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Show Notes

Mr. Ethical

Nicholas Wilson and the HSBC Blues

Why I have resigned from the Telegraph

Whistleblower wins 13-year campaign against HSBC

The Sword of Sanctions Knows No Scabbard: America’s Endless War on Iran

Any U.S. shooting war with Iran will probably be escalation of the sanctions war, a war the US kicked off with the fall of the Shah in 1979, escalated to the United Nations in 2006, and will probably never bring to a conclusion.

The Obama administration tried a sanctions limited cease-fire with the Iran nuclear deal but, with the election of Donald Trump, the peace may turn out to be fleeting and inconsequential.

The key element of the JCPOA (Joint Comprehensive Plan of Action) nuclear deal with Iran was relaxation of sanctions against Iran in return for concessions by Iran on its nuclear programs.

In a bizarre twist, the first stage of JCPOA as negotiated by John Kerry did not involve unraveling sanctions restrictions on U.S. corporations.  Those remained largely unchanged.  Instead, JCPOA involved the removal of some UN sanctions on Iran and an announcement that non-US parties would no longer face penalties themselves, i.e. “secondary sanctions, ” for doing business with a clutch of key Iranian companies.

In the old days, you see, a European bank or corporation could be itself liable to “secondary sanctions” for doing business with a long list of Iranian entities implicated in U.S. nuclear sanctions; but not anymore!  JCPOA knocked about 200 entities off the U.S. sanctions list, the biggest one being Iran National Oil Company, and oil was back on the menu!

Back on the menu for the Europeans, at least.

The P5+1 international structure of JCPOA and staged de-sanctioning was designed by the Obama administration in part, I think, to entangle the Europeans into the deal and buck some major US domestic political headwinds.

Getting EU businesses into Iran was, I suspect, one of those irresistibly smart/clever gambits that Obamanistas congratulate themselves about.  If the EU got in, American business would demand to get in, too, and energize a key constituency for normalization of U.S. relations with Iran.

And, since the European nations and banks were, at best, unenthusiastic participants in the Iran sanctions regime and would object to a collapse of the agreement and closure of the business window with Iran, supposedly the diplomatic costs of withdrawal for any successor US administration would be unacceptably high.

Well, maybe too high for Clinton.  With Trump, we’ll see.  I don’t think he expects to put “got rolled by the EU on Iran” on his list of achievements.

But even if Trump doesn’t overtly can the Iran deal, he can still sabotage it, mainly by sanctions.

And that’s already happening.  And it didn’t start with Trump.

It has been virtually ignored in the US media, as far as I can tell, that the Treasury Department has significantly sabotaged Obama administration removal of "secondary sanctions" related to Iran’s nuclear activities--in other words, undercutting the declaration that third parties, mainly EU corporations and businesses, could safely do business with Iran.

Significant swaths of the US Treasury Department are a hotbed of anti-Iran sentiment. In 2011, the Treasury Department designated Iran’s entire financial sector as a jurisdiction of primary money laundering concern whose “deceptive financial practices” “facilitate illicit conduct and evade sanctions” and pose “illicit finance risks for the global financial system”.

There are some hard, hard core anti-Iran ideologues in Treasury, particularly in the Office of Terrorism and Financial Intelligence.  But their anti-Iran vendetta can also draw support from the fact that Treasury relies on cooperation from foreign jurisdictions for its enforcement activities… and they are never going to get the cooperation they want from Iran.

As far as Treasury is concerned, I think the presumption is that the Iranian government does not accept the legitimacy of the sanctions regime, it will connive to evade sanctions, and it cannot be regarded as a sincere or trustworthy interlocutor with the Treasury Department in detecting, investigating, or reporting violations.

In other words, Treasury believes as long as there are illicit Iran-related operations going on and the Iran government is determined to shield them, probably any foreign bank is going to end up handling tainted transactions wittingly or unwittingly…and JCPOA enables that by opening up the European end of the global financial system to Iran.

Put it that way, you have to admit Treasury has a point.

And European banks have a problem.

Treasury penalties can sting.  When BNP Paribas accepted responsibility for knowingly flouting US sanctions on Cuba, Sudan, and Iran, it paid a $963 million fine to the Department of the Treasury…on top of $8 billion in federal and state criminal penalties as part of its plea deal.

With this context, European banks are understandably queasy about endangering their global business for the sake of scooping up some Iranian letter of credit money.

So you get reports like this:

Although Europe’s industrial powers have shown great enthusiasm for closer trade ties with Iran since then, the remaining unilateral US sanctions, whose language is vague and levy hefty fines on violators, have frightened European companies. 

...matched with reassurances like this one from Iran’s President Rouhani, who is now in Sweden trying to convince Europe to stand up to Trump:

Iran’s president said the European Union is counted upon to support European firms and banks willing to work with Tehran, assuring them there will be no negative consequences. 

Yeah, sure.

Treasury has enormous discretion in identifying, investigating, designating, and delivering “negative consequences” to foreign institutions that displease it, by hammering them via unilateral closed-door proceedings that exclude the accused and can employ confidential informants *cough* US cyberhacks *cough* and evidence provided by friendly foreign governments *cough* Israel *cough*.

Treasury has provided little if any assurance that it will be liberal and benefit-of-the-doubt-y in looking at the operations of European banks doing business with Iran.  Just the opposite, it appears.

JCPOA was supposed to ease Iran into the international financial system by letting European banks transact dollar-denominated business with Iran as long as it didn’t touch the American shore.

