Saturday, June 30, 2012

US–China collusion and the way forward for Japan

Many people think that current US–China relations are comparable to US-Soviet relations during the Cold War. This is completely mistaken.

It is often said that the US and China are rivals — even potential combatants — in areas near Okinawa and the South China Sea. Some Japanese military strategists go as far as asserting thatt Japan must enlist US military power to pursue a containment policy toward an expanding China.
And yet Japan’s stock market reacts to small changes in the outlook for China’s economic growth every day. China is Japan’s largest export market and offers the best hope of growth for many of Japan’s leading companies. This leaves Japan in an awkward position, because it has to balance its deep mutual economic dependency with China with the need to deter possible military confrontation. How can Japan take stances and pursue policies whose outcomes are so clearly at cross-purposes?

The answer is that Japan cannot. But in which direction should the country turn, and where should politicians seek to build broad popular support? No doubt economic concerns should be given priority because they have a greater immediate effect on people’s livelihoods and standard of living. Under Japan’s pacifist Constitution this choice is natural and imperative: a strong security system without bread is ridiculous.

In the years after the Second World War Japan relied on the US–Japan military alliance for protection from Soviet expansionism. This security policy was necessary until the dismantling of the Soviet Union in 1991. Japan’s potential enemy has since been replaced by emerging China, which Japanese vested interests have turned into the new enemy.

The treaties that ended war and established diplomatic relations between Japan and China were signed only 40 years ago. Does this relative newness mean Japan should prepare for a new war with China? No. Such thinking is nightmarish: China has developed nuclear weapons and ballistic missiles. If Japan fights against China on its own, Japan’s defeat is inevitable.

But what about Japan’s alliance with the world’s strongest military power — the US? Surely the support of the US would give Japan the edge in any conflict with China? But Japan cannot count on US power in a confrontation with China because the foremost security threat for the US is its financial deficit. US Navy Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, acknowledged as much last year. China currently holds nearly 2 trillion in US Treasury, agency and other securities. In any serious confrontation, or in the lead-up to it, China would naturally sell or demand repayment of its US debt holdings. The disastrous consequences for the US economy are now being factored into the US Defense Department’s scenario analyses. The military power of the US cannot be relied to turn against its Chinese banker.

This is the background for and foundation of the US–China Strategic and Economic Dialogue, which was first held in Washington in 2009 and completed its fourth edition in Beijing in May this year.

This is the reality of ‘Chimerica’: a relationship of such deep financial and economic interdependence that it defines a new global paradigm — one in which Japan is being increasingly marginalised and its importance downgraded.

Even in the military sphere, the US is far from challenging China. Instead, the US has begun trying to direct it in ways that will strengthen order and maintain international public goods.
There are plenty of reasons to be concerned about the trend toward Chinese militarism. Since the Tiananmen protests in 1989, China has increased its military spending every year and stopped democratic political reforms.

The US–Japan security treaty has not enhanced Japan’s security. On the contrary, it has increased Japan’s insecurity by promoting militarism in China and putting China in a strategic position that makes it difficult to withdraw its support for North Korea. This is tragic.

China is not a military threat to Japan, and even if it were the US cannot and will not go to war with China to protect Japan. The notion that the US–Japan military alliance is a form of deterrence is nonsense.

The right way forward for Japan is to abrogate the defence treaty with the US. US military bases in Japan should be closed and military personnel sent home. Japan should use diplomacy to achieve ‘win-win’ resolutions of disputes with China, including territorial disputes.

Japan should aim to become an ‘Asian Switzerland’. This concept, which was widely endorsed immediately after the war, is now barely mentioned at a time when East Asia is gradually descending into military competition. Japan should return to the peace spirit that characterised the aftermath of the war, when the nation decided to work toward world peace.
Susumu Yabuki is Emeritus Professor of Economics at Yokohama City University.

China’s strategic advantages: helping out the euro zone

The changing fortunes of the world’s mature economies relative to the emerging economies have prompted a remarkable reversal of roles when it comes to who might be able to help whom
And while it would be in everyone’s best interest to help one another in the wake of the global financial crisis, international investment in real assets (as opposed to the purchase of bonds or titles to debt) is the outcome of hard-nosed commercial business decisions. So the question to ask is: why would China and Chinese companies wish to help the Eurozone?

There are, as it turns out, some very good reasons for doing so, and strengthening the position of Chinese firms in an important export market is one of them. But there are also some good reasons why Chinese investors should steer clear of investing too much or unwisely — particularly at an early stage of their own relatively recent internationalisation.

