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Friday, October 28, 2011

U.S.-South Korea Relations


Mark E. Manyin, Coordinator
Specialist in Asian Affairs

Emma Chanlett-Avery
Specialist in Asian Affairs

Mary Beth Nikitin
Specialist in Nonproliferation


Since late 2008, relations between the United States and South Korea (known officially as the Republic of Korea, or ROK) have been arguably at their best state in decades. By the middle of 2010, in the view of many in the Obama Administration, South Korea had emerged as the United States’ closest ally in East Asia.

Of all the issues on the bilateral agenda, Congress has had the most direct role to play in the proposed Korea-U.S. Free Trade Agreement (KORUS FTA), the United States’ second-largest FTA after the North American Free Trade Agreement (NAFTA). Approval by both countries’ legislatures is necessary for the agreement to go into effect. The agreement was signed in 2007, but both the Bush and Obama Administrations delayed its submission to Congress, in part due to opposition to the deal. In early December 2010, the United States and South Korea announced they had agreed on modifications to the original agreement. South Korea accepted a range of U.S. demands designed to help the U.S. auto industry and received some concessions in return. In the United States, the supplementary deal appears to have changed the minds of many groups and Members of Congress who previously had opposed the FTA. On October 12, 2011, both chambers of Congress voted to approve legislation (H.R. 3080/P.L. 112-41) to implement the KORUS FTA. As of late October, the Korean National Assembly was debating the agreement.

The day after Congress passed the KORUS FTA, South Korean President Lee Myung-bak addressed a joint session of Congress. Lee was in Washington for a State Visit to the White House, the fifth since Barack Obama’s inauguration. Various aspects of his trip symbolized the close relationship between the two leaders, as well as the close policy coordination the two governments have forged, particularly over how to handle North Korea. The Obama and Lee Administrations have adopted a medium-to-longer-term policy of “strategic patience” that involves four main elements: refusing to return to the Six-Party Talks without an assurance from North Korea that it would take “irreversible steps” to denuclearize; gradually attempting to alter China’s strategic assessment of North Korea; using Pyongyang’s provocations as opportunities to tighten sanctions against North Korean entities; and insisting that significant multilateral and U.S. talks with North Korea must be preceded by improvements in North-South Korean relations. Lee, in turn, has linked progress in many areas of North-South relations to progress in denuclearizing North Korea.

The United States maintains about 28,500 troops in the ROK. Since 2009, the two sides have accelerated steps to transform the U.S.-ROK alliance’s primary purpose from one of defending against a North Korean attack to a regional and even global partnership. Washington and Seoul have announced a “Strategic Alliance 2015” plan to relocate U.S. troops on the Peninsula and boost ROK defense capabilities. Some Members of Congress have criticized the relocation plans.

Much of the current closeness between Seoul and Washington is due to President Lee. It is unclear how sustainable many of his policies will be, particularly into 2012, when South Koreans will elect a new president and a new legislature. Bilateral coordination will be particularly tested if South Korea’s left-of-center groups, which bitterly oppose much of Lee’s agenda, retake the presidency and/or the National Assembly.



Date of Report: October 22, 2011
Number of Pages: 32
Order Number: R41481
Price: $29.95

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Thursday, October 27, 2011

Taiwan: Major U.S. Arms Sales Since 1990


Shirley A. Kan
Specialist in Asian Security Affairs

This report, updated as warranted, discusses U.S. security assistance to Taiwan, or Republic of China (ROC), including policy issues for Congress and legislation. Congress has oversight of the Taiwan Relations Act (TRA), P.L. 96-8, which has governed arms sales to Taiwan since 1979, when the United States recognized the People’s Republic of China (PRC) instead of the ROC. Two other relevant parts of the “one China” policy are the August 17, 1982, U.S.-PRC Joint Communique and the “Six Assurances” to Taiwan. U.S. arms sales to Taiwan have been significant. The United States also expanded military ties with Taiwan after the PRC’s missile firings in 1995-1996. However, the U.S.-ROC Mutual Defense Treaty terminated in 1979.

