Security Challenges Arising from the Global Financial Crisis

Statement of Richard Nathan Haass, former Director of Policy Planning in the U.S. State Department, current President of the Council on Foreign Relations, before the Committee on Armed Services of the U.S. House of Representatives

Washington DC, March 11, 2009

Mr. Chairman,

Thank you for this opportunity to testify before the House Committee on Armed Services on security challenges arising from the global financial crisis. Let me first commend you and your colleagues for holding this hearing. Most of the analysis and commentary on the global economic crisis has focused on the economic consequences.

This is understandable, but it is not sufficient. The world does not consist of stovepipes, and what happens in the economic realm affects political and strategic policies and realities alike. It is also important to say at the outset that this crisis, which began in the housing sector in the United States, is now more than a financial crisis. It is a full-fledged economic crisis. It is also more than an American crisis. It is truly global.

I would add, too, that the crisis is unlike any challenge we have seen in the past. It is qualitatively different than the sort of cyclical downturn that capitalism produces periodically. This crisis promises to be one of great depth, duration, and consequence. This crisis was not inevitable. It was the result of flawed policies, poor decisions, and questionable behavior.

It is important that this point be fully understood lest the conclusion be widely drawn that market economies are to be avoided. The problem lies with the practice of capitalism, not the model. Nevertheless, the perception is otherwise, and one consequence of the economic crisis is that market economies have lost much of their luster and the United States has lost much of its credibility in this realm.

It is inconceivable in these circumstances to imagine an American official preaching the virtues of the Washington Consensus. This is unfortunate, as open economies continue to have more to offer the developing world than the alternatives. It also adds to the importance that the U.S. economy get back on track lest a lasting casualty of the crisis be modern capitalism itself.

The impact of the economic crisis will be varied and go far beyond the image of capitalism and the reputation of the United States. Director of National Intelligence Dennis Blair was all too correct when he testified recently that the primary near-term security concern of the United States is the global economic crisis and its geopolitical implications. The crisis will have impact on conditions within states, on the policies of states, on relations between states, and on the thinking of those who run states. I have already alluded to this last consideration.

Here I would only add that initial reactions around the world to the crisis appear to have evolved, from some initial gloating at America’s expense to resentment of the United States for having spawned this crisis to, increasingly, hopes that the American recovery arrives sooner and proves to be more robust than is predicted. This change of heart is not due to any change of thinking about the United States but rather to increased understanding that the recovery of others will to a significant extent depend on recovery in the United States. In a global world, what happens here affects developments elsewhere and vice versa. Decoupling in either direction is rarely a serious possibility. The crisis is clearly affecting the developed world, mostly as a result of the centrality of banking-related problems and the high degree of integration that exists among the economies of the developed world. Iceland’s government has fallen; others may over time. Many governments (including several in Central and Eastern Europe but outside the Eurozone) will require substantial loans.

The economies of Japan, much of Europe, and the United States are all contracting. World economic growth, which averaged 4 to 5 percent over the past decade, will be anemic this year even if it manages to be positive, which is increasingly unlikely. It is worth noting that the most recent World Bank projection predicts negative growth for 2009. Change of this sort will have consequences. There will likely be fewer resources available for defense and foreign assistance. Reduced availability of resources for defense makes it even more critical that U.S. planners determine priorities. Preparing to fight a large-scale conventional war is arguably not the highest priority given the enormous gap between the relevant military capabilities of the United States and others and the greater likelihood that security-related challenges will come from terrorism and asymmetric warfare. State-capacity building, the sort of activity the United States is doing in Iraq, Afghanistan, and Pakistan, will continue to place a heavy burden on U.S. military and civilian assets.

Also remaining highly relevant (and deserving to be a funding priority) will be standoff capabilities designed to destroy targets associated with terrorism and weapons of mass destruction. Developing states may appear to be better off than wealthier countries at first glance. Their growth on average is down by half from previous years, but still positive. Appearances, however, can be deceptive. This growth is measured from a low base in absolute and relative terms. The reduction in growth in some instances has been dramatic. Developing country exports are down as demand is down in the developed world.

Also reduced are aid flows and most importantly investment flows to the developing world. Commodity prices are much lower, a boon to those who rely on imports but a major problem for the many who are dependent on the income from one or two exports. A few countries merit specific mention. One is China. China’s economic success over the past few decades constitutes one of history’s great examples of poverty eradication. This process, one that has involved the migration of millions of people every year from poor rural areas to cities, will slow considerably. The already large number of domestic political protests in China over such issues as land confiscation, corruption, environmental degradation, and public health, is likely to grow. Absent renewed robust economic growth, the chances are high that the government will react by clamping down even more on the population lest economic frustration lead to meaningful political unrest.

Russia is in a different position, one characteristic of countries dependent on raw material exports for much of their wealth. The Russian economy is contracting after a period of boom. As is the case with China, this suggests the likely assertion of greater political control. But Russia is not as fully integrated as China is with the world economy. There is thus a greater (although impossible to quantify) chance that Russia’s leaders will turn to the time-honored resort of manufacturing an overseas crisis to divert attention than will China’s.

The same holds true for Iran and Venezuela, two countries that are heavily reliant on energy exports and whose foreign policies have been counterproductive (to say the least) from the U.S. perspective. But at the same time, it is possible that one or both will pull in their horns. Venezuela is already showing some signs of this, with its more welcoming stance toward international oil companies. This may well be simply a tactical adjustment to immediate needs.

And at least in principle, Iran’s government might find it more difficult to make the case to its own people for its continued pursuit of a nuclear weapons option if the Iranian people understood that it was costing them dearly with respect to their standard of living. Iraq is another oil producing country whose wealth is closely associated with the price of oil. Here the effects are sure to be unwanted. There is the danger that disorder will increase as unemployment rises, prospects for sharing revenue shrink, and the ability of the central government to dispense cash to build broad national support diminishes. In light of the multiple challenges already facing the United States, the last thing the Obama administration needs is the specter of an unravelling Iraq.