One thing needs to be clear, though: there is a big difference between portfolio investment and direct investment. Economists and economic statisticians define portfolio investment as any investment in a company in the host economy that weighs in at under 10 per cent of equity. Direct investment must involve at least 10 per cent of equity, above which threshold the investor can generally appoint a director to the board, thus securing a say in the management of the company. 

This, in turn, has vast flow-on implications; it enables the Chinese parent company to have a real input in the strategic decision-making and long-term development of their European business partner.

This is well illustrated by the recent acquisition activities in the German automobile supply sector. Since January 2011 Chinese firms have acquired a series of small- and medium-sized companies that were previously managed by private equity firms, including Kiekert, Preh, Saargummi, KSM Castings and Sellner. Sound business logic informed each of these acquisitions. In two instances, the German firm had already established a joint venture with the Chinese partner, which facilitated the process of entering the Chinese market. And in all cases, the acquirer came from the same industry sector and brought Chinese technology and market knowledge to the business.

Here it is easy to see how Chinese investment can have a positive impact on the European economy. Greater access to the Chinese market will support the growth trajectory of European firms, thus generating employment. The combination of Chinese and European technologies can also lead to the development of innovative products to serve new customer segments. And this reinforces the positive business relationship between economies that enjoy significant two-way investment and trade flows.

But is the picture as rosy when we look at European economies other than Germany? Within the Eurozone, the struggling economies of Portugal, Italy, Greece and Spain (the so-called PIGS) receive fairly small amounts of Chinese investment, which dropped from 9 per cent of total Chinese FDI in the EU in 2007 to as little as 4 per cent in 2010. So the relative importance of these countries as FDI hosts within the European Union has actually fallen since the beginning of the crisis, while the Eurozone overall has strengthened its position as a recipient of Chinese investment. This contrasts with the general perception that surplus assets available for purchase across the PIGS will stimulate an increase in Chinese investment.

In fact, data on mergers and acquisitions indicate that Chinese deals have remained stable or increased in these economies. These figures also indicate — at least on the face of it — that Chinese corporations are increasingly favouring brownfield over greenfield investments. This enables Chinese investors to gain quicker access to the host-country assets they seek, which complement the assets they bring to Eurozone economies. Chinese firms usually seek skills, technology and pan-European distribution channels, so the Mediterranean seaboard location of the PIGS countries makes them particularly attractive for brownfield investment.

Finally, it is also important to consider sovereign wealth funds. According to data from the WF Institute, significant Chinese examples include the China Investment Corporation (with projected assets of US$439.6 billion by mid-2012), the SAFE Investment Company (US$567.9 billion) and the National Social Security Fund (US$134.5 billion). These funds are primarily engaged in portfolio investment. But as the scale of investment rises, Chinese sovereign wealth funds have started to cross the 10 per cent threshold, as they feel the need to exercise a voice in the management of their money.

Meanwhile, the EU looks toward these funds for investment in large capital cost projects, such as road and water infrastructure. The hopes of EU governments are pinned on such investments because they could provide a fillip to local economies and accelerate the rate of recovery when, in due course, the European economy turns the corner in a return to growth.

So can Chinese investment help the Eurozone? In a word, yes. While it is not expected that the volume of Chinese FDI will match US or even Japanese investment in the Eurozone anytime soon, Chinese firms that play to their strengths while developing key business ventures will certainly energise static European markets.

Dr Hinrich Voss is a Roberts Academic Research Fellow at the Centre for International Business, University of Leeds.
Professor Jeremy Clegg is Jean Monnet Professor of European Integration and International Business Management, University of Leeds.
This article appeared in the most recent edition of the East Asia Forum Quarterly‘China’s Investment Abroad’.

Going to Jail in Asian Democracies

Breaking the culture of impunity

When a country begins to confront a legacy of corruption, the debate invariably passes through what might be called the Who is Untouchable? phase. It is often assumed in many countries that certain people are just too high up on the political food chain to be ensnared in corruption charges.

But what happens when that no longer proves to be the case? What if higher-ups are not all that high-up after all? Across Asia, a procession of leaders has gone to jail on charges that may look political, but in fact are usually related to corruption in high office.

The experience of a number of Asia’s democratic countries seems to indicate that a nation can survive and prosper after naming even the highest officials of the land — after they are out of office, generally speaking — suspects in various kinds of criminal malfeasance while in office. There are numerous examples – and ones that should show some western countries a healthy respect for stony lonesome is a good idea.

