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Authors: Gary Clyde Hufbauer and Cathleen Cimino-Isaacs, PIIE

There’s a potential mega-battle brewing over trade rules and the provision of market economy status for China that could reach the World Trade Organization (WTO) in 2016.

Whether particular countries grant China market economy status has important implications for the adjudication of anti-dumping cases. In international trade, dumping occurs when a country exports a product at a price below the normal cost of production or price paid in the exporting country.

China anti-dumping case

When China joined the WTO in 2001, Article 15 of China’s Protocol of Accession to the WTO generally allowed other WTO members to disregard Chinese prices and costs in anti-dumping cases and instead base the calculation of dumping margins using external benchmarks. An exception was made if Chinese producers could ‘clearly show’ that market economy conditions prevailed in the industry. Article 15 essentially authorised ‘nonmarket economy’ methodologies long used by the United States and the European Union in anti-dumping cases against communist countries.

Taking advantage of this provision, authorities in the United States, the European Union, Japan and Canada, among others, almost always use surrogate prices and costs to calculate Chinese dumping margins. Rarely are the authorities satisfied that market economy conditions prevail in Chinese industries.

This comparison with surrogate prices and costs typically leads to much higher dumping margins and thus much higher penalty duties imposed to bring the delivered price in the importing country closer to ‘normal value’. Since China is a leading target of dumping cases worldwide, the non-market economy methodology is a sore point with Chinese officials. A decade ago, China mounted a vigorous diplomatic campaign asking trade partners to accord it market economy status. The campaign succeeded with New Zealand, Singapore and Malaysia in 2004 and Australia in 2005, among others, but it did not persuade the United States, the European Union, Japan, Canada and several others.

All this brings us to the prospect of controversy come December 2016. Article 15(a)(ii) of China’s Protocol states:

The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail.

But buried in Article 15(d) is the critical sentence: ‘In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession’.

Chinese officials strongly argue that this sentence requires all countries to accord China market economy status on 11 December 2016, 15 years after China’s accession, and that WTO members can no longer use surrogate costs and prices in anti-dumping cases.

Some US and EU lawyers read the text differently. While they agree that Article 15(a)(ii) will effectively disappear, they do not agree that the Protocol confines WTO members to a binary choice between market economy (with its strict comparison of export prices with Chinese prices or costs) and non-market economy status (which allows comparison with surrogate prices or costs). They point to the opening language in Article 15(a), which states:

[T]he importing WTO member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China.

To be sure, under Article 15(d), the whole of Article 15(a) potentially disappears, but only ‘once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated’.

Come December 2016, the United States and European Union might well argue that China has not established that it is a market economy. They could modify their current surrogate practices and instead use ‘mix-and-match’ approaches — claiming that some Chinese firms or industries operate under market conditions and others do not. For those that do not, they could use surrogate prices or costs.

Whether the United States takes a hard-line mix-and-match approach, rather than grant China market economy status across the board, could well turn on policy considerations rather than legal parsing. Among these considerations will be the general atmosphere of commercial relations with China in 2015 and 2016, including the evolution of the renminbi exchange rate (devaluation would inspire a hard-line approach) and the outcome of the US–China Bilateral Investment Treaty negotiations (success would have the opposite effect).

With that observation from the economic text of realpolitik, we recommend that the United States should adopt a rebuttable presumption of market economy status in post-2016 anti-dumping cases. If a US petitioner can show that the Chinese firm accused of dumping is state-owned or state-controlled, does not publish financial accounts in accordance with international standards, or in other ways ignores commercial considerations in its business dealings, then the US Commerce Department could revert to surrogate prices or costs.

This approach would have two benefits: it would encourage Chinese state-owned and state-controlled firms to publish financial accounts and operate according to market principles, and it would answer fears by some US firms that they are being forced to compete with the Chinese Ministry of Finance.

If something like this mix-and-match approach is adopted, China might well initiate WTO litigation in response to an affirmative anti-dumping decision. But 2018 seems the earliest date for a final decision by the WTO Appellate Body. And even if China prevails in the WTO, the targeted Chinese firms would not receive retroactive refunds for anti-dumping duties collected prior to the ruling. Again, this hard commercial reality would encourage Chinese firms to publish accounts and operate according to market principles.

Answering these questions is of grave importance. The market economy battle, along with another potential battle over currency manipulation, has been spurred by the politically charged belief in the United States that China does not play fair — a legacy of many years of US trade deficits. These disputes could shape future trade rules, disputes and remedies for years to come.

