Ben W. Heineman, Jr.

By Ben W. Heineman, Jr.

(This article first appeared on TheAtlantic.com, where Ben Heineman is a frequent contributor)

The horrific death of more than 900 Bangladesh garment workers in the collapse of a building, following the death of 112 garment workers in a Bangladesh factory fire five months ago, has led, of course, to the inevitable calls for reform. The immediate question is how to ensure structural soundness of factories after the multi-storied Rana Plaza facility–making garments for as many as 30 international retailers–broke apart, burning, suffocating and crushing its workforce. But broader issues of worker health and safety for Bangladesh’s 5,000 garment factories have also come to the fore.

But if real reform is to occur on the ground, hard, complex questions must be asked and answered. Most importantly, what is the cost of necessary changes to protect workers and who will pay? Many actors have a role: the Bangladesh government, the factory owners, the garment buyers (including many international brands), consumers across the globe looking for cheap prices and developed world governments which have allowed preferential treatment for Bangladesh imports (using “trade” in lieu of “aid”) without serious review of worker standards.

Unless these fundamental relationships and responsibilities are clarified (perhaps by a multi-stakeholder task force), meaningful change is unlikely to occur given the complex interrelationships that allowed the tragedy to occur in the first place. At the core of the problem are global garment retailers who want the incur the lowest cost–and offer the lowest price–to compete in developed markets but who do not want to be complicit in publicized worker tragedies in developing markets. Similarly, governments in developing countries want to attract garment manufacturers (who sell at lowest cost to international retailers), want to pay lip-service to worker protection, but do not want to send those manufacturers to another low cost country because of costly health and safety regulation.

The backdrop for the catastrophic event at Rana Plaza is growth of the garment industry in Bangladesh. For much global trade, labor costs are only one part of the business equation. But in some spheres, like apparel, textiles and toys, cheap labor still is vital. And, as one of the poorest nations in the world (Bangladesh, a nation of 160 million, ranks 192nd in terms of per capita income), the minimum wage for the about 3.5 million garment workers (80-90 percent women) is about $38 dollars per month (one of lowest in the world). As wages in China have risen, international buyers have shifted attention to Bangladesh where thousands of garment factories now produce between $18-20 billion in goods annually, which constitute about 80 percent of the nation’s export volume and 10 percent of GDP.

The threshold question is whether the government of Bangladesh has established adequate laws and regulations relating to worker health, safety and well-being which provide appropriate nominal protection when compared to norms in other nations. These rules include building codes, fire prevention, health and safety conditions inside factories, other labor standards relating to wages and child labor, the right to organize, environmental protection against factory discharges and funds for workers injured, disabled or killed on the job. A daunting list! The obvious related question is whether Bangladesh has the means to enforce such laws: the political will, adequate numbers of trained inspectors, adequate numbers of enforcement officials, a regulatory and legal system capable of imposing sanctions when warranted and a remedy regime which imposes proper individual or company fines or penalties both to punish and deter individuals and companies as well as the capacity to order meaningful remedial action.

Bangladesh is poor and corrupt (rank: 144 if 176 on Transparency International Corruption Perceptions Index). It has had a strategy of encouraging the low cost garment industry by not having a serious regulatory regime protecting labor. And news reports state that its politicians have been involved in owning or supporting garment makers with improper payments to ensure laws do not exist or are not enforced. Although reformers and the government itself have called for a changes in government, there has been no serious analysis since the fire and building collapse of the “regulatory deficit” (although the government has promised to work with the International Labor Organization and workers to review plant safety by year end). How much would it cost to pass laws and develop meaningful enforcement capacity; how would poverty ridden Bangladesh pay for it; and, given corruption and weak rule of law, is meaningful action at scale in this sphere possible? Inadequate government is a huge obstacle to change, made even more difficult in a nation with highly contentious politics.

A second key question is whether the owners of the factories which make garments have the resources and the will to pay for the “compliance deficit.” the cost required to bring factories and working conditions from their current state “up to code,” assuming good laws and meaningful enforcement. Western consultants estimate that only about one percent of Bangladesh garment factories have good standards. Again, there is no detailed analysis of this question which has many dimensions. What would be cost, for example, of making the existing 4500 factories structurally sound (one labor organization has estimated $3 billion but without details). Importantly, what are the economics of the garment makers? Do they have any profit margins or net cash flow which could fund improvements. Can they raise prices to international buyers to get such funds without losing customers to competing countries? But, even if some manufacturers raise prices to fund reform, many others may try to keep their prices low to keep or increase business and to free-ride on the changed reputation of others, in the absence of effective government.

A third, related question is whether these garment factory owners are willing to allow workers to organize in unions or associations in order to have a voice in health and safety conditions (again assuming decent labor laws and decent enforcement). Following the building collapse stories emerged at how anti-union both the government and the owners have been. Yet worker “voice” is necessary to speak to government, owners, buyers, NGOs and the media. But, although right and necessary, such voice–overcoming the “organizing deficit”– has a cost too which must be understood if it is realistically going to grow, importantly with the support of the international retailers.

A fourth key issue relating to “who pays” and “who is accountable” questions is, of course, the role of those global retailers who buy the low-cost Bangladesh garments, the “buyer deficit.” Approximately 60 percent of the clothing made there goes to United States or the European Union. Many international brands buy from Bangladesh suppliers, including Wal-Mart, Benneton, Calvin Klein, Tommy Hilfiger, Children’s Place, Primark and Joe Fresh.

Having been criticized sharply for poor labor practices in suppliers, most well-known global companies (or their brands) have established labor standards for the companies from whom they buy product, either individually or through industry associations. They audit compliance with those standards themselves or through independent organizations. But, there are several problems. The standards may depend on local law which is inadequate or does not cover key technical issues (like building codes). When there are violations, the buyers may simply cut off the suppliers rather than helping them improve their practices, leaving workers no better off. Standards therefore my lead to buyers with visible brands to find select suppliers who are “up to code” but leaving many, many more who impose sub-standard conditions on workers. And sometimes, global buyers simply leave the country when they conclude that conditions are so bad, and compliance with standards so hard to ascertain, that they don’t want to take the risk of having their brand associated with product from that country. In the case of Bangladesh, both Walt Disney and Levi-Straus, two iconic U.S. brands, have pulled out of the country altogether.

The question then becomes whether international buyers are willing to go beyond imposition of standards and supplier cut offs and to pay, in some form, for the undetermined costs of the government “regulatory,” supplier “compliance” and worker “organizing” deficits. But, this aspect of the “buyer deficit” has no easy answer. Many have called for international buyers not to leave Bangladesh but invest in it because, deeply flawed though it may be, the garment industry has been a source of growth for the country and a way station, however dangerous and exploitive, out of even worse rural poverty for many women. But such calls have often been short on details about funding and implementation.Given corruption in the government and untrustworthiness of manufacturers, creating funds through higher taxes on buyers or higher prices from garment makers are unlikely and ineffective sources of finance for real reform.

Buyers could, perhaps, work directly with a few trusted manufacturers to use their own funds to help bring a small percentage of factories up to decent standards. But, this would leave hundreds, if not thousands, of facilities in sub-standard and hazardous condition. A few companies have committed funds for building fire safety (Gap pledged $22 million) or for training plant managers (Wal-Mart offered $1.8 million) or for compensating victims. Other retailers have indicated a willingness to finance some safety efforts (amounts undetermined) if other buyers will join them in such concerted action. (See, for example, the proposal of the Clean Clothes Campaign, a worker’s right NGO).

Perhaps an international non-profit organization could be created to receive and disburse such funds from international retailers, but target amounts, criteria for potential recipients and implementation planning are far from being defined. And, even in the immediate wake of catastrophe, many companies have not even made vague commitments to spend funds on actual improvements rather than just set and audit standards and reject suppliers who don’t meet them, although buyers are meeting to discuss what can be done. Ensuring that such private retailers funds are used for their intended purpose by manufacturers is yet another issue. Thus, actually implementing major substantive change–not just articulating good plans–by a concerted, critical mass of outside buyers, rather than by the government, is a significant challenge in a weak state like Bangladesh.

Then there is the “customer deficit.” If international retailers were willing (and able) to finance changes in Bangladesh factories in a meaningful, could they pass those costs on to bargain hunting customers in the U.S. and the EU through higher prices — or would they just reduce their profits by the amounts dedicated to real change. Under competition laws, companies cannot, obviously, agree on such a price rise so there will be disparate responses from retailers in amounts spent on reform and pricing actions, leading again to lack of coordination and free-riding. But, if price is not the only consideration, consumers can, as with other products like coffee and fruit, demand that retailers disclose supplier standards and auditing. Can a robust consumer movement arise among those shopping for discount clothing in response to the Bangladesh building collapse?

