Vietnam: hedging its way forward

Note: This policy memo was written 2 years ago, in April 2011, when I was an exchange graduate student at the Hankuk University of Foreign Studies. I decided to publish it now because its content, analysis and conclusions still hold perfectly valid in the current political and geostrategic context.

Abstract

Vietnam has come a long way since the enactment of the doi moi policy in 1986: confrontations and disputes have given way to regional cooperation and integration into the international system. However, the world has also notably changed during the last 25 years, and Vietnam’s policy must constantly adapt to the challenges and opportunities it faces. Caught in between two budding regional powers and the interests of the declining hegemon, Vietnam should hedge its way to increased prosperity and further preservation of its sovereignty and independence via a multipolar policy of hedging against and engagement with China.

Introduction: Vietnam as a member of the international community

2011 marks the 25th anniversary of the introduction of the doi moi (renovation) policy in Vietnam. Following economic stagnation after a failed collectivization drive following reunification, from 1975 to 1985, and also facing Soviet declining aid, the 1986 Sixth Party Congress approved broad reforms that transformed Vietnam into one of the fastest-growing economies in the world, averaging over 7% annual GDP growth from 1990 to 2010.

A new constitution was approved in 1992, outlining government reorganization and increased economic freedom. While Vietnam's economy remains dominated by state-owned enterprises (SOEs), which still produce about 40% of GDP, Vietnamese authorities have reaffirmed their commitment to economic liberalization and international integration. Vietnam joined the WTO in January 2007.

Vietnam did not begin to break its international isolation until it withdrew its troops from Cambodia in 1989. After the 1991 Paris Peace Agreements, Vietnam established diplomatic and economic relations with its Southeast Asian neighbors as well as with most of the countries of Western Europe and Northeast Asia, including China. In the 1990s, Vietnam also became a member of the World Bank, the International Monetary Fund and the Asian Development Bank, being also accepted into the Association of Southeast Asian Nations (ASEAN) in 1995, in what constituted its diplomatic reconciliation with the wider region (Simon, 2008).

The West: from enemy to savior?

The international normalization of Vietnam’s status took another giant step forward that same month of July of 1995, when the U.S. established diplomatic relations with its former enemy.  A Bilateral Trade Agreement (BTA) between the two nations entered into force in 2001, and Vietnam was granted unconditional normal trade relations status by the U.S. in 2006. Since then, bilateral trade between the United States and Vietnam has increased exponentially, reaching $15.4 billion in 2009 (U.S. Department of State, 2010). The U.S. is Vietnam's second-largest trade partner overall, just after China.

In October 2008, the U.S. and Vietnam inaugurated annual political-military talks and policy planning talks to consult on regional security and strategic issues. Meanwhile, President George W. Bush openly vowed to support Vietnam’s sovereignty, security and territorial integrity (Dosch, 2009), in what was a premonition of the 2010 events. First, Secretary of Defense Robert Gates affirmed that the U.S. wanted to ensure stability, freedom of navigation, and free and unhindered economic development in the South China Sea. Then came Hillary Clinton’s words, assuring that the peaceful resolution of competing sovereignty claims to the South China Sea was a U.S. national interest, prompting Chinese Foreign Minister Yang Jiechi to claim her comments were an attack on China. Just a month later, the U.S. Department of Defense and Vietnam’s Ministry of Defense held the first round of annual high-level defense talks, which preceded a joint naval exercise. In other words, ASEAN’s and Vietnam’s friendship and relationship with the U.S. is clearly going further away from being just on economic/trade matters.

Meanwhile, Vietnam’s diplomatic relations with the European Communities were established in 1990. The first EU-Vietnam Framework Cooperation Agreement (FCA) was signed in 1995, entering into force in June 1996[1] and aiming to promote trade and investment, support Vietnam's economic development and its transition to a market economy. Moreover, Vietnam, as a developing country, is a beneficiary of the Generalized System of Preferences, which offers preferential access to the European market in the form of reduced tariffs for goods.

With the EU-Vietnam agenda diversifying towards increased political and economic cooperation, negotiations to create a Free Trade Area[2] (FTA) and to sign a new Partnership and Cooperation Agreement (PCA) were launched in 2007. Eight rounds have already been completed with notable progress achieved, but the final signature of the Agreement is being delayed due to severe discrepancies in the fields of human rights and the rule of law between the two parties[3].

Overall, therefore, Vietnam has powerful economic and military partners to compensate for the meteoric rise of the traditional regional power, who is now once again taking the stage of world affairs.

China: the budding regional hegemon

There are two main, contradictory approaches to Chinese foreign policy, not only towards Southeast Asia but regarding its general orientation and goals. Both are based on Deng Xiaoping’s words, tao guang yang hui, whose different interpretations lead to two opposing views. The first one, promoted by Beijing and Chinese scholars and commentators, and which translates it as just keeping a low profile in international affairs, depicts China as a benevolent global player, centered on its three main priorities – sovereignty, security and development (Wang, 2011).

The other, mainly voiced by American realist scholars – most notably John Mearsheimer but also, in a more nuanced fashion, by Elizabeth Economy or Joseph Nye –, portraits China as an actor that hides its strengths and willingly portraits its weaknesses to avoid cooperating in global affairs while accumulating power to, in due time, change the actual world system[4].

