It’s been an Asia-centric four months. The Obama administration proclaimed America’s “pivot” toward Asia, while North Korea faced a pivotal moment following the death of its “Dear Leader” Kim Jong Il. President Obama conducted a broad swing through the Asia-Pacific region in November, starting in Honolulu where he hosted the Asia Pacific Economic Cooperation (APEC) Leaders Meeting, before pivoting first to Australia, where he announced a plan to begin rotating US Marines through Darwin, and then on to Indonesia, where he became the first US president to participate in the East Asia Summit. Even more pivotal was Secretary of State Hillary Clinton’s visit to Burma/Myanmar where she met with its “elected” leadership and also with democracy icon Aung Sang Suu Kyi.

While geopolitics was at the forefront of US thinking, regional governments were focused on economic developments. A spate of swap agreements underscored the need to inoculate regional governments from global economic woes. The “plus Three” countries – China, Japan, and South Korea – continue their march toward deeper integration, one intriguing counterpoint to the conclusion of the Korea-US Free Trade Agreement. The Asia-Pacific region should set the pace for global growth, but the many transitions of 2012 will introduce considerable uncertainty.

The Kim is dead, long live the Kim!

The world (apparently including the US and South Korean intelligence services) was shocked and surprised on Dec. 19 when a North Korean female newscaster, clad in a black funeral dress, tearfully announced on state TV the death of the nation’s paramount leader Kim Jong Il, revealing that Kim had “passed away from a great mental and physical strain” (a.k.a., a massive coronary) two days earlier. While Kim was known to have been in poor health following a stroke in 2008, he had in recent months seemed relatively healthy, making trips this past summer to both Russia and China, at least in part to gain acceptance from his two giant neighbors for his succession plan revolving around third son Kim Jong Un, a largely unknown and untested 28 or 29 year old who had been promoted in 2010 to the rank of a four-star general and named vice chairman of the Central Military Commission of the Korean Workers’ Party.

The North Korean elite quickly rallied behind their fallen leader’s chosen successor, with ceremonial head of state and President of the DPRK Supreme People’s Assembly Presidium Kim Yong Nam declaring that “Respected Comrade Kim Jong Un is now supreme leader of our party, military and people.” At the father’s memorial service, Kim Yong Nam announced that the son “inherits the ideology, leadership, courage, and audacity of Comrade Kim Jong Il,” while calling on the North Korean people (who have little choice in the matter) to “solidify the monolithic leadership” of the “great successor” (a.k.a., “peerless leader,” “peerless patriot,” “peerlessly brilliant commander,” “sun of the 21st century,” and “eobeoi,” the Korean word for parent, which North Korea had used only for Kim Jong Il and his father, Kim Il Sung). While no official titles were immediately bestowed upon him – these are sure to come soon – this year’s New Year’s message called on all North Koreans to “glorify the new century of Kim Il Sung’s Korea as an era of prosperity and proud victory under the leadership of Kim Jong Un, the supreme leader of our Party, our state, and our army.” The army in particular was instructed to “place absolute trust in and follow Kim Jong Un and become human rifles and bombs to defend him unto death, holding high the slogan ‘Let us defend with our very lives the Party Central Committee headed by the dear respected Comrade Kim Jong Un.’” If nothing else, this tells us the Party Central Committee will play a central governing role.

The funeral showcased the seven senior party and military officials who have apparently been chosen to be his mentors: his uncle, Jang Song Taek, a vice chairman of the National Defense Commission; Kim Ki Nam, North Korea’s propaganda chief; Choe Tae Bok, the party secretary in charge of external affairs; Vice Marshal Ri Yong Ho, head of the military’s general staff; Defense Minister Kim Yong Chun; Gen. Kim Jong Gak, whose job it is to monitor the allegiance of other generals; and U Dong Chuk, head of the North’s secret police and spy agency. The seven were identified in the Workers’ Party’s official newspaper, Rodong Sinmun, as “key figures who will lead the party and military during the Kim Jong Un era.” Missing from the ceremonies was Jang’s wife, Kim Jong Il’s sister Kim Kyong Hui, who is a regular Politburo member and a general. She is reportedly in ill health.

