Sri Lanka and China’s Indian Ocean Strategy


February 22, 2017

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Number 372 | February 21, 2017

ANALYSIS

Sri Lanka Suffers from China’s Indian Ocean Strategy

By Shiyana Gunasekara

Amidst local protests against the Chinese presence in the southern Sri Lankan town of Hambantota, Beijing insists that the town’s port project has been discussed in the “spirit of equality and mutual benefit, and follows market rules.” China’s activity in the Indian Ocean – particularly in Sri Lanka, which is a focal point in China’s One Belt One Road (OBOR) plan – appears to be predatory lending under the guise of economic development.

India needs to recalibrate its strategy towards the other South Asian countries for its own security, if not regional stability; however, Delhi has yet to offer a comparable alternative to doing business with China. Instead, India has taken its asymmetric power in the region and the de facto allegiances of its much smaller neighbors for granted.  With China’s recent track record of placing military vessels in traditionally commercial docks, India must take its role as the South Asian hegemon seriously.

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80% share of  Sri Lanka’s Hambantota Port goes to China

In October 2016, Sri Lanka’s Prime Minister Ranil Wickremesinghe announced that the China Merchants Holdings (International) Company Ltd. would hold an 80% share of the Hambantota Port in exchange for over USD $1 billion in the country’s debt.  This should be of particular concern to India, since China has used the Colombo South Container Terminal, owned by the same Chinese firm, to dock submarines, as opposed to the Sri Lanka Port Authority’s mooring designated for military vessels.  Previously, Colombo intended to hide visits of two other Chinese naval vessels from the media. With the majority of the Hambantota Port sold to China’s semi-private sector, India should be prepared for another visit by the People’s Liberation Army (PLA) Navy – perhaps for a much longer period of time.

The complete details of Chinese loans and other financial assistance have not been disclosed to the public, notably including details of the loan interest rates. China leads the country’s foreign inflows, with 98% of Chinese assistance to Sri Lanka being loans and only two percent as grants. China’s Export-Import Bank accounts for 77% of these loans, with 14% coming from the China Development Bank, and five percent from interest-free loans. China’s Export-Import Bank has notoriously given loans to countries on its OBOR initiative with strict self-serving procurement and contracting regulations: Chinese companies must be awarded the contract, both for the project itself and for procurement, and at least 50% of project procurement must be services, equipment, technology and materials from China.

Foreign direct investment and other forms of financial engagement from a G2 country to an emerging economy should be focused on market-friendly approaches to supporting economic development in the latter. Chinese investment in Sri Lanka, and other countries along China’s visionary trail would be a true boost to the local economy if the loan money were staying in the country through greater local employment and project procurement. Instead, Sri Lanka borrows money from China, which China requires to be used to contract largely state-owned Chinese companies. These companies provide salaries to Chinese employees who come to Sri Lanka to build infrastructure projects using mostly Chinese materials and technology.

The Mattala Airport and the Hambantota Port are prime examples of large-scale infrastructure projects financed by China that did not promote local economic development.These projects were purely gambles by the former Sri Lankan government, for which there was no guaranteed return on investment – a risky move for an economy coming out of an expensive three-decade war.

Sri Lanka, undergoing vast economic reforms outlined by the International Monetary Fund (IMF), might not be the only South Asian state that will have to be bailed out due to crushing Chinese-owned debt.  An IMF report on the Chinese-Pakistan Economic Corridor (CPEC), noted that import requirements of the project “will likely offset a significant share of inflows, such that the current account deficit would widen.” While the IMF acknowledges that the long run benefits may help mitigate said costs, such success is not guaranteed, as seen in Sri Lanka.  Hence Pakistan too should take into serious consideration the equity-for-debt swap that Sri Lanka was forced into due to the island nation’s ill-advised decisions and China’s over-eagerness to offer self-serving loans.

India is the largest power in South Asia in essentially every measure, and should continue to initiate deeper maritime collaborations with its neighbors for its own interests as well as for the benefit of the region. India can accomplish this goal by providing fiscal alternatives for its smaller neighbors to develop their infrastructures and human capital that are more favorable than Chinese-financed loans with unclear intentions.