In 1996, South Korea convicted its last authoritarian leader, ex-President Chun Doo-hwan, and his successor, Roh Tae-woo, both former generals, of charges related to corruption and abuse of power. The legal action was initiated by the elected civilian government as a way to come to grips with the country’s long history of military rule and the deep divisions related to a 1979 coup and the 1980 massacre of civilian protesters in the city of Gwangju.

Chun was sentenced to death and Roh was given a 22-year prison sentence. When long-time political prisoner Kim Dae-jung was elected president in 1997, he pardoned both men in a move that was widely seen as an act of national reconciliation.

Since then, numerous top Korean business executives also have found themselves in court despite the enormous power conglomerates wield in the country. In 2008, Samsung chairman Lee Kun-hee was convicted in a massive bribery scandal. He was pardoned after giving millions of dollars to charity and apologizing to the nation. Corruption crusaders were miffed, but the court action underscored the idea that no one in South Korea is totally safe from prosecution.

In Taiwan, Chen Shui-bian, who had been president for eight years, was forbidden from leaving the island an hour after he stepped down on May 20, 2008, and was later tried and convicted of fraud involving the use of a presidential fund to pursue foreign diplomacy. He was sentenced to 17-1/2 years in prison and ordered to pay a fine of NT$154 million. Both he and his wife, Wu-Shu-jen, remain in jail despite a long string of appeals. Both the Kuomintang and the Democratic Progressive Party (DPP) said that they respected the court’s decision.

Closer to home, the Philippines failed to prosecute former President Ferdinand Marcos after he was deposed in 1986. Former President Joseph Estrada did not fare so well. After he was ousted from office by a virtual coup in 2001, he faced numerous corruption charges. His successor, President Gloria Macapagal-Arroyo, gave him executive clemency and he was released after seven years of detention. Now Macapagal-Arroyo herself is under detention following her arrest in November 2011 on charges of electoral fraud.

In Bangladesh in 2007, a caretaker government backed by the military arrested and jailed the country’s two most prominent politicians, the bitter political rivals Sheikh Hasina Wajed and Begum Khaleda Zia, on charges of corruptin and anti-state activities, and kept them there for more than a year. Eventually they were freed and Sheikh Hasina’s Awami League went on to return to political power.

Finally, in Thailand the court convicted former Prime Minister Thaksin Shinawatra of corruption in 2008, following his ouster in a 2006 military coup. He fled the country and remains in exile, although with his sister currently in power it seems he may eventually be pardoned.

What is interesting about these cases is that the prosecutions occurred in functioning democracies and the political order did not come to an end. There was no military intervention or suspension of democratic processes as a result of the court actions. It could easily be argued that the countries involved — with the exception of Thailand, where the political divide is bitter and Thaksin remains a deeply polarizing figure — survived the prosecution of their former leaders with their democracies enhanced.

That these prosecutions of fallen presidents and prime ministers are politically motivated in most cases is a given, but there is a deeper meaning in the ability of Asia’s young democracies to bring even the most senior of politicians or their associates to the dock. No one is — or should be — untouchable.

It was deeply disappointing to many Filipinos that Marcos was never prosecuted in a Philippine court, but the woman who led the crusade that booted him into exile, President Corazon Aquino, felt that bringing him home would be destabilizing. It’s interesting that her son, the current President Benigno Aquino III, believes the opposite — that prosecuting Arroyo and others in her circle, like former Supreme Court Chief Justice Renato Corona, will aid the country’s battle against corruption.

The Corona impeachment “was a process that strengthened our democracy,” Aquino said later. It is a point worth noting.(A. Lin Neumann, one of the founders of Asia Sentinel)

Could China Teach Vietnam a New Lesson?

                                         Perhaps this is not such a good idea!
Vietnam passes a new maritime law laying further claim to disputed islands

On June 21, the Vietnamese National Assembly adopted the Vietnam Maritime Law, which was promptly criticized by China. The law sets out the legal status of Vietnam’s islands and sea and sovereignty under the 1982 United Nations Convention on the Law of the Sea, which also includes the disputed Spratly and Paracel Islands. Claiming sovereignty over these islands under the law has unnecessarily irked China and opened up yet another chapter in the ongoing South China Sea dispute.

In response to any slight, real or imaginary, could China teach Vietnam a lesson?

A series of conflicts

This spat over the Vietnam Maritime Law is merely one in a long line of conflicts between China and Vietnam. Vietnam’s origins are rooted in China’s history and its history is marred by periods of feudal strife, colonial oppression, and civil war. Although the ruling parties of each country fly the flag of Communism, at times necessary allies and enemies, there is little love lost between them.