Two other countries are worth highlighting. One is Pakistan. Pakistan’s economic performance is down sharply for many reasons, including a decrease in both foreign investment in the country and exports from Pakistan to other countries. Pakistan has little margin for error; the possibility that it could fail is all too real. The worsened economic situation makes governing all that much more difficult. The consequences of a failed Pakistan for the global struggle against terrorism, for attempts to prevent further nuclear proliferation, for the effort to promote stability in Afghanistan, and for India’s future are difficult to exaggerate. North Korea is a second nuclear-armed state whose stability is worsened by the economic crisis.

At issue is the extent to which South Korea (along with China and Japan) can provide resources to the North to help stave off collapse. Another serious consequence of the global economic crisis, one that affects both developed and developing countries, is the reality that protectionism is on the rise. One realm is trade; some seventeen of the twenty governments set to meet in London early next month have increased barriers to trade since they met late last year. Negotiated free trade agreements with Colombia, Panama, and South Korea continue to languish in the U.S. Congress. The president lacks the Trade Promotion Authority essential for the negotiation of complex, multilateral trade accords. Prospects for a Doha round global trade pact appear remote. The volume of world trade is down for the first time in decades. The economic but also strategic costs of this trend are high. Trade is a major source of political as well as economic integration; one reason China acts as responsibly as it does in the political sphere is because of its need to export its products lest potentially destabilizing unemployment jump sharply. Trade has other virtues as well. More than anything else, trade is a principal engine of global economic growth. The completion of the Doha round might be worth as much as $500 billion to the world in expanded economic activity. One-fourth of this expanded output would occur in the United States. This is the purest form of stimulus.

For the United States, exports are a source of millions of relatively high-paying jobs; imports are anti-inflationary and spur innovation. Alas, the economic crisis will make it difficult if not impossible to conclude new trade pacts and to gain the requisite domestic support for them. Economic nationalism is on the rise, and when this happens, the will and the ability of political leaders to support policies that are perceived to hurt large numbers of their citizens (but which in reality help many more) invariably goes down. What is more, the economic crisis may also make it more difficult to reach agreement on a global climate change pact when representatives of most of the world’s countries gather in Copenhagen late this year. Developed and developing countries alike will resist commitments that appear to or in fact do sacrifice near-term economic growth for long-term environmental benefit. What, then, should be done to limit the adverse strategic effects of an economic crisis that is certain to get worse and persist for some time?

The United States – the Obama administration and the Congress – should resist protectionism. “Buy America” provisions in the stimulus legislation will increase costs to American consumers and all but make certain that other countries will follow suit, thereby reducing the prospects for American firms to sell abroad. More American jobs are likely to be sacrificed than preserved. Increased protectionism will also dilute the strategic benefits that stem from trade and its ability to contribute to international stability by giving governments a stake in stability. Similar arguments hold as to why “lend national” provisions are counterproductive. Bringing countries into the world trading system (best done through WTO accession) makes strategic sense, too, as it gives them a stake in maintaining order at the same time it opens government decision-making to greater degrees of transparency. Recession cannot become this country’s energy policy or a reason not to decrease U.S. consumption of oil, imported or otherwise. Lower prices will dilute any economic incentive to consume less oil. Regulatory policy will be the principal means of discouraging demand and encouraging the development of alternative energy sources and technologies. Reduced demand is essential for strategic reasons (so as not to leave the United States highly dependent on imports and so that countries such as Russia, Venezuela, and Iran do not benefit from dollar inflows), for environmental reasons, and for economic reasons, i.e., not to increase the U.S. balance of payments deficit. The goal should be to use this moment of temporarily-reduced prices to decrease the chances we as a country again find ourselves in a world of high energy prices once the recession recedes.

The United States should work with other developed and reserve-rich countries to increase the capacity of the IMF to assist governments in need of temporary loans. Current capacity falls short of what is and will be needed. It would be helpful if aid budgets were not victims of the economic crisis. Aid is needed on a large scale not just for humanitarian reasons (to fight disease, etc.) but also to build the human capital that is the foundation of economic development. Aid will also be a necessary substitute in the short and medium run for investment. Absent such flows we are likely to see greater misery and an increased number of failing or failed states. The upcoming G-20 summit in London provides an opportunity to adopt or encourage some useful measures in many of these realms. It is essential that others, including Europe and Japan, take steps to stimulate their economies. It is equally important, though, that guidelines be promulgated so that stimulus programs do not become a convenient mechanism for unwarranted subsidies and “buy national” provisions that are simply protectionist measures by another name.

The London meeting is also an opportunity to increase IMF capacity, to generate commitments to provide aid to developing countries, and to agree on at least some regulatory principles for national banking and financial systems. There is not time, however, to try to rebuild the architecture of the international economic system, solve the problems caused by countries that run chronic surpluses, or revamp the system of exchange rates. Let me close with two final thoughts. Much of this hearing and statement is focused on the question of the consequences of the economic crisis for global security. But it is important to keep in mind that the relationship is not only one way. Developments in the political world can and will have an effect on the global economy.

Imagine for a second the economic consequences of, say, a Taiwan crisis or fighting between India and Pakistan or an armed confrontation with Iran over its nuclear ambitions. This last possibility is the most worrying in the near term and underscores the importance of trying to negotiate limits on Iran’s enrichment program lest the United States be confronted with the unsavory option of either living with an Iranian near or actual nuclear weapons capability or mounting a preventive military strike that, whatever it accomplished, would be sure to trigger a wider crisis that could well lead to energy prices several times their current level.

