Lowy Institute

As all you G20 nerds out there probably already know, next Monday, 1 December, Turkey officially takes the reins as G20 president. That means today is the final working day of the Australian presidency.

Ahead of the Brisbane Summit, Lowy Institute Executive Director Michael Fullilove and I wrote that Australia had used its host year to good effect and that Australia's G20 moment had arrived. It seems clear now that Australia has taken advantage of that moment. The thing that stands out from 2014 has been the clear articulation, then achievement, of the G20's goals.

The G20 achieved what it said it would to boost growth and jobs and build a stronger, more resilient economy. In many respects this reflects an evolution of the G20 away from the initial response to the financial crisis towards a second phase focused on lifting growth in countries affected by the crisis.

The achievements were also broad-ranging, so much so that the promised three-page leaders' communique needed to be squeezed into small text and narrow borders. Fortunately, though, the sprawling paragraphs of previous declarations are a thing of the past since Finance Ministers met in Sydney in February. Instead, a legacy of Australia's presidency will be of headlines and substance across a broad range of issues, tied together in a neat, coherent narrative (except, perhaps, for the Leaders Statement on Ebola).

On promoting growth and jobs, the IMF and OECD assessed that that the G20's campaign to lift growth by 2% by 2018 is achievable through the commitments made to date. To make it more meaningful, leaders submitted to peer review and to regular assessments by the IMF and OECD. This has been a commendable effort, although it should not be seen as mission accomplished. Despite the best of intentions, not all measures will be implemented, and further commitments will be needed over the next four years. And the next step will be to see the G20's efforts translate into upgrades in IMF and OECD forecasts

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2014 also saw the development of the multi-year Global Infrastructure Initiative, with the Brisbane Summit's addition being the announcement of Global Infrastructure Hub, an international organisation to progress the infrastructure agenda that will be located in Sydney for the next four years. The Hub has the potential to make a welcome contribution to the global investment challenge, although as Hugh Jorgenson and I noted in Brisbane, the announcement of the Hub raises some questions.

The first year of the G20's tax agenda saw progress on modernising international tax rules to combat base erosion and profit shifting, actions to address bank secrecy, and steps to include developing countries in the international tax agenda. Now come the negotiations on the tougher agenda items that will be less easy to reach agreement on, such as on countering harmful tax practices and the pricing of tranfers within companies, and the need to chart a longer-term path.

Six years on from the beginning of the financial crisis, we saw a shift from the 'responding to the crisis' phase of financial regulation to the 'finalising the policy framework' phase. Developments in 2014, including a proposal for too-big-to-fail banks to hold yet more capital to protect taxpayers from losses (seen as the last major piece of the policy framework puzzle) are ongoing issues, but during the Australian presidency the G20 has reshaped this narrative towards a focus on the implementation of existing commitments and revamping the way the Financial Stability Board works.

The real mark of the presidency's success, though, is that it achieved well beyond the narrow growth and resilience rhetoric. In particular, the Summit committed to put 100 million women into jobs and tackle corruption through strong principles on beneficial ownership.

The final language on climate change and Ebola should also be acknowledged in this spirit. Much has been made, including from Mike Callaghan, of Australia's reluctance to entertain these topics ahead of the Summit and the credit Australia could have claimed if it had acted differently. I won't add to that debate here, but I will point out that G20 leaders were able to provide direction on both issues, which will maintain some momentum heading into a more receptive Turkish presidency. Further, even if a great opportunity for stronger commitments was missed, it will be difficult to argue that the G20 has focused just on economic fundamentals in 2014 and missed the bigger moral picture.

Momentum has, unfortunately, not extended to all aspects of the agenda. The deadlock on IMF reform continues, with uncertain prospects under the new US Congress. With the IMF still heavily dependent on borrowed resources and bilateral loans that will expire by end-2016, 'Plan B' alternatives still not clear but unlikely to deliver substantial long-run improvements, and China signaling ever more loudly that it has the capacity to develop work-arounds to the existing global financial architecture, this topic will need greater attention in 2015.

But the achievements go on in other parts of the agenda. There was the recognition that more collaboration is needed on energy issues, with energy ministers asked to meet in 2015 and report on options to take this work forward. Australia also got lucky on trade, with the US-India deal on the WTO Bali trade facilitation agreement. 

Australia's success will only be fully determined in years to come, once we know if the growth target is achieved, the Hub becomes a known entity, and the multi-year agenda on tax, financial regulation, climate change, trade, energy, and IMF reform progress further. But for the moment, we can safely say that the presidency has ushered in a second, post-crisis phase for the G20, and provided much-needed momentum to the forum.

Over to you, Turkey.


After two months of protest and occupation, is the Hong Kong pro-democracy movement over?

It seems the protests are not going to achieve what they set out to do, let alone pose any threat to the rule of the Chinese Government. Chinese people on the mainland are basically uninterested and generally unsupportive of the Hong Kong protests, and Chinese authorities have vast experience in skilfully dismantling dissent, honed to a fine craft in responding to over 100,000 mass incidents of social unrest each year.

Over the past eight weeks the world has watched, with a gently waning interest, the protesters in Hong Kong, and reflecting on what the demonstrations mean for Hong Kong and mainland China. There is a presumption in the West that the liberal democratic system is the best way a society can operate and that all roads will eventually lead to that shining city. This view underpins an assumption that the Chinese population must be chafing under the current leadership model and waiting for an opportunity to embrace electoral democracy. Early on in the Hong Kong protests, there was talk of a 'contagion effect', in which mainlanders would see what their brethren in the former British colony were striving for, and join the struggle.

This was never very likely.

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There is a strong belief in China that while the situation in China is not perfect, and the Chinese Communist Party (CCP) is not without fault, things are better than they have been in a long time (see this Eric Li Ted Talk). The general view is that only the CCP could have brought China out of the century of humiliation (beginning with the Opium Wars in the 1840s) and built the country back up to where it is today. And it is only the CCP that can steer China forwards into a future that sees it restored to its former position of dignity and grandeur.

These views of China and its relationship with the world are based on a powerful web of understandings constructed and perpetuated across every aspect of society, including through the patriotic education campaign introduced after the Tiananmen incident of 1989.

While I was studying in China, a fellow foreign student asked our young language teacher what she knew about Tiananmen. Our teacher replied that she had heard a few stories, but did not know any detail. The foreign student gave her some readings he had brought with him, setting out the events of June 1989. Our teacher's first response was to ask where he had got this information, and whether he was sure it was reliable – she did not see how it could possibly be true. A week later the foreign student asked our teacher if she had finished the article, and what she thought. He evidently expected her to be shocked and dismayed, but our teacher told us the article seemed a bit long and overcomplicated, and she hadn't really got around to finishing it. She was not faking a lack of interest; the information just did not fit at all with her understanding of how the world worked. 