Gary Clyde Hufbauer is a senior fellow and Cathleen Cimino-Isaacs is a research associate at the Peterson Institute for International Economics (PIIE).

This article is based on a previous post published here by the Trade and Investment Policy Watch blog of PIIE.

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Is China a market economy?

New mining laws in Myanmar are expected to come into place after November’s national elections, enticing more foreign investment, but rights groups fear local communities could be imperiled without more solid legal protections.

Analysts say Myanmar’s mining industry is still at the “frontier” stage of development with prospects in precious metals as well as copper, tin and tungsten.

John Hancock, an Australian lawyer and consultant in Yangon, said there is plenty of enthusiasm with…

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Caution Urged as Myanmar Poised to Embrace More Mining

Author: Peter Drysdale, East Asia Forum

The visit, the week before last, of the general secretary of the Vietnamese Communist Party, Nguyen Phu Trong to Washington at the invitation of President Obama marked another important step on the long journey towards rapprochement between Vietnam and the United States. The visit marked the twentieth anniversary of the ‘normalisation’ of diplomatic relations and the removal of some of the embargoes after the end of the Indo-Chinese war nearly twenty years earlier. In all, it’s taken a generation to heal officially the wounds of war and the scars of US defeat at the hands of Ho Chi Minh’s North Vietnamese forces and their triumph over the South.

US President Barack Obama and Vietnamese General Secretary Nguyen Phu Trong shake hands during a meeting in the Oval Office of the White House in Washington, DC, 7 July 2015. (Photo: AAP)

Nguyen’s reception at the White House, wrote Hoang Binh Quan, a member of the central committee of the Communist Party of Vietnam and chairman of the its commission for external relations, in the Washington Post in the lead-up to the visit, symbolised respect for Vietnam’s choice of political regime. By inviting the party general secretary, a position that has no equivalent in the American system of government, Washington at last extended proper respect to Vietnam’s political choices. Vietnam’s political system may not reflect that of the United States in many ways, but Vietnam now sought to move in the same direction as the United States — as a market economy, with protections for foreign investors and the same ambitions for peace and stability in international affairs, Hoang wrote. ‘Strong partners — and good friends — are not necessarily those who are most alike but those who can accept each other as they are and have a frank dialogue about their differences’.

The celebrations in Washington and Hanoi naturally focused on how far the relationship has come and where it might go, not on how long it took to get there.

Moving beyond what President Obama called the two countries’ ‘difficult history’ has taken a long time, contrary to the hype about how remarkable and rapid their reconciliation had been during the visit. Within a decade, the United States was in deep alliance with the former Axis powers, Germany and Japan, after their defeat in the Second World War. Vietnam was different. It tore at America’s heart and profoundly divided its people. Vietnam was bound to remain in the sin bin (or the penalty box), so long as there was no overwhelming strategic imperative for seeking rapprochement. Contrast Australian and US post war relations with Vietnam. Australia too was mired in the Vietnam War, and deeply complicit in its origins. Its conduct and its failure divided the nation. Yet Australia opened diplomatic relations with Hanoi in 1975; quickly lifted embargoes on trade; embraced Vietnam’s joining ASEAN in 1995 and entered into defence cooperation from 1998 — despite becoming proportionally one of the developed world’s largest hosts to Vietnamese refugees from the anti-Hanoi South.

As Murray Hiebert points out this week US-Vietnam economic relations have blossomed since normalisation, with two-way trade topping US$36 billion last year, up 12-fold since 2001 when the two countries signed a bilateral free trade agreementPolitical and security ties between Vietnam and the United States have also come a long way since the two countries normalised relations, Hiebert says. ‘Since then, they have stepped up high-level visits and launched regular political, security, and defence dialogues to tackle outstanding issues. During a visit to Washington in July 2013, Vietnam’s president and his US counterpart laid the groundwork for a comprehensive partnership between the two countries. They agreed on nine areas of cooperation including political and economic relations, security ties, human rights, and cooperation on tackling environmental issues’.

Two main things have thus driven the eventual concession of respect for Vietnam as it is, rather than how it might be refashioned, by the United States.