But, as a law firm explained…

It remains to be seen whether many FFIs [Foreign Financial Institutions] will be willing to engage in this kind of business because there are still risks. First, FFIs have to ensure they are not inadvertently clearing payments through U.S. financial institutions. Second, they have to ensure they are not dealing with SDNs [Specially Designated Nationals i.e. sanctioned individuals and entities]… Third, engaging in this kind of business could have adverse effects on an FFI’s relationship with U.S. financial institutions. U.S. banks, for example, may be hesitant to maintain correspondent banking relationships with FFIs that process U.S. dollar payments offshore for Iranian banks.

Unsurprisingly, with the departure of Obama and the advent of Trump, as of mid-January, Treasury was still putting the chill on European banking arrangements with Iran.

European and Asian financial institutions are cautious about returning to Iran because of the multi-billion-dollar fines imposed by the US Department of Justice on the likes of Hong Kong’s HSBC and France’s BNP Paribas for alleged sanctions violations since 2010.  

‘For good reasons, a number of non-US financial institutions have a policy that they will not get involved in any of these transactions. A number of others will simply assess the opportunity on a case-by-case basis, having done their own due diligence and sought legal advice.’     

Trump doesn’t have to do much to poison the Iran deal; Treasury’s doing that for him.

If he wants the Iran deal to work, he’s got to bulldoze Treasury; and I don’t see him doing that.

Combine an aggressive Trump anti-Iran strategy with Treasury recalcitrance and you've got a recipe for trouble.

Trump can make those de facto secondary sanctions de jure by repudiating the Iran deal.  Or, if he decides to keep the Iran deal in place, albeit only as a lifeless shell, he can relist important Iranian entities on the US sanctions list for supposed non-JCPOA transgressions in the areas of missile tests, human rights, and support for terrorism, and reinstitute secondary sanctions that way.

And he might not even have to that, and just rely on Treasury to continue to intimidate European banks with the threat that they might get investigated and penalized for any Iran links they do establish.

Iran is looking at dodging US sanctions-related harassment by switching to the Euro, as an Iranian news agency reported:

Relatedly, a banking director has stated that in currency dealings, measures have been taken to carry out financial transactions in currencies other than US dollar and currently, along with euro, local currencies have also replaced the American money.

“It seems that anti-sanction measures of Iran against threats made by Donald Trump are being unveiled and activated in a succession,” he underlined.

But Iran might find that any European financial institutions with dollar exposure i.e. all of them might still be governed by fear of the U.S. Treasury Department, no matter how much they hate Trump and would love to do Euro business.

As Iran tries Plan B-- a path to the Euro, I think it is probably now looking at Plan C--C as in China--where it has to conduct its international business through cutouts in China.

And, as I describe in my February 6 edition of China Watch, China, by virtue of its deep economic engagement with Iran and history as co-conspirator in Iran’s evasion of sanctions, is an essential element in any Iran sanctions war strategy.

Iran is not terribly happy to rely on the PRC, which was apparently rather predatory in its commercial dealings with Iran during the Bush/Obama sanctions years.

Rather spectacularly, if also confusedly, Iran media reported that Iran was engaged in a dispute/negotiation/discussion? whatever with China over $18 billion/$22 billion/$25 billion/$47 billion? whatever of Iranian oil money that Ahmadinejad had locked up in a Chinese bank when US dollar denominated oil business couldn’t be openly transacted.

Probably part of Iran politics, and an attempt by the Rouhani crowd to dodge the "sold out to the United States" smear by redirecting to the "Ahmadinejad sold out to China" smear.

But also, I think, a sign to China that Iran can make trouble for the PRC by exposing it as a sanctions violator if Xi Jinping is too supportive of an aggressive Trump policy on Iran.

And the Trump administration already has its eye on China in the Iran sanctions game.

Trump fired the first volley in his sanctions war with Iran and China with his February 3 addition of several Chinese individuals and companies to the Iran sanctions list.

I doubt it will be the last.

# # # #

Peter Lee, Newsbud Senior Analyst & Commentator,  has been involved in East Asian affairs since 1979, first as a businessman and then as a writer. He has been writing on China with a focus on US policy since 2005. Mr. Lee’s work has appeared at Asia Times, CounterPunch, Japan Focus: The Asia Pacific Journal, and the South China Morning Post. He is the proprietor of the China Matters blog.

The Dance of the Five Powers on the Korean Peninsula

Arguably no Asian nation has suffered more in the modern era, or resisted more fiercely, than Korea.  Today it is still the battleground of empires, divided and beset by powerful outside forces.

Five competing agendas intersect on the Korean peninsula: those of South Korea, North Korea, China, Japan, and the United States.  The United States, in order to advance its interests and meet its alliance obligations, has to thread a difficult and winding path.

James Mattis visited South Korea on his first trip as Secretary of Defense.  Here’s what he has to deal with.

North Korea

The biggest dilemma for America, obviously, is North Korea a.k.a. the Democratic People’s Republic of Korea or DPRK.

The DPRK is cast as a maniacal enemy of the world order in general and the United States in particular.  It is neither.

It is a state that was left adrift by the collapse of its main ally, the Soviet Union, in 1989.  Today, it resents the People’s Republic of China semi-colonial economic and political aggrandizement of North Korea and the PRC’s obvious preference for economic engagement with the South.

One objective of the DPRK’s bomb and missile tests is to compel the PRC to shield the North from the inevitable diplomatic furor, and drive a wedge between the PRC and the South.  This process has borne, for the PRC, the most bitter fruit of the ROK promising to install a US missile defense system, and forcing China to follow through on its pledges of economic retaliation against the South.

North Korea fears the United States, which designated the DPRK as a member of the Axis of Evil in 2002 (apparently primarily to remove the “War on Islam” stigma that the original trio of Iraq/Iran/Syria would have invited), pursued a covert regime change policy during part of the George W. Bush era, has engaged in collective punishment of the DPRK’s people and its economy for well over a decade.