This kind of indifferent response by Chinese friends to what Westerners presume will be life-changing material is not unusual. In 2012 I was at the US Embassy in Beijing counting down to the announcement of the next US president. The Embassy had invited some Chinese officials to attend and to observe how 'real democracy' works. Chatting to these officials during the evening, I found that rather than being impressed, they were perplexed about the confusion and big spending that went into choosing a leader.

The belief that 'Western-style democracy' is inappropriate for China is as powerful there as the belief in the West that liberal democracy is the best model for a fair society.

Of course there are Chinese people who question and criticise what is happening around them. Petitioners come from the provinces to beg Beijing to intercede in local injustices. They are angry about corruption, unfair real estate deals, enforced child control, environmental degradation, and other issues. It is difficult to calculate how many 'mass incidents' occur in China as the Government does not release figures. Chinese academics reported in 2012 that annual incidents now regularly exceed 100,000. However the Chinese Government is practiced at dealing with these incidents and uses a variety of sophisticated mechanisms, tailored precisely to the individual and situation, to dispel discontent. As Perry and Selden point out in their book Chinese Society, the Chinese state has repeatedly shown its sophistication in quashing attempts to expand resistance beyond isolated cases. They argue that the forces for maintaining stability and order have grown alongside China's modernisation, urbanisation, internationalisation and new prosperity. 

This is what we are seeing now in Hong Kong. The early over-enthusiasm by police, when they used tear gas, has not been repeated. Instead, authorities have played a long waiting game which protesters could never really win. Although there have been violent scuffles over the past few days as police moved in to take down barricades at protest sites, it remains to be seen whether the arrest of the young student leaders Joshua Wong and Lester Shum will take the wind out of the sails of resistance, or whether they will be replaced by new leadership  advocating further protest.

It is a tempting but unrealistic presumption that protests in Hong Kong will catch on across China. The firmly entrenched beliefs of mainland Chinese people about how Chinese society and the state should operate are just as true and right to them as ours are to us. The combination of a strong and coherent set of values with a capable and highly-skilled state will ensure that they remain prevalent for some time to come.

Photo courtesy of Flickr user Pasu Au Yeung.


Thanks to Hugh White for continuing our debate on the China-Australia FTA and the intersection between Strategic Studies and Economics. Like Hugh, I do not think that 'Australia's economic weight and sophistication is such an irresistible magnet for China that we can dictate the terms of the relationship and compel it to accept without demur whatever strategic positions we choose to adopt'.

Each of the last four Australian governments has felt the tongue-lashings of the Chinese when their positions on various issues differed from those of the Chinese Communist Party (positions Australia was far from alone in the region in adopting). Even as a callow program director at the Lowy Institute, a private think tank, I was castigated more than once by Chinese officials in Australia for demurring against Chinese views. But although China forthrightly pushes back against those with a different worldview, that does not mean it lets such differences undercut Chinese interests.

I agree with Hugh that measuring the benefits of a bilateral preferential trade deal and divining its policy weight against assumed strategic imperatives is fiendishly difficult. But I think Hugh is underestimating the importance of the China-Australia deal for Beijing, for three reasons:

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  1. Leon Berkelmans indicated why the dated and modest estimates Hugh references are no longer a credible guide to the deal signed.
  2. As trade economists remind us every time a trade deal is done, the dynamic gains from structural change to the affected economies are likely to be much greater than the static gains to bilateral trade flows, which are the focus of traditional models such as the one Hugh cites.
  3. As shown by both Japanese and Chinese private sector firms getting the same elevated foreign direct investment ceilings through their respective deals with Australia, the same ceiling first granted to US firms a decade ago in the US-Australia preferential trade deal, the effects of any trade deal cannot be treated in isolation. Rather, each should be seen as part of a much larger whole. This explains why an economy the size of China would bother to negotiate a bilateral deal with Iceland, an economy less than 1% the size of Australia.

China's trade diplomacy seems to be following Deng Xiaoping's maxim to 'cross the river, feeling for the stones.' As shown by the Korea and Australia deals, China under Xi Jinping is signing broader and deeper trade deals with larger trading partners.

Through the ongoing Regional Comprehensive Economic Partnership process, China is now also in serious negotiations with its largest regional trading partner, Japan. And President Xi's embrace of the decade-old Free Trade Agreement for the Asia-Pacific idea indicates China is willing to consider trade talks with its largest national trading partner, the US. Lastly, China's trade deals with European Free Trade Area members suggest that China has 'felt the stones' towards trade talks with the European Union, China's largest collective trading partner.

Undoubtedly, Japan, the US and the EU will look at China's commitments in the China-Australia FTA as a minimum standard to be much improved upon, given their greater economic weight and sophistication.

Economic interests and strategic ones are both important, and these interests certainly do intersect. But in the case of the China-Australia FTA, I think Hugh understates the deal's economic importance to China and overstates the intersection between China's global economic interests and regional security interests. He also overstates the prominence of these regional security interests in this intersection.

Economics does explain the China-Australia FTA better than Strategic Studies.

Photo by Flickr user Alexander Kesselaar.


The view from Taipei

Tomorrow in Taiwan a record 11,130 seats will be contested in nationwide local elections, with 80% of Taiwan's population of 23 million heading to the polls. Voting will take place across nine categories of elected office in what is known as the 'nine-in-one' election. Six municipal mayors (including Taipei), six chiefs of indigenous districts, 532 county councillors and 7851 chiefs of village are just some of the positions up for grabs.

Local election campaigning in Taipei, 25 November 2014.

While these elections haven't stirred much interest in the Australian media, they are being closely watched in North Asia and the wider region as they will serve as a barometer for the 2016 presidential election.

Taiwan's next president (the incumbent, Ma Ying-jeou, has reached his term limit) will have to navigate a narrow course through treacherous waters. They will inherit Taiwan's struggle to remain on the international map, an increasingly toothless Asian tiger economy and protracted disputes in the South China Sea. They will, of course, also have to contend with the precipitous balance of maintaining a close economic relationship with China while continuing to assert the island's independence.

Then there are the events in Hong Kong, which many argue have angered Taiwanese and further fueled distrust of China. An emerging solidarity between Hong Kong's Umbrella Movement and Taiwan's Sunflower Movement has seen unity demonstrations in Taipei and advice shared on rally organisation and crowd mobilisation. A large crowd of yellow umbrellas was displayed at a recent East Asia Cup qualifier in Taipei.

