China used to call Russia its ‘older brother’. However, never again since the fall of the USSR. In an effort to portray its status as a less powerful yet assuredly more senior neighbour, Russian officials have recently begun referring to their country as China’s ‘elder sister’. The new term has proven less popular in China.

China used to call Russia its ‘older brother’. However, never again since the fall of the USSR. In an effort to portray its status as a less powerful yet assuredly more senior neighbour, Russian officials have recently begun referring to their country as China’s ‘elder sister’. The new term has proven less popular in China.

Whatever familial phrase these nations eventually settle on, it is increasingly clear to policymakers and analysts that the rapprochement between Moscow and Beijing is one of the most important trends in global politics since 2014. The two powers’ deepening accord has the potential to significantly shift the direction of geopolitics in North and Northeast Asia.

Russia signed a major oil export deal with China in 2009, agreeing to supply 15 million tonnes per annum through the East Siberia–Pacific Ocean pipeline. Since then, China’s energy cooperation with Russia seemed to always leave a bitter taste — until 2014. The catalyst for better relations was the crisis in Ukraine, which estranged Russia from the West. Moscow faced substantial capital outflows and uncertainty around its energy exports to the European Union. China became the only option. Moscow has since opened up to energy investment from China, removing a number of key restrictions on investing in oil and gas resources on Russian soil.

Increasing oil imports from Russia seems to make good sense to the Chinese leadership now that their territorial dispute with multiple countries in the South China Sea is intensifying. The long-argued ‘Malacca dilemma’ — China’s dependence on imports travelling through the narrow Malacca Strait between Malaysia and Indonesia — seems to finally have its manifesto. Despite a lack of real evidence that choking China’s oil imports in the world’s busiest strait is feasible or even possible, Russian oil exported through pipelines and trains certainly looks like a safer option.

For Russia, China’s oil bill has played a key role in holding up the country’s weak economy, especially since the European Union turned its back on Russian gas. However, as with all new dancing partners, there are bound to be missteps.

The collapse in oil prices since 2014 surprised both nations and hurt most oil exporters’ economies. Russia has been among the worst hit. Oil and gas exports account for 50 percent of its federal budget and 70 percent of export revenues before the collapse of oil prices in 2014. The huge gas deal signed with China in 2014 is price indexed to oil. Though the exact formula has not been revealed, the price informing the agreement would now be in a very different range from when the deal was inked.

China, too, is hardly in economic paradise.

The ‘new normal’ of China’s economic transition is far from stabilised. Premier Li Keqiang has repeatedly called for progress in addressing under-performing ‘zombie’ enterprises and overcapacity in heavy industries. Fiscal and financial measures to ratchet up China’s economy could be directed to innovation and productivity growth, instead of being wasted on putting these incompetent firms on life support. High debt among state-owned enterprises (SOEs) is hurting the government’s ability to propel economic growth while investment from the private sector decelerates sharply.

On the other hand, slow growth in heavy industries has seen China’s diesel demand decline consistently over the last few years. Car-clogged cities and the rise of electric vehicles also suggest dimming prospects for petrol demand growth. Competition for the Chinese oil market will only get fiercer as oil producers fail to freeze output and the world’s largest growing market faces huge uncertainty. None of these developments are in Russia’s interests.

However, China and Russia’s dance will go on as long the game of international power continues.

China and Russia are still complementary economies. One is rich in resources and high military technology, while the other is good at mass manufacturing and rich in cash. This complementarity is well demonstrated by their partnership in Central Asia, where China provides investment in resource-rich yet unpredictable countries while Russia ensures the stability of ruling regimes. Facing increasing pressure from both east and west, it is unlikely that either China or Russia will seek to change this partnership any time soon, though the countries’ willingness and ability may not always match.

Russia has become a surprising beneficiary of China’s deepening oil sector reform. The Chinese government granted approximately 80 million tonnes of crude oil import quota to a number of qualified ‘teapot’ refineries in Shandong province, an area that previously was only open to China’s national oil companies (NOCs). The move was an attempt to introduce an element of competition to the oil sector. As a result, over 90 percent of China’s oil import growth in the first half of 2016 was driven by these teapot refineries.

Energy ties between China and Russia reflect mutual demands for cooperation in political, security and economic dimensions. They cannot be viewed as driven by only one of them.

For both nations, opaque decision-making processes in government as well as in each country’s powerful NOCs mean that good bilateral communication and understanding are not always ensured. Sometimes their interests may be at odds.

Uncertainty surrounding the progress of China’s economic transition, SOE reform and future developments in energy technology could lead to a range of very different scenarios. These developments could either reinforce or destroy energy ties between China and Russia. However, in the years to come, the world should not be surprised to see more energy deals signed by these two powers.

China–Russia energy ties won’t short-out is republished with permission from East Asia Forum

The post Brothers in Energy appeared first on Economy Watch.

During this year’s G7 summit, Japan announced its vision of creating a LNG market to meet increasing energy demand. Natural resource markets are a foundation for trade and economic development. What is less well known is the close link between the natural resource markets and the currency markets.

During this year’s G7 summit, Japan announced its vision of creating a LNG market to meet increasing energy demand. Natural resource markets are a foundation for trade and economic development. What is less well known is the close link between the natural resource markets and the currency markets.

LNG was first imported to Japan by the Tokyo Electric Power Company and Tokyo Gas in 1969. Since then, the market has grown substantially and financing large LNG projects has become possible. However, the LNG market is much smaller and geographically dispersed than the crude oil market. Developing the market further requires a spot market, and there are three main requirements that need to be overcome to make the most of this opportunity.

First, storage capacity must grow. The storability of crude oil makes adjusting supply possible — essential for a spot market. Likewise, more LNG tanks must be built so that supply can respond to price changes. It is commonly assumed that storing LNG is difficult due to extreme temperature requirements. However, just like crude oil, LNG storage is feasible if investment in suitable infrastructure is made.

