East Asia

By Ian Bremmer

President Obama embarks today on a tour of East Asia, a region central to U.S. geopolitical interests and its economic recovery. The primary goal is "strategic reassurance," a term Deputy Secretary of State Jim Steinberg has used to describe U.S. relations with China.

On Friday, he'll reassure Japan's brand new Prime Minister Yukio Hatoyama that, despite well-publicized recent frictions in U.S.-Japanese relations and a broader U.S. engagement with China, his administration considers ties with Japan a cornerstone of U.S. foreign policy. And he'll seek some reassurance that the new DPJ government isn't about to revisit key assumptions in the relationship. Hatoyama will likely take the opportunity to "clarify" his view on the importance of the security partnership. Throw in a highly publicized Obama speech on Saturday, and we can expect an easing of suspicion and a lot of warm smiles, especially since the two sides now appear to have a deal on a joint-commission to resolve the Okinawa troops and base relocation issues.

On Sunday, Obama will be in Singapore, where he'll reassure Prime Minister Lee Hsien Loong that the US isn't planning on reducing its Asian presence anytime soon. He'll then join the festivities at the Asia-Pacific Economic Cooperation summit. During the meetings, there will be early discussion of an "Asian Economic Community" and rumors that Obama is involved in discussion with ASEAN leaders on a U.S.-ASEAN free trade agreement -- though he'll more likely simply be offering reassurance that his government hasn't set its trade agenda on indefinite hold. The meeting will end with public pledges from all sides to reject protectionism, the sort of empty reassurances we've seen in recent months at G20 meetings in Washington and London. Much of the media focus will be on the silk shirts and blouses inspired by Singapore's Peranakan culture that the leaders will be wearing.

More interesting are the side meetings that we'll hear much less about. Obama is scheduled to sit down with Myanmar's prime minister to reassure him that the United States is willing to engage the country's military junta if there's any prospect that engagement might yield results. Back home, Obama will reassure critics in Washington that he won't move to lift sanctions until Myanmar's generals offer something of substance. He's also scheduled to meet with Indonesian President Yudhoyono to assure him that the U.S. views the emerging regional player as a valuable local partner, and with Russia's President Medvedev to assure him that his administration is serious about improving strained relations with Moscow.

On Monday, Obama heads for Shanghai and Beijing for a three-day visit that includes some sightseeing and a Q&A with Chinese students around meetings with President Hu Jintao and Premier Wen Jiabao. The talking points for these sessions are nearly as ambitious as what you'd expect from one of those G20 meetings. There will be discussion of the recently contentious U.S.-Chinese trade relationship, energy, human rights, stability in Pakistan and Afghanistan, and the nuclear programs in North Korea and Iran. Obama can reassure China's leaders that he seeks mutually profitable engagement with the one subject he's NOT likely to bring up: The value of China's currency. The Chinese wouldn't welcome the discussion, and Obama has no interest in inviting the Chinese to comment on the state of the U.S. economy and Washington's role in it.

If there's any tangible progress from Obama's time in China, it will be on climate change/green energy issues. There may well be an agreement to expand joint development and investment in renewable energy technology. It won't be a true "breakthrough," but given the low likelihood that anything especially important comes out of climate change meetings in Copenhagen next month, the Obama team will use any sign of modest progress to reassure skeptics of his commitment on the issue and to tout the trip as a success.

On the way home, Obama will stop off in Seoul to tell South Korean President Lee Myung-bak that KORUS, the U.S.-South Korean free trade agreement, isn't dead. He'll also reassure Lee that, though the US won't reduce troop levels on the peninsula, Washington can help make their stay a little easier for South Korea's government to manage.

Ian Bremmer is president of Eurasia Group.

JACQUES WITT/AFP/Getty Images

By Ian Bremmer

The international conflict over North Korea's nuclear program has been locked in stalemate for years. The United States and Japan fear that Pyongyang will sell nuclear weapons and material to rogue regimes and/or terrorist groups or stumble its way into a shooting war. China and South Korea worry that North Korea will collapse, flooding Chinese border regions with sick and starving refugees and leaving South Korea with a reunification project that will cost a fortune and last a generation. This problem has allowed Kim Jong Il to periodically saber-rattle his way into fresh supplies of cash, food, and fuel. It's all been entirely predictable.