Finally, there is the question of what the EU and U.S. can do to leverage trade preferences for Bangladesh imports (given in the name of stimulating economic growth in one of the poorest nations) for better health and safety standards in the factories producing those imported products. To address this “trade law” deficit, and all the other “deficits” described above, Sander Levin and George Miller, Democrats on the House Ways and Means Committee, have asked the Obama Administration to review US trade preferences (which cover only part of apparel imports) and to join with the EU and Bangladesh in convening a task force of governmental, business and NGO representatives to develop a concrete plan of action.

Such a task force must address the fundamental issues raised here. What are the standards? What is the cost? Who is accountable? I am not advocating a comprehensive solution which could take years to devise and implement. Yet, priority, near-terms actions can flow more sensibly from the work of a special task force addressing the fundamental, longer term financial and responsibility issues affecting the various interconnected actors.

Many commentators have drawn an analogy between the collapse of the Rana Plaza in the Bangladesh Capital of Dhaka and the 1911 Triangle Shirtwaist factory fire in New York which claimed 146 lives. The 1911 event led to formation of a strong union (The Ladies Garment Workers) and much-needed reforms. But the Rana Plaza catastrophe represents a more complicated set of fractured global relationships, responsibilities and financial capabilities. Without greater clarity from an authoritative international body about these relationships, responsibilities and ability to pay, needed reform — which goes beyond mere rhetoric urging change — may be buried just as tragically as the more than 900 people under the Bangladesh rubble. And a double tragedy would be if reform efforts in Bangladesh drive garment makers and international retailers to other low cost countries which have not been in the spotlight–e.g. Pakistan, Myanmar, Vietnam, Cambodia–but where worker health and safety problems are much the same.

Ben Heineman is a senior fellow in the Belfer Center for Science and International Affairs at Harvard Kennedy School and a senior fellow at Harvard Law School’s Programs on Corporate Governance  and the Legal Profession. He was GE’s Senior Vice President for Law and Public Affairs.

Richard N. Rosecrance

By Richard N. Rosecrance

President Obama has nominated two representatives who will lead US trade talks over the next two years: Michael Froman, former White House economic aide as U.S. Trade Representative and Penny Pritzker, Hyatt scion and Chicago fund raiser as the new Secretary of Commerce. Together their appointments signal America’s new focus on increasing international trade as a stimulus to the domestic economy. The two representatives will deal with proposals for a customs accord with the European Union (TAFTA and an investment agreement) and a commercial union with Pacific nations in the Trans-Pacific Partnership. But the new stress on trade represents a more profound reorientation than just a new way of seeking economic development. It underscores America’s undiminished power of attraction to other countries in both international politics and economics.

Many have speculated that the (relative) decline in US GDP compared with rising Asia (only partly offset by the recent inclusion of new investment indicators in GDP measures) could inaugurate a new era of global uncertainty and instability. These critics have correctly pointed out that rising countries frequently get into conflict with established hegemonic powers as Germany did with Britain in 1914 and as Russia did for a considerable time with America after 1950. Harvard’s Joseph Nye and others have countered that America’s “soft power” partly mitigates this decline. A country’s “soft power” offered a global example of effectiveness in its society, democracy, or culture which other countries might be tempted to emulate.

More important, however, is the political and economic attraction which flows from America’s soft power as well as from trade arrangements the US is consummating with Europe and Asia.

In the past great theorists like Machiavelli and later Hobbes never understood that the balance of power could be transformed internationally. They did not realize that world was not condemned to endless balance of power rivalries. Every now and then “powers of attraction” would create a stunning overbalance of force in which joining parties would emerge satisfied. In Europe it did so for a half century after 1815. The Cold War came to an end because the United States had created an overbalance of power that made Soviet resistance counterproductive and ultimately attracted Moscow to begin (the still unfinished) process of political and economic reform.

Today, the United States stands athwart Asian and European worlds. It offers trade and investment to both continents. The attractive force of America’s open invitation to join a greater economic unit can change the game of world politics. If TAFTA and an investment agreement are negotiated, the US and the EU would then represent an economic unit of $32 trillion, about half of world GDP (of $61 trillion). If TPP emerges, it would combine an additional $2.3 trillion; if Japan, Canada and Mexico join, as seems likely, another $7.9 would be inputted into the growing commercial enterprise, rendering a total of over $40 trillion.

Those who center attention on the US-China rivalry and its potential consequences do not fully observe the attractive force of customs unions in this process. China’s $8 trillion GDP could not stand against or balance such a combination of economic strength. An overbalance of power would be concerted that China would then have to join. Where else could it sell its goods? Where else could it get the revenue to continue to import the largest share of energy on the planet? The balance of power would then yield to overbalance, and Beijing, perhaps ineluctably would be drawn into a more cooperative trading unit in world politics. China may of course have other short term ideas, but in the longer run, its own economic development will depend upon sturdy economic connections with the West, Japan, and free Asia. An overbalance will then begin to assert itself.

Richard Rosecrance is an adjunct professor at the Harvard Kennedy School, where he is director of the Belfer Center’s Project on U.S.-China Relations. He is author of the forthcoming book Resurgence of the West (Yale University Press, 2013).

Ben W. Heineman, Jr.

By Ben W. Heineman, Jr.

(This article first appeared in Harvard Business Review Blog Network, where Ben Heineman is a frequent contributor)

In President Obama’s second term, the United States has an ambitious and challenging Atlantic and Pacific trade agenda which could significantly alter the architecture of the global economy.

But the President has yet to designate someone to fill the crucial Cabinet level position of U.S. Trade Representative (USTR). The stakes, both internationally and domestically, are extremely high and Mr. Obama should immediately send to the Senate for confirmation a nominee of prominence and stature.

Doing so would show that he places the highest priority on both the Trans-Pacific Partnership (TPP) negotiations — started in 2011 and slated to end this year — and the newly launched free trade negotiations between the US and EU which are scheduled (optimistically) to be completed before the 2016 election. He should simultaneously push hard for Congressional renewal of Trade Promotion Authority (TPA) which gives the Executive the power to negotiate trade agreements subject only to a prompt up or down vote in the House and Senate with no amendments. This authority expired in 2007.

The Trans-Pacific talks have involved 11 developed and developing Pacific Rim nations with a combined GDP of $40 trillion,and which recently got a jolt of energy and complexity when Japan (GDP=$6 trillion) joined the negotiations. The US-EU talks involve the two largest economies in the world (EU $17 trillion, US $15 trillion, China $12 trillion) which account for about one-third of world trade annually ($2 billion per day).

Both negotiations aim to reduce tariff and non-tariff barriers in goods, services, investment and procurement. Importantly, this means harmonization or mutual recognition of national regulatory regimes, which can lead to global standards and greater ease and efficiency in cross border economic activity. The US-EU talks, for example, can not only have economic benefits (reduced costs/higher GDP in both regions without stimulus spending) but also geopolitical ones (refreshing the transatlantic alliance and rule of law market economies). The TPP hopes for similar effects.

Both negotiations are driven by a desire to spark a sluggish world economy and by an unstated but clear desire to provide powerful counterweights to China. This China strategy can occur through greater growth in developed and developing democracies; through regulatory and product standards which become world norms and to which China may have to conform; and through new rules, as yet undefined, to address the trade distortions of Chinese “state capitalism.” This last point, explicitly mentioned in the terms of reference of both negotiations, is aimed at the licit and illicit subsidies, preferences and advantages which China’s government provides to its national “corporate” champions, especially those owned by the state.

But, while the broad goals and general impact of both the Atlantic and Pacific trade talks are thematically compelling, the actual negotiations are exceedingly detailed and difficult. In each nation or region, special interests have to give up sacred cows, regulatory agencies have to modify their behavior and certain segments of the economy will suffer from increased competition while others will prosper. A Trade Representative of real stature and skill is needed to bring a broad national and global (not parochial) perspective to the talks, and to negotiate, compromise and close the deal with international counterparties on a package of contentious issues. Such a trade leader must simultaneously keep a fractured Congress informed and supportive while getting Trade Promotion Authority enacted and also carrying out the negotiating goals which Congress writes into the legislation.

