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Analysis

Obama Tours Asia with a Full Agenda

By RGE Analysts

President Obama embarked on his highly-anticipated maiden visit to Asia last week, furthering his efforts at global outreach. The trip comes as global leaders are reckoning with an unsynchronized exit from economic policies that have helped end the worst recession of the post-war era. Policy changes in Asia, particularly among major U.S. creditors, will be essential to rebalance global growth: APEC members (including those in the Americas) absorb 55% of U.S. goods exports and provide a major market for U.S. service exports, while Asia depends on U.S. consumers and foreign direct investment (FDI) to drive economic growth. With the trip, Obama aims to renew U.S. political and economic influence in a region that analysts claim was ignored by the previous administration, addressing key issues like economic cooperation, climate change, free trade and the regional balance of power. By spending nine days abroad as domestic issues like health care and unemployment vie for his attention, the president acknowledges the growing importance of the U.S. relationship with a rising Asia.

 

Obama’s first stop was Japan, a key U.S. ally and the host of a large (and increasingly contested) U.S. military concentration. Next, Obama stopped in Singapore, where he attended the APEC meeting. Obama, whose cap-and-trade legislation is stalled in Congress, was among the world leaders who accepted that a binding carbon emissions deal was unrealistic, saying the best that could be hoped for was a “politically binding” deal. On the sidelines of the APEC meeting, Obama met Russian President Dmitry Medvedev to discuss U.S.-Russia ties, the new arms control treaty and possible sanctions on Iran and North Korea. While in Singapore, Obama attended the first U.S.-Association of Southeast Asian Nations (ASEAN) summit, which was also attended by Myanmar’s leader, before arriving in China. His final stop will be South Korea, where talks of disarming North Korea may overshadow discussions on the U.S.-South Korea trade agreement.

 

Tensions and Reassurance in China

Ahead of Obama’s visit to China, U.S. officials have focused on a new goal of “strategic reassurance” that China will seek to maintain global stability as the country’s influence grows. A bilateral deal on climate change would have sent a powerful signal on this accord. Although U.S. and Chinese leaders signed several agreements on clean energy initiatives, in part because of job creation goals, neither side was ready to make any binding commitments on carbon reduction.

 

Similarly, the U.S. sought Chinese support on Afghanistan, Iran and North Korea, but no meaningful cooperative agreements have been aired publically. Over the past year, however, Chinese and U.S. leaders have been meeting more often than they have during past U.S. administrations, and linkages at all levels of governments have increased.

 

Trade and currency issues dominated the U.S.-China meetings, as they have in past meetings, though the relevant discussions were brief. The U.S. claimed a weak renminbi (RMB) would prevent the correction of global imbalances that both sides seek, but China put the blame on U.S. debt levels. This visit comes as market actors are increasingly pricing in a renewed gradual appreciation of the RMB over the next six months, as detailed in the recent RGE Analysis "What Is China’s Exit Strategy?" by Adam Wolfe and Rachel Ziemba.

 

Just before Obama’s arrival, a senior Chinese official criticized the loose U.S. monetary policy for the first time. As in their trade meeting in Hangzhou last month, China and the U.S. pledged to work together to avoid a trade war as pressure builds in both countries’ export sectors. As the global economy has begun to stabilize, the number of anti-dumping complaints has grown. Calm heads may prevail in the end, but, again, no strong commitments came from Obama’s visit or the meeting of trade leaders on October 29.

 

China sent a political message by skipping some of the goodwill gestures that usually accompany a U.S. presidential visit. Ahead of the visit, Chinese dissidents were reportedly rounded up, a striking contrast to the token prisoner releases that tended to precede visits from Presidents Clinton and Bush. Likewise, Obama’s “town hall” meeting in Shanghai was not televised live across China as past U.S. presidential speeches were. In addition to asserting China’s desire to level the political playing field, the moves may reflect insecurity on the part of China’s leadership, stemming in part from concern that the domestic economic recovery remains “unstable, unbalanced and not yet solid.” Even if it is better positioned to resist U.S. pressures, China still has a limited ability to alter policy in Washington, in part because China’s pursuit of macroeconomic stability from the dollar peg constrains other policies, including reserve diversification. U.S. Secretary of Commerce Gary Locke has bluntly defended the designation of China as a “nonmarket economy” for antidumping cases.

 

Preparing Again for Six-Party Talks

Ahead of Obama’s arrival in Asia, a naval firefight along the disputed border of North and South Korea highlighted the peninsula’s ever-present geopolitical risks. Obama will meet with all of the six-party talk leaders on this trip in an effort to rein in North Korea’s nuclear program. The talks are expected to resume next year, after a couple of bilateral meetings between North Korea and the U.S. Obama’s visit is an opportunity to assure all sides that the U.S. is focused on the situation, and to gauge each state’s policy priorities. Since the talks were suspended in 2007, South Korea and Japan have drifted closer in their positions, while China still fears the North Korean regime’s collapse more than its development of nuclear arms. Bridging this gap will be difficult for the Obama administration, and this visit will afford no easy solution. When talks resume, Obama will likely struggle to find a solution that does not involve once more buying the same promises from North Korea. 