Nevertheless, the DPRK’s foreign policy is predicated upon cultivating the US as a counterweight to the PRC.  This is, potentially, a highly attractive option for the United States, but the policy has never gained traction because of the US insistence under Obama that North Korea dismantle its nuclear weapons.

The DPRK leadership—with the precedent of the invasion of Libya and the death of Gaddafi—regards denuclearization as an impossibly high price.  Trying to kill two birds with one stone, North Korea hoped that upgrading its WMD deterrent would also compel America’s engagement, but the US ignored North Korea under the doctrine of “strategic patience”.

Until now.

Now, with the DPRK on the cusp of developing a nuclear-tipped ICMB capable of reaching the United States, Uncle Sam may—just may—be ready to talk.

The United States

The United States has maintained an adversarial policy with North Korea for many reasons, including the DPRK’s defiant nuclearization.  There’s also the obligations of standing up for South Korea in its testy relationship with the North.  And there’s the China factor: deterring and containing the DPRK is a convenient proxy for pumping military capabilities into North Asia to deter and contain China—without openly saying so.

This element is symbolized by the aggressive U.S. push to install the “Terminal High Altitude Area Defense” or THAAD missile battery into South Korea.

THAAD irritates the Chinese, with good reason.  The idea that THAAD is part of an effective South Korean defense against North Korea is rather dubious.  The main utility of the system appears to be the powerful radar that allows the system—when reconfigured away from North Korea, apparently a trivial task-- to see thousands of miles into PRC territory, and form part of the Asian radar picket line with installations in and around Japan, Taiwan, Guam, and Hawaii.  We pretend it has to do with the North Korean threat, but I think it’s got to do with degrading China’s strategic nuclear deterrent.  So do the Chinese.

The Chinese announced they were testing a multi-warhead ICBM arrangement—MIRV—to augment their modest nuclear arsenal.  It’s pretty much unmistakable that this escalation is in response to US moves in Asia—not just THAAD but also against the PRC development of a sub based deterrent operating out of the South China Sea.

At the same time, the United States knows the North Korean door is, if not wide open, ajar, and the US and the DPRK have some history of quiet engagement on the recovery of the remains of American servicemen from the Korean War, exchange of visits of delegations, and engagement through the DPRK delegation to the U.N.

There is a growing drumbeat of calls for the United States to abandon its unrealistic demand for North Korean denuclearization as a precondition for negotiations.  However, it is unclear if the Trump administration will take this step since it may lead to South Korea and Japan developing their own nuclear deterrents in pretty short order.


Japan, is widely resented on across the Korean Peninsula for its genocidal colonization during the first half of the 20th century and its arrogant footdragging on the issue of compensation and comfort women.  A more current reasons for resentment, especially in the South, is the increasingly zero-sum relationship between the Japanese and Korean economies and the burden that Abenomics—which pretty much resolved into a depreciation that boosted Japanese exports—placed on competing South Korean businesses.

Japanese Prime Minister Abe built his political career on outrage over North Korean abductees.  His new vision of Japanese self-defense –which includes consideration of a preventive strike or even expeditionary force to North Korea without the consent of South Korea—has not endeared him to anybody on the Peninsula.

As a result, US efforts to broker military and intelligence cooperation between Japan and South Korea have been arduous and only partially successful.

An indicator of the bitter feelings between the two nations is the comfort woman statue erected in front of the Japanese consulate in Busan, South Korea.  The Japanese government asserted this statue violated an agreement between Japan and South Korea to close the books on the issue in 2015 with a grudging Japanese apology, $9 million in compensation, and no more insults to Japanese dignity i.e. statues.  In January of this year, the Japanese recalled the consul general and the ambassador, and some South Korean politicians are threatening to put another statue on the Dokdo Islands, which the ROK occupies but Japan claims.

Add to this whole fraught scenario the suspicion, well-founded, I think, that Japan is happy to discourage North-South reunification, since a reunited Korea might become an economic powerhouse with access both to North Korea’s natural riches and its low-wage, tractable work force, and could eclipse Japan’s regional pre-eminence.


The People’s Republic of China, for its part, has testy relations with North Korea as a not-quite client ready to slide off into the arms of the United States.  Testy, as in when Kim Jong Un came to power, he executed his uncle, who was in charge of the PRC portfolio, presumably to signal that the new regime was open for business with Uncle Sam.

China has deeply penetrated into North Korea’s economy, its agents of influence probably riddle the party and government, and the most likely executor of regime change in North Korea is the PRC, not the United States.  China undoubtedly has contingency plans to send its military into North Korea to pre-empt any shenanigans by South Korea, the United States, or Japan in case of a succession crisis or other upheaval in the DPRK.  In recognition of this fact, the DPRK has, in its turn, undoubtedly made it clear to the PRC that its missiles and its nascent nuclear capability could credibly wreak havoc on North China.

In fact, the PRC let it be known  to the Kyodo News agency that North Korea was its second highest security threat, after the United States.

The PRC, in fact, welcomes international ostracization of North Korea via US policy and UN sanctions, since that gives a free hand to China in keeping the DPRK squirming under its thumb but on life support.  That, in turn, gives the PRC the freedom to develop its relationship with South Korea without worrying overmuch about DPRK queering its pitch by inconvenient outreach to the United States, Japan or, for that matter, South Korea—or the regime collapsing and bringing democratic Korean and perhaps US military forces to its Manchurian doorstep.

In 2014, the PRC made economic ties with South Korea—and weaning South Korea from the United States—a priority.  It’s ready to play hardball—with South Korea as the ball and China as the bat.