Second, producers and suppliers must be able to trade LNG. The clauses restricting destinations that can be delivered to should be abolished or at least made more flexible. Transportation infrastructure should also expand to allow for changing demand.

Lastly, financial institutions must provide liquidity to facilitate transactions and a means to hedge risks. The construction of a LNG production base requires large investments and most LNG trade is based on a long-term contract with the oil price as a benchmark. The involvement of major electricity and gas companies made financing big LNG related investment possible. When the oil price was high, many new projects began. Therefore, the rising oil price was the major impetus for the expansion of the LNG production. However, the expansion of the market calls for the creation of a LNG price index, which reflects demand and supply globally.

The companies dominating the oil industry predominantly use the US dollar and changing the trading currency would require an appropriate market for risk hedging. LNG sales contracts are linked with the oil price and have served the industry well as the US dollar and the oil price are negatively correlated, providing a natural hedge. However, the current low oil price creates a huge gap between the future forecasts of sellers and buyers. Sellers typically anticipate the low price to continue but buyers do not. So contract negotiations based on the link to oil have become harder to conclude.

Delinking LNG from oil will be useful for new projects and will result in delinking from the US dollar. Multiple currencies should be used since contractors and oil companies are exposed to foreign exchange risk from construction activities. If the revenue stream can be matched with its underlying cost, risks can be further mitigated.

Natural gas is typically found in rural areas. To avoid the abundance of resources hindering industrial development — the so called ‘resource curse’ — governments must solve problems associated with oligopoly and diversify the industrial base by global value chain upgrading. Such initiatives require large infrastructure projects with long life cycles, and infrastructure finance is often a bottleneck for sustainable development.

For this reason, most countries welcome foreign capital. LNG exporters can secure the revenue flow for foreign loan repayment. Given that Japan, South Korea and China are the major LNG importers, the Japanese yen, South Korean won and Chinese yuan should play a bigger role in matching the demands for infrastructure investment and LNG trade.

US consumption has contributed to world economic growth for decades. However, the US growth engine has relied on the reserve currency status of the US dollar and a current account deficit supported by US Treasury bond investors such as China, Japan and South Korea. As they transition to more consumption-driven economies and serve as a new engine of growth for the world economy, their currencies must also gain reserve currency status.

Japan, China and South Korea have a common interest, and responsibility, to establish a LNG spot market to meet future energy demand. In doing so, they may also contribute to sustainable industrial development through infrastructure investment in many parts of the world and ensure future growth for the world economy.

Is LNG the new fuel for the global economy? is republished with permission from East Asia Forum

The post Move Over Oil, It’s LNG appeared first on Economy Watch.

A wave of political activism has animated East Asian politics: Taiwan’s Sunflower Student Movement in 2014, South Korean 2015 street protests against President Park’s new labour law, and protests in Japan in 2015 against Prime Minister Abe’s security bills. Youth activism was common to all these movements. Facing challenges in a stagnating economy, the younger generations have developed a deeper political awareness from a sense of marginalisation from political decision-making processes.

A wave of political activism has animated East Asian politics: Taiwan’s Sunflower Student Movement in 2014, South Korean 2015 street protests against President Park’s new labour law, and protests in Japan in 2015 against Prime Minister Abe’s security bills. Youth activism was common to all these movements. Facing challenges in a stagnating economy, the younger generations have developed a deeper political awareness from a sense of marginalisation from political decision-making processes.

Despite common elements, the outcomes of these street protests have differed greatly. Protests in Taiwan and South Korea delivered a serious blow to the ruling parties electorally, but in the 2016 July upper house elections in Japan, the majority voted to support the ruling Liberal Democratic Party (LDP). At this point street demonstrations in Japan haven’t had the same impact.

One of the characteristics of political participation by the youth in Japan is the contrast between a growing interest in politics and low participation on Election Day. The CEO of Niwango, who manages Niconico — a Japanese social media giant — argues that its monthly political opinion poll consistently attracts 30,000 replies in just 15 minutes, far more than major television channels or newspapers. This suggests a strong interest in politics among the younger generation, despite claims to the contrary.

The big question is — if young people are interested in politics, why don’t they vote? There is still no definitive answer, but what is clear is that there is a representation gap. This gap derives from the ageing population engendering feelings of disempowerment among the youth in a ‘silver democracy’.

This gap between political awareness and the sense of marginalisation among certain subsets of the population is the driving force behind changes in political participation in Japan. Two other forces carry weight.

First is the top-down adjustment of the voting age to accommodate teenage voters. The July upper house election was the first national election after the Japanese government lowered the voting age to 18. Since then high schools have become the core institutions in teaching political participation strictly in terms of electoral participation.

The majority of teenage voters voted for the LDP. According to a survey by the Ministry of Internal Affairs and Communications, 51 percent of 18-year-olds turned out to vote, a substantially higher percentage than for 20-year-olds. From the perspective of the ruling party, the top-down accommodation of youth successfully strengthened its voter platform.

The fact that 18- and 19-year-olds were granted the vote because of top-down reform, rather than as a hard-fought political concession, will likely shape their voting behaviour in the longer term. They will likely be less motivated to campaign for change than if this voting reform had been the result of sustained political action by Japan’s youth. For most young Japanese, their initial experience was not a vote for change, but rather to learn and to comply with the current political system. It remains to be seen how well this modified electoral system will provide a voice for those youth who do desire change and to what extent it maintains political stability.

The second new force in Japanese politics is the increasing importance of gender. Discussions about and by women in politics have accelerated through internet blogs and via Twitter. In February, a hard-hitting political phrase, Nihon shine — ‘Go to hell, Japan’ — went viral. The phrase originated from a blogpost by an anonymous working mother decrying the fact that her one-year-old child had been denied a place at nursery school — ‘My child was denied enrolment in nursery school, go to hell Japan’. The woman was driven to the verge of giving up her job.

