Brexit – How the British People were Hacked

November 28, 2017

In today’s context, social engineering has now moved on – dramatically. It refers to the manipulation of people into performing actions they wouldn’t normally do. It’s a type of confidence trick, but unlike back in the day when propaganda was largely in print newspapers, there are now serious consequences of social media being used as the vehicle to distribute computational propaganda via psychological warfare strategies originally designed by the industrial military complex. Brexit was one of them.

Social engineering is really the hacking of human beings. It’s not new but what is new is the spectacular take up rate of social media across the world, and it brings with it some unique challenges.

The hints of social media being used for geo-political change arrived most notably in the 2010 US Congressional elections, where 61 million Facebook users saw a “social” message encouraging them to vote, with a link to polling station information. People saw a clickable “I VOTED” button, like a counter showing how many people had clicked on it and the profile pictures of six of their Facebook friends who had done so. Facebook’s project saw users who saw their friends’ faces more likely to vote than those who saw the message alone. Hundreds of thousands of votes were attributed to this one action by Facebook.¹

As most democratic elections are usually (but not always) won within a margin of about 5 percent, social media has become the latest battleground to garner votes.

As most democratic elections are usually (but not always) won within a margin of about 5 percent, social media has become the latest battleground to garner votes. For instance, in the 2015 general election in Britain, 10 parliamentary seats were won on less than one percent of the vote. One Conservative won his seat on a margin of just 27 votes. And social media had a lot to do with these results.

As for Britain’s 2016 EU referendum, 72.2 percent of eligible voters, nearly 34 million turned up at polling stations. A total of 70 per cent of all voters, and 82 per cent of 18-24 year olds, expected the UK to stay in the EU. However, since the unexpected Brexit result there has been an epic media post-mortem on why this happened. Much was blamed on certain demographics such as age, location, education and even religion. But the truth of the matter was that something else happened, which is currently being fought out in both the courts and in the shadows and more recently with the announced involvement of the Electoral Commission.

In the case of the EU referendum, only 2.5% of the electorate were identified as the crucial targets needed to cause an historical moment in British history. And so the strategy for bringing about Brexit was constructed.

By April this year it was becoming clear that illegal social media campaigns had played a significant role in Brexit. More recently though, research has uncovered a number of illegal game plans that were both scandalous and steeped in corruption whilst giving the lie that Britain has a functioning democracy, which it can no longer claim. To deflect the illegal strategies from within, mainstream media has firmly laid blame at Britain’s customary mortal enemy, Russia. These reports have now reached the point of frenzied delirium. There may be some small truth in them, but as I’ve said before, there’s a big difference between influence and control. Russia does not control Britain.

However, bots and trolls were worked together to spread propaganda and manipulate Twitter and Facebook users’ political views, which played a significant role in the Brexit outcome, says a new study from the Oxford Internet Institute, University of Oxford (which does not mention Russia).²

The report describes this particular form of computational propaganda as a “phenomenon that encompasses recent digital misinformation and manipulation efforts”, which “involves learning from and mimicking real people so as to manipulate public opinion across a diverse range of platforms and device networks”. It ends with the stark warning that: “Computational propaganda is now one of the most powerful tools against democracy.”

Social media are now monopoly platforms for public life and are being used as a tool for public opinion manipulation, which is clearly heading down a route towards methods of social control. For instance, the report makes an example that computational propaganda played a role during three recent political events in Brazil: the 2014 presidential elections, the impeachment of former president Dilma Rousseff and the 2016 municipal elections in Rio de Janeiro.

In Britain, it was clear that individual users design and operate fake and highly automated social media accounts. Political candidates, campaigns and lobbyists rent larger networks of accounts for purpose-built campaigns while governments assign public resources to the creation, experimentation and use of such accounts. The Oxford report confirms this.

In Britain, it was clear that individual users design and operate fake and highly automated social media accounts.

In studies in seven democratic countries, members of political parties and so called “freelance campaigners”, and even elections officials provided evidence that social media bots and computational propaganda more broadly had been used to manipulate online discussions. The report confirms this as well.

We have since found out that in Poland, significant portions of the conversation about politics over Twitter is produced by a handful of right-wing and nationalist accounts. Ukraine provides another perspective. It is perhaps the most globally advanced case of computational propaganda where numerous online social media disinformation campaigns have been waged against Ukrainian citizens. The industry that drives these efforts at manipulation has been active in Ukraine since the early 2000s, giving an insight to how long this form of human hacking has been active.

The most powerful forms of computational propaganda involve both algorithmic distribution and human curation – that is bots and trolls working together, all of which are now artificially shaping public life (Woolley & Howard, 2016). One person, or a small group of people, can use an army of political bots on social media to give the illusion of large-scale consensus.

Part of the Oxford report focussed on how regimes use political bots, built to look and act like real citizens, in efforts to silence opponents and to push official state messaging. In the case of Brexit and Donald trump’s unexpected rise to the Whitehouse we can see that certain campaigns were aimed directly at swaying the vote or defaming the opposition with numerous examples of misinformation distributed online with the intention of misleading voters.

As for the UK Brexit referendum it was found that political bots played a strategic role in shaping Twitter conversations. The family of hashtags associated with the argument for leaving the EU dominated, while less than one percent of accounts generated almost a third of all the messages (Howard & Kollanyi, 2016).

This was evidenced by a network of 13,000 twitter bots found to have tweeted hundreds of thousands of predominantly pro-Brexit messages prior to Britain’s EU referendum. The bots then disappeared within a few days of the result confirming their illegal existence. That Twitter may or may not know anything about these accounts is one thing, the fact that someone paid for it all against electoral regulations and got away undetected is very worrying indeed.

The co-ordinated attack on Britain’s democracy is slowly coming to light. A company called Cambridge Analytica are accused by a growing number of newspapers of using the same methods the military use to effect mass sentiment change.³ These are the same strategies of psychological warfare but adapted with the latest technology and used against a civilian population. In this case – Britain.

By mining the data of the entire adult population of Britain, algorithms were used with bots pumping out millions of micro-ads every day that continually learned and morphed enabling individual targeting. At one point, those identified as persuadable were receiving 50-60 politically driven messages in the last few days prior to the referendum.

As if to reinforce the huge technical changes society is experiencing, a report from security firm Imperva found that for the first time, bots had overtaken human driven activity on the Internet. That report from October this year stated that 52 percent of online activity is now automated. However, it also found that nearly a third of this activity was driven with nefarious intent i.e. pushing political messages, propaganda and fake news.⁴

The truly alarming realisation of all this is that in Britain, with its endemic surveillance apparatus, constructed for the government intelligence operation GCHQ by private contractors, without public or parliamentary debate, has left democracy at the mercy of political actors both inside and outside the borders of the country.

According to a growing number of prominent journalists, Brexit was the result of a combination of proven psychological warfare strategies used by privately owned corporations but developed by the British military, along with illegal funding provided by foreign billionaires for the sole purpose of profiting from the economic destabilisation caused by the result. And whilst these accusations are now the subject of bitter legal battles, the accusations keep bubbling to the surface from different sources.

In addition, it has since been found that coordination between “Leave” campaigns took place to give Brexit more of a push. It is prohibited under UK electoral law, unless campaign expenditure is declared, jointly, which it wasn’t. Vote Leave says the Electoral Commission “looked into this” and gave it “a clean bill of health” proving that the Commission is woefully equipped to deal with modern day strategies using new technologies. Money was then concentrated into online public manipulation strategies. In fact, more money was paid to just one company than any other “Leave” campaign and that one company distributed millions of political propaganda ads.

Martin Moore, director of the centre for the study of communication, media and power at King’s College London, contributed to an LSE report published in April that concluded the “UK’s electoral laws were weak and helpless in the face of new forms of digital campaigning.” They also concluded that within the safety of offshore companies, money poured into databases, and that the caps on spending had come off. The laws that had always underpinned Britain’s electoral regulations were no longer fit for purpose. Laws, the report said, that needed “urgent reviewing by parliament”.

One of the data companies deeply involved in this souring of democracy is not only owned by an American billionaire but is effectively part of the British and American defence establishment.

One of the data companies deeply involved in this souring of democracy is not only owned by an American billionaire but is effectively part of the British and American defence establishment. Having been caught strategically changing the outcome of history through data manipulation, you would have thought an investigation at the highest level was underway with arrest warrants following quickly behind. Instead, there is merely a libel case over the claims made by The Guardian newspaper to warn off others daring to speak the truth.

David Miller, a professor of sociology at Bath University and an authority in military psychological operations and propaganda, says it is “an extraordinary scandal that this should be anywhere near a democracy. It should be clear to voters where information is coming from, and if it’s not transparent or open where it’s coming from, it raises the question of whether we are actually living in a democracy or not.”

From here, politics has now evolved into tactical cyber warfare – against it’s own citizens. In the meantime, without legislation, Will Moy, Director of Britain’s Full Fact said – “It’s possible to target dark ads at millions of people without the rest of us knowing about it. Inaccurate information is spreading with no-one to scrutinise it. Democracy needs to be done in public.”

Finally, only Twitter or Facebook knows what users are being shown what adverts. With weak privacy obligations that the British government allowed in the first place, combined with commercial interests it means that this information is not publicly accessible. If, for instance, Facebook preferred a particular political party in power over another for tax advantages – who is going to know what they got up to.

Featured Image: UK spy agency GCHQ monitoring social media accounts of entire Britain © Times of Islamabad

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About the Author

Graham Vanbergen’s business career culminated in a Board position in one of Britain’s largest property portfolio’s owned by one of the world’s largest financial institutions of its type. Today, he writes for a number of renowned news and political outlets, is the contributing editor of TruePublica.org.uk and Director of NewsPublica.com.

References

1. – Facebook “I VOTED” – hundreds of thousands voted after seeing this button: https://www.forbes.com/sites/sebastianbailey/2012/09/24/how-facebook-could-swing-the-election/#759bc6d48389
2. Computational propaganda report – university of Oxford: http://comprop.oii.ox.ac.uk/wp-content/uploads/sites/89/2017/06/Casestudies-ExecutiveSummary.pdf
3. The great British Brexit robbery – The Guardian: https://www.theguardian.com/technology/2017/may/07/the-great-british-brexit-robbery-hijacked-democracy
4. When you can’t trust the data – Imperva report: http://www.thedrum.com/industryinsights/2017/10/10/when-you-can-t-trust-the-data-what-next

What the West Can Learn from the ASEAN Way

November 26, 2017

By Edgardo Angara

The rise of ASEAN shows how consensus-building, more than the rule of the majority, can help nations overcome religious and racial divisions to achieve shared goals. The West, too, can learn from the ASEAN way of musyawarah (consultation) and muafakat (consensus), which has sustained and strengthened the community in the last 50 years.

The rise of the ASEAN community is a curious study of how cooperation and consensus, more than the rule of the majority, can help nations overcome deep divisions in religion, law and race in the pursuit of common goals.

To some Western observers, the ASEAN propensity to build consensus in the midst of discord is a source of puzzlement and frustration as the members have refused to press and criticise each other on major issues confronting the 10-nation bloc, from human rights to maritime disputes.

Indeed, such a noninterventionist policy is enshrined within the ASEAN Charter itself, which commits members to “respecting the fundamental importance of amity and cooperation, and the principles of sovereignty, equality, territorial integrity, non-interference, consensus and unity in diversity”.¹

It is, however, precisely this focus on unanimity in its decision-making process, rooted in the ASEAN way of musyawarah (consultation) and muafakat (consensus),² which has given the ASEAN community the stability and resilience to grow and thrive in the last 50 years.

Today, the Association of Southeast Asian Nations is an unqualified success.

It is one of the most dynamic regional blocs standing toe-to-toe with the European Union, and is even considered by some as the most successful supranational grouping in the world. Composed of 10 countries, ASEAN is home to the world’s third-largest labour force with an economy that is poised to become the world’s fifth-largest by 2020, and, by some projections, the fourth-largest by 2050.

In 2016 the combined GDP of ASEAN countries was collectively worth $2.5 trillion, almost double the $1.3 trillion measured in 2010. In that same period, according to the World Economic Forum, GDP per capita across the region grew by 76 percent.³

Within Asia, only China and Japan have bigger economies.

The bloc’s population of 650 million citizens accounts for a staggering 10 percent of the world population, making it the biggest geopolitical bloc by the number of people, according to the WEF.

As an investment destination, ASEAN is topnotch. It is the fourth-largest exporting region in the world, accounting for up to 7 percent of global exports. Furthermore, more than half of the consumer base in ASEAN is young – under 30 years old. The Philippines is entering its “demographic sweet spot” with more working people than dependent children and retirees. This will reap substantial rewards, including higher per capita income, higher savings rate, and a broader tax base.

ASEAN is home to peoples of various racial origins, including the Han Chinese, the Indo-Aryan and Dravidian peoples of South Asia and the Malay-Austronesian race. Three of the world’s major religions – Christianity, Islam and Hinduism – are practiced in the region, and, at times, right next to each other.

Another sector that has boomed is tourism. All together, the 10 ASEAN states drew more visitors in 2013 than France, the world’s top destination. Three years ago, the World Cruise Industry Review projected that Asia may attract 7 million visitors by 2020, representing a fifth of the global cruise industry.

ASEAN will get a sizable portion of this market, considering its 25,000 island-destinations on offer. By contrast, the Bahamas has only 7,000.

What makes ASEAN’s success even more impressive is that it has done it amid deep divides in religion, race and legal tradition in Southeast Asia.

ASEAN is home to peoples of various racial origins, including the Han Chinese, the Indo-Aryan and Dravidian peoples of South Asia and the Malay-Austronesian race. Three of the world’s major religions – Christianity, Islam and Hinduism – are practiced in the region, and, at times, right next to each other. For instance, the world’s largest Muslim country, Indonesia, maintains brotherly ties with Asia’s largest Christian country, the Philippines.