Surviving, even thriving, in the domestic and international crossfire on such fractious issues as autos, drugs, aviation, financial services or agriculture requires that the President make these trade negotiations a top priority. This means he needs a strong leader who can remain not only above specialized interest group, regulatory and Congressional interests, but who is also outside the West Wing and can effectively direct the effort and package the issues in internal processes, until the President’s direct public involvement is needed.

Past USTRs were people of remarkable ability who came to the job with strong track records, or who developed a reputation for leadership once appointed, such as: Bob Strauss (Carter), Bill Brock (Reagan), Carla Hills (Bush 41), Mickey Kantor (Clinton), Charlene Barshefsky (Clinton), Bob Zoellick (Bush 43), Rob Portman (Bush 43).

Although top Administration officials, like National Security Advisor Tom Donilon, talk about the strategic importance of the Atlantic and Pacific trade negotiations, unfortunately the President himself has never shown much public interest in trade. Obama announced the US-EU trade negotiations in a single sentence buried deep in the State of the Union address. And he is the only recent president not to immediately propose renewal of Trade Promotion Authority upon assuming office. Instead, we have seen only an administration announcement, in an anodyne and faceless trade agenda paper, that it planned to work with the Congress on new TPA legislation. And thus far, leadership on the US-EU talks has come from the White House staff (per Michael Froman on the National Security and National Economic staffs), and TPP negotiations have been led by an assistant USTR, with neither the talks nor the point person receiving much national attention.

There is, in short, genuine doubt about whether President Obama really cares about these critical global initiatives, given all the other priorities with which he must deal. The obvious symbol of Presidential commitment is the United States Trade Representative. That is why it is so odd that no nomination has been announced, with TPA facing a tough fight in Congress; with the Pacific talks made infinitely more complicated by Japan’s entrance; and with the US-EU talks requiring firmer, clearer negotiating plans and some quick victories to develop momentum. Although strong support is needed from the President himself, Mr. Obama needs a potent national figure outside the West Wing who can take fire prior to his personal involvement in negotiations.

Reaching meaningful agreements with real impact in the Atlantic and Pacific trade talks would be a long-shot under the best of circustances. If the President does not make this a key priority which commands his attention, and on which he will spend leadership capital, these talks will not succeed, and may not even happen given the degree of political difficulty here and abroad. The economic costs would be very high for the US and the world.

Obama’s task is clear. Appoint the USTR now, Mr. President.

Ben Heineman is a senior fellow in the Belfer Center for Science and International Affairs at Harvard Kennedy School and a senior fellow at Harvard Law School’s Programs on Corporate Governance  and the Legal Profession. He was GE’s Senior Vice President for Law and Public Affairs.

Ben W. Heineman, Jr.

By Ben W. Heineman, Jr.

(This article first appeared on TheAtlantic.com, where Ben Heineman is a frequent contributor)

Labor markets have for the past quarter century been at the center of the globalization disputes under the “off-shoring and out-sourcing” rubric. How many jobs were lost at home to cheap labor abroad? What were conditions for those overseas workers? But the rapidly changing nature of the global economy has changed much, though not all, of that “off-shoring/out-sourcing” debate. Today, cheap labor is only one of many factors leading global companies to choose where to do business in diverse nations across the world. Major economic changes like the internal growth of emerging markets have scrambled debates about the global economy, posed challenges for international business, stimulated contradictory public policies and confused the general public.

It was often cheap labor in emerging markets that, more than two decades ago, led companies in developed markets to move company jobs away from the home country either to company owned facilities (off-shoring) or to third parties (out-sourcing) in developing markets. The broad idea was that less expensive manufacturing or inexpensive white collar workers would create goods and services in developing nations that would serve world markets. China, especially, would be the global product-manufacturing center; India, via the web, would be the global service provider.

The well known debate ensued between free-trade (more competition, cheaper goods in U.S., growth in developing markets) and fair trade (only wealthy benefit, hollowing out of U.S. middle class, exploitative labor standards overseas). The debate heated up in political years (including 2012), when “outsourcing” became an especially a dirty word. But, in addition to dramatic economic growth in emerging markets, four recent trends have significantly modified this old off-shoring and out-sourcing schematic.

First, labor costs for many businesses may no longer be the critical or even primary factor in global location decisions. Wages are rising in many emerging markets due, in part, to increased demand, new labor laws, and greater worker voice. Wages are declining in developed markets like the U.S. where depressed economic conditions for workers have led to lower wage and benefit packages, especially for lower entry level workers, and often through negotiations with organized labor. New technology, such as robotics, and higher productivity have also lowered the price of labor as a percentage of total product or service costs. When labor cost differences are not as dramatic or important, other costs like materials, energy, transportation, currency, capital, government imposed costs (tariffs, regulation) — which were always important — may have as great (or greater) impact on the location as cheap workers.

Second, companies are retaining but modifying their global supply chains by selectively reversing the long-term trend of outsourcing. They are “making” important parts of the products or services rather than “buying” from third parties, as described recently by U.S. business people and journalists, Companies are recognizing that closely interrelating, even co-locating, research and development, design and marketing, manufacturing and assembly close to the markets served can lead to much faster response to market shifts and to much faster innovation. The old practice of designing at home and then manufacturing abroad can slow the pace of innovation and product change to a crawl. So companies are making complex trade-offs between “making” and “buying” — and between the need to develop technology at connected global R&D centers and the need to apply it in a variety of local settings in a variety of ways.

Similarly, companies which were enamored of outsourcing key service functions like information technology to nations like India are discovering that these, too, are key to fast-paced innovation and should be “made” not “bought” — bringing them back in-house, with corporate units integrated across the world under global/local management. The “de-verticalizing” outsourcing process – when a company sent many of its functions between raw materials and the finished product to third parties – is now being partially reversed with “re-verticalization.” But, even with changes, global supply chains, even if owned more by the company and less by third parties, will remain critical.

Even when labor is a still a significant portion of the cost of a product (e.g. textiles, toys, some electronics), there is a growing movement among major, developed world companies, as I have detailed elsewhere, to engage in responsible off-shoring and out-sourcing by adopting labor and quality standards which aim to create decent wages, working conditions and environmental protections as well as more rigorous quality checks. The apparel industry has an off-shoring/out-sourcing code of conduct monitored by a third party, the Fair Labor Association (FLA), a practice now followed by Apple, but not the electronics industry as a whole.

But it must be emphasized: there are still great problems in supply chains for low cost products (as demonstrated by last year’s deadly factory fire in Bangladesh) and there is a great deal yet to do. Most brand-name, iconic multi-nationals, however, do understand that labor and quality standards are needed — both in their own overseas facilities for their own employees and in their supply chains — which will either increase costs or ameliorate some of the worst practices. And, at least for these major companies, this is another factor which may means that decisions about location and employment are not made purely on the cheapest possible labor.

Finally, companies’ choice of where to do business across the globe is heavily influenced by a witches brew of complex, often contradictory governmental policies at national, regional and local levels. Governments may seek to attract foreign investment yet also discriminate against it. They may promote non-protectionist policies for economic growth (infrastructure, R&D, more open immigration, skilled work force) or they may, especially in a recession, enact protectionist measures. They may, like China, engage in a host of illicit activities – pay-offs, piracy, hidden subsidies — to promote national champions. Or to counter state capitalism like China’s, they may engage in explicit subsidies or tax breaks or subsides or preferences or soft loans to promote domestic business’s ability to compete overseas against state supported or state owned companies — trade promotion ideas which teeter between reasonable competitive measures and bad crony-capitalism.

Ultimately, governments may recognize that virtually every other government has its thumb on the scale of economic activity and thus frustrate real global competition which can mean new jobs at home (even if old jobs may suffer). As a result, they may seek new free trade agreements to knock down tariffs and other trade barriers — as in current major trade talks in the Atlantic (between the U.S. and the EU) and in the Pacific (involving the U.S., Japan and others) — to stimulate economic growth and also to counter the rising power of China’s state capitalism. All these currents and cross-currents in present and evolving government policy have significant impact on location of global business activity.

These four trends take place in the context, as noted, of one central change: faster economic growth in developing markets than in developed markets. Much activity of global companies is now an attempt to sell in those new markets by having a powerful new local presence, even as they retain global supply chains. This is called “on-shoring” because it involves creating new, additive economic efforts in emerging markets which are far different than “off-shoring” jobs to cheap markets to export products back to expensive ones. Take China. Foreign auto makers (Japanese, European and American), have roughly 60 percent of a 15 million unit per year market, with tens of production facilities frequently owned with Chinese partners. GM is the leading car-maker in China with about 20 percent of sales (selling more units than in the U.S.) and has 11 assembly plants and four power-train plants in eight Chinese cities. For many U.S. multi-nationals approximately half their revenues, and 30-50 percent of their work-force, are outside the United States, reflecting the need to serve overseas markets.

