Global Economies

Ischinger on the Munich Security Conference Meeting in Vienna

The Munich Security Conference, chaired by EWI Board Member Wolfgang Ischinger, will meet in Vienna on June 16-17 as part of its 'MSC Core Group Meeting' series to discuss critical regional issues including Russia, the crisis in Ukraine and energy security in Europe.

Excerpts from the Munich Security Conference press release:

Chaired by Ambassador Wolfgang Ischinger, the MSC will assemble 60 senior decision-makers from the public and private sectors in Vienna’s Palais Liechtenstein to discuss ongoing challenges to European security against the backdrop of the 40th and 25th anniversaries of the OSCE Helsinki and Paris documents. The meeting will be held in partnership with the Federal Government of Austria and the Organization for Security and Cooperation in Europe (OSCE). 

The Core Group Meeting will take place immediately before the "Panel of Eminent Persons on European Security as a Common Project", initiated by the OSCE Troika, will gather in a separate meeting in Vienna to discuss its interim recommendations. The panel, chaired by Ambassador Ischinger and composed of leading personalities from the OSCE area, is tasked to develop suggestions for strengthening the OSCE and for the formation of a more crisis-resistant and resilient system of European security. 

Ambassador Wolfgang Ischinger on the MSC Core Group Meeting in Vienna:

"The Ukraine Crisis has clearly demonstrated that Europe’s security architecture is dysfunctional. For too long, the West has been under the illusion that Europe, through a number of treaties, agreements, and institutions, would be crisis-proof. At the Core Group Meeting in Vienna, we will debate measures to strengthen the security architecture and to build confidence in the Euro-Atlantic region. I am looking forward to intensive discussions among high-ranking participants."
 

To read the press release on the MSC website, click here.

To read an interview with Wolfgang Ischinger in Der Standard, click here. (German)

To read an article published by Deutsche Welle on Ischinger's discussion of conflict prevention, click here.

EWI's President-elect Munter Interviewed on India Today TV

In an interview with India Today TV, EWI President-elect and former U.S. Ambassador to Pakistan, Cameron Munter, discusses India-Pakistan relations and the role of EWI in fostering peace by expanding the dialogue to include key regional stakeholders.

1) How do you see the Indo-Pakistan relations now as compared to when you were posted in Islamabad?
A: I have always felt that the key to Pakistan's success and future would be the improvement of relations with India. There have been many times since I became the ambassador in 2010 when I thought that there might be a warming or there might be a thaw. Especially, a thaw that focused not only on politics, but also on economics, prosperity, investment, something that the rest of the world could follow on to help on prosperity of Pakistan and Indians as well. At this point, I am as optimistic as I have been in the past. The hopes have increased after Nawaz Sharif and Narendra Modi were put at the helm.

2) In 2013 elections in Pakistan, for the first time, Kashmir was not an issue and there was consensus across parties to have good relations with India. Today, all parties in Pakistan are toeing the military line against India. How do you see this shift?
A: I don't see this as a shift at all. It is a rhetorical shift based on disappointment from the Pakistan side. Underneath it all, those people who were the constituents - you mentioned the PPP, PTI, PMLN - there is a broad consensus that goes from top to bottom that a better relationship with India is necessary. When I was there, even found it in my talks with the military that good relations with India and stability in the region was necessary for Pakistan's future. I choose to see this as a passing phase where there are thoughtful people in Pakistan with deep issues, that people want to figure out a way to deal with India, but they haven't figured it out yet.

3) On Pakistan's completely different standards of acting against terror group attacking Indian interests in Pakistan.
A: We don't know a lot, and I have been out of the US government since 2012. So whatever I say would be mere speculation. There is a debate going on in Pakistan army on what is the existential threat to Pakistan. The traditional narrative is that India is the existential threat. 10 years of hard fighting in FATA, KPK have led many people who are leaders in Pakistan military, intelligence to come around the idea that perhaps there is another existential threat to Pakistan - that is the jehadi threat. So many soldiers have been killed by jehadis, many Pakistan soldiers have died since 2001. They are trying to figure out what it is. And it is possible that this could be addressed if there is proper dialogue with India.

4) On the anti-India sentiment in Pakistan.
A: I take you back to the elections of 2013, that no one found the reason to call on that to be elected. It could be that these are latent questions and that 60 years of troubles don't go immediately. But I am cheered by the fact that no one had to campaign over this idea. What we at EWI want to see is that we bring these bilateral questions to the floor but also look at these issues in the regional context. If we bring Afghanistan's future into it, if we look at China's interest in the region we can also look at the future of Iran. We can look at all the problems of the region and say perhaps all of these issues that you raise can be looked at a different way.

5) On America's hope about rise of Modi and politics with Pakistan.
A: The invitation to Nawaz Sharif was welcomed. Modi is seen as a very strong leader. He has a very strong reputation as a charismatic man who can get things done. Also, he can see things in a new way, and is the man who can break away from tradition because of his domestic strength and reach out to his neighbours that in the past has been limited to this kind of bilateral relations. We're not sure, it is something time will tell. We had hoped from an American point of view, he would be able to strike early in his tenure to take advantage of the new fresh feeling that he had. But it may still not be too late to have some creativity in the debate. I repeat what EWI is trying to do here is talking with Pakistan-Afghans and Indians in this conference and is trying to foster that kind of debate so that ideas are out there.