While it is unclear just how much power these mentors will have or share with the son, it’s a pretty safe bet that Kim Jong Un will remain the official face of the new leadership, just as his father decreed. The others have as much a vested interest in a stable power transition as junior Kim does; their own personal safety and survival are inextricably tied to regime survival and Kim Jong Un is the manifestation of this. It’s an even safer bet, however, that the “Young General” will not have the degree of absolute power and influence that his grandfather or father did; no third generation leader ever does.

Best guesses about the future

The real questions are, what does Kim Jong Il’s death mean in terms of North-South relations, the Six-Party Talks, eventual denuclearization, and the prospects for reform? Our guess is that Pyongyang had a game plan essentially in place taking them through not only the April 15 centenary of founder Kim Il Sung’s birth but the US and ROK presidential elections in November and December respectively, and that the new leadership will follow that course. Kim Jong Il did not choose his successors because he thought they would change direction but because he expected them to stay the course. It would be extremely bold for any new leader or leadership team to veer too far from the chosen path, at least initially.

What the chosen path is remains anyone’s guess. It likely includes another round of US-DPRK talks (which would have taken place the week of Kim Jong Il’s death) and, presumably, another round of North-South dialogue, followed by the eventual resumption of Six-Party Talks in late spring or early summer. If rumors of a deal involving US food aid for uranium enrichment freeze are indeed true, then the North will likely go along with this deal at some point, although we should have no illusions that the best we will get is a freeze at the known facility at Yongbyon, and not at the suspected but unacknowledged facilities elsewhere.

While Six-Party Talks are likely to resume at some point, their stated intent – denuclearization of the Korean Peninsula – will remain a pipedream. If the objective is denuclearization and we are all pretty well convinced that the North is not going to give up its nuclear weapons anytime soon, then why go back to the negotiating table? The most direct answer is because no one has come up with a better solution acceptable to all parties.

It’s also true that if you “won’t buy the same horse twice” – Washington’s favorite phrase, even though most North Korean horses have been bought more than once – then you really can’t start again from scratch. There is an important framework in place that has been bought and paid for, the September 2005 Joint Statement, and no one wants to recreate (or repurchase) the agreement.

It used to be that the Six-Party Talks were aimed at making things better (i.e., denuclearization); now the objective, should they resume, will likely be confined to keeping things from getting worse. The proper atmosphere – the appearance of progress, even if none is actually achieved – is also becoming more compelling, especially as election year is here for many of the players.

The most likely future path, at least initially, will be more of the same. The North will cautiously continue down the path laid out by Kim Jong Il, including a resumption of US-DPRK and North-South dialogue, leading to a resumption of Six-Party Talks, where they will attempt to get Seoul and Washington to buy the same horses for a third or fourth time, while throwing in at least one new horse – the already revealed portion of their uranium enrichment program – for sale.

Over the long term, there appears to be some hope, primarily emanating from Beijing, that Kim Jong Un will, if he listens well to regent Jang Sung Taek, take North Korea down the path of Chinese-style reform. Beijing, as expected, has heaped praise on Kim Jong Il’s memory and expressed unqualified support for Kim Jong Un’s leadership, in part because of China’s central concern over stability on the Peninsula, but apparently also based on the belief that Jang is or will be a “reformer.” Who knows, this may even be true. While this could relieve the suffering of the North Korean people over time, it will do little to promote the cause of denuclearization. This will remain a long-term challenge and one that will remain a lower priority for Beijing and Pyongyang, even as it continues to drive US and ROK policy.

America’s pivotal pivot toward Asia

President Obama and Secretary of State Clinton made high-profile visits to Asia to reassure friends and allies that the specter of impending defense cuts would not dampen the growing US commitment to the Asia Pacific region. The most visible manifestation of this so-called “pivot” was the announcement, during President Obama’s visit to Australia, of an impending US Marine rotational force presence at Darwin, Australia.

Beginning in 2012, US Marines will begin six-month rotations to Darwin for joint training. Initial deployments will involve 250 Marines with the number eventually growing to 2,500 by 2016. The agreement also calls for more frequent rotations by US military aircraft to Royal Australian Air Force facilities in Northern Australia. In keeping with the US Pacific Command’s old “Places, not Bases” dictum, the ground and air rotations will not require construction of new US bases in Australia nor represent a permanent redeployment of the US units. It is not presently clear where the Marines will deploy from. What has been made clear, however, is that these rotations will have little or no impact on the issue of US Marine basing in Okinawa. Regardless of whether the units deploy from Okinawa, Guam, Hawaii, or the continental US, they will still need a home base to return to at the end of the deployment.