While Taiwan's gaze is almost permanently fixed on China, the reverse is also often true. This piece in Foreign Policy explains why China is watching the elections (and also offering 'election discount' flights for Taiwanese living in China to return home to vote, in the hope that they will back candidates that oppose Taiwanese independence). Those seeking more English-language analysis of Saturday's elections should head to The Economist, Thinking Taiwan blog, The Diplomat, The Conversation and the UK's China Policy Institute blog.

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Tomorrow, mobile phones will be banned from polling booths, with fines ranging from A$1,000 to A$11,000. But this simple regulation will be almost impossible to enforce. Taiwan's mobile-addicted population spends an average of three hours online a day via smartphones – more than anywhere else in the world. It is hard to imagine a situation where technology-dependent Taiwanese youth (note: the voting age is 20) would sign off from mobile chat app LINE (75% of the Taiwanese population are users), let alone leave their phones behind.

The same mobile phone addiction has given rise to a vigorous brand of digital democracy in Taiwan. Some commentators believe it will play a decisive role in the outcome of the Taipei mayoral election, arguably the most important of tomorrow's electoral skirmishes. The position wields enormous influence and is a well-trodden path to the presidency. President Ma — also Chairman of the ruling Kuomintang (KMT) – was mayor of Taipei from 1998 to 2006. So far it has has been a fiercely fought competition between the relatively unknown Dr Ko Wen-je, an independent and eminent surgeon supported by the Democratic Progressive Party, and the well known KMT candidate Sean Lien, whose family was recently voted the most dominant political family in Taiwan.

KMT, known as pro-business and pro-China, is allegedly the richest political party in the world with registered assets in excess of A$1 billion. And Taipei is traditionally a KMT stronghold, so it is the KMT's race to lose. But some of the most recent polling (election laws prohibit the release of poll results in the final ten days before voting) show Ko leading Lien by more than 10%. The contest has been both dramatic and bizarre, and policy positions have often been overshadowed by intense mud-slinging. There have been allegations of corruption and money laundering, organ trafficking, wiretapping and a Watergate-type scandal. 

Despite the significant financial and political resources he brings to the table, there are a number of reasons why KMT's Sean Lien is behind in the polls.

Seemingly at the heart of it is a failure to connect with voters beyond core KMT supporters. Widely described as a 'princeling', his father, former vice president and KMT Chairman Lien Chan, has been outspoken during the campaign. But Lien Chan, who earlier this year emerged as a key figure in Cross-Strait talks when he was welcomed to Beijing by President Xi Jinping, may have harmed rather than helped his son's prospects. At a rally to support his son earlier this month, Lien Chan fired off a string of criticisms at Ko, including: 'I absolutely cannot stand the thought of having someone whose grandfather changed his surname to a Japanese one during the Japanese colonial era as mayor of Taipei. He (Ko) calls himself a commoner and us the privileged few. What a bastard'.

The remarks, meant to provoke nationalist sentiment, had the opposite effect. On national television Ko's elderly parents were forced to defend and explain the honour of Ko's grandfather, who was a teacher during Japanese colonisation. Apologies followed, but for many Taiwanese, who also lived through Japanese colonisation, it was profoundly offensive. It may have been the final straw for some. 

The contest is perhaps most poignantly summarised by the release of recent campaign ads. Ko's ad, 'How long has it been since you last listened to your children?', plays on the insecurities of the average Taiwanese family. It addresses inequality, unemployment and job security, high property prices and the declining birth rate. A shot of Taiwan's most expensive apartment complex 'The Palace', of which Sean Lien is a resident, is a pointed reminder to voters of his privileged background (although he alleges he moved out in September 2014).

In stark contrast, Sean Lien targets young voters in his Step Up-inspired music video 'The Same World', directed by famous music producer Kuang Sheng. The ad implores youth to vote as they would in a breakdancing competition: by considering skill rather than family background, wealth or power. But it is hard to see how this dance-off video, peppered with luxury vehicles, scantily clad women and designer sunglasses, will do anything but remind voters how far removed their lives are from that of the Lien family.


One of the nice things about blogging is that it opens up topics we international-relations specialists would otherwise never explore. One area is representations of world politics in film, games and other media. (Duck of Minerva, where I used to write, is good on this.)

This is a tricky area to write on, academically. How many of us would want to accredit a dissertation about hyper-patriotic US military tropes in the Call of Duty game series or the Transformers film series? These are actually interesting questions, but the international relations field does not reward it professionally. Still, we notice this stuff all the time.

American geopolitical entertainment is notorious for its rah-rah patriotism, 'patriotic' violence, and often brutality. John Wayne made Green Berets to shore up popular support for the Vietnam War. Rambo and Red Dawn capture popular American Cold War thinking so well that I have seen them listed in international relations syllabi.

Since 9/11, it is even more obvious. The TV show 24 was so influential that it influenced the torture debate in the US. Call of Duty channeled the Bush-era hysteria of high-tech terrorists lurking everywhere, which therefore required a massive military response like the Iraq War. The franchise even got right-wing hero (and convicted felon) Oliver North to plumb for the games as possible 'real-life' (!) scenarios. 2012's Battleship was basically a metaphor for the US and Japan working together to repel Chinese domination of the Pacific.

So here is a little social science fun on the Korean movie industry. I live in Korea, so inevitably I watch the films; the geopolitical ones are the most interesting for international relations types. And if there is one trope I notice again and again (perhaps because I am an American), it is the preposterous American villain scenarios the Korean film industry just adores. There's always a rogue American soldier or defence official ready to sacrifice Korea in the name of US global domination. Here are the most preposterous of the last decade:

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Welcome to Donmaekgol (2005)

North and South Korean soldiers in the middle of the Korean War stumble across each other in a remote village untouched by the war. There they learn that the war was just a big misunderstanding (there's no mention of Kim Il Sung or the communist invasion) and that the real enemy is the Americans who will imminently bomb the peaceful villagers. To the south, Korean officials arguing against the raid are over-ruled by the arrogant American air staff. But thankfully those Northern and Southern soldiers, who have since found their shared Korean-ness, work together to resist the air raid and save the idyllic village from American aggression.

Typhoon (2005)

A terrorist threatens to nuke Korea, but the Americans are more concerned that their secret plot to contain China and Russia will be leaked. Korea, and basing nuclear missiles there, is central to this scheme, so Washington invokes 'OPCON' to prevent Korean defensive action. Thankfully patriotic Korean SEALs launch a suicide mission without American permission and save Korea. This film captures favourite themes of the South Korean left from the last decade – OPCON, US manipulation of Korea, America containing China and Russia. Today, Seoul is desperate for the US to retain control of the wartime South Korean military (because it ties the US so tightly to Korean defense), but back in the day, OPCON reversion was marketed to the Korean public as restoring Korean sovereignty from the haughty Americans. Typhoon taps into that with standard-issue scenes of nasty, condescending American bureaucrats bossing around Korean officials.