Although wars have been fought between the two, the last to be fought between China and an independent Vietnam was the Sino-Vietnamese War in 1979, sparked largely by Vietnam’s invasion and overthrow of the Chinese-backed Khmer Rouge regime in Cambodia a month earlier. The Sino-Vietnamese War saw Chinese forces invade parts of northern Vietnam, ultimately transforming into a border war between the two countries. Vietnam, provided with intelligence from the Soviet Union (an ally of Vietnam and opponent of China), was able to react accordingly and keep the war from spreading farther south. Casualties were in the thousands and little had changed by the war’s end a month later. Both sides would claim victory, although small skirmishes continued well into the 1980s.

Deng Xiaoping’s assertion that it would teach Vietnam a lesson failed in its goal of sacking Hanoi, but it did reinforce hostilities between the two neighbors. Said hostilities lessened during the 1990s, but the Spratly and Paracel disputes continue to plague both nations.

China is clearly capable of carrying out similarly limited military operations against Vietnam. Since 1979, China has not only grown economically; it has also taken steps to improve its military capabilities. It is no longer a predominantly peasant nation but a modernizing state. That China could “teach Vietnam a lesson” is not the question. The question is whether China will impart said lesson.

Yes, but…

In this globalized world, military force between nations is seldom used as a first response. It is money, not bullets, which reign supreme, and for China, an economic powerhouse rather than the backwater nation it once was, economic threats have the ability to do more than military might. The geopolitical climate of 1979 and the Cold War are today nonexistent. The US, fatigued from Afghanistan and Iraq, cannot be compared to its counterpart following the Vietnam War. Despite its withdrawal from Iraq and gradual downsize in Afghanistan, the US has not retreated from the international stage to lick its wounds, as evidenced by its pivot towards Asia-Pacific. Its chief rival throughout the latter half of the 20th century, the Soviet Union, has abut disappeared. Wars between nations are increasingly rare with the nebulous and unpredictable nature of piracy and terrorism proving most threatening.

This is not to say wars between nations do not happen—the United States’ invasion of Iraq in 2003 and the South Ossetian War between Russia and Georgia in 2008 come to mind—never mind civil wars, which may include the Arab Spring and ongoing Syrian conflict, as well as any number on the African continent. All of this having taken place in the first decade and spilling into the second of the 21st century, gives one the impression that we live in dangerous times.

Military force, however, is a brutish and costly approach to resolving matters better handled diplomatically and/or economically. Today, China has in its arsenal of responses the ability to impose its will economically. In 1979, China’s attempt to teach Vietnam a lesson involved sending soldiers across the border. In 2012 and beyond, one can assume that China might simply counter any perceived Vietnamese intransigence via threat of economic consequences. It is not too much of an exaggeration to say that China could absorb Vietnam economically. No need for guns when one’s opponent could simply buy one out.

But more than its unmatched economic strength, there is reason why China would like to avoid any conflict with Vietnam. Given Beijing’s efforts to shape international perception of China, made difficult by its lack of democracy and poor human rights record, going to war would simply reinforce the image of China as a bully and belligerent, not yet ready to join the international community as a leader.

Beyond international perception of China, Beijing must also contend with the United States, which will not sit idly by should war come about. The US is unlikely to meet China openly on the battlefield; however, it would be foolish to assume that they will do nothing. It is quite possible that the US would fulfill the expected role of the Soviet Union during 1979 and perhaps more. American support can come in the form of diplomatic, economic, and intelligence assistance, leaving direct assistance to pro-American agents inside Vietnam.

Direct confrontation with China would be discouraged to preserve Washington’s relations with Beijing and vice versa. In the event that Vietnam becomes untenable, the US could simply cut Vietnam loose and repair diplomatic relations with China. The Vietnamese government, if it should seek US assistance, would do well to keep in mind that is not the Philippines.

War therefore seems unlikely despite current flareups between Vietnam and China. Far from suggesting that China will remain docile in affirming its place in Asia-Pacific and the globe, it will seek to avoid violent confrontation, so as not to lose the battle of public opinion.

A change in government

Relations between Vietnam and China can best be described as hot and cold, due in large part to the former’s schizophrenic nature.

Simply put, the Vietnamese government is not a reliable partner. Understandable in its efforts to walk a fine line between China and the United States, the government has not pursued this path to better the lives of its citizens but to ensure its continued rule. Side with China and the country runs the risk of falling under the influence of Beijing; however, should they join the US, they then risk being pressured into carrying out political reform, thus surrendering their power to the people.