First, Vietnam came to prosper and thrive despite its effective economic and political isolation from the largest power in the West (until the United States lifted embargoes in 1994, normalised diplomatic relations in 1995, signed the United States–Vietnam trade agreement in December 2001 and Vietnam acceded to the WTO in November 2006). Vietnam, though a one-party state, was more successful in the reformation of the economic, social and political conditions of its citizens from the 1980s than many in America might have presumed, given the nature of its political system. In the early years it was favoured by earnings from oil and gas exports. Over the past three decades a centrally planned economy has largely been supplanted by a market economy — in large part the result of bottom-up pressure for change to which the country’s Communist Party leadership has acquiesced. This prospect would have been remote had Vietnam not diplomatically re-positioned into ASEAN and. consistent with its outward-looking development model, embraced and been embraced by its neighbours in East Asia, including China, Japan, Australia, as well as countries elsewhere  in the world, like Europe. Vietnam became a relatively prosperous lower middle income economy — increasingly integrated into the world economy — that demanded attention in ASEAN and globally, despite its earlier isolation.

Second, there has been steady growth of the political imperative to build a surrogate alliance relationship around both countries’ anxieties over the rise of China, inspired more recently by the US pivot towards Asia.

Now both countries are engaged in the negotiation of the twelve-nation Trans Pacific Partnership (TPP) Agreement that would give Vietnam preferred access over other Asian partners, for example, in US textile markets (not ‘displacing US workers’, as Hoang tellingly noted in his Washington Post piece, but displacing other Asian suppliers, some of which are poorer in per capita GDP terms than Vietnam). In the language of international economics, the dominant element in the deal that appears to be on the table between the United States and Vietnam in the TPP diverts trade; it does not create it. It’s a horse trade of economic for political favours, although relaxation of embargoes on weapons sales awaits tangible progress on human rights in Vietnam.

As David Brown observes in this week’s lead essay, human rights — chiefly political and religious freedoms — have been on the American agenda since Washington and Hanoi resumed direct dialogue about a quarter of a century ago. ‘Though bilateral ties have grown vastly broader, US prodding on civil liberties still piques Vietnam’s one-party regime’.

Brown argues that Americans are unlikely to put aside their criticism of Vietnam on human rights no matter how close US–Vietnam ties may become in other respects. Hanoi can complain with some justification that Washington holds it, among America’s friends, to a uniquely high standard. ‘There’s a subjective element at work here: Vietnam’s intolerance of domestic dissent is a significant impediment to the resolution of America’s Vietnam War trauma. Americans want their former foes and others to be more like America. If, like Germany and Japan, the Vietnamese become exemplary world citizens, the sting of defeat is eased, the spilt blood and treasure somehow justified’.

Yet, Brown concludes, the political model in Vietnam is not the United States or other pluralist democracies, nor China: it’s Singapore, the city state that has effected ‘authoritarian legalism’. Whether that’s a stage along the way in political development, or an end-point, there’s a way to go before Vietnam gets there.

Peter Drysdale is Editor of the East Asia Forum.

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Vietnam and rapprochement with the United States

Author: Seungjoo Lee, Chung-Ang University

Economic integration has steadily increased in East Asia. But the region still suffers from what South Korean President Park Geun-hye calls ‘Asia’s paradox’, the disconnect between economic interdependence and backward political and security cooperation. Any further economic integration will likely reflect political power shifts in the region.

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Between 1990 and 2012, intra-regional trade among the ASEAN+3 nations increased from US$562 billion to US$4,436 billion. This represented 38 per cent of the region’s total trade in 2010, up from 28.6 per cent in 1990. In 2011, the share of trade in intermediate goods in East Asia was 56.9 per cent, while only 28.2 per cent of trade was in final goods.

Economic integration in East Asia is also gradually expanding to include India, Australia and New Zealand. In 1990, intra-regional trade in ASEAN+6 accounted for only 31.3 per cent of East Asian trade. By 2012, it had increased to 41.2 per cent. East Asian countries are more robust than in the past.

Economic integration among East Asian countries goes beyond trade to include investment and production. They are deepening economic integration by creating a virtuous circle of investment, production and trade.

At the same time, it is said that intra-regional trade does not properly reflect trade integration in East Asia. The intra-regional trade index tends to increase as the number of participating countries increases or when a large trading nation without a regional bias in trade is included. But it may be more precise to use alternative indices such as the intra-regional trade intensity or the regional trade introversion index. Intra-regional trade intensity in East Asia has been largely constant — not increasing — for the last three decades. It is still lower than that of the North American Free Trade Agreement and of the European Union.

