2015.

Meanwhile, the annual decline in the energy intensity of GDP has actually accelerated over the past two years at the same time as GDP growth has slowed. This is due primarily to the changing structure of Chinese economic activity: energy-intensive industrial activity, such as steel and cement production, has declined, while services sectors, which use less energy, have grown. These structural changes have occurred on top of an ongoing trend of energy efficiency improvement within industries.

The combined effect has been a dramatic slowdown in the growth of China’s total primary energy consumption (PEC) — from a compound annual rate of more than 8 percent per year between 2000 and 2013 to less than 1 percent in 2015.

It is likely that China’s structural transition will continue, reducing the energy requirements of China’s economic activity. Continued improvements in energy efficiency within industries are also likely to continue due to considerable opportunity and a strong policy focus on energy conservation.

Yet there are a number of risks. One is that energy efficiency improvements slow within the heavy industries experiencing structural stagnation or decline, such as steel production. Another is that the fast-growing household and commercial sectors will lead to rapid growth in energy demand for vehicles, buildings and appliances. In each of these cases, there is a critical role for policy to encourage high efficiency standards.

Now consider the changes in China’s energy supply. Coal has long been the dominant source of energy consumed in China, accounting for around two-thirds of PEC in 2014. Over the past decade, China has increasingly sought to diversify its energy supply due to concerns about energy security, air pollution and climate change as well as a desire to develop innovative manufacturing industries in renewable and nuclear energy. This has resulted in a range of measures aimed at expanding the supply of ‘non-fossil’ power generation.

The government has set overall targets for the non–fossil fuel share of PEC of 15 percent by 2020 and 20 percent by 2030, as well as absolute capacity targets for individual energy sources. It has also introduced various support mechanisms to encourage wind and solar power production and nuclear energy. As air pollution reduction has become a more urgent priority, government energy policy has increasingly encompassed direct controls on coal production and consumption. Efforts to reduce coal consumption in industry, which accounts for about half of China’s total coal consumption, are also under way.

In 2014–15, these changes in the energy supply mix combined with the dramatic slowdown in energy demand growth to cause the remarkable turnaround in China’s coal consumption. Measured in terms of energy content, China’s coal consumption fell by more than 3 percent in 2015. Because the decline is caused by a combination of overwhelmingly structural forces, it is likely that 2013–14 marked the peak in Chinese coal consumption.

China has also introduced a number of measures aimed at reducing greenhouse gas emissions per se, including targets for reducing the carbon dioxide intensity of GDP and carbon emissions trading. Yet despite the intense interest of the international climate policy community, these measures have played very little role in the radical shift in China’s emissions trajectory that has occurred over the past few years. While the importance of these measures is likely to grow over the next decade, they will remain less important than the other factors on both the demand side and the supply side.

China’s expansion of non-coal and non–fossil fuel electricity generation capacity will likely continue apace. But ensuring that China’s growing zero-carbon and low-carbon electricity sources are able to achieve their full potential for reducing the carbon intensity of electricity generation will require China to overcome a number of institutional and political hurdles.

A key set of institutional reform priorities involves marketisation and pricing reforms in the electricity sector. Fossil fuel production and electricity production currently enjoy a range of subsidies and are pervasively undertaxed, putting renewable energy at a competitive disadvantage. It is recommended that China remove subsidies for, and increase taxes on, fossil fuels so that prices more closely reflect their full social costs. Other electricity sector reforms are also needed, including those that would ensure renewable and nuclear energy suppliers are prioritised over fossil fuel generators by electricity network operators.

The outlook for China’s transport sector is more uncertain. Slower GDP growth and sluggish heavy industrial activity will continue to put downward pressure on oil demand growth, as they did in 2014–15. However, oil consumption growth will be driven by rising demand from household and commercial transportation as these sectors grow. The low global oil price will likely increase oil demand, though the government has moved to impose a price floor on crude oil of US$40 a barrel.

Overall, China’s net greenhouse gas emissions over the next decade will likely grow only very slowly — and will peak sometime during this period. China’s carbon dioxide emissions, which appear to have fallen in 2015, may continue to fall gradually. Whether they do will depend on the extent to which the above-mentioned risks can be effectively mitigated.

Ultimately, whatever the exact trajectory turns out to be, it is clear that the outlook for China’s carbon dioxide emissions has changed radically in recent years. This is welcome news for the global effort to mitigate climate change. However, there remains much to be done. The challenge for China now is to avoid a ‘long plateau’ in emissions by implementing reforms that will enable it simultaneously to achieve growing prosperity and rapidly falling emissions. In this regard, China’s enthusiasm to ratify the Paris Agreement is a positive signal.

China’s new growth model key to tackling climate change is republished with permission from East Asia Forum

The post China’s Latest Attempt to Clear the Air appeared first on Economy Watch.

The G20 summit of world leaders just finished two days of meetings, during which they focused primarily on the many ongoing fires threatening the global economy. These include the alleged “dumping” of Chinese steel on other nations, worsening climate change, cybersecurity and the fear of competitive devaluations.

The G20 summit of world leaders just finished two days of meetings, during which they focused primarily on the many ongoing fires threatening the global economy. These include the alleged “dumping” of Chinese steel on other nations, worsening climate change, cybersecurity and the fear of competitive devaluations.

However, perhaps the biggest threat facing the current international economic order over the long term – as well as the enormous prosperity it has created, lifting billions out of poverty – is the backlash against globalization. As it stands, however, the G20 is focusing on the firefighting and less on the long term.

That’s a big mistake because the global economy is more fragile than many think, and there’s a real risk that protectionism and anti-trade sentiment could derail what has been built. Instead of remaining a fire brigade or an annual talking shop, the G20 should use its clout and resources to serve as counterweight to the backlash and articulate a global vision.

As a professor of international business over the past three decades, I have seen how the benefits of globalization have lifted billions out of poverty in emerging countries and conferred on American consumers over US$2 trillion in savings since 1980 in the form of lower prices. While these gains have been somewhat offset by the loss of low-end manufacturing jobs in the U.S., the net benefit has been enormous.

What is the G20?

The world is a very uneven and unequal place, made up of 193 nations, each with its own language, culture, laws, institutions and average income, ranging from a paltry $221 per person per year in South Sudan to $101,994 in Luxembourg.

While there are regional or global bodies like the United Nations and the European Union and trade agreements between countries, there is no world government or judiciary that can enforce its will on a sovereign nation. National sovereignty is still very much the norm.

That’s where the G20 comes in.