Beijing was quick to protest the announcement, calling it “a manifestation of a Cold War mentality,” and warning, in a People’s Daily editorial, “If Australia uses its military bases to help the US harm Chinese interests, then Australia itself will be caught in the crossfire.” Someone needs to hand our Chinese colleagues a map. Last we checked, Darwin was some 2,500 miles from the nearest Chinese landmass; that’s one heck of a crossfire!

While the planned deployments to Darwin underscored the “pivot,” the term was not even mentioned by President Obama during his speech before the Australian Parliament. It actually emerged in a speech a week earlier by Secretary Clinton during her visit to Honolulu for APEC:

It is becoming increasingly clear that in the 21st century, the world’s strategic and economic center of gravity will be the Asia Pacific, from the Indian subcontinent to the western shores of the Americas. And one of the most important tasks of American statecraft over the next decades will be to lock in a substantially increased investment – diplomatic, economic, strategic, and otherwise – in this region. . . . After a decade in which we invested immense resources in [Iraq and Afghanistan], we have reached a pivot point. We now can redirect some of those investments to opportunities and obligations elsewhere. And Asia stands out as a region where opportunities abound.

During this speech, Secretary Clinton identified “challenges facing the Asia Pacific right now that demand America’s leadership, from ensuring freedom of navigation in the South China Sea to countering North Korea’s provocations and proliferation activities to promoting balanced and inclusive economic growth,” calling them the “why” behind America’s pivot toward the Asia Pacific. The “how” consisted of six “key lines of action” which she (and Comparative Connections – see “Clinton’s Guiding Principles” in our April 2010 Regional Overview: http://csis.org/files/publication/1001qoverview.pdf) had identified previously: strengthening our bilateral security alliances, deepening our working relationships with emerging powers, engaging with regional multilateral institutions, expanding trade and investment, forging a broad-based military presence, and advancing democracy and human rights.

The pivot concept was further amplified at a Nov 22 press conference by Deputy National Security Advisor Ben Rhodes: “Insofar as we’re making a pivot, it’s really a pivot from a decade of wars being the focus of American foreign policy, to one in which we can better distribute our posture in the world. And that as we look at where we’re going to ramp up, it’s the Asia Pacific that we see as a place that can take more attention from the United States, where we can pursue a more aggressive economic engagement, and where we want to be making sure our security presence is sufficient to continue to provide for the stability of the region going forward.”

While the term “pivot” may be new, the idea of the 21^st century being the “Pacific Century” certainly is not. In a series of East Asia Strategy Initiative reports prepared by the George H.W. Bush and Clinton administrations between 1990 and 1998, the Pentagon – at a time when China was largely an afterthought – clearly signaled its intention to shift its focus toward Asia. As the April 1990 EASI notes: “it is essential to position ourselves now to meet the challenges of the 21st century. Our goals in the next decade must be to deal with the realities of constrained defense budgets and a changing threat environment while maintaining our resolve to meet American commitments. In this context, we believe that our forward presence in the Asia-Pacific region will remain critical to deterring war, supporting our regional and bilateral objectives, and performing our military missions.” Sound familiar?

A pivotal moment for the EAS

With this year’s addition of the US and Russia, the East Asia Summit (EAS) now comprises all the key players in the Asia Pacific region: the 10 ASEAN states which remain at its core; their Plus Three partners (China, Japan, and South Korea); and the other three charter members, Australia, India, and New Zealand. As such, it now duplicates the membership of the ASEAN Defense Ministers Meeting Plus, although a clear link between the two (or between the EAS and the ASEAN Regional Forum or APEC) has not yet been established.