6) On terrorism - Hafiz Saeed, Lakhvi- How can India trust Pakistan?
A: It is true. I think that these suspicions are addressed to me over and over again. The more they're dug, the less possibility is that there is going to be peace. I don't deny that terrorism is an important issue especially since Mumbai attack 2011. However I would suggest if we continue to say the same things and make these accusations again and again we'll go nowhere.

7) How should India deal with Pakistan on Hafiz Saeed issue?
A: Are you suggesting that we should raid Pakistan to go after Saeed? I think we need to figure out a way to work with the authorities in Pakistan to see that justice is done. And we have not always been successful. We engage with the people in-charge but not always successful. Just like Lakhvi's release, it was a controversial thing. We make representations to the Pakistani's all the time. Your high commissioner in Pakistan with whom I had great contact when I was there we talked about it all the time. We were very open about it that it's very difficult to accept if you're Indian or people around that this may not be something we'll be able to solve. We may not be able to do that. What we would like to think however is that there is a broader discussion of issues within which this terrorism issue is embedded and this broader discussion leads to greater understanding so that this question doesn't derail everything else.

8) What use of the US bounty on Hafiz Sayed who is not underground but holding anti-India rallies in open?
A: What we're talking about is not a bounty it's something the press has said, it is not something we say. We're looking for information that could lead to his arrest and we're willing to pay for this information. A bounty implies that you're giving money so that someone will be killed like the old American west. So India should realise that term the 'bounty' has been created by the press erroneously. What we are looking for is information, evidence so that he could be behind bars.

9) What about India's evidence for arresting Saeed.
A: This is not something I can judge. But i would hope that we would get enough evidence that it would lead to Saeed's arrest. And that is what we have offered to pay for.

10) On SAARC summit next year in Islamabad and US expectations from India and Pakistan. Should Modi go?
A: A gesture of friendship is always good. I think it is up to him to decide what he wants to do. But what we hope every leader in the region will do as it would be an advantage to have a regional approach and have a dialogue. And if he makes that trip it leads to greater trust. So absolutely, it's always great to talk.

11) India called off official talks, but Modi spoke to Nawaz on pretext of cricket and sent Foreign Secretary on SAARC yatra. Was it under Obama's pressure during Republic Day?
A: Again I am an ex-diplomat so I can't say. But , when I was a diplomat in Pakistan, absolutely. We have always pressed Pakistan friends to talk with India and vise versa. We did not try to tell them what they should talk about. We try to tell them that there should be more talks then agreements. So there is no doubt in my mind yes we encouraged that dialogue.

12) The operation that killed Laden - Was it a covert or did the Pakistanis know about it?
A: Pakistan didn't know. We did not inform them. There has been an article in the New York Times by Seymour Hearsh which claims that this was a joint operation that Pakistan was told in advance and that the entire set of arguments since then had been a vast cover up. All I can say is that if it was a cover up then it also fooled the American ambassador in Pakistan. Because all the evidences that Seymour gave does not convince me.

13) There were political repercussions to the Operation.
A: Absolutely, it cost is a lot. It was a decision that was very important for us, we knew it would also have an impact on our relations with Pakistan. But in that operation there was a great deal of information taken on that particular house in Abbottabad. And there was no information that I knew during my time as a diplomat that the Pakistan government was involved in taking care of him, protecting him, knew about or took part in that raid.

14) Were there no apprehensions about breach of sovereignty?
A: There were a lot of discussions about what it would mean; we knew it would be a very difficult issue. But as our president said from the beginning if we found where this man was we were going to make sure we got him.

15) So covert operations okay for the US?
A: I think the part of the President's approach was that he was going to keep his word that this man wanted by the international community, was the man we were going to make sure we got.

16) If India were to conduct similar operations in Pakistan, would the US be okay with it?
A: That's for India to decide. I think dialogue is the way out. Anytime you resort to any other methods, you're taking great risks. Dialogue is the only way to do things.

17) But if dialogue on Lakhvi, Hafiz Sayeed, Dawood Ibrahim does not yield results, covert operations is the way out for India?
A: What I am saying is anytime you have the opportunity to make dialogues you should use it. If you make a judgement you have to live the result. We had to live with the result of our incursion into Pakistan. I think if we dwell only on terrorism, if we see that as the beginning and end of the relationship, then we were missing out the entire possibilities of long term of solving problem.
We during Afghan war often looked at 'urgent driving out the important'. I would like to ask my Indian and Pakistani to see if they can look beyond the urgent and important questions to say that solution can lie in broader and long term discussions where you're talking about what the people want, where you forget past make some progress which means your children are going to be safe.

18) So, the US is okay with covert operations against groups hitting it, but different standard for India Pakistan since they share borders and are nuclear neighbours?
A: I would suggest India should work in its interest and India's interest is a stable Pakistan. A stable Pakistan - a democratic, prosperous and gets along with India. This is not a favour to Pakistan, it is a favour to itself. If India has a problem with a neighbouring country, then it is for India to contribute in solving these problems. It is not a question of Americans wagging their fingers. It is a question of India and serving their self interest. I think that Pakistan has many things it could do to meet India half way and vice-versa.

