Lowy Institute

In the days leading up to last Friday's presidential inauguration ceremony in Taiwan, turtle eggs and pineapples hogged the front pages of the island nation's newspapers and airwaves. Chinese customs officials have become suddenly concerned about residual pesticides on pineapples exported by Taiwan . Buyers of Taiwanese turtle eggs are also dialling down their orders.

Given this fresh examples of the collateral damage caused by jittery cross-straits relations, its not surprising Taiwanese exporters, media commentators and politicians are increasingly worried that Beijing will use its considerable economic leverage to hurt the pro-independence, new Taiwanese government.

The country's new president is also clearly focused on matters economic. While much of the analysis on President Tsai Ying-wen's inauguration speech focused on how the new government will treat the '1992 Consensus', which stipulates both sides stick to the legal fiction of one China, the economic agenda was the subject of the first part of that speech. It is clearly the chief focus of the new administration.

This is in keeping with the views of the country's voters. According to a survey conducted by Taiwan Brain Trust, a pro-independence think tank with a close relationship to the new government, 62.9% of Taiwanese rank the economy as the top priority. Just 5.9% think managing the cross-Straits relationship should be the new government's main focus. Voters, particularly young Taiwanese, are concerned, like their counterparts elsewhere, about jobs and house prices. It seems the Clintonian maxim of 'it's the economy, stupid' also applies in Taiwan.

Dr Tsai's economic policy is centred on three themes: participating in regional economic free trade agreements; fostering more innovation; and encouraging more sustainable development. Like everything else in Taiwan, the one inescapable factor that will affect the success of all these laudable aims is China.

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Taiwan is arguably the world's most China-dependent economy. More than 40% of its exports go to the mainland. The island country is also one of the largest foreign investors in China while millions of Taiwanese work, study and invest in mainland China. The economic fabric of Taiwan and mainland China are closely interwoven.

The new government does not like this and worries about the over-reliance on China. Dr Tsai wants to strengthen 'the vitality and autonomy' of Taiwan's economy and 'bid farewell to our past over-reliance on a single market.'

Rong-I Wu, chairman of Taiwan Brain Trust and a former vice–premier in the Chen Shuibian government (in power from 2000–2008), says one of the key reasons behind Taiwan's recent economic struggles is the slowdown in China.

'Over-reliance on a single market is very dangerous. We want to strengthen our relations with other developed economies and we want to diversify our risk,' he said, 'Beijing's industrial policy is also aimed at substituting Taiwanese imports with domestically produced goods.'

So, how does the new government aim to reduce its exposure to China? The first priority is to join regional trade agreements such as the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP). Taipei will also promote a 'New Southbound Policy' that encourages Taiwanese businesses to expand their presence in Southeast Asia and India.

It is not clear whether Taiwan can easily join the TPP or RCEP. Chen-Sheng Ho, director of international affairs at Taiwan Institute Economic Research, says the 'China factor' looms large in Taiwan's ability to participate in global or regional economic trade regimes. Given the uncertain state of the cross-Straits relationship, we don't know if China will seek to frustrate Dr Tsai's ambition.

One should not, however, underestimate China's willingness to play hardball when it comes to Taiwan related issues. Past experience suggest Taiwan will face significant challenges in joining these regional trade agreements without China's implicit acquiescence. Dr Tsai also faces some resistance at home from the agricultural lobby, already unhappy with the new government's intention to relax import restrictions on American hogs.

Taiwan's pivot to Southeast Asia is also likely to result in competition with China's ambitious One Belt and One Road strategy. Senior Chinese officials are busy touring the region offering large cash sums to win over Southeast Asian countries, and China is already ASEAN's largest trading partner.

On the innovation front, Taiwan has been and still is an innovative economy with a large and vibrant small and medium enterprise sector. During my trip to attend President Tsai's inauguration ceremony, I also went to see two such firms: Singtex, a fabric firm that makes cloth from used coffee beans and recycled plastic bottles, and Gogoro, an electric scooter company that makes stylish and environmentally friendly scooters.

However, even when a good base exists, boosting innovation is much easier said than done. Rong-I Wu, a senior advisor close to the new government admits as much. He says the new government will allocate more money to research and development, education and training, and he believes it will make a difference.

The new government's decision to reduce its dependency on mainland China is sound. Past experience indicates Beijing has no qualms about using economic leverage to exert its influence. However, it is not clear whether it will be possible to reduce Taiwan's dependency on mainland China anytime soon. Despite China's sluggish growth, it is still the most important and fastest growing market for many companies, including those from the US and Japan.

It looks like the road to economic autonomy will be a bumpy one for Dr Tsai's new government.

Photo: Ashley Pon/Getty Images

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Looking for a universal, all-purpose hypothesis for the weirdness that is Trump, Sanders, Brexit, Austria's near-miss with a far-right presidency, and the worldwide decline in democracy? How about neoliberal globalisation?

The neofascist reaction, the force behind Trump, has come about because of the extreme disembeddedness of the economy from social relations. The neoliberal economy has become pure abstraction; as has the market, as has the state, there is no reality to any of these things the way we have classically understood them. Americans, like people everywhere rising up against neoliberal globalization (in Britain, for example, this takes the form of Brexit, or exit from the European Union), want a return of social relations, or embeddedness, to the economy.

Personally, I prefer this explanation from economist Tyler Cowen, though as others have noted, it is a highly speculative piece:

The contemporary world is not very well built for a large chunk of males.  The nature of current service jobs, coddled class time and homework-intensive schooling, a feminized culture allergic to most forms of violence, post-feminist gender relations, and egalitarian semi-cosmopolitanism just don’t sit well with many…what shall I call them?  Brutes?

Quite simply, there are many people who don’t like it when the world becomes nicer.  They do less well with nice.  And they respond by in turn behaving less nicely, if only in their voting behavior and perhaps their internet harassment as well.

Female median wages have been rising pretty consistently, but the male median wage, at least as measured, was higher back in 1969 than it is today (admittedly the deflator probably is off, but even that such a measure is possible speaks volumes).  A lot of men did better psychologically and maybe also economically in a world where America had a greater number of tough manufacturing jobs.  They thrived under brutish conditions, including a military draft to crack some of their heads into line.

