January 16-31, 2017

ASEAN

India-ASEAN Celebration of 25 Years of Friendship

The year 2017 marks the 25th anniversary of the India- Association of Southeast Asian Nations (ASEAN) relations. The 4th ASEAN Summit hosted by Singapore on January 28, 1992 marks the beginning of India-ASEAN relationship where India became the Sectoral Dialogue Partner of ASEAN. Since then, the relationship has progressed to a full dialogue partner in1996 and Strategic Partners in 2012. This historic occasion was celebrated with exchange of congratulatory messages between Prime Minister Shri Narendra Modi and H.E. Rodrigo Roa Duterte, President of the Philippines and ASEAN Chair for 2017. India and ASEAN share deep economic ties. ASEAN is India's 4th largest trading partner, accounting for 10.2% of India’s total trade. India is ASEAN's 7th largest trading partner. Investment flows are also robust both ways, with Singapore being the principal hub for both inward and outward investment. PM Modi in his message urged ASEAN for reaping the full benefits of the ASEAN-India Free Trade Area in Goods, Services and Investment, which has been in place since July 2015. While highlighting the importance of regional cooperation, the Prime Minister Narendra Modi has strongly pitched for Regional Comprehensive Economic Partnership (RCEP). RCEP is a proposed free trade agreement (FTA) between the 10-member states of the ASEAN - Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam- and the six states -China, India, Japan, South Korea and New Zealand, Australia with which ASEAN has existing free trade pacts. The robust partnership between India and ASEAN has contributed significantly to the regional growth and stability by articulating their consistence pursuance of a rule-based architecture which is open, inclusive, balanced and equitable. In longer run, India-ASEAN partnership is significant for the success of India’s Act East policy vis-à-vis ASEAN’s integration and the Master plan of ASEAN connectivity 2015.

Myanmar: Peace and Reconciliation Update

The second in a series of 21st Century Panglong Peace Conference is due to be held in February though the date for the same has not been announced as yet. The ethnic armed groups under the umbrella of the United Nationalities Federal Council (UNFC) have again stated that they will only join the upcoming 21st Century Panglong peace conference if all of their seven member groups are invited as participants, not observers. They are looking for equal status with other stakeholders—including armed groups who have signed the nationwide ceasefire agreement (NCA) earlier. They, like other groups want to discuss politics and federalism, military and security affairs, social and economic issues, as well as land and environmental issues. As observers they cannot take part in political dialogue and such discussions. It should be remembered that UNFC members participated in the National League for Democracy (NLD)-led 21st Century Panglong peace conference in August and September last year. This was done without their signing of NCA under special conditions from Union Peace Dialogue Joint Committee (UPDJC).

The UNFC has announced a number of principles to be adhered to before they can sign the NCA, the major one being that the government must announce ceasefire within 24 hours, and the UNFC members will then announce a ceasefire within 48 hours of that time. The nine principals have been agreed by the UNFC’s seven members and are now part of negotiations between the bloc and the government.

However, fighting between Myanmar military and ethnic armed groups based in the North East continues. Kachin Independence Army (KIA), the Ta’ang National Liberation Army (TNLA), the Arakan Army (AA), the United Wa State Army (UWSA), the Kokang’s Myanmar National Democratic Alliance Army (MNDAA), and Mongla’s National Democratic Alliance Army (NDAA) are the ethnic armed groups based in the NE Region.

The UWSA and the NDAA are not members of the UNFC and have negotiated separate agreements with government peace negotiators to attend the Union Peace Conference in August and September last year, stating that their bilateral ceasefire agreements were sufficient. Therefore, for an inclusive solution there is need for the government and military to negotiate with all the stakeholders including the UNFC (currently chaired by the KIA) as also those who are actively engaged in conflict in the northern Shan State.