The blog post attacked Abe’s womenomics agenda — which includes policies to promote ‘dynamic engagement of all citizens’, ‘countermeasures to the falling birth-rate’ and a ‘child allowance’ — as useless. The now-popular phrase ‘Go to hell’ crystallised the underlying frustration shared by women across age groups. As womenomics was a key pillar of Abe’s electoral platform and his policy to revitalise Japanese economy, the voice of this woman spoke to a core political concern of the government.

While the phrase ‘Go to hell, Japan’ was, unsurprisingly, severely criticised, it perfectly captured the frustration many Japanese women feel at being asked to work more and raise more children without effective government policies to support them. The phrase inadvertently set an example on how to delegitimise a major political platform of government.

The blog was picked up by a parliamentarian from the Democratic Party, the main opposition party, and was debated at a Diet session. Prime Minister Abe reacted by pointing out the anonymous character of the blog and questioning the existence of such a woman. His comment that ‘we cannot verify this’ only increased public attention, with numerous women stating that they identified with the blogger. Since then, the issue of nursery schools has become one of the top political agendas.

While opposition parties in Japan continue to be weak, the ruling party is tempted to keep its pre-election promises vague. Now, the frustrated public is increasingly using the internet as a tool by which marginalised groups — be they women, teenagers or high school students — can influence the political agenda from outside the electoral process.

Japanese leaders and political parties will be tested more by how they respond to online activism, rather than activism on the streets. The integrity of political leaders will be critically tested by their commitment to upholding freedom of speech and information. The challenge for Japanese democracy now will be to secure this emerging political space for women and young people beyond the polling stations.

Accommodating Japan’s youth and women in a silver democracy is republished with permission from East Asia Forum

The post Does Japan’s Democracy Have Room for Women and Children? appeared first on Economy Watch.

When Lee Hsien Loong collapsed during the National Day Rally speech on 21 August 2016, it shocked not only many Singaporeans, but also leaders from around the world. Although he recovered quickly and was able to finish his speech after a short break, the incident drew attention to the issue of leadership succession in a country that has long experienced predictable politics with little change.

When Lee Hsien Loong collapsed during the National Day Rally speech on 21 August 2016, it shocked not only many Singaporeans, but also leaders from around the world. Although he recovered quickly and was able to finish his speech after a short break, the incident drew attention to the issue of leadership succession in a country that has long experienced predictable politics with little change.

While Singapore maintains the appearance of a democracy, the ruling People’s Action Party (PAP) has dominated politics since independence by creating significant barriers to political opposition — currently the PAP control more than 90 percent of seats. In order to maintain this level of control, the PAP has successfully transferred power to the next generation of hand-picked leaders. However, presently, the leadership succession is still unclear despite the fact that the current prime minister is already 64 years old.

This level of uncertainty is a new development in post-independence Singaporean politics, which has become used to the dominant role of the PAP. The party’s first leader and prime minister, the late Lee Kuan Yew, has often been affectionately called the nation’s founding father. His successor, Goh Chok Tong, was widely seen as a seat warmer for the current prime minister, who is the son of the elder Lee.

Even though Singapore prides itself on being meritocratic, research by Michael Barr suggests otherwise. In a recent article titled ‘The Lees of Singapore’, Barr argues that the Lee family is at the heart of the political system merging ‘a personality cult into a national ideology’. He concludes that the current prime minister’s second son Li Hongyi is the most likely successor to his father.

However, none of the prime minister’s sons have yet shown interest in entering politics, which means that Singapore may have to move beyond the Lees. If one of them were to become prime minister, it would cast doubt over Singapore’s carefully constructed meritocratic values.

Despite the lack of a clear family heir, the list of potential direct successors to the current prime minister is extensive. On 4 September 2016, the pro-government paper featured six potential successors. They were Heng Swee Keat (Finance Minister), Chan Chun Sing (Minister in the Prime Minister’s Office), Tan Chuan-Jin (Minister for Social and Family Development), Ng Chee Meng (Acting Minister for Education — Schools), Ong Ye Kung (Acting Minister for Education — Higher Education and Skills), and Lawrence Wong (National Development Minister).

Despite Singapore’s diversity and the recent discussion about the need for better representation of minorities, all of these potential successors are ethnic Chinese men and half of them have a military background.

Of all the potential candidates, Finance Minister Heng Swee Kiat was long seen as the favourite until he suffered a stroke during a cabinet meeting on 12 May 2016. Although he has largely recovered, his medical condition has raised concerns over his ability to become the next prime minister. However, so far no one else has replaced him as the front-runner ahead of the next general election, scheduled to take place by 15 January 2021.

While there is still some time, the window for identifying a candidate who would be able to sustain the dominance of the ruling party into the future is quickly narrowing. This is important for the PAP because opposition parties have grown in popularity and discontent is rising — primarily due to the influx of foreigners and expensive living costs.

More troubling is the recent spate of governance failures including the secret recall of trains from a Chinese based manufacturer (revealed by the Hong Kong-based FactWire news agency) as well as the growing number of health crises such as the Zika virus.

The people in Singapore have become much more demanding than in the past — many expect to be involved in the decision making process for the selection of the next leader. At the very least, a popular leader must be identified who can gain the support from Singaporeans in the next general election. Such a person could be the popular Finance Minister and Deputy Prime Minister Tharman Shanmugaratnam, but he is currently not considered as a potential successor.

On one hand, previous leaders including Lee Kuan Yew have asserted that only an ethnic Chinese prime minister would be acceptable to the majority of Singaporeans. On the other, Tharman has also indicated in a 2015 interview with The Straits Times that he was not interested in the position and would only take it if he was forced to. However, the list of candidates suggests that it could be difficult for the party to find a popular leader who could avert calls for a more fundamental transformation of the one party dominated system.

The lack of a clear successor threatens to disrupt the decades of post-independence stability in Singaporean politics. In addition, the longer the uncertainty remains, the worse the potential consequences may be for the PAP.