Reminds me of the small torrent of articles produced in the US in 2009 on the so-called 'man-cession' or 'he-cession' because job losses in that downturn were felt so disproportionately among men. There were wider implications, argued Reihan Salam at the time:

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The great shift of power from males to females is likely to be dramatically accelerated by the economic crisis, as more people realize that the aggressive, risk-seeking behavior that has enabled men to entrench their power—the cult of macho—has now proven destructive and unsustainable in a globalized world.

Indeed, it’s now fair to say that the most enduring legacy of the Great Recession will not be the death of Wall Street. It will not be the death of finance. And it will not be the death of capitalism. These ideas and institutions will live on. What will not survive is macho. And the choice men will have to make, whether to accept or fight this new fact of history, will have seismic effects for all of humanity—women as well as men.

Photo by Flickr user Jason St Peter.

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Last weekend Tanya Plibersek, Labor Deputy Leader and Shadow Minister for Foreign Affairs and International Development, committed Labor to restoring the Coalition's latest round of cuts to Australia’s aid program and providing 'around $800 million more for overseas aid than the Liberals' over the next four years. The commitment has been near universally welcomed by the Australian development community that has had nothing but bad news about the budget for the past four years. In that context it is indeed worthy of praise. But, looking back at when the Rudd government came into power in 2007, it’s clear that Labor’s commitment to aid is not what it used to be.

So what does Labor’s commitment mean for the Australian aid budget?

An immediate restoration of $224 million in the 2016–17 budget would bring the total budget back to just over $4 billion, 5% more than the Coalition’s current plan. The extra $200 million per year in the three years thereafter, which roughly pegs the aid budget to forecast inflation, would leave the aid program at roughly $4.6 billion in 2019–20, about $500 million or 13% higher than the Coalition’s planned 2019–20 budget.

Labor's planned increase is substantial but it would only slightly nudge up our aid generosity. It would bump up aid as a proportion of Gross National Income from 0.23% to 0.26%, a level that would still be one of the worst points for generosity in Australia's history and far below the OECD average of 0.3%. There is also the UN mandated goal of 0.7%, achieved a few years ago by the United Kingdom while it was the depths of austerity.

Plibersek’s statement also set out how a Labor government would spend almost all of the planned increase. The UNHCR would be allocated an additional $450 million over three years, a sensible commitment considering the strain the sector is under. Core funding to NGOs would be lifted by $40 million a year, a 30% increase on the current budget of $130 million that goes directly to Australian NGOs. To be clear, NGOs have proven to be effective implementing partners time and again, but there was no justification given as to why the sector, which had a heavy presence at the Labor announcement and is also the most vocal in the development community, was singled out for such a large increase in funding. Together these two commitments make up $600 million of the planned $800 million increase, leaving whatever is left to restore the cuts made in 2016–17. That doesn’t leave much room for any more bold funding commitments.

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Of course, Plibersek is right to argue that 'it is impossible to fix the aid program quickly' but we should also ask ask how much more Labor can and should reasonably commit to. The simplest way to answer that question is to look at what the last Labor government did.

Table 1: Labor then and nowNote: I take a five-year horizon under Rudd and a four-year horizon under Shorten as the government has committed to restoring the $224 million in the 2016–17 cycle whereas, while Labor won the election in November 2007, its first budget wasn’t until 2008/09. Dataset here

Table 1 shows that, over a similar timespan the Rudd government delivered an increase to the aid budget double that to which Labor has promised under a Shorten government. While the previous scale-up wasn’t without its teething pains, and I doubt AusAID could have handled a scale-up at any faster rate, the comparison illustrates Labor position on foreign aid has softened significantly since it last waged an election campaign as an opposition. I would argue that this is driven by a few factors.

The first is that we simply don’t have a champion of the aid program with the weight and influence of Kevin Rudd in 2007. Rudd’s personal commitment to foreign aid is well known, and likely far outweighed the majority of his own party. The clearest reflection of this can be seen in the successive delays to the scale-up trajectory committed to by Rudd after he was removed from Cabinet in 2012.

The second is that there was a much clearer bipartisan commitment to foreign aid in the 2007 election. A sequence of high profile regional interventions and disasters (Timor-Leste, the Regional Assistance Mission to the Solomon Islands, and the Boxing Day tsunami being the most prominent) showed the Coalition how critical our aid program can be and resulted in our aid budget nearly doubling (in nominal terms) under the Howard government between 2000/01 and 2007/08. (ODA/GNI increased from 0.24% to 0.28% over the same period.) This led to a bipartisan commitment to increase the aid budget to 0.5% in the 2007 elections. Neither party has such a commitment this time around.

Finally, this election campaign contrasts starkly to that of Howard and Rudd nearly a decade ago. The hyperactive media cycle, devotion to polling, and instability on both sides of the aisle have left political leaders increasingly reluctant to try to lead and change public opinion in areas beyond the bread and butter issues of domestic politics. In this context, both sides of politics appear to have decided there are no votes in aid, and the domestic agenda will dominate this campaign more than most. In a period where the key determinants of Australia’s future are international, and the humanitarian needs that can only be served by a robust aid program are becoming even more acute, this is very unfortunate state of affairs. Labor has at least devoted time and thought to developing an aid policy but it is clear this opposition is not as internationalist in its approach and perhaps even philosophy than the Labor party that fought (and of course won) the 2007 election.

Tanya Plibersek will address the Lowy Institute on Tuesday 31 May. Details here. Greens leader Senator Richard Di Natale’s speech on foreign policy, delivered at the Lowy Institute on 17 May, can be found here.

Photo courtesy of Flickr user DFAT

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Najib Razak's term as prime minister of Malaysia is now in its seventh year and there is every reason to believe he will continue to lead Malaysia for a long while yet.

Najib Razak withVladimir Putin at the Russia-ASEAN Summit on May 19 (Photo: Mikhail Svetlov/Getty Images)

Given his scandal-ridden tenure, this is a remarkable outlook, one enabled by the sidelining of opponents, an illiberal electoral system, a divided opposition, and civil leadership that took a wrong turn.

As unlikely as it seemed when the The Wall Street Journal reported investigations of corruption and malfeasance on a massive scale related to investment fund 1MDB, Najib, through the power of incumbency, has gone from strength to strength while his detractors have lost momentum.