According to a White House Fact Sheet, President Obama’s participation in the Sixth EAS, “underscored the Administration’s commitment to deepening engagement in the Asia-Pacific region and playing a leadership role in its emerging institutions.  The President has made clear that full and active U.S. engagement in the region’s multilateral architecture helps to reinforce the system of rules, responsibilities, and norms that underlies regional peace, stability, and prosperity.” The EAS agenda covered a wide range of regional concerns, including education, energy and the environment, finance, avian influenza, and disaster response. President Obama reportedly called for a broadening of the dialogue to include strategic and security challenges as well, especially in the areas of maritime security (encouraging all parties to accelerate efforts to reach a full Code of Conduct for the South China Sea), nonproliferation (where he agreed to take the necessary steps to enable US accession to the Southeast Asia Nuclear Weapons Free Zone Treaty protocol and its entry into force at the earliest opportunity), and disaster response and humanitarian assistance (through a proposal to further develop a Rapid Disaster Response Agreement to create a legal and procedural framework for accelerating deployment of personnel, supplies, and services in the event of future disasters).

Meanwhile, the EAS Chairman’s Statement issued by Indonesian President Susilo Bambang Yudhoyono noted positively the “dynamic development of the EAS process” and the ongoing progress of cooperation in the five priority areas: energy and environment, finance, disaster management, education, and global health issues and pandemic diseases.

With the new year comes a new ASEAN chair, Cambodia, to be followed by Brunei in 2013. ASEAN leaders also unanimously agreed that Burma can chair the regional bloc in 2014, amid some signs of reform in the country. Burma had been pressured to pass when its turn to chair originally came around in 2006 but its recent reforms and positive gestures, including the release of Aung Sang Suu Kyi from house arrest in November 2010, have changed the political dynamic, not only for ASEAN but for Washington as well.

Clinton visits Burma: a pivot in the making?

While in Indonesia, President Obama announced that, for the first time in a half century, a US secretary of state was going to visit Burma. He also revealed that he had discussed the visit with Nobel Laureate Aung San Suu Kyi by phone (calling her from Air Force One while flying to Bali) and that she encouraged the initiative, thus providing him with important political cover for such a sensitive breakthrough gesture. Details of Secretary Clinton’s meetings with the Burmese leadership and Aung San Suu Kyi are discussed in detail in Sheldon Simon’s review of US-ASEAN relations. Suffice it to say that Burma appears to be reciprocating to the administration’s outstretched hand, even if, as Clinton warned repeatedly on the trip, that “there’s still so much to be done, starting with the unconditional complete release of all the political prisoners.” The US will be watching closely to see what the political leadership actually does: “when they start to take actions that further the momentum for reform and democratization, we will, too.”

The economic frame

From our vantage point, three pivotal events framed economic thinking in the last half of 2011. The first was ratification of the Korea-US Free Trade Agreement (KORUS). After being held up in both the US Congress and the ROK National Assembly, the visit of ROK President Lee Myung-bak to the US in October provided the needed push for congressional action. KORUS, along with long-stalled agreements with Panama and Colombia, passed the Senate by large margins. This was a real signal of US commitment to the US-ROK relationship, putting some meat on the bones of US rhetoric about its new commitment to Asia. The deal signaled to other US trade partners of its readiness to engage and encouraged them to join in – or be left behind. The head of Keidanren, the Japan Federation of Business Organizations, captured sentiment in his country when he noted that “Japan will inevitably face a disadvantage” after Seoul has concluded deals with the US and the European Union. (More analysis of the KORUS trade deal is in the chapter on US-Korea relations by Victor Cha and Ellen Kim)

A second defining element of the economic mindset was the failure of the Congressional supercommittee to reach agreement on a US budget deal. Following the near default on US debt in the summer, the inability of negotiators to find common ground on an acceptable budget package was one more nail in the coffin of US economic leadership. The collapse of the talks meant that automatic spending cuts would come into effect – the prospect of across-the-board reductions alarmed many conservatives who worry about the evisceration of US defense capabilities. The cry to undo the automatic sequestration is understandable, but it also makes plain the deep divide in Washington and the inability to get real work done. It was the prospect of deep defense cuts that was supposed to spur negotiators to reach agreement; instead, they have called for a change in the rules. That is not the stuff of real leadership.