Singapore’s succession struggles is republished with permission from East Asia Forum

The post Singapore Maintains the Appearance of Democracy appeared first on Economy Watch.

The Japanese business community is increasingly pessimistic about the Japan–China relationship. For the past three years the US-based Center for Strategic and International Studies (CSIS) and the Japan-based Nihon Keizai Shimbun (Nikkei) have surveyed Japanese business people about their attitudes to the bilateral relationship with China.

Results from the most recent 2016 survey, released in July, reflect a Japan that has grave fears about the political, security and economic dimensions of the relationship with its most important neighbour.

The Japanese business community is increasingly pessimistic about the Japan–China relationship. For the past three years the US-based Center for Strategic and International Studies (CSIS) and the Japan-based Nihon Keizai Shimbun (Nikkei) have surveyed Japanese business people about their attitudes to the bilateral relationship with China.

Results from the most recent 2016 survey, released in July, reflect a Japan that has grave fears about the political, security and economic dimensions of the relationship with its most important neighbour.

The CSIS–Nikkei survey shows Japanese business groups understand the vital importance of the bilateral economic relationship for Japan. Since 2013, more than two-thirds of Japanese surveyed have consistently acknowledged that the Chinese economy is ‘essential’ to Japan. Yet the surveys also demonstrate that the Japan–China economic relationship is changing.

More than half of Japanese surveyed since 2013 believe China’s importance to Japan’s economy will diminish in the future, particularly as China ceases to be the key production base for Japanese products. In place of China, nearly 90 percent of Japanese business groups are betting on India and Southeast Asia as the most important emerging economic destinations for Japanese investment.

As Waseda University China specialist Rumi Aoyama has shown, the key factor driving Japanese firms out of China is rising labour costs. However, when surveyed around 80 percent of Japanese business groups stated that it was political risk — not macroeconomic or commercial risk — that posed the biggest challenge for doing business in China.

These political risks come in many forms. Since 2013, the perceived risk of improper interference in business by local Chinese government authorities has nearly trebled, from 6 percent to 17 percent, while the perceived risk of a disruption to business caused by China’s foreign relations with the United States or other countries has grown from 16 percent to 23 percent.

The most important political risk perceived by Japanese businesses in China is deterioration in the Japan–China political and security relationship. In 2013, the year after the Japanese government nationalised a number of islands in the Senkaku/Diaoyu island chain, 44 percent of Japanese business groups cited deteriorating Japan–China relations as the greatest political risk facing Japanese firms in China.

In 2016, following an easing of tensions in the East China Sea, that figure had reduced to 30 percent. However, the East China Sea dispute continues to be a key source of tension in the bilateral relationship. Only one third of Japanese advocate ‘shelving’ the East China Sea dispute, while more than half believe the time for shelving the dispute and relying on diplomatic solutions has passed.

Instead, Japanese business groups argue that Japan should take steps to further consolidate its sovereignty claims by building permanent structures on the Senkaku/Diaoyu islands or by stationing Japanese civil servants there. In line with this view, 42 percent believe the Japanese Coast Guard should take stronger steps to counter China in the East China Sea, even if this might increase the risk of conflict. Another 35 percent believe Japan should deploy its Self-Defense Forces (SDF) to ‘resolutely’ safeguard Japanese sovereignty.

These responses suggest the Japanese business community believes that paramilitary or military force is now the only way to deter China in the East China Sea. This response is not surprising given that, over the past three years, more than 90 percent of Japanese business people surveyed have consistently stated that they view China as a threat. Yet beyond this dispute, the China threat has not fundamentally transformed Japan’s traditional post-World War II approach to security in Asia.

While Japanese business groups acknowledge the need to strengthen their country’s Coast Guard and SDF capabilities, a majority of respondents still believe that the US–Japan alliance is the best way to meet the threat from China. Similarly, on other pressing regional security issues like the South China Sea dispute, more than 70 percent of those surveyed argue that Japan should not intervene militarily, but should instead support dialogue through ASEAN-led processes and help Southeast Asian nations to strengthen their own defensive capabilities.

Perhaps the most important findings from the CSIS–Nikkei surveys are the responses that illuminate the nexus between politics and economics. There are some surprising and very mixed findings about how political and security issues affect the economic relationship and vice versa.

The Japanese business community clearly believes that political and security issues do affect Japan’s economic relationship with China. Only 8 percent of Japanese support Japan’s long-standing principle of ‘keeping politics and economics separate’ (seikei bunri). In contrast, 40 percent believe Japan should scale down its business interests in China if the Senkaku/Diaoyu island dispute deteriorates over the long term.

At the same time, 37 percent believe that even in the event of a worsening Senkaku/Diaoyu dispute, the two countries should try to maintain the status quo. Given that two-thirds of Japanese business groups anticipate growing tensions in the East Sea China dispute, this issue is likely to create strong uncertainty into the future.

Although two-thirds of Japanese business groups believe that China will not abide by international norms, there is strong support for Japan to become a member of the Chinese-led Asian Infrastructure Investment Bank (AIIB). Of business groups surveyed, 60 percent believe that Japan should become a formal member of the AIIB at some point in the future. This dichotomy is difficult to explain, but suggests that although they are deeply concerned about China’s future role in the international economic order, Japanese businesses also recognise the importance of new initiatives — like the AIIB — to Japan’s own economic future.

Since World War II, the China–Japan economic relationship has defied the liberal thesis that close economic ties between two countries breed closer political and security relations. Yet political and security tensions between China and Japan have not inhibited the development of a crucially important economic partnership between the two countries.

The Japanese business community recognises that this partnership is now evolving because of the changing nature of the Chinese economy, its growing influence in international political and economic order, and its ability to pose a security threat to Japan. Sustaining the bilateral China–Japan economic relationship in the face of these challenges will require serious attention and leadership on both sides.