 

Will the U.S. Engage with Myanmar?

At the U.S.-ASEAN meeting, Obama pressed Myanmar's ruling junta party to release political prisoners, including opposition leader Aung San Suu Kyi, and to engage in dialogue with the minority and democratic groups of Myanmar. But he failed to pressure ASEAN leaders to publicly make such statements in the presence of Myanmar’s junta leader Than Shwe. The ASEAN leaders did, however, press Myanmar to have free and fair elections in 2010. Obama admitted that his administration’s efforts to bring about political reform in Myanmar, including sanctions, have largely failed. While economic sanctions will remain in place, Obama signaled U.S. plans for gradual engagement with Myanmar. He also encouraged ASEAN leaders to engage with Myanmar's government, utilizing ASEAN’s increasing trade and investment in the country’s energy sector in recent years. Read the RGE Analysis "Obama Sets New Myanmar Policy in Motion" by Julie Ginsberg.

 

Reviving Policy toward Asia

The APEC and ASEAN member countries concurred with Obama that export-dependent Asia needs to boost domestic consumption as the U.S. consumes less going forward. Asia’s ability to allow greater currency flexibility, however, is constrained by falling exports and, more importantly, the weak dollar and RMB. Structural reforms to rebalance growth will take several years, and the political will to do so might be lacking in many countries. The RMB’s peg to the dollar since 2008 has affected the competitiveness of other Asian countries’ exports to the G3 countries and China. Asian central banks will continue intervening heavily in the FX markets to contain currency appreciation and accumulate FX reserves, which have large sterilization costs. At the APEC meeting, members expressed concern that excess liquidity and the low Fed funds rate are fueling asset bubbles in Asia, but hiking interest rates will induce more capital inflows and currency appreciation. The APEC members hinted at tightening regulatory and prudential measures to contain credit and asset bubbles.

 

During the tour, Obama tried to revive U.S. trade ties with Asia, which lately have been constrained by the Democratic Congress and economic downturn at home. Meanwhile, the EU and China have stepped in and increased trade relations with the Asia-Pacific economies. U.S. concerns over high unemployment rates and the ineffectiveness of the fiscal stimulus suggest that the Obama administration’s protectionist measures against China, Mexico and other APEC members will continue in the near term.

 

U.S. trade policy toward APEC countries will continue to be based on gradualism and a case-by-case approach. Despite signaling interest in the Trans-Pacific Partnership (TPP) bloc, the U.S. is still far from signing the agreement, and Vietnam’s possible participation in the bloc might make U.S. Congress averse to the deal. The TPP bloc includes countries like Singapore, Chile, New Zealand and Brunei, with whom the U.S. already has trade agreements or which pose little threat to U.S. industries, thus limiting potential gains for trade partners from signing such a deal.

 

Similarly, the free trade agreement with South Korea signed in 2007 remains moribund. The ratification of the trade deal is not likely in the near term given political obstacles in both countries. The U.S. wants to renegotiate on automotive and beef issues, which impact U.S. industries and the labor market, while South Korea doesn’t want any modification to the current deal.

 

Is APEC Integration Still a Long Way Off?

APEC’s developed economies will miss their 2010 deadline to create a free trade area. Critics argue that delayed APEC integration has led member countries to instead pursue bilateral trade agreements with each other, creating stumbling blocks to regional free trade. Differences in political and economic structures will hinder the full integration of the Asia-Pacific region, as well as the creation of regional blocs like those suggested by Japan and Australia, in the near term. Other constraints include differences in exchange rate flexibility between countries and some countries’ reservations regarding a greater U.S. role in the region.

 

Nonetheless, APEC members, including the U.S., will continue to strike bilateral trade deals for preferred goods with relevant APEC countries and pursue FDI, while keeping sensitive goods sheltered from trade. There are some signs that these trade and investment flows might become stepping stones rather than stumbling blocks to gradual regional integration, especially if the U.S. resumes a greater role. APEC countries account for over 50% of global GDP and 60% of global trade, and two-thirds of this is bilateral trade among APEC members, which implies that greater regional integration could have considerable benefits. Ongoing measures to improve supply-chain connectivity and reduce transaction and business costs will be pluses. Higher savings rate in the U.S. going forward, however, will have implications for the ongoing integration of ASEAN and APEC economies. Intra-Asia trade is largely meant for re-export to the U.S. and EU, and domestic consumption in the Asia-Pacific region and elsewhere will be inadequate to offset the decline in U.S. consumption in the short term.

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