Monday, November 13, 2006

Asia Needs a Rethink Too

Last Tuesday, November 7, was a memorable day. No, I’m not talking about the mid-term election in the US. It just happened that the Chinese picked that day to announce another record trade surplus ($23.4 billion) and that its foreign currency reserves had passed the trillion dollar mark.

About 70% to 80%, or to put it another way between $700 billion and $800 billion of those reserves are denominated in US dollars. A large chunk - $340 billion – are in US Treasury bonds. Surely, no country has ever controlled such a large portion of another country’s wealth.

The election and especially the firing of Defense Secretary Donald Rumsfeld and his replacement with Robert Gates are certain to prompt some soul-searching about Iraq. It should also prompt some re-thinking about Asia too. A good place to start is North Korea.

No other part of the administration’s Asia policy has been so infected by ideology, by the attitude that if Bill Clinton did it, it must be wrong, than North Korea. A few years ago President George W Bush famously linked North Korea with Iraq and Iran as the “axis of evil”.

The administration’s approach to North Korea has from the beginning marked by a kind of Sunday School view of the world. Dear Leader Kim Jong-il is evil; he wants something; therefore it must be denied him. Consequently nothing much has been accomplished in the past six years.

However, the stage is set for some progress, if the administration grabs the nettle. Pyongyang has made its demonstrations (mostly demonstrating weakness – their long-range missile and atomic bomb both fizzled.)

But the return to the six-party talks won’t accomplish anything unless the American negotiators are permitted to talk directly with their North Korean counterparts. I suspect that the US representatives will be given that latitude.

After all, “talk” is going to be the watch word in international affairs over the next few months, talk with the insurgents in Iraq, talk with Syria, talk with Iran and talk with North Korea.

The other major policy issue will, of course, be that giant elephant in the room, China. The administration’s policy toward China has, unlike North Korea, moved along mainly non-ideological paths (despite the occasional neo-con outburst about the “China threat.”)

Nevertheless the growing trade deficit and American dependence on China financing its debts is getting too worrisome to ignore. And if Bush does ignore them, you can be sure that many of the new Democrats elected to Congress last week are ready to keep his feet to the fire.

Within days of the election, the governor of China’s central bank was talking vaguely of having a “clear plan for currency reserve diversification,” using the dreaded word “diversification”, meaning selling big chunks of dollars, that sends chills up the spines of finance ministers.

The remarks made little impact on the American conscience (except in currency markets, where the dollar fell) but someday China may do more than just make hints. Other Asian nations with huge dollars holdings may follow setting the stage for a major recession in the US.

For the most part, American policy toward the rest of Asia has been characterized mainly by neglect, allowing China to move in and cement stronger trade and strategic relations with Southeast Asia.

President Bush has a chance to give this policy a fresh turn this week when he attends the annual meeting of the Asia Pacific Economic Cooperation forum, held this year in Hanoi.

He would be wise to play down his favorite topic – terrorism. Most Southeast Asian nations are sick and tired of being lectured on this subject, to the exclusion of all else, whenever Bush attends and Asian summit. And, in fact, they are doing pretty well in combating terrorism un their countries, thank you very much.

If he gets on this subject, most of the Asian leaders will politely tune out, waiting for the man to turn to another subject, and counting the minutes when they can button-hold the Chinese leaders to talk about trade and investment.


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