The Host (2006)

This film was so successful in Korea that it was briefly released in the West. The most famous sequence is at the very beginning when a US military doctor forces his reluctant Korean assistant to dump formaldehyde in the Han river (the main river bisecting Seoul). The agent produces a river monster that terrorizes the city. The evil US authority figure is standard-issue Korean anti-Americanism. But the best part is actually when the creature attacks. It eats an American English teacher with really bad hair while his Korean girlfriend watches. Hah! Korean high-schoolers everywhere, forced to learn English from an early age and attending cram-schools for hours each week, were likely cheering to see their worst enemy eaten. And take that, Korean girls who go out with foreigners!

A Little Pond (2009)

The film covers the alleged massacre of Korean refugees during the war at No Gun Ri. The film is based on this book, which in turn is based heavily on Associated Press accounts. Those accounts have been seriously questioned, however, in this well-researched response. None of this is covered in the film, including the war-time penetration of South Korea by communist infiltrators that likely contributed to the massacre. Instead, the most egregious interpretation of the event was adopted. The Americans massacre hundreds, and the US soldiers (portrayed wholly unconvincingly by non-Americans with vaguely Russian accents) are mindlessly gleeful and bloodthirsty. For a sustained response to the AP articles, go here.

Return to Base (2012)

A coup in North Korea brings to power a mad general determined to reunite Korea and punish America. To stop a missile launch against the US homeland, shady-looking American officers and bureaucrats in Korea (who sound an awful lot like Russians or European English teachers) yell at peace-seeking Korean Government officials and plot to nuke North Korea. The Koreans heroically stand-up to the domineering Americans infringing on Korean sovereignty. Much yelling and conniving about arrogant American control of Korean foreign policy ensues. A last-ditch air raid is launched to avert an American-led nuclear war in Korea sure to obliterate the peninsula. Thankfully, the Korean version of Tom Cruise saves the day from American nuclear war-mongers. 

The Flu (2013)

Just in time to stoke your Ebola paranoia, this film will teach you that the American response to pandemics is to massacre the hapless ill with a massive airstrike in the middle of a major city. Seoul is wracked by your standard-issue Hollywood plague, and the ill are congregating in the streets. To stop it from spreading, top American officials in Korea – once again in bad suits and with accents that sound an awful lot like the director just grabbed some Russians from a bar in Seoul – plan an airstrike on the infected people massed in public. This is to take place in downtown Seoul in broad daylight, presumably with global media coverage. To boot, the dastardly American commander overrules Korean officials by ordering Korean soldiers on the street to shoot at the ill. Naturally the first victim is a mother helping her child. Enraged South Korean officials threaten to shoot down the American fighters with surface-to-air missiles. A great deal of yelling about Korea as independent and not subject to American dictates follows. The Americans give in, disgraced before the heroism and patriotic might of the Korean president, and Seoul is saved.

Bonus Round: Anti-Japanese paranoia (see Hanbando [2006] and Roaring Currents [2014])

Did you know that the Japanese haven't changed in their rapacious desire to invade and conquer Korea since the Hideyoshi wars of the 1590s? The never-subtle Korean film industry is here to remind you of Japan's 425-year of anti-Korean fascist expansionism.

In my six-plus years in Korea, the Korean film industry is the most reliably anti-American segment of society I can think of. Compared to the government, military, or even academia or farmers, no Korean group is so consistently willing to envision wild conspiracies about the US manipulating Korea, condescending to its officials and exploiting OPCON for its own nefarious purposes. What I keep waiting to see is a Korean film that shows how the Combined Forces Command actually works, in response to something like the Cheonan sinking in 2010. But that would be a lot less fun to watch.


A Vietnamese frigate flies the Philippines flag during its maiden port call. (REUTERS/Romeo Ranoco.)

In what was the first ever port call between the countries, two Vietnamese frigates visited the Philippines on Tuesday. An unnamed Filipino naval officer said the two countries would hold peaceful joint patrols and operations in the Spratlys.

But the timing of the maiden port call was clear. It coincides with the first anniversary of China's declaration of an Air Defence Identification Zone (ADIZ) over parts of the East China Sea, including the Senkaku/Diaoyu Islands. Ever since, Southeast Asian states have worried about Beijing's intentions for its territorial disputes in the South China Sea.

The year seems to have only drawn us closer to a major incident, miscalculation or serious conflict in the South China Sea.

Yet there is little unity from the ASEAN bloc, despite much discussion. The ASEAN Foreign Ministers Meeting in May managed a joint communiqué expressing 'serious concerns' (the adjective was added at Vietnam's insistence and only after much debate). The November ASEAN Summit statement managed to declare that 'we remain concerned', with a further affirmation of 'the importance of maintaining peace and stability' including the 'freedom of navigation in and over-flight above the South China Sea'. A leaked pre-Summit draft document cited progress on the Code of Conduct on the South China Sea, but with no firm agreement on the decade-long process of negotiation. 

In the absence of ASEAN unity, Southeast Asian states continue to go it alone.  Read More

In March, the Philippines submitted a 4000-page argument of its claim to an arbitration tribunal at The Hague. Manila also announced this month its intention to spend $2 billion on defence procurement by 2017. Meanwhile, last week in Beijing at the newly elevated track 1.5 Xiangshan Forum (significant for the future of South China Sea discussions as it is built on an 'Asia for Asians' policy, jettisoning the US from the debate), the Philippines spoke strongly on averting conflict and building trust. [fold]

Vietnam has also taken a harder line. In May, China's state-owned oil company CNOOC moved its massive deep-water rig into Vietnam's Exclusive Economic Zone. Boats were rammed, some sank, and anti-China nationalist protests engulfed Vietnam. Then, as abruptly as it began, it stopped, and senior officials from both countries were shaking hands and agreeing on new cooperation. In ending its oil rig deployment at that crucial moment, Beijing may have avoided Vietnam 'breaking out of China's orbit'. But Vietnam's historical distrust of its northern neighbour has all but been reaffirmed. 

In September and October, Vietnam started broadening its friendship base. It swung closer to the US, which partially lifted the arms embargo. And in what seemed like a reply to the rig incident, President Dung met with Prime Minister Modi in India and signed a host of deals including one that offered India two oil exploration blocks in its EEZ in the South China Sea (a joint Modi-Dung statement here). In effect, this deal brought India directly into the territorial disputes on the side of Vietnam's claim.

All this was escalated by Beijing's construction in the Spratly Islands. Since August, China has dredged the seabed, spewing out land from the seafloor at Fiery Cross Reef. The reclamation of a 3km stretch of land would allow Beijing to build a sizeable airstrip. Despite other reclamations at Johnston South Reef, Gaven Reef, and Cuateron Reef since 2013, satellite imagery suggests this is by far the largest operation, and the only reclamation capable of accommodating an airstrip.