South Korea

South Korea appears to be experiencing a national crisis.  Google “South Korea unhappiness” or “Chosun hell” and you’ll see. The South Korea’s happiness indices have been declining for the last few years and the UN’s 2016 World Happiness Report placed South Korea at number 58—lower than Kazakhstan!    ROK researchers announced South Korean youths are the unhappiest of 22 countries in the OECD and 26% of them have contemplated suicide.  The malaise seems to be related to crushing work, lack of personal fulfillment, and a profound lack of opportunities.

It’s not just the young.  Here’s an appalling story about impoverished grannies  becoming prostitutes to pay for their medicines.

Analysts are calling for South Korea to make radical changes to overhaul an export-driven economic model that is increasingly unsuited to the new realities of North Asia, but will, unity, and leadership appear to be lacking.

In fact, South Korea presents an unnerving picture of what might happen when an Asian dragon—and for that matter, a functioning democracy, advanced market economy, and a key cog in the globalization machine-- hits the wall…and maybe never gets up.

Recently, South Koreans poured in the streets by the millions to obtain the impeachment of President Park for some mis-steps, questionable judgments, and apparent crimes that, one might think, she could have finessed in a different environment.  A profound Korean commitment to democracy, honesty, and transparency?  Or a profound sense of despair and frustration that found release in a cathartic mass movement?

In any event, on top of everything else, South Korea is facing a crisis of identity as it is increasingly Finlandized by the People’s Republic of China.

The ties of the ROK to the PRC economy are quite large and, perhaps, underappreciated in the West.  China is South Korea’s largest trading destination, accounting for about $230 billion dollars, or 25% of South Korea’s total import/export volume; ROK trade with the United States is half that.  Over four hundred flights per week connect 44 Chinese airports with 8 South Korean airports, making China by far the ROK’s biggest international flight partner.

South Korean enclaves—apartments, restaurants, businesses—can be found in Beijing and other Chinese cities.  Chinese visitors account for almost half of foreign tourists going to South Korea—8 million people.  In 2016 China surpassed the United States for the first time as the premier overseas study destination for South Korean students.

But the PRC is increasingly regarded, with good reason, as an overbearing and unfriendly neighbor.

China is now becoming a producer—and exporter—of the higher tech assemblies and products it used to import from South Korea.  A recent ROK study characterized the decline in exports to China since 2008 as “a collapse”.  And the sunny optimism is gone from South Korea’s “China boom,” judging by this article feeding the “Chosun hell” meme with stories about young South Korean women forced to endure dismal exile in Beijing as their last hope any kind of future.

Then, there’s THAAD.

The Chinese had threatened retaliation as early as 2014 if South Korea if it went with THAAD.  President Park, pressured by the alarming tempo of the North Korean nuclear program and the needs of the US alliance, decided to go with THAAD--and found out that the PRC was fully prepared to follow through on its promise.

The Yonhap News Agency reported that the South Korean government had tallied 43 separate instances of PRC retaliation for THAAD.

The first alleged actions were modest, perhaps even a source of mockery—the PRC stifling the in-country profile of K-Pop bands, who are tremendously popular in China.  But now it’s a matter of allegedly interfering with South Korean cosmetics and dairy businesses in China—a vital market—and refusing requests to operate charter flights, to throttle back tourist dollars. The South Korean government has retaliated, also discreetly, by holding up visas for PRC nationals slated to teach in Confucian Institutes –China’s main soft power gambit—in South Korea.  They are also talking about taking China to the World Trade Organization for erecting non-tariff trade barriers.

But the fact that China’s got plenty more retaliatory gas in the tank—up to and including the concern in South Korea is that the PRC may give the nationalism machine a crank, and start a wave of anti-ROK demonstrations and boycotts inside China—is casting a shadow over the ROK.

Now, with South Korea a political basket case with Park’s impeachment, the PRC is not letting up.

The woes of the PRC-ROK relationship are scheduled to increase with the lead-pipe assurance that the PRC will escalate retaliation when the THAAD system is actually installed.   Which is going to happen in the next few months since the United States, aware that popular opposition to THAAD topped 50% for the first time in December—and may go higher--successfully pushed for South Korea to install the system this year.

The United States hopes that China’s petty retaliation for THAAD is pushing the ROK more securely into the US camp.  However, the Chinese don’t think so and, judging by their results with a harsh maximalist approach to the South China Sea issue with the Philippines and Vietnam, they may be right.

There’s a case to be made that THAAD is just another element in the US missile defense boondoggle, and its value was less in its hoped-for effectiveness than its use as an affirmation of, and catalyst for, the South Korea—US strategic alignment.

There’s also a case to be made that the PRC doesn’t care if THAAD really works or not; it’s more interested in telling North Korea its future, for better or worse, resides with its gigantic near neighbor and not a distant and increasingly distracted American ally.

In the case of THAAD, it looks like warm feelings between the two nations—or care for the supposedly vital soft-power cuddly panda image the PRC was called on to project to the world-- is less important for China than teaching South Korea—and Asia—a lesson that the PRC cannot be defied without severe consequences.

Chinese economic pressure is an inescapable reality for vulnerable Asian states and the intangible psychic benefits that the US can offer—mainly in the areas of enhanced military cooperation—are, well, pretty intangible.  The expectation that Donald Trump may bully South Korea on trade and support for US forces in the ROK is not helping the public mood, either.

Ban Ki-moon, the conservatives’ best hope to replace Park, suddenly announced he wasn’t going to run for President after all, and a left-leaning candidate unenthusiastic about THAAD and more inclined to conciliate China may win the presidency.

So, South Korea finds itself out of step with all of the colonial powers that afflicted it to various degrees—China, Japan, and the United States—threatened by an increasingly confident and now nuclear-armed neighbor, and itself in the midst of an economic, political, and social crisis.

