Asia's Challenges For Obama

By Brian P. Klein

The Obama administration will come into office at a time of relative calm in East Asia. Cross-Strait relations are at a high point, territorial issues between China and Vietnam are being addressed amicably and Japan-China relations are progressing smoothly with reciprocal military ports of call and strong trade ties.

Against this favorable backdrop lie several potential difficulties, including serious concerns over North Korean leadership succession, the effects of a broad and lengthy global economic downturn and the risks inherent in China's next economic stage of development. Countries in the region are looking for expanded involvement by the United States in regional economic integration and security. The U.S.-Japan relations may need some bolstering after a minor rift in handling the abduction issue while removing North Korea from the state sponsors of terrorism list.

Here are some of the top Asia issues President-elect Barack Obama will likely face early in his administration.

Economic Crisis in Asia

The economic crisis is going to get worse before it gets better, and Asia is clearly not immune to the downturn. Interdependency has become a hallmark of globalization and over half of developing Asia's exports are purchased in the United States, the European Union, China, and Japan all of which are now caught in the economic undertow.

More than $60 billion has already been offered by the U.S. to South Korea and Singapore to help with the immediate dollar-loss shock of fluctuating currencies and economic slowdown. More countries will be seeking help in the months after inauguration day as the full implications of a dour holiday sales season shows up in end-of-year figures.

To further compound these difficulties, it is increasingly doubtful that China's domestic demand will compensate for its dramatically falling exports. This will further drag down much of Southeast Asia which provided raw material imports for much of China's manufacturing base.

Tens of billions of dollars will be needed to assist the region as the funds of the International Monetary Fund are rapidly depleted offering financing to countries across the world from Iceland to Pakistan. This poses several policy issues for greater U.S. support of the region. If bailout fatigue has not set in, the U.S. could continue funding individual requests for aid on a country-by-country basis as well as add significant sums to a new IMF fund. However, a severe economic recession in the U.S. compounded by already high debt levels and declining tax revenue may significantly hinder more robust American engagement.

China's Economic Transformation

As China-Taiwan bilateral relations continue to improve, the main concern in the early part of the Obama administration is likely to be China's adjustment to a new economic model -- favoring higher value-added manufacturing and less dependency on low-end production such as toys, garments and shoes. If the economic slowdown turns into a more sustained recession, China will be facing a drastically shrinking export market that may significantly alter the contours of its domestic economy.

This would be the first time in China's modern economic history that its leaders have to navigate a global downturn with a primarily export-oriented development strategy. The risk of social unrest should not be exaggerated, but it is real. Party legitimacy is predicated on the ability of Beijing to deliver continually improving economic returns on rising expectations.

The social fabric of modern China is permeated with potential fault lines. If the divisions between rich and poor continue to expand, the ranks of unemployed continue to grow, and the fiscal and monetary stimulus plan results primarily in re-inflating the housing bubble, China's domestic economy may have some very difficult years ahead. Because there are so many unaddressed grievances and the rule of law is still mostly an artifice (though there are many forward leaning bureaucrats who would like to see the legal system given the power it deserves), there is real potential for very local issues to explode into wider demonstrations.

In the U.S., greater control of Congress by the Democrats will likely result in a higher profile for human-rights issues and unfair trade practices. President-elect Obama's ability to navigate this fine line between public censuring and constructive engagement will determine the success of what is clearly a long-term pivotal relationship with China.

North Korea

One of the most serious regional crises to occur would be a political vacuum and economic collapse in North Korea, as Kim Jong Il's mysterious health problem worsens. Infighting among military leaders and close political advisors, absent a clear succession plan for the dynastic regime, seems inevitable. It is highly unlikely that the general populace, poor and hungry, would rise up in any organized fashion during this transitional period.

If leadership in North Korea does change there will be concerns over securing potential nuclear material and the posture of the D.P.R.K. military towards South Korea and U.S. troops stationed there. Enormous demands will be created for economic assistance, regional coordination and by potential refugee flows (most likely north through the porous Chinese border).

In the early stages of transition the type of leadership that emerges in the D.P.R.K. -- military strongman, council of advisors, or weak hereditary figurehead in the form of one of Mr. Kim's sons will matter far less than achieving short-term stability. All parties will want a more prosperous North before reunification, reducing the burden on South Korea's economy and easing the effects of the jarring psychological transition away from decades of ideological leadership for North Koreans.

Absent immediate crisis -- and it is quite possible that Mr. Kim could serve as nominal figurehead for quite some time even with diminished capacity -- the Obama administration will have some leeway in pursuing a deal with North Korea absent the influence of U.S. hard-line elements that have influenced recent negotiations.

This political reality would, for example, make establishing an interest section in Pyongyang to open direct lines of communication and facilitate visas for official travel to the U.S., far easier. Such a move would send an unequivocal sign to the current North Korean leadership that the U.S. is committed to resolving not just denuclearization of the peninsula, but a final peace. Establishing an interest section is neither reward for North Korean intransigence nor giving up leverage over denuclearization talks. It is a pragmatic step to facilitate discussions.