19) How strong is the al-Qaeda today?
A: I don't mean to duck the question but I am not in the government anymore so I can only tell you what I read in the newspapers. I think al-Qaeda is still a force, but it has been degraded. However, it is still a potent force in the world. I don't know if ISIS and can't comment on the claims that ISIS has made will weaken or strengthen al-Qaeda. But radical forces like that still exist, they are still powerful and we're still concerned about them.

20) How do you perceive ISIS in Afghan-Pakistan? Could it impact Kashmir?
A: I just can't say, I m not trying to avoid the question but I am not in the government anymore so I don't have the access to this information. Anytime you get that kind of threat you should be concerned. India, Pakistan and America should try to work together.

21) Can China be roped in to play a more pro-active role in Afghanistan?
A: One of the things quite interesting about China in this region is that it professes to have very similar goals to the US and India. Goals like keeping radical Islam from upsetting them and the region and second its economic interest. I think China is here to play a very constructive role. It may not be a role based on anything other than self interest. But I think we should look to China and China's interest in Pakistan and Afghan. I know there have been discussions at high levels between China and India. We applaud this kind of diplomatic relations.

22) But India has security concerns of encirclement with China being in PoK and in region.
A: I think New Delhi needs to talk openly with the Chinese. The Chinese are being open about what they want to do. You can choose to see someone as an enemy if you wish, but if you choose to try to understand why they are doing things and where the mutual advantage is that is probably more.

 

Click here to view the interview at India Today TV

 

EWI Convenes "Afghanistan Reconnected" Event in New Delhi, India

Merinews and Travel Biz Monitor report on EWI's recent advocacy and outreach mission to India.

On June 14-16, the EastWest Institute hosted a delegation of business leaders in New Delhi, India in partnership with the Federation of Indian Chambers of Commerce and Industry and the Observer Research Foundation. This mission was the second in a series of visits to capitals in Greater Central Asia that EWI is undertaking in 2015 as part of its Afghanistan Reconnected Process.

EWI President-elect Cameron Munter, former U.S. Ambassador to Pakistan, led the delegation and meetings between regional leaders from the public and private sectors in an effort to promote political and economic cooperation between Afghanistan, Central Asia, Pakistan and India. 

For the article on "Afghanistan Reconnected" published by Merinews, click here.

For the article published by Travel Biz Monitor, click here.

For photos of the opening session published by FICCI, click here.

 

Ukraine’s Energy Future Lies in Good Governance, Not in Diversification

In a piece for Russian International Affairs Council, EWI Senior Fellow Danila Bochkarev analyzes Ukraine's dependence on foreign sources of energy. 

Diversification at any cost is still perceived as a ‘silver bullet’ for Ukraine’s energy security. The country’s dependence on Gazprom is seen as the key challenge for ensuring the country’s national security. However, inefficiency, mismanagement, the selective application of reform packages, and war in its eastern regions are Ukraine’s biggest threats. Settling internal disputes in a way that guarantees respect for the legitimate interests of all social and political groups is therefore a clear “must.” Doing so will lay the foundation for successful energy reforms and transparent governance, thereby paving the way for future investments.

Ukraine’s dependence on foreign energy supplies is an issue of major concern for the current government and is perceived to be one of the key threats to the country’s national security. Attitudes toward this problem have remained the same before and after February 2014. In fact, virtually all of proposed diversification solutions – both under the Yanukovich and Poroshenko presidencies – have one element in common: an obsessive fixation on diversifying energy imports and shifting away from natural gas from Gazprom. Ukraine has already made several attempts, both successful and not, to find alternative sources of supply by building a physical reverse flow interconnector with Slovakia, mulling the re-gasification terminal option, and even exploring new alternative pipeline routes.

Alternative pipelines remain ‘pipe dreams’, while attempts to build a Liquefied Natural Gas (LNG) import terminal have so far been unsuccessful due to a number of significant logistical and supply challenges. Turkey will most likely veto the passage of LNG tankers via the Bosporus, and the cost of such deliveries will not permit Ukraine’s re-gasification terminal to compete with pipeline gas supplies from the EU and Russia.

In addition, the examples of Poland and Lithuania have shown that new LNG contracts - even with lower spot prices - are more expensive than traditional pipeline supplies. In November 2014, Reuters reported that Lithuania would pay at least 10% more for Norwegian LNG than for Russian pipeline gas in 2015. Norwegian LNG will cost almost $400 per 1,000 cubic meters, while Gazprom's shipments cost about $40 less.

Theoretically, Azeri LNG supplies might be a feasible commercial option but would require the construction of a liquefaction plant on the Georgia’s Black Sea coast and the commitment of gas reserves for supply to Ukraine. The future of this option is rather bleak, especially taking into account the current oversupply of competing pipeline projects focused on receiving Azerbaijani gas supplies.

