Good morning ladies and gentlemen. It’s a privilege and a pleasure to be back in Taipei and keynote this conference of such distinguished thinkers, who are wrestling with the issues that are shaping the twenty-first century. I want to thank the Institute of International Relations (IIR) at National Chengchi University (NCCU), the Institute of Political Science at Academia Sinica (IPSAS) for their inspiration and hospitality.

This is a key moment. The rise of China is apparent. The decline of the United States is everywhere assumed. The implications are just now unfolding.

Fortunately, the issues before this conference are not matters of war and peace at the present time, though plainly tensions in this region are different and higher today from what they were a year ago. With luck, skill, and good ideas, conflict will be on the farthest shelf of options for a very long time. War—which history teaches us is never unthinkable—nevertheless would be so devastating with the modern technologies of death, that it would surely wreck whatever dreams we may have for the twenty-first century.

Not all the news is worrisome. The reduction in tensions witnessed across the Taiwan Strait over the past two years gives me increasing confidence that the transitions that are occurring in the world—and in the East Asian region in particular—have the potential to be managed peacefully. The agreement this year over the Economic Cooperation Framework Agreement (ECFA) stands out as a particularly important milestone. It promises improved terms of trade, once it goes into force on January 1, and it opens the door to maintaining Taiwan’s competitiveness in an era of proliferating free and preferential trade agreements.

Taiwan’s recent special municipality elections, moreover, suggest that the previous yawning chasm between the two major parties here—on the question of policy toward the mainland—has been reduced to an important degree. Significant differences remain, to be sure, but I remember vividly how on a March day in 2008, Green supporters thought their party was finished, and Taiwan would become a mere province of China.

I think the results that we see today—a vibrant two-party system seeking to win the voters in the middle and avoiding extreme positions—speak to the wisdom of the democratic path to which both parties are committed. It attests to the fundamental common sense of Taiwan’s voters writ large. This is something my mentor, Ambassador Jim Lilley, told me repeatedly always to trust and never to forget.

But if Taiwan’s main challenges are less at home today than they were a few years ago, I think we can say they increasingly will come from the international arena. They are both positive and negative challenges, and include:

  • An apparent shift in the globe’s center of gravity to this region;
  • The still embryonic nature of the region’s security and economic architecture;
  • Unresolved claims on each other’s territories and seas;
  • The region’s historical enmities; and
  • A sense that the old global security structure that stabilized relations among the big powers—so that the small powers could prosper—is now eroding and raising risks to all.

After decades of paying lip service to the migration of trade and capital to the Asia-Pacific, without having adjusted the post-Bretton Woods international economic institutions, the world has been jolted by the recent financial crisis into making long overdue reforms. The G-20—which, as far as I can tell, is more accurately something like the G-24 or G-27, depending on whom you count—has emerged as a key addition to global economic governance, bringing India, Japan, South Korea, Australia, Indonesia, and China to a table that they should be at when their equities are at stake.

Moreover, the international financial institutions of the World Bank and International Monetary Fund have adjusted their voting shares to reflect the rise of emerging economies. 

The Asian-Pacific Economic Cooperation (APEC) continues to gather the region’s leaders and economic ministers, but it certainly remains disappointing compared to its early promise. There is a hope that this year, with the United States as host, a more ambitious APEC agenda can be attempted. The Obama administration’s about-face on trade and recent success in concluding the U.S.-South Korean KORUS free trade agreement offers a suggestion of what can be done to build out trade liberalization under the TPP—Trans Pacific Partnership. Fortunately, Taiwan remains a respected participant in APEC.

But the newest addition to the region’s architecture, the East Asian Summit (EAS)—which holds some early hopes of being a political and security mechanism to manage the region’s issues—excludes Taiwan. It remains unreasonable that so important a trading and investment participant in the region’s economy cannot be found a proper seat in the EAS. 

The assortment of official meetings and task forces associated with the Association of Southeast Asian Nations (ASEAN) continues to soldier on and grow, promising more than delivering. But Taiwan remains an outsider even there.

What is more, it is old thinking that prevents Taiwan from placing its people in the IMF, the World Bank, and other UN-related agencies. Surely, there can be greater accommodation to Taiwan’s realities, all the more so as the political agenda in Taiwan has shifted from confrontation over independence—through constructive ambiguity on issues of sovereignty—to a debate over the means and pace of long-term coexistence and conciliation.