Partnership with China isn’t working for South Korea; neither, apparently, is using THAAD and the US alliance to galvanize South Korean feelings of unity, agency, and independence.  Unsurprisingly, conservatives are looking for stronger medicine: South Korean development of its own nuclear deterrent, an option the ROK has flirted with for decades.

Maybe reunification with the North is the magic elixir South Korea, the peninsula, and the region need; but neither North Korea, China, Japan, or the United States seem interested in taking the stopper out of that bottle.

# # # #

Peter Lee, Newsbud Senior Analyst & Commentator, has been involved in East Asian affairs since 1979, first as a businessman and then as a writer.  He has been writing on China with a focus on US policy since 2005.  Mr. Lee’s work has appeared at Asia Times, CounterPunch, Japan Focus: The Asia Pacific Journal, and the South China Morning Post.  He is the proprietor of the China Matters blog.

TPP is Now Even Deader Than Ever Thanks to Trump

Donald Trump issued an executive order withdrawing the United States from the TPP on January 23.  He was predictably roasted by the libosphere, but not because Trump was cruelly dashing the cup of globalized prosperity from the lips of the thirsty American worker.

Matt O’Brien, who styles himself the economic wonk at the Washington Post, admitted the TPP was DOA as effective trade policy.  Instead, he wandered over into the geopolitical patch and flayed Trump for unilateral disarmament in the face of China: Donald Trump has forfeited his first fight with China.

An alternate title might have been, Donald Trump How Dare You Not Drag the TPP’s Corpse to Asia? 

O’Brien fessed up that the economic impact of TPP on the United States would probably be negligible: an estimated .23% bump in annual national income.  The trade commission report he cites also says that real GDP would rise by .15% by 2032 over the non-TPP baseline projection.

Consider this: the margin of error in US quarterly GDP calculations is around +/- 1.3%.  Which means any TPP gains are within the margin of error.

So is there a justification for TPP beyond providing further opportunities for aggrandizement by transnational corporations, one that might interest John/Jane Q. Taxpayer?

O’Brien claimed that the TPP, though economically insignificant, was a potent anti-Chinese weapon.  Maybe.

[T]he real reason to support the TPP wasn't economics so much as geopolitics. It was about keeping an economic foot firmly planted in China's backyard, and writing the trade rules so they couldn't. If this sounds like a less quantifiable benefit, well, that's because it is.

Indeed, the Obama administration, unable to sell the murky economic benefits of the secret TPP regime, started playing the China card in 2016 as the ratification struggle approached.

Ash Carter, for instance, had famously styled TPP as the equivalent of “another aircraft carrier”.

I’ve got my doubts about that “less quantifiable benefit”.

The idea that the PRC, the largest economy in the region, could be successfully faced down by a so-called high-standards trade bloc wasn’t too likely.  Especially since the PRC was promoting its own “low standards” trade regime, the RCEP or “Regional Comprehensive Economic Partnership”.  And the Asian nations were lining up to join both TPP and RCEP.  Money talks and standards walk in my opinion.

To support his assertions concerning the TPP as a geopolitical weapon, O’Brien made this jaw-dropping statement:

[Trade agreements] were still a way to not only open up markets, but also reward countries for reforming their economies like we wanted.

As Paul Krugman argued at the time, that was why NAFTA made more sense than any economic model would have told you. If we rejected Mexico's liberalizing government, it might have collapsed — and an anti-American one could have taken its place.

Ah, Paul.  Ah, Matt!

Ah, Bill Clinton! In 1993 you didn’t tell me we went through all that NAFTA political trauma just to prop up the PRI government of Mexico!

When he signed NAFTA, Big Dog told me:

NAFTA means jobs, American jobs and good- paying American jobs. If I didn't believe that, I wouldn't support this agreement…I believe that NAFTA will create 200,000 American jobs in the first 2 years of its effect…I believe that NAFTA will create a million jobs in the first 5 years of its impact.

I’m guessing that O’Brien’s stalwart defense of TPP as a useless trade pact is informed by the undeniable reality that NAFTA…turned out to be a useless trade pact.  The LA Times ran a piece on NAFTA that stated that specific gain attributable to NAFTA (as opposed to China & other global factors) wasn’t much:

After the 20th anniversary of NAFTA, the Congressional Research Service concluded that the trade agreement's effect on the U.S. economy was, on the whole, relatively small. And an earlier Congressional Budget Office report, released a decade after NAFTA, estimated that the accord added "probably no more than a few billion dollars, or a few hundredths of a percent," to the annual U.S. economy.

So if trade pacts are pretty much useless, pretty much the only Trump-bashing justification is the geopolitical one of “rewarding reformers”.

Unfortunately, O’Brien appears to mis-represent Krugman’s support for NAFTA.  Krugman did not by any means regard NAFTA as a brilliantly conceived geopolitical master stroke.

More like a blunder that needed some papering-over.

What Krugman said in his 1993 Foreign Affairs article O’Brien links to—The Uncomfortable Truth about NAFTA-- was that NAFTA was economically insignificant and unnecessary and the only reason to do it was to do Mexico’s President Salinas a solid…which Salinas needed only because he’d climbed out on a political limb and needed some help down:

We can see with the benefit of hindsight that it might have been better if President Salinas had not proposed NAFTA…But it is too late to reverse course.  A rejection of NAFTA by the United States would be a devastating slap in the face of Mexico’s reformers…Nobody can be sure what will happen if NAFTA fails.  The likely forecast is…financial crisis for Mexico as investors realize that the success of reform is not guaranteed, political crisis as Mexican populists like Cuauhtemoc Cardenas Solorzano—who may well have really won the last Presidential election—taunt the leadership with the way America rewards its friends.

