Monday, January 23, 2012

The Intractable Issue of Energy

As South Korea and Japan haggle over the most appropriate method of castigating Tehran for its nuclear program while also ensuring continued supply of petroleum from Iran, I think it's useful to recollect the insights of the late Japanese economist Wakimura Yoshitaro (1900-96). A member of the leftist economic circle, the Ouchi group, Wakimura warned that the transport of Middle Eastern oil was a potential flashpoint for global conflict. Having lost faith in the West's ability to negotiate without coercing oil producing countries, members of the Ouchi group concluded that continued dependence on oil and Japan's alliance with the United States would invariably pull them into an unwanted conflict surrounding the black gold. Their solution was for Japan to go nuclear.

Today both Seoul and Tokyo are struggling to balance their economic needs and their political allegiance to the United States. I argued in my most recent article on Asia Times Online that Washington's aggressive policies in the Middle East threatens East Asia's economic security and thus damages America's ties with its allies in the region.

Middle Eastern oil is indispensable to the global economy, but in particular to countries that rely heavily on shipping and heavy industry. South Korea and Japan both fall into this category - even though Japan developed nuclear energy after the post-war reconstruction, there are certain sectors where petroleum is irreplaceable. Part of South Korea's remarkable economic growth was based on its development of petrochemical industries, obviously an enterprise where oil is a prerequisite. Mind you, both nations are practically island nations that depend heavily on shipping for import-export. Nuclear powered container ships are still in their experimental stage.

Therefore, Washington's request to significantly reduce or ban import of oil from Iran comes as a serious blow to both Seoul and Tokyo.

Some experts in Israel have waived off concerns over loss of industrial output by suggesting that South Korea simply increase imports from other Gulf emirates. Besides, they said, diffusing Iran will help the denuclearization process in North Korea.

What's absurd about all this is how little regard these "professionals" have for the intricacies of trade and commerce. Yes, some Gulf states that have historically been terrified of Iran have offered to increase exports to South Korea. But oil from Saudi Arabia does not magically appear in your local gas station the next day - this requires more ships, rerouting of ships and funds, negotiating new deals (nearly three quarters of South Korea's imports from Iran are negotiated on a long term basis and only a quarter is bought on spot price) and dozens of other infrastructural and financial consideration have to be made.

In addition, South Korea's fiscal regime keeps the Won from being overvalued - this safety mechanism, while keeping exports relatively affordable, raises the cost of imports. Escalation of tensions in the Straits of Hormuz and the expansion of sanctions against Iran will invariably affect the market. At the end of the day, South Korean industries will be still be heavily burdened even if they are supplied from different sources.

It's contemptuous to color this as a simple process, especially when one country is bending over backwards to satisfy another's irrational fears.

Furthermore, what happens in Iran will not affect North Korea. Commercial links between the two states have already ebbed long time ago due to increased policing and oversight by the international community. North Korean missiles are no longer entering Iran, but nuclear proliferation expert Joshua Pollack noted that technology transfers have continued unabated. And why point to North Korea? It's the single greatest example of how punitive sanctions don't always work.

Meanwhile, Washington has long recognized its diminishing power in the Asia-Pacific. Obama's "pivot" seeks to reassert the importance of the United States in the region - And let's be fair, no one has forgotten about the US. After all, US security guarantees to South Korea and the Seventh Fleet stationed in Japan are considered essential facets of the two countries' defenses. At the same time, US cannot revert the confluence of time. China's industrial prowess is going to inevitably make it economically influential in the region.

The Free Trade Agreement with South Korea and the Trans Pacific Partnership with Japan are two great ways for the United States to build on existing (and still massive) trade links with its allies in East Asia. Indeed, nothing solidifies a relationship between two countries more than the transfer of goods and peoples. Add ideals and sense of familiarity - the United States is still indispensable in every way imaginable.

How do you mess this up? Force your allies to swallow bitter medicine for a sickness they don't have.

Chinese premier Wen Jiaobao stepped in with good timing and suggested taking the Iranian issue to the UN. He opposed Iran's nuclear program, but he also noted the incredible hardship that will be wrought on the world if the sanctions expanded. It's a bad day when Beijing appears like the more rational actor. Make no mistake, Seoul and Tokyo are in part holding out for China to forestall the current crisis.

If the United States truly feels as though there is a need for a strategic refocusing in the Asia-Pacific, then Washington must take into greater consideration the interests and concerns of South Korea and Japan.

In fact, an American president must learn to better empathize with countries around the world in general. Wakimura Yoshitaro believed that powerful Western nations will never negotiate with, but merely dictate to Middle Eastern countries, creating conditions for simmering anger to one day boil over and scald the rest of the world. Time for the United States to step up and prove itself to be a better country than those from another era.

Read my less rambunctious article here

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