Even if Najib wanted to resign he could not. Unlike former prime ministers, Abdullah Ahmad Badawi and Mahathir Mohamed, who were forced to quit by their party, the United Malays National Organisation (UMNO), the corruption allegations and supporting evidence against Najib are too serious, substantive and too public (everyone knows about them). A face-saving exit strategy could not be designed without compromising its designers.

All powerful individuals who were brave enough to oppose the prime minister have been cut down to size. As demonstrated through the sackings of then deputy prime minister Muhyiddin Yassin, and then minister for rural and regional development Shafie Apda, Najib has systematically separated his detractors from the power, patronage and machinery that would have been required to topple him.

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Mahathir Mohamed, Najib’s most vocal opponent, has also been diminished. This has been accomplished in two ways. Firstly, Mahathir's power and influence has been cut down. His son, Mukhriz Mohamed, was forced to resign as the chief minister of Kedah, Mahathir’s home state. Mahathir was compelled to resign as chair of Proton (Malaysia's national auto company) after earlier being fired as the chair of Petronas (the national oil company).

Most damaging however, was Najib’s suggestion that Mahathir had betrayed UMNO by working with the Chinese-dominated opposition. This resonated with UMNO supporters. Mahathir’s humiliation was complete when he lost the police escort accorded to former prime ministers.

On the institutional front, two of the four members of the high powered investigation team into the 1MDB are no longer there. Najib sacked the Attorney General Abdul Gani Patail while the Bank Negara (Central Bank) governor Zeti Akhtar Aziz retired. The Malaysian Anti-Corruption Commission Commissioner Abu Kassim Mohammed, appointed by the prime minister has not said much. The Inspector General of Police (IGP), Khalid Abu Bakar is the only top ranking civil servant from that high powered investigation still in favour with Najib.

Similarly, the Public Accounts Committee (PAC) that had been vigorously investigating the 1MDB issue was severely compromised through the promotion of four of its members to ministerial positions, and the appointment of a new chairperson.

Then there is the electoral system. Bridget Welsh, in her extensive analysis of the recent Sarawak elections, demonstrated the extent to which Najib can rely on the illiberal electoral system to keep him in power. (Read Welsh’s extensive analysis here, here, here, here and here).

Some have suggested the Sarawak electoral results would not be replicated on the peninsula. But domestic politics have once again aligned in Najib's favour as the opposition, civil society and the majority of the Rakyat, united in the general elections of 2008 and 2013, are now again fragmented.

The People’s Justice Party (PKR), which bridges the secular and the conservatives on the peninsula faces leadership transition uncertainty, both within the party itself and the opposition coalition. The party is split between those who support PKR deputy president Azmin Ali for leadership and those who don’t. Other possible candidates for the leadership include PKR vice president (and Anwar Ibrahim’s daughter) Nurrul Izzah, and PKR’s secretary general Rafizi Ramli.

Outside of the opposition coalition, Azmin Ali appears to have a good working relationship with the Islamic conservatives in the Pan-Malaysian Islamic Party (PAS) but this has alienated both the Parti Amanah Negara (PAN), PKR’s newly formed coalition partner (in the new coalition Pakatan Harapan), made up of moderates who were purged by the PAS, and some members of the Democratic Action Party (DAP).
 
The upshot of all of this is there is no longer a united opposition to UMNO and Najib. In fact, PAS (the largest opposition party by membership) is now actively being courted by UMNO, and its newly chosen conservative leader, Abdul Hadi Awang, has defended Najib on several occasions.
Civil society, in particular Bersih, had been in recent years the champion of principled politics through its efforts to reform Malaysia's flawed electoral system. However, the recent actions of its leading lights, Maria Chin Abdullah and Ambiga Sreenevasan, who have supported Mahathir Mohamed (albeit in their personal capacities) in his efforts to topple Najib, have sown confusion and discord.

Mahathir Mohamed has made it clear his 'Save Malaysia' campaign is primarily focused on toppling Najib and saving UMNO, and much less so on improving governance. One time supporters of the campaign, such as jailed former opposition leader Anwar Ibrahim, have come to see it primarily as a Mahathir vehicle rather than a genuine reform movement, as made clear in this scathing letter to PKR leaders. 

With these formidable challenges crippling the opposition and his detractors, it is difficult to see how Najib can be dislodged.

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For such a nondescript city in Iraq, Fallujah has name recognition beyond its importance. In Western military circles at least the name is synonymous with the 2004 battle that turned into the bloodiest urban assault undertaken by the US military since Vietnam.

Iraqi soldiers at Garma, part of the Fallujah operation (Photo: Ali Muhammed/Getty Images)

This time around, though the circumstances are different, it is once again a fight against Sunni insurgents who have had the benefit of long periods to establish defensive positions above and below ground. Regardless of the number of fighters inside the city, the urban environment offers the defenders many advantages, and diminishes the effectiveness of some of the attackers' advantages, particularly air power.

Much is riding on the outcome for the Iraqi government. The under-siege prime minister Haider al-Abadi, who announced the beginning of the assault on national television, seeks to shore up his position with a decisive victory. Of course the inevitable civilian casualties will be prime material for his enemies to use against him even if the assault goes to plan, and none other than Grand Ayatollah has called for restraint to be used during the battle. Videos of Iraqi forces assisting some civilians to flee have already begun to emerge and more of these should be expected as part of the political PR campaign.

Part of the difficulty for the Iraqi government is the confusing command and control arrangements between the various parties involved; the Iraqi army assaulting the city; the Iraqi police units providing support; the various Shi'a militias grouped under the Popular Mobilisation Units (some very loosely, if at all) who are supposed to conduct supporting attacks; and the Iraqi and coalition forces (including from the Australian Defence Force) who supply the air support and Joint Terminal Attack Controllers (JTAC). With the number of differing (and some potentially competing) agendas among those groups, it will take an impressive commander (and/or advisory staff) to effectively coordinate everyone's efforts.

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The Shi'a militias have so far satisfied themselves with conducting operations on the perimeter as part of the outer cordon. They have promised to leave the main assault to Iraqi government forces, but this has not stopped them from capitalising on their participation through selected photos circulated to the media including one allegedly featuring the scarlet pimpernel of the Iranian Revolutionary Guard Qassem Suleimani 'coordinating actions' in Fallujah.

