In this note, we extend our previous analysis of President-elect Obama’s economic policy priorities to focus on key issues faced in crafting Asia policies.
As the next US President faces mounting recession at home and two unfinished wars, Asian countries wonder if they will again struggle to be among the top political and economic priorities for the U.S. However, in the midst of the global financial crisis, the US might have much to look for in a region with over $4 trillion in reserves and Sovereign Wealth Funds as it injects capital into banks (and possibly a wide range of corporations), and plans a new fiscal stimulus. The US already signaled the importance of Asian economies by extending swap lines to Singapore and South Korea a few weeks ago in addition to previous credit extension to Japan, Australia and New Zealand, extending the dollar’s role as the reserve currency. Further coordination with key Asian economies and regional institutions will no doubt be a necessity to adequately respond to the global financial crisis and worsening economic outlook. Asia though must live up to its part of the bargain, strengthening regional institutions and bilateral ties to better respond to local and global challenges, something key economies might be unwilling to do so.
· The Obama administration will need to find common ground with China to meet many of its policy objectives. During Bush’s term, US-China talks broadened from RMB and energy policy to food safety, trade disputes and financial sector liberalization though a bilateral investment treaty has yet to make headway.
· Obama has pledged to use domestic trade remedies unless China allows its currency to appreciate, which is unlikely given slowing Chinese economic growth. RMB has appreciated more in real terms along with the dollar than
· Chinese trade and foreign investment flows indicate its purchases of US treasuries remain robust, holding over $1 trillion of US debt. But changes in China’s willingness to buy US assets could have significant effects on the US’s ability to finance its growing deficit, despite the flight of US investors to the treasury market.
· The insistence of the Democratic administration and Congress’ on including labor and environmental standards in trade deals, strengthen labor unions and keep farm subsidies might hinder US trade agreements with South Korea and ASEAN and the already faltering Doha trade talks.
· Obama’s proposal to raise taxes on firms’ offshore income while giving tax breaks to those keeping headquarters in US might affect Asia’s industry and service offshoring and outsourcing boom. Asia’s demands to reduce US service import barriers will also weaken.
· However, Asia’s concerns about any rise in US trade protectionism might be overrated given the costs to US from unilaterally withdrawing from global trade. Obama’s emphasis on improving the domestic safety net and retaining programs for workers displaced by trade might also help.
· Obama’s proposal to increase scrutiny of investments by Sovereign Wealth Funds and other state-owned investors may only add to the recent increase in US regulation under the Committee on Foreign Investment in the United States (CFIUS) to monitor inward investment by foreign government-linked companies.
· Moreover, the financial crisis and growing role of Sovereign capital might increase Congress’ aversion to financial globalization and inward foreign investment, even as the current crisis will reduce US ability to persuade other countries to increase financial sector liberalization.
· Obama seeks to lead global climate change policy and re-engage with the UN Framework Convention on Climate Change – the parent treaty of Kyoto accord.
· His goal to set emission reduction targets and invest in clean energy will pressure China to get more involved in global Climate Change policy as it becomes the top carbon emitter.
· But China and India with other emerging economies will continue to urge US and other developed nations with resource and technology to lead the fight against global warming.
· Obama plans to reduce oil imports and its impact on the US trade deficit. But recent correction in oil and gasoline prices and other policy priorities may ease some of the political urgency to forge new energy policies.
· Obama has warned against the geopolitical dangers of relying on adversaries and weak regimes for energy needs, suggesting his energy conservation plans may limit transfers to these countries.
· As China and India have contributed much of the incremental oil demand over the past five years, helping Asian countries increase the energy intensity of GDP and spur investment in alternative energy would bring environmental and economic dividends.
- Concluding military missions in Iraq and Afghanistan and countering Iran’s nuclear ambitions will continue to guide US bilateral and multilateral relations in Asia and globally. North Korea in contrast may take a back seat something that may concern Japan and South Korea, given increasing succession worries
- Focus on economic stabilization and regulatory reform in US and Asia may limit foreign policy initiatives and collective acti
on. This might be a concern given that the involvement of key Asian powers is needed to solve many cross-border issues.
- Strategic issues in South Asia will also dominate, given vulnerabilities in Afghanistan and Pakistan. Obama may face stiff opposition from Pakistani domestic leaders who continue to resent US influence and military presence in the region while any financial aid may come with political conditions.