Similarly, foreign companies have been “on-shoring” in the United States for years. . Foreign automakers built more than 3 million cars at 16 facilities in the United States in 2011 with the 70 percent of Japanese cars sold in the U.S. made in North America. Announcements of acquisitions or new plants in the U.S. are made almost every day by a non-U.S. companies, like Airbus, Siemens, Lenovo, Infosys, Ikea, and Foxconn. Indeed, foreign companies employ nearly 6 million Americans, account for 13 percent of manufacturing jobs and about 18 percent of exports.

Stories of foreign investment in the U.S. have been matched in the past few years with the “re-shoring” of overseas work back to the U.S. Iconic American companies like Apple, Google, Caterpillar, Ford, Emerson, GE, and Intel are adding plants and jobs in the U.S. or North America. The decisions are driven by some of the economic trends noted earlier (competitive overall cost for U.S. markets, desire to “make” not “buy” and integrate corporate functions for innovation close to customer). “Re-shoring” also helps symbolically and politically to counter, to an extent, the old “off-shoring” critiques. But, while “re-shoring” may slow the decades long decline in U.S. manufacturing jobs, from 20 percent of the workforce in 1980 to about 9 percent today, it is not likely to reverse it, much less herald a return to the glory days (the Bureau of Labor Statistics estimates that only 7 percent of the workforce in 2020 will be in manufacturing).

For most of the public, this significant modification in the off-shoring, out-sourcing debate is not well understood and people still revert to the old schematic This is because of politics. Companies are struggling to adjust to new global realities but generally try to present a strong nationalist face in their home countries (now aided by modest “re-shoring”). Importantly, nations that practice some version of “market capitalism” (less government intervention than “state capitalism”) are schizophrenic: torn between government policies to support real global competition and policies to support national companies and local workers. Broad adjustments in knowledge and attitudes about changes in global economic integration is necessary in developed “market capitalism” to reach the right balance of policies promoting the long-term ideal of global competition, adopting near term measures that counter state capitalism without engaging in crony capitalism, recognizing that with competition new domestic jobs may replace old ones and protecting domestic workers whose jobs may be lost due to technology and productivity – not just changes in trade.

Ben Heineman is a senior fellow in the Belfer Center for Science and International Affairs at Harvard Kennedy School and a senior fellow at Harvard Law School’s Programs on Corporate Governance  and the Legal Profession. He was GE’s Senior Vice President for Law and Public Affairs.

Justin Dargin

By Justin Dargin

(This article first appeared in Petroleum Economist)

Computer screens at the North American Aerospace Defense Command (NORAD) indicate to anxious personnel that a massive Soviet attack is under way.

Hundreds of bombers, nuclear-tipped inter-continental ballistic missiles (ICBMs) and submarines are heading for the US. NORAD prepares to retaliate and readies the US nuclear arsenal for a devastating counterattack. But, at the last moment, humanity is saved, and it is discovered that the supposed Soviet nuclear attack was the result of a hacking gone wildly out of control.

Sounds real? Thankfully, it was not. It was a scene from the 1983 blockbuster WarGames. The movie was released a full decade before the internet became commercialised and a full two decades before it became part of everyday life. While hackers first appeared on the scene in the 1960s, borne out of the high-tech and competitive environment at the Massachusetts Institute of Technology (MIT), hacking was first introduced to the general public by WarGames.

In WarGames, the film’s main character, played by a young Mathew Broderick, attempted to hack into the mainframe of a video game manufacturer so he could play games. Instead, he mistakenly hacked into NORAD’s advanced nuclear combat simulator, almost starting global thermo-nuclear war in the process. The movie, and a string of films made after it, sensationalised the dangers inherent to our computerised society.

While some of the fears voiced about cyber-war may be overblown, it is undeniable that there are serious risks. Cyber-attacks, which include cyber-espionage, the act of obtaining privileged information without the permission of the holder, as well as hacking to cause sabotage, are on the rise. And one of the most prominent targets has been the energy sector in the Middle East-North Africa (Mena) region, a development which threatens global energy markets by potentially disrupting supply and destabilising prices.

The beginning of major regional cyber-hostilities can be traced to the release of the Stuxnet virus, which targeted Iranian uranium enrichment facilities at Natanz in 2010. Stuxnet, the most damaging cyber-attack in the region to date, forced Mena policy-makers to seriously consider the threat posed by cyber-attacks.

Top secret work

The virus is the product of “Olympic Games”, a classified programme launched during George W Bush’s presidency. Since its launch, the Obama administration has made cyber-defence and -offence a strategic pillar of national security. Neither the US nor Israel have admitted any connection to Stuxnet, but it is widely believed they collaborated to develop the sophisticated malware. In mid-2010, a programming error released Stuxnet to the internet. Since then, the virus has infected millions of computers around the world.

After the Stuxnet attack, several other computer viruses compromised sensitive Iranian computer infrastructure, including the W32 Flame virus, which targeted the National Iranian Oil Company and the Iranian Oil Ministry in April 2012. These viruses did not seriously compromise Iranian oil production, as the country’s hydrocarbon sector is still primarily mechanical, not computerised. In a bid to mitigate the
attack, Iranian officials disconnected several of its main oil terminals from the internet to prevent the virus from spreading. And to provide a defence against further attacks, Iran is following a two-pronged cyber-security strategy, creating a special hacking unit with both defensive and offensive functions.

Iran is also planning to protect its national computer systems by isolating its domestic internet from the global web. The Iranian authorities already implemented the first phase of this plan, which saw all governmental offices and ministries connected to a national network which lacks external access. The second phase, due for completion in March, will bring all Iran’s internet users into the national intranet fold. While the Iranian intranet will regulate the exchange of information among citizens and regulate social media use, it will go some way towards shielding industrial networks from cyber-attacks from outside the domestic network.

Iran is not the only country fighting on the virtual frontlines. In August 2012, hackers launched cyber-attacks against Saudi Aramco and Qatari natural gas producer RasGas. The two firms were hit by the Shamoon virus, also called Disttrack, which is capable of overwriting computer files, rendering them unusable.

The Aramco attack infected nearly 30,000 workstations, crippling almost three-quarters of the company’s computers. This ultimately purged documents, spreadsheets, emails and files from the computer system. The virus replaced the purged files with an image of a burning US flag, and siphoned off data, sending it to a remote server. US defense secretary Leon Panetta claimed the attack was “probably the most destructive attack that the private sector has seen to date”. Abdullah al-Saadan, Aramco’s vice president for corporate planning said that hackers spent nearly a month attempting to penetrate Aramco’s
servers before they succeeded. Al-Saadan told the media: “[T]he main target in this attack was to stop the flow of oil and gas to local and international markets.”

Shamoon did not disrupt Saudi production, mostly because Aramco’s main output facilities are behind a secure computer system and, like Iran, much of the firm’s production technology is mechanised.

While Aramco has not publicly announced who, or what, it suspects is behind the attack, US officials maintain it is the work of Iran. Iran, for its part, denied any involvement. While the Islamic Republic is widely assumed to have both the motive and the capability to have launched the attack, computer forensics operations are still under way and no concrete evidence has yet been made public to support US claims.

Some analysts point out that the Aramco cyber-attack could have been Iran’s response to Saudi Arabia’s decision to increase oil production in mid- 2012. The Saudi move compensated for the loss of Iranian production as western sanctions against Iran came into force, effectively removing Iranian production from the market.

Since the Shamoon attack, Saudi Arabia has doubled homeland security spending from $7.8 billion to $15.4 billion. The kingdom also established a protection force for its oil sector, which will employ 35,000 personnel. Cybersecurity will be one of the force’s main focuses.

Shortly after the Aramco attacks, Qatar’s RasGas also became a victim of hacking. As with Aramco, the damage did not extend to production facilities. Even before the attack, Qatar was proactive in defining its cyber-security policies. It created a government agency in 2004 to focus on deterrence, monitoring, detection and analysis of emerging cyber-threats.