Vietnam’s noncommittal attitude has undoubtedly contributed to China’s irritation with its southern neighbor and the US’s reluctance to openly seek Vietnam as a strategic partner (among other reasons). It is not unusual or necessarily wrong that a government is driven by self-interest. In the case of Vietnam, however, this self-interest has come at the expense of its people and its relations with other countries.

A changing of the guard, so to speak, and the manner in which it does business would surely be met with approval by the US and China. Political reform is necessary, not merely to improve the lives of its citizens but its relations abroad. A changed government is not the magic bullet that will resolve political tensions between Hanoi and Beijing; however, it may serve to cool tensions between the two countries.

(Khanh Vu Duc is a Vietnamese Canadian lawyer in Ottawa, focusing on various areas of law. He researches on International Relations and International Law.)

Friday, June 29, 2012

Complacent Indonesian Govt Can Do Much More to Shake ‘Failed State’ Tag

The late independence activist Mako Tabuni in Jaypura in an undated file photo. 'While the Indonesian government is trying to improve the economy to prevent social breakdown (and sliding into the category of failed state), it does a bad job in actually addressing the root cause of the failure, notably extremism and violence due to its own passivity or incompetence. The examples of the latter were especially glaring in recent weeks, during which there were several reports of police misconduct. In Papua, the controversial shooting of Tabuni on June 14 led to unrest and mysterious shootings. Regardless of Mako’s guilt or innocence, the situation would not have deteriorated had the police acted with restraint that considered the already-volatile environment there.' Yohanes Sulaiman. (Antara Photo/Marcelinus Kelen)

A debate has been sparked by the publication of the latest Failed State Index, which placed Indonesia in the “warning” category, meaning the country is in danger of becoming a “failed state.” Its rank worsened marginally, from 64th in 2011 to 63rd this year.

Despite that, the indicators in general are positive, with Indonesia’s score actually decreasing from 81.6 in 2011 to 80.6 in 2012 in the study compiled by the US-based think tank Fund for Peace in collaboration with Foreign Policy magazine.

This means that the overall situation of the country improved slightly with progress in almost every sector, especially the economy.

On that topic, the report noted that economic development had improved, the poverty level was declining and gross domestic product was increasing. There’s still a long way to go, but any gains on the economic side, especially sustained across five years, is good news.

History shows us that the collapse of states and the rise of religious and nationalist extremists to power are almost always preceded by economic collapse. With the moderates discredited in many parts of the world due to failed economic policies, radicals and extremists with utopian, “pie in the sky” solutions become attractive to desperate populations hoping to escape economic hardship.

This is especially true in Indonesia, where regime changes have historically been preceded by economic crisis. The falls of presidents Sukarno and Suharto happened after economic conditions worsened. But as many analysts noted, the Failed State Index report found that social indicators were showing stalled progress. The report notes ongoing problems in infrastructure development, demographic pressures and “an increase in protests, harassment and violence against religious minorities. The government’s ability to curb violence between groups has been limited.”

While the government is trying to improve the economy in order to prevent social breakdown, it does a bad job in actually addressing the root cause of the failure, notably extremism and violence due to its own passivity or incompetence.

The examples of the latter were especially glaring in recent weeks, during which there were several reports of police misconduct. In Papua, the controversial shooting of independence activist Mako Tabuni on June 14 led to unrest and mysterious shootings. Regardless of Mako’s guilt or innocence, the situation would not have deteriorated had the police acted with restraint that considered the already-volatile environment there.

Elsewhere, police in Serang, Banten, landed in hot water over the false arrest, kidnapping and torture of Jumhani, a fried-food seller. Not long after that, Twitter was abuzz with the story of Jakarta policemen who allegedly attempted to blackmail a woman by declaring that her allergy medicine was some sort of illegal substance.

Pundits have had a field day, pinning blame for Indonesia’s worrisome rank on President Susilo Bambang Yudhoyono.

While it is probably unfair to put all blame on Yudhoyono’s shoulders, his presidency did raise expectations. The government is seen as passive, unwilling to push through law enforcement reforms and address the growing evidence of corruption within the ranks of the ruling party. Unsurprisingly, trust in the government is declining.

This feeds the narrative of Indonesia as a failed state. The claim, while unfair, is the result of the government’s inability to control violence caused by either hard-line organizations or from within the ranks of its own law enforcers.

Yohanes Sulaiman is a lecturer at the Indonesian Defense University (Unhan).