It will be interesting to see the degree to which Islamic State is willing or able to commit resources to the battle. US–supported forces operating under the Syrian Democratic Forces banner (largely the Kurdish YPG) have commenced an advance south towards the outskirts of Raqqa. IS leadership in Raqqa will therefore have to deal with its more proximate threat while simultaneously addressing the assault on Fallujah. Defeat in Fallujah should be inevitable, and if the cordon built up over the past few weeks and months has been even partially effective it should have made IS's ability to move fighters in or out difficult but not impossible. IS has already attempted to position itself ideologically for the fall of Fallujah in its most recent audio recording in which spokesperson Abu Muhammad al-Adnani claims that the loss of cities does not mean they are defeated as long as they retain the will to fight. 

IS may well see strategic utility in suffering a defeat while imposing an enormous cost in civilian lives and damaged infrastructure. This could breed ongoing ill-well among the Sunni Iraqi population, laying the groundwork for a sympathetic Sunni environment into which some of its Iraqi members could continue to operate after IS loses its territory. In this scenario, it would make sense to retain a relatively significant force in Fallujah. But if IS has deemed the defence of Mosul and Raqqa to be its main effort, it may well have withdrawn fighters and perhaps left local IS members to die in place. Until the battle proper is joined we won't be any the wiser as to how IS views the defence of Fallujah.

What is certain is that the re-taking of Fallujah may lead to nought strategically if it is not re-built and administered effectively and efficiently. Only then can the Iraqi government have any hope of extending its writ into the Sunni heartland of western Iraq. But that is for the future. For the moment, re-taking Fallujah will maintain the momentum of the Iraqi Security Forces and allow them to switch the main effort to the main prize perhaps before year's end — Mosul. 

Ali Muhammed/Anadolu Agency/Getty Images

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US presidential race 2016

Lowy Institute Executive Director Michael Fullilove remembers the 2008 US presidential election campaign, when he was living in Washington, as a time of hope and promise. This year's race? Not so much.

Fresh from a trip to the US, in this quick comment Dr Fullilove compares the two election cycles, discusses the shock Donald Trump has given the opinion–forming class, ponders what a Trump presidency might mean for Australia, and muses on a might-have-been.

Photo: John Sommers/Getty Images

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  • Student protests across Papua New Guinea continue as Prime Minister O’Neill has refused  demands to step aside. Four weeks of protest has forced UPNG to suspend the teaching semester, with the Vice-Chancellor demanding students vacate the premises in 48 hours. Unitech remains hopeful that the Semester can still be salvaged. Meanwhile, students argue that they cannot back down.
  • Protests are also beginning to spread through the country, with a rally of over 6,000 people in Kundiawa, the capital city of the Simbu province in the PNG highlands, making similar demands to the students.
  • PNG’s opposition leader Don Polye has been reinstated to Parliament by the Supreme Court, which has ruled that several ballot boxes from the 2012 election must now be recounted to ensure he is the elected representative for the Kandep Open Electorate.
  • Elsewhere in PNG the InterOil board has approved a $US2.2 billion takeover by rival Oil Search. Hailed as yet another coup by Oil Search CEO Peter Botton, the deal has been slammed by a former InterOil CEO and is being questioned by the head of the ICCC, PNG’s corporate watchdog.
  • The date for the Bougainville referendum has also been set for June 15, 2019.
  • The Vanuatu government says it will pass a constitutional amendment to reserve seats in Parliament for women, months after a national election in which none of the nine female candidates were successful.
  • New reporting shows the Solomon Islands government set a record deficit of SBD$172 million (US $21.5 million), or 2% of GDP, largely driven by paying down domestic debt.
  • A new World Bank report argues that the business as usual approach to tourism in the Pacific will not result in substantial growth of the sector. With careful planning, however, the report argues that tourism in the region can generate 'as much as US$1.8 billion per year in additional revenues and create up to 128,000 additional jobs by 2040'.
  • And in case you missed our panel last week looking at new approaches to tackling gender based violence in PNG, the podcast is available here.
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The Brexit referendum

Boris Johnson, former London Lord Mayor, tilter for the next British prime ministership, and all round consummate public player, may not have expected to have Geert Wilders as a political bedfellow.

Wilders, the ultra–nationalist, anti–Islamic Dutch populist, has joined Johnson in harking back to 1940s Europe to make the case for the UK to leave the EU.

Wilders,  once banned from entering the UK because of his extremist views is now topping the polls in the Netherlands, reflecting the rise of so many reactionary parties across the EU including Marine Le Pen’s National Front in France, the Alternative for Deutschland led by Frauke Petry, and the Five Start alliance in Italy.

In an extensive interview with The Sunday Telegraph, Wilders said Britain would unleash a ‘patriotic spring’ if it voted to leave the EU and ‘liberate’ Europe for the second time in a century. 'Like in the 1940s once again Britain could help liberate Europe from another totalitarian monster, this time called Brussels', Wilders opined.

In Austria, on the same day as Wilders’ views were published, a party founded in the 1950s by former Nazis who espoused ‘teutonic nationalism’ saw its leader, Norbert Hofer, narrowly miss out on the presidency. Former Greens leader Alexander Van der Bellen won in a vote that was 50.3 per cent to 49.7 percent, or 30,000 votes in a country of 8.4 million people. Hofer is no mild centre-right public figure and the contest revealed how utterly the traditional Austrian centre right and centre left parties got whammed.

Wilders' support and the Austrian vote came after Johnson's critics described him as ‘crossing the line’ when he said the past 2000 years of European history had been characterised by repeated attempts to unify Europe under a single government in order to recover the continent’s lost ‘golden age’ under the Romans. In a now infamous interview (also with The Sunday Telegraph), Johnson said: 'Napoleon, Hitler, various other people tried this out and it ends tragically. The EU is an attempt to do this by other methods'.

It was, to say the least, a jarring comparison but, in this age of Donald Trump and far right voices across Europe, there is stiff competition for such posturing.

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Scare tactics from both sides

With less than a month to the Brexit referendum, the economic arguments to remain in the EU seem to have been won. The vision of an independent, fresh and new British innovative powerhouse freed from the shackles of the EU does not seem to have resonated.