The final element was the ongoing crisis in Europe. As will become clear as readers get further into this discussion, uncertainty and the prospect of a double-dip in Europe have thrown a long shadow over economic policy in Asia. Governments are doing their best to limit the damage another downturn could create. These efforts once again underscore the interdependence that characterizes the global economy and should quiet any further speculation on the “decoupling” of Asia from other regions.

APEC

The US hosted the annual APEC Leaders Meeting this year, inviting the two dozen or so grandees to personally experience Hawaiian hospitality in November. In fact, APEC is a process as much as a showcase event, and during the run-up to the meeting, there were events throughout the US that highlighted priorities and concerns of the Obama administration. So while the usual “big” themes were on the agenda – increasing trade and investment, building capacity – the US also stressed “green growth,” the role of women, and entrepreneurship.

Ultimately, however, APEC was overshadowed by the Trans-Pacific Partnership (TPP). The US has adopted the TPP as its own (even though it was launched in 2006 by Brunei, Chile, New Zealand, and Singapore). Five other countries are now negotiating to join – Australia, Malaysia, Peru, the US, and Vietnam. Those countries agreed on the last day of the APEC meeting to try to conclude negotiations by the next APEC meeting in 2012. Canada, Japan, the Philippines, South Korea, and Taiwan have expressed interest in joining the negotiations as well, although it isn’t clear how serious they actually are.
The TPP has two goals. First it is intended to set a “gold standard” for trade deals. Economists worry that the absence of a global trade agreement will push governments to suboptimal bilateral and regional deals. The TPP is designed to check that impulse. Second, the TPP is a precursor to a Free Trade Area of the Asia Pacific, a huge FTA that would tie the entire Pacific economic community together.  As such, the deal is implicit acknowledgement that both APEC and the Doha round of global trade negotiations have lost steam. Some see it as a more nefarious design, arguing that TPP is a strategic counter to Chinese economic dominance of Asia; those analysts charge that China has not been invited to join and will not be asked in. The door is open, however; Beijing only needs to ask and be prepared to negotiate seriously.

A yen for currencies

Japan-South Korea

In October, the governments in Tokyo and Seoul agreed to increase their bilateral currency swap agreement from $13 billion to $70 billion. (The David Kang- Jiun Bang chapter on Japan-Korea relations provides more details.) That deal was followed by a three-year agreement between South Korea and China to expand their won-yuan swap line to $56 billion, another attempt to head off currency volatility.

Japan-China

During Japanese Prime Minister Noda Yoshihiko’s December trip to China, the two countries agreed to promote the use of their own currencies for trade and investment. Amounts and details were not available, but the two governments agreed the funds will be used for cross-border trade, supporting and developing the RMB-yen direct trading markets as well as supporting the healthy development of the RMB-yen bond markets. A working group of officials from key organizations – such as the Finance Ministry, Financial Services Agency, the Bank of Japan and the People’s Bank of China – will be set up to work out the details. This deal follows by days an agreement on a 70 billion RMB swap arrangement by China and Thailand.  

During his trip, Noda also confirmed Japanese plans to buy $10 billion of Chinese government debt. It is the first time that a developed country will purchase Chinese bonds with its foreign exchange reserves. Japanese officials insisted that the deal is another form of economic cooperation and isn’t intended to signal any broader strategic objective, such as diversifying Japan’s forex holdings. And in fact, the amount is a mere drop in the bucket (0.77 percent) of Japan’s estimated $1.3 trillion in foreign reserves, some 70 percent of which are thought to be in US dollars.

Japan-India

After Beijing, Noda went to Delhi for more high diplomacy. There, the two governments agreed to set up a three-year, $15 billion bilateral-currency swap, an agreement five times the previous swap arrangement signed in June 2008 and that expired earlier this year. The statement accompanying the deal said it would help buffer the two economies against uncertainties created by the European debt crisis. The swap agreement was part of a larger package of economic development projects, many of which are detailed in Satu Limaye’s chapter on India-US and India-East Asia relations.

In truth, these moves are long on symbolism and short on substance. While the amounts involved are small relative to their international trade (and the enormous amounts of foreign currency available), the agreements are votes of confidence and commitment, and may encourage other countries to do the same. Ultimately, however, the use of Asian currencies – the RMB in particular – will require a lighter grip. It has been possible to settle Chinese trade in RMB since mid-2010, but Beijing hasn’t relaxed currency controls enough to facilitate such deals.

