Lowy Institute

By Jackson Kwok, an intern with the Lowy Institute's East Asia Program. He holds a Bachelor of Arts (Honours) degree with specialisations in Chinese language, history, and foreign policy from the University of Sydney. 

Reading through the Chinese media coverage of last week's US-China Strategic and Economic Dialogue in Washington DC, Orwell's Nineteen Eighty-Four comes to mind. In Orwell's novel, Oceania regularly shifted alliances between Eurasia and Eastasia, first condemning one side in its propaganda and then quickly praising it when alliances shifted. In the same way, China's state-aligned media has shifted dramatically from heavily criticising the US to praising bilateral cooperation.

China's State Councilor Yang Jiechi and US Secretary of State John Kerry at the US-China Strategic and Economic Dialogue, 24 June, 2015

For the last month, China's media has constantly portrayed the US as an anxious world hegemon bent on containing China. On the eve of the Dialogue, the conservative tabloid the Global Times claimed the US had recently adopted a strategy of 'opposing China at every turn.' Yet the overwhelming praise for this year's Dialogue among China's media outlets marks a departure from the anti-US line. 

Xinhua published an article last Thursday which said the Dialogue had 'enhanced mutual trust' and 'consolidated consensus' between the two great powers. An article by the state-owned People's Daily argued that 'cooperation is the only viable option.' Xinhua produced another article on the same day which concluded that 'another solid step has been taken in the construction of Sino-US relations.'

Another article by Xinhua published last Monday hailed the event as a success, especially against the backdrop of bilateral tensions in recent months. The article argued that financial cooperation had become the 'new ballast of bilateral relations.' The sheer number of items agreed upon was also presented as evidence for the success of the Dialogue.

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Chinese media also emphasised the reportedly candid tone of the discussions. Articles celebrated the fact that disagreements on certain issues could be discussed openly. Both Xinhua and the Global Times said this was evidence that the relationship was maturing and praised each side's attempts to find common ground. China and the US diverged on maritime disputes and cyber security, but these were only vaguely mentioned. 

An article published by the People's Daily last Monday examined how the Dialogue has developed over its seven sessions. The author concluded that he had observed a positive shift towards cooperation. Conversation at this year's round of talks was more 'candid', the atmosphere was more 'peaceful' and there was more 'mutual understanding.' Even the often provocative Global Times was impressed by the frank tone of discussion.

A feature page on the English version of People's Daily proudly proclaimed that the talks achieved 'substantial results'.  Provincial news sources were similarly enthusiastic. There seemed to be little divergence from the official line.

As for online discussion, circulations on Weibo leading up to the Dialogue were cynical. Many Chinese netizens expected another round of political fallout between Washington and Beijing. After the Dialogue, many were genuinely surprised at how smoothly the event had proceeded, and praised the 'candid discussion'. Netizens welcomed what they saw as an attempt at engagement with China's position and a departure from Washington's hard-line tactics vis-à-vis the South China Sea.

There are two possible explanations for this shift in attitude. 

One is that the media is attempting to set a cooperative tone ahead of President Xi Jinping's visit to Washington in September. This involves setting up China as a fellow great power and as a responsible actor in the international system. In this way, Xi can approach President Obama as an equal and China will not appear to participate from a position of weakness. This framing also requires that China is presented as magnanimous and committed to sharing world leadership with the US. This message was particularly strong in the People's Daily. A piece on Monday claimed 'the whole world saw that the US and China have a strong desire to strengthen communication, control differences, and expand cooperation.'

The Tang Dynasty poem 'A View of Taishan' featured in a number of reports. The trials of US-China relations are likened to ascending a sacred mountain. Upon reaching the summit, maritime disputes and cyber security will seem insignificant: 'When shall I reach the top and hold / All mountains in a single glance?' Though supposedly 'insignificant', tensions over these issues could potentially derail Xi's US visit. The Chinese media is attempting to downplay them and present China as committed to big-picture goals.

It is also possible that China's media is entering a damage-control phase. Some might argue that China has pushed too hard in the South China Sea, and this softening of tone might be a reaction to Washington's hard-line response. In this sense, it could be a form of managing domestic opinion. Analysts argue that cycles of push and retreat have occurred in the past.

It's still uncertain why we've seen this shift in tone and attitude towards the US. While there is increased magnanimity about the US, there is increasing criticism of Japan and Prime Minister Abe in particular. In the last month, state-aligned media has continued to press the Japanese Government on its wartime legacy. It is possible that China needs to have an 'other' against which it can define itself. If the US is not playing that role, anti-Japan rhetoric is likely to increase temporarily.

It is worth watching how this shift develops in the lead-up to Xi's state visit in September, especially as tensions continue to bubble in the South China Sea.

Photo courtesy of Flickr user US Department of State.

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You're probably reading a lot of headlines today about Greece now being officially in arrears with the IMF. But as Lowy Institute economist Leon Berkelmans explains in this podcast, that's not the most important thing that happened in the Greek crisis over the last few days.

Listen also for Leon's views about the implications of this crisis for Asia. Eueope thinks it has this problem contained, but the fall of Lehman Brothers taught us a few things about unanticipated consequences...

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In a little-noticed interview, the chief of Panama's Canal Authority concedes that 'the world and the canal were unlikely to ever again see the booming container trade that characterised the 1990s and early 2000s' due to shifting manufacturing patterns and American thrift.

Obviously, he has business reasons for playing down the market's prospects, now that he is completing his canal's US$5.3 billion expansion. He wants to scare off potential rivals. Moreover, his widened canal is still too small for the growing ultralarge containership segment, so he may not be seeing a fully accurate view of world trade. And Panama container traffic is highly US-centered. Even so, other sources confirm global sluggishness in container traffic, which forms half of Panama's revenue and is a symbol of our connected world economy.

