GUEST COMMENTARY: U.S. fiscal follies reverberate in Asia

2013-10-26T00:00:00Z GUEST COMMENTARY: U.S. fiscal follies reverberate in AsiaBy Arthur I. Cyr nwitimes.com
October 26, 2013 12:00 am  • 

The United States may have averted a debt default, and ended the federal government shutdown, but costly political reverberations continue. The experience of Democratic and Republican leaders frozen in unmoving partisan positions has been unnerving, abroad and at home.

This is especially significant in Asia, given the steadily growing economic power of that region. Relations with China and Japan, already challenged, have been made more difficult.

One bright spot is provided by South Korea. This particularly pivotal Washington ally has been taking steps to add liquidity and therefore flexibility to financial markets.

China’s government has been notably negative in public comments on the political merry-go-round in Washington. Xinhua, the powerful government news and information agency, has declared the uncertainty concerning American government and fiscal policies means other nations should look to developing a "de-Americanized world" by means of a reserve currency alternative to the dollar.

Prime Minister Li Keqiang has told Secretary of State John Kerry that Beijing is "highly concerned" about the situation in Washington. China holds $1.28 trillion in U.S. Treasury debt, plus with other financial obligations. U.S. companies represent a substantial amount of the rapidly growing foreign investment in the Asian nation.

The two leaders met for talks Oct. 10 at the East Asia Summit held in Brunei. This was the eighth meeting of this increasingly influential body, which also includes Australia, India, Japan, New Zealand, Russia and the 10-member Association of Southeast Asian Nations.

President Barack Obama was scheduled to participate in this gathering of government leaders but cancelled his trip just before the summit began. The official explanation for the sudden move was the government shut-down and debt-ceiling uncertainty at home.

Given Obama’s aloof stance during that imbroglio, however, putting additional political pressure on the congressional Republicans is the more likely explanation.

Even after the end of the political standoff in Washington, China’s rulers have continued to express annoyance and frustration. The People’s Daily newspaper, an instrument of the Communist Party, featured an editorial expressing dismay that the U.S. government was being funded only through Jan. 15 and the debt ceiling raised until Feb. 7, 2014.

Just before the agreement was reached, Japan’s finance minister Taro Aso was uncharacteristically blunt in echoing China’s concerns and criticism. He warned the political problems of Washington directly threatened global financial stability.

Aso declared default would lead to a sudden drop in the triple-A bond rating and the "U.S. would fall into a fiscal crisis." Japan holds about $1.2 trillion in U.S. government debt instruments.

Related developments in South Korea are less prominent, yet hold potential for facilitating smoother relations across the Pacific. On Oct. 13, the central bank and finance ministry in Seoul announced a new $10 billion currency swap agreement with Indonesia. Under the terms of the accord, the two countries can exchange 10.7 trillion Korea won for 115 trillion Indonesian rupiah or vice versa.

Similar financial accords have been announced with Malaysia and the United Arab Emirates. South Korea already has swap agreements with China and Japan. Swaps can help stabilize volatile markets.

The Republic of Korea now holds more than $330 billion in currency reserves, the seventh largest in the world. Since the brutal Korean War of 1950-1953, South Korea and the United States have maintained close alliance.

That partnership remains vital. International relations involves more than money.

Arthur I. Cyr is Clausen Distinguished Professor at Carthage College in Wisconsin and author of "After the Cold War" (NYU Press and Palgrave/Macmillan). He can be reached at acyr@carthage.edu. The opinions are the writer's.

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