So how much further can the scope of economic integration expand? The United States is in the middle of negotiating the Trans-Pacific Partnership and China is floating ideas for the Free Trade Area of the Asia-Pacific. This shows that economic integration and regionalism are not just purely economic phenomena. They are also political constructs.

Economic integration in East Asia is not just regional — it has a global context. Intra-regional trade intensity has not increased because the region maintains a triangular trade structure: production occurs within the region but final goods are then exported out of the region. Even after the East Asian economies supposedly decoupled from the Western countries following the global finance crisis, the triangular trade structure has not changed.

What is changing is that East Asian countries are beginning to depend more on China for trade. China has been South Korea’s top trading partner since 2004. South Korean trade with China increased from 22.1 per cent in 2007 to 24.2 per cent in 2011. In the same period, its trade with the US and Japan declined. South Korea’s dependence on China for trade continued to increase even during the global financial crisis.

Asymmetric interdependence — the situation where the less dependent country can use its power to influence outcomes — with China is a reality for many East Asian countries. While the rise of China is obviously an economic opportunity, these countries may encounter significant risks in coming years. In particular, China’s stance toward neighbouring countries has changed from a charm offensive to more aggressive foreign policy.

East Asia has so far been unable to turn its ever-increasing economic interdependence into institutionalised cooperation, giving East Asian regionalism the nickname ‘soft regionalism’. But the rise of China may give more context to East Asia’s current wave of economic integration. The next question is how and why East Asian countries will engage with or hedge against China in economic terms.

Seungjoo Lee is a professor of Political Science and International Relations at Chung-Ang University, Seoul.

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The politics of Asian integration

Author: Raul (Pete) Pedrozo, United States Department of Defense

In a recent East Asia Forum article, Sam Bateman criticised a decision by the US Secretary of Defense Ashton Carter to develop military plans for more assertive freedom of navigation (FON) operations in the South China Sea (SCS). Specifically, Bateman asserts that ‘there are significant legal, operational and political risks involved with these operations’. While there may be risks associated with conducting FON operations in proximity of China’s man-made islands in the SCS, much of what Bateman states in support of his position is misplaced.

US warship SNS Safegurad is anchored at a port on the island of Palawan, western Philippines, 23 June 2015. The Philippines are holding separate naval drills with two of the country's top military allies, the United States and Japan, near the disputed South China Sea. (Photo: AAP)

First, Bateman alleges that the US is only concerned with China’s reclamation work in the SCS, which could give the impression that the US has abandoned its position of neutrality in the sovereignty disputes themselves. But, despite China’s assertive behaviour in the SCS over the past 40 years, starting with the 1974 invasion of the Paracels and culminating with its current reclamation activities encompassing more than 2000 acres (800 hectares), the US has maintained its neutrality regarding the sovereignty disputes. At both the US Pacific Command change of command ceremony and the Shangri-La Dialogue in late May, Carter stressed that ‘there should be an immediate and lasting halt to land reclamation by all claimants’.

Second, Bateman questions the legality of FON operations in the territorial sea, stating that ‘diverting from the normal passage route between points A and B just to demonstrate a right of passage’ does not constitute innocent passage. Bateman cites the provisions from the UN Convention on the Law of the Sea (UNCLOS) that innocent passage should be ‘continuous and expeditious’ and should not involve ‘any threat or use of force against the sovereignty, territorial integrity or political independence of the coastal State’.

There are a number of problems with Bateman’s analysis. To begin, nothing in UNCLOS suggests that a ship engaged in innocent passage must transit in a straight line between point A and B. All ships, including warships, enjoy a right of innocent passage through the territorial sea. Passage is innocent so long as it is not prejudicial to the peace, good order or security of the coastal state. Legally, it shall be considered prejudicial only if a foreign ship engages in any of the 12 prohibited activities listed in Article 19. Merely transiting the territorial sea is not one of these legally enumerated activities, a fact confirmed by the International Court of Justice in the Nicaragua v United States case.

Additionally, UNCLOS allows a coastal state to designate sea lanes and traffic separation schemes (TSS) in its territorial sea for safety of navigation purposes, which foreign ships exercising the right of innocent passage must use. But no such sea lanes or TSSs have been established in the SCS.