China is a pragmatic power, and most likely foresaw Sri Lanka’s economic decline that resulted in Chinese ownership of the Hambantota port. China’s actions of fostering questionable loan conditions and blurring the line between commercial and military objectives do not correspond to its purported aim of establishing a positive public image. Ultimately, if China commits to increased transparency, its ambition to become a re-emerging global power will be better received.

About the Author

Shiyana Gunasekara is a masters candidate at Johns Hopkins School of Advanced International Studies focusing on international economics and Asian affairs, and was a Fulbright Scholar to Sri Lanka in 2014-2015. She can be contacted at Shiyana.Gunasekara@jhu.edu

The East-West Center promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through cooperative study, research, and dialogue.

Established by the US Congress in 1960, the Center serves as a resource for information and analysis on critical issues of common concern, bringing people together to exchange views, build expertise, and develop policy options.

The Asia Pacific Bulletin (APB) series is produced by the East-West Center in Washington.

APB Series Editor: Dr. Satu Limaye, Director, East-West Center in Washington
APB Series Coordinator: Peter Valente, Project Assistant, East-West Center in Washington

The views expressed in this publication are those of the authors and do not necessarily reflect the policy or position of the East-West Center or any organization with which the author is affiliated.

The Kim Jong-nam Assassination: Tussle between China and North Korea


February 21, 2017

The Kim Jong-nam Assassination:Kuala Lumpur caught in an Ongoing Tussle between Beijing and Pyongyang

As dramatic and disturbing as the assassination of Kim Jong-nam is, it is simply a sideshow in the ongoing tussle between Beijing and Pyongyang. 

An uppity client state 

North Korea has long been a Chinese client state. It owes its very existence to China which also accounts for 89% of North Korea’s foreign trade. Chinese economic assistance, food aid and investments literally keep North Korea afloat.

As a client state, North Korea is expected to be mindful of China’s overall strategic interests in the region. No one, however, apparently briefed North Korea’s brash young leader about the niceties of client state behaviour. Since coming to power in 2011, Kim Jong-un’s actions have caused alarm and concern in Beijing.

His nuclear weapons programme and poorly timed missile testing threaten to upset the delicate balance of power that China is seeking to maintain in East Asia at a time when there is an unpredictable new occupant in the White House. The Chinese were also chagrined by the 2013 execution for treason of Kim’s uncle, Jang Song-thaek, who was well respected in Beijing. There were also a number of other unpleasant incidents between the two countries involving the treatment of Chinese investors and businessmen in North Korea.

More than anything else, however, a credible nuclear capability would give the North Korean dictator greater manoeuvrability vis-à-vis China and other powers, a worrying prospect for the Chinese leadership. As one Chinese professor put it, “If we choose an ally that can’t be tamed, we might become the biggest loser.”

To show its displeasure, China joined the international criticism of North Korea’s missile tests and last week rejected a shipment of coal from North Korea.

A slap in the face

Kim Jong-nam’s assassination has now plunged China-North Korea relations to a new low. It was no secret that Kim Jong-nam, the elder half-brother of Kim Jong-un, was under China’s protection, having lived in China since he fell from favour more than a decade ago. His presence in China was a constant reminder to Kim Jong-un that China had a convenient replacement, one who had perhaps a better claim to the throne as the eldest son, if he proved too unreasonable. For that reason alone, Kim Jong-nam was a marked man.

However, not even the mercurial and impulsive North Korean leader would have dared act against his half-brother while he was on Chinese soil. It would have been an insult that China would simply not have tolerated.

Malaysia, on the other hand, with its open doors, lax security and indulgent attitude towards North Korea is another story. Certainly, the North Korean leadership would not have expected that Malaysia would react the way it did. The law of unintended consequences just keeps cropping up in international affairs.

The reaction from Beijing was also not long in coming. Shortly after the assassination, China suspended all shipments of coal from North Korea until the end of the year. While the move was presented as part of China’s efforts to implement UN sanctions against North Korea, it is almost certainly a direct response to the Kim assassination in Kuala Lumpur.