The Box, a celebration of containerisation, was published in late 2007, the year container trade peaked in the Canal. Did this book call the top?

Shipping companies have been worried about trade for a few years now. What the Panama Canal executive says confirms their worst fears: a secular shift down in trade intensity. From the 1980s to the GFC, exports rose at about twice the rate of economic growth; since then they have grown barely in-line. As the price of stuff fell, container volumes did even better than headline trade value, often at two or three times GDP growth. But now this 'multiplier' is anaemic too: globalisation's momentum'has been lost.'

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Despite worries, protectionism has so far been the dog that didn't bark. In the wake of the GFC, many expected far worse barriers. As it turned out, progress on trade liberalisation has been made globally (eg. on agriculture) while anti-dumping complaints have been targeted (steel is one industry to watch).

But the move towards regional preferential trading blocs, and away from global trade negotiations, is clear enough. These blocs always resemble geopolitical groupings. Intra-regional transactions shorten distances compared to global routes, so trade volume (measured in total tonne-kilometers) is adversely impacted. It's natural for neighbours to trade more. In fact, what is remarkable is how supply chains, thanks to the economies of containerisation, became hyper-globalised to begin with.

Whether regionalisation is the reassertion of 'near-sourcing' advantages, or the more ominous result of geopolitical clustering, is the question. It is notable, for example, that the stated priority of the US is to seal trade agreements spanning the Atlantic and Pacific oceans, while China is focused on building trading pathways into Eurasia and across the Indian Ocean. Beijing will be onto something if it can make terrestrial routes cost-competitive with huge container ships.

But Americans still love Chinese imports, buying one-fifth of them all. Fully three-quarters of America's current account deficit is with China alone, an amazing dependency. China has an epic share of some US import categories, like 99% in air conditioners. And the American public is as pro-trade as it has been since 1997.

Still, there does seem to be some China fatigue in rich countries. Since about 2011 the Chinese share of imports into developed economies (mostly the US and EU) has flattened in the 15-20% range. Wage inflation and a stronger exchange rate have tamed China's competitiveness. Today it is still expanding its current account to all-time highs, but at a slower rate, and increasingly at the expense of its South-South partners. The single biggest driver of Chinese export growth in recent years has been industrial goods to emerging economies.

Advanced economies might reconfigure away from China to their neighbours, like Mexico for the US or Slovakia for the EU. Within Asia the same pattern of diversification is occurring.

Japanese firms have a 'China+1' strategy, helpfully nudged along by 2012's rare-earth blockade. Korea is busy setting up South East Asian manufacturing hubs as well. But this region is really China's backyard, or its 'bath plug', as Thai strategist Thitinan Pongsudhirak says, somewhat ambivalently. Another commentator recently claimed that Beijing has the upper hand over America in the South China Sea not just because of its geography but because of its asymmetric trade position. Whereas US citizens totally depend on China for myriad necessities, he says, 'China, by contrast, depends on the United States for little of vital importance.' He will not be comforted by Chinese hawks who question whether Americans have the financial stomach for a dispute over the South China Sea. As most everyone knows, this is the single busiest sealane in the world.

A conflict in the South China Sea is just one threat to world trade. But there will be plenty of consequences of 'peak Box' in any case. For instance, the value of trade could continue to rise while the mix moves towards more information products and services (where Washington's trade interests are focused) and away from physical merchandise and bulk materials. China may have already passed its maximum steel and coal demand, years ahead of miners' expectations. The miners know there will never be another China. Its urbanisation and trade globalisation have been the two pillars of world economic growth.

Photo courtesy of Flickr user Paul Townsend.

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The Indo-Pacific is a strategic system encompassing the Indian and Pacific oceans, reflecting the expanding interests and reach of China and India as well as the enduring role of the US. The Lowy Institute's International Security program presents a weekly selection of links illuminating the changing security picture in this increasingly connected super-region.

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The establishment of the Asian Infrastructure Investment Bank (AIIB) reached another milestone on Monday when 50 of the 57 founding members signed the AIIB's Articles of Agreement. Seven countries are still sorting out domestic requirements before signing.

China's Finance Minister Jiwei Lou and Australian Treasurer Joe Hockey, Brisbane, November 2014. (Flickr/G20 Australia 2014.)

The pace of progress has been impressive and the AIIB has gained a momentum that has surprised many, including China.

In October 2014, 22 Asian countries signed a Memorandum of Understanding on the establishment of the new bank. By early April, the list of countries which wanted to be founding members had grown to 57 and, notwithstanding pressure from Washington, included such US allies as the UK, Germany, France, Korea and Australia. 

China's drafting of the AIIB's Articles of Agreement has also been impressive, both in terms of speed and responsiveness in accommodating the views of other countries. China appeased concerns by some countries, including Australia, that the Bank may not truly be a multilateral institution.

 So far, the AIIB has been a big win for China.

It appears that China wants to maintain the pace in getting the AIIB up and running, with Chinese Finance Minister Jiwei Lou indicating that he was confident the AIIB could start functioning before the end of 2015. What constitutes 'functioning' is not defined, but China may be wise to hasten slowly when it comes to entering into its first loan programs.

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It will be important for the AIIB to have in place thorough processes and procedures before it starts lending. Among the steps necessary for the AIIB to be fully functional: the establishment of a treasury function so that the bank can access international capital markets; the recruitment of an international (and not predominantly Chinese) workforce with the appropriate expertise; and the development of rigorous procurement procedures and safeguards policies covering the environmental and social aspects of the bank's activities.