Reverse flow – the only operational solution

Until now, only reverse flow options to Ukraine from the EU have been accessible and operational. According to Ukrtransgaz data, reverse flow shipments launched in 2012 accounted respectively for 2.13 billion cubic meters (bcm) in 2013 and 5.1 bcm in 2014 of gas supplies. In 2014, reverse flow supplies covered 12.7 % of Ukraine’s domestic gas consumption. The oversupply of natural gas in Europe led to competitive price offers for reverse flow shipments, especially when compared to the undiscounted price offered by Gazprom to Ukraine during the spring/summer period (April 1 to September 30, 2015). However, the fall of oil prices changed the overall price dynamics in the wider Europe - Gazprom’s price for Ukraine fell to $247/1000 cubic meters for the second quarter of 2015. This number offers a pricing advantage over reverse flow shipments from the EU.

Gazprom: too expensive for Ukraine?

Between 2010 and 2013, the price charged by Gazprom to Ukraine’s national energy company Naftogaz - considered by Kiev as excessive and unjust – was used as a main argument for diversification away from Russia. According to Ukraine’s State Statistics Committee data, Gazprom shipped 37.5 bcm in 2011, while billing Naftogaz $11.35 billion. Imports decreased to 33 bcm in 2012, falling a further 15.5% to 27.9 bcm in 2013. The cost of Russian gas imports reached respectively $10.2 billion in 2012 and $10.68 billion in 2013. This was a significant financial burden for Naftogaz; indeed, while supplies dropped by more than 25% between 2011 and 2013, the total amount paid to Gazprom decreased only by 5 %.

Inefficiency and mismanagement at the heart of the matter

Political turmoil, economic crisis, and armed conflict have led to a significant reduction in primary energy and natural gas consumption in Ukraine. In 2014, the country’s gas consumption fell from 50.3 bcm to 42.6 bcm, imports also decreased from 27.8 bcm in 2013 to 19.6 bcm in 2014, while imports of Russian gas fell to 14.5 bcm (2014). The bulk of Russian gas supplies – 13.93 bcm – was shipped in the first half of 2014 [1].

This sharp decrease in both consumption and imports was mostly due to the collapse of the country’s industrial sector (consumption fell from 20.06 bcm in 2013 to 15.7 bcm in 2014) and supply restrictions for district heating companies (consumption decreased from 8.29 bcm in 2013 to 7 bcm in 2014) and the residential sector (consumption reduced from 16.84 bcm in 2013 to 15.1 bcm in 2014). Ukraine’s natural gas import bill also dropped from $12 billion in 2013 to $8.8 billion in 2014. In 2014, total financial transfers from Naftogaz to Gazprom were only $7.2 billion, including $1.45 billion in debt payments for 2013 supplies, and a $1 billion pre-payment to Gazprom wired in December 2014 (also used for gas purchases in January 2015) [2].

The decrease of energy imports/domestic gas consumption and lower prices should have reduced the deficit of national energy company Naftogaz. In reality, the company’s losses increased from 17.96 billion UAH in 2013 ($2 billion) to 85.45 billion UAH ($7.59 billion) in 2014 [3]. Though non-payments and national currency devaluation have contributed to Naftogaz’ shortfall, they cannot explain the threefold increase in the company’s deficit. Residential gas prices went up 50% as of May 2014 and industrial consumers continued to pay market-based tariffs, higher than the average price of imported gas - all of which should have helped to alleviate the company’s deficit. In fact, Naftogaz’s relatively cheap domestic gas production (17.2 bcm in 2014) covered an essential part of socially significant consumption (residential and district heating – 22.1 bcm) and in 2014, a (partial) cross-subsidy was required only for 5.1 bcm. The transit of Russian gas via Ukraine – requiring the usage of natural gas as a fuel for compressor stations – was one of key sources of Ukrtransgaz’ (transportation subsidiary of Naftogaz) income. In 2014, transit of Gazprom gas to Europe generated 17.42 billion UAH ($1.5 billion) in profits.

According to various media reports, part of Ukraine’s deficit was due to mismanagement of production and gas flows. For example, in December 2014, the Ukrainian national weekly ZN.UA published the summary conclusions of the Audit Chamber of Ukraine. The report claimed that between 2011 and 2014, some 2 billion cubic meters per annum (bcma) produced by Ukrnafta – an upstream subsidiary of Naftogaz – were sold to private entities at the highly discounted price of $15 - $26/1000 cubic metres, representing only a fraction of Ukraine’s industrial tariffs. Naftogaz was forced to source these volumes abroad by paying on average $700 million per year. It is estimated that at least 3 bcm of gas produced by Naftogaz and its subsidiaries do not reach intended customers in the residential/heating sector.

Mismanagement in the state-owned company is combined with the over-taxation of the private (‘independent’) gas producers. Ukraine’s 'independents' are an important domestic source of natural gas supplies. Ukraine produced 20.5 bcm of gas in 2014, down 1.0 bcm when compared to 2013. Private producers, however, increased their output by 18 % to 3.3 bcm. ‘Independents’ holding 100 bcm of proved gas reserves could in theory quickly increase their production to 5-6 bcm/year [4].

While the Ukrainian leadership took some steps to show its commitment to reforms – such as adopting the Third Energy Package compliant gas market law (Law N. 2250) and thus breaking Naftogaz’s monopoly – Kiev has still a long way to go. However, further steps towards reform should be coherent with a general fiscal and energy policy. New laws should also be efficient in practice and not only on paper. For example, while adopting market liberalization reforms in theory, the Ukrainian government often chooses a different path in practice, for instance, by sharply increasing gas taxation for private producers in December 2014. The new fiscal regime clearly favors the license–holder of the large fields (e.g. Naftogaz) over smaller private enterprises and risks undermining both the growth of “independents” and the liberalization of Ukraine’s gas market. Subsoil fees (the equivalent of royalties) jumped from 28% to 55% for shallow fields (above 5,000 m) and from 15% to 28% for deep fields (below 5,000 m). New taxation might kill the goose that laid the golden eggs and undermine the prospects for domestic natural gas production.