Such religious and racial divisions tend to degenerate into outbursts of conflict in most parts of the world, but in ASEAN, people mostly live in peaceful coexistence with each other, with some notable and unfortunate exceptions, as in Myanmar’s Rohingya crisis and the long-running Muslim insurgency in the southern Philippines.

There, too, is significant diversity in terms of legal traditions.

Where most former British colonies, like Malaysia, Singapore and Brunei Darussalam follow common law (largely unwritten, precedent-based) systems, Thailand and Vietnam adhere to a continental or codal (“Napoleonic”) legal system. The Philippines follows a mixture of the two.

Such diversity “puts Southeast Asia at a distinct disadvantage in terms of fostering regional cooperation,” according to Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy, National University of Singapore, and coauthor of “The ASEAN Miracle: A Catalyst for Peace”.⁴

“When ASEAN was founded in 1967, most experts expected it to die within years.” he said in a commentary published in August.

The Singaporean academic noted that Southeast Asia at the time was a poor and deeply troubled region described by the British historian C.A. Fisher as the “Balkans of Asia”.

“The Vietnam War was underway, and the Sino-Vietnamese War was yet to be fought. Many viewed the five non-Communist states that founded ASEAN – Indonesia, Malaysia, the Philippines, Singapore, and Thailand – as dominoes, set to be tipped over by a neighbour’s fall to communism or descent into civil strife,” Kishore said.

In 1967, when the five founding members signed the Bangkok Declaration, the primary objective was to ward off the threat of foreign interference that loomed heavily over the region during the Cold War. This signalled the transformation of the region “from battlefield into a marketplace”, as explored by Balazs Szalontai in “The end of the Cold War and the Third World: new perspectives on regional conflict.”⁵

Soon, according to Kishore, even ASEAN’s “communist enemies” Cambodia, Laos and Vietnam joined the bloc.

“So, too, did Myanmar, ending decades of isolation,” he said. “Asean’s policy of engaging Myanmar drew criticism from the West, but it helped lay the groundwork for a peaceful transition from military rule,” Kishore said, pointing out the contrast with the West’s policy of isolation toward Syria.

As the region grows, however, threats and challenges persist.

One is the Islamic State and the scourge of religious extremism. In March 2015, Singapore Prime Minister Lee Hsien Loong, speaking at the 14^th Asia Security Summit, described ISIS’s declaration to establish an ASEAN wilayat (province) under its caliphate as a “grandiose, pie-in-the-sky dream”.⁶

The plan to form an antiterrorism pact between the Philippines, Malaysia and Indonesia is thus highly urgent.

He nonetheless predicted that it was not far-fetched for the terrorist organisation to aim to establish a base in the region, “somewhere far from the centres of power of state governments, where the governments’ writ does not run”. His words proved prophetic. The plan materialised in Marawi City in southern Philippines, where fighting continues between government forces and militant sympathisers of the terrorist group.

ASEAN has long been threatened by radical extremism. Many young Southeast Asian Muslims went to Pakistan in the 1980s to help Afghani jihadists defend against Soviet occupation of Afghanistan. They were radicalised by such groups as al-Qaeda. When they returned to their home countries in the 1990s, they founded their own groups, such as Jema’ah Islamiyah, which was responsible for the 2002 bombing in Bali and the 2000 “Rizal Day” bombings around Metro Manila.

The plan to form an antiterrorism pact between the Philippines, Malaysia and Indonesia is thus highly urgent.

Besides terrorism, maritime disputes aggravated by China’s island-building activities and militarisation of the South China Sea rank among the most disturbing and disruptive challenges to ASEAN’s future development.

Though not all members are party to the disputes, ASEAN’s insistence and emphasis on consensus-building makes it difficult for the bloc to take any decisive position beyond calling for a toothless Code of Conduct in the South China Sea.

Pundits have argued that such a decision-making process is a weakness of ASEAN, leading to ineptness in responding to humanitarian crises and security issues besetting the region. Other commentators, however, believe this approach is preferable to the Western model.

Edith Terry, an Adjunct Professor at the Hong Kong University of Science and Technology, wrote that such a “lowest-common-denominator approach” was in fact why ASEAN “holds up well amid disappointment with the Bretton Woods institutions”.⁷

She said: “ASEAN will never face a Brexit. Its fundamental promise to its members is that it does not challenge their sovereignty. Its Jakarta-based secretariat is the opposite of the bureaucratic Babylons of the European Union, the World Bank, the International Monetary Fund, the World Trade Organization or the UN and its many offshoots. It has a staff of 300, compared to 100 times that in EU headquarters in Brussels.”

Unlike the World Bank, IMF or the UN, according to Terry, ASEAN does not have an equity structure that gives richer members more say but, instead, calibrates its dues to the paying capacity of its poorest members.

The flip side of such an argument is that the requirement for unanimity among the 10 ASEAN states opens the window for interference by big external powers, such as China and the United States, whose attempts to peddle influence within the grouping are no secret.

In January, Kilian Spandler, a political scientist and board member of the Germany-based think-tank Young Initiative on Foreign Affairs and International Relations, wrote an analysis with the intriguing title: “What Can ASEAN Teach the EU?”⁸

Unlike the World Bank, IMF or the UN, ASEAN does not have an equity structure that gives richer members more say.

Whereas before, the European Union had shown little interest in learning from the ASEAN experiment, Spandler said this changed recently as a consequence of domestic challenges in Europe arising from “populist and xenophobic reactions toward the increased immigration by displaced persons from outside the continent”.

“Just like that, EU policymakers have become very interested in how countries like Malaysia, Singapore, and the Philippines managed to keep conflict between people of Malay, Sinic, and Indian ethnicity, Christian and Muslim belief, or indigenous and immigrant origin at bay,” Spandler said.

Thus, he said, ASEAN has begun to develop its own “normative power” – a term used to describe the EU’s ability to influence others’ ideas and create a beneficial international environment by projecting its values abroad. “ASEAN appears to have found a unique selling point beyond its trade potential, and this has brought the organisation closer to the goal of a level playing field with its European partners,” Spandler said.

In the next 50 years, ASEAN may achieve a level of economic and political integration that is similar to that of the EU. Its economic and social fundamentals are strong and stable, and, barring major obstacles, the bloc appears to be on its way to becoming a major power.

The European model, however, clearly is not the suitable one to follow. Instead, ASEAN will do well to continue on the path of longevity and relevance that has sustained it for the past 50 years – the ASEAN way.

Featured Image: Leaders of the Association of Southeast Asian Nations gather for a plenary session of the biyearly summit in Manila, Philippines on April 2017. © ASEAN50/Released

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About the Author

Edgardo J. Angara spent most of his professional career in public service and law. He was Senate President (1993-1995) and Senator for four six-year terms, serving as a legislator for 23 years. He was a Founding President of the ASEAN Law Association (ALA); President of the Integrated Bar of the Philippines (IBP) (1979-1980); and the Philippine Bar Association (1975-1976).

References

1. The Asean Charter. http://www.asean.org/wp-content/uploads/2012/05/11.-October-2015-The-ASEAN-Charter-18th-Reprint-Amended-updated-on-05_-April-2016-IJP.pdf
2. “ASEAN’s Third Way?” by Daniel Wu, The Diplomat. https://thediplomat.com/2011/11/aseans-third-way/
3. “ASEAN is 50, and it’s come a long way. Here’s why you should care,” by Alex Gray, World Economic Forum. https://www.weforum.org/agenda/2017/01/asean-is-50-and-it-s-come-a-long-way-here-s-why-you-should-care/
4. World View, by Kishore Mahbubani, Philippine Daily Inquirer http://opinion.inquirer.net/106070/asean-at-50
5. “From battleﬁeld into marketplace: The end of the Cold War in Indochina, 1985-1989,” by Balazs Szalontai, “The end of the Cold War and the Third World: new perspectives on regional conflict.” http://www.academia.edu/25628812/From_Battlefield_into_Marketplace_The_End_of_the_Cold_War_in_Indochina_1985-9
6. Keynote Speech by Prime Minister Lee Hsien Loong at the Shangri-La Dialogue. http://www.pmo.gov.sg/newsroom/transcript-keynote-speech-prime-minister-lee-hsien-loong-shangri-la-dialogue-29-may-2015
7. “Asean at 50 is a model that has aged surprisingly well,” by Edith Terry, South China Morning Post. http://www.scmp.com/comment/insight-opinion/article/2105746/asean-50-model-has-aged-surprisingly-well
8. “What Can ASEAN Teach the EU?” by Kilian Spandler, The Diplomat. https://thediplomat.com/2017/01/what-can-asean-teach-the-eu/

Nuclear Power and Public Fear in the Era of Climate Change

November 25, 2017

By Scott Montgomery

To discuss nuclear power requires discussion of public anxiety, particularly fear of radiation. Such fear exaggerates levels of actual risk and poses a hurdle to progress in non-carbon energy in the West, while nuclear power advances elsewhere. China and Russia will soon gain leadership of nuclear power over the US, posing major questions for the future.

To write about nuclear power and its future, there’s no avoiding the matter of public anxiety. Perused with a calm eye, the dread surrounding this energy source, which accounts for the great majority of non-carbon electricity in Europe and the US, largely returns to fear and trembling about radiation. Not dealing with this factor is thus to allow the proverbial elephant in the room to hold a family reunion. What follows therefore begins with a discussion of this anxiety before looking at the new nuclear era the world has lately entered.

A few years ago, I was hired to run a workshop on communication for a group of scientists at a well-known US government agency, most of whom worked on radiation safety. When asked what they thought about public attitudes on this topic, most deferred to official agency statements or changed the subject. One researcher, however, took me aside and in a lowered voice, as if confessing a dark deed, told me:

I rarely talk about my work or about radiation, Chernobyl, etc. What most people feel they know about these things, probably from decades of news hysteria and other sources, is too misinformed. They don’t want to hear what I have to say, not really. It would take many hours to correct any part of this. And you’d be climbing a steep hill the whole time. By the way, you can’t use my name.¹

In the years I’ve spent researching nuclear power (NP), I’ve managed to gain responses on the question of popular attitudes from dozens of experts. None of these people ever worked in the NP industry. They were radiologists, health physicists, nuclear physicists, radiobiologists, and medical researchers working on the impacts of ionising radiation (that is, radiation able to remove an electron from an atom). What they told me was quite striking, though unsurprising.

It is common knowledge in this expert community that public fear of radiation, and the media tendency to legitimise it, are out of all proportion to the actual risk determined by decades of research. Much of the public, for example, unfortunately believes that any level of exposure is dangerous. Fear is felt to be justified no matter the dose level, type(s) of radiation, or exposure pathway (skin, inhalation, ingestion). It has also become clear that such fear is responsible for actions causing the great majority of casualties in nuclear accidents. Bluntly put, dread of radiation has proven more perilous than radiation itself.

It is common knowledge in this expert community that public fear of radiation, and the media tendency to legitimise it, are out of all proportion to the actual risk determined by decades of research.

How do we know this? From research on four key groups: 1) Japanese survivors from Hiroshima and Nagasaki; 2) populations living in areas of high natural background radiation; 3) workers in various industries who deal with radioactive materials; and 4) residents affected by fallout from Chernobyl and Three Mile Island. Radiation dose is measured in milli-Sieverts (mSv), with higher levels considered to start around 1,000 mSv, where radiation sickness is significant but fatal cancer risk is 5% or less. Low doses are usually viewed as below 100 mSv. At such levels, lifetime cancer risk is extremely small or undetectable.² While a statistical risk (<0.01%) has been interpreted down to 50 mSv/year, millions of people live in parts of the world where doses from natural background radiation range from 30-200 mSv. Repeated epidemiological studies have shown no added risk for cancer in any of these places.³

By “added” I mean in addition to the expected risk of 25%-33% in most societies, due to tobacco use, air pollution, exposure to certain chemicals, poor diet, and other factors. In the Chernobyl accident, over 99% of the resident population affected by the fallout received doses in the 5-33 mSv, including evacuees. After 30 years, a total of 47 deaths and roughly 4,000 cases of thyroid cancer have been attributed to radiation from the worst nuclear accident in history (no fatalities are associated with Three Mile Island and none are predicted for Fukushima).⁴ The question must be asked whether this constitutes a true “catastrophe”. It is a necessary question when we compare the many hundreds of deaths among the public from oil/gas explosions (e.g. the 1984 San Juanico disaster in Mexico) and hydroelectric dam failures, and most pressingly the >1 million premature deaths annually caused by air pollution due to coal and oil use.⁵

There is another reason to refocus our understanding of Chernobyl. This too is well-known in the expert community but much less appreciated in the rest of society. Work by medical professionals, such as Evelyn Bromet, Stony Brook University School of Medicine, documents the widespread presence of “depression, anxiety, post-traumatic stress disorder, general distress, and medically unexplained somatic symptoms (e.g., fatigue, severe headaches, muscle and joint pain)”. And there are yet other impacts to consider, brought by evacuation:

Families were sometimes separated, and pregnant women were told to have abortions. Evacuees were not welcomed by the communities where they were resettled… Doctors attributed diseases and symptoms to Chernobyl indiscriminately [and the] psychosocial fallout from Chernobyl was then compounded by the political and socio-economic turmoil following the break-up of the Soviet Union.⁶

With Fukushima, where no radiation injuries to any member of the public occurred, over a thousand people died as a result of the evacuation. This included hospital patients and elderly people who needed nursing care, plus others with heart ailments and others who suffered from stroke. As with Chernobyl, stigmatisation by others and by oneself, has become a serious problem for many.⁷

There seems a worrisome irony here. Emergency response programmes are predominantly aimed at protecting the public from radiation. Yet the evidence from actual accidents shows that this emphasis can be misplaced. By embodying public fear, it can encourage rushed evacuations, while downplaying the need for resources to address medical and psychosocial impacts of an event.