In both the Aramco and RasGas attacks, the virus did not disrupt energy production as a thick wall of cyber-protection separated the output-controlling servers from the main network. Iran is believed to
have masterminded both attacks, but officials have yet to provide indisputable evidence for this allegation. In any case, it appears that insiders at Aramco, and possibly RasGas, helped the hackers gain access to the firms’ computer systems. The mole seems to have uploaded the malware via a USB drive, thereby bypassing the extensive security firewalls.

The United Arab Emirates’ energy infrastructure has, so far, not been compromised by a cyber-attack. Nevertheless, there are concerns about the country’s vulnerability. Historically, the UAE, a major financial hub for Mena, considered cybersecurity issues through the prism of financial crime. Various estimates posit that, annually, cyber-crime costs the UAE approximately $600 million.

According to an International Institute for Management Development report, the UAE’s cyber-security ranks first in the Mena region, and is fourth globally. However, in terms of nongovernmental computer networks, the statistics are not so impressive.

In its annual cyber-threat assessment report, Microsoft announced that in the UAE alone approximately 36% of private-sector computers are infected with some form of computer virus, adding that the Emirates’ infection rate is almost double the global average.

Now, as the UAE plans to increase its oil production from 2.8 million barrels a day (b/d) to 3.5 million b/d by 2018, it is focusing on developing a cybersecurity apparatus for its energy sector.

While other Mena countries are still developing their cyber-security infrastructure, the UAE has already created a national cyber-defence organisation, the Computer Emergency Response Team, a unit of the Emirates’ Telecommunication Regulatory Authority (TRA). The response team monitors and prevents attacks on the country’s technology infrastructure. The TRA provides alerts to members and gives directions on how to mitigate attacks, and also searches for structural weaknesses in the country’s computer network.

The Mena region is not the only region seeing an increase in cyber-attacks directed against the energy sector. It is a global issue and many countries now sense their vulnerability. For instance, the US Department of Homeland Security (DHS) announced that by the end of the fiscal year on 30 September 2012, American companies reported 198 cyber-incidents (attacks and intrusions) to the government. The
DHS indicated that more than 40% of these incidents targeted energy companies.

In 2012, the DHS warned of an extensive cyber-attack aimed at US natural-gas pipeline companies, adding the attack appeared to be espionage. Some US intelligence community officials suspect China was complicit, either officially or unofficially. Similar intrusions have targeted Canadian energy firms.

China vehemently denied the accusations, saying they are unfounded. Canadian security agencies warn that the “usual suspects” (China or Iran, for example) are not always the perpetrators, cautioning that so-called hacktivist groups, such as Anonymous, may be the culprits. In 2011, Anonymous threatened to unleash a wave of cyber-attacks against companies active in Canada’s oil-sands. It is understood
organised crime syndicates are seeking to pilfer sensitive company and governmental information by malware in order to sell to the highest bidder.

Cyber-attacks have not yet disrupted global oil and gas supplies. This is, in part, because attacks on the energy sector have been limited to business IT networks, rather than production facilities.
In many energy companies, these two networks are separated by an “air gap” which physically separates two or more networks from electronically communicating with each other. While this has prevented many cyber-attacks hitting hydrocarbons output, this quarantining of a company’s production network could be defeated by an inside job. It is possible for a hacker to physically transport malware via a USB flash drive, as is suspected behind the Aramco and RasGas attacks, and upload it into a company’s production network, potentially wreaking havoc.

Regional tensions, associated with Gaza and the West Bank, the Arab Spring and the Iranian uranium enrichment programme make it probable that cyber-attacks in the region will continue apace. The Arab Spring
is of particular salience as it created a perfect storm for such cyber-attacks to increase in both scope and ferocity as pro-government and rebels battle it out in the virtual realm.

Improving defences

In the future, it is likely most cyber-attacks will focus on regional energy infrastructure, while increasing in scope and sophistication. Many Mena countries are working to further develop their defensive capabilities to stave off and deter potential attacks. However, there are no international treaties governing cyber-activity of this kind, and no globally accepted norms of what constitutes acceptable state action in this field.

But legal principles are emerging to govern the virtual world. For instance, the US government reasons that rules governing defensive posture in the wake of a cyber-attack should follow parallel rules for military engagements in the “kinetic” world. The corollary of this is that the Pentagon and Department of Defense are increasingly likely to respond to a destructive cyber-attack against US interests with
conventional military retaliation.

Nonetheless, there are several reasons to believe that cyber-attacks will increase exponentially in the future. For one thing, they are often viewed as a “cost-free” method to inflict damage on a rival who is unlikely to respond in a conventional military way. Moreover, governments and companies often do not disclose cyber-attacks in order to avoid creating a media storm. The issue of attribution of cyber-attacks is quite unsettled as well. While computer forensic techniques have become more sophisticated, it is still exceedingly difficult to discover the identities of the perpetrators of a cyber-attack.

Mena policymakers are well aware of the potential damage cyber-attacks could cause, not only to their reputations, but to their economic growth and the health of the global economy as well. As a result, many Mena countries have recently hosted several high-profile IT defence forums, including the Cyber Defense Summit, which has been held in Muscat for the past two years, and the Middle East Energy Security Forum, held in Dubai. Moreover, several IT security companies have relocated to the region to assist policymakers develop robust defenses.

It must be stressed that cyber-attacks, such as Stuxnet against Iran, are not run-of-the-mill. For a start they are not easy to deploy. But, as Mena countries modernise their computer systems and energy production infrastructure, their vulnerability to cyber-attacks will increase. Some energy companies are upgrading their IT networks, but are connecting some critical infrastructure directly to the internet. This worries cyber-security experts as these nodes can be used as entry points by dedicated hackers. However, the leap from gaining entry to a computer network to hacking into and controlling production systems is a large one, and quite difficult to achieve.

Malicious computer codes of Stuxnet’s calibre require significant expertise and capital to develop and unleash, making them beyond the competence of “ordinary” hackers. Furthermore, a determined foe could bypass online security architecture by using a mole within the company to upload malware via a USB drive.

The greatest cyber-threat facing the energy sector is cyber-espionage and intrusion. At present, it is extremely difficult to gain virtual control over an industrial process. But as convergence – the use of network architecture to integrate separate networks into one, such as the business and production networks of an energy company – becomes the norm, companies increase their vulnerability to hackers. After all, a network is only as strong as its weakest element.

The damage such an attack on production infrastructure could cause is, for the moment, largely unknown. However, it is fair to state that a major attack on the IT network of a major Mena producer could have serious consequences – not just for that company’s domestic energy industry, but also for the global energy market.

Even if an attack failed to disrupt production, it would spark enough uncertainty to spike oil prices. This alone would threaten the fragile global economic recovery. However, a cyber-attack of this magnitude would have another, more worrying, consequence. It would add a new, wild-card element to oil-price risk assessment – one that would add extra volatility to the market, at a time the world economy
can ill-afford to shoulder the cost of that risk.

Justin Dargin is Middle East energy specialist, and a former Associate with Harvard Kennedy School’s Belfer Center for Science and International Affairs

The author would like to acknowledge the efforts of his research assistant, Martin Vladimirov

Ehud Eiran

By Ehud Eiran

Former Associate and Research Fellow, International Security Program, Belfer Center for Science and International Affairs

In a March 19 piece on Foreign Affairs. com, Retired Admiral Yual Zur and I argued for the development of a comprehensive Israeli maritime strategy. Israel not only resides on the shores of the Mediterranean, but also relies on the seas for almost all of its imports, exports and cable communications. In many ways – due its political, economic, and cultural isolation for the Middle-East – Israel had become an island of sorts.

While the Jewish state’s founding father, David Ben Gurion, believed that the seas hold the key for the state’s future, over the years, the role of the sea in the eyes of national planners declined. Israel has no clear strategy regarding the seas and how they might contribute for its future prosperity. It further lacks the institutional depth expected from a nation that is so dependent on the seas. For example, Israel has no coast guard and the number of Israeli civilian sailors declined from some 1500 a few decades ago, to less than 300 today. But recent strategic developments must lead Israel to close its maritime gap.

First, massive gas deposits found in the last few years in Israeli economic waters are going to become a crucial part of its economy. Second, the seas had become a major supply route of arms for Israel’s non-state foes. Third, the growing tensions with Iran should lead Israel to develop platforms that have a longer reach, the navy’s being an obvious choice. Finally, Israel benefits from the rise of new international maritime security regimes, such as the Proliferation Security Initiative, and may need to think more seriously about how it could contribute to them.

The full article is available at Foreign Affairs.

Kei Koga

By Kei Koga.