Finally, getting through this economic crisis should not be confused with restoring prolonged calm in the markets or sustainable growth. Enormous stimulus measures here at home coupled with equally unprecedented increases in the current account deficit and national debt make it all but certain that down the road the United States will confront not just renewed inflation but quite possibly a dollar crisis as well. At some point central banks and other holders of dollars will have secnd thoughts about continuing to add to their dollar holdings, currently larger than ever given the desire for a safe harbor. Ongoing U.S. requirements for debt financing, however, will likely mean that interest rates would need to be raised, something that could choke off a recovery. This underscores the importance of limiting stimulus packages to what is truly essential to reviving economic activity and to taking other measures (such as entitlement reform and the already discussed steps to reduce oil use) lest the current crisis give way to another one.

Folgt auf die Finanzkrise ein Bürgerkrieg?

Das Volk rebelliert nämlich nie allein deshalb, weil es einen schweren Sack schleppen muss, es lehnt sich nie gegen die Ausbeutung auf, denn es kennt kein Leben ohne Ausbeutung. Das Volk empört sich erst dann, wenn ihm jemand plötzlich und unvermutet einen zweiten Sack aufzubürden versucht. Er rebelliert, weil er spürt, dass du ihm mit diesem zweiten Sack betrügen wolltest, du hast ihn wie ein stumpfes Tier behandelt, den Rest seiner geschändeten Würde in den Schmutz getreten, ihn zum Idioten gemacht. Der Mensch langt nicht nach dem Beil, um seinen Geldbeutel zu verteidigen, sondern seine Würde. (Aus dem Roman König der Könige von Ryszard Kapuściński)

Steht der Zusammenbruch der öffentlichen Ordnung kurz bevor, nachdem die globale Finanzkrise die Ohnmacht der Politik (die mit einer unanständigen Umverteilung von Steuergeldern für die oberen Zehntausend reagiert, anstatt das System grundlegend zu verändern) entlarvt hat? Den genauen Zeitpunkt und die Form des kommenden Bürgerkriegs kann man noch nicht voraussehen. Dass er kommen wird, steht jedenfalls fest. Wann und wie er kommen wird, liegt noch verborgen im Schoße der Zukunft.

Es ist zumindest die ziemlich apokalyptische Prophezeiung der europäischen Denkfabrik European Laboratory of Political Anticipation LEAP/Europe 2020, die in einer Pressemitteilung vom 18. Februar 2009 verkündet wurde.

Ein ähnliches düsteres Szenario prognostiziert ebenfalls Igor Panarin, Dekan der Fakultät Internationale Beziehungen der Diplomatischen Akademie des russischen Außenministeriums: ” Der US-Dollar ist durch nichts mehr gedeckt. Die Außenverschuldung ist lawinenartig gewachsen: 1980 hatte es noch keine gegeben, 1998, als ich meine Prognose aufstellte, lag sie bei zwei Billionen Dollar, heute beträgt sie mehr als elf Billionen Dollar. Das ist eine Pyramide, die unbedingt einstürzen wird. Millionen von Bürgern haben ihre Ersparnisse eingebüßt. Die Preise und die Arbeitslosigkeit werden steigen. General Motors und Ford stehen am Rande des Zusammenbruchs. Das bedeutet, dass ganze Städte arbeitslos werden.”

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Pressemitteilung European Laboratory of Political Anticipation LEAP/Europe 2020

Seit Februar 2006 vertrat LEAP/E2020 die Auffassung, dass die umfassende weltweite Krise in vier Grundphasen ablaufen würde, nämlich die Anfangsphase, die Beschleunigungsphase, die Aufprallphase und die Dekantierungsphase. Die Ereignisse der letzten zwei Jahre fügten sich hervorragend in dieses Schema. Jedoch müssen wir uns endlich in die Einsicht finden, dass die Regierenden unfähig sind, die wahre Natur der Krise zu verstehen. Denn seit nunmehr mehr als einem Jahr bekämpft die Politik mit ihren Maßnahmen nur die Symptome der Krise, nicht aber die Ursachen.

Deshalb gehen wir heute davon aus, dass mit dem vierten Quartal 2009 eine fünfte Phase der Krise einsetzen wird, in der die öffentliche Ordnung zerfallen wird.

Nach der Auffassung von LEAP/E2020 werden zwei bedeutende Phänomene diese neue Phase der Krise prägen; die kommenden Ereignisse werden damit in zwei parallelen Entwicklungen ablaufen:

A. Die zwei bedeutenden Phänomene:

1. Das Wegbrechen der globalen Finanzbasis (Dollar + Schulden)
2. Die sich beschleunigende Divergenz der Interessen der großen Staaten und der internationalen Organisationen

B. Die zwei parallelen Entwicklungen:

1. Die rasche Auflösung des gesamten gegenwärtigen internationalen Systems
2. Die Auflösung der Handlungsfähigkeit der mächtigen Staaten und großen internationalen Organisationen

Wir hatten gehofft, dass die Dekantierungsphase den Regierenden dieser Welt ermöglichen würde, die Schlussfolgerungen aus dem Zusammenbruch der Nachkriegsweltordnung zu ziehen. Man kann heute mit größtem Bedauern nur feststellen, dass solcher Optimismus nicht mehr zu rechtfertigen ist.

In den USA wie auch in Europa, in China oder in Japan handeln die Regierenden, als ob die Weltordnung nur von einer vorüber gehenden Krise erfasst wäre und es genügen würde, noch etwas Treibstoff (Liquidität, also weitere Schulden) und weitere Tinkturen (Leitzinssenkungen, staatlicher Aufkauf von wertlosen Forderungen, Konjunkturförderprogramme zu Gunsten insolventer Industriezweige) in das System zu gießen, um den Motor wieder zum Anspringen zu bringen. Sie wollen einfach nicht verstehen, dass, wie der Begriff der umfassenden weltweiten Krise, den LEAP/E2020 im Februar 2006 prägte, zu vermittelt versucht, die Weltordnung nicht mehr funktionsfähig ist. Statt verzweifelt zu versuchen, diese am Boden liegende, unrettbare Weltordnung zu retten, muss endlich die Schaffung einer neuen Weltordnung angegangen werden.