Southeast Asia’s view of Chinese foreign policy falls somewhere in between these two opposed approaches. While some scholars challenge the hypothesis that China, as a rising economic power, seeks political gains leveraging the trade asymmetry with smaller partners Asian, arguing that China’s bilateral economic cooperation with individual ASEAN members – such as Vietnam – is for the pursuit of (mutual) prosperity (Ko, 2010). However, even those same scholars are cautious when predicting future developments[5].

Border disputes, wars, mistrust emanating from China’s imperial past: economic relations aside, those have been the constants of the relations between Vietnam and China. Close ties between Vietnam and the U.S.S.R. prompted China to sever ties with its southern neighbour, even briefly entering into war with Vietnam in 1978 as retaliation for Hanoi’s invasion of Cambodia that toppled the pro-Chinese khmer rouge government.

Although land border disputes were solved in 1999 and the controversy surrounding the area of the Gulf of Tonkin was also settled one year later[6], just a few years after relations between the two countries were normalized (in 1991), overlapping claims over the Spratly and the Paracel islands in the potentially oil-rich area of the South China Sea – or the East Sea, as Vietnam calls it –, remain a hot issue.

Over the years, such claims have produced armed altercations; in 1988, 70 Vietnamese sailors died in a confrontation with China in the Spratlys. The new century seemed to bring some progress, with the 2002 declaration setting freedom of navigation and the 2005 agreements on security cooperation and to perform joint seismic surveys. However, already in 2005, a Chinese gunboat opened fire on Vietnamese fishermen, killing 9. The year 2007 marked a low point in China-Vietnam relations, after China pressured foreign oil companies to abandon their exploration contracts with Vietnam in the South China Sea and Hanoi subsequently tolerated anti-Chinese demonstrations (Dosch, 2008).

Despite the comprehensive strategic partnership announced in 2008, relations with China remained tense, as exemplified by the brief diplomatic crisis caused by a Chinese website that posted documents of alleged invasion plans of Vietnam. China's efforts in the summer of 2009 to strictly enforce its unilateral fishing ban in disputed waters led to the detention of more than two dozen Vietnamese fishermen (U.S. Department of State, 2010).

Fears of Chinese naval power growth[7] and, linked to that, of the assertiveness of Beijing’s policy towards the South China Sea were confirmed in 2010, when Admiral Zhang Huachen affirmed that the Chinese navy was aiming for far sea defense to protect major shipping lanes, and that the South China Sea would be the first battleground (Economy, 2011). Rhetoric is sustained by hard facts: China is building a big naval base in Hainan Island, just in front of the coast of Vietnam.

Added to the disputes and historical animosity are also fears, common in all Southeast Asian countries, that China will influence internal politics via its Diaspora (Chung, 2004). Be it true or not, what can’t be denied is that China's internal dynamism creates external ambitions: empires rarely come about by design; they grow organically (Kaplan, 2010), and peripheral states have to contain their overwhelming power with the limited means they have in hand.

Hedging against China’s rise

There is also some debate on the position of Southeast Asian countries, including Vietnam, vis-à-vis China’s rise. On the one side, scholars such as Steve Chan (2008) suggest that China’s strategy of "peaceful development" means that countries in East Asia are, in general, not alarmed by a rising China, a view that is supported by David C. Kang (2007), who argues that China’s rapidly growing economic, military and political power has not led to a balancing behavior by other states in the region, as it has already occurred in other historical periods: in other words, China’s ascent has meant increased regional stability.

However, many scholars dismiss these arguments, based on the simple premise that past events cannot be reliably used to predict future behaviors. Moreover, the Chinese empire was a self-contained, economically and socially conservative entity which did not actively seek the improvement of its material and power conditions via continuous economic interactions with other countries. Current China is much different: it’s an economic powerhouse, hungry for markets, energy resources, raw materials and markets willing to absorb their products, and that makes it obviously more aggressive in the practical endeavors of its foreign policy[8].

                                              

An overall analysis of the behaviors of most East Asian countries towards China, however, shows a tendency to moderate, low-key hedging combined with overt, mostly economic engagement (Roy, 2005), with only Taiwan[9] – for obvious reasons – pursuing a relatively unambiguous balancing strategy toward China and just North Korea clearly bandwagoning with China[10].

In fact, the range of policy choices for smaller states facing a potential regional hegemon is broader than balancing and bandwagoning (Schweller, 1999). Southeast Asian states employ four strategies, the most general being hedging, or keeping open more than one strategic option against the possibility of a future security threat (Roy, 2005). However, they also engage with the up-and-coming regional big power, using rewards in exchange for its acceptance of the existing status quo. These two moderate strategies lie in the middle of the intensity spectrum, which is coped by (power) balancing on the non-cooperation side, and by bandwagoning as the extreme form of cooperation with the perceived hegemon.

Of course, scholars such as Chung (2004) also detect a strategy of “counter-hedging” emanating from Beijing policy, focused on reaching out to Southeast Asian countries and making them come to terms with China’s leadership. As such, China also expect deference from Southeast Asian nations in respect to foreign policy.

As far as Vietnam is concerned, scholars writing in different moments of recent history attest how a sense of resentment towards China remains both within much of Vietnam’s political elite and in part of the population (Pierre, 2000 and Dosch, 2009). Although scholars writing a few years ago claimed that Vietnam practiced one of the most moderate, covert ways of hedging against Chinese power (Roy, 2005), things seemed to change in recent years, as demonstrated by the recent strategic rapprochement with the U.S.