Why do people so fear radiation, and therefore in many cases NP? The reasons are complex. Moreover, they have an evolving history. A simplified (but still accurate) overview might begin with the visions left by Hiroshima and Nagasaki, images that blended in the 1950s with government secrecy and misinformation about fallout from atmospheric tests. Claims by some scientists about multi-generational genetic damage were later disproven yet still became part of nuclear lore. By the 1960s and 70s, the rise of environmentalism foregrounded worry over nuclear waste. But in the Vietnam Era, opposition to NP was also motivated by deep concerns over growing power of the state, specifically the “military-industrial complex”, with NP as both sign and symbol of failing democracy and an endangered planet. Tyranny didn’t arrive, but Three Mile Island and Chernobyl did. These two accidents, and the media gales they gave rise to, helped elevate dread about radiation, a reality revitalised by Fukushima. During all this time, proliferation worries have been real too. But they are not what keeps people up at night or leads them to vote and march against a NP plant or waste site planned for their area.

In today’s world, various elements of this benighted past tend to melt together for many people into an alloy of suspicion and angst. An intimidation factor – the feeling that radiation and NP are too complex to grasp (not true) – adds to the sense of vulnerability. Yet this is far from true for everyone. A significant portion of the environmental, scientific, high tech, and business communities, as well as many younger people concerned about climate change, are either unpersuaded that NP represents an existential threat or view it as a much-needed non-carbon source of electricity. Such is all the truer now that major nations and auto makers have vowed to electrify the car by 2040.

Even with a large number of further closures, say 200 or more, the world could see over 600 operating reactors within a few decades.

This is a good sign for the future. NP, after all, is shaping up to be a growth industry for the 21^st century in many parts of the world. This truth may sound impossible to some in the West, but the numbers bear it out. Today, two-thirds of humanity live in countries with nuclear power; by 2050, the figure could well be 75% or more.

Here are some figures to contemplate. In late 2011, soon after the Fukushima accident, there were 433 operable reactors in the world. Six years later, after two dozen permanent shut downs, the number had climbed to 449, with 57 more reactors under construction⁸ and plans and proposals in a wide variety of countries for over 500 more.⁹ In a majority of nations with NP, older reactors that have been well-maintained and updated over time are now being relicensed for a further 20 years of operation. While this will extend their operating lives into the 2040s and 50s, there is much discussion about further relicensing if further upgrading is done. Such considerations make sense against a background of climate change, lethal pollution from carbon energy, and possible future cost constraints. It bears emphasis that the original 40-year licensing period was applied for economic reasons, not engineering ones, as the time needed for loan repayment and some degree of profit-making.

Yet even with a large number of further closures, say 200 or more, the world could see over 600 operating reactors within a few decades. There is more than a small possibility that China alone will build as many as 300-500³ of various sizes, given its extensive plans. Russia and India also have major expansion plans underway that together total more than 100 new reactors.

No less important, however, is the growth of NP into countries where it has not previously existed. Naysayers love to call this a matter of “paper reactors”. Yet in the past few years, real physical plants have been started or are about to start in Belarus (2 reactors), United Arab Emirates (4), and Turkey (4). Other countries where the choice of NP sites, financing options, and signed agreements with vendors have continued to move forward include Egypt, Saudi Arabia, Jordan, Nigeria, Bangladesh, and Poland. Meanwhile, the International Atomic Energy Agency, whose main job is to provide guidance and monitoring of civilian NP programmes worldwide, has been especially busy in recent years. It has been called on to help develop the legal and policy basis for nuclear programmes in nearly two dozen in Africa, Southeast Asia, Central Asia, and South America.¹⁰ None of this guarantees that all such programmes will result in reactors being built, of course. Yet to deny that a strong level of global interest exists, or to claim it is temporary and misguided, would be both naïve and condescending.

Thus, a key question: why are these nations attracted to NP? The answer is that it helps provide a real solution to their most pressing energy needs. Surging demand for electricity is one of these, a reality in many developing nations. At least 1.1 billion people have no access to electricity, with another 2 billion having only intermittent power. Economic growth is constrained in many nations by power availability, while much farm produce spoils due to lack of refrigeration. Energy security defines another issue, one that merges with the need to lower carbon emissions. NP satisfies these requirements at a high level, providing massive amounts of non-carbon power with the smallest footprint of any source, allowing a nation to shift away from dependence on fossil fuels. Neither can it be denied that nations are drawn to NP for the prestige it can give to a country’s image.

China, in a sense, provides an overall model – and lesson – for this. Having pursued a breakneck pace of development from the late 1990s to 2013, it sought energy security in colossal use of its most abundant domestic resource, coal. The result has been an equally immense level of pollution, with severe impacts on public health and rising levels of dissent. More recently, China’s government has moved assertively to develop non-carbon sources. Though far from solving its carbon energy problems, China has set a precedent by combining all non-carbon sources, including nuclear and renewables, into one category. It is a sign of recognition that both sources are required to deal with pollution and climate change.

China’s NP programme is unique, and huge.¹¹ Since 2013, it has been completing 6-7 new reactors each year, reaching a total of 38 in late 2017. Its plans are to have just under 100 by around 2030, with over 140 more now proposed to follow. At this point, it appears certain that China will surpass the US (99 reactors) as the world’s leading NP nation within 15 years. China’s plans include developing reactors of varied size and output, using current and advanced designs adapted from western and Russian sources. A big part of China’s long-term effort will involve exports of its technology and investments in other country’s programmes, as shown, for example, by its participation in the UK’s Hinkley Point C plant. For Asia, the Middle East, and Africa, such plans are part of the One Belt One Road initiative launched by the current President Xi Jinping.

It seems another tragic irony that much of the advanced world simply watches as other parts of the globe move ahead with a non-carbon technology the West itself invented.

The only other country with a comparable programme is Russia, which has developed its own successful reactor technology for export. Rosatom, the Kremlin’s NP entity, has signed agreements of various kinds with as many as 32 countries for building and financing NP plants. Given the economic sanctions on Russia for its seizure of Crimea, many observers doubt more than a small handful of these will ever see broken ground. Such a conclusion appears sensible at the moment. Yet, somehow, Rosatom is right now building 2 reactors in Belarus and will very soon (2018) begin 4 more in Turkey. Though the firm is undoubtedly in no position to pay for dozens of reactors itself, the new export landscape is proving more adaptable than the old build-in-your-own-pasture approach.¹²

It seems another tragic irony that much of the advanced world simply watches as other parts of the globe move ahead with a non-carbon technology the West itself invented. Such is particularly true for the US, the once-and-future world leader whose nuclear industry is in dire trouble with little help from government. Such is happening even as the country’s chief global rivals become the new world forces in a technology humanity needs to combat climate change. For those much concerned with non-proliferation, a nuclear future run by Russia and China can hardly be reassuring. In this new context, radiation/nuclear angst translates into a serious hurdle. The world will move ahead with nuclear power regardless. But there will be much to bemoan if the West indeed proves to be so scared of its own peaceful and productive creations that it cannot adequately deal with the greatest and most long-term global threat we all now face.

Featured Image: Jungliangcheng power plant in Tianjin, China © Wikimedia Commons

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About the Author

Scott L. Montgomery is a Geoscientist and Faculty Member at the University of Washington, Seattle (USA). After 25 years in the energy industry, he now teaches, lectures, and writes on energy-related matters. His most recent book, with US diplomat Thomas Graham Jr., is Seeing the Light: Making the Case for Nuclear Power in the 21^st Century.

References

1. Quoted from: Scott L. Montgomery and Thomas Graham, Jr. Seeing the Light: Making the Case for Nuclear Power in the 21^st Century. Cambridge University Press, 2017;
2. These points are extensively covered in: Timothy Jorgensen, Strange Glow: The History of Radiation. Princeton University Press, 2016. Some of this information is also covered on Dr. Jorgensen’s website devoted to the book, at: http://www.timothyjorgensen.com/index.htm
3. S.M.J. Mortazavi, M. Ghiassiu-Nejad, and M. Rezaiean, “Cancer risk due to exposure to high levels of natural radon in the inhabitants of Ramsar, Iran.” International Congress Series 1276 (2005), 436-437; http://www.sums.ac.ir/~mmortazavi/paper2.pdf
4. International Atomic Energy Agency (IAEA), Chernobyl: Looking Back to Go Forward. Conference Proceedings, 6-7 September 2005, Vienna, 43-116. http://www-pub.iaea.org/books/IAEABooks/7717/Chernobyl-Looking-Back-to-Go-Forward
5. Kiran Stacey, “India air pollution poised to exceed China’s,” Financial Times 14 February 2017, https://www.ft.com/content/dbcb8502-f1d8-11e6-8758-6876151821a6
6. Evelyn J. Bromet, “Mental Health Consequences of the Chernobyl Disaster,” Journal of Radiological Protection 32:1 (2012), N71-N75. http://iopscience.iop.org/article/10.1088/0952-4746/32/1/N71/meta
7. Akira Ohtsuru et al., “From Hiroshima and Nagasaki to Fukushima 3: Nuclear disasters and health – lessons learned, challenges, and proposals.” The Lancet 386, 1 August 2015, 490-497. http://www.thelancet.com/series/from-hiroshima-and-nagasaki-to-fukushima
8. International Atomic Energy Agency (IAEA), Power Reactor Database, https://www.iaea.org/pris/
9. World Nuclear Association, World Nuclear Power Reactors & Uranium Requirements, http://www.world-nuclear.org/information-library/facts-and-figures/world-nuclear-power-reactors-and-uranium-requireme.aspx (September 2017). Accessed 12/10/2017
10. See varied stories of such work at: IAEA Press Centre, https://www.iaea.org/press
11. World Nuclear Association, Nuclear Power in China, http://www.world-nuclear.org/information-library/country-profiles/countries-a-f/china-nuclear-power.aspx
12. Scott L. Montgomery, “Russia: a global energy superpower that is much more than a petrostate,” The Conversation, 14 April 2016, https://theconversation.com/russia-a-global-energy-powerhouse-thats-much-more-than-a-petro-state-57766

What Do We Know About Mass Shootings?

November 24, 2017

By Frederic Lemieux

In this article, the author examines key elements defining mass shootings and the evolution of definitions over time. The article also scrutinises the characteristics of active shooters and the dynamics of these incidents. Finally, it looks at the impact of gun control regulation on the occurrence of mass shootings through the years and by comparison to other developed countries.

On Sunday October 1^st 2017 an active shooter named Stephen Paddock, 64 years old, perpetrated the deadliest mass shooting in modern American history killing 58 persons and injuring more than 500 in Las Vegas. The criminal investigation showed that the shooter meticulously prepared the massacre by stockpiling multiple modified assault rifles and explosives, choosing the “perfect” shooting vantage point and planning an escape route.¹ However, this tragic incident is not isolated and other active shooters have shown similar level of preparation in the past (for instance James Holmes, Aurora 2012; Eric Harris and Dylan Klebold, Columbine 1999). Once again, the Las Vegas mass shooting reignited the debate on gun control but what do we know about mass shootings? Are they getting worse? Can they be prevented? To answer these questions, this article will shed light on the phenomenon of mass shootings by examining existing academic researches and available government data. This article places an emphasis on the definition of mass shootings, their characteristics and dynamics as well as the ability of our society to prevent them.

What is Mass Shooting?

Mass shooting is an act of extreme violence in which an individual armed with one or several firearms engage in a shooting rampage killing and injuring random people.² Randomness is an important aspect of a mass shooting because it differentiates these incidents from multiple casualties violence like familicides, hate crimes or gang violence, which target very specific groups of people and have different root causes. Mass shooting and act of terror are not the same either. Terrorism, also known as political violence, is motivated by a political or social cause. For instance, the terrorist attacks that happened in Orlando and San Bernardino used mass shooting as modus operandi as part of a broader strategy of jihadist terrorism. In these cases, mass shootings are a mean (violence) to end (political cause). The vast majority of mass shootings do not fall into this category because they are perpetrated by individuals that have more personal motives such as vengeance and frustration.

It has been established that in 59% of the cases, the perpetrators were carrying two or more firearms and that assault rifles were used in 26% of the cases. In 76% of the cases, the firearms were acquired legally through stores or private sales.

The formal definition and classification of mass shooting has evolved over the years. In 2008, According to the Department of Homeland Security (DHS), an active shooter is defined as “an individual actively engaged in killing or attempting to kill people in a confined and populated area”. In its definition, DHS notes that “in most cases, active shooters use firearms(s) and there is no pattern or method to their selection of victims”.³ Before 2013, the Federal Bureau of Investigation (FBI) provided a more operational categorisation where mass shootings happen when four or more people are killed by one or more murderer(s) in a particular location with no cooling-off period between the murders. More recently, federal institutions and agencies such as the White House, Department of Justice, Department of Education, Department of Homeland Security agree on the following definition: “an individual actively engaged in killing or attempting to kill people in a confined or populated area”.⁴ This definition implicitly assumes that firearms are used for the perpetration of the crime. These changes in definition impacted directly the number of cases included in studies and affected the comparability of studies conducted over time.

Characteristics and Frequency of Mass Shootings

In a study published in 2014,⁵ using the old definition of mass shooting that only includes incidents with four or more casualties, provides a descriptive analysis showing that mass shooting perpetrators were 35 years old on average and that their ages ranged from 13 to 66 years old. The vast majority of shooters are Caucasian and male (66% and 99% respectively). In 56% of the cases, signs of mental illness existed before the incidents occurred. It has been reported that 52% of the perpetrators committed suicide, that 17% were killed by police officers, that 30% were arrested, and that in only one case did a bystander stop the shooter by use of physical force (without a weapon). Regarding the weapons involved in these incidents, it has been established that in 59% of the cases, the perpetrators were carrying two or more firearms and that assault rifles were used in 26% of the cases. In 76% of the cases, the firearms were acquired legally through stores or private sales. The vast majority of the mass shootings happened in a closed environment, such as schools (16%), workplaces (29%), and commercial buildings like restaurants, shopping malls, or shops (23%). Finally, the total number of victims is established at 1090. More precisely, these incidents have caused 576 fatalities and 514 injuries between 1983 and 2013.