This week the UK Treasury warned that in the first two years after leaving the EU, the UK could see GDP drop 3.6% and push the economy into recession. Inflation would rocket and house prices would fall. Some have suggested the Treasury was overly negative but, nevertheless, the economic case for the farewell to Brussels seems less and less convincing.

In response, the Leave campaign is revving up its anti–immigration arguments as well as threats of worse crime, jobs lost and an increased terrorism threat. The other side is also upping the ante.

Britain Prime Minister David Cameron, foremost advocate for the Remain campaign, might not have the flair of Johnson, However there was a nod to the BoJo style when Cameron said Russian President Vladimir Putin and ISIS would welcome the UK leaving the EU.

Dropping any residual niceties, the President of the European Commission, Jean-Claude Juncker, set the tone for the final run to the UK referendum saying: 'Deserters (from the EU) will not be welcomed back with open arms'.

Meanwhile as the rhetorical temperature rises and both sides befuddle the issues, polling gives some clue to voting intentions. Since Cameron announced the referendum, the Remain case has been in the majority although the level of support has ebbed and flowed. The latest Financial Times Poll of Polls, however, showed 47% in favour of staying, 40% wanting to leave, and 13% undecided.

But the most recent polling data, released a few days ago, suggests support for the Leave campaign is falling away. This ORB poll suggests 55% want to remain, 42% want to leave.

The Australian-born political strategist, Sir Lynton Crosby, who was given credit for the Conservative Party’s victory last year, reckons the Remain campaign has strengthened its position and the poll shows the Leave campaign has failed to quell economic concerns.

However polls are not infallable. Last year they failed to predict a Tory victory. The rise of anti-establishment feeling suggests the referendum result could be very close, a margin so slim that it leaves the UK politically divided and ripe for further populism.

Perhaps Boris Johnson is counting on that.

Photo Ian Forsyth/Getty Images

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None of the US presidential candidates is keen on the Trans-Pacific Partnership. Does this mean that the treaty — signed but unratified — is finished and all that debate, negotiation and angst will have been vain?

President Obama doesn’t see it that way. He’s still plugging away in the hope of presenting enabling legislation to Congress before it breaks in mid-July for the party conventions. It is at least technically possible that Congress could approve it before the presidential election, or even in the ‘lame-duck’ post-election period before the new president takes over. But this is a big ask.

Hillary Clinton has not only come out against the agreement in its current form, but has ruled out any action in the lame duck period if she is elected.  Donald Trump wouldn’t be supporting it. Thus the best chance — if a slim one — is that President Obama sees it as so important for his own legacy that he puts in the huge effort required to see this through in his term.

Unlikely though this seems, there are TPP advocates,  including powerful sectoral interests that would benefit from the agreement signed last February. They understand that if the TPP doesn’t get through this year, it will be on the back-burner for years to come. If it doesn’t go ahead, where does that leave Obama’s ‘pivot’ to Asia? For her part Clinton, if elected, might be content to have had the TPP resolved before she takes over responsibility. 

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Some of the necessary prior actions have been taken. The US International Trade Commission has examined the agreement and concluded that it will benefit the USA, even if the impact on GDP is tiny

Many members of Congress have a fixation with ‘currency manipulation’ and are still calling for counter-measures to be included in the TPP. But the compromise reached earlier was for the US Treasury to address this issue unilaterally, which it has done by spelling out more precisely what it would regard as ‘currency manipulation’.

The Treasury’s criteria illustrates the muddle that arises when bureaucrats attempt to placate public ignorance. Of the three criteria developed for identifying ‘manipulation’, only one makes any economic sense. Perhaps substantial official intervention in foreign-exchange markets might constitute ‘manipulation’ (although the Swiss authorities would regard their attempt to constrain their growth-sapping appreciation as being worth a try, even if it was ultimately unsuccessful).  But the second criterion — concern about large current account imbalances — is harder to justify. And the third — concern about bilateral imbalances (i.e the trade position between the US and its individual trading partners) — is not just nonsensical, but actually harmful. If all countries responded to large bilateral imbalances by imposing trade restrictions, global trade would shrink dramatically. A key advantage of free international trade is that a country can obtain imports from one trading partner and pay for them by exporting to another partner. The bilateral balance between individual trading partners is irrelevant.

Fortunately it is unlikely that all three criteria would be infringed simultaneously, and even if they were, the penalties imposed could be trivial. But this sop to Congressional misunderstandings illustrates the illogical compromises that arise in international rule-making.

What about the alternative set of inferior trade rules which President Obama fears China will put in place if the TPP doesn’t go ahead?

As we speak, China is negotiating a trade deal that would carve up some of the fastest-growing markets in the world at our expense, putting American jobs, businesses and goods at risk.

What he has in mind is the Regional Comprehensive Economic Partnership (RCEP), which is actually an ASEAN initiative, not a rival China ploy. The RCEP envisages a set of rules or reforms which are aimed principally at practical impediments to trade, rather than establishing high-level principles as the TPP aims to do. It won’t address some US concerns (the role of state-owned enterprises, intellectual property rights or industry/state dispute resolution), but some would argue that the TPP over-reaches on these issues. Sensibly enough, Australia regards the two trade deals as conceptually compatible and supports both.  In any case it seems most unlikely that RCEP will be completed on schedule by the end of the year (ASEAN schedules tend to slip, and the negotiating schedule seems open-ended).

Perhaps more seriously, the case for TPP (and the characterisation of RCEP as China’s rules) is increasingly looking like a ‘contain–China’ play. In the Washington Post article, President Obama said:

America should write the rules. America should call the shots. Other countries should play by the rules that America and our partners set, and not the other way around. 

A more nuanced approach might offer China both carrot and stick: cooperation in developing mutually beneficial global trading rules while at the same time pushing-back against China’s South China Sea territorial claims.

Photo courtesy of Flickr user Jens Schnott Knudsen

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Asia has hosted the world’s second 'space race' for several decades. As with the first space race between the US and the Soviet Union, the ultimate goal is to send humans into space.

Japan once harboured dreams of its own space capsule, but cancelled those plans when it joined the International Space Station program. Japan contributed a laboratory module and an uncrewed cargo spacecraft to the Station, but elected to launch astronauts aboard the US shuttle.

China forged a path of autarky, developing its own crew-carrying spacecraft (with its first astronaut launch in 2003) and its own space laboratories.