(This article first appeared in Asia Times Online)

Since the end of the Cold War, the Association of Southeast Asian Nations (ASEAN) has engaged the outside world to play an active security role within greater East Asia. In 1994, ASEAN created the ASEAN Regional Forum (ARF), at which regional powers such as the United States, Japan, and China meet annually to discuss security issues in the region and beyond.

In 1997, ASEAN+3 was created in order to manage regional issues, especially economics. In 2005, the East Asia Summit (EAS) was established by inviting Australia, India and New Zealand in addition to the ASEAN+3 member states. In 2011, the summit’s membership was expanded to the US and Russia.

In 2010, the ASEAN Defense Ministers Meeting (ADMM) expanded its membership to include all members from EAS to form ADMM Plus. By inviting the region’s great powers, ASEAN had two objectives: (1) to maintain the constant attention of the great powers to ASEAN and (2) to avoid political marginalization from them.

To this end, ASEAN has attempted to maintain its post–Cold War fundamental principle of regional multilateralism: “ASEAN Centrality”. This principle derives from the 10-member grouping’s negative experience in the late 1980s with the establishment of the rival Asia-Pacific Economic Cooperation (APEC) forum.

APEC was initiated by Australia and Japan and was strongly supported by the US. However, it quickly became an institutional threat to ASEAN as it became relied upon by the region’s great powers to shape regional economics and marginalized ASEAN’s political raison d’être in East Asia.

In response, in 1990 ASEAN created the “Kuching Consensus”, which aimed to limit APEC to “a consultative forum on economic issues,” and attempted to prevent formal institutionalization of APEC by constraining its functional expansion. This negative experience led ASEAN to seek ways to prevent political marginalization from the great powers.

During the same post–Cold War period, ASEAN was also concerned about the future of great power politics in Southeast Asia. As US-Soviet tensions eased and Soviet Union forces withdrew from the Asia-Pacific, the US also began to disengage militarily from the region. China and Japan, meanwhile, began to play more active political and military roles.

Strategic uncertainties created momentum for ASEAN to establish ARF, which initially aimed to build confidence among regional great powers. At the same time, ASEAN advanced the notion of “ASEAN Centrality” in hopes of avoiding political marginalization from these powers, in part by assuring they would chair or co-chair meetings and maintain influence over their agenda and procedure.

This principle worked well due to two main political conditions. First, there was a significant measure of strategic uncertainty in East Asia. The US’s political and military commitment to the region became unclear beginning in the early 1990s.

The uncertainty was driven by the 1992 collapse of the Soviet Union, Washington’s failure to bail out the region’s economies after the 1997–98 Asian financial crisis and the post-9/11 wars in Afghanistan and Iraq that led the US to focus more on the Middle East.

In this context, ASEAN has been a useful framework to help fill Southeast Asia’s power vacuum. In addition, ASEAN became a forum for shaping the region’s political outlook instead of only balancing and counterbalancing political power among member states.

Second, the Sino-Japanese political rivalry in East Asia created a better stage for “ASEAN Centrality”. Because it would be difficult for either China or Japan to lead without creating regional blocs, ASEAN could utilize this rivalry to lead East Asian multilateralism.

With the establishment of ASEAN+3, Japan, the existing great economic power in Asia, and China, the potential future economic leader in the region and beyond, often had political disputes over the development of economic, political, and security multilateral frameworks.

The 2005 establishment of the EAS was a case in point. China strongly supported Malaysia’s initiative to create a strong political regional framework through EAS by including only ASEAN+3 member states. On the other hand, Japan vigorously backed Indonesia’s separate initiative to include other democratic states such as Australia, India, and New Zealand. As such, the region’s great powers evaded direct confrontation by positioning ASEAN in the middle.

Strategic middleman
“ASEAN Centrality” functions with the understanding that there are certain political tensions among regional powers. In this competitive state, gaining support from ASEAN’s 10 members means regional powers can dramatically increase their political leverage over rivals, thus making ASEAN a subject of their interest and attention.

Nevertheless, this trend has gradually shifted. Regional powers are now overhauling their strategy from vying for the balance of influence to competing for the balance of power in the region. The East Asian security environment began to change in 2009 when China and other regional states intensified their territorial disputes with each other in the South China Sea.

This intensification was triggered at the international level with China’s official claim to the entire South China Sea, as indicated in its controversial “nine dash line” map. Beijing submitted its expansive maritime claim to the United Nations on May 7, 2009.

That claim was made in response to a Malaysia-Vietnam joint submission on their sovereignty to certain South China Sea areas on May 6, 2009, a move which was highly criticized at the time by China and the Philippines. China’s counter-claim also invited severe criticism from other Southeast Asian states, including Indonesia, Malaysia, the Philippines and Vietnam.

More recently, China and Japan have intensified their dispute over the contested Senkaku/Diaoyu islands. This began in September 2010 when a Chinese fishing boat collided with a Japanese Coast Guard vessel. The incident sparked nationalistic demonstrations in both China and Japan, further bilateral relations.

The confrontations are still ongoing and have heightened diplomatic and military tensions between China and other claimant states in both the East China Sea and South China Sea. Southeast Asian claimant states have recently shifted their defense doctrines and sought bilateral defense linkages with outside powers to counter China’s perceived assertiveness.

For example, Japan issued a new National Defense Program Guideline in 2010 which asserted the necessity for Japan to “cautiously watch” China’s growing military capabilities. Japan also aimed to strengthen bilateral strategic linkages, including the US-Japan alliance, a strategic partnership with India, and trilateral dialogues with US-Australia and US-India.

The Philippines, meanwhile, has sought public reassurance of its mutual defense treaty with the US and developed other defense linkages, including maritime cooperation with India and Japan. Manila’s drive for more great power linkages came after the 2011 Reed Bank and 2012 Scarborough Reef incidents with China. Vietnam has also strengthened bilateral security ties, as seen in its 2012 US-Vietnam defense memorandum of understanding (MOU).

All of these maneuvers indicate that the behavior of regional powers is ultimately based on balance of power logic that reaches beyond ASEAN’s institutional frameworks. At the same time, ASEAN faces significant internal divisions among members with different opportunity-threat perceptions of China.

ASEAN has faced this difficulty since its inception in 1967 as a bulwark against the spread of regional communism. The expansion of the grouping’s membership from six to ten members in the 1990s has made it more difficult to reach a consensus, particularly on security issues where China has a competing interest.

As regional power rivalry rises, states are increasingly choosing to bypass ASEAN and individually engage its member states on a bilateral basis in order to strengthen their balancing or counterbalancing strategies. This “divide and rule” strategy will likely further weaken ASEAN solidarity, a key component of “ASEAN Centrality”.

This trend towards fragmentation was illustrated at the ASEAN Ministerial Meeting in July 2012, when ASEAN failed for the first time to issue a joint communiqué due to disagreements between China ally Cambodia and rival claimant the Philippines over whether to refer to the South China Sea in the statement. In this sense, “ASEAN Centrality” is now under pressure both externally and internally.

So, what can ASEAN do to maintain its centrality? Without economic and military capabilities to match regional powers, ASEAN cannot flex its muscles to pursue power politics. Instead, ASEAN could focus on redefining its affiliated EAS, ADMM Plus and expanded ASEAN Maritime Forum (AMF). In fact, ASEAN has not yet lost its comparative advantages in shaping the East Asian security environment and still appeals to several great powers.

Japan’s recent diplomatic maneuver illustrates this point. Prime Minister Shinzo Abe advocated in his December 2012 article “Asia’s Democratic Security Diamond” that Japan should create strategic linkages among “Australia, India, Japan, and the US state of Hawaii” to “form a diamond to safeguard the maritime commons stretching from the Indian Ocean region to the western Pacific.”

Though Abe’s article did not mention ASEAN as a part of Japan’s “security diamond” strategy, some sensed that shifted when he visited four ASEAN states as part of the 40th anniversary of ASEAN-Japan relations in January 2013. His “The Bounty of the Open Seas” speech outlined five key principles for Japanese diplomacy: democratic values, rule of laws, open economies, cultural exchanges and human exchanges.

In the same speech, Abe referred to ASEAN as “a supremely vital linchpin in terms of its importance to our diplomatic strategy.” Moreover, ASEAN and India recently elevated their relations to “strategic partnership” and issued a “Vision Statement” in December 2012 which further incorporated issues of maritime security and freedom of navigation.