Several authors also identify one more reason for Vietnam to hedge against Chinese growing influence: namely, that Vietnamese economy is largely competitive, rather than complimentary, to China’s (Roy, 2005). However, other scholars, such as Chung (2004), consider that China can be also an excellent market for, among others, Vietnamese household and electronic appliances. In any case, it seems clear that the goal pursued by Hanoi in the transition period until the ASEAN-China FTA takes full effect is to see labor costs rise in China and, therefore, indirectly make Vietnam’s manufactures more competitive.

Conclusions and recommendations: multipolar crosshedging

From the above it can easily be inferred that neither bandwagoning nor openly balancing against China is the way to go for Vietnam. Instead, a more refined version of the current low-key hedging seems to offer the best chances for an independent, sovereign and prosperous Vietnam.

Therefore, the aim should be to create a strategy based upon a detailed division of the interrelating hedging activities and policies, both at the internal and the external level: in other words, to build a structure of multipolar crosshedging. Internally, hedging can both take place at the economic and the military/security levels. Externally, these same categories apply, but should be further divided in multilateral and bilateral activities/policies.

Starting with the internal hedging, one key goal for Vietnam’s policymakers should be improving the political and economic conditions. Improved rule of law and a serious drive to curb rampant corruption would create a far better climate to attract foreign investment that currently goes further north, into China or elsewhere in Asia. Moreover, the progressive aperture of the economy should be gradually accelerated, as well as the dismantling of old, inefficient SOEs that still account for a large share of the nation’s GDP and which squeeze Vietnam’s public finances. Finally, the government should keep fighting against high inflationary pressures, exacerbated by the growing inflow of imports and the continuous depreciation of Vietnam’s currency – which seemed to halt in 2010, but is accelerating again in 2011 –, the dong, due to the rising public debt. Again, dismantling big SOEs in a controlled fashion – instead of pumping billions into moribund ones – could help break these negative dynamics.

The second side of internal hedging is already being actively pursued by the Vietnamese government. With the goal of building a credible deterrent, able to alter the calculations of a hypothetically aggressive China, Vietnam is on a drive to acquire modern Russian[11], French and Indian weapons. This buildup, although the risks any arms race entails, should be considered necessary as long as China claims its undisputed sovereignty over the South China Sea.

On the international plane, Vietnam should strive to improve its hedging against Chinese hegemony on two fields (economic/political and military/security), as well as using two engagement and cooperation methods: bilateralism and multilateralism. Thus, the bilateral economic hedging strategy should be highlighted by the push to sign a new Association Agreement with the European Union and, given the difficulties posed by the multilateral ASEAN-U.S. negotiations, also a bilateral Free Trade Area agreement with the U.S.

The key to understand this approach is based on the nature and structure of the relevant economies: namely, Vietnam’s export-oriented economy – whose main exports, accounting for almost 70% of GDP, are oil, textiles, footwear, fishery and seafood products, rice, pepper, wood products, coffee and rubber – is fully compatible with the more advanced, postmodern economies of the U.S. and the EU.

Broadening the trade channels with these two major economic powers, who already are Vietnam’s two main export partners and with whom Vietnam enjoys a healthy trade surplus (European Commission, 2011, and U.S. Department of State, 2010), via the implementation of such agreements would boost Vietnam’s exports – as it proved to do when normal trade relations with both the EU and the U.S. were established – and also reduce Vietnam’s economic dependence on China, with whom Vietnam became further enmeshed after the entry into force of the ASEAN-China FTA in 2010[12].

Criticism to this approach will certainly include claims that expensive imports from these countries are going to skyrocket and, therefore, hurt the already worrying trade balance figures. However, such claims are unfounded: imports would keep on rising anyway, as in any country with a fast-growing economy aiming for middle-income status. Moreover, FTAs would only help reduce the prices end consumers and companies pay for such foreign goods – which they would end up buying anyway –, thus even helping to curb mounting inflation.

The multilateral side to economic hedging will hang upon successful full inclusion into the ASEAN Free Trade Area – Vietnam was given extra time to meet the AFTA's tariff reduction obligations – as well as into the ASEAN Comprehensive Investment Area, both due by 2015. In the meantime, Vietnam should also push for the effective application of the tariff reduction for rice exports to China, due in 2015[13], as well as for further tariff reductions this valuable Vietnamese export. Another obvious goal would be the effective hedging against cheap, cost-effective Chinese manufactures, which will be able to freely enter the Vietnamese market in 2015, via the internal hedging measures proposed above.

Moving on to the security area, multilateral hedging activities should be centered on the resolution, either within the ASEAN framework or by accepting the mediation proposal made by U.S. Secretary of State Hillary Clinton in 2010, of sovereignty disputes over the Spratly Islands with the Philippines and Malaysia. Reaching an agreement is, more than ever, a priority, even if it involves some form of joint sovereignty or tit-for-tat agreements regarding the exploration and exploitation of energy sources and the fishing rights over these territories. The goal should be to confront China with one united voice, which would also help Vietnam’s case regarding sovereignty over the Paracel Islands. Vietnam should then push for these conflicts to be discussed and resolved within the ARF framework[14].