Energy efficiency is another area where Ukraine is lagging behind both its eastern and western neighbors. Ukraine's energy-saving potential could be as much as 40% - 50% of its current energy consumption. According to the World Energy Council, energy consumption within Ukraine's GDP reached 0.47 million British thermal units (Btu) last year, three and a half times higher than the average for countries in the Organization for Economic Cooperation and Development (OECD). While some energy-saving and energy-efficiency measures were implemented by previous governments, the introduction of such policies were effectively blocked by lobbies of domestic energy intensive industries. In 2008-2013, the energy intensity of Ukraine's GDPdecreased only by 3.5% - a meager result even if compared to rather modest progress made by neighboring Russia and Belarus. Energy-efficiency measures are particularly cheap to implement in Ukraine. In 2000 - 2013, per unit energy consumption of the Russian economy decreased by 34%, 5 % alone in 2011 - 2013 [5].

A stable and competitive regulatory regime, coupled with internal political stability, can pave the way for an expansion of durable and stable domestic energy supplies in Ukraine. Yet energy reform is not merely a function of relevant policy measures – it also depends on internal peace and stability in Ukraine. The loss of Crimea has not impacted Ukraine’s energy system, but the expansion of hostilities in Donbass – Ukraine’s industrial heartland - could lead to a full-scale nationwide energy catastrophe. There is a high risk that if unrest continues, it will spread from the industrial regions to the energy heart of Ukraine – to Dnepropetrovsk, Kharkov and Poltava regions. It is important to note that 80% of Ukraine’s natural gas output is extracted in Poltava and Kharkov regions. Only the peaceful resolution of internal tensions, taking into account the interests of all regions and parties, will help to revive Ukraine’s economy and its energy sector.

From a purely commercial prospective, energy cooperation between Russia and Ukraine make perfect sense, especially taking into account the remaining economic interdependence between the two countries. For example, despite a political crisis nuclear energy ties between the two countries remain strong. In 2014, Ukraine bought nuclear fuel for $628.176 million. An essential part - worth $588.831 million – came from Russia. The cooperation persists despite (often unconstructive) interference of politics in the business processes.

The future of gas cooperation is more uncertain and heavily depends on the position of Ukrainian government. From a purely rational economic point of view, cooperation with Gazprom – especially in the time of low prices – is commercially viable and outcompetes all available or planned diversification options. However, politics in nowadays Ukraine interferes with business and not always in a positive way. Leaders in Ukraine’s business and civil society should prevent politicians from going down the ‘blind alley’ of threat scenarios and concentrate on a de-politicized energy dialogue between the two countries on a technical and business level.

To read this article at the Russian International Affairs Council, click here.

1. Natogaz & Ukrtransgaz data.

2. Author’s estimates based on Gazprom and Naftogaz statistics.

3. Naftogaz’ corporate data.

4. Estimates provided by Philip Vorobyov, commercial executive at JKX Oil & Gas, an important Ukranian ‘independent’ gas producer.

5. Data provided by Sergey Abyshev Deputy Head, Office for Administrative and Legal Affairs, Ministry of Energy of the Russian Federation. Quoted in “Energoemkost’ VVP RF za 13 let snizilas’ na 34 %”, Neft Rossii, December 4, 2014.

Managing Differences Key to New Model of China-U.S. Relations

In a piece for China-US Focus Digest, EWI Board Member, Zhou Wenzhong analyzes the potential for a new proposed model of China-U.S. relations.

In February 2012, Xi Jinping, then vice-president of China, made a visit to the United States. During the trip, he called for “a new model of major-country relations befitting the 21st century” between China and the US. Three months later, then Chinese President Hu Jintao said in his speech to the opening session of the fourth round of China-US Strategic and Economic Dialogue (S&ED) that “no matter how the international landscape or our domestic situations may evolve, China and the US must remain committed to enhancing our partnership and strive to build a new model of major-country relations that reassure the international community as well as our own publics.” Fast forward to June 2013. Xi Jinping, the recently elected President of China, held a retreat with US President Barack Obama at Sunnylands in California. During the summit, Xi laid out, in considerable detail, China’s proposal to build a new model of major-country relations with the US featuring no conflict or confrontation, mutual respect and win-win cooperation, to which Obama responded positively.

In my view, this vision of a new model of China-US relations is important for three reasons.

First, it outlines a new possibility of relations between a rising power and an established power.

After China overtook Japan as the second largest economy in 2010, US officials and pundits began to discuss the implications of China overtaking the US one day as the world’s largest economy. Some predict that this would happen as early as 2020 and no later than 2030. Trained in historical fatalism and the realist theory of international politics, American analysts are inclined to think that a rising China will inevitably challenge US interests and a collision between Beijing and Washington is all but certain. According to this argument, the US should start to prepare itself for such an eventuality. Mindful of this narrative, China offered to construct a new model of relations with the US. If successful, this attempt can help both sides to avert “the tragedy of great-power politics”, avoid the Thucydides’ trap and prove historical fatalism wrong.