Geschichte wartet nicht, bis die Menschen für sie bereit sind. Da die Schaffung der neuen Weltordnung nicht vorausschauend und planend möglich war, wird der Zerfall der öffentlichen Ordnung während dieser fünften Phase der Krise die Welt in ein solches Chaos stürzen, dass die neue Weltordnung als Zufallsprodukt und Improvisation entstehen wird. Die beiden parallelen Entwicklungen, die wir in dieser 32. Ausgabe des GEAB beschreiben, werden für einige der großen Staaten und internationalen Organisationen tragisch sein.

Nach unserer Auffassung verbleibt nur ein sehr kleines Zeitfenster, während dem das Schlimmste noch vermieden werden kann, nämlich bis zum Sommer 2009. Dann wird die Zahlungsunfähigkeit erst Großbritanniens und dann der Vereinigten Staaten die Grundlagen des bestehenden Systems zusammen stürzen lassen und Chaos ausbrechen.

Wir gehen sehr konkret davon aus, dass der geplante G20-Gipfel April 2009 die letzte Chance für die bestehende Weltordnung ist, die aktuell wirkenden Kräfte so auszurichten, dass der Übergang in die neue Weltordnung sich mit dem geringst möglichen Schaden vollzieht.

Wenn ihnen das nicht gelingt, wird den Mächtigen der aktuellen Weltordnung die Kontrolle über die Ereignisse vollständig entgleiten, und zwar nicht nur auf globaler Ebene, sondern für einige von ihnen auch in ihren eigenen Ländern; die Welt wird in die Phase, in der die öffentliche Ordnung zusammen bricht, gleiten wie ein Schiff, dessen Ruder gebrochen ist. Am Ausgang dieser Phase des Zusammenbruchs der öffentlichen Ordnung wird die Welt mehr dem Europa von 1913 ähneln als der Welt, an deren reale Existenz die meisten noch bis 2007 glaubten.

Die meisten der von der Krise betroffenen Staaten, unter ihnen die mächtigsten dieser Erde, versuchten verzweifelt, das immer weiter anwachsende Gewicht der Krise zu schultern; sie verstanden nicht, dass sie damit die Gefahr herauf beschworen, unter dieser Last zusammen zu brechen. Sie vergaßen, dass Staaten, von Menschen geschaffen, nur solange Bestand haben, wie sich eine Mehrheit dieser Menschen mit ihnen identifiziert. In dieser 32. Ausgabe des GEAB wird LEAP/E2020 seine Analysen über die Auswirkungen dieser Phase des Zusammenbruchs der öffentlichen Ordnung auf die USA und die EU vorlegen.

Es wird für alle, Privatpersonen wie Wirtschaftsführer, dringlich, sich auf eine sehr schwierige Zeit vorzubereiten, in der ganze Bereiche unserer Gesellschaft wegbrechen werden und zumindest zeitweise oder sogar dauerhaft aufhören werden, Bestandteile der Gesellschaft zu bilden.

So wird z.B. der Zerfall des Weltwährungssystems im Sommer 2009 nicht nur den Dollar (und aller Geldanlagen in Dollar) zusammen brechen lassen, sondern das Vertrauen in alle Papierwährungen (also ohne Gold- oder Silberdeckung) massiv unterminieren. Alle Empfehlungen in dieser Ausgabe des GEAB sollen auf diese Situation vorbereiten.

Weiterhin gehen wir davon aus, dass die Staaten, die besonders monolithisch, besonders mächtig, besonders zentralistisch sind, diejenigen sein werden, die von der fünften Phase der umfassenden weltweiten Krise besonders massiv betroffen sein werden. Weitere Staaten, die unter dem Schutz dieser Staaten stehen, werden ihre Schutzmächte verlieren und damit dem Chaos in ihren Regionen ausgeliefert sein.

The Trilateral Strategic Dialogue between USA, Japan and Australia

Foreign policy analysts Michael Auslin, Zhu Feng, Rory Medcalf, Sheldon W. Simon, Akihiko Tanaka, and William Tow, from the National Bureau of Asian Research, released a report on the new American strategic partnership with Japan and Australia.

“In response to changes in the Asia-Pacific region, including the rise of China and nontraditional security threats, U.S. strategic thinking has begun to look beyond the traditional hub-and-spoke model of postwar U.S. alliances and formulate new agreements such as the Trilateral Strategic Dialogue (TSD).

Washington has joined Canberra and Tokyo in a dialogue designed to focus their bilateral relationships on joint regional concerns. Initiated in 2005, the TSD agenda has remained focused on more narrowly defined security concerns, including maritime security, nonproliferation mechanisms, counterterrorism, and missile defense. At a minimum, the United States is pushing for the enhancement of information exchange on these issues as well as for sharing strategic assessments with Japan and Australia in order to have similar regional pictures.

Engaging Japan in TSD discussions over common threats and common responses can serve to help further refine the goal of globalizing the U.S.-Japan alliance, as seen in TSD-initiated joint military exercises held among the three countries.”

Read full story.

An American Strategy for Asia

by Dan Blumenthal and Aaron Friedberg

ASIA STRATEGY WORKING GROUP – American Enterprise Institute (AEI)

On the global shift in wealth and power toward Asia

The new U.S. administration confronts an unusually long and daunting list of pressing foreign policy problems: ongoing conflicts in Afghanistan and Iraq, the continuing threat of global terrorism, a brewing crisis in Pakistan, unresolved nuclear standoffs with Iran and North Korea, Russia’s new aggressiveness toward its neighbors, and the lingering aftereffects of a global financial meltdown. All will demand urgent attention and timely action. The president-elect will be lucky if he has a moment to savor his victory, let alone to pause and reflect on the longer-term trends that are reshaping the world.