Moreover, as Bateman correctly points out, man-made islands constructed on submerged features are not entitled to a 12-nautical mile (nm) territorial sea. Therefore, US ships and aircraft can legally conduct operations within 12 nm of the feature. Furthermore, because the US maintains a position of neutrality over the sovereignty disputes, it does not recognise Chinese sovereignty over any of the SCS features.

Third, Bateman asserts that ‘FON operations are inherently dangerous’. Due to the risks involved, the FON program is administered with great caution. Since its inception in 1979, hundreds of FON assertions have been conducted by US ships and aircraft around the world. Each operation is deliberately planned, legally reviewed and approved at the highest levels of government. With a handful of exceptions, these operations have been conducted peacefully and professionally without interference from the coastal state.

Fourth, Bateman rebukes the US for criticising Chinese vessels for lacking professionalism and failing to follow the international rules for preventing collisions, indicating that that the ‘US Navy has experienced several accidents in recent years as a consequence of its own navigational errors and poor seamanship’. While US naval vessels have been involved in mishaps as a result of poor seamanship, the big difference is that poor seamanship by US officers is generally inadvertent, while poor seamanship and lack of professionalism on the part of Chinese officers has tended to appear deliberate.

Fifth, Bateman indicates that regional nations may not support increased US presence in the SCS, citing a statement by the Vietnamese foreign ministry. But this is at odds with the success of ongoing US engagement in the region. Singapore invited the US to forward deploy four frigates to the small country. Then, the US and Australia signed an agreement that will more than double the number of US troops training in northern Australia.

Similarly, the US and the Philippines signed the Enhanced Defense Cooperation Agreement that will enable US forces to access Philippine bases and facilities, as well as pre-position materiel in the Philippines for military and humanitarian missions. Of greater significance is the recent signing of the US–Vietnam Joint Vision Statement on Defense Relations, which opens new opportunities for enhanced US–Vietnamese defence cooperation.

Finally, Bateman claims that ‘by provoking China in such an aggressive and unnecessary manner, it can only make the current situation worse’. Politics aside, FON operations are a lawful exercise of navigation and overflight rights and freedoms, and other lawful uses of the sea and airspace, available to all nations under international law.

The US will not acquiesce in unilateral acts of other states designed to restrict the rights and freedoms of the international community in navigation and overflight and other related high seas uses.

Captain Pedrozo is former professor of international law at the Naval War College and is now a Deputy General Counsel for the US Department of Defense. He previously served as Staff Judge Advocate, US Pacific Command, and Special Assistant to the Under Secretary of Defense for Policy. The views expressed do not necessarily represent the position of the US Government or the US Department of Defense.

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Don’t go wobbly on freedom of navigation in the South China Sea

Author: Junya Nishino, Keio University

Many expected Japan–Republic of Korea (ROK) relations to be reset when the Shinzo Abe and Park Geun-hye administrations first came to power, but the past two years or so have seen further deterioration and pessimism.

June 2015 will mark the 50th anniversary of the normalisation of diplomatic relations between the two countries, offering a perfect opportunity to construct a shared long-term vision for Japan–ROK relations. Especially now, when challenges abound between the two, the achievements of the past 50 years since normalisation should be affirmed and a vision formulated for the future.

Endeavours to that end must begin with the following three points.

First, unceasing efforts must be made to restore trust between Japan and the ROK and deepen bilateral strategic dialogue, communication and mutual understanding. There has been a worrying halt of nearly three years in Japan–ROK summit meetings — the last one took place in May 2012 between former Japanese prime minister Noda Yoshihiko and ROK president Lee Myung-bak in Beijing.

A growing number of experts are abandoning any hope for a meeting under the Abe and Park administrations. But the deterioration in Japan–ROK relations is not due solely to the personalities of the two leaders. It stems in great part from changes in the international political structure and regional power balance in East Asia.

In particular, differing perspectives on the rise of China have destabilised relations. Japan views China as a military threat in part due to the Senkaku/Diaoyu Islands issue. The ROK in turn has seemingly begun to view Japan’s security posture vis-à-vis China as a potential threat.

In a 2014 opinion poll by Asahi Shimbun, the top responses in Japan to the question of which ‘country do you feel poses the greatest military threat’ were China at 55 per cent followed by the Democratic People’s Republic of Korea (DPRK) at 29 per cent. Respondents in the ROK put the DPRK first at 65 per cent, Japan second at 20 per cent and China third at 10 per cent.