The region’s other major space power is India. An Indian cosmonaut flew in space with a Soviet mission in 1984, but India delayed any plans for developing a human spacecraft by itself. In recent years, this has changed.

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India seems to have been panicked by the tremendous strides achieved by the Chinese program. One reaction was a crash program to send a robot orbiter to Mars before China could achieve the same goal. The other has been the start of a human spaceflight program.

India hopes to launch a small capsule spacecraft at some point in the future. With all due respect to India and its generally excellent space program, the human spaceflight program seems like a shambles. India has yet to tame the rocket it will need to launch the capsule. There seems to be so much confusion over the management of the project. This is reaction, rather than carefully planned action. That sort of haphazard activity is a recipe for disaster in spaceflight.

Recently, India tested a small scale model of a reusable space shuttle on a sub-orbital flight. The test was successful, but it should not be interpreted as a sign of an imminent Indian astronaut shuttle. Japan also conducted similar tests in preparation for a Japanese robot shuttle, but the program was cancelled. The boffins are playing around, but getting beyond the experimental phase will require more time, money and effort. China is also planning to test a full-sized mockup of a new space capsule later this year, which is slated for missions to the moon. Again, it isn’t really clear when this vehicle will be fully developed or even carry astronauts into deep space.

In contrast with the US, now a a nation without the ability to launch astronauts on its own spacecraft, and Russia, whose space program is also stagnating, human spaceflight is in a turbulent and fascinating flux in Asia.  Expect some intriguing developments over the next few years.

Photo: Getty Images

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US presidential race 2016

So, with less than two months to go until the Democratic and Republican presidential nominees are crowned at their respective party conventions, the GOP is uniting around its candidate while the bitter rivalry between the two Democratic camps has many questioning if the party will be back able to come back together.

Few could have foreseen this is where we would be at this stage of the race. 

In the beginning, there were 17 candidates vying for the Republican nomination. As the field thinned, speculation grew that a successful run by Donald Trump would rip the GOP asunder. And now? Republicans are falling into line behind Trump, memorably described by conservative columnist Hugh Hewitt as 'the unlikeliest, most unconventional nominee of a major party in modern times'.

Republican National Committee (RNC) chair Reince Priebus is doing his best to reframe the previously unthinkable as the new normal, repeatedly endorsing Trump as his party's presumptive nominee through both actions and tweets.

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Others are falling into line, albeit a tad grudgingly. On Thursday RNC member Marsha Coats called for the party to give Trump 'the opportunity to prove himself'. Coats acknowledged Trump had not figured in her 'top two' choices for president but she's moving on, saying:

I fear if we do not unite to support Donald Trump, we will again open the door for at least another four years of Washington implementing a left-wing agenda.

Earlier this month, Alex Roarty wrote on Roll Call that what was 'once a war within the Republican Party' may be all but over.  

Trump’s march to the nomination...has divided the loose coalition of Republican and conservative leaders who for months have fought his campaign. 
At the heart of their split is whether continued attacks against the New York billionaire will only weaken the party’s inevitable nominee further – or whether Trump’s polarizing candidacy necessitates that his foes continue their fight no matter the long odds. 
Increasingly, unity is winning out.

Not everyone is happy about that.

In a much discussed piece, Washington Post columnist  Robert Kagan slammed the GOP for attempting to treat Donald Trump 'as a normal political candidate'. 

Republican politicians marvel at how he has 'tapped into' a hitherto unknown swath of the voting public. But what he has tapped into is what the founders most feared when they established the democratic republic: the popular passions unleashed, the 'mobocracy'. Conservatives have been warning for decades about government suffocating liberty. But here is the other threat to liberty that Alexis de Tocqueville and the ancient philosophers warned about: that the people in a democracy, excited, angry and unconstrained, might run roughshod over even the institutions created to preserve their freedoms. As Alexander Hamilton watched the French Revolution unfold, he feared in America what he saw play out in France — that the unleashing of popular passions would lead not to greater democracy but to the arrival of a tyrant, riding to power on the shoulders of the people.

But Kagan and his fellow neoconservatives are increasingly isolated. And while some still push for an alternative to Trump, not many apart from desolate Ted Cruz supporters, really expect this to happen.

There will be plenty more twists and turns before the presidential vote on November 8. But now Donald Trump has won over a large (and growing) portion of his party, only the foolhardy would say he can't make it to the White House.

Photo Scott Olson/Getty Images

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The maritime relationship between India and Australia has been on an upward trajectory since the 2014 Australia-India Framework for Security Cooperation. A lack of past interaction meant there was ample room for collaboration. The pace of development in the relationship has been quick, and includes a bilateral exercise, regular meetings between defence ministers, and a new White Shipping Agreement. There has also been a first collaboration; an Indian aircraft headed to Fiji on a relief mission after Cyclone Winston stopped over at RAAF base Amberley in Queensland for maintenance purposes.

So the ground is now set and policies are in motion, but what’s next? Unfortunately, differing agendas may lead to frustration and disappointment as the relationship moves forward. 

In every conference and seminar in Australia on developments in the region and the maritime domain, India is high on the agenda. The reason is China. Just like in India, the Australian strategic community is closely monitoring changing dynamics in the maritime domain. As far as India is concerned, Australia’s interests lie in understanding what New Delhi will do as China’s maritime aggression continues. How will India balance the rise of China and when will India finally take up responsibility in the region? 

Until Canberra ceases simplistically framing India against the rise of China, the answer will be disappointing. The two countries are looking at the same problem through a different lens.

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India is of course concerned about China’s rise and presence in Indian Ocean, and wants to play a role. But India does not want to position itself against China. It does not measure every approach as a reaction to Chinese policies in the region. India’s new approach to maritime security is a reflection of the changing security environment and India’s need to step out of isolation. This approach is seen by Australia as India indicating to the region that it will take on a bigger responsibility. But the strategic outlook from each end is different. 

India is going to do what it thinks is necessary and that includes engaging and collaborating with regional navies and building a network of friends and partners. What India does not consider necessary is meeting another state’s expectations of what constitutes regional responsibility. 