The G20 is a mixed bag of leaders representing 19 countries plus the EU, ranging from rich democracies like the U.S. and Germany to monarchies like Saudi Arabia and autocracies like Russia. Their economies cover 85 percent of the world’s economic output, almost two-thirds of its population and about three-quarters of its carbon footprint. However, it is a small enough group that these countries can have a real impact when they put their minds to something.

What can the G20 leaders accomplish when they get together, other than develop personal relationships? Actually, quite a lot, because the group not only represents over three-quarters of the world economy but, being small, can hope to reach consensus, compared with absurdly unwieldy bodies such as the United Nations with its 193 members. For the past century or longer, humankind has been building a global civilization and an interconnected economy. This cannot continue without closer coordination and cooperation among its leading nations, especially with emerging threats and concerns.

The G20 provides a forum to address them.

Presidents Obama and Xi could do more at the G20 than deal with short-term problems. Nicolas Asfonri/Reuters

Threats and concerns

President Xi Jinping summarized many of those threats in his 47-minute inaugural G20 speech.

Most are economic, such as sluggish global growth and falling trade. Protectionist sentiment and xenophobia are on the rise, as seen in the U.K.’s Brexit referendum and the candidacy of Donald Trump. This so-called globalization backlash threatens to take us backward to a more fragmented, “raise the drawbridge” world with a lower standard of living for all.

One of the biggest fears on this score is that countries will engage in competitive devaluations of their currencies to make their exports cheaper for other nations to buy and, consequently, reducing imports from its trading partners. As the world’s biggest exporter, China led the way at the summit in declaring that it would manage the value of the yuan responsibly, although it did not articulate any specific guidelines or parameters.

Other concerns included discrimination against foreign direct investors, the growing challenge of cybersecurity, the global oil glut and climate change. On this last problem, some progress was made as Presidents Obama and Xi reaffirmed their commitment to the Paris climate agreements.

Except for climate change, most of the other issues tackled by the G20 are short-term in nature. This is necessary, but misses a great opportunity to build an institution that addresses the long term collective destiny of humankind.

The G20 should build an institution devoted to long-term issues.

With so many pressing problems festering across the globe, it may be difficult to focus on the long term. That is exactly what the G20 needs to do, and is the only institution uniquely positioned to do so because of the relatively small size of member states.

We are, arguably, building and nurturing a global civilization, yet there is no efficient and ongoing organizational “architecture” for intergovernmental coordination and consensus. The United Nations, with 193 member states, is too large, too amorphous and too unstructured to do the job effectively. A smaller group of 20 nations – which as I noted represent about half the globe’s people and most of its output – can achieve better coordination and accomplish much more. An annual meeting is insufficient.

The G20 should take on this important role. It could become an articulator and formulator of strategy for long-term progress in the world economy and act as a counterweight to those who feel threatened by globalization and the rapid spread of ideas and values that are challenging traditional ones.

The global convergence of ideas and lifestyles distresses those whose traditional identities and self-image are threatened. Britain’s exit from the EU, Trump’s rise, the spread of extreme conservatism in Islam, ultraorthodoxy in Judaism and the unnecessarily defensive attitudes of the Hindu right in India are all manifestations of the reaction to globalization and the psychological and sometimes real threat it poses to traditionalists around the world.

Globalization is also seen as a threat by workers whose skills can be replicated by others in foreign countries, doing the same work for lower wages. This was one of the main concerns of Bernie Sanders supporters.

To an employee in Peoria, Illinois, or Canton, Ohio, laid off because his job was transferred to Vietnam, it is small comfort to be told that his pain is more than offset for the U.S. as a whole because America’s participation in trade treaties has created more export or international business jobs in California and Texas. Alternatively, that the typical American household benefits because it hypothetically saves at least $800 a year because of cheaper imports.

What the G20 could do is not only to articulate the overall benefits of globalization to their citizens but take practical steps such as creating a joint fund and colleges or vocational schools for retraining workers displaced by globalization – and encouraging its 20 member states to do the same in their own nations.

That’s why the G20 is the best bet to lead a coordinated defense of globalization and its benefits.

Over the last 15 years, globalization has lifted about 1.25 billion people out of extreme poverty and propelled another 1 to 2 billion into the middle class. Another telling stat: In 1981, when the world population was 4.5 billion, 1.98 billion lived in abject poverty. That’s 44 percent. In 2015, even though the world population reached 7.4 billion, the abject poverty rate had plunged to 9.6 percent. Only 710 million today live in extreme poverty.

This is primarily because of the spread of foreign direct investment, trade, domestic and international deregulation and the (tentative and shaky) emergence of a rules-based world economic order.

It is a stunning but fragile accomplishment, unprecedented in human history – which has been full of sudden blockages and U-turns.

The glories of Rome, Chang-An (capital of the Han dynasty, today’s Xian) and Pataliputra (capital of the Mauryan Empire in India) interconnected by the “Silk Road,” were followed by centuries of “dark ages” in Europe and fragmentation in China and India. The forces of protectionism, recidivism, excessive nationalism and tribalism lap at the shores of our fragile global economy. Who will defend it and help us build a global civilization while minimizing the pain of those hurt by globalization?

Even the largest countries, acting alone, are inadequate to play such a role. The G20 nations, while accounting for more four-fifths of the global economy, are nevertheless a small enough group to achieve consensus.

The coming decades of the 21st century call for an even greater degree of coordination, communication and joint action in pursuing fiscal policies and monetary systems, fostering innovation, balancing growth with ecological needs, tackling global warming and continuing poverty reduction. Although I’m not a big fan of big government, the G20 could be the leading espouser of global values, norms and rules and as a proponent of international business.

How the G20 can ensure the marvelous gains from globalization aren’t lost is republished with permission from The Conversation

The post Making vs. Keeping G20 Globalization Gains appeared first on Economy Watch.

For two days at the start of September, the centre of East Asian politics moved to Russia’s main city on the Pacific coast. Vladivostok hosted the Eastern Economic Forum, an annual event designed to pitch the Russian Far East to domestic and international investors.

For two days at the start of September, the centre of East Asian politics moved to Russia’s main city on the Pacific coast. Vladivostok hosted the Eastern Economic Forum, an annual event designed to pitch the Russian Far East to domestic and international investors.

This year, business dealings were overshadowed by high diplomacy. The forum was attended by Russian President Vladimir Putin, Japanese Prime Minister Shinzo Abe and South Korean President Park Geun-hye. After Putin held bilateral talks with Abe and Park, the trio appeared on the plenary panel moderated by former Australian Prime Minister Kevin Rudd.

Park primarily came to Vladivostok to persuade Putin to put more pressure on North Korea, but she seems to have left with little. Even though Moscow is concerned about North Korea’s weapons, it does not share Seoul’s obsession with Pyongyang.