Another crucial first step will be to clearly establish the roles, responsibilities and expectations of the Board of Directors, management and staff. The AIIB has a three-layer governance structure involving a Board of Governors (usually the finance ministers of member countries), a twelve-member Board of Directors, and management/staff. The AIIB has wisely chosen against having a full-time resident board of directors, and unlike most other international institutions, board members will not be officers of the bank, nor will they be paid by the bank. The problem with a full-time executive board is that directors get too involved in the detail of individual loan decisions and do not exercise strategic oversight. The roles of executive directors and management are thus blurred. And there can be a conflict of interest in directors performing as officers of the bank and as representatives of country shareholders.

But for a non-resident board to be effective, its role has to be clearly defined. The expectations placed on management and staff also have to be clearly laid out if they are to be held accountable for their performance. This is not done in other international institutions.

But perhaps the most important first step is to determine the business plan for the AIIB. Some of the key issues to be resolved include:

  • Who will be the bank's clients?
  • What will be its main activities?
  • On what terms will it lend?

There is still uncertainty as to the precise role of the AIIB and how it will interact with the multilateral development banks such as the World Bank and Asian Development Bank. Unlike those institutions, the AIIB does not have a poverty alleviation function. Nor does it have any provision to provide concessional loans to low-income countries. Does this mean the AIIB will be seeking to lend on commercial terms to projects with the highest rate of return?

There are expectations that the AIIB should focus on big ticket infrastructure projects such as power plants, airports, seaports, thus filling a gap left by other lending institutions. But part of the reason for that gap is that big projects have many environmental and social considerations that have raised problems for other multilateral lenders. Good planning and preparation will be essential.

The AIIB will be under close international scrutiny from day one to see if any of the concerns initially raised about this Chinese initiative are realised. Such concerns include the fear that the bank would primarily be a vehicle to promote China's political and social interest, and that it would ignore social and environmental considerations with its loans. Given these concerns, it will be important not only for China but for all the founding members that the AIIB's performance is beyond criticism from day one.

As such, the AIIB would be wise to hasten slowly in its quest to get the bank up and running. The success China has achieved to date could be lost if the AIIB rushed too quickly to get money out the door. This would be a loss not only for China but for the international community, which has much at stake in ensuring that the AIIB is a success.

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Rights activists around the world are hoping that the historic ruling in favour of same-sex marriage in the US last week will help them achieve the same in their countries. For Indonesia, however, changes to the institution of marriage are a long way off, both in terms of law and public opinion.

While the Supreme Court in the US was deciding on the constitutional protection offered for same-sex unions, Indonesia's Constitutional Court was weighing in on other aspects of marriage, with far less progressive results.

The court last Thursday rejected two petitions for judicial review of Indonesia's marriage law, which asked for interfaith marriages to be permitted by the state, and for the minimum age of marriage for girls to be raised from 16 to 18 years. The court rejected both petitions, using religious arguments to defend the controversial 1974 Marriage Law.

Under the current law, girls and women can marry from age 16, while the legal age for men to marry is 19. Both can marry at an even younger age with the permission of the Religious Court or a government official. These conditions conflict with international standards as well as Indonesia's own law on child protection, which defines children as all individuals under the age of 18. In other words, the marriage law as it stands effectively legalises child marriage.

This has implications not only for children's rights, but also for reproductive health in Indonesia. The country this year is struggling to meet a Millennium Development Goals target on reducing its maternal mortality ratio, which is among the worst in the region and has only worsened in recent years. One factor driving the high rate of maternal deaths in Indonesia is teenage pregnancy, which poses health risks to mother and child. The judges in last week's court decision showed less concern for the dangers of teenage pregnancy and more for pregnancy arising from pre-marital sex, which they said would be prevented by keeping a low minimum age for girls to marry.

The panel of eight male judges and one female judge (who also happened to be the only dissenting voice on the issue) further referenced an Islamic teaching that allows marriage for girls at any age after reaching puberty.

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Religion plays a strong role in marriage law in Indonesia. The second article of the Marriage Law states that a union is only considered legal if it is conducted according to one of the officially recognised faiths: Islam, Catholicism, Protestantism, Hinduism, Buddhism, and now Confucianism. This article does not specifically forbid interfaith marriage, but effectively prevents it by not allowing for the option of a civil ceremony, by deferring authority to religious laws on whether interfaith couples can be married, and by creating complications for civil registration of interfaith marriages after a ceremony has taken place. The petition at the Constitutional Court last week challenged the general interpretation of this article, which holds that one party of an interfaith couple must convert to the other's religion if the union is to be legally recognised. But the court rejected the petition, citing moral and religious values.

Lukman Saifuddin, the Minister for Religious Affairs, welcomed the court's decision on interfaith marriage, saying that it reflected the religious values of Indonesian society and the inseparability of marriage from religion. He made similar comments about the ruling by the Supreme Court in the US last week, stating via his Twitter account that 'In the Indonesian context, marriage is a sacred event and a part of religious worship. The state will not recognise same-sex marriage.' In Indonesia's active Twittersphere, the comment attracted some criticism, but mostly received support from netizens who agreed that marriage was primarily a religious matter. 

The difference between the discourse over marriage in Indonesia and the US this week is that in Indonesia, religion was prioritised over human rights. Allowing for girls to be married at age 16 impinges on their ability to fulfil their potential and their rights to health, education special protection as children. Requiring couples to marry under a single religion impinges on their rights to religious freedom. Separating law from religion in this matter will go a long way in fulfilling human rights in Indonesia.