As coal is North Korea’s single largest export item to China, the suspension is bound to hit the North Korean regime particularly hard. No doubt other measures are being planned as well although China is unlikely, at least at this stage, to attempt regime change in Pyongyang.

A tougher than expected response

In the immediate aftermath of the assassination, Malaysia appeared to go out of its way to avoid doing anything that would further exacerbate the situation. The Home Minister indicated that the body would, in due course, be returned to Pyongyang in accordance with international practice. He also insisted that the incident would not affect bilateral relations.

The provocative response of the North Korean Ambassador, however, appears to have stiffened Malaysia’s resolve.

In two rambling press conferences, the Ambassador accused Malaysia of a litany of offenses – colluding with his country’s enemies, scheming to implicate North Korea in the assassination, roughing up North Korean citizens and violating human rights and international law.

Failure to respond appropriately to such a provocation would have made the Malaysian government, already beset by a number of domestic scandals, look weak.

Interestingly, while the Ambassador alluded to South Korea when he accused Malaysia of colluding with “hostile forces,” his comments could apply to China as well.

Wisma Putra, which was largely silent in the early days of the drama, quickly responded by summoning the North Korean Ambassador for a dressing down. More significantly, Wisma Putra announced that Malaysia’s Ambassador in Pyongyang had been recalled for consultations – the strongest diplomatic show of displeasure short of breaking off relations.

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Recalling our Ambassador is absolutely the right thing to do given that it is now pretty clear that North Korea was complicit in the assassination. No country can look with equanimity upon such outrageous behaviour.

The North Korean Ambassador is, of course, in a very delicate situation; he has a Damocles sword hanging over him. If he is not seen to be zealous and conscientious enough in defence of the regime, he could suffer the same fate as his predecessor who found himself at the wrong end of a firing squad after being recalled from Kuala Lumpur. It is this fear of the consequences of failure, as much as anything else, that might have pushed him to the point where his actions have now done serious damage to the bilateral relations. It is hard to see him continuing in his present post for long.

Such are the perils of working in the North Korean foreign service.

Diplomatic and protocol issues

The assassination also raises interesting protocol issues. According to Satow’s Guide to Diplomatic Practice, long the go to handbook for diplomats, “If the death [of a diplomat] takes place in circumstances where ordinarily an inquest would be held, the authorities in the receiving state should if necessary be reminded that it has been general international practice not to hold an inquest where a diplomatic agent or other member of a mission dies in office, whether in inviolable premises or not.”

Some would argue, therefore, that Malaysia did not have the authority to carry out the post-mortem and that North Korea is within its rights to demand the return of Kim Jong-nam’s remains given that he was travelling on a diplomatic passport.

However, it can also be argued that although Kim Jong-nam was travelling on a diplomatic passport he was not formally accredited here and is, therefore, not subject to the same protocol.

What this means is that Malaysia has a great deal of latitude in deciding how to proceed with the case. Given that other countries – China and South Korea come to mind – also have a vested interest in the outcome, Malaysia will have to tread a careful path if it wishes to avoid being caught up in the bigger power play that is unfolding behind the scenes.

For now at least, both China and South Korea will no doubt be pleased with Malaysia’s tough stance. They will take satisfaction that the investigation has resulted in prolonged negative exposure for Pyongyang that will both further isolate and discredit the regime.

What happens now will depend, to a large degree, on how things play out between Beijing and Pyongyang. Where the remains of Kim Jong-nam finally ends up will provide interesting clues.

Malaysia, which has been increasingly deferential to China – even quietly sending back to China Muslim Uighur refugees who sought asylum in Malaysia – will likely be mindful of China’s interest in the matter.

Rethinking Malaysia-North Korea relations 

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Address: Diplomatic Enclave Munhung-dong, Taedonggang District Pyongyang …Malaysian Embassy

If nothing else, hopefully the assassination and the angry North Korean response to Kuala Lumpur’s handling of the case will prompt a reassessment of relations with Pyongyang.

For some unfathomable reason, Malaysia has had a resident diplomatic mission in Pyongyang since 2003, one of only 23 missions in the North Korean capital. Unfathomable because trade is practically non-existent (with almost zero prospects of improvement) and there are simply no bilateral issues worth talking about that would warrant the expense of a mission.