Other Spratly Island claimants (Vietnam, Philippines, Taiwan, Malaysia and Vietnam) have airfields of varying sizes in the disputed territories. China does not, though its Hainan Island base and modernised navy is highly capable of power projection.

The Philippines has officially protested the Fiery Cross Reef reclamation. Described by some as an 'unsinkable aircraft carrier', an airbase on the island would allow for a South China Sea ADIZ, a concern that has been increasingly talked about since November last year. It is a move that could push ASEAN states toward greater unity, so perhaps to quiet regional fears, Beijing bought $20 billion in development loans to the ASEAN Summit (much of it offered to Myanmar and Cambodia) and has gathered all but Indonesia into its Asian Infrastructure Investment Bank.

Southeast Asian states, particularly Vietnam and the Philippines, will continue to regard the 'big guy' of Asia as a wolf in sheep's clothing. Much of this perception is due to actions in the South China Sea.  An airstrip could be a rallying point for unity against Beijing, an ADIZ would surely be one. 

  • This week it was announced that US President Barack Obama will be the Chief Guest at India's Republic Day celebrations next year, marking the first time the honour has been bestowed upon a US president. What does this mean for US-India ties?
  • India has become the world's largest weapons importer.
  • The Brookings Institution has released a report on the opportunities and challenges for India in reinvigorating the South Asian Association for Regional Cooperation.
  • David Brewster argues that India's understanding of strategic autonomy must evolve to remain relevant.
  • How can India speed up its justice system?
  • Six years on from the 26/11 Mumbai bombings, officials say India is facing a heightened terrorist threat.
  • Can India and Pakistan go green?
  • Amy Kazmin argues that tracking down India's overseas black money will be harder than the Modi Government thinks.
  • New York style blogger The Sartorialist  recently visited India. Here's the first image he posted from the trip, taken in Mumbai: 


Senior economic policy makers, economic analysts, academics and commentators have been concerned about the daunting challenge of structural and budget adjustment facing Australia due to the decline in mineral prices from the levels reached in the boom period of 2003-04 to 2011-12.

In Beyond the Boom, John Edwards estimates that the mining boom contributed 3% to GDP: 'Three per cent of real GDP is big, but as a change over eight years it is not that big'. This estimate of 3% is central to Edwards' strong dissent from the widespread belief that Australia is facing a formidable challenge. Because of Edwards' profile and appointments, including on the Board of the Reserve Bank of Australia (RBA), his assessment carries weight in the policy debate.

In a paper published by the Minerals Council, I argued that Edwards has greatly underestimated the economic benefits of the boom and, therefore, has vastly understated the adjustment challenge. Subsequently, in his post on The Interpreter, Edwards attempted to refute some of my arguments.

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The crux of the matter lies in the distinction between production and income. Edwards' focus is on the production side, on the 'contribution to GDP from the mining boom to 2011-12'.

Almost all other commentators and modellers look beyond GDP, to the real income of Australians. Essentially, over and above GDP, during the boom a large boost was given to the income (or purchasing power) of Australians. Now that mineral prices have fallen, this will not recur, and it presents an adjustment challenge.

Economists have two standard methods to estimate the boost to economic income delivered by a boom in export prices: 

  1. The Australian Bureau of Statistics (ABS) way, using the System of National Accounts. This method yields a benefit equal to 14% of the GDP of 2011-12.
  2. The modelling way, using quantitative representations of the economy: this yields a benefit equal to 13% of the GDP of the year 2012-13 (argued in recent RBA Research Paper authored by Peter Downes et al. Although I discussed the paper in my Minerals Council critique of Beyond the Boom, it is not mentioned in Edwards' response as it was published after Edwards' book).

The ABS's national accounts tell us that over the decade to 2011-12, production as measured by real GDP grew more slowly than did the real purchasing power of GDP, as measured by national income. There was a 14% gain in income over and above the boost to GDP itself. This difference is usually called the 'trading gain', because it measures the benefit of a rise in the international terms of trade.

Before proceeding, here is a clarification to reassure Edwards: everybody has reported the size of the benefit of the boom as a ratio, equal to the benefit (however conceived) divided by some understandable denominator. Everyone, including Edwards, uses the GDP (or GNP) of the end year (2011-12 or 2012-13) as the denominator. Nobody who has contributed to the debate thinks that the ABS has estimated that the boom caused a 14% rise in GDP. Everybody knows that, because it takes GDP as given, the ABS method attributes no boost to GDP on account of the boom.

The Downes et al paper does, however, estimate that the boom did indeed boost the GDP of 2012-13 by 6%. National income was boosted by 13%, with the extra 7% mainly due to the trading gain.

Edwards steadfastly refuses to accept the standard interpretation of the trading gain as showing the rise in income, over and above the rise in GDP. His ground is that, for the 'trading gain' to become actual rather than merely hypothetical, the income boost must be spent on additional imports.

This assertion suggests a failure to understand national accounting. Edwards does not seem to appreciate that the ABS can estimate the size of the gain in income without having to show what uses were made of the income gain. Income can be used for saving, as well as for spending. Savings rose dramatically. Edwards amply documented the rise in saving, but he did not seem to understand that it refutes his argument that the ABS's 14% trading gain in income was merely hypothetical until it manifested as imports.

Moreover, Edwards has misinterpreted the facts about imports: 'Households, anyway, do not seem to have responded gladly to flat import prices. They have not very vigorously increased their purchases of imports compared with earlier trends.' But import prices were not flat. Instead, due to the rise in the exchange rate, they fell greatly, relative to Australian prices generally. That is what a sharp rise in the exchange rates does.

As to quantities, imports volumes rose about 70% faster than GDP in the boom (and the composition of imports did not change much). The additional imports were financed out of the higher national income and were stimulated by the large fall in the real price of imports.

The Downes et al paper confirms that the mineral boom caused a large rise in import volumes. The methodology used, a fully specified model of the economy, is far superior to Edwards' method, which estimated 'counterfactual' import volumes by simply comparing the decade before 2002-03 with the decade following.

Before going further, it is necessary to state that Edwards and all other commentators must realise that some benefits of the boom will last beyond its end. These lasting advantages are not captured in the production or income numbers discussed so far. They consist in huge rise in the capital stock, and a significant increase in private wealth, both of which will ease the adjustment to lower terms of trade.

There is a revealing lapse in Edwards' use of national accounts nomenclature. Although Edwards repeatedly states that his 3% is the mining boom's contribution to GDP, strictly his is an estimate of the mining boom's contribution to GNP, not GDP.