New Delhi has been expanding its collaborations and presence through the region. Even if it has no interest in making a statement in the South China Sea, its strategic relationships with the countries such as Vietnam and the Philippines continue to develop. In the Indian Ocean, India naturally considers itself a prominent player and is working with a range of countries, from Australia and Indonesia in the east to Seychelles in the west. From India’s point of view, it is doing as much as required and more than it has done in the past. Yet, nations cannot hide their disappointment as far as India’s role in the region is concerned.

From New Delhi’s point of view, engaging with Australia remains a complicated affair. Every time India works with Australia, it must factor in Washington. Though India’s relationship with the US has improved markedly, New Delhi is used to working in a bilateral, unaligned manner. Australia cannot understand why India would look at the US alliance as a negative and India cannot understand why Australia would not think of the alliance as a potential impediment to other bilateral relations. 

Despite being big, democratic Indian Ocean residents with shared values, there are stark differences between the two countries. The differences in part come from perspectives, threat perception and priorities in the maritime domain. There is a need to manage expectations from both ends.

India is just beginning to engage with the region and is willing to do more. Before Australia can start questioning India about its regional responsibilities, it must do more to strengthen trust at a bilateral level. There has to be enough communication, dialogue and understanding before the two can reach a consensus on how to deal with the regional challenges.  

What India should do is communicate; convey its concerns and acknowledge the areas in which it could use some help. Australia, for its part, should be more understanding, and factor in India’s threats along its land borders, its bureaucratic complexities, and its overall foreign policy objectives.  

Photo: Commonwealth of Australia/Department of Defence

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'The decision to lift the ban was not based on China or any other considerations,' Obama said today:

Precisely no-one, including the Chinese, believes this. So what was achieved by maintaining this fiction?

This is not meant as a naive question. I recognise there are plenty of occasions in diplomacy, as in life, when it is inadvisable to tell the unvarnished truth. There are even occasions when it is mutually beneficial to maintain a patently false facade so that both sides in a diplomatic crisis can save face (see 'This is Why Governments Don't Comment on Intelligence Matters'). But how does this situation qualify?

One possible justification is that such a blunt denial shuts down any potentially awkward questions from the media. But he's the US President. He can handle it, can't he? And surely the whole point of lifting the embargo is to send a signal to China, so why would he want to avoid questions anyway?

Perhaps the clinching reason is that Obama simply didn't want to speak so openly while in Vietnam, and standing right beside his Vietnamese counterpart, who has a delicate balance to maintain in relations with Beijing. If that's the case, perhaps Obama will speak more openly after his departure.

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A new NATO missile defence base in Romania recently became operational, which has revived an erroneous debate about whether the step significantly alters nuclear parity between NATO and Russia.

Discussions about NATO's current missile defence capabilities are a distraction from Moscow's actual concerns about future missile defence deployments and its argument for establishing technical 'legal guarantees' to reduce uncertainties and prevent an arms race. Risks from any escalation of tension do not derive from disagreement with Russia over the merits of its security concerns. Rather, Russia's arguments have not been addressed and discussions on the prospect of an international treaty to regulate and set an upper limit for missile defence capabilities has been absent.

The threat of missile defence gradually making first-strike dynamics favourable to a second-strike could have disastrous impact on decision-making during heightened tensions between NATO and Russia. This is not a new or controversial argument as it was the reasoning behind the US-Soviet Anti-Ballistic Missile (ABM) Treaty in 1972. The unilateral US withdrawal from the ABM in 2001 to establish a 'limited missile defence system' did not produce a new international treaty to ensure it would remain 'limited'. As former French President Jacques Chirac warned, missile defence could 'pave the way' for unlimited and unconstrained development of an 'even more ambitious system'. Walter Slocombe, the former US Under Secretary of Defence, encouraged more recognition for 'the more understandable Russian fear that once the US commits to a partial defence, it will inevitably proceed to technologies and scales of deployment that could conceivably put Russian retaliatory capabilities at risk'. 

History demonstrates that when a new weapons technology is introduced, the technology and deployments are initially rudimentary and ineffective. Focus should therefore be devoted to their likely evolution as the first deployments often serve the function of establishing a platform for future advancements.

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President Vladimir Putin unmistakably articulated Russia's concerns in his renowned 2007 speech in Munich, positing that 'today this system is ineffective but we do not know exactly whether it will one day be effective'. A few months later the US Secretary of State, Condoleezza Rice, ridiculed Russian concerns about the existing plans to deploy 10 interceptors in Poland as being 'purely ludicrous and everybody knows it'. The Russian Foreign Minister, Sergei Lavrov, explicitly referred to expected enhancements: 'most likely in the foreseeable future we will hear about hundreds and even thousands of missile interceptors in various parts of the world, including Europe. Poland, it is only a trial balloon'.

This prediction soon materialised as the planned interceptive missiles increased beyond 500.

The gradual expansion of missile defence capabilities is not a possible unintended development, but rather a planned approach of continuously upgrading the system as new technology and funding becomes available. The former US Secretary of Defence Donald Rumsfeld, explained in 2003: 'We have instead decided to develop and put in place a rudimentary system by 2004 . . . and then build on that foundation with increasingly effective capabilities as the technologies mature.' NATO's Phased Adoptive Approach perpetuates this model by gradually enhancing the capabilities of the missile defence system in various phases, while refusing to set upper limits on the potential potency of the system.

Much like the gradual expansion of NATO membership, the incremental expansion of missile defence has the effect of diminishing domestic and international opposition as the water gradually grows warmer. 

Following the US unilateral withdrawal from the ABM Treaty in 2001, there was potential for replacing it with a new international agreement to ensure the deployments would remain limited. Washington's withdrawal was vehemently detested across Europe and the fears echoed Russian sentiments. The decision to make missile defence a NATO asset diminished the prospect for developing an international treaty with Russia. NATO is adamant to remain the dominant security institution in Europe by opposing any international agreements or 'legal guarantees' that could give Russia a 'veto' on the continent. As a senior European diplomat argued: 'the Russians are right on the substance of missile defence, but . . . We cannot be seen as giving them a veto on these types of issues.'

By conflating compromise with appeasement, international treaties are perceived as diluting the authority and autonomy of NATO as the foundation for European security. As stated by the former US Ambassador to Russia, Michael McFaul: 'we are going to accept no limitations on that whatsoever . . .  we are going to build whatever missile defense system we need'. Eradicating any possible ambiguity, he continued by arguing 'we're not going to reassure or give or trade anything with the Russians regarding NATO expansion or missile defence'. The previous opposition by major European capitals to missile defence was subverted as 'alliance solidarity', limiting the scope for political pluralism.