Most of the attention was focused on Putin and Abe. During his second stint in office since December 2012, Abe has been determined to resolve the long-standing dispute with Russia over the southern Kuril Islands — known in Japan as the Northern Territories. This trip to Vladivostok was the Japanese leader’s fourth consecutive visit to Russia since April 2013. He has created a ministerial office dedicated to promoting relations with Russia. In addition, he has suggested that Japanese and Russian leaders should meet in Vladivostok every year.

In his speech at the Eastern Economic Forum, Abe made an impassioned plea to ‘Vladimir’ to solve the territorial issue. Putin sounded less emotional, but he made it clear that Russia is very open to dialogue with Japan on reaching a compromise. Very few details have emerged from the Russia–Japan summitry so far, but some observers suggest that Putin–Abe diplomacy might lead to a breakthrough.

Putin and Abe are both strong leaders that enjoy sustainable popularity and trust from their respective nations. Both are capable of making bold foreign policy decisions with the confidence that public and elites will support them. Some would argue that Putin and Abe share a similar outlook: in domestic politics both men are conservative, but have aspiring visions of their countries as influential on the world stage.

There are also geopolitical and geo-economic considerations at play encouraging the two countries to seek rapprochement. Being locked in a confrontation with the West, Moscow hopes to find, in Japan, a major developed partner that is able to do business with Russia pragmatically. The Kremlin sees better ties with Tokyo as an essential element in its ongoing efforts to boost the development of Russia’s vast eastern territories. Without Japan, Russia’s ongoing ‘Asian pivot’ might be shaky.

Japan also finds itself in an increasingly complicated security environment. The rise of China causes angst among many Japanese. North Korea, which is steadily advancing its nuclear and missile programs, is a growing threat; while Tokyo’s political relations with South Korea remain lukewarm at best.

At the same time, the Japanese alliance with the United States, which for so long has been the cornerstone of Japanese foreign policy, looks less and less ironclad, with significant portions of the American electorate demanding the downgrade of US security commitments overseas. Under such circumstances, it is crucial for Tokyo to normalise its relationship with Russia. Geo-economic considerations also play a role, with the Russian Far East’s rich energy resources an obvious option to enhance Japan’s energy security.

The next meeting between Putin and Abe is scheduled to take place in just three months. In December the Japanese Prime Minister will host the Russian leader in Nagato, Yamaguchi Prefecture — his home constituency. There is a possibility that Abe and Putin will finally reach a compromise.

A solution would most probably be based on the ‘two plus alpha’ formula, meaning that Russia would agree to transfer the two smaller islands to Japan (Shikotan and Habomai) and something else. Exactly what else Russia is willing to offer appears to be the subject of negotiations right now.

This may be fishing rights for Japan near the two bigger islands of Iturup and Kunashir or special privileges for Japanese citizens to visit, reside and do business on the currently disputed islands. Putin is unlikely to make any significant concessions on Russia’s core sovereignty. However, with smart and artful diplomacy, the deal can be packaged and presented to the public as a win for both sides.

Russia-Japan territorial resolution on the horizon? is republished with permission from East Asia Forum

The post Did the EEC Push Russian-Japanese Territorial Issues Forward? appeared first on Economy Watch.

Globalisation has contributed to the growth of China for decades but the rise of protectionism in Western economies could curb Chinese trade and investment.

Globalisation has contributed to the growth of China for decades but the rise of protectionism in Western economies could curb Chinese trade and investment.

The demise of manufacturing industries in the United States unable to compete against low priced Chinese imports has led to retaliatory action, most notably on steel imports. The European Union has reacted similarly.

In Australia there has also been strong opposition to the China Australia Free Trade Agreement, particularly by unions concerned that Chinese companies investing in Australia would bring workers from China. Sentiment also runs strongly against Chinese foreign investment in agricultural land and infrastructure.

Overly restrictive trade and investment measures will have serious implications for future world growth, if the backlash against globalisation intensifies them.

China was a big beneficiary of globalisation

No other sizeable economy in history has ever experienced three unbroken decades of near 10% average economic growth as China did during the recent globalisation era, the legacy of economic reforms begun by leader Deng Xiaoping. This growth in aggregate output was on average over three times greater per annum than its Western trading partners.

The key factors underpinning this growth were: encouragement of foreign direct investment, specifically in manufacturing, greater internal labour mobility, higher domestic saving due to contraction of social welfare entitlements previously extended by the state sector and an improved investment climate for the private sector with less corruption.

Simultaneously, China’s remarkable integration into the world economy was due to its international merchandise trade expanding at an annual average of 15% during the globalisation era from the early 1980s to 2008. That was more than double the global rate.

After China joined the World Trade Organisation (WTO) in 2001, the liberalisation of international trade barriers significantly boosted its international merchandise trade. Policies that encouraged foreign direct investment also greatly assisted exports by multinational firms (such as Motorola, Toshiba, Nokia and LG) operating in coastal China.

Export-led growth had been crucial to China’s development strategy before the global financial crisis and a tightly managed exchange rate system was instrumental to its success. China’s export growth has persistently outpaced its import growth, giving rise to trade and current account surpluses.

China’s embrace of globalisation made it a highly open economy relative to most advanced economies in the world. As a proportion of GDP, its total exports plus imports of goods and services remains well above comparable ratios for the United States, Japan and Germany.

In China’s development strategy, large trade surpluses were seen to be an objective of economic policy. Since the global financial crisis, China has adopted a policy of re-balancing its economy away from increasing its dependence on exports and investment as the primary sources of aggregate expenditure growth towards domestic consumption and services provision.

This will have profound international implications generating spillovers for trade and commodity prices. Curbing export growth will reduce China’s vulnerability to the backlash against globalisation.

More foreign investment, less trade growth?

Due to a slowdown in China’s growth and trade, its current account surplus, mainly reflecting its trade surplus, has fallen from a high of 10% of GDP in 2007 to around 2-3% in recent years.

However China’s central bank, the People’s Bank of China, has accumulated huge foreign exchange reserves over the past decade of over $US 3 trillion. These reserve holdings are the highest of any economy in the world and over twice the value of Australia’s annual GDP.

China’s foreign money holdings are now also managed by its sovereign wealth fund, China Investment Corporation, which has amassed a portfolio of high yielding assets worldwide.

This huge arsenal of funds suggests China’s future gains from globalisation will depend more on investing overseas. It’s because of this its foreign investment abroad will play a larger role than previously.

World merchandise trade grew at under 3% in 2015 according to the WTO in line with world GDP growth. This is a major slowdown relative to the peak globalisation period between 1990 and 2008 when world trade growth grew twice the speed of GDP growth.