When asked ‘which do you consider more important for your country, the US or China?’ in another 2014 joint opinion poll by Yomiuri Shimbun and Hankook Ilbo, Japanese heavily favoured the US (74 per cent) over China (14 per cent), while South Koreans were nearly evenly split between the US (47 per cent) and China (46 per cent). These disagreements are causing a divergence in security policy and mutual distrust between Japan and the ROK.

Political leaders and diplomats in both Japan and the ROK should, as quickly as possible, seek to enhance bilateral cooperation. This requires frank dialogue to foster understanding of each other’s foreign and security policies. Japan and the ROK should consider conducting the usual vice-ministerial strategic dialogues at a higher level by, say, holding regular meetings between top Japanese and ROK security policy officials, such as that held between National Security Council Secretary General Yachi Shotaro and National Security Office Chief Kim Kwan-jin in October 2014.

Second, gaining the understanding of the general public is essential to further develop Japan–ROK relations. Both countries’ leaders need to speak to their respective constituencies more enthusiastically and openly about the importance of good relations and cooperation. The deterioration in sentiment toward the ROK is especially serious in Japan, with a 2014 Cabinet Office poll showing the proportion of Japanese who do not feel an affinity with the ROK is at an all-time high of 66 per cent. The ‘fatigue’ they feel when the ROK raises historical issues continues to cause many Japanese to lose sight of just how important relations with the ROK are.

The time has come for political leaders to distance themselves from short-sighted, emotionally loaded arguments and to highlight the importance of good long-term relations with their neighbours. The Japanese cabinet made this clear in December 2013: ‘The ROK is a neighbouring country of the utmost geopolitical importance for the security of Japan. Close cooperation with the ROK is of great significance for peace and stability in the region’. Japan holds the same importance for the ROK. Therefore it is incumbent upon the political leaders of both countries to explain the vital importance of the relationship to their respective publics more candidly and persuasively.

Third, diplomacy on controversial historical issues is vital. Diplomacy is not a time for obstinacy but rather one when mutual compromises are made to gradually uncover points of equilibrium. But Japan must supplement bilateral diplomacy with persuasive arguments at home and clear explanations internationally.

Japan addressed the so-called ‘comfort women’ issue wholeheartedly in the 1990s by, for example, establishing the Asian Women’s Fund, but its communications on the issue both at home and abroad have proved insufficient. Unfortunately, Japan’s past efforts are almost entirely unknown and therefore unrecognised in the ROK. As the ‘comfort women’ issue has been treated as a human rights issue since the early 2000s, Japan’s approach needs to be even more conscious of the opinions of the international community.

Japan and the ROK should explain domestically and internationally that they respect the decisions and efforts made thus far and they will aim to resolve issues in accordance with internationally-agreed rules. They should also affirm that they will jointly, calmly and constructively address the destabilising impact of nationalism in East Asia.

Mutual criticism and persistent assertiveness are not conducive to joint action. At the same time, historical issues do not constitute the whole of Japan–ROK relations; the political leaders of Japan and the ROK should firmly commit to expanding exchange and cooperation in various endeavours. Even while earnestly addressing the past, we must not lose sight of 50 years of diplomatic cooperation designed to ensure future peace and prosperity.

Junya Nishino is an Associate Professor in the Department of Political Science, Faculty of Law and Politics at Keio University.

A version of this article was first published here by the Association of Japanese Institutes of Strategic Studies.

Originally posted here:
Japan and South Korea must foster domestic support for bilateral relations

Author: Evelyn Goh, ANU

The recent 2015 Shangri-La Dialogue focused on China, the United States and maritime security. But those expecting fireworks in the wake of China’s new Defence White Paper and recent sharply worded speeches by US defence officials were left disappointed. 

US Defense Secretary Ashton Carter reiterated America’s vital role and continued commitment to regional security. The tone was deliberately softened by repeated references to America’s determination to create a regional security architecture ‘where everyone rises and everybody wins’ and US desire to ‘protect the rights of all countries, whether large or small, to win, to rise, to prosper and to determine their own destiny’. To ears familiar with Chinese rhetoric, this packaging sounded like ‘mutual benefit’ and ‘win-win cooperation’ — with American characteristics.

But Carter also took care to contextualise US concerns about the South China Sea disputes. He noted that all claimant states have been building structures on the disputed features, but he stated that it is the scale and speed of China’s reclamation works that spur concerns.