Well...hold that thought about a financial crisis.  And a political crisis.

It might be worth pointing out that the fraudulent character of Salinas’ win over Cardenas in 1988 that Krugman so casually alludes to was confirmed by the guy who did the rigging, the president of Mexico at the time, Miguel de la Madrid.  But you go into a neoliberal globalizing ratf*cking with the reformer you’ve got, not the reformer you want, is the message here I guess.

Perhaps because of the pressures of hot-take journalism and the WaPo’s need for at least 12 anti-Trump items per day, O’Brien didn’t dig a little deeper to discuss the political and strategic impact of NAFTA on Mexico.  Way, way deeper.  Like Wikipedia.  Fortunately, Newsbud is the home of handmade artisanal slow news, so I’ll do the heavy lifting for him.

In retrospect, in fact, for Mexico, NAFTA looks like the ultimate poisoned chalice.

First things first.  “NAFTA as a favor to Salinas without any downside” didn’t pan out.

The Zapatistas symbolically chose the day NAFTA took effect to launch their revolution in Chiapas to protest the Mexican government’s abandonment of subsistence farmers to the untender mercies of American agribusiness.

Salinas’ handpicked successor as president, Luis Donaldo Colosio, was assassinated, allegedly because he was leaning toward invoking the rhetoric of understanding with the Zapatistas in order to overcome the social and political headwinds his campaign was encountering.

In trying to manage the Zapatista challenge, in other words, Colosio was thereby pushing PRI Mexican politics too far to the left to please the anxious & angry conservatives around Salinas, if not Salinas himself.

Well, maybe Salinas himself, with the Colosio murder allegedly sparking over a dozen collateral cover-up hits perhaps orchestrated by Salinas’ brother.

Then, Salinas bungled the binge-spend-political campaign endgame in 1994 when he was trying to pump up the economy to put Ernesto Zedillo, the guy who stepped in for Colosio, in power. To finance deficit spending he had to sell bonds.  Not peso bonds but bonds that were sold off in pesos and redeemed in US dollars.  Why? Oh why?

Take it away, Wikipedia!

This may have been a response to three important events that had shaken investor confidence in the stability of the country: the Zapatista uprising, the assassination of PRI presidential candidate Luis Donaldo Colosio, and the assassination of José Francisco Ruiz Massieu, Salinas' former brother-in-law, who was also the Secretary General of the PRI and whose murder was never solved during Salinas' presidency, even when Mario Ruiz Massieu (Francisco's brother) was the attorney general and in charge of the investigation.

Ah, investor confidence!  Apparently the NAFTA magic was helpless before the realities of Mexican politics and corruption and a financial crisis popped up anyway.

Salinas flinched from raising interest rates to protect the peso, the forex reserves emptied out, the peso lost almost half its value in a week, and as for Mexican businesses that were livin’ the dream in NAFTA-land, bringing in that good American stuff, now they had devalued pesos and US dollar debt and a world of problems.

In 1995, inflation doubled, unemployment doubled, and GDP fell by 6.2%.  Infant mortality went up 7% because mothers had to work instead of looking after their kids.

Maybe it wasn’t just Salinas.

Maybe…NAFTA played a role.  Liberalization of the financial system allowed foreign capital to pour in and inflate a bubble of false prosperity that Salinas and the PRI politicians couldn’t bear to pop.  To keep on NAFTA’s good side when things turned nasty, Mexico did not resort to capital controls to try to shield its economy even as the hot money that had poured into the economy post-NAFTA began to giddyap outta there:

Critical scholars conclude that the 1994 Mexican peso crisis exposed the problems of Mexico’s neoliberal turn to the Washington consensus approach to development. Notably, the crisis revealed the problems of a privatized banking sector within a liberalized yet internationally subordinate economy that is dependent on foreign flows of finance capital.

President Bill Clinton had to stump up a $50 billion rescue package for Mexico.

Salinas himself, instead of basking in the thanks of a grateful nation for his farsighted decision to pursue NAFTA, left Mexico for self-imposed exile in Ireland in 1995 to dodge the legal and political unpleasantness relating to the collapse of the Mexican economy, a string of murders surrounding the Colosio assassination, and the role of his brother, Raul Salinas, in the misappropriation of at least $66 million in Mexican government money that ended up in Switzerland during Salinas’ presidency.

Here’s a grace note from the Encyclopedia Britannica, not exactly a hotbed of leftist agitation, concerning some more NAFTA blowback:

In retaliation for Cardenas’ outspoken stand against privatization and the North American Trade Agreement, both embraced by Salinas, the government targeted Cardenas and his supporters.  Between 1988 and 1994 about 500 activists affiliated with the PRD [Cardenas’ party] were murdered.

With this background, we can take a more informed look at O’Brien’s assertion-- If we rejected Mexico's liberalizing government, it might have collapsed — and an anti-American one could have taken its place.

A more accurate phrasing might be If we rejected Salinas’s criminal enterprise, it might have collapsed—and a democratic government could have taken its place.

But it looks like even that unflattering rephrasing gives NAFTA too much credit.

By fueling the Zapatista rebellion, triggering a murderous split between rightists and reformers within PRI, and enabling the hot money meltdown that cratered the Mexican economy, NAFTA didn’t help Salinas—it made his job harder and, in fact, drove him into exile.

Long story short, NAFTA was an all around fiasco for Mexico.

Far from averting a political crisis, NAFTA sparked a major, ongoing insurgency inside Mexico that apparently led to the assassination of the leading presidential candidate and a campaign of political murder against opponents of the pact.