China’s economy is growing at its slowest rate in 25 years, well below the phenomenal rates experienced before the global financial crisis. Yet, China’s growth remains robust by any standard. It increased its GDP last year by the size of Sweden’s.

There is a two-way relationship between growth in China and its trading partners in the rest of the world. The global slowdown reduces demand for China’s exports and lowers China’s growth, which, in turn, reduces China’s demand for imports, especially commodities, lowering GDP in the rest of the world.

A key reason The Great Depression of the 1930s was so prolonged was that many countries, following the enactment of the Smoot-Hawley Tariff Act in the United States, became highly protectionist, which severely contracted world trade.

Luckily, so far we have not seen a repeat of that 1930s experience. Yet if the globalisation backlash results in ever-increasing anti-free international trade and investment measures, it remains a clear and present danger to future living standards.

If the backlash against globalisation hurts China, it hurts global growth too is republished with permission from The Conversation

The post Globalization Meets Protectionism appeared first on Economy Watch.

Hugh White’s views on the dangers of the United States moving to a ‘No First Use’ nuclear posture are inherently unpersuasive. The virtues of a ‘No First Use’ policy have been crisply spelled out by Ramesh Thakur, for instance, in recent pieces in The Strategist and Bulletin of the Atomic Scientists.

Hugh White’s views on the dangers of the United States moving to a ‘No First Use’ nuclear posture are inherently unpersuasive. The virtues of a ‘No First Use’ policy have been crisply spelled out by Ramesh Thakur, for instance, in recent pieces in The Strategist and Bulletin of the Atomic Scientists.

White’s views are also most decidedly not shared by a large group of former prime ministers, foreign ministers, key diplomats and other senior figures from around the region, including Japan and South Korea, who recently signed a statement on this issue as members of the Asia-Pacific Leadership Network for Nuclear Non-Proliferation and Disarmament.

Hugh White is a very fine strategic analyst and I agree with many of his views. However, he has long been far too insouciant, in my judgement, about the enormous risks in the contemporary world associated with the possession and potential use, deliberately or inadvertently, of nuclear weapons by anyone.  Even to the extent of him being able to contemplate with equanimity a nuclear-armed Japan as part of his vision for a more evenly balanced new ‘concert of powers’ in East Asia.

The existential scale of those risks have been acknowledged by no less a group of hard-headed Cold War realists than Henry Kissinger, George Shultz, Bill Perry and Sam Nunn in their famous series of Wall Street Journal articles since 2007.

Their voices should be heeded. A policy of ‘No First Use’ can only be a first step on what will necessarily be a very long journey to a nuclear weapons free world. US President Barack Obama’s willingness to take this step is hugely welcome.

The statement of the Asia-Pacific Leadership Network for Nuclear Non-Proliferation and Disarmament is reproduced here in full.

‘The Obama administration is reportedly considering how to re-energize the nuclear arms control agenda in the endgame of his presidency. One significant initiative that has been flagged is a No First Use policy whereby the US would commit itself not to be the first to use nuclear weapons in any circumstances.

We would welcome this significant change in the longstanding US nuclear strategy as President Obama’s vision of a nuclear-weapon-free world has made little visible progress.

President Obama entered office with a strong commitment to the nuclear policy agenda. His first major foreign policy speech in Prague in 2009 articulated a powerful vision of a world free of the threat of nuclear weapons. His achievements as president include the New START treaty with Russia, four Nuclear Security Summits, and the deal to ensure that Iran’s nuclear program is peaceful and a historic visit to Hiroshima in May.

The bold agenda has stalled.

A No First Use policy would have both symbolic value and significant practical implications. Its potential benefits greatly exceed possible downsides. It would encourage a shift away from high-risk doctrines and weapons deployments. A No First Use policy would avoid the need for forward deployment, launch-on-warning postures, and pre-delegation of authority to battlefield commanders, significantly dampening the prospects of accidental and unauthorized use. It would also speak to the world’s growing humanitarian concerns on nuclear weapons.

If, following the US example, No First Use were adopted by all nuclear armed states, the policy could become the centrepiece of a global nuclear restraint regime, strengthen strategic stability, mute crisis instability, solidify the boundary between nuclear and conventional weapons, and further entrench the norm against the use of nuclear weapons.

President Obama has rightly noted that “As the only nation ever to use nuclear weapons”, the US “has a moral obligation to continue to lead the way in eliminating them”. Increased confidence following a No First Use convention would reduce tensions between nuclear-armed states and contribute to a climate conducive to further progress on nuclear disarmament.

We strongly encourage a US No First Use policy and call on America’s Asia-Pacific allies to support it’.

On nuclear first strike, White is wrong is republished with permission from East Asia Forum

The post ‘No First Use’ Fallout appeared first on Economy Watch.

As China assumes G20 leadership, the prospect of global “protectionism” is on the rise and the stakes could not be higher for cooperation and major structural reforms. Without continued investment and trade, secular stagnation in advanced economies and growth deceleration in emerging economies will continue to broaden.

As China assumes G20 leadership, the prospect of global “protectionism” is on the rise and the stakes could not be higher for cooperation and major structural reforms. Without continued investment and trade, secular stagnation in advanced economies and growth deceleration in emerging economies will continue to broaden.

Since 1980, global economic integration accelerated dramatically until the onset of the financial crisis in the fall of 2008. After years of secular stagnation in major advanced economies and deceleration of growth in large emerging economies, modest signs of recovery have prompted international observers’ hope for the revival of globalization.

In the absence of broad policy acceleration following the G20 Summit in Hangzhou, China, such hopes may amount to hollow pipe dreams.

Massive monetary stimulus, but no pickup in trade and investment

At the peak of globalization, Baltic Dry Index (BDI) was often used as a broad barometer of international commodity trade and as a leading indicator since it seemed to reflect future economic growth. The index soared to a record high in May 2008 reaching 11,793 points. However, as the financial crisis spread in the advanced West, international trade collapsed in the emerging East. Barely half a year later, the BDI had plunged by 94 percent, to 663 points, lowest since 1986.

As China and other large emerging economies chose to support the ailing advanced economies through the G20 cooperation, major economies in North America and Europe pledged accelerated reforms in global governance, while launching massive fiscal stimulus and monetary easing. These factors caused the BDI to rise to 4,661 in 2009. However, as promises of reforms were ignored and stimulus policies expired, the BDI bottomed out at 1043 in early 2011, coinciding with the European sovereign debt crisis.