Yet such reflection is badly needed. As important as they undoubtedly are, all of the issues listed above are being played out against the backdrop of something even bigger: a massive, rapid shift in the distribution of global wealth and power toward Asia. This process has been gathering momentum for more than thirty years; if current projections are borne out, in the next thirty Asia’s rise will fundamentally alter the structure of the international system and the character of great power politics.

It is difficult to exaggerate the magnitude of what is taking place. The changes now underway are comparable in scale, and potentially in historical significance, to the “rise of the West” – the emergence of Europe as the world’s leader in wealth and military power – or the rise of the United States to global preponderance that began in the nineteenth century.

Such a profound shift will eventually require the reexamination, and ultimately the reorientation, of many aspects of America’s foreign, economic, and defense policies. These changes may be forced by events. Or they could be shaped by a clear and coherent national strategy, a plan of action that looks beyond today’s turmoil, sets broad goals, and identifies the tools and policies that will be necessary to achieve them.

The purpose of this report is to put forward an American strategy for Asia. While it is motivated by an awareness of long-term trends, the emphasis of this report will be on the concrete and practical. We intend not only to identify goals, but also to specify the steps that a new president should take over the next four to eight years to bring them closer to realization.

Our report differs from others on related subjects in two important ways.

First, it is focused rather than comprehensive. Instead of touching lightly on every conceivable subject relevant to Asia, we have chosen to concentrate on those that we believe to be of greatest strategic importance.

Second, our report is more candid than is typically the case about the challenges that are likely to emanate from Asia and, in particular, about those that may result from the rise of China. Our intention is not to be provocative, but rather to be clear. Ritualized “happy talk” about where China is headed will do little, if anything, to alter Beijing’s course. But unwarranted optimism on the part of our leaders may make it harder to maintain public support for the policies necessary to keep the peace and secure American interests, and it could set the stage for future disappointment and overreaction if exaggerated expectations of Sino-American friendship are not met.

We have been reminded in recent years how important it is not to overstate the magnitude and imminence of threats to our nation’s security, but it is at least as important to be clear and honest in acknowledging their existence.

Read full report.

Central Banks respond to worst financial crisis since 1929

Several of the world’s most influential central banks unveiled a coordinated response to this week’s market turmoil and broader concerns about financial markets.

The U.S. Federal Reserve announced it would make an additional $180 billion available to foreign banks for overnight and longer-term money markets.

The European Central Bank, Bank of Japan, Bank of England, Bank of Canada, and Swiss National Bank made a joint statement that they would work with the U.S. Fed to help make short-term loans available to financial institutions in their countries.

Separately, the Financial Times reports Russia will inject over $19 billion to support its sputtering financial markets, following a dramatic stock slide.

A backgrounder from the Wall Street Journal says the credit crisis, spawned from bad U.S. mortgage-backed debt, has spread into the worst financial crisis since the 1930s, and that there is no clear end in sight.

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Japan to host 23rd World Scout Jamboree in 2015

Japan has just won the bid to host the 23rd World Scout Jamboree in 2015.

Announced in the Plenary Hall at ICC Jeju on Jeju Island at the 38th World Scout Conference, Japan was ecstatic to hear the results with the Chairman of the bidding committee, Mr. Osamu Hirose saying: “We are very happy and we are sure that the Jamboree will be a very good opportunity to educate young people, and also very good chance to show how Scouts around the world are creating a better world.”

The Jamboree will be located on Kirarahama or Kirara Beach in Yamaguchi Prefecture. The Japanese word “kirara” means mica: Kirara Beach offers a beautiful landscape in front of which the Seto Inland Sea glitters in the sunlight just like mica.

To get more informations about the World Scout Movement, please click here.

Landmark China-Japan deal agreed

China and Japan inked a historic agreement and a “new starting point” for bilateral relations. The pledge, which comes after years of tense relations over wartime history and off-shore natural resources, establishes an annual summit between the nations.

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Online newspapers challenge Japan’s mainstream media

The Christian Science Monitor reports on the rise of citizen journalism and online newspapers in Japan — and the concern it has brought from the country’s mainstream media.

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Shirakawa to head Bank of Japan

The Wall Street Journal reports on the new nominee to run Japan’s central bank, Masaaki Shirakawa. The article says Shirawaka is likely to be a candidate the country’s opposition can tolerate, potentially ending a political standoff that has lasted weeks.

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Feasibility of an Asian Currency Unit

A new working paper from an Indian economic research institute examines the feasibility of establishing a pan-Asian currency.

“In this paper we evaluate the feasibility of a common Asian Currency Unit (ACU) involving countries of East and South Asia. We analyze the various properties of an ACU and calculate it’s value using weighted averages of the values of Asian currencies. Looking at the movement of individual Asian currencies vis-à-vis the ACU, we find that there have been severe misalignments among the Asian currencies during the past seven years. We discuss the possibility of the Rupee figuring in the ACU and identify the major economic, political and historical impediments in the way of faster acceptance of ACU in the region. We point out the various strategies that could be employed to facilitate faster adoption of ACU. These include creating certain institutional safeguards as well as strengthening the existing ones. Finally, we highlight some ways to promote the use and acceptability of the ACU and also emphasize the importance of conceiving a larger framework of participating countries, including India.”

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U.S. Dollar plunges to record low

Bad U.S. sales data added to recession concerns as the dollar fell to record lows the euro and reached its lowest point against the Japanese yen since 1995. Gold also reached record highs, topping $1000 per ounce for the first time in its history.