He first calculates the contribution as 6% of the GDP of 2011-12, but then discounts that by half because of foreign shareholdings in mining. But this is how the national accounts go from GDP to GNP, by deducting from GDP what is owned by foreigners on account of their productive and financial services (net of what is owing in the other direction). Thus, the ABS estimate of the trading gain takes account of foreign ownership of GDP and therefore, contrary to what Edwards asserts, should not be further discounted for foreign ownership.

Finally, there is something contingent in the way Edwards arrived at his 6% boost to GDP or 3% boost to GNP. If the rise of the exchange rate had been less, his estimate would have been more. Consequently, regardless of the cause of the rise in the exchange rate — and most observers say the mineral boom was a major, if not the prime factor — Edwards' method understates the national gain.

This is because the rise in the exchange rate reduced his estimate of the benefits of the boom, but did not reduce the benefits to Australia as a whole. Edwards measured the AUD-denominated benefits that flowed to the Australian owners of mining shares to state governments as royalties and to the ATO as company tax payments from miners. The rise in the exchange rate reduced these AUD flows (regardless of the causes of the rise in the exchange rate). But the rise in the exchange rate did not reduce the national gain. It merely redistributed some of it away from the Australian owners of mining shares and towards other Australians, including those purchasing imports which were now much cheaper in AUD terms.

Edwards needs to understand that (to the first order of approximation) a rise or fall in the exchange rate redistributes income and wealth, rather than increases or decreases national income and wealth.

Unfortunately, in a table I misreported the dates for which I estimated the effect of the exchange rate on Edwards' calculation.

In conclusion,  Edwards seems to have had difficulty in applying the System of National Accounts to the issue, he confuses GDP, GNP and economic welfare and he does not understand the redistributive effect of a rise in the exchange rate. As a result, Edwards greatly understates both the benefit of the boom and the burden of adjustment caused by the fall in the international terms of trade.

 The lone dissenter is sometimes right, but not in this case.

Photo courtesy of Flickr user Robyn Jay.


As regular Interpreter readers have no doubt heard by now, the Chancellor of Germany, Angela Merkel, gave the 2014 Lowy Lecture last week in Sydney.

Sam Roggeveen has already outlined the main elements of what Merkel said, but the rest of world now seems to be catching on. That speech, and her words particularly on the crisis in Ukraine and Russia, are now being called a 'major shift in European geopolitics.' Indeed, Der Spiegel ran an editorial this week saying 'It was a clear challenge and turning point after a year of diplomatic efforts that, while not useless, now appear to have been exhausted.'

It has taken Chancellor Merkel some time to speak publicly about what she says are the 'forces which refuse to accept the concept of mutual respect' and who 'believe in the supposed law of the strong and disregard the strength of law.' President Obama argued something very similar in a speech at the UN General Assembly in September, where he said that Russia's aggression was 'a vision of the world in which might makes right — a world in which one nation's borders can be redrawn by another.' Aside from the significance of the leader of Germany (and to a large degree, Europe) coming around to speaking forcefully about Putin and Russian violation of international law, what is interesting about Merkel's speech is that it was given by Merkel herself.

A recent and lengthy New Yorker profile  by George Packer paints a picture of someone who is coolly detached from her ego and who did not come to politics naturally. She is a triple threat in German politics: 

Among German leaders, Merkel is a triple anomaly: a woman (divorced, remarried, no children), a scientist (quantum chemistry), and an Ossi (a product of East Germany). These qualities, though making her an outsider in German politics, also helped to propel her extraordinary rise. Yet some observers, attempting to explain her success, look everywhere but to Merkel herself. “There are some who say what should not be can’t really exist—that a woman from East Germany, who doesn’t have the typical qualities a politician should have, shouldn’t be in this position,” Göring-Eckardt, another woman from East Germany, said. “They don’t want to say she’s just a very good politician.” Throughout her career, Merkel has made older and more powerful politicians, almost all of them men, pay a high price for underestimating her.

And on her analytical qualities: 

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People who have followed her career point to Merkel’s scientific habit of mind as a key to her political success. “She is about the best analyst of any given situation that I could imagine,” a senior official in her government said. “She looks at various vectors, extrapolates, and says, ‘This is where I think it’s going.’ ” Trained to see the invisible world in terms of particles and waves, Merkel learned to approach problems methodically, drawing comparisons, running scenarios, weighing risks, anticipating reactions, and then, even after making a decision, letting it sit for a while before acting. She once told a story from her childhood of standing on a diving board for the full hour of a swimming lesson until, at the bell, she finally jumped.

Packer puts particular emphasis on Merkel's political maneuvering and her ability to play a long game. Speaking about the Chancellor and one of her long-time and trusted political advisers, Beate Baumann: 

Fed up with Kohl’s smug bullying, the two women practiced a form of “invisible cruelty”: they played hardball but relished their victories privately, without celebrating in public and making unnecessary enemies. Their style, Ulrich said, is “not ‘House of Cards.’ ” On one rare occasion, Merkel bared her teeth. In 1996, during negotiations over a nuclear-waste law, Gerhard Schröder, two years away from becoming Chancellor, called her performance as environment minister “pitiful.” In her interview with Herlinde Koelbl that year, Merkel said, “I will put him in the corner, just like he did with me. I still need time, but one day the time will come for this, and I am already looking forward.” It took nine years for her to make good on the promise.

Early on in the Ukraine crisis, Merkel, who speaks fluent Russian, was said to be the closest to Putin and the Western leader who knew him best. A last extract for those that doubt her resolve:

John Kornblum, a former U.S. Ambassador to Germany, who still lives in Berlin, said, “If you cross her, you end up dead. There’s nothing cushy about her. There’s a whole list of alpha males who thought they would get her out of the way, and they’re all now in other walks of life.”

The piece is also littered with great anecdotes about a leader who rarely gives personal interviews: 

In off-the-record conversations with German journalists, she replays entire conversations with other world leaders, performing wicked imitations. Among her favorite targets have been Kohl, Putin, King Abdullah of Saudi Arabia, former Pope Benedict XVI, and Al Gore. (“Ah have to teach mah people,” she mimics, in a Prussian approximation of central Tennessee.) After one meeting with Nicolas Sarkozy, the French President, during the euro crisis, she told a group of journalists that Sarkozy’s foot had been nervously jiggling the entire time.


By Anna Kirk, an intern in the Lowy Institute's Melanesia program.


Within hours of US Secretary of Defense Chuck Hagel announcing his resignation, candidates to replace him were being named. Within a day, two out of the top three rumoured candidates removed themselves from contention. So the quest to find a new Secretary of Defense is becoming a case of 'who's left?' Given the challenges abroad, and more importantly at home, this is understandable.