Malaysian 1MDB Scandal: An Update

The 1 Malaysian Development Berhad (1MDB) fund, set up in 2009, by Malaysian Prime Minister Najib Razak, is the subject of money laundering investigations in six other countries including Switzerland, Singapore, UAE and the United States. Civil lawsuits filed by the US Department of Justice last year alleged that more than US$ 3.5 billion was misappropriated from the fund. The lawsuits filed in July 2016 sought to seize $US1 billion in assets allegedly siphoned off from 1MDB and diverted into luxury real estate in New York, Beverly Hills and London, valuable paintings, and a private jet. Media reports have also stated that US $700 million were banked in Najib’s own bank accounts. However, Malaysia’s Attorney General Mohamed Apandi Ali cleared Najib of any wrongdoing in 2016 and stated that US$ 620 million of this money was a legal political donation from Saudi Arabia which had been returned. Saudi Foreign Minister Adel al-Jubeir though reiterating that there had been no wrongdoing, said in media interview in February 2016 that the money neither came from the Saudi government nor was it a political donation.

Former Malaysian PM Mahathir and other Malay politicians have called for Najib’s resignation over the 1MDB scandal. Najib’s pivoting towards China has led the political opposition to strengthen anti-China sentiment and criticize Najib as having sold Malaysia’s internal sovereignty to China. Najib’s visit to Beijing in November 2016 led to US$34 billion in deals, including an agreement to purchase four Chinese naval vessels – the first major defense deal between the two Asian countries.

Philippines-US-China Triangle

On January 26, Philippines Defense Secretary Delfin Lorenzana told a news conference that the United States will upgrade and build facilities on Philippine military bases this year, bolstering an alliance strained by President Duterte's opposition to US troop presence. The Pentagon had given the green light to start work in 2014 as part of an Enhanced Defense Cooperation Agreement (EDCA). EDCA will allow the expansion of rotational deployment of US ships, aircraft and troops at five bases in the Philippines as well as the storage of equipment for humanitarian and maritime security operations. Lorenzana said Washington had committed to build warehouses, barracks and runways in the five agreed locations and Duterte was aware of the projects and had promised to honor all existing agreements with the United States. In January, US Senator John McCain (head of the US Senate's Armed Services Committee) also proposed $7.5 billion of new military funding for US forces and their allies in the Asia-Pacific. This Asia Pacific Stability Initiative, funded over five years, would allow the US to increase munitions supplies, expand military facilities and strengthen cooperation with allies across a region increasingly threatened by China and North Korea.

While Philippines has stated that it wants a non-confrontational approach to not jeopardize its gains from Chinese trade and investment (and offers of military hardware), it has been quick to protest on China’s installation of weapons on artificial islands in South China Sea. On January 17, Lorenzana said that China’s installation of weapons on artificial islands in the disputed strategic waterway was “very troubling”. The Philippine foreign ministry sent a note-verbale to the Chinese embassy in December after confirming a report from the US-based Center for Strategic and International Studies about China’s arms buildup in the Spratly Islands. The Philippines, for its part, has decided to shelve planned upgrades to facilities on islands it controls, such as repairing an eroded runway to avoid incurring China’s wrath. Mischief Reef, one of the islands where China has stationed missiles and other weapons is located within the Philippines’ 200 nautical mile exclusive economic zone.

Singapore

Hong Kong-Singapore Diplomatic row over

Hong Kong customs authorities agreed to return nine Singaporean armoured vehicles seized by them in transit from Taiwan on November 23, 2016. This has ended the diplomatic row between Lion city state and Beijing. The Hong Kong customs seized those armoured vehicle as a breach of local laws governing the import, export and trans-shipment of strategic commodities. This incidence was a low point in Beijing-Singapore relations due to possibilities of investigation leading to criminal prosecution by Beijing. The amicable solution achieved by both the countries highlights the intention of Singapore and Beijing to smoothen ties amid rising geopolitical turbulence unleashed by the US President Donald Trump’s Asia Policy.

Vietnam

Joint Communiqué during Vietnam Party Chief’s Visit to China

From January 12-15, Vietnam (Communist Party of Vietnam) chief, Secretary-General Nguyen Phu Trong became the first foreign leader to visit China in 2017.The four-day visit resulted in a joint communiqué wherein China and Vietnam pledged to manage their maritime differences and safeguard peace in the South China Sea. Chinese news agency Xinhua reported that the two countries would seek mutually-acceptable, both short-term and long-term solutions, via negotiation. Meanwhile, both countries also agreed to avoid any acts that may escalate existent tensions. The visit also encouraged bilateral cooperation on trade, defense and security. The Vietnamese news website Vietnamnet.vn reported that the two sides would “accelerate” talks on demarcating an area in the shared Gulf of Tonkin for joint development. China is Vietnam’s largest trading partner, and Vietnam is China's second largest trade partner in ASEAN.