Photo by Flickr user Ashley Ringrose.

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China's long-anticipated formal pledge to international climate change negotiations, it's 'intended nationally determined contribution' or INDC, has arrived.

China's target is a 60% to 65% reduction in the emissions-intensity of the economy by 2030 pegged at 2005 levels, with carbon dioxide emissions peaking around 2030, perhaps earlier. China has also pledged to increase the share of non-fossil fuels to 20% of total energy use and a large increase in forest carbon stocks.

The emissions-intensity target means reducing the ratio of carbon dioxide emissions to GDP by 60% to 65%, or conversely, increasing the amount of economic output per tonne of carbon by almost two-thirds. It's the only new commitment in addition to what China pledged at a joint announcement with the US at last year's APEC meeting. And it packs some punch.

Decarbonisation and how to do it

What it means is that China aims to continue until 2030 the rate of decarbonisation targeted for the 2005 to 2020 period — around 4% per year. This target will require strong action to improve energy productivity and shift to zero-carbon energy sources.

Such a pace of cleaning up  economic growth has rarely been achieved elsewhere over a significant period of time. The decarbonisation rate in the US since its emissions peak in 2007 is 3.3% per year, and this has included an unprecedented boom in cheap gas. EU carbon dioxide emissions peaked in 2002, and its collective emissions intensity declined by an annual average of 2.2% during the following ten years. The main historical precedent for decarbonisation rates above 4% per year over extended periods of time are Russia and other parts of the Eastern bloc following the 1990s collapse of Soviet-era industrial structures.

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The long list of actions listed in China's INDC is a fair indication of the magnitude of the task, and it is an sign of the resolve of the Chinese Government. They range from higher efficiency in coal use and a limit on the total amount of coal; fast development of solar, wind, hydro, nuclear and gas; energy efficient and low-carbon industrial systems; and cutting emissions from buildings and transport. The actions also include broader support for R&D, low-carbon growth patterns, a strong commitment to national emissions trading and to 'make the market play a decisive role in resource allocation'.

Change is underway

Yet China could do better still. China is likely to outperform the 2020 target, given that average annual reductions from 2005 to 2014 were 4.5%, as reported by Beijing. Energy productivity greatly lags that of advanced economies. Enormous gains can be made by further improving technical efficiency and by accelerating the shift in economic structures away from energy-intensive industries. And China will continue to shift its energy mix away from coal and towards nuclear, gas and renewables, and also towards reducing the emissions-intensity of every unit of energy used.

Fundamental changes in the factors that drive China's greenhouse gas emissions are already happening. Total coal use in China fell in 2014 compared to 2013 (on the basis of preliminary data). This is partly because industrial output such as steel has leveled off, heralding the 'new normal' of Chinese economic growth. The era of extremely rapid expansion of infrastructure is coming to an end and the sources of economic growth are shifting to less resource-intensive activities.

Alongside structural changes, China is achieving rapid improvements in the efficiency of energy use. New coal-fired power stations are still being built, but they are state of the art and are replacing old inefficient plants. Industry, road transport and buildings are all getting more efficient and there is huge potential for further improvements. Add to that the push for the expansion of hydroelectricity and nuclear power, as well as solar and wind plants, all of which are beginning to make a dent in China's energy supply.

China's emissions turnaround is driven partly by circumstance and partly by a strong policy effort. That effort is not being undertaken out of altruism for the global climate but for solid reasons of national self-interest. A lower carbon trajectory has tangible short to medium-term benefits for China, as I explained in a recent paper with my colleague Teng Fei from Tsinghua University.

A flat and early peak?

It all adds up to the prospect that China's emissions could peak well before the target date of 2030, as argued recently by Nick Stern as well as Ross Garnaut. Many experts see a peak in the first half of the 2020s as possible, and some think it could happen even earlier.

Ultimately, what matters much more than the date of the peak is the level of China's emissions over years to come. 'Peaking' invokes images of a rapid increase in carbon emissions, then a turning point followed by a rapid decrease. But the historical experience is that countries' emissions trajectories simply flatten out, and the peak is a point not much higher than many others on a drawn-out plateau. The profile looks more like Mount Kosziousku than Mount Everest.

The climate pledge submitted this week does not give an estimate of that level, because it depends on the future growth rate of China's GDP. But that growth rate is slowing, and it could be that emissions levels will rise only gradually in coming years before a peak. That would be very good news for the climate.

Photo courtesy of Flickr user Asian Development Bank.

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The view from New York

Six months into its membership of the UN Security Council, New Zealand will get to wield the gavel at the famed horseshoe table in New York over the course of this month.

Occupying the president's chair will be the Kiwi's new Permanent Representative, Gerard van Bohemen, a refreshingly direct and down-to-earth diplomat who served as deputy head of the mission the last time New Zealand was on the Security Council in the early 1990s. He has taken over from the newly knighted Sir Jim McLay, a former deputy prime minister who commanded New Zealand's successful UN Security Council campaign and last month took up a new position as the country's representative to the Palestinian Authority. 

So far New Zealand's big play on the council, to draft a resolution setting out parameters for a final Middle East peace deal, has come to nought. France and Jordan, the representative of the Arab states, have produced resolutions of their own, and have told New Zealand that a third draft would complicate their efforts. But the Arab League sees July as an opportunity to push for such a resolution, increasing international pressure on Israel, knowing that New Zealand will give it a sympathetic hearing.

New Zealand's Foreign Minister Murray McCully has not given up hope the Kiwis can help spur the Israelis and Palestinians into action, distant though that possibility seems.