NAFTA failed to forestall an economic crisis; in fact the poorly-constructed liberalization contributed to and exacerbated Mexico’s economic crisis in the 1990s.

The “reformer” NAFTA was supposed to reward wasn’t a reformer: he was an opportunist who saw the path to influence was giving the Yanquis the neo-liberal policies they craved.

It could even be argued the main significance of NAFTA was that maybe it gave Salinas the political capital he needed to complete a campaign of murder, theft, and corruption…and postpone the day of reckoning long enough for him to drive the Mexican economy into a ditch!

So O’Brien has zero basis to claim NAFTA as a positive precedent for TPP as a piece of geopolitical genius.  It’s just the opposite.  NAFTA stands accused of making the situation worse.

Maybe that’s the globalist definition of a “less quantifiable benefit”—less than zero.

Perhaps the message O’Brien got through the neoliberal jungle telegraph was the current rationale for the  TPP is to do a solid for Japan’s Shinzo Abe like NAFTA was supposed to do for Salinas—without going into the messy and embarrassing details of the Mexican case.

Japan, after all, was cast for the role in Asia under TPP that Salinas played so miserably in NAFTA: the free market force multiplier that will make the United States/Japan combine an economic and strategic factor to be respected and reckoned with in East Asia…and by China.

I had my doubts about that rosy scenario for TPP.

In Washington, with solid historical reasons, perhaps Abe is regarded as securely in America’s pocket as Salinas was.

But I think that’s an inaccurate reading of Abe, his fraught relationship with the United States, and his strategy for securing Japan’s economic and security position in Asia.

I think Abe astutely exploits the US desperate eagerness for a bestie in Asia to upgrade Japan’s centrality in regional security and economics, not exclusively to secure American power but also to prepare Japan against the day if/when/as the US is marginalized by distance, diminished capacity, and the lure of other opportunities.

Well, thanks to Trump that day’s come sooner than expected, at least in the case of “trade agreement geopolitics”.

And if it means that we’ve lost the opportunity for TPP to “do a NAFTA on Japan” like what happened in Mexico, well maybe it’s a win for everybody.

But, as the wreckage of the TPP is hurriedly swept away, what is becoming clear is how shaky the political, strategic, intellectual and, perhaps, moral foundations of trade-pact globalism really are.

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Peter Lee, Newsbud Senior Analyst & Commentator, has been involved in East Asian affairs since 1979, first as a businessman and then as a writer.  He has been writing on China with a focus on US policy since 2005.  Mr. Lee’s work has appeared at Asia Times, CounterPunch, Japan Focus: The Asia Pacific Journal, and the South China Morning Post.  He is the proprietor of the China Matters blog.

Newsbud Exclusive- Rex Tillerson Moves Up Date for China War!

Intentionally or Not Tillerson Has Put Down a Marker

Rex Tillerson, Donald Trump’s nominee for Secretary of State, stirred up the South China Sea, along with China, Asia, and the entire globe with this statement: We have to send China a clear signal that the island building stops and second your access to those islands is not allowed.

Oh baby.

It was a bit amusing to see the China hawks from both Republican and Democratic Parties, who have vociferously condemned the Obama administration for its deficiencies of sack in standing up to the PRC in the South China Sea, shrinking back in dismay at this one and deploying their own temporizing arguments.

But the world can relax.  Kinda.

Tillerson’s role in the Trump administration is to reassure, not deliver bowel-loosening terror to America’s enemies.  His overall approach to Asia appears sober and judicious.  Tillerson’s statement looks like a flub, a mis-statement by a person of a certain age grimly but gamely slogging through the fifth hour of Congressional hearings.

The entire passage indicates he had been briefed but had not fully internalized the mind-glazing minutiae of the South China Sea dispute.  In some areas he seemed to be winging it based on what the astute business executive picks up about China while flipping through Forbes in his limo on the way to the office tower.

Here’s the transcript:

We have to step back and look at all of China’s activities…Island building in the South China Sea, the declaration of control of airspace in waters over the Senkaku Islands with Japan.  Both of these are illegal actions.  They are taking territory or control or declaring control of territories that are not rightfully China’s.  The island building in the South China Sea itself in many respects in my view, building islands and putting military assets on those islands is akin to Russia’s taking of Crimea, it’s the taking of territories others lay claim to. The US has never taken a side in the issues but what we have advocated for international processes dealing with that and China should respect those international processes…I think again the failure after response has allowed them tojust  keep pushing the envelope on this.  So we find we are where we are and we have to deal with it.  The way we’ve got to deal with it is we’ve got to show back up in the region with traditional allies in Southeast Asia.  And I think using existing structures to begin  the re-engagement use ASEAN which most members of ASEAN are affected by this.  You have got $5 trillion of economic trade going through those water every day.  This is a threat to the total economy if China is allowed to somehow dictate passage through these waters.  This is an issue of great importance for many.

And would you support a more aggressive posture in the South China Sea? 

We going to have to send China a clear signal that first the island building stops and second your access to those islands is not allowed.

Perhaps Tillerson was trying to say We have to send China a clear signal that the island building stops and second your military access to those islands is not allowed.

That would be roughly in line with current understandings between the PRC and the US, namely that the PRC will lay off the island building and not turn these islands into offensive bastions.  The PRC has militarized these islands to the extent that they are making some provisions for their defense, in part thanks to the fact that Ash Carter, with his usual over-reach, devoted the last round of US-Philippine military exercises to showy island-assault drills.

Perhaps one of several slips of the tongue by Tillerson just in that one passage.

First of all $5 trillion per day.  No.  The authorized soundbite is $5 trillion a year.  And that’s pure BS, as I have documented ad nauseumThe South China Sea is an indispensable strategic waterway for only one country, unsurprisingly the country whose name is on the label: China.