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U.S.-Japan-South Korea: Time for Trilateralism?

An article by Michael Auslin, director, Project on Japan-U.S. Relations, Yale University, and Christopher Griffin, research fellow in Asian Studies at The American Enterprise Institute, notes historical “asymmetries” in U.S. relations with Japan and South Korea and calls for a new age of trilateralism.

Time for Trilateralism?

by Michael Auslin, Christopher Griffin
Washington D.C., Thursday, March 6, 2008

A perennial challenge for American strategy in Asia has been the asymmetries between Washington’s two most important alliances in the region. Although South Korea and Japan were steady partners throughout the Cold War, historic antagonisms between the two countries have hindered the coordination of alliance policy and capabilities. As the threats and challenges we face in Asia evolve, the United States should work with South Korea and Japan’s new leaders to launch a trilateral security initiative.

For over six decades, the United States has provided stability in Asia through its sustained military presence and “hub-and-spoke” system of bilateral alliances. But the strategic environment in Asia is undergoing dramatic change with such emerging and ongoing challenges as the North Korean nuclear situation, China’s rapidly growing military, and natural disasters like the 2004 Indian Ocean tsunami. These challenges require the United States either to seek new ways to coordinate its Asian alliances or to risk seeing its influence in the region steadily eroded.

The need for coordination is most evident in Washington’s relations with Japan and South Korea, officially known as the Republic of Korea (ROK), vital allies perched at the front line of Asia’s security challenges. But these countries remain mired in a mutual animosity that has complex roots, a situation that has frustrated trilateral security cooperation with the United States. Fortunately, the near-simultaneous inaugurations of new leaders in Seoul and Tokyo present a unique opportunity to move beyond these longstanding obstacles and engage our two most important Asian allies in a trilateral agenda.

In South Korea, the February 25 inauguration of President Lee Myung-bak presents a break from the confrontational identity politics of his predecessor, Roh Moo-hyun. Lee has declared his intention to seek a “mature relationship” with Japan in which he will dispense with symbolic feuds in favor of enhanced cooperation. Meanwhile, the late 2007 accession of Japanese prime minister Yasuo Fukuda provides Lee with an eager partner in Tokyo. On the same day that Lee called for a mature relationship, Fukuda declared in his annual policy speech to Japan’s Diet that he would seek a “future-oriented and stable relationship” with South Korea.

At face value, these statements reflect a mutual desire to restore some basic comity to ROK-Japanese relations. Indeed, “mature” and “future-oriented” refer to a decade-old summit in which the two countries agreed to place cooperation above historical feuds. But private comments by policymakers in Seoul and Tokyo imply that Lee and Fukuda are looking beyond restoring the status quo ante on the “history issue.” As one heavyweight in Japan’s ruling Liberal Democratic Party puts it, “I’ve spoken with President Lee’s advisers, and we agreed that the time has come to push for greater cooperation bilaterally and also with the United States.”

The United States must play a vital role if South Korea and Japan are to capitalize on this opportunity to transcend long-standing barriers to greater cooperation. Even if both of these new leaders are eager to push the envelope, domestic politics will limit their freedom to maneuver unless the United States participates in the process. For Washington, the timing could not be better.

From Complementary to Coordinated

In recent years, Washington’s alliances with Seoul and Tokyo have each undergone significant change, creating gaps between goals and capabilities as we move our forces throughout Asia and as our security partners invest in their militaries. Although this process of transforming the alliances is an American priority, it has also revealed, yet again, how little South Korea and Japan trust one another and how difficult it is to maintain a united front without trilateral coordination.

Since 2003, the United States has been engaged in three major sets of force posture and capabilities reviews that affect Northeast Asia: the Global Posture Review (GPR), an effort to restructure the global deployment of American forces to better match the post-Cold War world; the Strategic Policy Initiative (SPI), a bilateral review with South Korea of the future of the alliance centered on the transfer of capabilities and command authority to Seoul, as well as the reduction and realignment of U.S. troops on the peninsula; and the Defense Policy Review Initiative (DPRI), a bilateral dialogue with Japan to develop a set of roles, missions, and capabilities between the two partners, as well as a realignment of U.S. forces there.

Although carried out separately, these simultaneous reviews have served common, reciprocal goals: the United States aims to enhance burden sharing within each alliance, while both South Korea and Japan seek to reduce the impacts of American garrisons on their respective populations. For example, the United States agreed in a set of bilateral deals with Seoul and Tokyo in late 2005 to remove some twelve thousand soldiers from Korea and some eight thousand Marines from Japan over the next decade. While the GPR has provided an overarching framework for American goals in these efforts, the absence of sustained, senior trilateral dialogue has prevented effective coordination.

This lack of coordination creates significant uncertainty for both South Korea and Japan about Asia’s future strategic landscape. The assumption of greater “burden-sharing” in either Seoul or Tokyo ultimately involves attaining new capabilities: Seoul is undertaking a fundamental modernization of its military by 2020, while Japanese politicians have worked since 2001 to dismantle the array of restrictions on Japanese defense policy, including the possible revision of Japan’s war-renouncing constitution. Although American policymakers welcome these growing capabilities in South Korea and Japan, their counterparts in Seoul and Tokyo are observing each other’s military development warily.

While our two allies upgrade their capabilities, the United States has begun reducing its military presence in each country. Although this is popular in Korea and Japan, it also diminishes the ability of the alliances to balance American power directly against regional threats and reassure allied policymakers that U.S. troops are a tripwire for American commitment. The Pentagon is transferring new weapons systems to Guam in an effort to maintain the regional balance, but it is still engaged in a balancing act in which American credibility is on the line. If South Korea or Japan loses faith in American alliance commitments, it is difficult to predict how either would respond.