There should, however, be a serious degree of skepticism accompanying any dealings with North Korea. The recent denial of over-flight rights by India for a North Korean plane bound for Iran is yet another example of suspicious D.P.R.K. activity. This duplicity makes negotiations ever more difficult, reinforcing concerns that the D.P.R.K. may try to cheat the system.

Despite this concern, there is an historic opportunity for President-elect Obama to cautiously engage the D.P.R.K. and achieve peace on the peninsula within his four-year term. Mr. Kim will increasingly have legacy issues on his mind. Recognizing that the nuclear threat gets the attention of the West, he has deftly used this bargaining chip to his advantage. It should not, however be considered his endgame. The incentive of immense wealth creation from eventual normalization of relations with the U.S. for power holders in Pyongyang and an eventual emergent middle class should not be underestimated.

Regional Integration

Greater economic integration in Asia has been a long sought after, but as yet unrealized goal of many in the region. While the difficulties are substantial and the specific economic benefits for free trade agreements as yet unclear it is an area ripe for greater U.S. involvement. With an Obama administration and stronger Democratic control of Congress environmental and labor issues will be more prominent, but they will likely not stop the general trend of negotiating FTAs.

Free trade and economic partnership agreements have proliferated as the Doha round of negotiations stalled and later failed. China has completed an FTA in goods and services with the 10 members of the Association of Southeast Asian Nations and expectations are high that the final section on investment will be concluded sometime soon. Japan too has completed negotiations with Asean and the race is on for both in their pursuit of other countries in the region.

Strong correlations between these agreements and an actual increase in economic activity are difficult to establish. Controversial agricultural sectors as well as comprehensive coverage of services and investment are often passed over in order to reach agreement. However, the political dimensions of forging stronger ties are not insignificant.

It is highly likely that a proposal for a free trade agreement of the Asia Pacific, an idea that has circulated for years, will once again be brought to the attention of Asia-Pacific Economic Cooperation member countries. While such an agreement would take years to work through, further U.S. involvement in regional integration is especially important.

Part of the problem lies with overlapping bureaucracies. Asean and APEC cover widely varying geography and issues. Absent a unifying organization that brings economic issues under one roof, the countries of Asia will continue to fend for themselves in the midst of a global economic downturn.

Leadership, or the lack thereof, is also hindering integration. The proliferation of bilateral trade agreements is fostering an escalatory environment in which Asian countries rush to negotiate partial deals in the hopes of besting their neighbors. The free flow of goods and services moving seamlessly from one end of the region to the other certainly has strategic advantages. Early in the Obama administration there will be ample opportunity to further a more broad-based approach to regional integration.

The U.S.-Japan Alliance

Hairline cracks in the relationship have appeared over delisting North Korea from the State sponsors of terrorism list before the issue of kidnapped Japanese citizens had been resolved. Some interpret this as an abandonment of formerly close U.S.-Japan ties causing some concern over the strength of this relationship.

There are also concerns that the Obama administration will favor China and the allure of its enormous potential market over Japan, although this sentiment is hard to pin down to specific policy implications. Some of these fears seem misplaced as Chinese military opacity continues to cause concern in Washington. Similarly both countries share many of the same economic concerns vis-à-vis China including protection of intellectual property rights, rule of law, market access, climate change, pollution and food-safety issues. Further U.S. engagement with China on these issues helps Japan.

Despite what may appear to the U.S. as unnecessary Japanese concern over weakening ties, President-elect Obama should make clear, early and often, that the U.S.-Japan alliance serves as the cornerstone of Washington's relations with Asia. To this end the President's first stop in the region should be Tokyo. A U.S.-Japan FTA negotiation could be introduced even though discussions of agricultural issues will be difficult. The Obama administration could also support, in whatever way it can, the establishment of a committee to resolve Japanese kidnapping issues akin to the pow-mia liaison capacity that exists between North Korea and the U.S.

Leadership by example, rather than by caveat has been a valued and time-tested approach to successfully resolving international tensions. There may be times when the U.S. has to go it alone to protect vital national security interests. Fortunately most of the issues in Southeast and East Asia have multilateral solutions. A nuanced, tailored approach to Asia has a far better chance of realizing tangible results in this environment. This may mean avoiding the temptations to openly criticize governments before making serious attempts to address issues through quiet diplomacy -- an approach that does not feed the immediacy of an ever-shortening news cycle.

President-elect Obama, by successfully unifying the U.S. across racial, religious, ethnic and gender lines to win an historic election is perhaps best positioned to use his unifying presence to solve some of the most intractable problems facing the region. The result of his influence may well be equally historic and positive changes throughout Asia over the next four years.

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Mr. Klein is an international affairs fellow of the Council on Foreign Relations in Japan