Political concerns fuel Japanese business pessimism in China is republished with permission from East Asia Forum

The post Japanese Businesses Express Concern about the Chinese Relationship Direction appeared first on Economy Watch.

When President Barack Obama said, ‘The TPP means that America will write the rules of the road in the 21st century’, he was not speaking metaphorically. Large passages in the final text were lifted verbatim, sometimes en masse, from past US free trade agreements (FTAs).

When President Barack Obama said, ‘The TPP means that America will write the rules of the road in the 21st century’, he was not speaking metaphorically. Large passages in the final text were lifted verbatim, sometimes en masse, from past US free trade agreements (FTAs).

TPP advocates harbour the hope that ratification could pass during the lame duck session scheduled for between the 8 November presidential election and the 16 December adjournment, but that now faces extremely high obstacles. Senate Majority Leader Mitch McConnell, House Speaker Paul Ryan and others say they will not schedule a vote then. They insist that several provisions of the TPP be, in effect, renegotiated. However, many of the chapters already reflect US interests, or at least the priorities of US interest groups with the greatest leverage in Washington.

With the United States having gained more on its priorities than it gave to others on theirs, imagine the resentment among other TPP countries when Capitol Hill insists that they reopen negotiations to give even more, just to satisfy US pharmaceutical and tobacco firms.

Scholars Todd Allee and Andrew Lugg documented that about half the passages in past US FTAs show up in the TPP — more than those of any other country. US dominance is even stronger in the chapters where US policymakers had the greatest interest, such as investment. Nearly half the passages in the 16,000-word investment chapter were lifted in big chunks directly from past US FTAs.

Yet, the United States did not open its market very much in return for the myriad concessions it wrested from others. According to the United States International Trade Commission (USITC), TPP will result in US imports from the world in 2032 being a mere 1 percent above what they would be without TPP. The increase in imports deriving from TPP will amount to less than 0.2 percent of GDP.

Part of the reason for these dismal results is that much of the growth in imports from TPP countries will come at the expense of others not in the TPP. It may be nice for Vietnam that it can sell more footwear and apparel to the United States, but if this comes at the expense of Bangladesh’s exports, what is the benefit to the United States? Or to global growth?

Not only does TPP fail to lift US imports very much, it doesn’t do much for US exports either. According to the USITC, by 2032, TPP will boost US exports to the other TPP partners by a piddling 0.2 percent of GDP.

The most basic reason that TPP won’t increase US trade very much is that, in most of the sizeable TPP countries, tariffs outside of agriculture are already so low that a pact focused on bringing them to zero would not make much of a difference.

However, this is only part of the problem. The Obama administration was unwilling or unable to expand imports in areas where it could have done so. This is not because US trade officials don’t really believe in free trade. It’s because they had to fashion an agreement that could get through Congress. Take the case of government procurement.

In 2009 (latest available), only $326 billion in federal and state procurement was open to imports. That was just 20 percent of total US procurement that year. In 2014, only 4.6 percent of the United States’ total spending on government procurement (federal, state and local) was spent on imports, compared to 4.7 percent in Japan, 6.1 percent in China and 7.5 percent in the European Union. By contrast, total imports of goods and services by the United States in 2014 amounted to 13 percent. If imports had the same market share in procurement as in the economy as a whole, US imports would increase by 1 percent of US GDP — five times as much as the entire TPP.

Opening up US procurement further, especially to the states and localities, would have been a virtual invitation to Congress to reject the TPP. The Obama administration learned that lesson in 2009 when, against its will, Congress insisted on putting all sorts of ‘Buy American’ provisions in President Obama’s huge stimulus package.

Rather than face a political firestorm, the Office of the United States Trade Representative (USTR) in 2014 pledged that the TPP would make no changes to US procurement laws at the federal, state or local level or undermine existing requirements. The United States rejected requests from others that it pledge to refrain from any further ‘Buy American’ provisions and it rejected requests to cover state and local governments.

In the TPP talks, according to Jean Heilman Grier — a former senior procurement negotiator with the USTR in both World Trade Organization and TPP talks — Japan and Canada (as they did in GPA), along with Australia, Chile and Peru (as in past FTAs) agreed to liberalise procurement by its prefectures and localities, but only for countries that reciprocated. The United States, along with Malaysia, Mexico, New Zealand and Vietnam, rebuffed the offer of reciprocity.

So much for Washington’s talk of a ‘gold standard’ pact.

One of the greatest sources of US influence has been the widespread perception that it was a ‘benign hegemon’, especially compared to prewar European colonial powers, the Soviet Union or China. Today, US hegemony is seen as less benign, at least on international economic issues.

TPP to tarnish US relations is republished with permission from East Asia Forum

The post TPP Passage Less Likely appeared first on Economy Watch.

Recently, technical and operational specifications of the Scorpene class submarine that India is buying from DCNS — a naval shipbuilder two-thirds owned by the French government — were leaked to The Australian newspaper. The incident follows the Modi administration’s launch of an AU$150 billion (US$113 billion) program to modernise the armed forces.

Recently, technical and operational specifications of the Scorpene class submarine that India is buying from DCNS — a naval shipbuilder two-thirds owned by the French government — were leaked to The Australian newspaper. The incident follows the Modi administration’s launch of an AU$150 billion (US$113 billion) program to modernise the armed forces. It is a timely reminder of a basic flaw in India’s weapons acquisition and digitisation: a lack of expertise in cyber security and data encryption.

DCNS recently won the AU$50 billion (US$37 billion) contract to build the next generation of twelve submarines for Australia. Though the United States remained publicly neutral during the bidding process, privately it advised Australia against France because, as was widely reported, France was not careful enough with its military secrets.

The initial reaction of the Indian Defence Minister, Manohar Parrikar, was that the leak was ‘not a big worry’. He added that India was not the source of the leak, implying there was nothing to worry about. The following day Parrikar blamed The Australian for causing embarrassment by breaking the story.