The ASEAN Regional Forum should also, in its turn, take a leap forward to become a tool of constructive diplomacy, and not just a multilateral forum for confidence-building. Going to the next stage will require strong political will by a community of members that sustain the inviolability of the principle of non-interference into internal affairs. However, Vietnam should side with the U.S., a strong proponent of a more integral approach to the forum (Nanto, 2010), to emphasize the need for moving forward in this sense.

A more active and assertive ARF, together with a united stand by all ASEAN countries, should also be the best framework from which to push for the establishment of a binding Code of Conduct on the South China Sea, containing specific terms that would counter China’s hegemonic interests in the area. Although the 1992 Declaration was a step in the good direction, facts and recent history tell us that it was insufficient: a new, stronger agreement is sorely needed, and Vietnam will only be able to contain Chinese ambitions via stronger cooperation with both the U.S. and its regional partners.

Finally, bilateral hedging in security matters would involve the further deepening of military relations with the U.S., building upon the progresses made in recent years. Military cooperation with a quickly modernizing and militarily stronger India, which is also hedging against China’s regional dominance, should also be pursued: there is already a successful precedent, when Indian naval vessels exercised with their Vietnamese counterparts in the South China Sea in mid-2000 (Chung, 2004). Finally, the good relations with Russia could be extended to some form of military cooperation, be it on a bilateral basis or under the ASEAN umbrella.

However, the all these multilateral hedging efforts will be useless or counterproductive if Vietnam alienates China. In fact, Hanoi should seek further engagement and cooperation with China, based on shared interests and values. Bilateral talks regarding the status of the South China Sea should be maintained, in order to keep all negotiation channels open, and emphasis should be put on the ability of both nations to achieve peaceful resolutions to thorny matters, as was the case with the 1999 and 2000 border demarcation agreements.

Also in political terms, ASEAN +3 should also be seen as an effective channel for political dialogue and cooperation, as well as for boosting mutual trust and resolving disputes (Simon, 2008). Vietnam should strive to further boost this dialogue channel

Moreover, cooperation on transnational issues such as human and drug trafficking should be further improved, both in the best interest of Vietnam (affected by the trafficking of young Vietnamese women sent to China to marry local peasants or to work as prostitutes) and China (seriously affected by increasing drug smuggling to Yunnan province, mainly from Myanmar but also from Vietnam).

Pollution and overconsumption of upstream water resources of the Mekong River are also an issue that should be raised. The effects this has downstream, on Vietnam’s rice paddies in the Mekong Delta, can also hurt Beijing’s quest for food security, as China is a big customer of Vietnamese rice exports[15]. Therefore, Hanoi has a clear bargaining chip, offering preferential treatment to China in rice exports in exchange for environmentally-sound exploitation of hydraulic resources in the Mekong River. 

Finally, although the Vietnamese government should aim to improve its human rights track record, if the current status quo in that aspect is maintained, Vietnam will enjoy staunch support from China, which also deems Western criticism as illicit, obtrusive and provocative interference in domestic affairs.

Maintaining the best possible balance has been the cornerstone of Vietnamese foreign policy since the end of the Cold War (Dosch, 2009), while the preservation of state sovereignty, foreign policy autonomy, regional peace and economic growth have been ASEAN’s goals since its inception in 1967 (Roy, 2005 and Simon, 2008). Hanoi, as the other governments in the wider region, is very careful not to provoke China, except when protecting vital national interests (Roy, 2005). With their careful strategy of moderate hedging and enhanced cooperation, Vietnamese authorities look to avoid turning China into an enemy by treating it as an enemy. However, China will have to convince its neighbors that it takes their concerns into consideration as it builds up its military capabilities, while also aiming for greater transparency and willingness to establish common security systems in the wider region (Wang, 2011). Until that happens, smaller Asian nations such as Vietnam will have to keep on hedging to maintain this unstable balance or power, peace and prosperity.

References

Amer, R. and Nguyen, H., 2005. The Management of Vietnam’s Border Disputes: What Impact on Its Sovereignty and Regional Integration? Contemporary Southeast Asia, 27, No. 3, pp. 429-452.

Blank, S., 2011. What Can the United States Learn from Russia’s Relations with ASEAN Countries? Asia Pacific Bulletin, Number 96 [online]. Available at: <http://www.eastwestcenter.org/fileadmin/stored/pdfs/apb096.pdf> [Accessed 24 April 2011].

Central Intelligence Agency, 2011. The World Factbook: Vietnam. [online] Available at: <https://www.cia.gov/library/publications/the-world-factbook/geos/vm.html> [Accessed 24 April 2011].

Chan, S., 2008. China, the U.S., and the Power-Transition Theory: A Critique. London and New York: Routledge.

Chung, C.P., 2004. Southeast Asia-China Relations: Dialectics of "Hedging" and "Counter-Hedging". Southeast Asian Affairs, Volume 2004, pp. 35-53.

Dosch, J., 2009. Vietnam in 2008: Foreign Policy Successes but Daunting Domestic Problems. Southeast Asian Affairs, Volume 2009, pp. 373-388.

Economy, E., 2010. The Game Changer. Coping With China's Foreign Policy Revolution. Foreign Affairs, Volume 89, Number 6, pp. 142-152.