Tom Switzer pointed briefly to the 'gruelling confirmation hearings' that await a Secretary of Defense nominee before the now Republican-controlled US Senate. The reputation for intense scrutiny experienced during these sessions has already forced high profile Obama Administration candidates to reconsider.

But to say the domestic concerns of a new Secretary of Defense end there would be incorrect. Consider for a moment the unenviable position of managing the world's most powerful military amid budgetary uncertainty and while conducting a military campaign in the Middle East.

But perhaps the greatest domestic challenge confronting a new Secretary of Defense is his or her place within the Obama Administration. The resignation of Chuck Hagel has led some informed commentators to believe he was a victim to what is seen as the White House's increasing centralisation of national security decision-making. Tom Ricks of Foreign Policy wrote:

Unless you have total White House backing in the first place, the job is almost impossible. Without such a commitment, it is just a nightmare.

Obama's eventual nominee will reflect a desire to either increase or decrease this trend of centralisation. Obama can pick a Secretary of Defense either because he/she will advocate and execute White House policy, or because he/she can be trusted to work in relative autonomy. These qualities are not mutually exclusive, but they won't always synchronize. The President's eventual choice will reflect his preferences and determine the direction of US National Security policy for the foreseeable future.

Photo courtesy of Flickr user US Department of Defense.


Last week's Fifth Xiangshan Forum in Beijing demonstrated just how difficult it will be to resolve disputes in the South China Sea as long as key parties believe history must arbitrate the veracity of claims to sovereignty over contested islands.

Scholars, officials and military officers from all around Asia were present, including many from the claimant countries in territorial disputes in the South China Sea, such as Vietnam and the Philippines. 

One of the strongest messages at the forum was how intensely most regional actors feel that there is a problem of deep strategic mistrust, and how important genuine communication and dialogue is in overcoming that mistrust. Yet these same actors were all firmly committed to their own positions and seemed to show little interest in accommodating the views of others. This is not particularly surprising at an event like this, but it does not bode well for achieving lasting peace and security.

Several of the presentations from ASEAN countries made repeated references to the importance of resolving disputes in the region multilaterally, rather than focusing on bilateral negotiations. This was understood by forum-ologists as a thinly veiled criticism of China's approach to the ASEAN region.

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The Philippines' Major General Raul Del Rosario was more direct. The Philippines currently has a case against China with UNCLOS over parts of the South China Sea, including the Scarborough Shoals — small islands in what the Philippines calls the West Philippines Sea. In his speech, the Major General thanked China for its assistance after Typhoon Haiyan and emphasised that maritime disputes were only a small part of Sino-Philippines relations. He then laid out his view that creating a regional environment based on trust was becoming increasingly difficult, when, as he put it, some actors promote their own narrative and expect others to change their outlook accordingly. He criticised unnamed states for being inflexible, subjectively interpreting facts and ignoring the rule of law.

Should the audience have been in any doubt as to what he was referring to, the Major General then explicitly spoke about the Philippines' commitment to resolving disputes with China in the South China Sea based on the UNCLOS rules-based approach, and behaving according to what he described as universal principles and norms. 

The speech may have been counter-productive for the Philippines. One of China's narratives is that the US has historically attempted to prevent it from resuming its rightful role in world, and that it will continue to do so. This view is powerfully resonant among the Chinese people. By promoting UNCLOS and universal norms, the Philippines is likely be seen in China as aligning itself with the US, meaning its views can be dismissed. Arguably, the Philippines would be better off pursuing its objectives by speaking with the same voice as ASEAN.

The Major General's views were certainly in line with that of the US speaker. Earlier in the same panel, US Admiral (Ret) Gary Roughead, Former Chief of Naval Operations, set out the non-official US position. As with the official US position, Roughead emphasised freedom of navigation, that the US 'rebalancing' to Asia was not a return as it had in fact never left and that all claimants in the South China Sea should clarify their claims consistent with international law. But Roughead went beyond the official US line in that he specifically raised concerns over what he described as a lack of clarity around the 'nine-dash line' that China argues delineates its territory in the South China Sea. 

The Chinese speakers, regardless of affiliation, emphasised the importance of Asian solutions. Referring to President Xi's vision for an Asia security concept outlined this year, General Chang Wanquan from the Ministry of National Defence made three suggestions for long-term stability and security in the region. Firstly, he recommended strengthening dispute-management procedures to deal with crises, which he explained as negotiating with respect to historical facts and timely information sharing. His second point was to strengthen defence cooperation to build strategic trust, and thirdly, he called for further strengthening of regional security architecture to foster a stronger sense of belonging to a community of common destiny and move past Cold War thinking. These points were generally well received.

General Chang painted a picture of China as alone in a largely hostile world, not yet fully recovered from its recent history, and still vulnerable to threats to its national interests. He put forward an image of China committed to being at the forefront of Asia's 'community of shared destiny' as a means for securing the region's stability. The image of China 'recovering' from history was shared by the other Chinese forum participants, and forms the basis of China's position on its territorial disputes in the South China Sea. 

Chinese media coverage of the Xiangshan Forum reflected General Chan's understanding. State media outlets such as the People's Daily portrayed China's role in the forum as a benevolent regional actor working tirelessly to ensure peace and stability. These reports focused on how China is collaborating with numerous countries in the region, such as India, Vietnam, the US and Kyrgyzstan, while other states such as Japan and the Philippines are undermining China's efforts to build security. Non-state outlets such as the South China Morning Post look more at how China is seen as a threat by countries in the region.

More than once during the Forum, Europe was used as an example of how mistrustful states could create and maintain a long-lasting peace. However, European cooperation required states to take the facts of the day as the foundation for the future, with some reference to history. In Asia however, powerful actors like China insist that history should be the foundation for cooperation, with some reference to current facts. Given that most if not all historical facts can be countered by an earlier fact, who has the right to decide at what point 'reality' should be established? 

For Chinese officials and everyday people alike, the narrative of national humiliation at the hands of foreign powers is an absolutely fundamental aspect of Chinese identity, and the only reality on which legitimate claims to territory in the South China Sea can be based. 

As such it is almost inconceivable that the Chinese Government could concede territory in the South China Sea without suffering a strong domestic backlash. Yet it seems that some compromise will be necessary for genuine cooperation and dialogue in the region. Policy-makers hoping to influence China's behaviour in the South China Sea need to understand just how critical the politics of history is to Chinese national identity and not presume that Chinese leaders will be either willing or able to back away from their understanding of historical facts.

Photo courtesy of Xiangshan Forum 2014 Website.


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.

 The Lowy Institute International Security Program's work on Indo-Pacific security is supported by two grants from the John D and Catherine T MacArthur Foundation.