Articles and commentaries eventually forced the defence establishment to admit that the leak was a serious matter and that the effectiveness of Scorpene class submarines has been severely compromised. The enormity of the damage done by this leak is dawning on New Delhi: on 4 September, Parrikar cancelled the proposed purchase of a further three submarines.

However, this is not the first such cybersecurity breach in India. In March 2010, Minister of State for Communications and IT, Sachin Pilot, told reporters that government networks had been attacked by China but that ‘not one attempt has been successful’. For nearly a year prior to Pilot’s assertion, a US–Canada team of cyber spy-hunters had been tracking the activities of a southern China-based cyber espionage gang that was mainly targeting India.

The gang, most likely from China’s prestigious University of Electronic Science and Technology, had in fact accessed the Ministry of Defence’s vast array of computers and stole the design and other technical details of several Indian missile systems. They accessed documents relating to the security outlook of Nagaland, Assam, Tripura, Manipur, and other Indian states. The gang also targeted organisations including the Ministry of External Affairs, India’s United States embassy, and even companies like Tata Group, DLF, and YKK India. New Delhi only learnt of this theft when the US–Canada cyber spy-hunters informed it.

The US–Canada team published their findings in a report in 2010. The report reinforced that weak security in one group can result in the theft of data from another organisation. This is why experts find it so hard to pinpoint the original source of cyber spying and why countries active in cyber espionage are able to refute such accusations.

Cyber security is not achieved merely by installing firewall and anti-virus software. It is a work in progress, and so the security architecture of an organisation’s computers must be monitored constantly. Yet it seems that no serious effort has been made by India to remedy the situation since the report was published.

Last year, the Australian Strategic Policy Institute (ASPI) published a report on the cyber maturity of the Asia Pacific region. In the ASPI report, India scores 4 out of 10 on each of four critical aspects of cyber security, well below the scores of China, Japan and Singapore. These include the organisational structure of cyber matters, the accessibility of cyber security assistance, the existence of a cybercrime centre and financial cybercrime laws and, finally, the extent of the military’s role in cyber security.

India’s overall weighted cyber maturity ranking was 50 — well below countries like Australia (79.9), New Zealand (72.8), Japan (85.1), China (64) and even Brunei (51).

The monitoring of social media is another weak spot in India’s cyber security architecture. For example, in the case of Mehdi Masroor Biswas, an Islamic State sympathiser and Bangalore’s most prolific jihadi tweeter, India only knew of his existence after British journalists tracked him down and informed Indian authorities that he had been arrested.

India suffers from a skills shortage in cyber security. According to a secret paper prepared by the National Security Council Secretariat in 2013, India employed only 556 cybersecurity experts in all organisations in the government domain. By comparison, China employed 125,000 and the United States 91,080.

Cyber security is not merely a technical or software problem. Besides knowledge of information technology, it requires appreciation of a range of disciplines including engineering and sociology. When dealing with state-sponsored cyber hackers, experts need an understanding of a range of factors including that country’s psychology, motives, political decision-making processes and the depth of its expertise and resources.

India has close defence and economic ties with both Israel and the United States. They are leaders in cybersecurity. The Indian government should actively encourage cyber security firms from these countries to bid for business in India, pass on their expertise to indigenous firms, and help set up start-up firms in this rapidly growing field.

India aspires to be a global power, a superpower in computer software and hardware developments, a hub for advanced manufacturing systems and an E-commerce specialist. To realise all these aspirations, India must first tackle its skills gap and adopt a more long-term strategy.

Cyber security in India is republished with permission from East Asia Forum

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The recently concluded 28th and 29th ASEAN Summits in Vientiane, Laos again saw ASEAN give a muted response to the more contentious issues facing member states. This is largely a result of conflicting national interests between members in the absence of a cohesive framework to deal with such issues.

The recently concluded 28th and 29th ASEAN Summits in Vientiane, Laos again saw ASEAN give a muted response to the more contentious issues facing member states. This is largely a result of conflicting national interests between members in the absence of a cohesive framework to deal with such issues.

To date, ASEAN’s responses — or lack thereof — to regional disputes has relayed an impression of indecision and dysfunctionality to the international audience. However, to its credit, the regional body has worked cohesively to effectively resolve other challenges such as managing responses to natural disasters. This cooperation — in the typical ASEAN fashion of decision by consensus — has taken many years of discussion (and several devastating natural disasters) to materialise.

The majority of ASEAN states are located in geographic areas at high risk of natural disasters. Examples prevalent in the Southeast Asian region include floods, tropical cyclones, forest fires, and the occasional tsunami. A number of ASEAN states — particularly Indonesia and the Philippines —also reside geographically in the ‘Pacific ring of fire’, an unstable and volatile seismic area known for major earthquakes and volcanic eruptions.

When the 2004 Boxing Day tsunami hit Indonesia, Malaysia and Thailand, other ASEAN member states were reluctant to assist in rescue operations due to traditional apprehensions regarding state borders, military intervention and humanitarian aid.

After witnessing the consequences of their indecision — destroyed communities and fractured families — ASEAN nations learnt their lesson. In 2005, the United Nations’ World Conference on Disaster Reduction helped to create a framework for appropriate disaster relief response through the Hyogo Framework of Action. This then prompted ASEAN to initiate its own legal framework for a united and coordinated response to natural disasters. The ASEAN Agreement on Disaster Management and Emergency Response (AADMER) was signed by all members of ASEAN in 2005 and came into force in 2009.

In 2008, in the wake of Cyclone Nargis that hit Myanmar and killed at least 130,000 people, ASEAN set up an Emergency Rapid Assessment Team (ASEAN-ERAT) that assesses disasters and recommends the appropriate course of relief actions — such as water and sanitation, food, health, logistics and coordination of relief units. ASEAN-ERAT also serves to harmonise disaster relief operations by reducing confusion and delays and optimising assets and manpower deployment.