Another study completed by the FBI in 2014 and using the new definition with no restriction on casualties reveals similar findings.⁶ The report has identified 160 mass shooting incidents between 2000 and 2013, with a yearly average of 6.4 incidents. A total of 486 persons have been killed and 557 injured. The report also shows that mass shooting incidents are becoming more frequent in the last seven years of that period (2006-2013) with annual average of 16.4 incidents. This trend has also been corroborated by another study conducted by Harvard University researchers.⁷ The active shooters have committed suicide in the majority of these incidents (56%) or have been killed by law enforcement officers (28%). In 13% of incidents, unarmed citizens have been able to restrain the active shooter. In the remaining cases (3%), active shooters have surrendered to police officers. Finally, the majority of mass shootings incidents took place in commercial (45.6%) and educational environments (24.3%).

Can Mass Shootings Be Prevented?

During the period of the so-called “assault rifle ban” law (1994-2004), the number of mass shooting incident has reduced by 31% and the number of victims as a result of these incidents dropped by 45%.

It is a very difficult question to answer since these incidents are difficult to predict. However, available data and studies tend to indicate that, by adopting gun control laws that restrict the accessibility to certain types of firearms (assault rifles), limit the firepower (e.g. magazine capacity), and prohibits certain category of person to acquire firearms (children, criminals, mentally ill), mass shooting occurrence and the number of victims can be significantly reduced. For instance, the number of mass shootings in the United States and the number of fatalities associated with these incidents have reduced substantially under the Public Safety and Recreational Firearms Use Protection Act of 2004.⁸ More precisely, during the period of the so-called “assault rifle ban” law (1994-2004), the number of mass shooting incident has reduced by 31% and the number of victims as a result of these incidents dropped by 45% compared to the decades before (1983-1993) and after the ban period (2004-2013). Similar results have been found by other research.⁹ The relation between stricter gun control legislations and lower occurrence of mass shooting incidents and their associated death toll is not only verified in the United States but also exists in other developed countries. A study examining the impact of the National Firearm Agreement of 1996 and the National Handgun Control Agreement (2002) in Australia between 1981 and 2013 shows that a drastic decrease in mass shooting incidents happened after 1996. Only one incident happened in 2002 at Monash University compared to 13 mass shootings prior to 1996.¹⁰ In many other developed countries, strict gun control legislations are in effect for several years and they have experienced far less occurrence in mass shooting. In other words, stricter gun regulations may not guarantee zero mass shootings incidents but can substantially reduce their occurrence and save a significant number of lives.

Featured Image: The “Welcome to Las Vegas” sign is surrounded by flowers and items, left after the October 1 mass shooting, in Las Vegas, Nevada October 2017. © REUTERS/Las Vegas Sun/Steve Marcus

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About the Author

Frederic Lemieux is Professor of the Practice and Faculty Director of the Master’s degree in Applied Intelligence at Georgetown University. He received his doctoral degree from the School of Criminology at the University of Montreal, Canada. During his academic career, Dr. Lemieux has studied violent crimes including terrorism and mass shooting. His research findings have been published in peer-reviewed journal and books.

References

1. https://www.nytimes.com/2017/10/03/us/las-vegas-gunman.html.
2. Bjelopera, J. P., Bagalman, E. S., Caldwell, W., Finklea, K. M., & McCallion, G. (2013). Public Mass Shootings in the United States: Selected Implications for Federal Public Health and Safety Policy. Washington DC: Congressional Research Service.
3. “Active Shooter – How to Respond.” Department of Homeland Security. October 2008. http://www.dhs.gov/xlibrary/assets/active_shooter_booklet.pdf
4. Federal Bureau of Investigation (2014). A Study of Active Shooter Incidents in the United States between 2000 and 2013. Washington D.C., Department of Justice.
5. Lemieux, F. (2014). Effect of Gun Culture and Firearm Laws on Gun Violence and Mass Shootings in the United States. International Journal of Criminal Justice Sciences, 9 (1): 74-93.
6. Federal Bureau of Investigation (2014). A Study of Active Shooter Incidents in the United States between 2000 and 2013. Washington D.C., Department of Justice.
7. https://www.hsph.harvard.edu/news/features/mass-public-shootings-increasing-in-us/
8. Lemieux, F. (2014). Effect of Gun Culture and Firearm Laws on Gun Violence and Mass Shootings in the United States. International Journal of Criminal Justice Sciences, 9 (1): 74-93.
9. Duwe, G. (2016). Pattern and Prevalence of Public Mass shootings in the United States 1915-2013. In Wilson, L. (2016) The Wiley Handbook of the Psychology of Mass Shootings. Wiley & Sons, Chichester U.K.: 20-35.
10. Lemieux, F., S. Bricknell, T. Prenzler, (2015) Mass shootings in Australia and the United States, 1981-2013. Journal of Criminological Research, Policy and Practice, 1 (3): 131-142.

The Changing Nature of Country Risk in the Age of Globalisation and Donald Trump

November 23, 2017

By Michel-Henry Bouchet

In today’s global economy, the concept of Country Risk has been evolving. In this article, the author elaborates on the changing nature of country risk, recent events to be considered, and how socio-political stability is a must for market-based capitalism to achieve sustainability.

1. A Changing and Multi-faceted Concept.

Country Risk stems from a set of interdependent economic, financial and socio-political factors specific to a particular country in the global economy; these factors can affect both domestic and foreign economic agents in terms of savings, investment and credit transactions. But Country Risk is no longer what it used to be. Since the late 1990s and more recently in the wake of the Global Financial Crisis, there have been profound changes in the nature and consequences of Country Risk. Donald Trump’s presidency is about to accelerate these changes, contributing to greater uncertainty and more risk. We can identify six radically new dimensions.

First, country risk managers are used to focussing on country-specific risk features, such as balance of payments deficits, exchange rate, indebtedness ratios and political fragility. But the globalised market economy has added a new component of country risk, namely spill-over effect and crisis contamination. Indeed, the full scope and range of the risks economic agents face in the global economy is precisely that this economy is global. This “echo chamber” that propagates and accentuates imbalances is bound to breed volatility and crises. Worldwide income inequalities within and among countries impede the conditions for stable, sustained growth, feeding instead social disorder, migrations, and political upheaval. Many investors and domestic residents, often in rich countries with poor populations, are plagued by failed states. These changing conditions mean that country risk managers have only done part of their job when they analyse the socio-economic and political situation of a specific country.

Second, the traditional divide between developed/emerging countries is at best obsolete, and at worst, a source of errors in country risk assessment. This divide adds a conceptual myopia to the complexity of economic, financial and socio-political risk assessment. Emerging market countries with large external debt and with little export diversification have been the traditional focus of Country Risk. But liquidity and solvency challenges have shifted north-west, towards developed countries. On average, the solvency ratios (i.e. public debt to GDP) are near or above 100% for the majority of developed countries, while many emerging market countries have boasted substantial current account surpluses since the late 1990s. In recent years, such concerns have led rating agencies to shift the risk focus from emerging to developed markets, with a much larger number of downgrades for the latter.

Developed countries with mature and sophisticated legal, regulatory and institutional frameworks are not immune to turbulence.

Third, for long developing countries with weak socio-political institutions have held the monopoly of political volatility. This is no longer true. Developed countries with mature and sophisticated legal, regulatory and institutional frameworks are not immune to turbulence. Drastic adjustment measures in advanced economies have contributed to socio-political turmoil, notably in the EU. Greece, Spain, Portugal and to a lesser extent Italy and France, have witnessed the emergence of radical political parties as a response to the growing discredit of traditional channels of popular mobilisation. The downgrading of developed countries since the inception of the global crisis has, in many cases, been rooted in political risk. When S&Ps lowered the US long-term sovereign rating in August 2011, the agency spotlighted the political uncertainty of American policymaking. Widening wealth gaps, terrorism threats and immigration-driven political radicalism nurtures social volatility in industrialised nations.

Fourth, country risk managers can no longer rely on traditional yardsticks of risk rating and ranking. Volatility, herd instinct and complexity make quantitative assessment of Country Risk at best biased tools and at worst recipes for simplistic outlooks. Rating agencies almost systematically failed to predict crises over the last three decades. Exchange rate depreciation, falling commodity export revenues, deteriorating creditworthiness, and socio-political upheavals have been followed rather than preceded by rating signals. Country Risk in the age of globalisation thus requires managers to be more agile, broad-minded and innovative than in the past. Only an array of converging analytical approaches can lead to a more rigorous examination of the economic, institutional and socio-political fabric that keeps in line or distorts a country’s development path. The latter requires economic growth coupled with those conditions that make it sustainable, including a legitimate political power base, social mobilisation, sound institutions and robust infrastructures.

Fifth, Country Risk has become the by-product of complex intertwining between the public and private sectors. Financial sector weaknesses constitute a new channel of Country Risk due to large sovereign claims that are held by financial institutions which would suffer from bond value declines, including in supposedly more regulated markets such as Japan, the Eurozone, and the United States. As the IMF has warned: “Sovereign risks have been transformed in a number of important ways as a direct consequence of the crisis and major fault lines in the financial sector. As the public sector intervened to support financial institutions, distinctions between sovereign and non-sovereign and private liabilities have been blurred, and public exposure to private risks has increased.”¹

2. The Domestic Dimension of Country Risk.

Domestic residents also face Country Risk from their own country’s socio-economic and political turmoil. A country’s government can take arbitrary decisions that will alter residents’ economic and social prosperity.

The sixth and last change in Country Risk is probably the most important. For too long the definition of country risk analysis has been restricted to the assessment of a foreign entity’s ability and willingness to meet its external obligations in full and on time. This narrow definition concerns only the cross-border claims of foreign economic agents while excluding domestic residents. The exclusive focus on a foreign country’s uncertainty has proved elusive and in many ways risky. How can we explain the massive private capital outflows of residents of Venezuela who strive to mitigate the risk of an abrupt drop in purchasing power and mounting political turmoil? How can we account for the so-called brain drain in Spain in the aftermath of 2008, when thousands of young engineers, architects, and economists fled to work in Germany, Canada or the United States, to escape massive unemployment and shrinking job opportunities? How should we analyse the 15% drop in the pound exchange rate in the wake of the narrow victory of Brexit in June of 2016, feeding inflation and hurting the competitiveness of British industry?

Each of these examples shows that Country Risk is not the monopoly of foreign creditors, exporters, or investors. Domestic residents also face Country Risk from their own country’s socio-economic and political turmoil. A country’s government can take arbitrary decisions that will alter residents’ economic and social prosperity. Private corporations, banks and insurance companies, as well as households, all face the risk of rising uncertainty and a destabilising business environment that will affect profit, investment and revenue opportunities. The man in the street is faced with Country Risk in times of corruption, volatile tax regulations, heavy bureaucracy, inflation, devaluation and negative real interest rates. The range of risk mitigation tools commonly available is rather limited. Risk hedging policies for those whose real value of savings is at stake include cutting consumption, holding gold and shifting liquid assets abroad. A country’s government can become hostile to its own population. In addition, a deterioration in the perception of risk by capital markets and rating agencies will feed back into domestic residents’ environment and well-being.

3. Country Risk in the Age of Donald Trump’s Presidency.

In the United States, domestic sources of Country Risk have been increasing since the turbulent election of Donald Trump in November of 2016. One can distinguish three main sources of Trump-driven volatility, namely, direct, indirect, and collateral sources of Country Risk:

One source of volatility came from the rising uncertainty of financial investment in the US stock market during the tough election campaign of late 2016 between Clinton and Trump. As noted by an investment bank’s report to its clients: “Trump’s election means that financial markets will have to digest additional monetary uncertainty. He has been saying for some time now that interest rates have been too low for too long and that he does not wish to reappoint Janet Yellen.”² Another cause of volatility could stem from the US Congress’ failure to raise the debt ceiling in the Fall of 2017, triggering a chain reaction of higher bond yields, with dramatic consequences for banks, insurance companies and investors globally. As noted by Aon’s political risk experts: “Although the scope and scale of President Trump’s policies are as yet unclear, proposed policies include trade and investment restrictions, greater government spending and lower taxes, resulting in wider fiscal deficits (and greater debt levels) and restrictions on immigration, which may impact remittances.”³ Another cause of uncertainty is the populist, trade protectionist and anti-globalisation stance of Donald Trump that has created widespread anxiety in US companies with stakes in export and import markets in Mexico and Canada. Brookings data show that “the United States trades as much with Canada and Mexico as it does with Japan, Korea, and the BRICS combined. Millions of jobs in US states depend on exports to Canada and Mexico.”⁴ In addition, many companies rely on supply chains with suppliers in Canada and Mexico to import intermediate inputs for the domestic US market or for re-exporting. At stake is the global competitiveness of US manufacturing whose reliance on a much weaker dollar would make imports more expensive without boosting trade markets. Trump’s harsh anti-globalisation rhetoric and his “Buy American” slogan have led governors and mayors to promote investment pledges aimed at reassuring foreign companies whose supply chains nurture employment. Needless to say, the US dependence on oil supplies from both Canada and Mexico could of course not be offset by a diversification of energy resources from the Middle East and still less from Venezuela. Last but not least, an additional cause of uncertainty is Trump’s deregulation objectives that are applauded by free-market fundamentalists while encouraging the financial sector to take excessive risk.