However, many analysts throw caution to reading too much into the joint communiqué issued during Trong’s visit as it significantly overlaps with points in the 2002 Declaration on the Conduct of the Parties in the South China Sea (signed between ASEAN and China).While both China and Vietnam have sought to reach out to the other, conflict over water resources in the Mekong River appear to be another litmus test for China-Vietnam ties. For Vietnam’s lower Mekong Delta, Chinese-owned dams pose an emerging yet dire threat to the region’s future survival. During the 2016 double disaster, the slow and reluctant move by Chinese government to discharge water to alleviate the drought along the Mekong tarnished Beijing’s image greatly among the Vietnamese public.

Cambodia Suspends Annual Military Drill with US

On January 17, Cambodia suspended the annual “Angkor Sentinel’ military exercises with the United States stating that the country’s troops were needed to maintain security during the local elections in June 2017. It would have been the eight consecutive year for the joint military exercises. US Embassy spokesman Jay Raman confirmed that the drills for 2017 and 2018 had been annulled but stressed that military exchanges and training programs were not affected. A Cambodian Defense Ministry spokesperson however, stressed that China did not play any role in the decision and reiterated that Cambodia valued cooperation with both China and US. Ironically on same day (January 17), Vongsey Vissoth, Secretary of State at Cambodia’s Finance Ministry met with Asian Infrastructure Investment Bank (AIIB) Vice-President and Chief Investment Officer D.J. Pandian indicating that Cambodia is planning to seek a loan from the China-backed AIIB for its infrastructure development.

Cambodia and China’s growing closeness in recent years is highly visible. In December 2015, Cambodia and China conducted a joint drill for the first time. The "Golden Dragon" exercise was reportedly similar in size and purpose to "Angkor Sentinel."

INDO – PACIFIC

Is the New American Administration Raising the Ante in the South China Sea?

The new White House spokesman Sean Spicer said the United States would prevent China from taking over territory in international waters in the South China Sea. His comments have been widely interpreted as an affirmation of the remarks by the secretary of state, Rex Tillerson, on Jan. 11 that the United States would not allow China access to islands it has built in the South China Sea, and upon which it has installed weapons systems and built military-length airstrips. “The U.S. is going to make sure that we protect our interests there,” Spicer said when asked if President Trump agreed with his nominee. “It’s a question of if those islands are in fact in international waters and not part of China proper, then yeah, we’re going to make sure that we defend international territories from being taken over by one country.” China’s Foreign Ministry reacted calmly to Tillerson’s remarks last week, declining to be drawn into how it would react in a “hypothetical” situation. “The United States is not a country directly involved in the South China Sea,” ministry spokeswoman Hua Chunying told a news conference. “We urge the United States to respect facts and speak and act cautiously to avoid damaging peace and stability in the area.”Meanwhile, the hawkish Global Times warned that any such action would lead to "a large-scale war".

These statements by the US administration seem to signal a ratcheting up of the American stance on the South China Sea imbroglio. The previous administration had recommenced the Freedom of Navigation (FONOPS) in 2015 but had not threatened action as indicated by the Trump administration. While the White House has not said how it plans ‘defend international territories from being taken over by one country’, these pronouncements are sure to infuriate China. While the legality of the terms like ‘international waters’ and ‘international territory’ itself are unclear, since they do not find any mention in current international maritime law, future American actions in this part of the world will be interesting to watch.

JAPAN

Salvaging Remnants of TPP

After more than a decade of negotiations, the Trans-Pacific Partnership (TPP) saw a painful climax with US President Donald Trump (as per his promise) discarding the TPP on assuming office. Japan became the only country to have successfully ratified the TPP with Abe stating that he would like to continue pursue Trump’s understanding on the strategic and economic importance of the TPP. Australia and New Zealand have affirmed their support and hope to salvage the TPP by encouraging China and Indonesia, among other Asian countries, to join with a TPP 12-minus-one template. On January 23, Australian PM, Malcolm Turnbull, reportedly confirmed Australia’s commitment to the TPP in a phone conversation with Japan’s Prime Minister, Shinzo Abe. At a media conference on January 24, Turnbull noted that it is still possible that US policy could change over time on TPP, as Congress and the Secretary of State, Rex Tillerson, were in favor of the TPP. Australian Trade Minister Steven Ciobo though conceded a number of “competing factors” would complicate a TPP 12-minus-one agreement, including that Mexico and Canada may first have to deal with Trump attempting to renegotiate the North American free trade agreement. Also China has proposed a counter pact, the Free Trade Area of the Asia Pacific (FTAAP) and has championed the ASEAN- backed Regional Comprehensive Economic Partnership (RCEP).