In the past half decade, advanced economies have sustained a semblance of stability, but only by relying on historically ultra-low interest rates and massive injections of quantitative easing; today QE measures exceed $12 trillion, some $10 trillion in negative-yielding global bonds, and there have been 660 interest rate cuts since the collapse of Lehman Brothers in 2008. Intriguingly, these huge shifts are not reflected by the BDI, which has continued to stagnate. It reached a historical low of 290 last February oscillating in upper-600 point range today – amid the global crisis levels.

Optimists argue that the index reflects poorly on globalization because it is a better indicator of international commodity trade than global economic integration. Yet, the indicators of global investment and trade herald even gloomier prospects.

Eclipse of globalization

Starting around 1870, capital and trade flows rapidly became substantial, driven by falling transport costs. However, this first wave of globalization was reversed by a retreat into nationalism and protectionism between 1914 and 1945.

After World War II, trade barriers came down, and transport costs continued to fall, thanks to the U.S.-led Bretton Woods system. As foreign direct investment (FDI) and international trade returned to the pre-1914 levels, globalization was fueled by the “three glorious decades” of economic miracles in Western Europe followed by the rise of Japan. However, this second wave of globalization mostly benefited the advanced economies. It was their “golden era.”

After 1980, many developing countries broke into world markets for manufactured goods and services, while they were also able to attract foreign capital. This era of globalization peaked between China’s membership in the World Trade Organization (WTO) in 2001 and the onset of the global recession in 2008. It lent credibility to the idea that large emerging economies had become a central force in the global economy, even before the global crisis. Therefore, when the advanced West, led by the U.S., was swept by the Great Recession, large emerging economies (proxied by China) fueled the global economy, which was thus spared from a global depression.

As the G20 cooperation dimmed, so did global growth prospects, too. Before the global crisis, world investment soared to almost $2 trillion. Despite new demographics, growth and productivity, global FDI flows rose to $1.7 trillion in 2015; the highest level since the global crisis, yet well behind the record high a decade ago. That could undermine the investment needs and future of the Sustainable Development Goals and the ambitious Paris Agreement on climate change.

Unfortunately, the state of world trade is even worse. As the 18^th report of the Global Trade Alert showed last year, world export volumes are not growing more slowly, but falling. Manufacturing prices were down almost 10 percent, whereas world export prices remained some 20 percent lower than their 2011 highs – not least because of trade restrictions imposed by certain G20 economies in key product categories.

At the same time, the third leg of globalization, global migration, is plunging in developed regions, while stagnating in developing regions. Even worse, the 21^st century has started with the greatest global forced displacement since the postwar era, with more than 65 million people displaced from their homes by conflict and persecution in 2015, according to the UN Refugee Agency.

In the past, world investment, trade and migration habitually picked up as recessions ended. Today, there will be no return to “business as usual.” As a result, the stakes could not be higher for G20 cooperation today. Global economic integration is at crossroads.

China and G20’s historical moment

The good news is that, between 2008 and 2013, as economic momentum shifted from the transatlantic axis to Asia, it led emerging Asia to add more to the global economy than the entirety of Germany. Indeed, Asia may have produced nearly another Germany in the past three years, despite China’s growth deceleration.

Following the global crisis in 2009-10, half of global GDP growth could be attributed to China, although its GDP was less than 10 percent of the world total. A huge $590 billion stimulus plan supported Chinese growth when the world economy needed it the most. However, as that stimulus helped to keep many advanced, emerging and developing economies afloat, it cost China a massive debt burden that will take years to unwind.

Today, China accounts for 25 percent of world GDP growth, which is closer to its share in the world economy. Undoubtedly, China will do its share for global growth prospects, as evidenced by the massive One Belt One Road (OBOR) initiative, which has potential to accelerate industrialization in multiple world regions, and the China-sponsored BRICS New Development Bank and the Asian Infrastructure Investment Bank, which seek to complement – not substitute – multilateral organizations, which are dominated by major advanced economies.

However, amid its rebalancing and deleveraging, China cannot do more. It is now the turn of the major advanced economies and other large emerging economies to execute their structural reforms. That’s what their economies need to alleviate secular stagnation and deceleration, while supporting aging populations. That’s also what G20 needs to restore acceptable levels of global economic integration.

In early July, G20 ministers reached a deal to cut global trade costs, reaffirmed commitment to reduce trade protectionism and set up a new global investment policy. Thanks to a series of deals in Shanghai, the prospects of ‘de-globalization’ remain pressing but are no longer inevitable.

Following the G20 Summit in Hangzhou, what is needed is a multi-front attack on the global slump in investment and trade. Otherwise, the global forced displacement will get a lot worse, which would undermine the remaining global growth prospects and foster destabilization around the world.

Led by China, G20 Must Reverse the Eclipse of Globalization is republished with permission from The Difference Group

The post Can China Mitigate Rising Global Protectionism? appeared first on Economy Watch.

At the end of the twentieth century, China was an observer of global governance, on the sidelines of the G7 and not yet a member of the World Trade Organisation (WTO). Encouraged by Western countries to embrace global governance, China has become much more proactive in pushing global cooperation since the G20 was founded. As president of the G20 for 2016, China has an unprecedented opportunity to provide impetus to global development.

At the end of the twentieth century, China was an observer of global governance, on the sidelines of the G7 and not yet a member of the World Trade Organisation (WTO). Encouraged by Western countries to embrace global governance, China has become much more proactive in pushing global cooperation since the G20 was founded. As president of the G20 for 2016, China has an unprecedented opportunity to provide impetus to global development.

After accession to the WTO in 2001, China became deeply integrated into global markets and that sparked a shift in its approach toward global governance. Invited by France, China attended the G8 Summit in 2003 for the first time, together with other emerging economies such as India and Brazil. However, it was the global financial crisis in 2008 that persuaded the United States to call for an enlarged leaders’ summit, of G20 members. Then Chinese president Hu Jintao attended as a full member, marking a new stage in China’s participation in the premier forum of global governance.

The 13th Five Year Plan set out China’s intention to ‘actively participate in global economic governance and (to contribute to the provision of) global public goods, increasing (the power of dialogue) in global economic governance’. In addition, China is eager to display its commitment to global cooperation through the G20 at a time when it feels cornered by geopolitical and territorial conflicts in the Asia Pacific.

However, how can China help contribute to shaping global cooperation with its partners in the G20?

The major achievement of the G20 in the last eight years has been through collective measures in response to the global financial crisis via expansionary fiscal and monetary policies. This involved a kind of grand bargain between the developed and emerging economies of the G20. The former made concessions on IMF quotas and World Bank voting power reform in exchange for the latter’s cooperation on exchange rates, trade, climate change and IMF contributions.

As the largest representative of emerging economies within the G20, China led the BRICS nations — Brazil, Russia, India and South Africa — among others and played a key role in reaching this agreement.