Perhaps still more dangerous is a deeply-rooted split that is emerging between two forces in the United States’ socio-political arena: on the one hand, the traditional institutional set up, including political parties, “mainstream” media, the federal agencies, academia, and the unions; and on the other, a popular base that claims that these institutional actors are discredited and represent a secretive class of globalist bureaucrats. A so-called “deep state” is accused of constituting a disloyal force and powerful inertia in Washington that defends the interests of globalised business against those of the man in the street. Consequently, the strength of traditional media channels is challenged by alternative conservative media groups (such as Breitbart, Infowars, Sinclair Broadcast Group, and to some extent FoxNews).⁵ Donald Trump’s repeated accusations that the mainstream media are dishonest, coupled with dwindling readership, tend to discredit mass channels of public opinion while substituting the direct thrust of presidential tweets and biased news from his most vocal supporters in conservative-leaning digital networks. As noted by Zingales: “Inquisitive, daring and influential media outlets willing to take a strong stand against economic power are essential in a capitalist society. They are our defence against crony capitalism.”⁶

4. Conclusion:

To reach sustainability, market-based capitalism requires a minimum level of socio-political stability to preserve democratic rights and economic inclusiveness. Today, its two main threats come from widening wealth gaps and radical populism whose fertile ground combines global terrorism, corruption, discredited elites and migration flows. When traditional channels of the public voice such as parties, unions and media are bypassed or prove to be ineffective, a crisis of social mediation is not far from the horizon. Frustration and social demands find shortcuts that result in “the age of brutality”. Civil society’s ability to challenge power is an essential component of modernisation. Today, competitive capitalism has become inherently unstable due to mounting scepticism regarding the fair distribution of its benefits and its stubborn myopia concerning the natural environment. Donald Trump in the White House could not be further from representing an impartial arbiter setting fair rules for the game and enforcing them to help level the playing field. Under his “fire and fury” presidency, uncertainty, volatility and hence Country Risk will continue to rise both in the United States and globally.

Featured Image: © Bloomberg | Getty

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About the Author

Michel-Henry Bouchet is Distinguished Global Finance Professor at Skema Business School. After an international career at BNP, the World Bank and the Washington-based Institute of International Finance, he was founder and CEO of Owen Stanley Financial, a specialised advisory firm dealing with debt restructuring strategy for national governments. His next book entitled “Country Risk in the Age of Globalization” will be published by Palgrave-McMillan in the beginning of 2018, together with C. Fishkin and A. Goguel.

References

1. Definition and Measurement of Sovereign Risk Need to be Broadened, Press Release No. 11/91, IMF, Washington, D.C. March 18, 2011.
2. Kempen Capital Management, Turbulence with Trump: Special Report, 9 November 2016.
3. Aon Political Risk report 2017, page 10.
4. Parilla, J. “How US states rely on the NAFTA supply chain”, Brookings, March 30, 2017.
5. The number of readers of the WSJ weakened from 10,13 million in the Fall of 2009 to only 8,5 in 2015-16. https://www.statista.com/statistics/229986/readers-of-the-wall-street-journal-daily-edition/
6. Luigi Zingales, A strong press is best defense against crony capitalism, Financial Times, October 18, 2015.

Anatomy of the Global Economy and Its Implications for Protectionism

November 23, 2017

By Sa’idu Sulaiman

Can protectionism, a major component of mercantilism which was practiced in Europe from 16^th to 18^th century, be well-suited with the global economy in the era of globalisation? This discourse examines the framework of the global economy in the context of advanced globalisation by citing relevant literature and then explains its implications for protectionism. It shows that the global economy is, among others, characterised by interdependence among nations which does not go well with protectionism, and concludes that the adoption of positive globalism and supplementing macroeconomic policies with globoeconomic policies could be more useful to the global economy.

Introduction

The global economy is the sum total of the economies of individuals, corporations and all nations in existence today. It is influencing the economies of individual nations and at the same time being influenced by macroeconomic policies of the individual nations and the economic policies of world bodies like the World Trade Organization, World Bank, International Monetary Fund, etc. Protectionism, a significant component of the 16^th mercantilist economist system that emerged in Europe, is still being pursued to protect national economies from the perceived and real threats of globalism and international competition. It has repercussions for the global economy. The global economy too, as product of the forces of globalisation, has acquired certain features and components which define its anatomy and strengthens its influence on or reactions to protectionist policies. The goals of this article are examining the anatomy of the global economy in the era of globalisation and explaining its implications for protectionism.

Protectionism as an Essential Component of Mercantilism

To understand why protectionism is an essential component of mercantilism or economic nationalism, one needs to know the history mercantilism and its main characteristics and goals. Mercantilism became popular in Europe during the 1500s. It replaced the older, feudal economic system in Western Europe, especially in Netherlands, France and England. In England, the first large-scale and integrative approach to mercantilism was started during the Elizabethan Era (1558-1603). The most notable people in establishing the English mercantilist system include Gerard de Malynes and Thomas Mun, who first articulated the Elizabethan system which was developed further by Josiah Child. Mercantilism was the economic version of warfare that used economics as a means for warfare. It was a form of economic nationalism.¹

Laura LaHaye, an Adjunct Professor at the Illinois Institute of Technology and former research economist with the General Agreement on Tariffs and Trade, writes that the means of achieving the goals of mercantilism include, among others, imposing high tariffs on the importation of finished goods that competed with local manufacturers, and low or no taxes on the importation of raw materials or exotic products. Other goals are imposing low or no taxes on the export of finished goods, and high taxes on the exportation of raw materials. The mercantile system, she adds, “served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state”.² Mercantilism has advantages and disadvantages. It had a positive impact on Britain helping it to turn into the world’s dominant trader and global power. The Italian city-state of Venice, which monopolised the Mediterranean pilgrim and spice trades, prohibited the importation of finished products and forced all Venetian naval traffic to make a stop in Venice regardless of the cargoes final destination. This ensured additional economic activities within Venice and enriched it at its consumers’ expense.³

The first school of economic thought to completely reject mercantilism was that of the physiocrats, a group of French scholars led by François Quesnay (1694-1774).⁴ As advocates of laissez-faire, the physiocrats saw no distinction between domestic and foreign trade and believed that all trade was beneficial both to the trader and the public, in contrast to the mercantilists who perceived trade as a zero-sum game. Adams Smith, who is considered to be greatest critic of mercantilism, regarded the mercantile system as a gigantic conspiracy by manufacturers and merchants against consumers. He demonstrated that trade, when freely initiated, benefitted both parties and that specialisation in production allowed for economies of scale which improved efficiency and growth. He also pointed out that the collusive relationship between government and industry was harmful to the general population.⁵

A study that involved respondents from 33 countries across five continents investigated how the different characteristics of both individuals and countries determine peoples’ support for protectionism. Part of the results indicate that support for protectionism increases when inflation pressures become high despite the fact that trade liberalisation would rationally push prices down. The researchers’ conclusions, among others, are that the best way to overcome the pessimistic view about free trade is to increase peoples’ skills; more educated people are more likely to support free trade wherever they reside; and finally, supply of transparent information about trade restrictions, trade composition and the significance of export sectors and foreign markets might also reduce peoples’ support for protectionism.⁶

The Anatomy of the Global Economy

As it has been rightly stated, the global economy is, presently, a very complex system that links people in different nations through trade and flow of goods, services and information. One of its features is interdependence.

The global economy has parts or causes that give it a form or structure; in other words, it has an anatomy or framework that characterises its form, direction and essence. As it has been rightly stated, the global economy is, presently, a very complex system that links people in different nations through trade and flow of goods, services and information. One of its features is interdependence. As national economies are increasingly being integrated through global trade, the economic growth of a given nation is also increasingly dependent on the economic welfare of its trade partners.⁷

In the current phase of globalisation, changes in policy and technology has brought vertical disintegration of production in several industries while structural change in the global economy is increasingly connected to functional and spatial fragmentation of production and consumption as well as their reintegration through trade. So trade in intermediate goods has grown faster than trade in final goods, leading to a higher degree in interdependence among national production systems and higher exposure to external shocks as depicted by the 2009 global crisis.⁸

The contemporary world, as D Keet explains, conceives the global economy in four different ways:

1. It is seen as an international economic system within which economies of individual nations rapidly being absorbed and disappearing because the economic system is characterised by porous borders and limited policy options that are losing viability and relevance.

2. It is seen as the sum of complex interactions between national economies.

3. The global economy is conceived as a complex combination of national economies or national economies within regional economies, upon which transnational economic agents and international institutions and regulations operate.

4. It is viewed as a dynamic combination of a distinctive supra-national global economy manifested by the independent operations of transnational economic agencies and actors which act upon and interact with the economies of individual nations and with regional economies.⁹

A good example of the interdependence among nations, which is salient in the anatomy of the global economy, comes from the production of the Boeing 787 Dreamliner which is creating significant new employment in a number of nations. The wings of the aircraft are made in Japan, the engines in the United Kingdom and the United States, the flaps and ailerons in Canada and Australia, while the fuselage is made in Japan, Italy and the United States. The horizontal stabilisers are made in Italy, the landing gear in France while the doors are produced in Sweden and France. The production of this aircraft involves 43 suppliers spread over 135 sites around the world collaborating and cooperating with one another for their mutual benefit.¹⁰

From what has been said, it is clear that economies of individual nations are now being absorbed into the global economy. It is further indicated that national economies are losing viability and relevance. The global economy, as depicted above, is characterised by interdependence and complex interactions between national economies and the global economy. The economy of France, for instance, interacts and is acted upon by the European economy, which is a regional economy and by the global economy and the international economic institutions such as the World Bank and the I.M.F. Macroeconomic policy in France could be less effective without the consideration of the influences of the European economy and the global economy.

The world will become more united in confronting poverty, illiteracy, malnutrition, global warming, terror and violation of human rights if it accepts positive globalism and shuns negative globalism which often serves as the basis for protectionism.

With the ever increasing forces of globalisation, achieving macroeconomic policy objectives by any single nation is becoming increasingly ineffective. Nations need to fashion out mutually beneficial globoeconomic policies that will also promote peace and understanding among them. Globoeconomics is defined as the study of macro-economic variables and policies of a nation, region or the entire globe as they influence or are influenced by macroeconomic variables and policies of other nations or regions as a result of globalisation.¹¹

Globalisation has been in existence for a long time though being manifested in different forms. It will never cease to exist. It will continue to influence economies of the world in both positive and negative ways. The global economy will prosper when world leaders and policy makers prefer positive globalism to nationalism. The world will become more united in confronting poverty, illiteracy, malnutrition, global warming, terror and violation of human rights if it accepts positive globalism and shuns negative globalism which often serves as the basis for protectionism. Positive globalism means showing love and concern for humanity in general and taking lawful measures to promote its wellbeing without any form of discrimination, while negative globalism means surrendering the sovereignty of individual nations to an amalgam of a domineering authority or organisation seeking to control them through biased laws and regulations, evil plotting and machinations.¹²

The Implications

One of the main implications of the anatomy of the global economy for protectionism in era of globalisation is that there are little chances for protectionism to yield positive results to individual nations that that adopt it as trade policy, and to their trading partners in the global arena. Another implication is that the global economy, as it is now, is incompatible with protectionist policies because by restricting competition in production of goods and services, protectionism can be counterproductive and by reducing consumer satisfaction and standard of living. It can have negative repercussions on the quality of peoples’ lives.

Nations with infant and weak industries facing strong competition coming foreign firms should endeavour to deal with this obstacle through provision of facilities and capacity building for meeting the challenges that are inherent in free trade.

Geoffrey Garrett recently argues that free trade, which one can see as the opposite of protectionism, improves the living standards of people because it lowers the cost of goods and services and produces economic winners and losers, and that compensating the losers, who are few, concentrated workers that lost their jobs to foreigners, can be away of offsetting its negative effects. He further observes that rapid technological change coupled with economic stagnation in Middle America had caused more pain than free trade. So the biggest challenges for the Trump administration are increasing America’s growth rate and helping more Americans to benefit from the revolution in information technology.¹³

Protectionism can also spur misunderstanding and fan the embers of hatred among members of the international community. Nations with infant and weak industries facing strong competition coming foreign firms should endeavour to deal with this obstacle through provision of facilities and capacity building for meeting the challenges that are inherent in free trade.

Conclusion

Protectionism has been an essential component of the 16^th century mercantilism which had been receiving support and criticisms since that time. The global economy is presently characterised increased interdependence among nations and by complex interactions between national economies and the global economy. With the features it has acquired due to the forces of globalisation, the global economy does not go well with protectionism. Nowadays the adoption of positive globalism and supplementing macroeconomic policies with globoeconomic policies could be more useful to the global economy than the adoption of protectionism or economic nationalism.

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About the Author

Sa’idu Sulaiman is a Chief Lecturer of Economics at the Sa’adatu Rimi College of Education, Kano, Nigeria. He is also an author of books such as 12 Facts about Protectionism and the Global Economy, 9 Requirements for Quality Research and Academic Papers, Unforgettable Experiences in Abuja, Manchester and London, two recent novels, The Desperate Migrant and What Matters Most.