With Trump’s withdrawal, Indonesia has said it would reconsider its intention of joining TPP though it would monitor the current situation. Meanwhile, it would focus on bilateral economic cooperation with the US. Malaysia called the TPP a “missed opportunity" and its Trade Minister Mustapa Mohamed noted in a statement on January 24 that Malaysia's focus would be on enhancing regional economic integration. In a statement by its Ministry of Trade and Industry (MTI) on January 24, Singapore said it would continue to participate in other regional trade integrations initiatives. Vietnam, in a statement by its Foreign Ministry on January 25, reaffirmed its commitment to economic reforms and effective implementation of its existing and future free trade agreements.

Abe 4 Country Trip: Philippines, Australia, Indonesia and Vietnam

In a bid to calm the growing uncertainty in the region, Prime Minister Shinzo Abe took a crucial Asia-Pacific trip spanning four countries right before Trump’s inauguration on January 20. His first stopover in the Philippines for a two-day visit (January 12-13) was aimed at shoring ties with its mercurial leader, and boosting Tokyo's economic foothold in the face of anticipated competition from China. Abe’s visit aims to reassert Japan’s importance as one of the largest investors in Philippines (as well as the ASEAN region) in view of China’s growing investment footprint. During the visit, Abe and Duterte reached five deals, which covered Japanese help for agribusiness as well as a $5.2 million grant for Philippine coast guard speedboats and anti-terrorism equipment. Japan already contributes heavily to the largely impoverished Philippines through the Manila-based Asian Development Bank, which has lent the Philippines an average $745 million per year since 2006 for poverty reduction.

Australia (January 13-15) was Abe's second stop in his four-nation tour and aimed to boost Japan's trade and security engagements amid concerns over Trump administration and China's growing outreach in the region. Japan and Australia witnessed the signing of anew Acquisition and Cross-Servicing Agreement to further facilitate mutual logistical support between the Australian Defense Force and the Japan Self-Defense Forces. PM Abe and Australian PM Turnbull also mentioned their expectation to conclude negotiations to facilitate larger joint military operations and exercises. They reaffirmed to work proactively, alongside the US and other like-minded countries, including India, to maintain the rules-based international order and support a peaceful and stable Indo-Pacific region. Further, PM Turnbull also reiterated his belief in the TPP in view of Trump’s vow to discard the deal. He stated that like ratification by Japan, he earnestly hoped TPP would be ratified by all 12 countries.

The third leg of the trip included Abe’s two-day maiden state visit to Indonesia from January 15-16. PM Abe and Indonesian President Joko Widodo reaffirmed that their common interest in maintaining and promoting free, open and stable seas for peace, stability and prosperity of the region. In this context, Abe introduced to President Widodo Japan’s “Free and Open Indo-Pacific Strategy”, while President Widodo in turn explained Indonesia’s “Global Maritime Fulcrum” and “Enhanced Regional Architecture in the Asia Pacific” concept. Abe and President Widodo also discussed four major strategic projects - the Patimban port, the Jakarta-Surabaya rail project, the East Natuna oil and gas block as well as chemical and fertilizer projects. However, there seemed to be a divergence of interests during the visit as while the Japanese leader was mainly concerned with security matters, the Indonesian leader seemed to be more concerned with economic benefits.

The final country to be visited by Abe was Vietnam from January 16-17. Vietnamese PM Nguyen Xuan Phuc acknowledged Japan’s efforts to become the first country to ratify the TPP and stressed that Vietnam was also preparing for ratification. Besides TPP, Abe emphasized close collaboration with Vietnam in RCEP talks to realize an early conclusion of a high-quality agreement. Meanwhile, PM Phuc requested for Japanese Official Development Assistance (ODA) to train Vietnamese industrial personnel and sought larger cooperation with Japan on human resources development. Japan also decided to provide six new patrol vessels to Vietnam to enhance defense cooperation in accordance with its Vientiane Vision. To strengthen growing Japan-Vietnam ties, Their Majesties the Emperor and Empress of Japan will also make their first visit through a week-long trip in late December.