These overtures and initiatives indicate that ASEAN and its affiliated institutions still have a comparative advantage in shaping and influencing East Asia’s security landscape and could play a key role in maintaining regional maritime stability. ASEAN would be wise to go beyond staging fora for talks discussions among member states and move to establish a monitoring mechanism to maintain the maritime status quo, as territorial disputes are likely to intensify among claimant states.

Such a mechanism would require an institutional emphasis on preventing threats or use of force over territorial disputes. Coordinating the existing frameworks of the EAS, ADMM Plus and expanded AMF could buttress such a mechanism by weaving together functionalities at various government levels.

It is time for ASEAN to seriously consider this enhanced role if it aims to maintain “ASEAN Centrality” in East Asian multilateralism.

Kei Koga is a research fellow at the International Security Program of the Belfer Center for Science and International Affairs, John F Kennedy School of Government, Harvard University.

Ben W. Heineman, Jr.

By Ben W. Heineman, Jr.

(This article first appeared on TheAtlantic.com, where Ben Heineman is a frequent contributor)

The contrast was striking. In his State of the Union address, President Obama buried the start of a U.S.-E.U. free trade negotiations in a single sentence well down in the text: ” Tonight, I’m announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union, because trade that is fair and free across the Atlantic supports millions of good-paying American jobs.”

Yet, remarkably, The New York Times, The Wall Street Journal and The Financial Times led their editions the second day after the speech with the trade talk stories, and under multi-deck headlines (“Obama Bid for Trade Pact with Europe Stirs Hope: Rise of China May Spur Deal Despite Past Failures–Visions of Lower Prices.“)

In trumpeting the story, the newspapers acknowledged the potential significance of such a deal between the first and second largest economies in the world (E.U. $17 trillion; U.S. $15 trillion; China $12 trillion), reflecting the views of politicians and other leaders on both sides of the Atlantic. In downplaying the announcement, the president was hedging his bets: because of parochial interests in both the U.S. and the E.U., it will be hard to get a meaningful deal done on a host of technocratic issues, and he doesn’t want the trade negotiations to detract politically from the host of other issues he wishes to advance during his second term.

Yet the irony is that the president cannot hedge his bets without effectively undermining, or indeed killing, the talks in their infancy. He must be prepared to put the full weight of the administration, and the full weight of the presidency, behind this project for it to have a decent chance of succeeding.

As I described in some detail in a scene-setting piece late last year, talks would be aimed at reducing barriers to transatlantic trade in goods, services, investment, and public procurement. In broad outline, a truly substantive agreement between the U.S. and the E.U., which together account for nearly half of world GDP and 30 percent of world trade, could have significant benefits: in economics (reduced costs, higher GDP, more jobs in both regions, without the need for governmental stimulus); in foreign policy (energizing transatlantic relations, reaffirming the continuing vitality of democratic, rule of law nations and being an even more effective counter-weight to the Hobbesian state capitalism of China); in global product and regulatory standards (U.S.-E.U. agreements would have major impact around the world–China’s export economy would have to conform).

But, as virtually all observers have noted, this new round of transatlantic trade talks begin against a background of many failed efforts in the past twenty years owing to stubborn, high visibility disagreements–not just with the U.S. but within Europe itself–about the value of different approaches, especially in key areas like privacy, food, agriculture, aircraft, services, and public procurement.

In addition, Europe today is struggling to find continent-wide mechanisms for more coordinated fiscal and monetary policy (although trade talks are seen as a unifying process). Poor economic conditions are generating protectionist sentiment in both the U.S. and Europe, and head-of-state leadership is necessary but may be lacking in some Euro countries (like France). Plus, the subject matter of the talks is so detailed and technical that it is difficult to make a broad, appealing political case for hard choices. Most trade negotiators start with the fanfare of broad themes before descending into a cacophony of detail.

The talks do begin with some impetus from a joint U.S.-EU “High Level Working Group on Jobs and Growth,” which has been working on the possibility of such talks since the Fall of 2011 and airing issues with affected groups. It issued its final report on schedule with the State of the Union, urging talks go forward because the officials had made some progress on preliminary agreements (although not describing them in any detail).

iStockphoto

Nonetheless, despite this modest momentum, President Obama and the administration must make this a first-order priority to overcome the powerful parochial interests on both sides of the Atlantic. For example, very soon:

• The administration must decide whether and when it can work with Congress to enact trade promotion authority, which gives the president the power to negotiate trade agreements which are subject only to an up-or-down vote in the Congress and cannot be amended or filibustered. That authority expired in 2007 and has not been renewed. (The leaders of the Senate Finance Committee, Senators Max Baucus (D-Mont) and Orin Hatch (R-Utah), have said they would support its reinstatement.) Otherwise, getting an U.S.-EU agreement through a Congress that wants to add its own pet ideas could be a nightmare, although similar political hurdles must be also cleared in Europe institutions as well. The authority will ultimately be needed, because the Europeans don’t want to renegotiate a deal with the Congress.

• The president must appoint a powerful, highly regarded public figure as U.S. trade representative who can stand above the vested interests (including regulators in the executive branch’s various departments and agencies) and strike compromises that will draw pressure group fire in such fraught areas as agriculture, aviation, drugs, autos, medical devices, and professional services. This appointment will be an early test of Obama’s commitment to the issue.

• The administration must promptly define with the EU a negotiating agenda that is broad enough to have real economic and geopolitical impact, that combines relatively easy issues (removing remaining tariffs) with hard ones (scientific differences over food), and that can be done, in the words of White House official Michael Froman, “on one tank of gas” — i.e. in two-plus years, so some promise of additional growth is realized when economies are still lagging. Parties talk today of a “comprehensive” agreement, but terms of the talks must still be clarified.

• The president must make clear to the administration, the Congress, and the major interest groups that he will personally have a strong interest in a successful outcome and, although he must obviously delegate to the U.S. trade representative, he is prepared to support strongly the transatlantic compromises on sensitive issues that will be necessary. Because of the breadth of the undertaking, it is contemplated that there will need to be “sector-by-sector” negotiations. But it is, of course, between sectors in the U.S. and the EU (aviation, food, professional services, procurement) where the fights can be fiercest. So the trade representatives must stand above these inevitable disagreements and help resolve them–with the president’s support as necessary.

• The administration and its European counterparts must agree on a team of first-class trade and economic analysts who can credibly make the case that the agreements will have the broad benefits claimed to justify special interests being dented. Invariably in trade agreements there are bitter fights over job creation or loss, over effects on prices (should be lower), and over whether what is finally negotiated will positively impact economic growth/GDP.

Given the deep historical relationship between the U.S. and the states of Europe, it is not hard to be enthusiastic about the broad possibilities of a free trade agreement. Uniform safety and emissions standards for autos, or one-stop shopping for drug approval may sound good–or at least mutual recognition of each trading blocs’ regulatory approach. But the hard, technical realities of the subject mean that the public is not likely to be very engaged (to put it mildly) and the lift will be heavy. This is why we need to watch with such care to see if the President and the administration are really ready to face into the risks and fight them to the ground as a high priority of the administration.

Shortly after the State of the Union, a strong statement of support for trade negotiations was issued by the National Chicken Council, the National Turkey Federation and the U.S. Poultry and Egg Association. Well and good, even if these weren’t high on the list of groups you recognize. Different scientific views about food safety is one of many contested issues.

But the negotiations are a quintessential national-international issue that will require the broad perspective, and the unique power, of the presidency to succeed.

Ben Heineman is a senior fellow in the Belfer Center for Science and International Affairs at Harvard Kennedy School and a senior fellow at Harvard Law School’s Programs on Corporate Governance  and the Legal Profession. He was GE’s Senior Vice President for Law and Public Affairs.

Hui Zhang

By Hui Zhang

Senior Research Associate, Project on Managing the Atom, Belfer Center for Science and International Affairs, Harvard Kennedy School

On February 12, 2013, North Korea conducted its third nuclear test, and a number of seismic stations around the world detected the event. Before and after the test, there has been much anticipation in the media that we might learn through off-site sampling analysis whether North Korea exploded plutonium bomb like it did in the in 2006 and 2009 tests, or a new device using highly enriched uranium (HEU).

Indeed, many experts have suggested that the test was an HEU explosion. North Korea has only a small supply of plutonium—material that it had stopped producing by 2008—and had more recently demonstrated an operational capability to enrich uranium, which would support a much larger arsenal of weapons given North Korea’s huge deposits of natural uranium. Without a doubt, confirming the type of nuclear weapon it tested is highly desirable. However, the seismic signals are useless in this regard. The question is, then, can the off-site environmental sampling analysis distinguish a plutonium explosion from a HEU explosion?