Perhaps in a desperate bid to add some substance to the relationship, both countries even explored ways to enhance tourism, never mind that North Korea is a country with no outbound tourists and only a few, possibly insane, inbound travelers.

What is more preposterous, however, was the decision some years ago to quietly take in 300 North Korean workers to work in Sarawak’s mining sector. Why Malaysia would even think of employing North Korean workers – slave labour, to all intent and purposes, toiling in a distant land to augment the regime’s scarce foreign reserves – is a mystery.

Malaysia also plays host to an approximately 1000 strong tightly knit community of North Korean businessmen, restaurant workers and other dubious ‘professionals,’ all of whom are controlled by the North Korean embassy and serve the interests of the state in one form or another.

Clearly, this is a one-sided relationship that benefits North Korea rather than Malaysia. Certainly, not many Malaysian taxpayers will lose any sleep if our mission in Pyongyang is shut for good.

 

Donald Trump–The Reluctant Multilateralist (?)


February 21, 2017

Donald Trump–The Reluctant Multilateralist (?)

by Barry Eichengreen

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Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His latest book is Hall of Mirrors:The Great Depression, the Great Recession, and the Uses – and Misuses – of History.–www.project-syndicate.org

FLORENCE – Donald Trump did not assume the US presidency as a committed multilateralist. On that, partisans of all political persuasions can agree. Among his most controversial campaign statements were some suggesting that NATO was obsolete, a position that bodes ill for his attitude to other multilateral organizations and alliances.

Last week, however, Trump stepped back, reassuring an audience at US Central Command in Tampa, Florida (the headquarters for US forces that operate in the Middle East). “We strongly support NATO,” he declared, explaining that his “issue” with the Alliance was one of full and proper financial contributions from all members, not fundamental security arrangements.

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This more nuanced view presumably reflects a new appreciation, whether born of security briefings or the sobering fact of actually occupying the Oval Office, that the world is a dangerous place. Even a president committed to putting “America first” now seems to recognize that a framework through which countries can pursue shared goals is not a bad thing.

The question now is whether what is true for NATO is also true for the International Monetary Fund, the World Bank, the World Trade Organization, and the Basel Committee on Banking Supervision. Trump’s record on the campaign trail and Twitter is not heartening. Back in 2012, he tweeted criticism of the World Bank for “tying poverty to ‘climate change’” (his quotation marks). “And we wonder why international organizations are ineffective,” he complained.

Likewise, last July, he mooted the possibility that the United States might withdraw from the WTO if it constrained his ability to impose tariffs. And he vowed repeatedly during the presidential campaign to withdraw from the Paris climate agreement. But the evolution of Trump’s position on NATO suggests that he may yet see merit to working through these organizations as he comes to recognize that the world economy, too, is a dangerous place.

Following the election, Trump acknowledged having an open mind on the Paris climate agreement. His position seemed less to deny the existence of global warming than to insist that policies mitigating climate change not impose an unreasonable burden on American companies.

The way to limit the competitive burden on US producers is, of course, by ensuring that other countries also require their companies to take steps to mitigate climate change, thereby keeping the playing field level. And this is precisely what the Paris agreement is about.

The real test of Trump’s stance on multilateralism will be how he approaches the WTO. Persuading the US Congress to agree on corporate and personal income-tax reform, a $1 trillion infrastructure initiative, and a replacement for Obama’s signature health-care reform won’t be easy, to say the least. Doing so will require patience, which is not Trump’s strong suit. This suggests that he will feel pressured to do what he can unilaterally.–Barry Eichengreen

The same can be said of the Basel Committee’s standards for capital adequacy. Holding more capital is not costless for US banks, as advisers like Gary Cohn, formerly of Goldman Sachs and now the head of Trump’s National Economic Council, presumably tell the president morning, noon, and night. Leveling the playing field in this area means requiring foreign banks also to hold more capital, which is precisely the point of the Basel process.