Earlier this year, as relations between Washington and Jerusalem soured, the Obama Administration signaled that it might finally countenance such a resolution, partly in diplomatic retaliation for Benjamin Netanyahu's speech before Congress, in which he lambasted the nuclear deal with Iran. In recent weeks, the US has resumed its traditional role of protecting Israel at the UN, although it's also been deliberately ambiguous on whether it would veto a European-backed resolution.

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'Up until this point, we have pushed away against European efforts,' Barack Obama told Israel's Channel Two in early June. But the President also noted that America's support for Israel at the UN was complicated by the widespread perception within the international community that Netanyahu was no longer serious about a two-state solution. 

Benjamin Netanyahu, after meeting Murray McCully in Jerusalem earlier this month, sounded a warning to New Zealand and others pushing for a Middle East peace resolution. 'The main thing we have learned,' the Israeli Prime Minister said pointedly, 'is that peace is achieved, as we did with Jordan and with Egypt, through direct negotiations between parties, and not by fiat.' But the very fact that Israel is even paying attention to New Zealand is testament to the diplomatic clout that comes with membership of the Security Council. On the most nettlesome international issue of them all, Wellington* has become a significant player, if not a decisive or central one. 

The presidency of the Security Council gives members the chance to push their pet projects, and New Zealand will seek to promote the interests of small island developing states, or SIDS as they are known in an organisation addicted to acronyms. The viability of South Pacific tuna fishermen rarely gets an airing in Turtle Bay, but that could change in late July when New Zealand convenes a thematic debate chaired by Murray McCully, at which small island states can bring their concerns to the table. 

The last time New Zealand presided over the Council, the genocide in Rwanda dominated proceedings (the New Zealanders argued forcefully for the UN not to flea Rwanda). This time, the overriding international issue looks set to be the nuclear deal with Iran, the original deadline for which was yesterday, though it looks to have been extended by a week. Given that all the P5 members are signatories to the framework deal, the Security Council is expected to rubber-stamp any agreement. But New Zealand, in its presidential role, will be involved in the nuts and bolts of the oversight provisions and the relaxation of UN sanctions. 

New Zealand's diplomats, though refusing to benchmark themselves against their trans-Tasman rivals, were impressed with how Australia approached its two years on the council. The former Aussie Ambassador Gary Quinlan and his team showed what a temporary member could achieve. As the influential Jerusalem Post noted last month, in language that will sound familiar to Australian ears, New Zealand could hardly be regarded as a 'diplomatic heavyweight', but its membership of the Security Council means it is 'punching above its weight.' 

* My apologies. This piece has been corrected after I inadvertently relocated the New Zealand capital. Not only am I aware that Wellington is the home of government, but also of the finest coffee shop I have ever had the good fortune to visit, which is just across the road from the Beehive. I have not only apologised to the New Zealand ambassador in person, but also to my Kiwi-born wife.

Photo courtesy of Flickr user United Nations Photo.

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English is, fortunately, the global lingua franca. Thus, comments on current events made in English are the final arbiters for most of the world. This is mostly for the good but can misfire. Where the EU is concerned, the nabobs in London, Washington and elsewhere in Tony Abbott's Anglosphere don't get it, as shown by recent comments on events in Greece and on Germany's role in Europe.

No soccer match, tennis game or golf play-off would ever dare to go into the number of prolongations we are all exposed to by the interminable tragi-comedy of Greece vs Europe. At the time of writing, Greek banks are closed but the final outcome is still far from clear. We don't know if there will be a clear cut 'Grexit', the much discussed exit of Greece from the euro. What will certainly ensue, however, is a prolonged period of muddling through, with severe capital controls and budget policies.

Since the beginning of the prolonged negotiations between the present Greek Government and the 'troika' (the European Commission, European Central Bank and the IMF), there have been three main reasons why too much leniency for Greece (including a debt 'haircut') was impossible.

First was the fear of precedent. A European backdown on Greece would have been intolerable for other European countries that had already swallowed bitter budget medicine, mainly Ireland, Portugal and Spain.

The second reason was the presence on the Greek side of a government coalition of populist, far-left and far-right parties such as are on the rise in practically every European country. Massive illegal immigration and violent extremism are severe enough problems for Europe. To hand an easy and undeserved victory to such a coalition would simply make those problems worse. The third factor was the Tsirpas Government and how it used its newly gained power. A recent comment by Christine Lagarde, not normally a fiery orator, says it all: 'Let's have a discussion among adults.' What was unsaid but painfully obvious: '...and not with a bunch of vainglorious adolescents without neckties but full of ill-applied game theory and macho hot air.'

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Europe, and particularly Germany, still prefers to keep Greece within the Eurozone, but Greece represents around 2% of the economic weight of the Eurozone, so Europe can live with Greece going back to the Drachma, and eventually to economic hell. The poor in Greece would be the main victims, not the country's rich and powerful. That includes the present government, which still does not see that the only way back to prosperity is deep structural and fiscal reforms. 

Reports from two FT columnists — one on the necessary death of the Euro, made obvious by the Greek drama; another on the ideological damage which the 'Grexit' will do to the very core of the EU concept and thus of the European soul — are at the very least premature. Even a keen observer like Gideon Rachman, for all his experience, has got it fundamentally wrong for once.

The Eurozone is not a monetary union such as we have seen before but an economic reaction to the fact that the EU some time ago become one large manufacturing and service-providing area made up of countless cross-border value chains. An area-wide currency provides for a level playing field for suppliers and assemblers regardless of national borders. Contrary to what is often claimed, the political decision to create a single currency (and with it a common banking, regulatory and eventually fiscal union) followed economic reality rather than leading it. As a result, national sovereignty was transferred for the greater good of all. (This is of course anathema to nationalists all over the EU, yet the idea that the UK prefers to opt out of full European integration continues to baffle observers on the continent. After all, Britain without Europe is just an island adrift.)