'You can always count on China to be good to its neighbours this time of year', observes Carl Thayer. 'The money is meant to send a message that China is the big sugar daddy of Southeast Asia and will outbid the US.'

The APEC Summit in Beijing witnessed the hosts committing US$40 billion for the Silk Road and the same amount for ASEAN infrastructure

That China is providing development funds to formerly wealthier countries is itself remarkable. But the recent munificence highlights the deeper paradox: is China still a developing country or is it advanced? The answer, of course, is both. China identifies rhetorically with the South, even while it sends rockets to the moon. Such a large country with such awesome social disparities can simultaneously be developing and advanced. Its inequality does not hamper China's ability to export capital to richer countries; perversely, it enables it.

The reason is 'financial repression': legitimised diversion or confiscation of private wealth. Many countries employ this tool. China's repression follows the standard Asian formula of a controlled capital account, low deposit rates and (until recently) an undervalued currency. 

With the breaking of the 'iron rice bowl', households were suddenly forced into precautionary savings for their old age. The result is an 'imbalanced' economy in which households save an unhealthy fraction of what they earn while government banks skim off these savings to gorge themselves, indulge SOEs and distribute largesse to other countries. The central bank also sequesters foreign exchange earnings as official reserves through exchange rate intervention, and the Government represses consumption with regressive taxes.

All of these measures shift value from savers and consumers to borrowers and producers. Some estimate the annual transfer at 5-8% of GDP. As a result, Beijing's fiscal condition looks robust (though the IMF disagrees), with the Government flush with cash while Washington DC has shutdowns.

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Naturally, Chinese state funds deployed abroad come with an agenda. Beijing expects that over time, other countries will recognise that 'China is the giver of economic benefits, US staying power is questionable and they (must) accommodate Chinese interests', says Bonnie Glaser at CSIS. She continues, 'China's strategy is to weave together a network of economic interdependence. It is using the centrality of its power to persuade (them) that to challenge China...is simply not worth it.' And Chinese officials readily admit a main objective of its various development funds is to find outlets for surplus capacity. China's steel industry already exports 80 million tonnes, equivalent to India's total output.

This is in contrast to America's TPP. Min Ye makes some comparisons:

 The TPP seeks to reduce the roles of governments in market operations and to restrict the importance of SOEs, Beijing's Silk Road plan relies on top-level government coordination and enhances the power of large state owned enterprises. TPP focuses on services, IPR and domestic regulations. The Silk Road strategy aims to facilitate large-scale infrastructure construction, energy sale and transport, and relocation of manufacturing industries.

Vladimir Yakunin, head of Russian Railways, has learned of Beijing's limitations and conditions. 'Russia has so far had little success in tapping Chinese funding for its corporate sector', writes the Financial Times, and the few deals 'were all tied to purchases of Chinese equipment.'

By contrast, commercial financing on market terms from private sources is America's forte. While Washington can punish Wall Street, it can hardly tell bankers where to lend or invest. Americans invest US$350 billion overseas annually yet, sanctions aside, a US president cannot significantly influence where in the world they invest.  Xi Jinping, on the other hand 'dangles' US$1.25 trillion of outbound investment over the next decade, plus 500 million Chinese tourists. So Beijing certainly can direct state companies, though neither it nor Washington can commit the future agency of private actors. 

It's also important to keep scale in perspective. China's official foreign exchange reserves are US$4 trillion; a single US company manages more. Global equity funds total over US$20 trillion and debt markets are bigger still. Beijing is extremely powerful, but its clout partly derives from its willingness to undertake financial risks that other states, and a much larger private sector, rejects.

The payoff of China's 'financial repression' strategy is uncertain in the long run, but today it buys geopolitical influence and explains Beijing's enthusiasm for establishing new multilateral lending agencies under its own aegis (it also has two very large export/development banks of its own). To be sure, there is much investment needed globally in infrastructure, not least in America. Governments inevitably must play a role in infrastructure building, and China should pursue quality opportunities abroad. If eventually, however, the financial returns on China's overseas development projects are poor, we might not ever hear the news. But we will see the consequences of misallocation and misadventure: high indebtedness, low returns for savers and pensioners, and ultimately lower living standards for Chinese citizens, who will foot the bill for Beijing's moneybags foreign policy.

Photo courtesy of Flickr user Jim Fischer.


UPDATE: Here's an interview with China's chief climate negotiator on the US-China deal.

In case there is any residual euphoria left over the China-US climate agreement, here are a couple of pieces to put a dampener on it. First, here's Alex Evans, a Senior Fellow at the Center on International Cooperation (CIC) at New York University, writing at Global Dashboard:

The policies and measures unveiled in yesterday’s US-China announcement are awfully thin. There’s a “renewed commitment” to technology cooperation, with no funding numbers attached. Some stuff about a demonstration project on carbon capture and sequestration, which people have been talking about for over a decade now – it’s starting to sound like nuclear fusion. More cooperation on reducing HFC emissions, which do have massive global warming potential, but are incredibly easy for China to reduce – cynics like me think that China was actively inflating them so as to score Clean Development Mechanism permits, and is only now talking about a phase out because demand for CDM permits has collapsed along with EUETS prices. There’s a “climate smart low carbon cities initiative” which is basically a plan to convene a summit. And that’s pretty much it.

This was an eye-opener:

I was talking last night to a veteran climate negotiator from a developed country government, who observed that the climate priesthood has, for years, been having far too nice a time meeting up every six months for drinks and per diems. No one wants the party to end. There is no sense of urgency. No real deadline. She’s absolutely, 100% right. I started going to UN climate summits when I was a student. Next summer I’m 40. And the conversations in Warsaw last winter had basically not moved on since the first one I went to in the Hague a decade a half ago. The only way this will ever end, she continued, is if policymakers give them six months to work out a solution, and make clear at the outset that at the end of this period, they can all piss off home.

The second article is by two engineers at Google who worked together on the company's now abandoned renewable energy initiative called RE<C. They discovered that even if this plan had succeeded, it would not be enough:

Suppose for a moment that (RE<C) had achieved the most extraordinary success possible, and that we had found cheap renewable energy technologies that could gradually replace all the world’s coal plants—a situation roughly equivalent to the energy innovation study’s best-case scenario. Even if that dream had come to pass, it still wouldn’t have solved climate change. This realization was frankly shocking: Not only had RE<C failed to reach its goal of creating energy cheaper than coal, but that goal had not been ambitious enough to reverse climate change. That realization prompted us to reconsider the economics of energy. What’s needed, we concluded, are reliable zero-carbon energy sources so cheap that the operators of power plants and industrial facilities alike have an economic rationale for switching over soon—say, within the next 40 years.

The piece seems unduly pessimistic to me, given that it barely mentions the effect carbon pricing would have on the economics of renewables.