Wikileaks cables demonstrate that this was a deliberate strategy by Washington. The former US Ambassador to Norway, Benson Whitney, reported that the US was mounting pressure on the Norwegian Government to reverse its position on missile defence 'to avoid damaging alliance solidarity'. The US Ambassador later confirmed that Norway had to 'adjust to current realities' and the country had a 'hard time defending its position if the issue shifts to one of alliance solidarity.' 

The new missile defence base in Romania signifies another step towards a precarious and unpredictable nuclear confrontation with Russia. The repudiation of the pending nuclear stand-off by referring to the current capabilities of the Romanian base alone should be interpreted as evidence that the world's largest military alliance is sleepwalking into another conflict. The obvious puzzle is that despite the possible calamitous ramifications, there is virtually no discussions about the merits of Russia's arguments concerning future capabilities, and a categorical rejection of any international treaties that could limit NATO's autonomy.

Photo courtesy of Flickr user U.S. Missile Defense Agency.

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Cracking down on tax avoidance by multinational companies is good politics. As Ross Gittins notes, voters think ‘those blighters should be paying more tax’. The Coalition and Labor are trying to out-do each other in demonstrating their resolve to make multinationals pay their ‘fair share’. 

But if measures to restrict multinationals shifting profits to low-tax jurisdictions are effective and tax is paid where economic activity takes place, this will increase the pressure on Australia to lower its company tax rate to more competitive levels if it wants to maintain and attract foreign investment.

Labor was first off the mark in announcing an international tax avoidance package which included significantly tightening ‘thin capitalisation rules’ to limit multinationals using debt to lower Australian tax bills. The initial response by the Turnbull government was to say that the measure would make Australia less competitive and cost jobs. But the government then announced measures to limit the extent to which multinationals can claim tax deductions for debt (though the proposals were not as restrictive as the opposition’s).

The 2016-17 Budget featured a  ‘Tax Integrity Package’, which includes a new Diverted Profits Tax (DPT) — more commonly known as a Google Tax. Australia is following the UK, which is the only other country to unilaterally impose a DPT.

Australia replicated the first limb of the UK’s DPT in 2015, when it enacted the Multinational Anti-Avoidance Law (MAAL), aimed at combatting schemes where a foreign entity artificially avoids having a taxable presence in Australia. The second limb of the UK DPT tackled cross-border transactions by UK residents which result in a ‘tax mismatch’ and lack economic substance. The 2016 Budget measure replicates and extends the second limb of the UK tax.

Will Australia’s Google Tax be effective? Shadow assistant treasurer Andrew Leigh has called it a joke, claiming that ‘putting aside their enforcement measures, the Coalition’s multilateral tax measures are budgeted to raise just $200 million…this falls well short of Labor’s multinational tax package’.  However, as Ross Gittins points out, the aim is not to raise tax at the DPT rate of 40% but encourage multinationals to pay tax at the standard 30% rate in the first place – the DPT will only catch the ‘slow learners’.

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Has the UK approach worked?

There are mixed reports on the effectiveness of the UK DPT. Most reviews say it is too early to evaluate, although it has been claimed to have influenced Amazon restructuring its operations such that it would pay tax on profits from UK sales. However, the Amazon restructure is Europe-wide and appears to be a response to public pressure in many countries. Forbes ran an article with the headline ‘The Abject Failure of Osborne’s Google Tax on Diverted Profits’. One factor contributing to the sentiment of this piece was a tax settlement between the UK authorities and Google, which resulted in Google paying seemingly not much extra tax given the size of its UK sales (public concern subsequently led to a parliamentary inquiry). Another assessment of the UK DPT (from Clifford Chance) is that it is ‘fundamentally flawed’ and that it’s not clear if it ‘is technically capable of taxing the very arrangements it was created to contain’.

There are mixed views of the effectiveness of the first leg of Australia’s DPT (the MAAL). The MAAL has been cited as influencing Google’s announcement that it will restructure its operations and pay tax on sales in Australia. But the Australian Tax Office (ATO) has issued a tax alert saying it was aware that taxpayers were seeking to use artificial devices and contrived arrangements to avoid being caught by the MAAL.

The second leg of Australia’s DPT as announced in the 2016 Budget will significantly strengthen the ATO’s capacity to tackle multinationals. Its coverage is wider than the UK DPT, and most significantly it is not a self-assessment tax like the UK’s, but involves the ATO deciding when the DPT applies and corporates having to pay the tax before seeking a review. The Australian DPT will potentially cover any related party transaction in a jurisdiction where the tax rate is 80 % or less than Australia’s corporate tax rate. Given Australia’s relatively high company tax rate, this means the DPT will cover transactions in any country with a rate of 24%  or less. As a result, the Corporate Tax Association estimates that nearly half of all related party transactions undertaken by large Australian companies would be potentially caught by the tax. PricewaterhouseCoopers has also pointed out that the DPT goes beyond the OECD’s recommendations on Base Erosion and Profit Shifting.

The Coalition may well be right in claiming it has the toughest measures of any comparable country. But if these measures are too onerous and go beyond capturing recalcitrant taxpayers, the laws could deter foreign investment in Australia. It is also not clear how the DPT will relate to Australia’s double tax agreements. The Parliamentary Budget Office warned in 2015 that a unilateral DPT could result in revenge taxes being imposed on the operation of Australian companies in other jurisdictions.

If measures such as the DPT are effective in ensuring that tax is applied where economic activity takes place, the most far-reaching outcome may be that economic activity becomes more sensitive to headline tax rates. A consequence of multinationals being able to lower their effective tax rates through profit shifting is that their investment decisions have not been responsive to headline tax rates. This is a benefit to countries with a relatively high company tax rate, such as Australia. But if the ability of multinationals to shift profits to low–tax jurisdictions is significantly reduced, the incentive will be for companies to shift their economic activity — which means investment and jobs — to low–tax jurisdictions.

The bottom line is that if Australia is effective in combating the ability of multinationals to shift profits, it will have to lower its company tax rate to more competitive levels if it wants to maintain and attract new foreign investment.

Photo courtesy of Flickr user Neon Tommy

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