European External Action Service, 2011. Vietnam. [online] Available at: < http://eeas.europa.eu/vietnam/index_en.htm> [Accessed 24 April 2011].

European Union, 2011. Delegation of the European Union to Vietnam. [online] Available at: < http://www.delvnm.ec.europa.eu/> [Accessed 24 April 2011].

Glaser, C., 2011. Will China’s Rise Lead to War? Why Realism Does Not Mean Pessimism. Foreign Affairs, Volume 90, Number 2, pp. 80-91.

Green, M., 2007. Future Visions of Asian Security: The Five Rings. Asia Policy, Number 3, pp. 19-24.

Kang, D., 2007. China Rising: Peace, Power, and Order in East Asia. New York: Columbia University Press.

Kaplan, R., 2010. The Geography of Chinese Power. Foreign Affairs, Volume 89, Number 3, pp. 22-41.

Kastner, S., 2008. The Global Implications of China’s Rise. International Studies Review, 10, pp. 786–794.

Ko, A., 2010. Not for political domination: China's foreign economic policy towards Vietnam, Singapore and Malaysia in the open era. Ph D. University of Glasgow.

Nanto, D., 2010. East Asian Regional Architecture: New Economic and Security Arrangements and U.S. Policy. [online] Congressional Research Service. Available at: <http://fpc.state.gov/documents/organization/142760.pdf> [Accessed 24 April 2011].

Nye, J., 2011. China’s Rise Doesn’t Mean War. Foreign Policy [online]. Available at: <http://www.foreignpolicy.com/articles/2011/01/02/unconventional_wisdom?page=0,3> [Accessed 24 April 2011].

Pierre, A., 2000. Vietnam's Contradictions. Foreign Affairs, Volume 79, Number 6, pp. 69-86.

Pyle, K., 2007. Reading the New Era in Asia: The Use of History and Culture in the Making of Foreign Policy. Asia Policy, Number 3, pp. 1-11.

Roy, D., 2005. Southeast Asia and China: Balancing or Bandwagoning? Contemporary Southeast Asia, 27, No. 2, pp. 305-322.

Simon, S., 2008. ASEAN and the New Regional Multilateralism: The Long and Bumpy Road to Community. In: Shambaugh, D. and Yahuda, M., eds. 2008. International Relations of Asia. Lanham: Rowman & Littlefield Publishers, pp. 195-214.

Storey, I., 2008. Securing Southeast Asia’s Sea Lanes: A Work in Progress. Asia Policy, Number 6, pp. 95-127.

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Wang, J., 2011. China’s Search for a Grand Strategy. Foreign Affairs, Volume 90, Number 2, pp. 68-79.

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[1] In the multilateral sphere, relations are shaped around the 1980 EC-ASEAN Cooperation Agreement, which allows all parties to be involved in regional cooperation activities.

[2] FTA negotiations with Vietnam and other individual ASEAN countries were started after talks to reach a wider EU – ASEAN FTA stalled due to the differences in development levels among ASEAN countries.

[3] In fact, after a few years of progressive but controlled opening of the political sphere, Vietnam has cracked down on protests and opposition after the global crisis hit the country in 2008, a situation that worries the EU, as stated in its 2010 Mid Term Review of the Vietnam Country Strategy.

[4] A good example of the two confronting views can be found in the views regarding the (unofficial) announcement, in 2010, that the South China Sea was one of the country’s core interests. While Chinese scholar Wang (2011) dismisses it as a reckless act perpetrated by some unauthorized commentators, American scholar E. Economy (2011) treats them as official statements and, therefore, genuine Chinese policy.

[5] Thus, Ko (2010) also affirms that continued economic growth will be the foundation of the Chinese military modernization, and the future might bring a Southeast Asia without real bargaining power to the Chinese demands in the political realm.

[6] This, together with border agreements with Cambodia, prompted commentators such as Amer and Thao (2005) to proclaim that Vietnam had an impressive track record in solving border disputes in a historically complicated region.

[7] Already in the year 2000, Vietnamese security officials worried about the threat posed by the future development of the Chinese navy, which they saw coming in a timeframe of between 10 and 20 years (Pierre, 2000).

[8] In fact, even Chan (2008) suggests that an economically stagnating China could be more aggressive than the current rising China.

[9] As Kastner (2008) points out, Chinese behavior toward Taiwan provides information for other states in the region concerning Chinese intentions.

[10] However, some scholars writing at the start of the current century, such as Kang saw a pattern of bandwagoning with China (Roy, 2005). However, his view of bandwagoning focuses on economic cooperation and interdependence, based on Schweller’s (1994) definition, and not on Waltz’s (1987) more integral approach, that also includes a security component. As Acharya (2003) affirms, economic cooperation does not mean political alignment with China.

[11] In fact, according to several Russian newspapers, Vietnam was, in 2009, the main customer of Russia’s weapons industry (Blank, 2011).

[12] In a first stage, up to 2015, the liberalization committed by Vietnam in the framework of ASEAN-China FTA is limited with 50 per cent of the tariff line to be liberalized (Source: Vietnam Business News).

[13] Under the ASEAN-China FTA, rice is categorized as a highly sensitive product, so tariffs will be reduced to less than 50 per cent on January 1, 2015.

[14] It must be remembered that China’s membership in the ARF meant its accession to the ASEAN’s Treaty of Amity and Cooperation, which provides for the peaceful settlement of disputes and which was seen as a key element to restrain China’s actions in the South China Sea.