But the Dear Leader's illness has changed the game. His government has been unusually belligerent lately, even by North Korean standards. Following the latest missile tests, they haven't made new demands for talks or aid and insist they will not return to six-party talks until others at the table accept North Korea as a nuclear state. Its government has since sentenced two US journalists to 12 years of hard labor for "hostilities against the Korean nation and illegal entry." Especially provocative have been a series of cyber-attacks on US and South Korean government websites, which officials in both countries believe originated from North Korea. This more reckless North Korean behavior suggests that senior civilian and military officials, increasingly unsure how the coming power transition will go, are trying to secure some extra room for maneuver.

For the moment, North Korean actions are aimed at an internal, not an international, audience. That makes their actions less predictable -- and increases the risk of accidental confrontation.

The Obama administration, aware that bad things happen when all sides are in escalation mode at the same time, has stepped back from the tougher rhetoric of weeks past. There's been little mention of sanctions. For the imprisoned journalists, Secretary of State Clinton is now asking for mercy rather than demanding justice.

But if North Korea really is moving into political succession mode as Kim Jong Il's health heads downhill, those who will be left behind are making a much-faster-than-planned move to shore up support for his recently designated successor, third son Kim Jong Un. It will be easier for them to maintain national unity at a time when the country stands on the brink of war.

Until the North Korean leadership feels confident enough to return to the established patterns of negotiation and extortion, its actions will remain much more difficult to predict. That problem, in turns, elevates the risk of miscalculation -- and a confrontation that no one wants.

AUM JUNG-SEOK/AFP/Getty Images

By Ian Bremmer

Some want to see the US and China form a comprehensive political and economic partnership, an alliance of pragmatism that provides workable solutions to key international problems: the global economic slowdown, climate change, collective security, and other issues. Those who make this argument ignore the reality that China remains a developing country with serious internal challenges ahead. This will sharply limit the Chinese leadership's eagerness for taking on new international burdens, however triumphalist their rhetoric becomes.

More to the point, U.S. and Chinese advantages are not as complementary as some think. An America that is gradually losing much of its economic advantage over fast-emerging states will continue to take on much of the geopolitical heavy lifting --on nonproliferation, on the Middle East peace process, on the challenge of quelling militancy in Afghanistan and Pakistan, on Iraqi stability, on risks that Iran will destabilize the region, on piracy, and plenty of other issues. The U.S. military and U.S. taxpayer will begin to feel even more over-extended, and the electorate will challenge U.S. policymakers to justify America's global security presence.

Beijing may soon announce that China is building its first aircraft carrier. That will set off alarm bells in the American media, but it's really much ado about not much. China's navy is focused on protecting Asian shipping lanes. Building one carrier isn't the same as assembling a complete carrier battle group. The United States has 11 such groups. In other words, for all the talk about China's future blue water navy, Beijing will not be able to project a global naval presence for decades to come.

Yet, though the United States will maintain its military dominance for the foreseeable future, China will feel that it's doing more than its share in the provision of public goods on the geo-economic side. In particular, the Chinese will be expected to buy U.S. Treasuries as Americans inflate away the value of those assets. That's why high-level Chinese officials have been talking up the idea of a new reserve currency.

With this obvious mutual dependence, can't Washington and Beijing form a mutually profitable partnership? The United States makes the world safe for Chinese commerce while, in the interest of global economic stability, China continues to subsidize U.S. spending?

Don't bet on it. Here's why:

The economic downturn will move domestic constituencies in both countries to complain about their share of burdens and dismiss much of the value provided by the other side. Populist-minded U.S. political officials will get in front of this public anger to avoid being swallowed up by it. Not so long ago, the Chinese leadership could simply have shrugged off this problem on their side. But an increasingly active Chinese blogosphere and a more assertive local press can, without directly challenging the Party's right to rule, help drive public demand for action that the government can't afford to ignore.

But here's the bigger problem: Those on the U.S. side providing the geopolitical leadership (mainly in the Pentagon) and those on the Chinese side managing foreign economic policy don't speak the same institutional language. Their values, their worldviews, and their vocabularies are entirely different. There is not enough common ground on which these two institutions can forge a partnership.

That's why the U.S. and Chinese governments are likely to find themselves increasingly at odds over the next several years --and why hopes for a G2 solution to a wide range of transnational problems are likely to be dashed.

Jed Jacobsohn/Getty Images

By Ian Bremmer

North Korea could become Obama's first true foreign-policy crisis. The country's second nuclear test has drawn international condemnation --including some unusually tough language from China -- and we'll surely see a UN Security Council resolution expressing more of the same. But there's just not much policy flexibility here, and therefore not many ways of cooling things off.

