America, China and Japan; military and monetary networks misaligned?

At this year’s Japanese Association of International Relations conference, Inoguchi Takashi (editor of International Relations of the Asia Pacific) chaired a session entitled “military and monetary networks.” Speakers included, T.J.Pempel, Daniel Drezner, and Chung-in Moon.

The papers themselves were all of a high quality, but it was in the discussion afterwards that the significance of the theme became apparent. Taken together, what these papers suggested to me was that the military and monetary networks in East Asia are no longer neatly aligned with each other.

It is now common knowledge that East Asia played a major role in the current financial crisis. While not dismissing the negligence of the US authorities, the global imbalance which permitted (or even encouraged) bubbles in US economy to emerge had their origin in the post-Asian Financial Crisis decision of East Asian government’s to build up excessive foreign reserves in a bid to ensure that “never again” would they need to go to the IMF.

What is less common knowledge is that this decision to rely on the dollar in Asia, (and thereby to effectively underwrite the US profligacy) has had major political implications. Make no mistake, East Asian states are not choosing to use the dollar (as a reserve currency, and importantly to denominate their trade and credit) out of the kindness of their hearts. Inoguchi called this “the kindness of strangers.” They expect something in return.

In the case of Japan and Korea, part of the kickback is a security guarantee. Japan (and Korea) support the US dollar in part (perhaps large part) because of a political logic. During the Asian Financial Crisis, Japan’s proposal for an Asian Monetary Fund was seen as a sort treachery by the US. Indeed, as Prof. Chung-In noted Korea did not endorse it for fears of US retaliation. Would a movement away from the US dollar really affect the region’s security order? Who can say. But in the minds of decision-makers at the top, clearly a link existed between the military and monetary networks.

But what about China? Now the world’s largest holder of US treasury bonds and the US’s only potential rival, what does China expect from US in return for supporting the dollar’s role until now? Obviously, China does not want any kind of security guarantee, China will provide protection for its own national integrity, national dignity and nationals - Thank-you. What about political favors? Also unlikely, as a permanent member of the UNSC, China is already at the top. The US played that card in 1972. Taiwan? Maybe, but hard to imagine.

In fact, China is most likely after an economic return. This should hardly be surprising, the CCP’s regime legitimacy depends now on being able to deliver economic growth and development – and to do so consistently. The accumulation of US dollars, whether in foreign reserves, treasury bonds or bank accounts, was a function of the decision to maintain a peg (or de facto peg) of the RMB to the USD. As Drezner argues, it was not a deliberate decision – but rather came out of China’s export orientated development strategy, a strategy which had been successfully road tested by both Japan and Korea (both of whom alliance partners of the US!). The fact that China ended up “supporting” the US hegemonic position in finance was neither here nor there.

Until now. Now China has realized that sitting of 2 trillion of USD is not a proposition that carries no costs – quite the opposite, it is risky. China finds itself having effectively bought ‘war bonds’ from the US, a country which - while a largely benevolent hegemon - is nevertheless a hegemon feeling challenged by China’s rise. China’s is now worried that that investment will not be repaid in full. Simple inflation might wipe out significant value, as would appreciation in the RMB versus the dollar – something China is now under pressure to do.

At the same time that China is reconsidering its position in the US’s monetary network, Japan and Korea are reconsidering their position in the so-called “Pax Americana” military network. Indeed, Hatoyama’s administration’s difficulties in negotiating US base arrangements (over the noise of vocal protests in Okinawa) are suggestive of this shift in Japan. Just how this will effect Japan’s orientation towards the monetary network is still unknown, but it is unlikely that Japan is going more interested in supporting the USD in the longer term.

In a related point, Prof. Tadokoro noted that while all eyes are one the big holders of US debt in North-east Asia, ASEAN countries have the possibility of “sneaking out” the US monetary network, evidence for such can be seen in the Chiang-Mai Initiatives (some of which are denominated in Yen and RMB).

The misalignment of the security network which excludes China, and the monetary network in which China and US so close as to be mutually dependent is thrown into sharp relief by the current World Financial Crisis. A crisis with its origin in this region.

(The papers presented at the session should be released in a special issue of IRAP next year.)