It adopted a fiscal stimulus package of RMB 4 trillion (approximately US$586 billion) and committed US$43 billion, one-tenth of the total, to the IMF’s transitionary capital increase to respond to the Euro crisis before the IMF quota reform took effect. As repayment, China surpassed Germany, the United Kingdom and France to become the third-largest shareholder in the IMF and the World Bank — after the United States and Japan.

Formal membership of the G20 Summit, alongside increases in quotas and voting power within the IMF and the World Bank, represent a significant elevation of China’s place in global economic governance. However, this should not be overestimated. A formal seat at the table and minor numerical adjustments to quotas and voting rights are of more symbolic than substantial importance.

Real power in global governance requires intellectual input into the international financial and economic agenda, policies and rules — the effective exercise of ‘soft’ power. China lags behind in the exercise of institutional soft power in this theatre. The major substantial outcomes of the G20 to date, including updating international financial regulatory rules through Basel III and international tax cooperation on tax havens, have been mostly led by the Atlantic countries.

The Hangzhou Summit offers China a role in shaping the world development agenda and bringing a longer-term vision to the G20 that aligns with its own domestic priorities. In addition, that’s where China’s efforts have been heavily directed.

China has been deepening the G20 structural reform agenda, identifying reform priorities, enunciating guiding principles and indexes by which to judge member performance, and highlighting innovative drivers of growth. It has also been promoting the ongoing role of the G20 Trade Ministers’ Meeting and consensus on the Strategy for Global Trade Growth as well as the Guiding Principles for Global Investment Policymaking. In addition, China has promoted green financing and the timely implementation of the 2030 Sustainable Development Agenda.

In the area of financial reform, China has also been proactive. It has called for a bigger role for IMF Special Drawing Rights in the international financial system, considered joining the Paris Club to more constructively contribute to the discussions of the thorny sovereign debt restructure issue, initiated the establishment of the G20 Research Centre for Anti-Corruption Fugitive Repatriation and Asset Recovery, and provided technical assistance to build developing countries’ capabilities on tax administration.

All arms of the Chinese government have been confronted by a hard ‘capacity test’ in contributing to the development of the G20 agenda in the lead-up to Hangzhou. In an era where global markets are increasingly difficult to govern, no one can guarantee that these efforts through China’s presidency will bear fruit. However, at the very least, the G20 process has been a good trust-building exercise for China and the world.

More importantly, China has gained much experience in driving global governance through participating in various G20 engagement groups. This is only the beginning of a process. Success in strengthening of China’s economy, its enterprises and society will ultimately be the real sources of the constructive exercise of Chinese soft power in the global economy.

Can China help shape global governance at the G20? is republished with permission from East Asia Forum

The post Another Shot at Global Governance Reform appeared first on Economy Watch.

There is growing evidence that inequality is increasing not only in Australia but also internationally within the advanced industrial economies. The age of endless growth in prosperity for everyone is a distant memory of a more hopeful age.

There is growing evidence that inequality is increasing not only in Australia but also internationally within the advanced industrial economies. The age of endless growth in prosperity for everyone is a distant memory of a more hopeful age.

Australia, the land of the fair go, has in the past presented a bulwark against the ugly inequality that has openly disfigured US and UK society, and is increasingly evident throughout Europe. However, this week’s Chifley Research Centre report on inequality reveals how far Australia has slipped from its ideals of fairness and equity.

The research centre is the think tank of the Australian Labor Party, and in an introductory comment, Wayne Swan MP states:

“This is not some tepid third way Davos fudge in which we pretend the only response to growing wealth and income inequality and disruptive technological change is world class education and training.”

This examination of the threat to Australia’s future prosperity presented by growing inequality is part of the Inclusive Prosperity Commission, a major policy project of the Chifley Centre. What is “inclusive prosperity”? Simply put it is:

* good jobs and wages

* housing you can afford

* health care when you need it

* education for the future

* secure income in retirement.

This list bares a close resemblance to the evils identified in the wartime UK Beveridge Report – squalor, ignorance, want, idleness, and disease. We thought we had eradicated these evils for virtually everyone in the advanced economies with the development of social, education, housing and health services combined with a growing and inclusive economy offering full employment. How did we get back to societies and economies where absolute poverty is widespread, and inequality is everywhere?

In Australia, unlike most advanced industrial economies, we have consistently maintained economic growth for the last 25 years; however, the benefits of this growth have been very unequally distributed. The Chifley Report argues:

“Economic growth which does not generate these benefits for working class and middle-class households has no social purpose and cannot be sustained, neither economically nor politically. Policies which put these outcomes at risk weaken the economy – policies that lead us in this direction strengthen the economy over time.”

The report suggests two solutions to Australia’s dilemma:

* A “high-pressure economy” grounded in high productivity and strong aggregate demand: based on full employment, and a tax and transfer system that promotes fairness.

* A “progressive supply side agenda”: support for innovation, long-term investment in public infrastructure and sustainability, quality health and education for all, and incentives for long-term private sector investment.

The concentration of wealth in recent decades has destabilised financial markets and delivered the global financial crisis as economist Joseph Stiglitz and others have argued.

Essentially, inequality causes lower growth and reduces efficiency as a lack of opportunity means that the most valuable asset in the economy – its people – are not fully utilised.

While Australia has not gone down the American path – yet, there are worrying indications we are heading in this direction. Australia has now slipped into the bottom half of the OECD countries with the highest inequality. The gender pay gap is growing, not decreasing. As CEDA acknowledges, an estimated 4-6% of Australian society continues to experience chronic poverty and deprivation in an affluent society.

Wealth in Australia is highly concentrated, with the top 10% of wealth holders owning 45% of all wealth (Table 1).

Distribution of Australian Wealth

Wealth shares, 2012 Australian Council of Social Service

There is no guarantee of shared prosperity going forward with the many challenges Australia faces including the economic transformation of Asia, technological progress and digital disruption, diversification of the economy, and an ageing population. If we do not adopt inclusive economic and social policies, where will we end up?

The current distribution of wealth in the United States is a guide, with the top 5% possessing over 60% of all wealth, and the bottom 50% left to survive on a few percent of the total wealth (Table 2).

As Janet Yellen Chair of the Board of Governors of the Federal Reserve stated:

“ It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority … to the extent that opportunity itself is enhanced by access to economic resources, inequality of outcomes can exacerbate inequality of opportunity, thereby perpetuating a trend of increasing inequality.”