Second, it champions an inclusive approach to China-US interactions in the Asia-Pacific region.

Early in his first term, President Obama announced a “pivot” to Asia. By increasing strategic, political, economic and security investments in the region, Washington seeks to contain the rapidly growing strength and influence of Beijing. This strategy has heightened differences and tensions, and created a more competitive environment in the region. It raises the specter of Sino-American conflict, which would be destructive to the bilateral relationship, and might jeopardize peace and stability in the Asia-Pacific region. To stave off this dire scenario, China has championed a more inclusive approach. Chinese leaders argue that the Pacific Ocean is big enough for the two nations. China and the US should strive to avoid conflict and confrontation, show mutual respect and pursue win-win cooperation. By addressing sources of competition and friction, the two countries build a more positive relationship in the region.

Third, it reflects China’s commitment to peaceful development and win-win cooperation as it rises to major-country status.

Under the new leadership, China has pioneered ground-breaking theories and practices in its diplomacy. Whether or not China can build a constructive relationship with the US will be the touchstone of this new approach. Conversely, the vision of a new model of major-country relations can enrich China’s innovations in diplomatic theory and practice. Make no mistake: the vision is not aimed at challenging American supremacy in the world, seeking parity with Washington, or forming a G2 with the US. On the contrary, it is to maximize positive interactions and constructive cooperation between the world’s largest developing and developed countries. A more immediate goal is to dispel strategic distrust between the two sides and the often negative predictions about China-US relations, and persuade the world that this vital relationship is a positive, amicable, cooperative, constructive and predictable one.

Since 2013, some tangible progress has been made toward realizing this vision.

First of all, Chinese and US leaders are pursuing constructive dialogue with unprecedented depth and width.

The Sunnylands summit between President Xi Jinping and President Obama in June 2013 created a new model of engagement between our leaders. Without fussing over whether it was a state or working visit, the two presidents spent more than eight hours in face-to-face dialogue. They discussed a broad array of issues: from domestic developments and governance experience to economic and financial issues facing China and the US, from traditional bilateral issues to nontraditional regional and global challenges such as North Korea’s nuclear program, climate change and cyber-security. While helping to drive China-US cooperation around concrete issues, the meeting did not shy away from certain long-standing disagreements. The Sunnylands summit will be remembered as an unprecedented investment in China-US relations for its novel format, length and depth of discussion, and range of topics.

Then in November 2014, President Obama came to Beijing to attend the APEC Economic Leaders’ Meeting, after which he paid a state visit to China. All eyes were on his meeting with President Xi. As it turned out, the two presidents spent ten hours together over two half-days. They met informally at the Zhongnanhai leadership compound for an evening walk, a restricted meeting, a private dinner and a tête-à-tête over tea, where they shared domestic developments and priorities. The next morning, they met again in formal talks to discuss bilateral and international issues at the Great Hall of the People.

Both sides characterized the conversations as constructive, candid, sincere, in-depth and productive. Obama said that they gave him “the most comprehensive, in-depth understanding of the history of the Chinese Communist Party and its idea of governance and a better understanding of why Chinese people cherish national unity and stability.” Through these talks, the two leaders had an opportunity to reaffirm their shared desire to work toward a new model of relations, increase mutual understanding, address misperceptions and reduce mistrust. With Obama passing the halfway point of his presidency and contemplating his diplomatic legacy, the meeting drove home to him the importance of building a more positive relationship with China in his last two years in office. He sounded a positive note at a joint press conference with Xi, saying, “The truth is that we have made important progress today for the benefit of both of our nations and for the benefit of the world. The truth is that even more progress is possible as we continue to develop this important relationship. I am confident that we will be able to do so.”

In addition to unprecedented presidential “face-time”, China and the US have also reaped “early harvests” over the last two years in important bilateral and multilateral areas.

The two sides have agreed to launch substantive negotiations on a bilateral investment treaty (BIT) based on pre-establishment national treatment and a negative list, a major breakthrough in China-US economic engagement. Meantime, two-way trade and investment continue to soar. Last year saw a record $555.1 billion of trade and $120 billion of cumulative investment between China and the US.

For too long, military-to-military ties have lagged other areas of the relationship. After the two presidents agreed at Sunnylands to improve and enhance mil-to-mil relations, a number of advances have been made, such as increased interactions at all levels, institutionalized dialogue and consultation, exchanges between young officers, joint trainings and exercises. Last summer, China participated for the first time in the RIMPAC exercise organized by the US, a significant breakthrough as China fielded the second largest fleet (after the US) in the 23-nation exercise. This was followed by the signing of the mechanism of notification of major military activities and the code of safe conduct for maritime and air encounters by senior defense officials in November 2014. These two confidence-building mechanisms (CBMs) will go a long way toward bolstering strategic trust, managing crisis and preventing risks between China and the US and help to reduce the chances of miscalculation and accidents involving their militaries.