[15] Although China considers rice a “highly sensitive product”, it imports of around 600,000 tons of Vietnamese rice yearly.

Cyprus, levies, loans and human nature

More often than not, humans behave in a psychologically and socially understandable way which, alas, turns out to be quite irrational. As behavioral economists, based on the ground-breaking research of D. Kahneman and A. Tversky, have demonstrated, economic decisions do not always make sense. Widespread reactions to the Cypriot combined bail-in and bail-out are a prime example thereof.

Last Friday, right before a long weekend in Cyprus, the Eurogroup decided, on behalf of the so-called Troika – including the European Commission, the European Central Bank and the International Monetary Fund – and in conjunction with Cyprus' new centre-right president Nicos Anastasiades, to apply a one-time "stability levy" to all Cypriot deposits to complement the €10 billion bailout loan its European partners were offering to stabilize the dramatic financial situation of this divided Mediterranean island.

What started as an atrocious injustice for small savers – with initial plans asking for a 6.75% levy on all deposits under €100,000 (theoretically fully guaranteed by the Cypriot government and Europe's planned Deposit Guarantee Scheme) and just a 9.99% levy on deposits over €100,000 – now looks like a one-time wealth tax for richer Cypriots and non-Cypriots alike, which will have to foot the bill to the tune of €5.8 billion via a levy that will surely shave at least 10% off the balance of all deposits below €500,000 and up to 15% of those of the wealthiest.

A 12.5% levy was precisely what Germany was asking for from the start, in order to punish speculators and money launderers that had found a home in the poorly regulated and overly generous Cypriot banking system, with interest rates for ordinary deposits averaging over 4.5% (or even more for much-favored Russian customers). It now appears that it was Cypriot president Anastasiades the one insisting on spreading the levy to ordinary savers to "lower the burden on the wealthy" and try to prevent them from fleeing Cyprus as a low-tax banking haven.

Be it as it may, everybody is talking only about the injustice of this planned "lab experiment" with the Cypriot people, that unduly punished honest working-class people (and the rich) in a way no other previously rescued European country had faced. Further from that, the Eurogroup showed undue toughness in not offering a more generous direct bailout and forcing the Cypriot people to pay for it heads on. In other words, our economic short-sightedness made most people, including the press and many pundits (with some honorable exceptions), forget that a bailout package is no more than a loan that needs to be returned with interest, not a donation.

Cyprus’ GDP hovers around €18 billion. It has just received an €10 billion bailout. In other words, they will have to eventually repay a loan amounting to 55% of GDP, or around €13,000 per capita – plus the corresponding yearly interest. Please note that this amount (minus interest) equals a one-time levy of 13% on a deposit of €100,000 (or 10% over €130,000), of course assuming that each and every Cypriot had such savings.

As economists have extensively and reliably proved, debt-to-GDP ratios of over 90% severely reduce growth prospects. Public debt already stood at 81% of GDP in 2012: add a further 55% and the number turns into a scary 136% of GDP, not even counting the projected deficit for 2013, which should amount to a further 4-5% of GDP. What if the EU had been really generous and offered an all-encompassing rescue package of €16-17 billion? Well, in that case, public debt at the end of 2013 might reach a nightmarish 180% of GDP, or €43,000 (plus interest) per capita. Plus, unsustainable debt means austerity measures and budget cuts, and most Europeans know what this recipe entails: rising unemployment, more poverty and the loss of the sadly unappreciated multiplier and accelerator effects of government and public sector investment.

Let's just spend a few lines comparing it with the "standard bailout" of the Spanish banking sector, agreed in June 2012, to the tune of a €60 billion rescue package (or 6% of Spanish GDP). Being a loan and not a donation and coming before the actual implementation of the Eurozone banking union, this hefty amount was debited into the public debt accounts. Spain is currently paying a yield of around 5% for standard 10-year notes and between 3 and 4% for shorter-maturity bonds, so interest payments for this extra debt would amount roughly €2 billion per year during up to 10 years, thus raising the actual bill to almost €80 billion.

Under the current dramatic economic situation, the total number of active taxpayers among the Spanish working population stands at barely over 16 million (and decreasing). If we divide these 80 billion among the tax-paying, active population, we get that each non-retired taxpayer should foot a bill of €5,000. Even if we divide it across the entire population, the projected bill stands at €1,700 per person.

This would equal applying the initially-planned Cypriot levy of 6.75% to someone with a deposit of €75,000, or to anyone with savings of just over €27,000 in case we artificially divide the bill among all Spaniards, including children, the retired and the 26% of unemployed working population. If we use the first number, however, working Spaniards are already paying more than what an ordinary Cypriot, with less than €100,000 in savings, would have paid under the unfair and harsh levy scheme proposed last Friday. Of course, this is not to say that their current situation is enviable: on the contrary. Cypriots will also have to foot the bill for the additional €10 billion that the Troika is lending the nation in order to save its banks and this is, by far, the heaviest burden on the Cypriots – for the rich and the poor alike.