A big clanger is that the PRC has not asserted control of airspace over the Senkakus.  They’ve declared it to be part of their Air Defense Identification Zone, which is not a declaration of sovereign territorial airspace.  It’s simply a declaration that aircraft that fly in that airspace file flight plans and announce themselves to Chinese air traffic control.  The US military and all Japanese aircraft ignore the ADIZ.

Secondly, there is a Crimea-type situation in the South China Sea, but it doesn’t relate to the Spratlys where the island-building is going on.  It relates to the Paracels, a clutch of islands near the Chinese mainland that the PRC seized from its South Vietnamese garrison in 1974 and has been rather massively developed by the PRC since then with military and increasingly civilian installations.  Although (North) Vietnam at one time stated the seizure was OK, it’s still disputed territory, and the United States agrees.  Spoiler: it’s never going back to Vietnam.

The Spratleys are dotted with islands and atolls seized by China, Taiwan, Malaysia, the Philippines, and Vietnam.  All of these occupations are disputed but none of them involve conquest and none of them are illegal—except one, which I’ll get to later.

The general situation is that the disputed sovereignty of uninhabited genuine landforms in the ocean—high tide elevations—can only be agreed by mutual consent of the claiming parties.  If two or more countries dispute sovereignty over a landform, the dispute simply festers.  The United States’ policy is not to take sides.  The most noteworthy example is the Senkakus: the United States affirms they are covered by the US-Japan Mutual Defense Treaty, but also accepts that their sovereignty is disputed between China and Japan.

Most of the PRC island claims in the Spratlys are not seriously disputed.  And the Chinese can do pretty much whatever they want on those islands, including terraforming them into viable civil outposts and even military colonies.  Not illegal, whatever Mr. Tillerson says.

The famous UNCLOS arbitration result did not concern the sovereignty of those islands.  It is a maritime judgment that rejected China’s infamous Nine Dash Line claiming the entire SCS, islands and all, for China; it affirmed the Exclusive Economic Zone boundaries for the Philippines; and, in the process, declared that the man-made islands—whoever they belonged to i.e. without trying to rule on sovereignty—would only be entitled to the most minimal territorial waters and no exclusive economic zone.

The most contentious dispute concerns Scarborough Shoal, an unterraformed high tide elevation inside the Philippine EEZ whose sovereignty is claimed by both the PRC and the Philippines.  Again, ongoing sovereignty dispute, no US position.  There’s no permanent land occupation, just continual jockeying of PRC and Philippine government and fishing vessels.  The UNCLOS Arbitral Commission decided the two countries should share the fisheries, which they are now apparently doing.

The one illegal island in the mix is Mischief Reef.  Mischief Reef is built on a Low Tide Elevation, meaning it is under water at high tide.  No matter how much the PRC builds on that reef, it doesn’t count as an island.  It’s a structure on the seabed.  The seabed, in this case, falls within the Exclusive Economic Zone of the Philippines.  Under UNCLOS, the Philippines has the right under international law to demand that the PRC vacate the structure, or maybe pay rent on it.  Billions of dollars of rent.  The Philippines is thinking about it but, under President Rodrigo Duterte, is pursuing engagement with the PRC instead.

And the Philippines can’t rely on US backing if it tries to forcibly evict the PRC from Mischief Reef.  US obligations under the defense treaty don’t include joining in tussles over EEZ interests.

Long story short: the only way the United States would have legal standing in the South China Sea island disputes would be to ally with Vietnam in a war of reconquest of the Paracels, or by modifying or creatively interpreting its defense treaty with the Philippines to support an attack on Mischief Reef.

Neither Vietnam nor the Philippines are currently interested.


Don’t draw the conclusion that, just because the United States doesn’t have a clear legal standing in the South China Sea, it can’t take military action.

The US can simply unilaterally declare that PRC activities in the South China Sea threaten, directly or indirectly, the security of the United States, and then do whatever it wants to do.

The Trump administration is committed to a more antagonistic policy vis a vis China in order to bolster Trump and American prestige in the region, the US Navy in particular has been frustrated with Obama administration restraint and, at the bottom of it all, there is US confidence, misplaced or otherwise, that the PRC is a paper tiger that can be safely kicked in the behind without worrying overmuch about the military consequences.

A thoroughgoing naval and air blockade of the man-made islands in the Spratlys would be, to put it mildly, a pretty big step.  I think the PRC would be compelled to oppose it, collect a few martyrs, and then respond asymmetrically but massively.  And the United States would not collect a lot of gratitude from the ASEAN states for tipping the region into a regional war.

And it would be…illegal, an obstruction of marine and air navigation, the freedom of the seas and skies and whatnot we’re always going on about.

But, intentionally or not, Tillerson has put down a marker.  Not following through exposes the Trump administration to accusations of the same sort of timorousness that have dogged the Obama administration.

So I expect the Trump administration and the US Navy will turn their attention to some kind of demonstration in the South China Sea.  Maybe not something that lights off World War III, maybe a one-off stop of a “suspicious” vessel, maybe delivering a spanking to the next PLAN vessel that tries to snatch a US drone, in any event a cathartic confrontation beyond the impotent FONOPS—Freedom of Navigation operations adored by think tank planners--that will gratify the US Navy and put the PRC on notice that the United States is in the SCS to escalate.

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Peter Lee, Newsbud Senior Analyst & Commentator,  has been involved in East Asian affairs since 1979, first as a businessman and then as a writer. He has been writing on China with a focus on US policy since 2005. Mr. Lee’s work has appeared at Asia Times, CounterPunch, Japan Focus: The Asia Pacific Journal, and the South China Morning Post. He is the proprietor of the China Matters blog.