ASEAN-ERAT is now managed by the ASEAN Coordinating Centre for Humanitarian Assistance on Disaster Management (AHA Centre). The AHA Centre itself was formed in 2011 and is governed by the ASEAN Committee on Disaster Management. It even has its own strategic vision: ‘One ASEAN, One Response’.

ASEAN-ERAT also serves as the liaison between ASEAN and non-ASEAN countries involved in disaster relief in the region. Today, the ASEAN-ERAT team has 91 members from a spread of ASEAN states that are trained to respond to regional natural disasters. Since its formation, ASEAN-ERAT has been deployed on 10 operations, including the Haiyan and Rammasun typhoons and the Bohol earthquake, all of which hit the Philippines.

ASEAN has established standby arrangements through which members voluntarily offer civilian and military assets, logistic support, and supplies that can be immediately mobilised for relief operations. ASEAN has also introduced standard operating procedures that ensure smooth coordination and execution of emergency operations by the multitude of ASEAN agencies that have very different languages and work cultures.

The AHA Centre runs the ASEAN Disaster Information Network (ADInet), which provides an up-to-date database of all natural disasters reported in the region. This database is used by the AHA Centre’s Disaster Monitoring and Response System (DMRS) for analysis and disaster alerts and freely shared between member states. The AHA Centre also conducts regular executive courses and joint civilian and military training on disaster management for ASEAN members.

To further prepare for natural disaster relief operations, ASEAN has run annual disaster simulation exercises since the signing of the AADMER in 2005. These exercises test the readiness of ASEAN disaster management and emergency relief agencies, its cohesiveness and its ability to collaborate closely with other UN agencies, non-government organisations and military units.

ASEAN’s recent cooperation in the midst of natural disasters serves as a strong confidence building initiative. It is one of the few key areas in which ASEAN members can work closely with each other regardless of other strategic challenges or conflicting geopolitical interests. This bodes well for the future of ASEAN and shows that it can act cohesively and decisively in its own distinctive way to address issues that might otherwise threaten to divide one of the world’s more important regional organisations.

Natural disaster management and the future of ASEAN cohesion is republished with permission from East Asia Forum

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Australia has vastly more material resources than its Pacific neighbours. It represents 94.5 percent of the region’s GDP, 98 percent of defence and security spending and contributes 60 percent of total development assistance. Based on a simple comparison of size and material resources, it has been claimed that Australia has ‘a natural right to lead’ in the Pacific and is effectively a ‘great power’ or a ‘regional hegemon’.

Australia has vastly more material resources than its Pacific neighbours. It represents 94.5 percent of the region’s GDP, 98 percent of defence and security spending and contributes 60 percent of total development assistance. Based on a simple comparison of size and material resources, it has been claimed that Australia has ‘a natural right to lead’ in the Pacific and is effectively a ‘great power’ or a ‘regional hegemon’.

However, if this was once true, it is no longer the case. Even at the apparent high point of Australia’s influence, when it successfully secured the support of the Pacific Islands Forum to lead the Regional Assistance Mission to the Solomon Islands in 2003 and then persuaded Papua New Guinea (PNG) and Nauru to agree to smaller interventions in 2004, it has faced limits.

During the Solomon Islands intervention, Australia was constantly criticised by government officials and civil society. In PNG, Australia was forced to withdraw its police after a successful constitutional challenge to the immunity granted to them. In addition, in Nauru, Australia’s governance assistance became increasingly contingent on Nauru’s agreement to host an asylum seeker processing centre.

The limits of Australia’s influence became clearer following the 2006 coup. Australia’s efforts to isolate and adopt sanctions against the military regime had little effect and, in 2012, Australia resumed formal diplomatic relations with the military regime two years before Fiji returned to democracy.

More recently, changes to the broader Asia-Pacific power structure have altered the geopolitical landscape. Most notably, China has increased its aid to the region and Russia recently made a significant donation of military equipment to Fiji. Indeed, the 2013 Defence White Paper acknowledges that ‘attitudes to our role are changing’ in the region, as ‘the growing reach and influence of Asian nations opens up a wider range of external players for our neighbours to partner with’. A number of these external partners were out in force at the dialogue following the recent Pacific Islands Forum leaders’ meeting, including China, India, Indonesia, Japan and South Korea.

Australian Prime Minister Turnbull has acknowledged that the complex regional context ‘demands more engagement at every level, more integrated policy and fresh ideas’. However, while Australia’s announcement of an extra AU$80 million of funding to respond to climate change in the region was welcomed, this does not change the fact that Australia’s approach to climate change is fundamentally different to that of Pacific states.

The regional order is also evolving, with Pacific states increasingly creating, or strengthening, alternative regional and sub-regional institutions and organisations that exclude Australia. For instance, the Pacific Islands Development Forum — established by the Fijian military regime in 2012 — operates in parallel to (and potentially competition with) the Pacific Islands Forum. These alternative organisations also provide avenues for other external powers to acquire influence in the region.

PNG is an increasingly influential player in the region. However, Australia’s relations with PNG are being undermined by its reliance on PNG hosting the Manus Island Regional Processing Centre. Towards the end of 2015, the PNG government cancelled the contracts of all Australian advisers working within the PNG government. And before the recent Pacific Islands Forum Trade Ministers meeting, PNG publicly announced that it would not participate in the Pacific Islands Agreeement on Closer Economic Relations (PACER Plus) on the grounds that it did not offer enough benefits.

Australia’s strategic influence in the Pacific is waning and the characterisation of the state as a ‘regional hegemon’ is a hollow one.

Therefore, Australia faces a dilemma. It has vital strategic interests in the Pacific but comparatively less influence with which to pursue them. Pacific states are largely unwilling to accept Australian leadership and are instead exercising ‘weapons of the weak’ — foot-dragging, expelling officials, staging demonstrations, sabotaging agreements, and brinkmanship.