And now to free trade

Also during their Beijing summit, Noda and Wen confirmed that they, along with South Korea, would conclude negotiations next year on a trilateral investment treaty. That treaty has been under discussion for four years, and there were hopes that a deal might be reached by year’s end. At a trilateral summit among Noda, Wen, and ROK President Lee Myung-bak that was held on the sidelines of the EAS in Bali in November, the three agreed to wrap up talks by the end of the year.  That proved too ambitious, but Noda told reporters that the parties are “only one step away” from an agreement.

The investment treaty is considered a crucial step forward for a “plus Three” (China, Japan, South Korea) free trade agreement. Some 100 representatives from the three countries – industry, government, and academics – convened in Pyeongchang in South Korea at year’s end to discuss and adopt a research paper that calls for an FTA; the paper will be formally presented to the leaders of the three countries at their next trilateral summit, scheduled to be held next May in Beijing. (In the interim the paper will be reviewed by higher ranking government officials.) If concluded, the FTA will create the third largest economic community (behind the EU and NAFTA), with a population of 1.52 billion people and a combined GDP of $12.34 trillion, and accounting for one-fifth of global output and one-sixth of global trade volume. Korean experts estimate that deal would increase ROK economic growth by 5.14 percent, China’s by 1.54 percent, and Japan by 1.21 percent.

The prospect of a trilateral FTA has prodded the governments in Tokyo and Seoul to resume their own stalled negotiations toward a bilateral agreement. Discussions began in December 2003, but they reached deadlock a year later over the usual holdup, agricultural and fisheries trade. When Noda and Lee met in Seoul in October, they agreed to speed up working-level talks. Kyodo news reported that talks might start again in the first half of 2012.

Economic outlook

The Asia-Pacific region continues to drive global growth. The IMF forecast 7.9 percent growth for emerging Asia in 2011 and 7.1 percent growth in 2012; these are downward revisions of 0.2 percent and 0.3 percent, respectively over April estimates. (This contrasts with “Industrial Asia’s” – Australia, Japan, and New Zealand – flat line in 2011 and 2.5 percent expansion in 2012). The IMF anticipates China will grow 9.5 percent for 2011 and 9 percent in 2012. India will lag a little behind, registering 7.8 growth in 2011 and 7.5 percent in 2012. Other high performers in the region include Indonesia and Vietnam, growing 6.4 and 5.8 percent respectively in 2011 and both will expand 6.3 percent in 2012. Korea will register 4 percent growth in 2011 and 4.4 percent in 2012.

One of the darker spots on the economic picture was flooding in Thailand, which has been devastated by floods that began in July. The human toll exceeds 800 lives and economic losses have been put at $45 billion. The impact has been felt far beyond its borders as the inundation has disrupted the regional and global supply chains of which Thailand is a critical link. The IMF estimates that the Thai economy will 3.5 percent in 2011, a drop of 0.4 percent from its April forecast. Growth will pick up to reach 4.8 percent in 2012, a 0.3 percent increase over the earlier forecast. The Thai government is anticipating 5.0 percent growth in 2012; the Bank of Thailand figure is 4.1 percent.

For comparison, Moody’s is a little more pessimistic, forecasting 8.7 percent growth for China in 2012 and 6.6 percent growth in India; the 6.3 percent estimate for Indonesia matches that of the IMF. The outlook for South Korea is a little darker, with the country set to grow 3.6 percent in 2011 and slow to 3.5 percent in 2012. Thailand is projected to about 2.8 percent in 2011 (down from initial forecasts of 3.7 percent) and pick up a little steam to reach 2.9 percent in 2012, a marked contrast with official predictions.

The year to come

We expect 2012 to be a year of transition with elections or leadership changes scheduled for most major counties in the region. That process was jumpstarted with the death of Kim Jong Il, and that change will reinforce uncertainties as it plays out. Elections will impact bilateral and multilateral relations, creating new dynamics in the region. Even when economic policies are not at the forefront of campaigns, the knock-on effects of policies changes will add to political uncertainty. In short, there will be a lot to discuss and assess in the year ahead. Add in “unknown unknowns” and we will be quite busy. Happy New Year!