References

1. Mercantilism. Retrieved on February 12, 2017 from https://en.m.wikipedia.org/wiki/Mercantilism
2. Laura LaHay (2008) Mercantilism. Liberty Fund, Inc. Retrieved on February 16, 2017 from http://www.econlib.org/library/Enc/Mercantilism.html
3. Mercantilism. Retrieved on February 13, from https://en.m.wikipedia.org/wiki/Mercantilism
4. Sulaiman, Sa’idu (2012) The Making of Economics: an Introduction to the History of Economic Thought. Kano: Samarib Publishers.
5. Mercantilism. Retrieved on February 12, 2017 from https://en.m.wikipedia.org/wiki/Mercantilism and Laura LaHay (2008 ) Mercantilism. Liberty Fund, Inc Retrieved on February 16, 2017 from http://www.econlib.org/library/Enc/Mercantilism.html
6. Melgar, Natalia; Milgram-Baleix, Juliette and Rossi1, Máximo (2013) “Explaining Protectionism Support: The Role of Economic Factors” International Scholarly Research Notices (ISRN) Economics.Volume 2013 (2013), 14 pages. Accessed of September 12, 2017 from https://www.hindawi.com/journals/isrn/2013/954071/
7. AAG Centre for Global Geography Education (undated) Global Economy Module: Conceptual Framework. Retrieved on September 11, 2017
8. Memedovic, Olga and Lapadare, Lelio (2009) Structural Change in the World in the World Economy: Main Features and Trends, Research and Statistics Branch Working Paper 24/2009. United Nations Industrial Development Organization. Retrieved on September 11, 2017 from http://www.unido.org>Pub_free>Structrural_change_in-the_world_economy.pdf
9. Keet, D. 1999, Globalization and Regionalization: Contradictory Tendencies, Counteractive Tactics or Strategic Possibilities. (Braamfontein: The Foundation for Global Dialogue)
10. Organisation for Economic Co-operation and Development (2017) Why open markets matter OECD Direct. Retrieved on September 12, 2017 from http://www.oecd.org/trade/whyopenmarketsmatter.htm
11. Sulaiman, Sa’idu (2004) The Impact of Globalization on Macroeconomic Policies of Nations and the Need for the Adoption of Globoeconomics, unpublished paper.
12. See Sulaiman, Sa’idu (2017) 12 Facts about Protectionism and the Global Economy. Available at https://www.amazon.com/Facts-About-Protectionism-Global-Economy/dp/1544739036
13. For details, see Wharton School of the University of Pennsylvania (2017) Do Trade Agreements Lead to Income Inequality? Retrieved on February 6, 2017 from http://knowledge.wharton.upenn.edu/article/do-trade-agreements-lead-to-income-inequality/

Getting to Yes with China and North Korea

November 20, 2017

By Walter Clemens, Jr.

We are all for world peace and economic stability. But who holds the key? In this article, the author shares his expert insights on how the United States could come to terms with China and North Korea. In the end, rewards, and not sanctions, might just be the key to a better world.

The United States is Number One in “hard power” that can be used to compel and coerce others to change their behaviour. But Washington can also use its military and economic strengths for “soft power” goals – to persuade and coopt others for joint gains. The United States did so in 1947–1950 when it expended nearly three percent of GDP under the Marshall Plan to help friends and former foes to rebuild and ally for shared objectives. The programme incentivised France to cooperate with Germany and the Benelux countries to cooperate with France. When the US economy slowed, trade with revitalised Europeans kept US factories and workers busy. Mutual gain laid the basis for a shared prosperity and military security community that remain strong after nearly seven decades.

Instead of threatening today’s adversaries around the world, the United States could carry a big stick but also offer positive incentives to resolve disputes. As Roger Fisher and William Ury argued in Getting to Yes, we need to search for arrangements that meet the basic interests of each share-holder.

Two of the major conflicts in East Asia concern China’s claims in its offshore waters and its policies to North Korea. China’s claims islands and rocky outcroppings in the South China Sea and has begun to fortify them. An international court at the Hague has ruled that China has no historic or other right to this territorial aggrandisement. What could Washington offer to persuade China to pull back before an arms conflict ensues with US ships demonstrating their right to sail in international waters? First, Washington could back a programme of cooperation among all the littoral nations – China, the Philippines, Vietnam and others – to develop and share the mineral and fishing riches of the disputed waters. Second, the United States could commit to cutting back its intelligence gathering from ships and planes traversing waters close to the Chinese mainland. Neither step would bring material gain to the United States but could save it from a perilous military confrontation.

The United States should also assure China that – no matter what happens there – US troops will never advance further north than the outskirts of Pyongyang.

With regard to North Korea, Beijing and Washington need to plan for alternative futures. If the regime collapses, Beijing and Washington should agree in advance how to dispose of DPRK nuclear weapons and facilities. The United States should also assure China that – no matter what happens there – US troops will never advance further north than the outskirts of Pyongyang. If the two Koreas merged and nuclear weapons removed, US troops could be withdrawn from the peninsula.

Positive incentives helped achieve the Agreed Framework signed by US and DPRK negotiators in 1994. The North agreed to stop production of plutonium in return for construction of two light water power reactors and – until they began operating – regular deliveries of heavy oil. Both sides denounced the accord in 2002. Washington complained that the North cheated by starting to enrich uranium. Pyongyang countered that the United States broke its obligations. Contrary to Japanese Prime Minister Shinzo Abe,¹ by 2002 construction of the reactors had still not begun and oil deliveries often arrived late. Also, Washington had done nothing to normalise political relations with the DPRK as pledged in 1994.

Today, some US leaders say that “everything is on the table” with North Korea. They claim to prefer diplomacy to war, but some say that “we have tried everything with North Korea and achieved nothing”. Some policy analysts conclude that we must use military force or just settle for deterring another nuclear-armed adversary.

The reality is that the United States and its partners have done little to leverage their economic and other strengths to offer Pyongyang positive inducements to change its behaviour. Indeed, after North Korea’s sixth nuclear test, President Donald Trump denounced as “appeasement” the efforts of South Korea’s president to re-engage the North in sports and other forms of cooperation. Many if not most of America’s leaders are short on empathy. They cannot imagine how the world looks when confronted with huge US-South Korean military exercises that include amphibious landings and missions to “de-capitate” the Pyongyang leadership.

What positive actions could Washington and Seoul offer the North? The US could accept the North’s frequent requests to negotiate a peace treaty to supersede the 1953 armistice. Washington could offer to establish diplomatic relations with Pyongyang. The scope of US-South Korean military exercises could be reduced. In tandem with these moves US and South Korean leaders could demand a freeze of the North’s missile and nuclear tests. The aim would be to trade “security” for “arms control”.

Another kind of inducement is suggested by Shepherd Iverson’s new book Stop North Korea! A Radical New Approach to the North Korean Standoff (Tuttle, 2017). A professor for eight years at Inha University in Incheon, Iverson makes the case for a version of economic statecraft – a buy-out of North Korea as if it were an under-performing corporation controlled by a board of short-sighted, rent-seeking bosses. One could debate all the payouts, but Iverson’s principle would remain: the transfer of billions of dollars to the “enemy” to achieve both unification and de-nuclearisation.

Iverson suggests that the South Korean government and its Bank of Korea, joined by chaebols (such as Samsung) and other private investors, create a multibillion dollar Reunification Investment Fund to rescue and integrate the North. The buy-out would cost $175 billion spread out over seven years. Less than 20 percent of this money would go to elites and military officials who benefit from the existing rule, while the rest would be distributed widely. All this could stimulate a new political economy in which all North Koreans would benefit.

Iverson’s proposal, if implemented, could bring about peaceful unification of the two Koreas and de-nuclearisation of the peninsula in a short time. But could it be adopted by prospective donors and accepted by the powers that be in Pyongyang?

An investment of $175 billion would be a trivial outlay if it prevented war and reduced defence expenditures.

In return for outsiders’ largesse, the North would join the South in a united Korea without nuclear arms. The Bank of Korea and other contributors to the fund would soon recover their investments. All Korea’s neighbours plus the United States and Europe could profit from new business opportunities. Russia would obtain a gas pipeline into all of Korea. China would be freed from a perennial headache and could access Korean minerals. A unified Korea would gain peace and stability, more people and territory, more mineral resources, greater energy security and diversification, valuable Pacific ports, along with rail connections to China, Russia, and continental Europe. The greatest gain for all would be elimination of a serious security threat for every nation in the region and the United States. An investment of $175 billion would be a trivial outlay if it prevented war and reduced defence expenditures.

Iverson does not address whatever financial burdens for South Koreans resulted from integrating North and South. Iverson expects that chaebols and smaller enterprises in the South would make huge profits from freely expanding into the North. But some experts estimate that unification could cost South Koreans from half a trillion to a trillion dollars – far more than the cost of the initial buy-out.

Threats and sanctions (loaded with loopholes) have not halted North Korea’s arms buildup or reduced tensions in Northeast Asia. All the key actors in the region need to think how they could use their assets to create positive values and forge a better future for all parties. Rewards, not sanctions, could be the key to greater prosperity as well as stability.

Featured Image: Chinese President Xi Jinping courtesy of zedbooks.net, US President Donald Trump courtesy of The Independent & North Korean Supreme Leader Kim Jong Un courtesy of KCNA Via KNS/AFP/Getty Images

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About the Author

Walter C. Clemens, Jr. is Associate, Harvard University Davis Center for Russian and Eurasian Studies and Professor Emeritus of Political Science at Boston University. He wrote North Korea and the World: Human Rights, Arms Control, and Strategies for Negotiation (Lexington: University Press of Kentucky, 2016). He can be reached at [email protected].

Reference

1. New York Times, September 18, 2017

Everyone Should Know How Long the American IRS Can Audit

November 20, 2017

By Robert W. Wood

The American IRS is known throughout the world, and FATCA, the US global reporting law, has extended its reach. Everyone should know how long the IRS has to audit or collect taxes under several different statutes of limitation.

Around the world, the IRS has a surprisingly long reach. To begin with US citizens and green card holders must report their worldwide income to the IRS. On top of that, companies and investors that have any US source income must report their income to the IRS too. And then there are the non-tax payment forms, such as FATCA compliance and financial account reporting.

When you consider the power of the IRS, it can be daunting for most anyone. Just look at how the IRS and US Justice Department radically reshaped the previously secretive and powerful world of Swiss banking. The IRS collected over $10 billion, and has now moved on to vast numbers of other offshore jurisdictions.

So, knowing how long you could be in the IRS crosshairs can be good business. The overarching federal tax statute of limitations runs three years after you file your tax return. But don’t stop with that simple rule. There are many exceptions that give the IRS six years or longer, in some cases forever.

The statute is six years if your return includes a “substantial understatement of income”. Generally, this means you have left off more than 25 percent of your gross income. The IRS has argued in court that other items on your tax return that have th e effect of more than a 25 percent understatement of gross income give it an extra three years. For years, there was litigation over what it means to omit income from your return.

In US v. Home Concrete & Supply, LLC, 132 S. Ct. 1836 (2012), the US Supreme Court slapped down the IRS, holding that overstating your tax basis in assets you sell is not the same as omitting income. But Congress overruled the Supreme Court and gave the IRS six years by statute, so that is the current law.

The overarching federal tax statute of limitations runs three years after you file your tax return. But don’t stop with that simple rule.

The IRS is still going after offshore income and assets in a big way, and that dovetails with another IRS audit rule. The three years is also doubled to six if you omitted more than $5,000 of foreign income (say, interest on an overseas account). This rule applies even if you disclosed the existence of the account on your tax return, and even if you filed an FBAR reporting the existence of the account.

Certain other forms related to foreign assets and foreign gifts or inheritances are also important. If you miss one of these forms, the statute never runs. If you receive a gift or inheritance of over $100,000 from a non-US person, you must file Form 3520. If you fail to file it, your statute of limitations never starts to run.

IRS Form 8938 was added to the tax law by FATCA, the Foreign Account Tax Compliance Act. Form 8938 requires US filers to disclose the details of foreign financial accounts and assets over certain thresholds. If you are required to file Form 8938 and skip it, the IRS clock never even starts to run.

If you own part of a foreign corporation, it can trigger extra reporting, including filing an IRS Form 5471. Failing to file it means penalties, generally $10,000 per form. A separate penalty can apply to each Form 5471 filed late, incomplete or inaccurate.

This penalty can apply even if no tax is due on the whole tax return. Even worse, if you fail to file a required Form 5471, your entire tax return remains open for audit indefinitely. Forms 5471 are not only required of US shareholders in controlled foreign corporations. They are also required when a US shareholder acquires stock resulting in 10 percent ownership in any foreign company.

What if you never file a tax return or file a fraudulent one? The IRS has no time limit if you never file a return, or if it can prove civil or criminal fraud. Statute of limitation issues come up frequently, and the facts can become confusing.

Consider what happens if an IRS notice is sent to a partnership, but not to its individual partners. The audit or tax dispute may be ongoing, but you may have no personal notice of it. You might think that your statute has run and that you are in the clear, but partnership tax rules may give the IRS extra time.

Also watch for cases where the statute may be “tolled” (held in abeyance) by an tsummons, even though you have no notice of it. A John Doe summons is issued not to taxpayers, but to banks and other third parties who have relationships with taxpayers. You may have no actual notice that the summons was issued. Yet it can extend your statute of limitations.

This can occur if a promoter has sold you on a tax strategy. The IRS may issue the promoter a summons asking for all the names of his client/customers. While he fights turning those names over, the statute of limitations clock for all of those clients is stopped.

Another situation in which the IRS statute is tolled is where the taxpayer is outside the United States. Even after many years, when you return, you may find that your tax problems can spring back to life.

The statute of limitations is sometimes about good record-keeping. Even being able to prove exactly when you filed your return, or exactly what forms or figures were included in your return, can be critical. For that reason, keep scrupulous records, including proof of when you mailed your returns.

The difference between winning and losing a tax case may depend on your records. The vast majority of IRS disputes are settled, and getting a good or mediocre settlement can hinge on your records too. The statute usually begins to run when a return is filed, so keep certified mail or courier confirmation.

If you file electronically, keep all the electronic data, plus a hard copy of your return. As for record retention, many people feel safe about destroying receipts and back-up data after six or seven years. However, you should never destroy old tax returns. Keep copies forever. Also, do not destroy old receipts if they relate to basis in an asset.

For example, receipts for home remodelling 15 years ago are still relevant, as long as you own the house. You may need to prove your basis when you later sell it, and you will want to claim a basis increase for the remodelling 15 years back. For all these reasons, be careful and keep good records.