Forthcoming Abe-Trump Summit: The Agenda

As per White House statement, President Trump affirmed the “ironclad US commitment to ensuring the security of Japan” during a telephone call on January 28, in which Abe and Trump agreed to meet in Washington on February 10. Secretary of State Nominee Rex Tillerson told a Senate confirmation hearing that the US remains committed to defending the Senkaku Islands under the US-Japan security treaty. However, a Japanese Foreign Ministry official noted that assumptions that had long been taken for granted between Japan and the US needed to be reconfirmed with President Trump. Abe wants Trump to reiterate the US obligation to defend the Senkaku Islands in the East China Sea under Article 5 of the treaty. Trump's administration has put the focus of the Abe visit, on primarily starting talks on bilateral trade with Japan after discarding the TPP. Japan has reiterated that it is preparing for all contingencies in dealing with Trump who has vehemently accused Japan of not offering fair access to US carmakers.

Trump has threatened a border tax on Japanese imports into the United States and has fervidly accused Japan of unfair barriers to foreign auto imports. Japanese officials have argued that there are no tariffs or discriminatory non-tariff barriers on foreign car imports into Japan. Even during TPP negotiations, US officials had argued that Japan’s safety standards constituted a non-tariff barrier and insisted that US vehicles that meet US safety standards be allowed in. While they could not get Japan to accede on the issue, Washington did manage to get Tokyo to agree to a TPP provision that would allow the United States to raise the automobile tariff if Japanese imports rose rapidly. Japanese officials are now concerned that friction in automobile sector could fallout to other contentious sectors such as agriculture. With a strong probability that Trump could demand the total elimination of tariffs on agricultural products such as beef and rice, a high-ranking Japanese farm industry official has emphatically said that no concessions would be made that go beyond the TPP.

During the phone call, Abe and Trump also discussed US Defense Secretary James Mattis' scheduled first trip to Japan (and South Korea). A week before in a phone call on January 23, Shotaro Yachi, head of Japan's National Security Council, also spoke to Michael Flynn, Trump’s National Security Adviser. They had agreed that Japan and the US would remain key allies and continue to cooperate closely. As per reports in the Asian Nikkei Review, the US has requested that Taro Aso, Japan's deputy prime minister and finance minister, accompany Abe for the summit. Washington aims to establish a hotline between Vice President Mike Pence and Japanese cabinet members to ensure stable relations.

CHINA

Slower Growth Key to Lowering Risk

Maintaining an economic growth rate of at least 6.5% was thought to be critical for ensuring social stability in China. However, recent voices in the Chinese media have advised of adhering to a slower growth. One such voice was heard in the Global Times recently. This Global Times piece is based on a presentation given by Andrew R. Tilton, chief Asia-Pacific economist at Goldman Sachs while he was in Beijing.

The said piece claims that China's economy would continue to decelerate in the coming year even though growth targets for the year 2016 have been met effectively. This deceleration would be on account of policymakers tightening policies in some sectors like the real estate and auto sector. Such a change, the article claims has come about post the Central Economic Work Conference held in December 2016, wherein, it has been realized that maintaining a higher economic growth which comes with its attendant risks. Hence, though the commitment to maintain a 6.5% growth rate (for the next 5 year plan (2016-2020)) so as to meet the target of the first centennial goal (of doubling income during the decade 2010-2020)) still stands, there is a bit more flexibility in going about the same. This flexibility stems from an understanding that slower growth allows for an easier avoidance of major economic risks.

The article further points out that in the past, economic growth targets set by policymakers were generally below the potential of the Chinese economy and were meant to be seen as reassurances of the economy not slowing down below a point. Now with the growth target being set slightly above the growth potential of the economy, there is a necessity of factoring in the same and working towards risk mitigation. Keeping the same in mind, the article suggests that opting for lower economic growth rate target could be the way forward for the Chinese economy.

PLAN Acquisitions – Adding Teeth and Capability