Share of all financial assets by net worth group in US, 2014

Board of Governors of the Federal Reserve System, Survey of Consumer Finances

As Michael Cooney of the Chifley Centre argues, the new level of inequality that is emerging in Australia is not only a challenge to our morality but also a serious threat to our future economic growth. What is required is inclusive growth with both efficiency and equity at its core. This will provide a more resilient and responsible economy.

A world with inequality everywhere is a moral and economic threat is republished with permission from The Conversation

The post Inequality Creeps into the Land of the Fair Go appeared first on Economy Watch.

Immigrants have become a major scapegoat in recent years for sputtering Western economies.

Immigrants have become a major scapegoat in recent years for sputtering Western economies.

From the U.K.’s jarring “Brexit” from the European Union to Donald Trump’s infamous wall and more recent proposal to apply “extreme vetting” to those wishing to enter the U.S., many politicians have found success by casting immigrants as a threat to the physical, social and economic welfare of natives.

In short, Americans (and our European brethren) are unhappy, and many are convinced immigration brings harm. A recent poll found that almost two-thirds of Americans think immigration, including the legal kind, “jeopardizes the United States.”

While it has become a popular notion in the West that immigrants jeopardize the job prospects of natives, over 30 years of economic research (including my own) gives strong reason to believe otherwise.

In addition, in fact, the opposite may be more likely: There’s evidence immigrants actually promote more economic growth.

Stopping the flow of immigrants into the U.K. was the reason many voted to leave the EU. Neil Hall/Reuters

Why we blame immigrants for our troubles

Extensive reviews of research on the topic (like this one) show that most studies of how immigration affects native wages and employment found very little effect.

Although economists have yet to arrive at a complete consensus, decades of studies generally do not support the notion that immigration harms the economy, market wages or native employment. So why do so many believe it when research suggests otherwise?

Recent media coverage can be partly to blame, for promoting more negative images of immigrants than positive ones. One example is how there’s been a lot of coverage of fraud in the H-1B visa program but relatively little of testimony by Bill Gates and others about its important benefits. In addition, nationalistic politicians frequently drum up support by claiming immigrants are stealing our jobs.

However, a deeper issue is that it is easy to think that the labor market is a zero-sum game. If everyone is competing over a finite number of jobs, more immigrants mean fewer opportunities for natives. However, the reality is much more complex, and the labor market is far from a zero-sum game.

A new migrant interested in the same job as you may diminish your odds a little.  However, a single immigrant with a good idea might end up creating hundreds or thousands of jobs that wouldn’t have existed had he or she not crossed an ocean or border (the impact of son-of-a-migrant Steve Jobs or South African tech entrepreneur Elon Musk comes to mind).

The labor market is dynamic, and both individual workers and employers constantly readjust to changing conditions. In fact, many economists have found evidence that natives quickly adjust to the labor market forces of immigration and in a way that often yields positive benefits.

Immigrant Elon Musk isn’t taking anyone’s job: he’s created thousands at Tesla and SpaceX. Stephen Lam/Reuters

Adjusting to immigration

Immigration flows into the U.S. do not affect all sectors equally. Immigrants are highly overrepresented in either very low-skilled manual and labor-intensive jobs or very high-skilled science and engineering occupations.

The types of immigrants who arrive and the areas in which they work are crucial for understanding the impact, and this concentration makes it possible to adjust to it.

In a 2010 study, Dartmouth economist Ethan Lewis found that companies in regions that saw inflows of less-skilled immigrants in recent decades adopted capital machinery at a lower rate.

In other words, because businesses substituted capital for less-skilled immigrant workers, they didn’t suffer harmful effects on productivity or value added per worker. This substitution lowers the pressure to reduce wages.

Economists Giovanni Peri and Chad Sparber found that inflows of immigrants – whether low- or high-skilled – induced native workers to shift to jobs that are more complementary in nature and where they have a comparative advantage. Moreover, that limited the impact on wages and employment.

For example, natives working in fields receiving large inflows of low-skilled immigrants – who had a comparative advantage in manual and physical labor – moved toward occupations requiring more communication-intensive tasks. They observed a similar phenomenon when high-skilled immigrants with comparative advantages in fields like science and mathematics enter the U.S. labor force. Rather than being laid off, native skilled workers moved to occupations that required more managerial and communication skills.

Economists George Borjas and Kirk Doran also found convincing evidence of this mobility in very high-skilled academic research positions, where native mathematicians altered their research away from topics dominated by new immigrant academics.

Just as natives move toward occupations in which they possess a comparative advantage relative to immigrants, they can also move across skill groups by acquiring education. Several economic papers, like ones by Jennifer Hunt and Will Olney and Dan Hickman, found that natives tend to acquire more education following the arrival of less-skilled immigrants. Increases in education benefit the long-term prospects of natives, and means they are no longer competing in the less-skilled labor market.

Growing the economic pie

However, beyond simply doing no or little harm to natives, there’s evidence immigrants actually benefit the overall economy – which helps everyone.

Recall that immigrants in the U.S. are highly represented in high-skill science and engineering occupations. Economists have long understood that economic growth is generated by innovation, which in turn comes from research and development. A study by Stanford economist Charles Jones found that nearly half of U.S. economic growth since the 1950s is attributable to the increase in the number of scientists and engineers engaged in research and development.

Combine this with the fact that about half of the growth in the number of scientists and engineers in the U.S. since the 1980s was due to immigrants and it is not difficult to understand the connection between skilled immigration and economic prosperity.

In a recent paper, coauthored with Giovanni Peri and Chad Sparber, I formally tested this idea. We examined whether increases in skilled foreign-born scientists and engineers in the U.S. from 1980 to 2010 improved productivity. We found modest gains in real wages for native skilled workers. Moreover, no negative impacts on native employment.

Complementing our finding is research by economists William Kerr and William Lincoln, who found that skilled immigrants increase innovation, thereby generating productivity gains for native workers most ready to take advantage of such technological advances.

As long as immigrants continue to innovate and invent, they can continue to boost economic growth.

A man expresses himself back when immigration reform was possible. Those were the days. Immigration protest via www.shutterstock.com

Who is actually most hurt by immigration?

Although most studies don’t find adverse impacts on natives, that does not mean they have not found adverse impacts at all. In fact, the group that most commonly appears to be negatively affected by new immigrants is other recent immigrants.

Recent immigrants are the most easily substituted with new immigrants, tend to live and work in the same labor markets that new immigrants enter, often do not have the skills to move toward communication-intensive jobs and face restrictive policies that limit access to higher education. As such, their labor market prospects appear to deteriorate when new immigrants arrive.