Pointing out the irrationality of the exclusive focus on the levy for depositors, outrageous as it might be, is not to say that we should consider the solution to be optimal. Far from it: curing illnesses that could have been prevented is never the best possible option, and the medicine employed always has undesirable side effects. The first and more obvious is that the image of the European Union, led by the seemingly omnipotent German government, has been badly tainted by an improvised, half-baked rescue that highlighted a worrying lack of internal solidarity and cohesion. The unhealthy exercise of finger pointing carried out by the Cypriot president and the German finance minister, now also including the Eurogroup itself, has only helped create further discomfort with the initial decision and hurt even more the feelings of those who still dare to feel European. Mending the initial abusive levy for small savers at the eleventh hour in face of parliamentary pressure will definitely not mend their image overnight in front of millions of scared Southern European taxpayers.

The second is the lack of justice and punishment for the ones who could have prevented this malaise but did nothing else than feeding it: the greedy bankers and politicians of this small and divided Mediterranean island. If the size of your financial system is 8 times that of your GDP, there must be something wrong. If your guaranteed deposit interest rates are almost double those of other Eurozone countries, there must be something wrong. If you bet over 60% of the GDP of your country on Greek bonds, there is definitely something wrong with you. If you lure Russian (and Israeli) undeclared income on a massive scale and spice it up with the lowest corporate tax rate in the EU (currently at just 10% and set to rise to Ireland’s much-maligned 12.5% if this clause of the March 16 deal if finally approved), you have all the ingredients for a massive crash fueled by offshore funds flushed into a banking casino economy. One has to wonder why a Russian company, Gazprom, allegedly offered Cyprus a debt restructuring deal to avoid the EU bailout. Companies operate out of self-interest, not for the public good. Of course, this offer had an even darker side, aside from helping fellow Russians whose savings in Cyprus might take a nice haircut: the private bailout would have been in exchange for the island’s gas rights. In other words, it all just looks way too shady.

However, nobody cared to regulate this casino until it was way too late, and a few people sure made hefty profits with this business. Will they pay for it? Or is are the EU, the IMF, the Eurogroup and everyone involved in the issue forgetting about them… either because they also feel the shame of culpability or, worse still, because these very clever people are above and beyond the law? Sadly enough, the only answer we can now give to this doubt of ours is the one given by the Financial Times’ Martin Wolf in reviewing a newly published book: bankers are intellectually naked (and, we might add, most politicians look rather naked to us, too).

Free trade agreements and nuclear trade-offs

U.S. President Barack Obama is carefully planning his upcoming visit to Israel and, with it, he is also complicating a negotiated diplomatic solution to the Iranian nuclear crisis and undermining the rather unusual efforts of the European External Action Service. 

On March 15, with no extra publicly available data to back the statement and no special provocative statements from Iran, President Obama warned that, despite the Iranian bomb could be more than one year away, a military option remained pretty much on the table.

On a more discreet note, although equally important and closely related, last February 28, the U.S. Senate passed Resolution 65, calling the U.S. to provide support for Israeli strikes on Iran, aimed at preventing the Islamic republic from acquiring nuclear capabilities, in the form of military, economic and diplomatic backing.

To make things even more complicated, it all comes in the aftermath of North Korea’s latest long-range missile test, in December 2012, and third nuclear test, earlier in February, both taking place on the heels of the signature of a bilateral cooperation  agreement in the fields of science and technology – signed in Tehran on September 1, 2012 with both Iranian President M. Ahmadineyad and North Korean Chairman of the Presidium of the Supreme People's Assembly Kim Yong-nam present at the official ceremony – and allegedly supported by (and even carried out on behalf of) Iran, which has also successfully test-fired two different short-range missiles.

This conflict-geared agenda is undermining the efforts of other international players to defuse tensions and negotiate a palatable solution to the conflict over Iran’s nuclear plans. Most notably, the almost unprecedented proactive efforts of the often reactive European Union diplomatic arm to take the lead in negotiating a peaceful resolution to the Iranian nuclear issue are being not-so-subtly being put aside by the combined efforts of the revamped Netanyahu cabinet (now including a right-wing defense minister M. Yaalon) in Israel and its American ally.

It also comes at a complicated time for the European Union to answer back and hold its ground: after several months of preparatory meetings and negotiations, the European Commission has given the green light to launch talks leading to a comprehensive Free Trade Agreement (FTA) with the United States of America, Europe’s main trade partner, an agreement that would remarkably boost transatlantic cooperation and bilateral trade.

Signing this FTA not only makes economic sense for the sputtering EU economy, but also carries great diplomatic and geostrategic clout: amid notable cuts in defense budgets all across Europe – military expenditure across Asia has overtaken Europe’s for the first time in contemporary history – and fears that NATO’s role and capabilities are being undermined in the context of Washington’s much-trumpeted “pivot to Asia” , Europe’s democracies are trying hard not to become irrelevant in the multipolar 21st century.

When silence is the only sound coming from the European External Action Service and the loudest voices can be heard in the Directorate Generals for Trade and Economic and Financial Affairs, the only valid conclusion one can reach is that Europe needs to export its way out of the crisis and thus further improve its balance of trade, a discourse that has two clear implications for the involved parties. First, the EU enjoys a healthy and growing positive trade balance with Israel (up from under €3 billion surplus in 2009 to over €5 billion surplus in 2011 when combining trade in goods and services) and is not willing to see it vanish overnight. Second, free trade with the United States would notably boost European exports across the Atlantic, raising European aggregated GDP an estimated 0.5% per year, and any source of growth is now sorely needed. In the words of Mr. Vale de Almeida, EU Ambassador to the U.S., “it is good to see Europe perceived again in Washington as a source of growth, and we must seize the moment.”