Trump may similarly come to appreciate the advantages of working through the IMF when a crisis erupts in Venezuela, or in Mexico as a result of his own policies. In 1995, the US Treasury extended financial assistance to Mexico through the Exchange Stabilization Fund. In 2008, the Federal Reserve provided Brazil with a $30 billion swap line to help it navigate the global financial crisis. But imagine the outrage with which Trump’s supporters would greet a “taxpayer bailout” of a foreign country or Mexican officials’ anger over having to secure assistance from the same Trump administration responsible for their country’s ills. Both sides would surely prefer working through the IMF.

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Jim Yong Kim–From Brown University to The World Bank

Trump can’t be pleased that the Obama administration rushed to push through the reappointment of its chosen World Bank president, Jim Yong Kim. But he clearly recognizes the benefits of development aid. While he has said that the US should “stop sending foreign aid to countries that hate us,” he has also observed that failure to help poor countries can foment instability.

This would appear to be an area where Trump will favor bilateral action, which would enable him to assuage his conservative critics by insisting that no US funds go toward family planning, while taking credit for any and all assistance. At the same time, minimizing the role of the US in the World Bank would create a vacuum to be filled by China, Trump’s bête noire, both in that institution and through the activities of the Chinese-led Asian Infrastructure Investment Bank.

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The real test of Trump’s stance on multilateralism will be how he approaches the WTO. Persuading the US Congress to agree on corporate and personal income-tax reform, a $1 trillion infrastructure initiative, and a replacement for Obama’s signature health-care reform won’t be easy, to say the least. Doing so will require patience, which is not Trump’s strong suit. This suggests that he will feel pressured to do what he can unilaterally.

One thing he can do unilaterally is slap duties on imports, potentially in violation of WTO rules. We’ll soon find out whether those rules will deter him.

https://www.project-syndicate.org/commentary/trump-nato-reluctant-mulitlateralist-by-barry-eichengreen-2017-02

East Asia: Trade Regime critical for Economic Stability and Political Security


East Asia: Trade Regime critical for Economic Stability and Political Security

by  EAF Editorial Group

What the Trump Administration will ultimately do to the shape of the global trade regime is difficult to foretell but there’s no question that it will change it forever, even if there is strong global push-back against Trump’s threat to unravel trade agreements and carry a protectionist stick.

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The trade regime, and the way in which it encourages open trade and international interdependence among those who sign on to its rules, is not simply an instrument of economic policy strategy that can be changed without political consequence. For most countries, and certainly those in East Asia which are so dependent on open trade to sustain their basic livelihood, the trade regime is a critical instrument of political security.

Trump has already signed executive orders to withdraw the United States from the Trans-Pacific Partnership (TPP) and renegotiate the North American Free Trade Agreement (NAFTA). What appeared noisy campaign rhetoric has been transformed into concrete action.

Trump’s withdrawal from the TPP is no big deal in itself: with the exception of what it promised in terms of liberalisation of the Japanese economy, the economic effects of the deal that was on the table were oversold. Even renegotiation of NAFTA may have more limited economic consequences than have been threatened. But these steps, together with the threat of punitive tariffs on imports from China and Mexico, plus a total retreat from multilateral or regional trade agreements, tears at the core principles upon which the US supported postwar economic order had been built.

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POTUS Donald J. Trump and China’s President Xi

Anyone who says that a switch of this magnitude and direction in the trade policy strategy of the world’s largest economy and second-largest international trader is of little consequence is seriously delusional. The old certainties that brought prosperity and a significant measure of stability to world affairs for nearly three-quarters of a century after the Second World War are under serious threat.

A world in which the defining characteristic is a lot of bilateral trade agreements rather than one in which multilateral and regional frameworks are predominant imposes costs on business and consumers alike because of the need for compliance with different rules of treatment across different trading partners. It also injects a different tone into international politics. These concerns are what motivates the argument for regional and global trade regimes that govern international flows of goods and services through unified rules and standards.

The broader the framework within which trade can take place, the greater will be the scope for division of labour and the higher the gains from international trade. Bilateral trade deals can’t replicate the gains from regional and multilateral agreement, and they will unhelpfully cut across global and regional value chains. As the largest centre of production networks, East Asia has much at stake in the push back against an open, global rules-based trading system and the regional arrangements that support it.