It pays to know how far back you can be asked to prove your income, expenses, bank deposits and more. Finally, be careful how you respond to the IRS if you are contacted.

Once a tax assessment is made, the IRS collection statute is typically 10 years. This is the basic collection statute, but in some cases that ten years can essentially be renewed. And there are some cases where the IRS seems to have a memory like an elephant. For example, in Beeler v. Commissioner, T.C. Memo. 2013-130, the Tax Court held Mr. Beeler responsible for 30-year-old payroll tax liabilities.

Conclusion. An IRS audit or investigation can involve targetted questions and requests of proof of particular items only. Alternatively, it might cover the waterfront, asking for proof of virtually every item. Even if you do your best with your taxes, taxes are horribly complex. Innocent mistakes can sometimes be interpreted as suspect, and digging into the past is rarely pleasant.

Records that were at your fingertips when you filed might be buried or gone even a few years later. So, the stakes with these kinds of issues can be large. Tax lawyers and accountants are used to monitoring the duration of their clients’ audit exposure, and so should you. It pays to know how far back you can be asked to prove your income, expenses, bank deposits and more. Finally, be careful how you respond to the IRS if you are contacted.

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About the Author

Robert W. Wood is a tax lawyer representing clients worldwide from offices at Wood LLP, in San Francisco (www.WoodLLP.com). He is the author of numerous tax books, and writes frequently about taxes for Forbes.com, Tax Notes, and other publications. This discussion is not intended as legal advice.

Indonesia Islamic Economic Project: A Disruptive Initiative for a more Just, Inclusive, and Impactful Finance

November 20, 2017

By Banjaran Surya Indrastomo

Indonesia Islamic economic project was initiated in the periphery and has been expanding significantly in different spectrums generating both authentic and Islamic version of financial institutions. With the recent move by the government to accelerate the development, it has to acknowledge its nature to reach its most potential.

Common presumptive mistake that general observer of Islamic economic in Indonesia would typically have is on the belief that Islamic economic is naturally flourished and accommodated in the most populous Muslim country. Although it is not entirely erroneous to have such initial thought, the fact that the penetration of Islamic finance was considerably low in a country of 219.9 million Muslim,¹ with Islamic banking leading at around 5.3% by end 2016, set a contradicting reality on the ground.² Even, Indonesia was not among top five countries of Islamic finance by size. This opposing fact might suggest the assumption that Islamic economics is naturally fitted in Muslim majority context does not always stand. Nevertheless, one could not take away the condition and the context over which Islamic economic realisations are taking place in different parts of the world and this is where Indonesia’s story is unique in particular. While most of Islamic economics project elsewhere were initiated by either Muslim regime or dominant Muslim group,³ the inception of the concept and its articulation in Indonesia happened through a bottom-up process involving processes of experimentation, collaboration, negotiation, and institutionalisation. This is where the story is becoming interesting as the Indonesian experience depict more of a civil initiative rather than imposed project in the setting where it could be assumed to be at its most welcomed and synchronised environment. In particular, this initiative was fuelled with spirit to realise just, inclusive, and impactful finance.

This opposing fact might suggest the assumption that Islamic economics is naturally fitted in Muslim majority context does not always stand.

Indonesia is a late comer in the global Islamic economic wave compared to other experiences. While the first experimental trial in the form of social bank came in Egypt in 1963, Indonesia’s experience began in early 1980s with cooperative-acting-as-microfinance providing Islamic-based financing at a time where Islamic Development Bank and the first Islamic-commercial bank in Dubai have already been established. The first Islamic bank of Indonesia was established ten years after in 1992, causing another delay for expansion and consolidation. This delay was not without a reason: at a time when the regime was consolidating the economy through a centralistic approach, such an idea integrating an experiment into a national plan was not a popular path in developmental planning. A negative stigma to initiative that carry Islamic agenda as a result of unpopular political Islam in the past is worsening any attempt to bring this case legitimate. Hence, when it first came into ground as a micro-level experiment, it is out of the initiative of small group of Islamic economic enthusiast influenced by global spread that was aware with the limited opportunity available for pushing for a bigger agenda of a messo-level institution. Therefore, this particular early stage development was uniquely bottom-up pushed within an available opportunity and rather unconducive environment.

Even though global influence was strong in Indonesian case, the initiative moved within the context of local problem that is already in existence in the ground. In coming with cooperative-acting-as-Islamic-Microfinance that later widely known as Baitul Maal Wa Tamwil, this small group of proponents of Islamic economics was aiming at addressing problems aroused from informal money lending practices that is considered zalim (unjust). This condition was substantiated as a problem aroused out of Riba, a forbidden practice within a transaction that was initially touching upon multiplying the payment from the principal that was popular in the medieval time and then later include the practice of interest taking in the modern time.⁴ The solution offered to this unacceptable practice is a partnership type of arrangement that resets the predetermined rate on giving financing by bringing together individual or groups and financial institution to share both potential risks and return under either Mudharabah or Musharakah contract.⁵ This arrangement is expected to eliminate injustice practice that burden those in need of capital through sharing risks rather than transferring risks. With its nature being an experiment, such initiative faced challenges and difficulties, resulting in series of failures.⁶ Nonetheless, the pursuance for a better model continued, triggering for institutional experiment and emergence in differing part of Indonesia with particular concentration in Java. This was indeed an indication of its focus on the impact.

While the micro expansion continued until end of 1980s, early 1990s period marked the beginning of collaborative initiative in developing Islamic economics through Islamic finance. With the lead of Scholar council, coalitional power that consist of civil leaders, technocrat, and Muslim intellectual was formed.⁷ This sparked new form of initiative that not only brought together different spectrum of influences but also targetted a higher objective within meso and macro level. Two achievements can be highlighted out of this: (i) a recognition of sharing practice in banking Act during deregulation process, and (ii) the formation of the first Islamic bank in Indonesia. These achievements were made possible due to consolidated attempts in different lines to assure that all required changes were there to support such action. For instance, a continuous approach to the regime was facilitated by the link and support from the Muslim intellectual circle whose influence was extended to the presidential circle. Indeed, those progresses were not possible without the consent of the regime. When the regime was on board, the president Suharto himself led the fund raising for the establishment of the bank.⁸ Beyond this process, the success of this collaboration took place through contextualising the presence of Islamic meso and macro products with the existing problem. One of the reason for that collaboration was on the fact this initiative was seen as a common solution to inclusivity in finance. This sourced from the belief that low financial deepening was contributed by religious reason related to prohibition of Riba. As such, Islamic bank in Indonesia was foreseen as a solution to this issue by regulator or regime at a time. On the other hand, Islamic bank was seen as a start for empowering Muslim in Indonesia through equitable financing. Hence, common ground could be reached between those with differing motives.

The progress made was an important milestone for proponent of Islamic economics as their marginal aspiration was institutionalised in later stage. This achievement managed to raise confidence level of those who believe with such structure. Albeit the hurdling regulatory environment within the frame of banking and other financial institutions, the continuous expansion of both Islamic banks and Islamic micro-economic institution along with other supporting institutions such as takaful, Islamic-version of insurance, has allowed the project to strengthen their presence. The collaboration even managed to be extended within Islamic finance ecosystem by fund channelling and other harmonisation attempt to back up those within the ecosystem. This collective mobilisation of capacity and resources in supporting each part has brought that recognition for Islamic finance industry as a legitimated industry. When Asian financial crisis hammered Indonesia in 1997-1998, a positive wave for reforming the financial sector has placed the industry on upper hand as the success of its Islamic bank to pass the crisis was seen as an avenue to strengthen the soundness and resilience of financial system.⁹ Since then, the project has seen an active involvement of regulatory body, especially Bank Indonesia, in facilitating further expansion of the industry and creating public awareness with various programmes. The expansion also stretched beyond intermediary institution toward other platform such as capital market. Regulator of capital market also innovated to allow Islamic capital market to grow with Islamic mutual fund and Sukuk to come together with Jakarta Islamic Index. Choiruzzad considered the leadership of regulatory bodies as timely given the decline of Muslim intellectual presence providing resources and authority to further institutionalised Islamic finance mode through collaboration.¹⁰

Indonesia Islamic capital market also recorded tremendous growth with increasing issuance of sukuk, especially government one that raised Rp. 87.31 Trillion, as a highlight.

With regulatory body driving the expansion of Islamic finance, the penetration of Islamic finance became visible as institutional presence soar with the market size of both banking institutions and other micro-oriented Islamic financial institution. In 2016, Islamic banks reached 34 units along with 163 Islamic rural banks spread across Indonesia.¹¹Non-banking institutions also grew in numbers with Takaful companies reaching 58 in number while Shari’ah financing companies and venture capital hit 40 and 7 in total. The total assets of Islamic finance in Indonesia accounted for around Rp. 897.1 Trillion by first quarter of 2017.¹² Indonesia Islamic capital market also recorded tremendous growth with increasing issuance of sukuk, especially government one that raised Rp. 87.31 Trillion, as a highlight. This does not include around 4,500 to 5,500 BMTs that spread both in urban and remoted areas opening access of financing to those sub-prime individuals and groups.¹³ It remains a mystery of the size of the total assets of these institutions, yet, some have been growing in size up to the level that it could not be categorised as micro institution. Hence, the expansion of Islamic finance not only happened through mainstreaming process but it also consistently pushed in the periphery serving underprivileged beyond middle class urban Indonesian.

The expansive nature of Islamic economic project of Indonesia finally attract the attention of the central authority. They realise the potential of such project in contributing to developmental agenda of the nation. In July 27^th, 2017, the government formed Komite Nasional Keuangan Syari’ah (“National Committee of Shari’ah Finance”) as a coordinating body in facilitating the development of Islamic economic and finance involving multiple stakeholders.¹⁴ This committee function to ensure that the masterplan of Shari’ah finance architecture that officially introduced in World Islamic Economic Forum 2016 can be executed. Within this mandate, this committee worked toward synergising regulators, government and industry, creating a synergised and progressive Shari’ah financial system that accommodate development, implementing the agenda of the masterplan, and integrating with halal-based industry.¹⁵ This move marked the beginning of government leading initiative within a movement that was bottom-up in nature. It is indeed a timely move considering the stagnancy of the industry since it is going mainstream which was contributed by structural issue related to regulation and incentive mechanism within taxation system.¹⁶

The expansive nature of Islamic economic project of Indonesia finally attract the attention of the central authority. They realise the potential of such project in contributing to developmental agenda of the nation.

Although the formation of KNKS demonstrate government commitment to foster the expansion of Islamic finance in having stronger presence and contribution to other expanding and halal industries, this move should be observed carefully in relation to disruptive nature of its development so far within the motives to reach just, inclusive, and impactful finance. It could not be denied that this alignment has been long awaited by some proponents of this Islamic economic project. Nevertheless, one should realise that this initiative was indeed periphery nature and concern toward reforming finance to go beyond its business as usual providing access and opportunity for greater masses that happened to be Muslim. When this frame was seen as a mode to mobilise capital, the purpose of this process should not only limit toward money making purpose but also toward a contribution that is in line with the goal of Shari’ah, which is Maqasid itself. This brings finance toward a greater dimension of responsibility to account for stakeholders, especially the underprivileged. For instance, in relation to recent discussion over the use of Hajj fund for development,¹⁷ this should be seen as a positive step stone as such funding would not only strengthen the capitalisation of Islamic financial industry but also exposed toward better management and disclosure standard. The challenge would be on its professionalisation to the extent that any allocation of investment should not only consider pay off but also its effect as well as liability management. As perpetual fund with particular mandate, the utilisation of the fund should first map its liability exposure and construct strategy accordingly without neglecting its responsibility toward national development, including in relation to infrastructure project. Such careful consideration is for the purpose of providing necessary space for Islamic economic project to remain disruptive and impactful in nature opposed to being conformist and structurally determined. Hence, a top-down approach should ensure that enabling mind-set should be put forward in facilitating further expansion of Islamic economic project in Indonesia with such a promising prospect in the future.

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About the Author

Banjaran Surya Indrastomo is an Islamic Political Economist by training with research focus on Islamic Economics, Islamic Economic Sociology, and Indonesia Islamic Economic experience. He is an Awardee of the Indonesia Endowment Fund for Education (LPDP) and is registered in the doctoral programme in Islamic Finance at Durham University Business School.