China’s Deputy Chief of General Staff Admiral Sun Jianguo stressed China’s continued restraint and commitment to freedom of navigation in the South China Sea disputes — the United States’ main concern. And he claimed that China’s reclamation and construction work on some islets was aimed at improving local communities’ quality of life, China’s disaster response capability, scientific monitoring and regional navigation safety.

The 2015 Shangri-La Dialogue might appear uneventful, but avoiding bad-tempered public pyrotechnics probably facilitated private meetings between defence ministers and their retinues — the main arenas for substantive exchanges.

Preventing a diplomatic fall-out between China and the US is itself a success. It helps to bring this annual dialogue back to an even keel after the 2014 experience, at which China launched an unsuccessful media campaign and the US delegation was perceived to have blatantly coordinated with its regional allies, especially Japan, to criticise China. A repeat of 2014 might have affected the tenor of the upcoming US–China Strategic and Economic Dialogues and the prospects for President Xi Jinping’s planned visit to Washington.

But drawing back from ‘full and frank’ public exchanges may reinforce a growing divide in Asia Pacific strategic dialogues. One of the Shangri-La Dialogue’s key challenges has always been how to secure substantive Chinese participation so that it can be a true dialogue about Asian security affairs. For the Chinese, the Shangri-La Dialogue tends to highlight the uncomfortable reality that the Asia Pacific is filled with American allies and friends, many of whom have superior resources. The largest delegations tend to be from the United States, Japan, Singapore, and the combined European countries.

China has recently increased the size (and vocality) of its delegations and media presence but has sent its defence minister only once, in 2011. Admiral Sun’s speech demonstrated China’s preference for diplomatic performance above substance in the Shangri-La Dialogue. This is consistent with Beijing’s efforts since 2014 to promote alternative China-led multilateral security forums, such as the Conference for Interaction and Confidence Building in Asia and the Xiangshan Forum. These forums have wider participation from Asia (including Central Asia and Russia), China-set agendas and discussions more critical of the US role in the region.

If this trend continues, Asia risks developing separate sets of multilateral security dialogues, one dominated by the US and the other by China, with each set talking in parallel and past each other. This trend is especially worrying given current tensions in the South China Sea.

Secretary Carter’s speech contained three key messages for China. First, the US is a ‘resident power’ in the Asia Pacific that intends to remain the most important security player. Carter emphasised the continuing ‘regional demand for persistent American engagement and the importance of the regional security architecture’. He also stressed how the US is helping its regional allies and security partners — including Japan, the Philippines and Vietnam — to improve their maritime domain awareness and capabilities.

Second, this widespread and growing regional support for US leadership is in part fuelled by China’s own actions. China appears ‘out of step’ with international rules and norms, and the regional consensus opposing coercion and in favour of peaceful resolution of disputes.

Third, the US intends to uphold freedom of navigation and overflight in maritime East Asia, and will ‘continue to fly, sail and operate wherever international law allows’ — which in Washington’s view includes the areas surrounding the artificial islands China is building in the South China Sea. Just before the Shangri-La Dialogue, a CNN reporter aboard a US Poseidon surveillance plane flying over these structures released a voice recording of a Chinese military officer warning the aircraft to stay out of China’s ‘military alert zone’. The US Department of Defense is reportedly considering sending military ships and aircraft within the 12 nautical-mile radius of China’s artificial islands — either unilaterally or together with regional allies — to test freedom of navigation.

While the US spoke relatively softly, it seems to be carrying a big stick. But exactly how big is the stick? Secretary Carter’s visit to Vietnam following the Shangri-La Dialogue has already generated disappointment at the limits of defence cooperation, and worries that the Vietnamese could not be persuaded to sign up to halt construction in the South China Sea.

Meanwhile, the insecurity spiral continues: China is unlikely to cease or slow down its program of island construction and might declare an air defence identification zone over parts of the South China Sea; the US will find it hard not to test freedom of navigation without damaging its own credibility.

Both sides may find opportunities to negotiate mutual restraint. But it is equally possible that it will take a crisis or accident involving American and Chinese personnel in the South China Sea to force them to come to some mutual understandings about conflict avoidance and management.

Evelyn Goh is the Shedden Professor of Strategic Policy Studies at the Australian National University.

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Regional divisions simmer beneath the surface at Shangri-La

Author: Sanchita Basu Das, ISEAS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Slow but steady for the ASEAN Economic Community