The expansion of bilateral exchanges calls for a more convenient visa regime. Last November, the two presidents agreed to issue five-year, multiple-entry visas to each other’s students and ten-year, multiple-entry visas to each other’s business travelers and tourists. The announcement was hugely popular in both countries and will surely bolster people-to-people exchanges across the Pacific. As a result, the number of Chinese visas issued to US visitors grew by 54% in the three months after the announcement, culminating in 4.3 million two-way visits for 2014.

In the multilateral arena, the two sides have reached bilateral understanding to expand the WTO’s Information Technology Agreement (ITA), which will inject momentum into multilateral discussions in Geneva. The two sides have enjoyed close communication and coordination on the Iranian nuclear issue and worked together to drive progress in the P5+1 negotiations. They have also stayed in close touch on the Korean nuclear issue to maintain peace and stability on the peninsula and in northeast Asia. In addition, there have also been collaborative efforts to improve the situation in Syria, Afghanistan, South Sudan and to fight the Ebola epidemic in Africa.

The joint announcement on climate change issued after the Xi-Obama summit last November deserves special mention. With the United Nations Climate Conference scheduled for December in Paris, the world is watching whether an agreement can be secured to limit global temperature rise to 2 degrees Celsius from pre-industrial levels. As the world’s largest emitters, the positions of China and the US will be crucial. The joint announcement was eye-catching because it contained clear targets: the US intends to achieve an economy-wide target of reducing its emissions by 26%-28% below its 2005 level in 2025, while China intends to increase the share of non-fossil fuels in primary energy consumption to around 20% by 2030 and achieve the peaking of CO2 emissions around 2030. Both sides agreed to push for a global deal at the Paris conference. Meantime, China and the US will enhance practical cooperation, including on advanced coal technologies, nuclear energy, shale gas, renewable energy, carbon capture, utilization and storage (CCUS), hydrofluorocarbons (HFCs), low-carbon cities, and trade in green goods. These significant steps will bring about a paradigm shift in the global politics of addressing climate change. The New York Times noted that in the past, no country was willing to cut emissions until other countries have done so; with the China-US announcement, countries will be motivated to follow their leadership. This demonstrates the enormous value of China-US cooperation to strengthening global governance.

More can be expected. On Feb 11, President Obama called President Xi to invite him to pay a state visit to the US in conjunction with attending the UN’s 70th anniversary events, which Xi readily accepted. The Chinese and US teams are preparing the ground for a successful visit, which will hopefully cement the momentum of high-level engagement, remove mistrust and build consensus for better relations through patient and in-depth dialogue, and deliver more tangible results of cooperation. If so, Xi’s September visit will surely drive new progress in building a new model of major-country relations between China and the US.

Let me end with a few thoughts on the implementation of the new-model vision.

Building a new model of China-US relations will be fraught and complex process full of opportunities and challenges. It is important that both sides adopt new thinking. China’s rise is taking place against the backdrop of economic globalization, regional integration and international cooperation in the post-Cold War environment. Committed to peaceful development and win-win cooperation, China has drawn lessons from the past. Beijing has expressed a sincere desire to avoid the strategic mistakes other rising powers have made and find a new path to major-country status. The US rose to global preeminence after the Second World War. It established a global architecture during the Cold War and stood out as the world’s sole superpower after the end of the Cold War. But times have changed. The US should stop relying on military and geopolitical methods as the way to maintain its advantageous position. It should stop viewing the rise of China in zero-sum terms and take a fresh look at its relationship with a rising power whose values and social system is fundamentally different from its own. Thus, both sides can give sustained impetus to the vision through new thinking and dynamic action.

To build a new model of China-US relations, the two sides need to respect each other’s core interests and major concerns and manage their differences and tensions. As China’s economy and interests continue to grow, Beijing will not shirk from upholding its sovereignty, security and development interests and will assume a bigger role in regional and global affairs. The US must stop thinking that China’s actions are targeted at the US and its allies and designed to weaken US supremacy or the regional order. Washington must not seek to counterbalance or even contain Beijing. Hence the importance of managing differences, which is as central to the relationship as augmenting cooperation. To do this, both sides must focus on the big picture, discard a confrontational approach and improve internal coordination.

To build a new model of China-US relations, both sides must approach it from a larger, global context. The course taken by China-US relations will have a big impact on world events. While our world is becoming more multi-polar and globalized, the urgency and challenges of global governance are more prominent. In the current phase of China-US relations, both sides need to closely monitor and analyze global developments, think outside the box, and be prepared for both opportunities and challenges in a fast-changing world. This is the best way to achieve sound and steady growth of China-US relations in the long run.

To read the article at China-US Focus Digest, click here.

With Eye on China, Japan Ramps Up Pacific Island Security Ties

Writing for World Politics Review, Jonathan Miller, EWI Fellow for the China, East Asia and United States (CEAUS) Program, analyzes Japan's efforts to increase engagement in the South Pacific and keep Chinese influence at bay. 

"The South Pacific has become a crowded field for influence with many diplomatic suitors. Japan’s efforts have complemented similar overtures by its key partners. That includes Australia, which has distributed the most foreign aid to the Pacific Islands in the past decade, nearly $7 billion, along with New Zealand, the United States and, to a lesser extent, the United Kingdom and France. But they are not alone, as divergent interests are at play in the Pacific," Miller writes.

To read the full article at World Politics Review, click here.