The net result is that while the United States has achieved its immediate goals in the GPR-SPI-DPRI process, ongoing antagonism between Seoul and Tokyo threatens the long-term health of both alliances. A specter of this danger was seen after North Korea’s July 2006 missile test, when Roh’s government focused its criticism not on Pyongyang but on Tokyo’s “making a fuss” over the launches. Senior South Korean officials under Roh even identified Japan as their principal security concern. Over time, this kind of hostility could render both alliances ineffective as our partners turn against one another.

Toward a Trilateral Security Committee

After years of deteriorated ROK-Japanese relations, rapprochement under Lee and Fukuda will allow the United States to develop a common security agenda with its two most important allies in Asia. The first step toward coordinating the U.S.-ROK and U.S.-Japanese alliances will be the establishment of a sustained senior dialogue on security affairs. Such a dialogue would provide the guidance and imprimatur necessary for working-level officials to develop a broad agenda. Moreover, a relatively formal mechanism–centered perhaps on annual meetings–would be more self-sustaining than ad hoc negotiations on immediate issues.

Such a mechanism should be based upon the regular senior dialogue that already occurs between the United States and its Northeast Asian allies. The U.S.-ROK Security Consultative Meeting (SCM) is an annual arrangement between the U.S. secretary of defense, the ROK minister of national defense, and the chairmen of each nation’s joint military staffs. Meanwhile, U.S.-Japanese security consultations are centered at the Security Consultative Committee (SCC), which is composed of the American secretaries of state and defense and their Japanese counterparts.

A prospective “Trilateral Security Committee” could link these two ongoing dialogues. Such a mechanism would allow the three countries’ defense ministers to offer strategic direction and establish institutional priorities for their respective departments and ministries.

This proposed body would also distinguish itself from the Trilateral Coordination and Oversight Group (TCOG), an effort at trilateral cooperation on North Korea from 1999 to 2003. A major reason the TCOG dissolved was American disinterest in a body that required constant senior-level effort while providing diminishing returns. The coordinating mechanism proposed here would avoid this pitfall by simultaneously upgrading and downgrading the level of dialogue: senior-level talks would occur less frequently than under TCOG, allowing good ideas and successful efforts to float up from the institutionalized working-level negotiations over time.

Indeed, perhaps the most important function of a Trilateral Security Committee would be to affirm and guide working-level negotiations among the three countries. Some of these talks are already occurring. For example, the U.S. Pacific Command’s Policy and Planning Directorate coordinates talks with the military staffs in Tokyo and Seoul, and the three governments are investing in enhanced communications capabilities, such as video teleconferencing. The key challenge now is to imbue these efforts with purpose and structure. For a Trilateral Security Committee to carry out such a task, it must develop a common strategic vision among the three countries and coordinate the roles, missions, and capabilities that will carry the alliances into the future.

A Common Strategic Vision

In a series of recent bilateral agreements through the SCM and the SCC, South Korea and Japan have each articulated strategic objectives shared with the United States and put in place operational plans for effecting them. These sets of agreements, however, neither refer to one another nor provide guidance as to how the alliances are to work together to promote security in Northeast Asia. Addressing these lacunas must be the first goal for trilateral security cooperation.

A Trilateral Security Committee could contribute to this goal by directing the policy shops in each country’s defense and foreign ministries to craft common language on several issues, especially the development of South Korean and Japanese military capabilities, the future of North Korea, and the potential for expanding cooperation to such global issues as sea lanes.

The first of these issues is at the heart of the matter: how South Korea and Japan can simultaneously develop military capabilities while enhancing mutual confidence in one another’s benevolent intentions. Trilateral policy discussions to hammer out common strategic objectives can be a key step in this process, hopefully reaching the point at which South Korea and Japan can explicitly welcome each other’s evolving capabilities and use that common understanding as a basis for further operational talks on coordination and collaborative development.

The second issue–the future of North Korea–illustrates a useful distinction between the Trilateral Security Committee and the defunct TCOG. Whereas the success or failure of TCOG was contingent upon coordinated policy toward the North Korean nuclear crisis that developed after November 2002, the proposed Trilateral Security Committee would treat the North Korean dilemma as just one of many concerns, meaning that the first instance of disagreement over Pyongyang would not doom trilateral cooperation.

On the third issue–expanding cooperation to global issues–both South Korea and Japan have shown significant ambivalence in recent years. The United States has looked to each to provide the necessary strategic flexibility for forward-based U.S. forces to deploy on missions outside East Asia and has also raised expectations for its allies to directly contribute to Operation Enduring Freedom and Operation Iraqi Freedom. There is no firm consensus in either Seoul or Tokyo with regards to the role their countries will play in future global operations, although this issue will partly determine how they justify their growing military capabilities and future relations with the United States.

Developing a common strategic vision on these issues is the first step to developing a trilateral security relationship. The broad range of shared interests among the United States, South Korea, and Japan puts such a vision in reach. It will also be necessary for the three governments to assess how their bilateral alliances may be better coordinated–and in some cases integrated–at the operational level in order to achieve these objectives.

Coordinating Roles, Capabilities, and Missions

For too long, America’s alliances in Asia have amounted to less than the sum of their parts, as each has functioned bilaterally without sharing capabilities or commitments. The changing American force posture in Asia requires dismantling such barriers. As the United States shifts its military from South Korea and Japan to forward bases like the one on Guam, it will be essential for the three countries to discuss how those capabilities will be called upon in the event of a crisis in the region. Three sets of operational capabilities in particular merit prioritization: cooperation for humanitarian disasters, cooperative maritime security, and missile defense.