It is thus time to reassess Australia’s Pacific strategy. Instead of characterising the Pacific as a threatening ‘arc of instability’, Australia’s foreign policy should start from a more positive premise that recognises the region’s potential. This may help Australia work with Pacific states as their principal security partner, rather than an increasingly marginalised hollow hegemon.

Hollow hegemon: Australia’s declining influence in the Pacific is republished with permission from East Asia Forum

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For close to 40 years after 1955, the Liberal Democratic Party (LDP) dominated Japan’s competitive party system. Opposition parties were not able to mount a successful challenge to LDP rule at the national level, but they had an important impact on policy and the political process. Japan had one dominant party but not a one-party system.

For close to 40 years after 1955, the Liberal Democratic Party (LDP) dominated Japan’s competitive party system. Opposition parties were not able to mount a successful challenge to LDP rule at the national level, but they had an important impact on policy and the political process. Japan had one dominant party but not a one-party system.

The opposition was strong enough to prevent the adoption of many policies for which the LDP fought hard — constitutional revision, government financial support for the controversial Yasukuni shrine and the reintroduction of prewar morals education. Broad popular support for the Japan Socialist Party’s (JSP) positions on rearmament and on defending the liberties enshrined in the constitution made it impossible for the LDP to implement key policies it espoused in its initial party platform in 1955.

Half a century later, the LDP is again pushing these policies forward with renewed vigour.

Polarised party systems with deep ideological and policy divisions tend to undermine political stability. However, in postwar Japan the tug and pull between a right-leaning LDP and a left wing opposition dominated by the JSP created a dynamic tension that drew the system towards the centre. Over time the LDP — which started out determined to overturn many of the political reforms adopted during the American occupation and write a new Constitution — downplayed its revanchist goals and made retaining political power its overarching objective. Emphasising a pragmatic approach, the LDP became the pre-eminent party of the centre.

The socialists did not make a comparable adjustment in their political orientation and moved to the left. Doing so led elements on its right wing to break off to form the Democratic Socialist Party and also made room for Komeito, formed in 1964, to occupy space that had opened up to the left of the LDP and the right of the JSP.

In the 1990s, the demise of the JSP seemed to be leading to a reordered political party system centred on competition between the LDP on the centre-right and the newly formed centre-left Democratic Party of Japan (DPJ). It seemed possible that an alternation of power between two dominant parties might become the new normal. That view seemed to be confirmed when the DPJ enjoyed a landslide victory in the 2009 lower house election and took control of the government.

However, it was not to be. The three years the DPJ held power proved to be a disaster for the party and a godsend for the LDP. Many factors contributed to the DPJ’s failure, among the most important being the ineptitude of Prime Minister Yukio Hatoyama, the effort by Ichiro Ozawa to control the party, the party’s bureaucrat-bashing approach, poor handling of the crises created by the Tohoku earthquake and the nuclear disaster at Fukushima. It looked as though the party might be getting its bearings under Prime Minister Yoshihiko Noda, but by then it was too late.

Since losing power to the LDP in 2012, the Democrats have been at a loss as to how to recover public support. Under chairman Katsuya Okada the Democratic Party, as it is now known, opted to define its goals not in terms of what the party stands for but what it stands against. It is against collective self-defence, against the classified secrets act and against constitutional revision.

Now it has a new leader, Renho Murata, the first female to lead a major Japanese political party. The former model and TV presenter, whose father is Taiwanese and mother Japanese, brings a fresh face to a homogeneous Japanese political world dominated by older men. However, she has an enormous task ahead in building party unity and formulating concrete alternative policies, especially on the economy, which is consistently the primary concern of voters.

Renho — she goes by her first name alone — will need to convince the public that she has a realistic understanding of security issues and that if her party held government again, they would not make a mess of it. Escaping the image of a party that stands for nothing but opposing LDP policies will be no easy task.

Public opinion is critical of LDP policies but the kind of intensity that led people to demonstrate in large numbers against the LDP years ago is simply not there anymore. The Democratic Party’s effort to make opposition to constitutional revision the key issue in the 2016 upper house election campaign gained little traction. Prime Minister Abe downplayed the constitutional issue and emphasised the importance of sticking to his economic strategy. Democratic Party leaders never articulated an economic policy of their own.

Now that the LDP is no longer being pulled to the centre by parties on the left, the party’s more conservative members are demanding that the party return to its roots and fulfil the vision of its founders. The changing dynamics of party politics in Japan has set in motion the LDP’s rightward shift.

Those on the party right reject the pragmatic, economics-first strategy of the ‘conservative mainstream’ (hoshu honryÅ«) as an unprincipled betrayal of the party’s ideals and goals. Prime Minister Abe, for example, has criticised his party for becoming a ‘party to maintain power’ rather than seeking to fulfil its original platform — the revision of the American-drafted constitution in particular. Abe believes he has a responsibility to give priority to the LDP’s goals as set out by his grandfather, Prime Minister Nobusuke Kishi, more than half a century ago.

As far as the LDP’s opposition is concerned, there is no future for the Democrats or any party that defines its raison d’etre in terms of what it opposes and that avoids taking clear positions on difficult issues of national security policy. The sad truth is that never in Japan’s postwar history has the political opposition been as enfeebled as it is now. Renho has her work cut out for her.

Japan’s political party system will be reinvented, one way or another. It is possible that reinvention will leave the LDP so strong and the opposition so impotent that Japan evolves into something similar to a one-party system in which the checks and balances essential to democratic governance are drastically weakened. Japan needs to find a new formula to sustain a system that cleaves toward the centre. The tug between revanchist conservatives and Marxist-dominated progressives that helped keep the centre on centre in the past is no longer relevant. Japan requires the presence of a catch-all centre-left party that offers the public a realistic alternative to the LDP.

Weak opposition is a cancer in Japan’s political system is republished with permission from East Asia Forum

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