Germany provides another example of this basic failure in Anglosphere understanding of what today's Europe is all about. A recent article by none other than former Fed Chairman Ben Bernanke serves as a telling example. As a citizen of a federalist country, Bernanke should know better. He treats Germany's trade surplus as a national phenomenon, easily fixable by national decisions if there is political will to do so. But German exports, very much including the products of its vaunted car industry, are an amalgamated product of European economic value chains involving goods and persons from various European countries, not all necessarily researching, planning, assembling and selling in the countries they were born in. The ensuing exports happen to be counted as German exports, mainly because trade statistics have not yet found a way to reflect this complex reality.

Consequently, Bernanke's specific propositions to remedy the German surplus fall short. Investment in public infrastructure in Germany will increase in any case, if only because the last generation of infrastructure, thrown up somewhat hastily after World War II, is coming to the end of its life. Spain has built excellent public infrastructure over the last 20 years (albeit with too-cheap money and in parts excessively). This is a boon to anybody traveling or transporting goods there, and will allow allocation of funds elsewhere for decades.

In short, traditional national remedies in economics (and in areas such as immigration, education and research, and energy) simply cannot be applied in today's Europe. So much the better. As we all know (and this includes the wise wags from the Anglosphere), Europe can only master its big challenge with one economy and one currency. What is that big challenge? To remain fully in charge of its future in a world no longer centered on  transatlantic relations but on  the Asia Pacific.

Photo by Flickr user Theophilos Papadopoulos.

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President Barack Obama finally has authority from the US Congress for advancing the Trans-Pacific Partnership (TPP), a signature foreign policy of his final term in office. The TPP aims to establish a free trade zone around the Pacific Rim covering 40% of the global economy, while excluding China.

The future of the agreement had been left in doubt after the President's own party initially voted against granting him trade promotion authority, with some members now vowing to defeat the TPP itself. For Australia, the episode is thus not a story of success, but of the ongoing obstacles Congress poses to coherent American leadership in the Asia Pacific.

US officials focusing on the region repeatedly proclaim a 'rules-based order' as the necessary bulwark against China's rising power. For Obama, 'strong and sustained American leadership is essential to a rules-based international order.' Australia has followed suit, with Defence Minister Kevin Andrews declaring that: 'Notwithstanding China's growth, the United States will remain the single most important country in enforcing a rules-based order.'

In his 2015 State of the Union address Obama directly linked passage of the TPP with halting China's desire 'to write the rules for the world's fastest-growing region.' His recognition that 'we should write those rules' is nevertheless being frustrated by Congress, which has proven itself either unconvinced of the importance of the task, or unable to recognise that US-centred rules are founded on a half-century of American primacy in the Asia Pacific that is now being challenged by China.

The precarious future of the TPP follows the creation of the Chinese-led Asian Infrastructure Investment Bank (AIIB), in the face of US opposition. The AIIB was established in part as a response to Congressional refusal to grant China more representative rights in global financial institutions. Likewise, the US Senate continues to obstruct the UN Convention on the Law of the Sea (UNCLOS), even as America now seeks to enforce freedom of navigation rules in the South China Sea.

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China's construction of artificial islands in the South China Sea is perhaps the most prominent example of the way power is being contested at the level of international legal rules. Under UNCLOS, artificial islands do not attract the same rights as a natural land feature, which would include the right to control sea and airspace out to 12 nautical miles. China has nevertheless attempted to enforce these rights against American 'freedom of navigation' operations in which US aircraft deliberately challenge purported Chinese airspace.

The American claim to be acting in defence of impartial maritime rules is weakened as long as the US itself refuses to ratify UNCLOS. For Obama it is clear that 'ongoing failure to ratify this Treaty undermines our national interest in a rules-based international order.' Defenders of US policy claim that the US already accepts rules pertinent to the South China Sea as established customary international law, while the treaty improperly creates additional obligations in relation to resource exploitation. Yet the legitimacy of taking action under a rules-based order derives from the clear acceptance of legal constraints, rather than the selective application of rules that constrain others.

Responsibility lies with Congress, with every president from George HW Bush onward supporting ratification as consistent with American global interests. Likewise, the most recent Chicago Council on Global Affairs' survey of American leaders confirmed not only universal support among Democrats but solid majority support among Republican leaders. As such, the incoherence in US regional leadership can be traced back to failings specific to the US Senate.

China's artificial islands have been described as 'unsinkable aircraft carriers' that allow the projection of military power far from China's mainland. It is therefore telling that US Defense Secretary Ashton Carter has argued that 'passing TPP is as important to me as another aircraft carrier.' Carter's phrasing was a reminder that the TPP remains necessary in geo-strategic terms if the US is to 'promote a global order that reflects both our interests and our values.'

The US Congress remains an unreliable partner in this strategy, beholden to competing ideological and institutional concerns. Some reservations about the TPP may well have a legitimate domestic basis, while resistance to UNCLOS probably owes more to populist fears about guarding US sovereignty. In either case the alternative is increasingly conspicuous reliance on brute force to sustain the status quo. Conversely the Chinese are steadily increasing their capacity to promote interests through rules.

A future US Congress may ratify UNCLOS, but possibly not until the motivation of containing China is so transparent as to destroy the benefits of doing so. Likewise, faltering on the TPP has increased incentives for China to establish its own financial order – Australia formally joined the AIIB this week.