The six party talks were already broken down, and the North Koreans had been steadily upping the ante over the past two months -- with increasingly belligerent rhetoric, the arrest of two American journalists, and new satellite and missile test launches. None of these actions has brought the North Koreans much satisfaction, and they've contributed to a harder-line Obama administration response than was otherwise likely -- including the push through of yet another UN Security Council resolution and the establishment of preconditions for new talks.

It's hard to know how much of North Korea's aggressiveness flows from economic necessity and how much suggests a shift toward a more overtly hostile policy. But it's perfectly clear that Pyongyang is responding to a geopolitical squeeze that it has found increasingly uncomfortable.

This is not simply "belligerent business as usual," and the second nuclear test is a big deal for the North Koreans. First, they know they're crossing a "red line" for their friends in Beijing. (Apparently, North Korea took the unusual step of giving the United States a one-hour heads-up before the test, while saying nothing to Beijing.) Second, they only have enough nuclear fuel for a very small arsenal (perhaps 6-8 devices in total). In other words, they knew in advance they better make this test count.

Tensions will likely subside for a few weeks. The Obama administration has responded with the diplomatic equivalent of outrage but will ultimately need to back off preconditions and recognize the need to return to the bargaining table -- particularly since this will be the price for China to continue to focus its frustration on Pyongyang. The next question will be at what point the United States and China turn the economic aid back on. There's no hard-line domestic faction pushing the Obama administration for tougher sanctions (as there is on Iran). But the Japanese government will look extremely unfavorably on rewarding North Korean provocations, and the White House will weigh that reality with care.

If officials in the U.S. and North Korean governments decide to push the current conflict further, we'll see an active restart of the nuclear program and provocative border incidents -- disruption of neighboring shipping and potentially a limited incursion into the demilitarized zone (DMZ). We could even begin to see some market impact in South Korea.

For now, North Korea appears determined to push the envelope. The United States can't give Pyongyang what it wants. All that's left is for the two sides to negotiate their way back to the negotiating table. That may take time, and the problem is growing that, in the interim, neither side has total control of where the conflict might go next.

By Ian Bremmer

This week's headlines have painted a dire picture of the state of Japan's economy. GDP contracted by 4 percent over the first three months of 2009, the worst quarterly performance on record. Year on year, Japan's economy shrunk by more than 15 percent, the steepest such decline in more than half a century. But my latest visit to the country has convinced me that there's already light at the end of Japan's dark economic tunnel. Instead, it's the political situation we ought to be worrying about.

Despite the alarming headlines, I was pleasantly surprised to see the beginnings of a turnaround in economic sentiment. The prevailing gloom I felt in talks with Japanese business leaders earlier in the year has given way to cautious optimism that a recovery in China is about to lift the rest of Asia out of its malaise. Executives had lots of questions for me on threats to stability in Pakistan (mostly because President Asif Ali Zardari visited Tokyo last month asking for money), on Venezuela (because Japan has signed a deal with Hugo Chavez to build an energy partnership), and even a surprising curiosity about opportunities in Iraq. In other words, Japanese investors have resumed their shopping.

Japan's political situation, on the other hand, has only gotten murkier. Prime Minister Taro Aso and the ruling Liberal Democratic Party (LDP) have managed to climb their way out of single-digit approval ratings, but numbers in the low 30s still leave the party facing likely defeat in an election that must be called by early September. And the LDP's recent recovery took place at a time when the unpopular, scandal-ridden, and ailing Ichiro Ozawa still ran the opposition Democratic Party of Japan (DPJ). Now that he's announced his resignation, public focus will return to the country's dire economic performance -- and the LDP's inability to turn it around. Recovery is coming, but not fast enough to bail out the ruling party, and Aso has neither the track record nor the temperament to reverse his fortunes as the far more talented Junichiro Koizumi managed to do four years ago.

So what will the next Japanese government look like? When my turn arrived to ask questions of knowledgeable friends in political and business circles, I got some very interesting answers. More than one well-informed source warned me that Japan is about to have a centrist third party, one comprised of disgruntled factions from within the LDP and DPJ. How successful the new party will be is open to question, but the plans are well underway -- one of the LDP's leading politicians and a younger DPJ maverick (referred to as a "rising star" by one official) have been busy raising cash for the new party (to be announced right after elections) from senior Japanese executives.

The risk is of political paralysis. In other words, it's starting to look like Japanese politicians will be fully occupied with sorting out their new alliances and rivalries over the next couple of years just as China resumes its rise, the Obama administration works to build ties with Japan on new ground, and gradual economic recovery offers opportunities for much-needed structural economic reforms. That's bad news -- for Japan and for its friends in Washington.