References

1. Badan Pusat Statistik, Statistical Yearbook of Indonesia 2016, https://www.bps.go.id/website/pdf_publikasi/Statistik-Indonesia-2016–_rev.pdf, (August 10, 2017)
2. Islamic Finance Service Board, Islamic Financial Services Industry Stability Report 2016, http://www.ifsb.org/docs/IFSI%20Stability%20Report%202016%20(final).pdf, (August 10, 2017)
3. Henry, C., M and Wilson, R., The Politics of Islamic Finance. (Edinburgh: Edinburgh University Press, 2004).
4. Siddiqi, M., N., “Current State of Knowledge and Development of the Disclipline” (Keynote Address, Roundtable on Islamic Economics, Islamic Research and Training Institute, Jeddah and the Arab Planning Institute, Kuwait, May 26-27, 2004).
5. Ahmad, M., Economics of Islam: A Comparative Study (Lahore: Muhammad Ashraf, 1947).
6. Antonio, M., S. “Islamic Banking in Indonesia”, (unpublished doctoral thesis, University of Melbourne, 2004).
7. Choiruzzad, S., A. and Nugroho, B., E., “Indonesia’s Islamic Economy Project and the Islamic Scholars”, Procedia Environmental Sciences 17 (2013): 957-966.
8. Perwataatmadja, K., A., Membumika Ekonomi Islam di Indonesia, (Depok: Usaha Kami, 1996).
9. Indrastomo, B., S., “The Emergence of Islamic Economic Movement in Indonesia”, Kyoto Bulletin of Islamic Area Studies, 9 (March 2016): 62-78.
10. Choiruzzad, S., A., “The Central Bank in the Development of Islamic Economy Project in Indonesia: Role, Motivations, and Moderating Effect”, The Ritsumeikan Journal of International Studies 25, 2 (2012): 125-172.
11. Otoritas Jasa Keuangan, Laporan Triwulanan Triwulan I – 2017, http://www.ojk.go.id/id/data-dan-statistik/ojk/Documents/Pages/Laporan-Triwulan-I—2017/Laporan%20Triwulan%20I-2017.pdf, (August 10, 2017)
12. Ibid
13. Bappenas, Komite Nasional Keuangan Syariah untuk Percepatan Pengembangan Ekonomi dan Keuangan Syari’ah Indonesia (Jakarta, 2017)
14. Geotimes, Presiden Resmikan KNKS untuk Kembangkan Perbankan Syariah <https://geotimes.co.id/presiden-resmikan-knks-untuk-kembangkan-perbankan-syariah/> [accessed 10 August 2017]
15. Bappenas, Komite Nasional Keuangan Syariah untuk Percepatan Pengembangan Ekonomi dan Keuangan Syari’ah Indonesia (Jakarta, 2017)
16. Thomson Reuters, Indonesia Islamic Finance Report: Prospects for Exponential Growth, <https://ceif.iba.edu.pk/pdf/ThomsonReuters-IndonesiaIslamicFinanceReportProspectsforExponentialGrowth.pdf> [accessed 10 August 2017]
17. Suryowati, E. Investasi Dana Haji untuk Infrastruktur Dikhawatirkan Bias Kepentingan http://nasional.kompas.com/read/2017/07/31/12345301/investasi-dana-haji-untuk-infrastruktur-dikhawatirkan-bias-kepentingan [accessed 10 August 2017]

Trump’s Asia Tour: From Old Conflicts to New Prospects

November 16, 2017

By Dan Steinbock

Trump’s gruelling 12-day Asia tour was a quest for mega deals. US policies in Asia are shifting. The stress on competitive strategic visions is being redefined by historic bilateral economic opportunities with China, Vietnam, South Korea, the Philippines and other ASEAN and APEC nations.

Diplomatic history has its ironies. In the Obama era, US President initiated a pivot to Asia that he had little time to visit. In the Trump era, US President has been so busy fortressing America against the world that he has had to spend more time in Asia to tame rumours about US disengagement.

This time President Trump’s strategic objective was in lucrative deal-making, which proved historical. In the future “America First” issues are likely to return with gusto, especially as the White House’s future is overshadowed by the Mueller investigation at home.

Golf, Trade and Arms in Japan

Besides golf with Prime Minister Shinzo Abe, Trump had a good reason to start his Asian tour in Japan. Outside of North America, Japan is America’s third-largest export market and second-largest source of imports. Japanese firms are the second-largest source of foreign direct investment (FDI) in the US, and Japanese investors are the largest foreign holders of US treasuries.

The aging Japan has a critical role in a containment scenario, which Washington would seize against Beijing, should the US-China bilateral relations fall apart.

Ever since Trump withdrew from the Trans-Pacific Partnership (TPP), the White House’s focus has been on a redefined bilateral trade deal with Japan that would also include significant arms deals. Strategically, the alliance rests on the forward deployment of 50,000 US troops and other US military assets in Japan, including the controversial Okinawa base.

After decades of secular stagnation, Japanese politics has been more stable after the victories of Abe’s Liberal Democratic Party in the 2012, 2016 and 2017 elections. But instead of seizing the historic opportunity to use political consolidation to reignite the Japanese economy, Abe has pursued controversial strategic initiatives, including re-militarisation, the US-style 2015 security legislation, and re-nuclearisation.

Ménage à Trois in the Korean Peninsula

Since the early 1950s, the Mutual Defense Treaty has allowed the US to dominate South Korea’s military defence. Today, some 29,000 US troops are based in the country, which is included under the US “nuclear umbrella”.

Realistically, the harder Trump will push Seoul economically, the more he will stand to lose strategically – and vice versa.

However, after the Park impeachment, South Korea opted for a strategic U-turn in economy and strategic relations. Elected in May 2017, President Moon Jae-in is no friend of the US anti-missile system (THAAD); he supports sanctions against North Korea, but only as long as it is aimed at bringing Pyongyang to the negotiating table.Moon does not accept the past Park-Obama “sanctions-only” approach toward North Korea, which the Trump administration has escalated with its “maximum pressure” principle.

South Korea remains the US’s seventh-largest trading partner and the US is South Korea’s second-largest trading partner. The two economies are joined by the Korea-US Free Trade Agreement (KORUS FTA). While the Trump administration has stated its intent to review and renegotiate the deal, it has not specified what it would like to amend.

Realistically, the harder Trump will push Seoul economically, the more he will stand to lose strategically – and vice versa.

Historic Deals to Avoid a Clash with China

In 2016, US-China trade amounted to $579 billion, while Trump’s singular focus is on the $368 billion trade deficit. Yet, merchandise trade is only one aspect of the broad bilateral economic relationship. Today, China is US’s second-largest merchandise trading partner, third-largest export market, and biggest source of imports.

During his tour, Trump was accompanied by CEOs of 30 companies. Hungry for huge deals, the last thing they wanted was Trump to undermine access to the $400 billion Chinese market, based on US exports to China, sales by US foreign affiliates in China, and re-exports of US products through Hong Kong to China.

The same goes for services, foreign direct investment (FDI) and US Treasury securities. China is America’s fourth largest services trading partner (at $70 billion), third-largest services export market, and US has a major services trade surplus with China. The combined annual US-China investment passed $60 billion in 2016, but there is room for far more as China has become the world’s third-largest source of global FDI. Finally, China remains the second-largest foreign holder of US Treasury securities ($1.2 billion as of August 2017), which help keep US interest rates low.

In Beijing, the Trump Administration more moderate approach toward China paid off – as evidenced by the historic $254 billion deals.

Nurturing Vietnam as ASEAN’s “Mini-China”

Trump’s tour featured two major Association of Southeast Asian Nations (ASEAN) nations, Vietnam and the Philippines. Since Obama’s military pivot to Asia, Washington has morphed its relationship with Vietnam into a “strategic partnership”.

Vietnam’s rapid growth in bilateral trade can be attributed to the post-1986 domestic economic reforms and US extension of normal trade relations (NTR) status in 2001.

Based on US data, bilateral trade soared from $220 million in 1994 to $45 billion in 2015, which has turned Vietnam into the 13^th-largest source for US imports (but only 37^th-largest destination for US exports). To Washington, Vietnam is a “mini-China”: the second-largest source of US clothing imports, a major source for electrical machinery, footwear, and furniture. While Washington seeks to protect US agricultural interests against Vietnam, the latter sees the regulation of its catfish-like basa imports in the US as protectionism.

Vietnam is hedging its trade bets. While it was a willing participant in the TPP, it is a party to negotiations to the Regional Comprehensive Economic Partnership (RCEP), a pan-Asian regional trade association that currently does not include the US but promotes the interests of emerging nations in Asia Pacific.

Duterte Re-calibration Between US and China

Washington’s ties with its former colony the Philippines grew deep during the controversial Marcos years (1965-86), which led to the end of the US bases in the country (1947-91) and the departure of US forces from the Philippines, and during the Aquino III years (2010-16), which resulted in the Enhanced Defense Cooperation Agreement (EDCA), the return of US forces to the Philippines, rearmament with Pentagon’s support and the escalation of maritime conflicts with China.

Since the 2016 election triumph of Rodrigo Duterte, the US-Philippines relationship has been subject to a recalibration and, in the end of the Obama era, alleged US efforts at destabilisation.

However, the twin periods of close US ties coincided with deep strategic dependency on US, increasing economic polarisation within the country and the spread of drugs, corruption and questionable “narco ties” with the pre-2016 regime.

Since the 2016 election triumph of Rodrigo Duterte, the US-Philippines relationship has been subject to a recalibration and, in the end of the Obama era, alleged US efforts at destabilisation. Duterte’s sovereign foreign policy is less reliant on US security guarantees and benefits from economic relations with China – even as he has been developing more constructive personal ties with the Trump White House.

Duterte has also been able to link the Philippines into the China-supported One Road One Belt (OBOR) initiative, which is vital to his government’s huge “Build, Build, Build” infrastructure program that is paving way to the tripling of the Philippine per capita incomes in the next 25 years.

ASEAN Tribute to the Not-so-benign Hegemon

Trump seeks to review and renegotiate many of the existing trade deals, while challenging the US postwar hub-and-spoke system of security alliances in the region. Unsurprisingly, then, several Association of Southeast Asian Nations (ASEAN), countries – such as Malaysia, Thailand and Singapore – that were not included in the current tour sought to preempt pressures.

During a recent visit, Premier Najib Raza announced that Malaysia’s large national pension fund and provident fund would invest several billion dollars in equity and infrastructure projects in the US as Malaysia Airlines pledged to explore options for acquiring more Boeing jetliners and General Electric engines at $10 billion.

Prime Minister Prayut Chanocha promised Thailand would buy Blackhawk and Lakota helicopters, a Cobra gunship, Harpoon missiles and F-16 fighter jet upgrades, plus 20 new Boeing jetliners for Thai Airways. Siam Cement Group agreed to purchase 155,000 tons of coal while Thai petroleum company PTT will invest in shale gas factories in Ohio. Prayut and Trump signed an MOU to facilitate $6 billion worth of investments that could create over 8,000 jobs in the US.

Tiny but wealthy Singapore followed in the footprints. Prime Minister Lee Hsien Loong showcased Singapore Airlines’ deal with Boeing for buying 39 B787 and B777-9 aircraft, which – as it was said – could create 70,000 jobs in the US.

That is the regional way to offer dollar-tribute to the US hegemon.

US Military Pivot to Asia

Trump’s Asian tour was also about the hard sell of military assets across the region. According to SIPRI, increases in global military spending are now driven by demand in Asia, along with the Middle East. During the Obama military pivot to Asia, Asia/Oceania received most of global imports (43%). Of the 10 largest importers in 2012-16, half were in India, China, Australia, Pakistan and Vietnam.

US dominates imports to its key security allies in East Asia and Oceania; Australia, Japan, and South Korea. In the past, these were thriving economies; today, they are aging and slowing. Growth markets are in emerging Asia, which is less prosperous and thus not willing to pay the US price premium, especially with more cost-efficient arms rivals, such as Russia.

When President Obama gave eloquent speeches about peace, his pivot to Asia contributed to maritime conflicts in the region fuelling demand for weapons. But Pentagon did not cash the profits. Russia accounted for most arms deliveries to Asia and Oceania (37%), followed by the US (27%) and China (10%).

And despite US-India strategic cooperation, Russia dominated arms imports in India (68% of total imports) and Vietnam (88%). Meanwhile, China has become a major arms supplier in Pakistan (68%), Bangladesh (73%), and Myanmar (70%).

From TPP Lite to Real Free Trade in Asia Pacific

After Japan, South Korea, China and Vietnam, Trump attended the Asia Pacific Economic Cooperation (APEC) Summit in Danang, Vietnam, followed by the 50^th Anniversary of ASEAN and 40^th Anniversary of the US-ASEAN Relations in Manila.

While trade ministers from 11 countries announced they would push ahead with a TPP lite, Abe may have seen the newly-named Comprehensive and Progressive Agreement for Trans-Pacific Partnership as a rival to the China-supported RCEP. In reality, it is a shaky TPP lite that will serve as a face-saving measure to him but as a hedge option to other 10 nations.

The US has a role in the ASEAN Economic Community (AEC), APEC and the US-ASEAN Connect Framework – as long as its engagement rests on economic cooperation, not geopolitical destabilisation.

With the failed original TPP, the “America First” doctrine, Washington’s polarisation and the impending impasse of the Mueller investigation, APEC hopes for greater US initiative in the region rest on quick-sand. The best APEC may hope for is long-term US-Chinese cooperation for the Free Trade Area of Asia-Pacific (FTAAP), which focuses on trade and investment and has room for both the US and China.

In this view, the US has a role in the ASEAN Economic Community (AEC), APEC and the US-ASEAN Connect Framework – as long as its engagement rests on economic cooperation, not geopolitical destabilisation. In turn, the ASEAN nations’ integration plan AEC 2025 can benefit from China’s globalisation initiatives, particularly the OBOR and the Asian Infrastructure Investment initiative (AIIP). In contrast, an enforced “America First” doctrine would undermine ASEAN 2025 goals.

A Historical US-Chinese Opportunity

In a defiant address, Trump told the APEC meeting that the US would no longer tolerate “chronic trade abuses”, while Xi announced that globalisation was irreversible. What got lost in the translation was the intriguing fact – and historical opportunity – that the Trump and Xi visions need not be seen as exclusive.

In fact, both the US and Chinese visions support globalisation, but with caveats. Both criticise the old multilateral international banks, though for different reasons. Both believe in rebalancing that is not accompanied by excessive trade deficits and foreign investment that should benefit both investors and destinations.

It is not the competitive US-China visions that offer a new path to the future in Asia Pacific. Rather, it is the inherent commonalities in these approaches that could sustain trade and investment in the region – and globally.

The original commentary was published by China-US Focus on November 15, 2017

Featured Image: President Donald Trump and other leaders do the “ASEAN-way handshake” on stage during the opening ceremony at the ASEAN Summit at the Cultural Center of the Philippines, Nov. 13, 2017, in Manila, Philippines.

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About the Author

Dr. Dan Steinbock is Guest Fellow of Shanghai Institutes for International Studies (SIIS), see http://en.siis.org.cn/. The commentary is part of his SIIS project “China in the Era of Economic Uncertainty and Geopolitical Risk”. For his global advisory activities and other affiliations in the US and Europe, see http://www.differencegroup.net/

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