The objective of establishing a rules-based regional order is a worthy one capable of delivering greater security and prosperity to all. But American allies can take nothing for granted while Congress acts as if setting regional rules is divorced from the underlying contest for regional power.

Photo courtesy of Flickr user Speaker John Boehner.

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Yesterday's announcement of an Australia-Singapore Comprehensive Strategic Partnership (CSP), on the cusp of Singapore's 50th anniversary celebrations, has significance beyond the bilateral relationship. The bundling together of several new economic, law enforcement and security memoranda during Prime Minister Tony Abbott's visit to Singapore amounts to a surprisingly broad agenda, passing the 'comprehensive' test. In what sense might it also be worthy of the over-used 'strategic' tag?

By pursuing closer security relations with Singapore, Canberra is displaying good strategic sense. Reliable partnerships are increasingly hard to come by in Southeast Asia, given a region-wide malaise of domestic introspection and distracted political leadership. So the CSP should be recognised as steadying the tiller of Singapore-Australia bilateral ties, which have had their ups and downs over the years.

The signing of a memorandum of understanding (MoU) on counter-terrorism is an easy win, drawing on the symmetry between the two governments' upfront emphasis on the ISIS threat, and largely compatible approaches towards de-radicalisation. Separate agreements to deepen bilateral cooperation against money-laundering and transnational crime could have multiplier effects, given Singapore's importance as a financial hub and as host to Interpol's Global Complex for Innovation.

Of more strategic significance, the CSP will see an expansion of defence engagement under a new cooperation agreement to be fleshed out by July next year.

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Bilateral engagement with Singapore, arguably already Canberra's deepest defence link in Southeast Asia ( according to Benjamin Schreer), is set for a further expansion of the Singapore Armed Forces (SAF) army and air force training in Australia. This is likely to fall in synch with the release of Australia's 2015 defence white paper in the coming months and the anticipated commitment of additional resources to defence engagement in Southeast Asia.

Singapore and Australia already exercise together regularly through the Five Power Defence Arrangements. However, one clear advantage that marks Singapore apart as an Australian defence partner in Southeast Asia is its comparably advanced military capability. Without the need for any capacity-building element, the SAF and the ADF have many more options for exercising and operating together at the higher end, and for pursuing defence industrial cooperation. For the army this includes amphibious force development, as suggested by the pattern of recent exercises. Singapore will, almost certainly, become the only Southeast Asian country to operate the Joint Strike Fighter, opening up opportunities for advanced air force cooperation as well as potential economies of scale in the maintenance and upgrade of this exorbitantly expensive platform, which will be essential to managing its life-cycle costs.

The bilateral defence relationship certainly has room for growth. Despite the impressive scale of Singapore's military activity within Australia through the annual Wallaby exercise, which involves 5000 Singaporean personnel and 300 SAF platforms, Singapore's defence engagement with Australia is thinner than these numbers suggest. Its priority has been to maintain access to Australia's Shoalwater Bay training area, where the SAF has a rare opportunity to practice large-scale combined operations and live firing. But often the SAF is effectively exercising with itself. As part of a general trend towards cross-bracing Australia's defence relations across the Indo-Pacific, the ADF should be aiming to leverage more joint engagement with Singapore from the enhanced defence cooperation agreement, including trilateral opportunities with the US. Australia also benefits from continued access to Singapore's military ports and airfields.

The upgrading of Australia-Singapore security relations should be appreciated in a broader strategic context that extends to the South China Sea, as well as in the political context of the currently under-performing relationship with Indonesia. Asked about the South China Sea at a joint press conference with Prime Minister Lee Hsien Loong, Tony Abbott was keen to stress that 'like Singapore', we 'deplore any unilateral alteration of the status quo' and 'uphold freedom of navigation on the sea and in the air'.

Although he was also asked if 'Indonesia has pushed both Singapore and Australia into a closer relationship', it would be wrong to paint the CSP in such a reactive light. In his speech, Lee went out of his way to give Abbott credit for taking a personal lead in developing the CSP initiative since 2012. Nevertheless, the subsequent deterioration in Canberra's ties with Jakarta has made Singapore all the more important for Canberra, not as a counterweight but as much-needed diplomatic ballast to compensate for Australia's over-dependence on Indonesia's goodwill. Jakarta will remain Canberra's most important relationship in Southeast Asia, but the perils of placing too many eggs in one basket over recent years have become apparent.

If there is a downside to the CSP, it is that liberal-democratic credentials could be inferred as a diminished consideration in Australia's choice of strategic partners in Southeast Asia, notwithstanding Tony Abbott's appeal to 'common values and instincts' with Singapore. That, unfortunately, is as much a sad reflection on the state of the region as on pragmatism determining Canberra's preferences.

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With the signing of the AIIB's Articles of Agreement in Beijing yesterday, how is the Bank shaping up? Here are some key things that struck me reading the Agreement:

Membership

The Bank's members are split into two groups: regional and non-regional. Regional members include those countries classified by the UN as being in Asia or Oceania. So that extends to Central Asia and the Middle East, as well as Pacific Island countries, if they were to join later.

Regional members contribute 75% of the capital. The largest contributors are China, India, Russia, South Korea, Australia, Indonesia and Brazil. Of the non-regional members, Germany, France and the UK will contribute significant capital.

Voting shares are calculated through a complex formula. The Articles of Agreement don't state the breakdown of voting rights, although Chinese media has said Beijing will have 26.06%. This will give it effective veto power, as the Bank's high-level decisions (eg. on capital, membership, operations) will require the support of at least 75% of the votes. According to the SCMP, China will be followed by India (7.5%), Russia (5.92%), Germany (4.15%), Korea (3.5%) and Australia (3.46%).