By Ian Bremmer
 
The first five "fat tails" are detailed in the entry below. Here are the second five. Again, each of these scenarios remains unlikely. But in each case, the impact of the global economic meltdown on a particular state's real economy has dramatically increased the likelihood of a fat tail occurring -- from 2 percent or 3 percent six months ago to 10 percent to 20 percent over the next several months, a serious enough concern to warrant focused attention.

6. Turkey's secularists lash out

Reinvigorated by their solid performance in recent local elections and still seething over last year's failed bid to close the ruling justice and development party (AKP), Turkey's opposition secularists in the military, media, and business elite are emboldened to try again, launching a public campaign to build opposition to the ruling party across the country. A sharper-than-expected economic contraction provides them with a new political opportunity to take on the AKP in the courts.

Weakened by the AKP's own poor election showing, Prime Minister Recep Tayyip Erdogan struggles to manage the nationalist and radical Islamist elements within his party. Convinced that his political survival depends more on party unity than on building consensus across the political class, Erdogan overplays his hand by trying once again to amend the constitution. The high court orders closure of the AKP and bans Erdogan from office. Turkey then finds itself in an institutional crisis that brings policymaking -- and the country's bid to join the European Union -- to a grinding halt in the middle of a recession. Foreign investors abandon ship, moving capital into less risky markets.

7. Argentina opens up

Fat tails can offer opportunities as well as risks.  That's the case in Argentina.  There the global recession could unravel the country's economy. The government's inability to manage the fallout would push its poll numbers sharply lower, persuading advisors to President Cristina Fernandez de Kirchner to advance the date of legislative elections from October to June to allow her allies a chance to face voters before the opposition gets organized and the economy deteriorates further. The president's husband, former president Néstor Kirchner, would head the government's legislative list.

Against the backdrop of spiraling social discontent, President Kirchner's Peronist party loses its lower house majority, and Néstor Kirchner would finish behind dissident members of his own party in Buenos Aires. The president resigns, and Vice President Julio Cobos becomes president. Kirchner's departure opens new policy possibilities. The Cobos government reduces state interference in domestic markets, removes restrictions on the farming sector, and improves the transparency (and therefore the credibility) of the national statistics institute. He signs an agreement with the IMF and promises to resolve the country's outstanding debt problems, quelling fears of default. This leads to a serious improvement in market sentiment.

8. The emirates disintegrate

The weakness of existing federal institutions has pulled back the curtain on a serious problem -- Emirati leaders haven't been able to respond in a coordinated way to the financial crisis. Abu Dhabi has jumped in to recapitalize the other emirates, but its strong moves to extend political control could push angry royals in Dubai, Ras al Khaymah and Sharjah, to look for future opportunities to reassert their independence.

Under this scenario, once the financial crisis passes, the smaller emirates try to kickstart their economic programs, provoking a federal veto. Sheikh Mohammed bin Rashid al Maktoum of Dubai tries to reestablish his economic autonomy by launching new infrastructure projects without the approval of Abu Dhabi's al Nahayan family. Abu Dhabi then blocks Dubai's negotiations with international partners, damaging Dubai's credibility and humiliating its royal family. Sharjah tries to restart talks on gas imports from Iran and Ras al Khaymah considers the same option. The Abu Dhabi-dominated federal government opposes the process. The smaller states then create a new federation or simply become independent states, and the UAE federation ceases to exist. The weak institutionalization of federalism and the UAE's increasingly personalized politics make this scenario not quite as unlikely as it seems.

9. Japan's policy paralysis

Japan's Liberal Democratic Party (LDP) will likely lose control of the lower house of parliament, the chamber which selects the prime minister, in an election that must be called by September 10. The opposition Democratic Party of Japan (DPJ) will likely win a majority of seats outright and form a new cabinet or a large plurality and forge a coalition with independents and LDP defectors.

But the more worrisome scenario involves the DPJ failing to win a majority of lower house seats, creating a chain reaction of party schisms that paralyze the coalition building process. The LDP loss aggravates already bitter internal rivalries, splintering the party that has ruled Japan almost continuously for more than 50 years. Internal battles over policy also plague the DPJ. If more conservative DPJ members form alliances with former LDP members, the DPJ could fall apart as well, further complicating the coalition-building process at a moment of economic uncertainty.