Green light, therefore, from Brussels for Israel and the United States to take the course they consider more fit for the Iranian nuclear issue... of course, China and its strategic energy interests permitting.

Betting everything on China

How North Korea really aims at China with its threats against South Korea and the United States

Since its 12 December long-range missile / satellite launch and 12 February nuclear test – already its third, the most powerful yet and allegedly funded by and performed on behalf of Iran –, the Democratic People's Republic of Korea (DPRK) has been all over the news, most recently by threatening to cut all communication lines with Seoul and voiding the 1953 armnistice – one of the few elements that keeps the unstable peace in the Korean peninsula alive – in response to the passing of UNSC Resolution 2094, considered the most punitive to date (albeit not the harshest that could be imposed), which condemns North Korea's nuclear activities "in the strongest terms", imposes new financial sanctions, strengthens states' autohority to inspect suspicious cargo from the DPRK and imposes additional sanctions on individuals and entities.

However, further from the passing of yet another UNSC Resolution (in fact, another resolution against North Korea, no. 2087, was adopted last January), the reelection of Barack Obama or the even more recent investiture of new South Korean President Park Geun-hye, the reasons behind the unusually bellicose behaviour of the Kim Jong-un regime, dialectically already surpassing that of 2010, which preceded the shelling of the allegedly disputed Yeonpyeong island, have to be found in the menacing attitude shift coming from China. The stakes are too high for the regime, which is now resorting to indirect brinkmanship negotiation tactics to make sure China has no choice but to keep supporting it.

Several warning signs are arising from China. Although the Chinese government's worst nightmare would be a North Korean collapse, which would trigger a flood of impoverished refugees crossing China's border and create a security nightmare until North Korea's nuclear weapons were found and secured, Beijing's stance has perilously drifted from near-unconditional support to a more critical stance. Two unprecedented moves reflect this potential attitude shift.

First, critical voices from inside China's Communist Party have been allowed to publicly question Beijing's support of the Kim regime. In one of the most resounding pieces, whose publication in the Financial Times guaranteed its international impact, Deng Youwen, deputy editor of the journal of the Central Party School of the Communist Party, asserted that the benefits of this privileged relationship are unclear: ideology-based relationships are dangerous, the Cold War is over and North Korea's strategic value should not be overstated, North Korea will not reform (i.e. will not open its economy to Chinese businesses looking for cheap labor) and Pyongyang is drifting away from Beijing (i.e. it does not follow anyone's orders). In fact, Deng was just voicing the concerns of a growing number of Chinese intellectuals and party members. Despite the obvious fact that trade with North Korea has helped revitalize the impoverished Northeastern provinces of Liaoning, Jilin and Heilongjiang, especially since the start of the Northeast Asia Project in 2002, North Korea has been testing China's patience for too long, and weariness is starting to show.

This leads us to the second change in China's behaviour vis-à-vis North Korea. Until recently, Pyongyang's only ally and regime guarantor refrained from actively supporting UNSC Resolutions against North Korea, unless in those related to the 2006 and 2009 nuclear tests. However, it all changed last December, when Chinese dilomats joined their U.S. counterparts to proceed with a UNSC resolution criticizing North Korea for its latest missile launch. As asserted by Kurt Campbell, this surprised and enraged Pyongyang and set the stage for the February nuclear test, a strong warning to China that North Korea has no interest in playing the role of vassal state (i.e. what Deng Youwen qualifies of "Pyongyang drifting away from Beijing"). Not surprisingly, China played an active role in drafting UNSC Resolution 2094, implicitly threatening the eventual enforcement of these strengthened sanctions. 

In the past, China-DPRK trade has even increased in the aftermath of UN sanctions, as implementing regulations passed by the United States, the EU and other states and trade blocks were put into effect but circumvented via China, which consistently failed to create detailed lists of forbidden imports of the luxury items that the North Korean elite craves. If China's attitude changes – and that is still to be seen, although there are some early promising signs –, the effects for the luxurious lifestyle of Kim's clique could be devastating, potentially triggering severe internal discontent and instability. Further from the economic benefits for the Chinese nationals engaging in trade activities with the Korean elites, Beijing is very much aware of the risk of regime collapse if trade or aid are severely cut down. Pyongyang knows it and is playing its cards to make sure China's fears overwhelm its desire to please the international community on the North Korean issue amid growing tensions tied to its trade surplus, growing military clout and territorial demands in the South China Sea and the Sea of Japan.

Professor Jennifer Lind has ably asked herself whether China will finally bite North Korea. The answer is still up in the air and, as she says, the significance of these recent developments should not be exaggerated, as the Chinese have still watered down the degre of punishment imposed against Pyongyang despite actively backing the sanctions. Plus, if past behaviour can be of help to predict the future, Chinese firms have, with Beijing's consent, consistently helped North Korea evade sanctions. So far, the only obvious fact is that Pyongyang is placing a strong bet on its fearful brinkmanship tactics, hoping they play into Beijing's fears of instability in its backyard. We can just hope that Pyongyang's China-aimed strong words and threats do not end up in violent provocations, which could eventually trigger a disastrous major conflict.