Crisis Response and Humanitarian Assistance. The response to the 2004 Indian Ocean tsunami provided the United States, South Korea, and Japan with valuable lessons about how the three countries can coordinate their efforts. Both South Korea and Japan sent personnel to the U.S.-led Combined Support Force 536 headquarters, and, in addition to the air, sea, and land assets that each country dispatched to the rescue effort, elements of U.S. Forces Korea and U.S. Forces Japan were also mobilized, requiring coordinated logistical flows from the two countries.

Future trilateral dialogue on humanitarian disaster response can build on the tsunami experience to move toward a framework for joint operations to provide postcrisis humanitarian assistance. Indeed, in February 2008, the three countries agreed to launch a trilateral steering group to develop military cooperation for such incidents. Given the risk of natural or man-made humanitarian disasters in Asia, developing this capability will remain a priority for U.S.-ROK-Japanese relations.

Maritime Security. South Korea depends upon the security of sea lanes running from the Persian Gulf for some 80 percent of its energy; 90 percent of Japan’s energy resources flow through the same channels. While Japan gradually assumed responsibility for policing the sea lanes between Japan and the Strait of Malacca from the 1970s until the November 2001 dispatch of Japanese Maritime Self-Defense Force vessels to the Indian Ocean in support of Operation Enduring Freedom, there has been disappointingly little cooperation between South Korea and Japan in this regard.

The absence of a tradition of trilateral maritime security cooperation is especially problematic for American policy goals because of the ongoing procurement by South Korea and Japan of ever more advanced maritime platforms, including the South Korean Sejong the Great and the Japanese Kongo class ships, their respective Aegis-equipped air warfare destroyers. Without a clear, commonly articulated role for these vessels to play in each alliance relative to the other, it often appears that South Korea and Japan are arming to deter one another. Greater maritime security cooperation will reassure Seoul and Tokyo that their new capabilities are part of coordinated alliance capabilities, not signs of a bilateral arms race.

An important subset of maritime security cooperation is the Proliferation Security Initiative (PSI), the ongoing international effort to share information about and interdict weapons of mass destruction. South Korea has chosen not to join this effort and made a pointed declaration of its intentions not to following the October 2006 North Korean nuclear test. Seoul’s participation in the PSI would not only cultivate trust between Seoul, Tokyo, and Washington, but it would also increase the chances of stopping North Korean proliferation.

Missile Defense. The most direct route to coordination between the two alliances’ missile defense efforts is integration. This is critical because both allies face a dire threat: North Korea’s arsenal of Scud, Nodong, and Taepodong ballistic missiles can deliver conventional, chemical, or biological warheads to targets throughout Asia, placing at least tens of thousands of lives at risk. Collaboration on missile defense could allow the three countries to deter a North Korean attack credibly.

Since late 2004, the United States and Japan have developed a joint missile defense system that will include a combination of mid-course intercepting SM-3 missiles based on U.S. and Japanese Aegis-equipped ships and terminal-phase PAC-3 missile batteries. In support of this effort, the United States has deployed X-band radar systems to Japan while the two sides have developed enhanced information-sharing and joint command-and-control capabilities. In December 2007, a Japanese destroyer successfully intercepted a ballistic missile with an SM-3 missile, heralding Japan’s arrival on the missile defense stage.

South Korea has watched these developments from the sidelines, avoiding participation in the U.S. missile defense system, postponing the purchase of PAC-3 missiles until 2012, and declining to invest in SM-3 missiles for their own Aegis-class destroyers. This hesitancy to develop a missile defense system reflects both the unwillingness of the Roh government to risk offending Pyongyang and legitimate South Korean concerns about the effectiveness of intercepting missiles that are traveling relatively short distances down the peninsula.

It is in the context of South Korea’s misgivings that the United States and Japan stand to benefit most from engaging Seoul on missile defense cooperation. Defeating any North Korean missile barrage in the future would protect vital American military capabilities based in Japan or Guam, minimize the risk that an intentional North Korean provocation could lead to all-out war, and help prevent Japan from taking independent action in response. Honest discussion about the stakes in this matter should open the door for improved trilateral relations.

The agenda for coordinating roles, missions, and capabilities between the U.S.-ROK and U.S.-Japanese alliances remains very broad, but progress in these three areas will be a good start.

Seizing the Opportunity

In many ways, the Trilateral Security Committee proposal would represent a fundamental realignment of American security policy in Asia away from the traditional hub-and-spoke system of exclusive bilateral alliances to a nascent multilateral system in which our security relationships are more closely entwined. As such, we offer several caveats about building such a coordinating mechanism.

First, South Korea and Japan still share a deep history of mistrust that could derail any sustained trilateral effort. The proposed arrangement would serve as a confidence-building mechanism so that the two countries can articulate shared objectives for developing national defense policies and capabilities. Moreover, such a mechanism would raise the stakes that both Seoul and Tokyo hold in improved bilateral relations. Although the deterioration of ROK-Japanese relations in the first years of this decade were dramatic, they reminded us that when the two sides shared a minimal security relationship, there was little to lose from playing games with historical issues or fanning nationalistic sentiments. Each side will face incentives to be more responsible with respect to these symbolic issues.

A second caveat is that China would almost certainly criticize a trilateral mechanism as an attempt at containment. China’s recalcitrance is a longstanding obstacle to institution-building in Asia and something of a red herring. This proposal is for an effort by a triad of allies to address common security issues like the North Korean nuclear crisis, maritime security, and humanitarian response. Indeed, to the degree that Beijing supports long-term stability in Northeast Asia, it should welcome any arrangement that would minimize the chances of a destabilizing ROK-Japanese confrontation.

The onus remains upon Washington to engage the new governments in Seoul and Tokyo. Although both governments seek to develop trilateral relations, neither will be willing to engage the other without American leadership. The present alignment of leadership in Seoul and Tokyo offers Washington a rare opportunity to build a more robust pillar for Asian security–an opportunity that we should not let slip by.

Reprinted with kindly permission of The American Enterprise Institute.

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