While the direct economic costs of Trump turning America’s back on the TPP and other measures might be relatively small, the systemic costs are much larger.

As Shiro Armstrong and Amy King write in this week’s lead essay, Trump’s executive order to withdraw the United States from the TPP agreement in the Asia Pacific ‘is a strategic turning point in the open economic order. It is a blow to furthering reform for some members, a lost opportunity for the United States to write the rules of international commerce, and more worryingly a sign of the United States turning its back on the global economic system it helped create and lead’.

How can East Asia, which includes China and Japan — the world’s largest and fourth-largest trading nations — stand against the corrosion of a global trading order that is so central to their common economic and political interests?

The economies of East Asia must, of course, stand quietly firm in global and regional forums and in all their bilateral representations to the United States against the undermining of the global trading system, giving strength to those forces in America that can help to shape much better outcomes than the present circumstances threaten. But, through their own commitment to collective liberalisation and reform, they can also help to lead the system back from the brink.

With major multilateral trade deals at the WTO now too difficult and bilaterals only able to make slow and incomplete progress towards freer markets, Armstrong and King observe, all eyes now turn to Asia’s Regional Comprehensive Economic Partnership (RCEP) agreement. It is the most important initiative on the global trade scene.

Image result for flags of asean member statesASEAN is the hub of RCEP Agreement

RCEP comprises the 10 Southeast Asian members of ASEAN as well as Australia, China, India, Japan, New Zealand and South Korea. Though, as Armstrong and King say, there are many misconceptions about the RCEP enterprise.

‘The first misconception is that RCEP is China-led. But China is a spoke and ASEAN is the hub of the arrangement. RCEP was built to consolidate ASEAN’s five separate free trade agreements with China, South Korea, Japan, India and Australia–New Zealand. And the RCEP idea and its guiding principles were crafted not in China, but in Indonesia. ASEAN centrality has ensured that RCEP has incorporated Asia’s other large power — Japan — and reflects Japanese preferences as much as those of China. Originally, China wanted to limit core membership of Asian cooperation to ASEAN plus China, Japan and South Korea. Japan wanted a larger membership, involving Australia, New Zealand and India, to help provide a counterweight to China’.

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In the end, ASEAN centrality and the interests of Australia and India in the region meant a broader and representative group ideally placed to take the lead collectively on global trade.

‘With the world trading system under threat’, as Armstrong and King conclude, ‘it is time for leaders in Asia to step up and push for opening markets and deepening reforms to enhance economic integration, not just with each other but with Europe, the United States and the rest of the world’.

*The EAF Editorial Group is composed of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel, Amy King and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.

http://www.eastasiaforum.org/2017/02/20/east-asias-agreement-to-keep-the-world-economy-open/

President Donald Trump–Doing what he does Best


February 19, 2017

President Donald J. Trump–Doing what he does Best: Electioneering in stead of Governing

Listen to President of the United States at Melbourne, Florida and tell me what you think. His speech resonates with his supporters  no doubt, but it raises more concerns for the rest of us around the world. America, the Land of the Free and Home of the Brave, is not an Island onto itself. Under the 45th President, it is  also a fading City on a Hill.

As a  friend of America, I am disappointed at what is happening in America today. In less than a month in office, Mr Trump, you are not acting presidential, but more like a demagogue.

What America is in 2017 reminds me of 1968. To me, you are like the coming of another Richard Milhous Nixon. A divided, polarized, paranoiac, and inward looking America led by another toxic President is not good for a distracted America, and the world which depends on sanity and order in 1600 Pennsylvania Avenue, Washington DC.

Taking on the Press is not the solution. It is time for you, Mr. President, to tap the power of the  Press to support and promote your agenda for change. Antagonism towards the Media is, therefore, counterproductive.

So please get out of  your campaign mode, and start governing and making friends with the Media and the rest of the world. It has to be “I am Okay, You are Okay”(Eric Berne) paradigm for global peace and stability. You need, Mr. Trump, friends to keep America and the world safe from terrorism, racism and other forms of extremism, not just ISIS/Dash.–Din Merican.