Capital subscriptions are to be paid in 20% installments over five years. These can be paid in US dollars or other convertible currency (which the Bank can convert into US$ at any time). Special provisions are made for 'less-developed countries', including the option to pay up to ten installments, or to pay up to 50% of the subscription in their own currency.

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Operations

The Bank can provide financing to its members (governments, agencies or enterprises) or to international and regional agencies operating in member countries. (There are also special circumstances in which the Bank may provide assistance to non-members.)

Assistance will primarily be in the form of direct loans, investment in equity capital and technical assistance. Terms and conditions of financing, including interest rates and length of repayment, will be determined in each case, and will of course depend upon the AIIB's credit rating. Financing can be provided in the currency of the country receiving the loan, if necessary. This may be well-received by some countries who struggle with the currency fluctuations associated with paying back China Eximbank loans in RMB.

There will be an open procurement policy, meaning goods and services (and companies) from non-member states can be engaged in AIIB-funded projects. This is different to the Asian Development Bank. (It also means that those countries that jumped on board at the last minute in order to make sure their companies didn't miss out on opportunities could have gained that advantage without joining.)

China was successful in getting its favourite language into the Agreement: 'The Bank, its President, officers and staff shall not interfere in the political affairs of any member, nor shall they be influenced in their decisions by the political character of the member concerned.' Interestingly, this was taken even further, by stating that 'only economic considerations shall be relevant to their decisions.' I suspect this latter point will in reality be relaxed, as it will be challenging to make sound investment decisions without taking the political economy of a country into account.

There is also a stress on collaborating with existing multilateral and bilateral development institutions. The European Bank for Reconstruction and Development has already put its hand up, with its president ready to propose joint projects to get underway next year. 

Governance

The Bank will have one president, and one or more vice-presidents. (I'm assuming these positions will actually be open to men and women, even though the English version uses the male pronoun.)

Each of the members will have a representative on the Board of Governors. The governors will elect the Board of Directors: nine representing regional members and three representing non-regional members. Directors will represent all members who voted for them, and will serve for two years. They will be responsible for the general operations of the Bank.

Importantly, neither the governors nor the Board of Directors will be paid, and do not need to be resident at the Bank's headquarters (in Beijing). This is part of China's aim to make the Bank more efficient than its counterparts.

Next steps

The Articles of Agreement will enter into force (and the AIIB will become operational) once at least 10 signatories whose capital subscription comprises at least 50% of the total have deposited their 'instruments of ratification, acceptance or approval' to the Government of China. And then, the eyes of the world will be watching China to see how it manages this new leadership role. It won't be easy.

Photo by Flickr user Steve Webel.

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There is heightened speculation in Turkey about a long-debated military intervention in northern Syria, where Kurdish forces are battling militants from ISIS.

Both pro- and anti-government newspapers are reporting that Turkey is mulling sending up to 18,000 ground troops into Syria. The two countries share a 500km border, where fighting has come within a stone's throw.

Late Monday, Prime Minister Ahmet Davutoglu said Turkey would consider 'all necessary measures' to secure its borders. But the Government is yet to comment publicly on reports that ground troops would be sent in. Sources close to the Government say the idea is being seriously considered at a national security conference held on Monday and Tuesday this week, and that an announcement is expected in coming days. 

Any intervention on the part of the Turks would likely be aimed at frustrating efforts by the Kurds to establish their own statelet in Syria. Turkey and Kurdish forces from the PKK have been locked in a decades-long conflict, and Kurds in Syria hope to establish an autonomous zone in the north-eastern part of the country, potentially galvanising separatist sentiments among their counterparts in Turkey. 

In a fiery address on Friday, Turkey's President, Recep Tayyip Erdogan, accused Syrian Kurds of ethnic cleansing and said: 'We will never allow the establishment of a state on our southern border in the north of Syria.'

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Turkey has long pushed for the creation of a 'buffer zone' along its southern border with Syria, but has failed to secure international approval, partly due to its stance against the Kurds who, with the help of US air cover, have proven the only force capable of pushing back the advance of ISIS. The Kurds engaged in intense fighting against ISIS to secure the border city of Kobani, and have advanced east towards Tel Abyad, potentially giving them a 300km stronghold on Turkey's doorstep. 

But such a bold and unilateral move by Turkey could complicate an already crowded battlefield. While a large scale-state intervention could serve as a much needed 'strong hand' in Syria, Turkey risks direct confrontation with the Kurds as well as the Assad-led Syrian military. It could even face retributive attacks by ISIS itself.

There are political risks at play as well.

The ruling AK Party sought to renew its parliamentary majority earlier this month in Turkey's general elections, but instead the Party suffered damaging losses, losing its majority and resulting in a hung parliament. The biggest winner in the election was the pro-Kurdish left-wing Peoples' Democracy Party, which secured about 80 seats in the 550-seat chamber. The Government will have to negotiate a coalition, probably with extreme nationalists, or call a fresh election.

It's highly unlikely that a large-scale military invasion of Syria could be made by an outgoing government. Sources close to the Government say talk of intervention is genuine, but one has to wonder whether the leak was aimed at denting the AK Party's standing as it courts potential partners to form a coalition. An invasion of Syria aimed at the Kurds would almost certainly end Turkey's peace process with the Kurds, a key achievement of Erdogan's leadership and a campaign platform.

Photo courtesy of Wikipedia Commons.

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Photo courtesy of Lee Hsien Loong's Facebook page.

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