At the last U.S.-Taiwan annual arms sales talks on April 24, 2001, President George W. Bush approved for possible sale diesel-electric submarines, P-3 anti-submarine warfare (ASW) aircraft (linked to the submarine sale), four decommissioned U.S. Kidd-class destroyers, and other items. Bush also deferred decisions on Aegis-equipped destroyers and other items, while denying other requests. Afterward, attention turned to Taiwan, where the military, civilian officials, and legislators from competing political parties debated contentious issues about how much to spend on defense and which U.S. weapons to acquire, despite the increasing threat (including a missile buildup) from the People’s Liberation Army (PLA). In 2003, the Bush Administration pointed Taiwan to three priorities for defense: command and control, missile defense, and ASW. The Pentagon also has broadened its concern from Taiwan’s arms purchases to its defense spending, seriousness in self-defense and protection of secrets, joint capabilities, operational readiness, critical infrastructure protection, and asymmetrical advantages. Blocked by the Kuomintang (KMT) party in the Legislative Yuan (LY) that opposed the Democratic Progressive Party (DPP)’s president (2000-2008), the Special Budget (not passed) for submarines, P-3C ASW aircraft, and PAC-3 missile defense systems was cut from $18 billion in 2004 to $9 billion (for submarines only) in 2005. In March 2006, Taiwan’s defense minister requested a 2006 Supplemental Defense Budget (not passed) in part for submarine procurement, P-3Cs, and PAC-2 upgrades (not new PAC-3 missiles). In June 2007, the LY passed Taiwan’s 2007 defense budget with funds for P-3C planes, PAC-2 upgrades, and F-16C/D fighters. In December 2007, the LY approved $62 million to start the sub design phase. After the KMT’s Ma Ying-jeou became President in May 2008, he resumed cross-strait talks while retaining the arms requests. But he cut the defense budget.

Attention also turned to U.S. decisions on pending arms sales. In 2008, congressional concerns mounted about a suspected “freeze” in President Bush’s notifications to Congress on arms sales. On October 3, 2008, Bush finally notified Congress. However, he submitted six of the eight pending programs (not a “package”) for a combined value of $6.5 billion. Despite the concerns in 2008, President Obama repeated that cycle to wait to submit formal notifications for congressional review all at one time (on January 29, 2010) of five major programs with a total value of $6.4 billion and again (on September 21, 2011) of three major programs with a total value of $5.9 billion, including upgrades for Taiwan’s existing F-16A/B fighters. Like Bush, President Obama did not notify the submarine design program (the only one pending from decisions in 2001) and has not accepted Taiwan’s formal request for new F-16C/D fighters (pending since 2006). Legislation in the 112th Congress includes H.Con.Res. 39 (Andrews), H.R. 2583 (Ros-Lehtinen), S. 1539 (Cornyn), H.R. 2918 (Ros-Lehtinen), and H.R. 2992 (Granger). Among other congressional actions, Senator Cornyn introduced as an amendment to H.R. 2832 his legislation to compel a sale of F-16C/Ds, and, on September 22, the Senate rejected that amendment to a trade bill. The House Foreign Affairs Committee held a hearing on Why Taiwan Matters on October 4, 2011, at which the Departments of State and Defense testified.



Date of Report: October 21, 2011
Number of Pages: 76
Order Number: RL30957
Price: $29.95

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Wednesday, October 12, 2011

Japan-U.S. Relations: Issues for Congress

Emma Chanlett-Avery, Coordinator
Specialist in Asian Affairs

William H. Cooper
Specialist in International Trade and Finance

Mark E. Manyin
Specialist in Asian Affairs


The post-World War II U.S.-Japan alliance has long been an anchor of the U.S. security role in East Asia. The alliance facilitates the forward deployment of about 36,000 U.S. troops and other U.S. military assets in the Asia-Pacific, thereby undergirding U.S. national security strategy in the region. For Japan, the alliance and the U.S. nuclear umbrella provide maneuvering room in dealing with its neighbors, particularly China and North Korea.

When a devastating earthquake and tsunami hit Japan on March 11, 2011, U.S.-Japan relations were stable but still recovering from a difficult period in 2009-2010. The Democratic Party of Japan’s (DPJ’s) landslide victory in the August 2009 elections for the Lower House of Japan’s legislature marked the end of an era in Japan; it was the first time Japan’s Liberal Democratic Party (LDP) was voted out of office. The LDP had ruled Japan virtually uninterrupted since 1955. Since the resignation of the DPJ’s first prime minister, Yukio Hatoyama, in June 2010, bilateral relations have been smoother under the leadership of Naoto Kan and newly-elected Prime Minister Yoshihiko Noda. The party appears to have shifted its strategic thinking after a series of provocations from North Korea and indications of growing assertiveness from the Chinese military in disputed waters in 2010. The massive and immediate relief provided by the United States following the March 11 disaster bolstered the relationship further.

Difficult problems remain in the alliance, particularly in implementing a 2006 agreement to relocate the controversial Futenma Marine Air Station to a less densely populated location on Okinawa. The move is to be the first part of a planned realignment of U.S. forces in Asia, designed in part to reduce the footprint of U.S. forces on Okinawa by redeploying 8,000 U.S. Marines and their dependents to new facilities in Guam. After months of indecision and mixed messages from Tokyo, the Hatoyama government agreed to honor the original agreement, much to the dismay of the many Okinawans opposed to the base. Both Kan and Noda voiced intention to honor the agreement, but the task of reconstruction and the political weakness of the Prime Minister’s office are likely to preclude swift progress.