Research suggests natives’ productivity in certain occupations – ones that truly appear to be zero-sum – is also somewhat affected by immigration. For example, economists George Borjas and Kirk Doran found that the publishing rates of American math professors were negatively affected by inflows of Soviet mathematicians in the 1990s after the Soviet Union’s collapse. Since the amount of papers an academic journal can publish is fixed, more quality papers from immigrants will crowd out those written by natives.

Other studies that take a general focus on the labor market and find negative effects have been debated from time to time among academics, however, with little consensus.

A new paper, however, calls into question many of these negative findings, showing researchers have been using measures of immigration that carry an inherent negative bias. Using correct measures eliminates the negative impact.

Facts are facts

All in all, most of the research suggests that the fear that immigration will drastically harm native wages and job prospects is by and large unsubstantiated. In fact, much work has shown the labor market is dynamic, and that native workers and employers take measures to evade any competitive forces from immigration.

While some pundits and presidential candidates will likely continue to claim immigration is harming our economy, that won’t alter the evidence economists have uncovered in study after study. By the same token, claims that immigrants are flooding across our southern border (so we need a giant wall to keep them out) doesn’t change the fact that illegal immigration to the U.S. has actually been falling for the past nine years.

Though it is easy to believe that foreigners will overcrowd a frail, zero-sum labor market, decades of research has shown the only thing that sums to zero are the estimated effects of immigration.

Why we’re wrong to blame immigrants for our sputtering economies is republished with permission from The Conversation

The post Are Immigrants Hurting or Helping Economic Growth? appeared first on Economy Watch.

Barack Obama began his presidency with a dramatic gesture, which captured the world’s imagination and won him the Nobel Peace Prize. Speaking in Prague in 2009, he declared that the United States would work towards abolishing nuclear weapons. Since then, for over seven years, nothing has happened. Now that might be about to change.

Barack Obama began his presidency with a dramatic gesture, which captured the world’s imagination and won him the Nobel Peace Prize. Speaking in Prague in 2009, he declared that the United States would work towards abolishing nuclear weapons. Since then, for over seven years, nothing has happened. Now that might be about to change.

The Washington Post reported that deputy national security adviser Ben Rhodes told the Arms Control Association on 6 June: ‘I can promise you today that President Obama is continuing to review a number of ways he can advance the Prague agenda over the course of the next seven months. Put simply, our work is not finished on these issues.’

There have been no official announcements, but well-orchestrated press reports say that in his last months as president, Obama wants to take the first concrete step towards nuclear abolition by reducing the United States’ own dependence on nuclear forces.

He could do that by declaring officially that the United States will never use nuclear weapons unless an adversary has used them first.

That is a big deal. It may or may not bring us a step closer to abolishing nuclear weapons, but it would certainly be a big blow to the US’ strategic credibility in Asia.

All the world’s other major nuclear powers have made what is called a ‘no first use’ (NFU) declaration decades ago, which in effect means they have promised not to start a nuclear war.

However, the United States has not. During the Cold War, Washington always threatened to use nuclear weapons first to stop the Soviet Union’s massive conventional forces overrunning Western Europe.

Since the Cold War ended, many people have argued that Washington no longer needs to make this kind of threat. They say that US conventional forces are now so overwhelmingly powerful that they could easily deter any adversary without threatening nuclear escalation.

Back in 2009, Obama seemed to agree with this argument, and he was widely expected to make an NFU declaration. However, many of his advisers disagreed, and when his major Nuclear Posture Review came out in 2010, it stopped far short of an NFU declaration.

That left his historic Prague initiative dead in the water. Obama could not credibly argue to abolish nuclear weapons while his own government, alone among the major nuclear powers, still threatened to start a nuclear war by using them first to defeat a conventional attack.

The key reason that Obama’s advisers, like most of Washington’s foreign policy ‘establishment’, thought the United States should hang on to this threat was the attitude of US allies, including South Korea and Japan. They said an NFU declaration would seriously undermine allies’ confidence in US security guarantees because leaders in Tokyo and Seoul did not buy the argument that US conventional forces were now so strong that nuclear forces would never be needed.

On the contrary, US allies — like many analysts and policymakers in the US itself —understand all too well how much the conventional forces of US rivals like China have improved in recent years. There is no real doubt that defeating China in a major war without using nuclear forces is becoming harder, not easier.

That seems to many people a decisive argument for the United States to keep the threat of nuclear escalation firmly on the table.

However, it is not that simple.

The US’ threat of nuclear escalation only works to deter an adversary if the adversary believes that Washington’s threat is serious, not a bluff. In addition, the problem is that the threat is not credible against any adversary — like China today and perhaps North Korea in future — that has nuclear weapons of its own that can target the United States.

In a conflict over the Senkaku/Diaoyu islands, for example, the United States could not credibly threaten to use nuclear weapons against Chinese conventional forces, because China could so easily and credibly threaten to retaliate by launching a nuclear strike against the United States.

Back in the Cold War, US threats to use nuclear weapons first were credible despite the risk of Soviet nuclear retaliation because the stakes were so high. Everyone believed that the US would be willing to risk a nuclear attack on itself to keep the Soviets out of West Berlin. However, no one believes the US today would accept the same risks to defend Japan’s claims to the Senkaku/Diaoyu Islands, or even over Taiwan. So any US threat of nuclear escalation would be trumped by China’s counter-threat of nuclear retaliation.

Obama probably understands this, which helps explain why he wants to think again about making an NFU declaration. In addition, this time, he will be harder to dissuade.

However, that does not mean the experts who talked him out of NFU back then were wrong about the impact on US allies. A declaration that the United States would no longer threaten to use its nuclear weapons to defend them against a conventional attack would erode their confidence because it would implicitly acknowledge that the threat was not credible.

Combined with the knowledge that the United States could no longer easily win a conventional war against an adversary like China, this would be a big blow to the US’ standing as the leading strategic power in Asia and the guarantor of its allies’ security.

The reality is that while it might make perfect sense in the light of new strategic realities, and perhaps even help to move the world towards nuclear disarmament, an NFU declaration would weaken the United States’ standing in Asia by amplifying the message that it no longer has the will to stand up to China.

That message is of course already being heard loud and clear this year from the US presidential campaign trail, and not just from Republican candidate Donald Trump.

Democratic candidate Hillary Clinton’s categorical repudiation of the Trans-Pacific Partnership shows how strongly the political wind is blowing against the old orthodoxies of free trade and strong alliances that have guided US foreign policy for generations. No one should assume that Clinton, if she wins the White House, would reverse an NFU declaration made by Obama. She would be too worried about what that might mean for her chances of re-election for a second term in 2020.

‘No first use’ nuclear pledge bad for US standing in Asia is republished with permission from East Asia Forum

The post The Complex Nature of a Nuclear Pledge appeared first on Economy Watch.