Japan is then ruled (as it was during the mid 1990s) by a fragile and fractious multiparty coalition that can't advance reforms needed for response to the economic crisis, deregulation, and foreign-policy priorities like reinvigorated relations with Washington, undermining Japan's value as an economic and security partner. This scenario provokes anxiety over the future strength of the Japanese economy and its security alliance with the United States. It then takes several years for the country's leading political parties to redevelop along ideologically coherent lines.

10. Poland runs off the rails

In Poland, the Civic Platform (PO)-led ruling coalition has successfully promoted a moderate, pro-market, pro-western agenda and has become one of Eastern Europe's most stable and capable governments. But under this fat tail scenario, the global economic outlook pushes Poland into a severe recession. Following an anti-market, anti-foreigner, and thinly veiled anti-banking/anti-Semitic electoral campaign, the populist/nationalist Law and Justice party (PIS) takes power in 2011, and the country turns inward. The new government blames capitalism (as well as the west in general and PO in particular) for all of Poland's ills. Its policy agenda is economically statist and culturally intolerant and nationalist.

The PIS-led government asserts control over a broad range of state and quasi-state companies in sectors like energy, mining, and banking/insurance. Officials appoint boards of directors for these companies based less on competence than on political loyalty. Poland withdraws its commitment to join the eurozone. The government scores domestic political points via attacks on both the EU and Russia -- with negative strategic and economic consequences. PIS launches corruption "witch hunts" against former communists, PO party loyalists, and foreigners, destabilizing Poland's economy and generating capital flight.

Click Here for The 10 crises you aren't expecting but should be (Part 1)

By Ian Bremmer 

Some readers will be surprised to see that Eurasia Group's list of top risks for 2009 (reprinted below) doesn't include China. Doesn't that country face a serious threat of destabilizing social unrest? It's clear that the global economic downturn has had an impact; thousands of manufacturers have shut down in the past few months as demand for China's exports falls in the United States and across Europe. That puts large numbers of unhappy people on the streets. And this is a country that already faces tens of thousands of protests each year over a broad range of public grievances.

So why didn't China make the cut? Because nationalism and pride in the very visible achievements of the Chinese system are now conspicuously more intense than at any time since I started traveling to China. I experienced this phenomenon again and again before, during, and after the Beijing Olympics last August. For millions of Chinese, those Games were their Games, their opportunity to command the spotlight on the international stage. The Communist Party delivered on promises of a great show.

It's not just the success of the Olympics, of course. It's decades of heady economic growth that continues to create opportunities for ever-larger numbers of people. There's no evidence at this point that a significant number of Chinese citizens hold their government responsible for the developing slowdown in the Chinese economy. In fact, there's an often expressed feeling in the country that American misdeeds and the western free-market system are to blame. If anything, many Chinese probably believe that it's China's over-reliance on the West that needs to change.

It's true that demonstrations have erupted across the country over the past year, reflecting deep public anger over a startling diversity of heart-wrenching issues -- from infants dying from poisoned milk to schoolchildren crushed to death inside shoddily constructed schools during the Sichuan earthquake to disputes over property rights to all kinds of other local economic problems. But the overwhelming majority of these demonstrations are targeted not at the Communist Party leadership in Beijing but at local officials, bureaucrats, and business interests.

Still, when it comes to social stability, the Chinese government takes nothing for granted. The leadership has spent considerable time and resources on efforts to stimulate growth and to create new jobs. That will help keep displaced workers off the streets. For those who do protest, the party elite has again demonstrated a determination to quell social dissent by any means necessary. Both commitments will probably help limit the turmoil produced by any large-scale and coordinated public protest in 2009.

Longer term, the risk of social instability is obvious. The party leadership is well aware that the country's vast range of environmental problems and their impact on the lives of ordinary Chinese create enormous potential for trouble. Nor is it at all clear that China can continue to generate the 10 to 12 million jobs needed to sustain longer-term economic growth-particularly jobs that require highly-skilled labor. That will prove a growing problem as tens of millions more people in search of opportunity emigrate from the countryside into China's fast-expanding cities.

The party's ability to maintain its monopoly hold on political power depends on its ability to continue to generate prosperity. But it has earned enough political capital over the years that the authoritarian system is unlikely to face regime-threatening protests at the first sign of a slowdown-even a serious one. China is an enormous, dynamic economy with more systemic flexibility than many people realize, and it's likely to emerge from the global financial crisis in better shape than most of the world's other emerging markets.

That should be enough to keep the most dangerous risks at bay...at least for 2009.

Photo: MIKE CLARKE/AFP/Getty Images