 

Leveraging Impact Investment in Post-2014 Afghanistan

EWI's report — Afghanistan Reconnected: Regional Economic Security Beyond 2014 — illustrates how regional collaboration would strengthen economic, political and social ties between Central Asia and South Asia and contribute to a more stable Afghanistan in 2014 and beyond. Reflecting this view, deputy chief of mission of the Afghan Embassy in India, M. Ashraf Haidari, discusses the potential for regional investment in Afghanistan in The Diplomat.

In complex post-conflict environments, such as Afghanistan, security and development needs are intertwined. Without addressing both at the same time, it would be hard to ensure an enabling environment for sustainable economic growth. In other words, bullets alone cannot remedy Afghanistan’s situation. In the words of the campaign of former U.S. President Bill Clinton: “The economy, stupid.” That is a fact that is even more relevant in the fight against terrorism in Afghanistan.

A large number of the Taliban foot-soldiers, who former Commander of International Security Assistance Forces (ISAF) General David Petraeus used to call “ten-dollar-a-day Taliban,” are non-ideological. They have resorted to violence in the absence of a sustainable livelihood to support themselves and their families. Many of these rental fighters can and should be weaned off the battlefield by providing them with long-term incomes. This necessitates the creation of more jobs for Afghanistan’s youthful population in urban and rural areas, leading to a lasting stability. And those jobs should be sustainable in a productive economy, since history has shown that employment created through “quick fixes,” like cash-for-work projects, has only temporarily addressed what remains Afghans’ top need and concern, even before security.

Investment Opportunities

Afghanistan has urgent need for impact investment. Some 70 percent of its 30 million people are below the age of 25, many of whom are the breadwinners of large households, with additional dependents such as war widows and children. Because Afghans begin working from an early age to support their families, they are resilient and enterprising. At a relatively young age, despite a high rate of illiteracy, they constitute a responsible, energetic, and industrious workforce. Unfortunately, they lack access to skills development opportunities, capital, and credit to grow their small or medium businesses, which largely operate in Afghanistan’s vast informal economy.

This situation provides for numerous impact investment opportunities in every sector of the Afghan economy. In June 2012, at the Delhi Investment Summit on Afghanistan, the Afghan Ministry of Commerce and Industries presented to potential investors a detailed list of “Investment Opportunities in Afghanistan,” an updated copy of which is available online. At the summit, some 320 participating business representatives were informed of 25 different markets for investment in the following sectors.

· Energy
· Minerals
· Transport
· Agriculture and agribusiness
· Small and medium industries
· ICTs, finance, health services, and construction

With the exception of a few domestic and foreign “first movers” in each of these sectors and their related markets, most markets remain under-invested. The government of Afghanistan has frequently encouraged Indian and international investors to visit Afghanistan and see for themselves the countless, highly profitable investment opportunities in the country’s “virgin” markets.

Doing Business in Afghanistan  

To flourish, businesses need security and governance, and so not surprisingly most investors want to know about the business environment in Afghanistan. Insecurity and weak governance do actually undermine business efforts and put investments at risk. Like most post-conflict countries, Afghanistan is not free of these challenges, and the Afghan government continues to confront and address them in partnership with the international community.

Despite ongoing negative news about the situation in Afghanistan, the Afghan government has made monumental gains in building the military and civilian institutions of the state, based on one of the most progressive constitutions in the region, which provides for a private sector-led economy. The World Bank’s 2013 Doing Business Index ranked Afghanistan 28 out of 185 countries when it comes to establishing a business in the country. This has been made possible by the Afghanistan Investment Support Agency (AISA), which serves as a one-stop-shop for investors, foreign and domestic, enabling them to register and establish a business in Afghanistan within a couple of weeks.

And over the past 14 years, the Afghan government has enacted a number of commercial and investment laws, including a company law, consumer protection law, competition law, partnership law, and arbitration law, among others. This legislation has streamlined many of the problems associated with Afghanistan’s former centrally planned economy. However, while these laws meet international business and investment standards, there are times when a lack of institutional capacity prevents implementation and enforcement. In an effort to attract, facilitate, and retain long-term investment, the reforms agenda of the new National Unity Government of Afghanistan has prioritized the resolution of existing bottlenecks to ensure a business-friendly environment across Afghanistan.

The Way Forward

Afghanistan is a trade hub that links the Indian subcontinent with Central Asia, the Middle East, and China, a region that includes some of the fastest growing economies in the world. Its location also makes Afghanistan a natural locus for an emerging regional network of trade routes and pipelines.

The ease of competition and the ample potential for growth in Afghanistan are relatively new developments. For the first time in decades, Afghanistan enjoys the most investment-friendly environment in the region. The people of Afghanistan see these new opportunities as a way to rebuild their homeland. They are proud of their historical tradition of commerce and cultural exchange, dating back 2000 years, to the era of the Silk Road.

With each economic opportunity that is fulfilled, the people of Afghanistan move one step closer to reconnecting with their heritage and securing a future for their country. Indian and other regional investors are welcome to play a major role in helping the Afghan people fulfill their national destiny, which is intertwined with that of India and the rest of the region.

 

To read the article at The Diplomat click here.

To read our report on Afghanistan Reconnected: Regional Economic Security Beyond 2014 click here.

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