Japan is one of the United States’ most important economic partners. Outside of North America, it is the United States’ second-largest export market and second-largest source of imports. Japanese firms are the United States’ second-largest source of foreign direct investment, and Japanese investors are the second-largest foreign holders of U.S. treasuries, helping to finance the U.S. deficit and reduce upward pressure on U.S. interest rates. Bilateral trade friction has decreased in recent years, partly because U.S. concern about the trade deficit with Japan has been replaced by concern about a much larger deficit with China. One exception was U.S. criticism over Japan’s decision in 2003 to ban imports of U.S. beef, which have since resumed, but on a limited basis.

However, the economic problems in Japan and the United States associated with the credit crisis and the related economic recession, together with the impact of the March 11 disasters, will likely dominate the bilateral economic agenda for the foreseeable future. Japan has been hit particularly hard by the financial crisis and the subsequent economic downturn. Japan’s gross domestic product (GDP) declined 1.2% in 2008 and 5.3% in 2009 but grew 4.0% in 2010. It is expected to increase only 1.0% in 2011 as a result of the March 11 earthquake, tsunami, and nuclear accident. The value of the yen has appreciated and has hit 15-year highs against the U.S. dollar, which could adversely affect Japanese exports to the United States and other countries, contributing to the downturn in Japanese economic growth.



Date of Report: September 23, 2011
Number of Pages: 32
Order Number: RL33436
Price: $29.95

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Thursday, October 6, 2011

China’s Currency: An Analysis of the Economic Issues


Wayne M. Morrison
Specialist in Asian Trade and Finance

Marc Labonte
Specialist in Macroeconomic Policy


China’s policy of intervening in currency markets to limit or halt the appreciation of its currency, the renminbi (RMB), against the U.S. dollar and other currencies has become an issue of concern for many in Congress. Critics charge that China’s currency policy is intended to make its exports significantly cheaper, and its imports more expensive, than would occur if the RMB were a freely-traded currency. They contend that the RMB is significantly undervalued against the dollar and that this has been a major contributor to the large annual U.S. trade deficits with China and the loss of U.S. jobs in recent years. Several bills have been introduced the 112th Congress that seek to address the effects of undervalued currencies, including H.R. 639, S. 328, S. 1130, S. 267, and S. 1619. On the other hand, some analysts contend that China’s industrial policies, its failure to adequately protect U.S. intellectual property rights, and its unbalanced economic growth model, pose more serious challenges to U.S. economic interests than China’s currency policy. Some U.S. business groups have also expressed concern that U.S. currency legislation could aggravate U.S.-China commercial ties.

From July 2005 to July 2008, China’s central bank allowed the RMB to appreciate against the dollar by about 21%. However, once the effects of the global economic crisis became apparent, China halted appreciation of the RMB in an effort to help Chinese industries dependent on trade. From July 2008 to about mid-June 2010, China kept the exchange rate of the RMB relatively constant at 6.83 yuan (the base unit of the RMB) to the dollar. On June 19, 2010, China resumed appreciation of the RMB. Since then, China has allowed the RMB/dollar exchange rate to rise by 7.4% to 6.36 yuan per dollar. Many U.S. officials have criticized this pace as being too slow, especially given China’s strong economic growth over the past few years, including its trade sector, and its rising level of foreign exchange reserves.

Many economists argue that the effects of China’s currency policy on the U.S. economy are complex. If the RMB is undervalued (as many contend), then it might be viewed as an indirect export subsidy which artificially lowers the prices of Chinese products imported into the United States. Under this view, this benefits U.S. consumers and U.S. firms that use Chinese-made parts and components, but could negatively affect certain U.S. import-sensitive firms. An undervalued RMB might also have the effect of limiting the level of U.S. exports to China than might occur under a floating exchange rate system. Further complicating the issue is China’s large purchases of U.S. Treasury securities, which totaled $1.2 trillion as of July 2011. These purchases occur because China’s intervention in currency markets causes it to accumulate large levels of foreign exchange reserves, especially U.S. dollars, which are then used to purchase U.S. debt. Such purchases help the U.S. government fund its budget deficit, which helps to keep U.S. interest rates relatively low. These factors suggest that an appreciation of the RMB to the dollar could benefit some U.S. sectors, but could negatively impact others. The effects of the global economic slowdown have refocused attention on the need to reduce global imbalances (e.g., savings, investment, and trade), especially in regards to China and the United States. Many economists contend that China should take steps to rebalance its economy by lessening its dependence on exports and fixed investment as the main drivers of its economic growth while boosting the level of domestic consumer demand. A market-based currency policy is seen as an important factor in achieving this goal. Further RMB appreciation could help promote the development of nonexport industries in China, while boosting China’s imports, including from the United States.

This report provides an economic analysis of China’s currency policy and examines current legislation and options for Congress.



Date of Report: September 29, 2011
Number of Pages: 44
Order Number: RS21625
Price: $29.95

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