An underground nuclear test produces noble gases as fission products; in particular, radioactive xenon isotopes are often vented above ground and detected in air samples. However, if the underground containment is effective, it is possible that not enough gases would leak out to be detected. Indeed, there are no reports documenting any releases from the 2009 North Korean test, while in the 2006 test, there was a release of gas detected.

The International Monitoring System (IMS) established by the Comprehensive Nuclear-Test-Ban Treaty has been mandated to establish a worldwide network of detector systems capable of detecting the four radioxenons: Xe-131m, Xe-133m, Xe-133, and Xe-135. An air sampling of xenon would be dependent on a number of factors including, e.g. how much xenon isotopes would be released into atmosphere (related to total inventory, leak rate, etc); meteorology conditions and dilutions (atmospheric dispersion), timely access to the plume (e.g. decay factor and plume location), the background radionuclide concentration, and the minimum detectable concentration.

Since the amount of the xenon that is released by an underground test is very uncertain, any clue to the nature of the fissile material would have to come from looking at isotope ratios. These ratios are different for uranium-235 and plutonium-239 fissions. Based on an analysis I did with colleagues in 2007, we concluded that if one were able to detect and analyze the radioactive xenon within the first few hours after an explosion, it would be possible to distinguish between the xenon from plutonium and uranium explosions. If the air samples were taken two days after the test, however, such determinations would be very difficult. Beyond two days after the explosion, there is no way to detect from sampling of radioactive isotopes whether the test used plutonium or HEU.

While the off-site sampling would be very difficult to confirm a plutonium or uranium explosion(s), the radioactive xenon isotope ratios would be able to confirm whether the seismic event was caused by a nuclear explosion. For instance, analysts would use the activity ratio of xe-135 to xe133 to identify a nuclear test, although they might need to make sure that there was no leakage from nuclear reactors in the vicinity of the test, or if there was a recent leakage, there was no contribution to the samples. (See this paper).

It should be noted that if the unfissioned materials (e.g. plutonium or HEU debris) are vented and collected, it would be easy to determine whether the explosion was from plutonium or HEU device. However, unlike the noble gases, the unfissioned materials would not easily escape into the atmosphere in a normal underground test. Even if some plutonium or HEU debris is vented, in North Korea’s case, it would be hard for that material to be transported over long distances and across borders for off-site air sampling.

Finally, another interesting question is how big an explosion occurred.  What was the likely yield of the weapon that was tested?  Unfortunately, using off-site air sampling would not help to be able to estimate the yield.  In the case of North Korea, we will need to depend on the records of seismic detection.

Scott Moore

By Scott Moore

The very phrase “world peace” has become something of a synonym for naiveté. Yet in recent years, compelling evidence has emerged to suggest that at least one important aspect of world peace, the absence or rarity of inter-state warfare, may in fact be the predictable result of observable, long-term trends. Scholarly work on what might be called the “decline-in-violence” phenomenon emerged following the conclusion of a surprisingly peaceful Cold War, but has lately garnered greater popular attention from journalists and public intellectuals like Harvard psychologist Steven Pinker.

In a world faced with the ever-present risk of terrorist attacks and a looming Iranian nuclear capability, the decline-in-violence proposition is often treated with skepticism. But it’s time for the international security community to think seriously about preparing for a durable world peace instead of the constant threat of world war.

To be clear, we cannot expect a violence-free world any time soon. Instead, the data suggests that certain kinds of violence, most notably inter-state wars, are becoming less common even as other forms of conflict increase. Of course, there are good reasons to be cautious in accepting this interpretation: it’s difficult to categorize and count acts of violence across countries, and many proposed explanations for declines in violence, such as the spread of cultural norms against war and conflict, don’t seem to apply in all cases. But one trend in violence is sufficiently robust to give even skeptics pause: the long-term decline in the number and intensity of inter-state wars. Indeed, it is a striking and little-appreciated fact that despite no shortage of violence of other kinds, the world is at present entirely and blessedly free of traditional, state-on-state warfare.

On-going discussions about the future of international security must include the remarkably low prevalence of inter-state warfare in recent history. To be sure, the international community has made great progress in broadening the focus of security beyond state-state conflict. The US State Department’s 2010 “Quadrennial Diplomacy and Development Review,” which laid out a concept of “civilian power” integrating traditional diplomacy, public engagement with civil society actors, and development aid, stands out as a sterling example. But the fact remains that the basic architecture of international security is ill-equipped to function in a world in which organized, inter-state warfare is rare. Although inter-state wars will still occur in the future, they will be of less importance to international security than during any previous period. It is often said that soldiers prepare to fight the last war instead of the next, but the international security community has an even bigger problem: preparing for war when the future is more likely to be peace.

The threat of peace to an international security community fixated on war is illustrated in the history of the Cold War period and its aftermath. Indeed, the last time international security scholars and policymakers seriously envisioned a stable international peace was right around the time that the Soviet Union acquired nuclear weapons and exposed an intention to occupy Eastern Europe indefinitely. In response, western leaders erected national security structures designed to confront the threat of a theater war in Europe within the context of a global struggle for influence. Subsequently, many hundreds of thousands of lives were lost in proxy battles and inter-state wars, but not in Europe. There something quite unexpected happened: nothing. Despite millions of troops facing one another across the Iron Curtain, a Third

An armored vehicle carries African Union peacekeeping forces on the outskirts of Mogadishu, Somalia, Jan. 19, 2012. (AP Photo).

World War was averted, and western leaders gleefully turned to reaping a “peace dividend” by scaling back their far-flung entanglements to focus on re-integrating the former Soviet bloc.

But these efforts were upended when the rest of the world exploded in new forms of violence, for which the disarming great powers were distinctly unprepared. The Balkans were consumed in vicious internecine warfare which UN peacekeeping forces were powerless to control, and the tiny mountain country of Rwanda became the scene of unimaginable ethnic slaughter in which western countries, haunted by the specter of a failed mission in Somalia, dared not intervene.

In retrospect, it is clear that the international community possessed neither the analytic tools nor the institutional capabilities to deal with a world order in which ethno-religious groups, and not nation-states, were the primary operative actors. Which brings us back to the question: what if organized state violence and warfare is the exception rather than the rule in international security?

The short answer is that the international community remains exceptionally unprepared. Despite a decade in which the United States and many of its allies have been focused on counterinsurgency campaigns, and the US Army boasts that its junior officers routinely run municipal governments, the foreign and security policy apparatus of the great powers remain overwhelmingly focused on state-state conflict. Washington’s rapid strategic re-positioning toward the Asia-Pacific region and the promulgation of an “Air-Sea Battle” doctrine is perhaps the most vivid example of an enduringly myopic focus on traditional geopolitics and the prospect of inter-state warfare. But the real risk of this approach is that it marginalizes the type of long-term capacity-building which relies much more on civilian and non-governmental actors than militaries and Foreign Ministries—and which is necessary in a world where unorganized, intra-state violence is the dominant issue in international security.

Doing so requires reform on at least three basic principles.

First, systemic socioeconomic issues, particularly income inequality, access to basic infrastructure and services, and political participation, should become the central concerns of international security, with a correspondingly greater engagement of disciplines like sociology, anthropology, and geography.

Second, the traditional functional barriers between militaries, diplomatic bureaucracies, and development organizations should be broken down and re-organized to focus more on different time-scales, with some focused on short-term emergency operations like disaster relief and humanitarian intervention, and others completely devoted to long-term, cooperative institution-building.

Third, fora like the UN Security Council, which traditionally represent nation-state actors, should broaden their participatory structures. Particular emphasis should be given to sub-national leaders whose portfolios are primarily social and economic, rather than explicitly political or military, in order to bridge the traditional divide between the study of international and domestic affairs.

Violence is not dead, but certain forms of it, particularly inter-state conflict, are in long-term decline, and that remarkable fact should be a much greater part of discussions about the future of international security. The Munich Security Conference possesses a distinguished history of broadening discussions about international security, particularly by including new stakeholders. This positions it perfectly to help foster a serious discussion about the decline of inter-state warfare as a critical issue for the future of the international security community—and how it can prepare for such a happy though tentative prospect.

Scott Moore is a Giorgio Ruffolo Doctoral Research Fellow at the Belfer Center for Science and International Affairs, Harvard Kennedy School, and a doctoral candidate in Politics at the University of Oxford.