This past year has witnessed the re-emergence of long-dormant tensions over disputed territories in the Senkaku/Diaoyu Islands, the South China Sea, and over rights to exercise forces in the Yellow Sea. Taiwan has a direct interest in two of the three, and more than a passing interest in the outcome of the exchange of words between Washington and Beijing over the Yellow Sea.

Missteps and overreactions were abundant in the recent spat over the Senkaku/Diaoyu Islands and North Korea’s misbehavior. They demonstrated that there is ample mistrust between Beijing and Tokyo, Seoul and Pyongyang. Prior to this year, there were small but encouraging signs that cooperation among China, Japan, and Korea could become the dominant motif in Northeast Asia, through their many meetings in the various regional fora, the Six Party Talks, cooperation under the Chiangmai Initiative, and their trilateral swap commitments. The last is an arrangement to which Taiwan could constructively contribute. But until the recent tensions—fired by ancient enmities and newer miscalculations—are eased, this pattern will be difficult to restart. 

The familiar post-World War II order of U.S.-centered “hub and spokes” relationships appears somewhat surprisingly to endure into the twenty-first century, providing the core security counterweight to prevent the region’s strong centrifugal forces from overwhelming its weaker centripetal forces, a classic balance-of-power function. The strength of the U.S. alliance structure—whether welcome or not in Beijing or elsewhere—appears still to act as a brake on rash action to enforce old claims and settle old scores through military means.

For example, China muted its protests over the George Washington exercising recently in the Yellow Sea, after its North Korean ally rashly fired artillery into the South. Beijing saw that Washington is determined to meet its obligations to Seoul and protests would be unavailing. China preemptively sent only “fishing administration” vessels to make its points in the Diaoyu Islands, choosing not to send naval vessels that could have triggered a tough response under the U.S.-Japanese alliance of mutual defense treaty. This sort of restraint suggests a resident wisdom that should be acknowledged and encouraged.

China could not have been entirely pleased that the foreign ministers of the three allies met unusually in Washington this week to respond to the new signs of disorder. Yet, it remains engaged in diplomacy to seek a solution to the current tensions, as seen in the telephone conversation between Presidents Hu and Obama on Sunday. So long as the United States remains willing and able to provide what is necessary to sustain the region’s security and stability—while keeping open the door to negotiation—the prospect for the region’s smaller powers seems safe enough.

Now, this brings me to the heart of the matter: Is the United States going to be willing and able to do its part to sustain the region’s security and stability over the long haul? In the face of seemingly unsustainable fiscal deficits at home, a sense of growing economic inequality, and political gridlock, should the region begin to prepare for a day when the United States cannot or will not make a decisive difference in the balance of power in the region?

As China closes the technology gap between itself and modern armed forces—and does so on the rising tide of a still rapidly growing GDP—it has already, in the words of Defense Secretary Bob Gates, ended the “sanctuary” status of the Western Pacific, which the United States enjoyed for the previous six decades. In these more contested environs, can America’s partners in the region trust the United States to be able to deliver the right forces, at the right time, to deter or defeat aggression?

For the near term, the answer is clearly “yes.” Just look at the scale and intensity of the recent exercises conducted with South Korea and Japan. If anything, recent events have reinforced alliance relationships that wobbled over the past five or so years with these allies, as they experimented with ideas of greater equidistance between Beijing and Washington. I cite the joint foreign ministers meeting in Washington this week as a clear example.

The United States is importantly engaged in a quiet “strategic rebalancing,” as over time it extracts itself from Iraq and Afghanistan and reallocates resources to the Pacific. The Obama administration has made a welcome commitment to reactivate American involvement in the region, from India through Southeast Asia to Northeast Asia. And it has followed through with actions reflecting its recognition of the region’s growing gravitational pull.

Yet, many in China and around the region perceive a power shift is underway. They see the United States down and China up, and now as the moment to press for a change in the correlation of forces. In the changed domestic media atmosphere of China, these voices are increasingly echoed in official rhetoric, though official policy has been significantly more cautious and low-key.

Over the longer term, however, my honest answer to the question of U.S. sustainability has to be: “I don’t know, but don’t be too quick to count the United States out.” After two long and frustrating wars that diverted massive resources, when some allies are still cutting their defense budgets, and when others that have a growing stake in the world’s systemic order fail to put up their share to maintain it, it would be unsurprising if Americans were to turn to a more non-interventionist foreign policy.

As everyone here knows, America has experienced major financial and foreign policy setbacks before and recovered. Periodically throughout the nineteenth century, and vividly in the twentieth century, the United States was set back severely by the Great Depression and defeat in Vietnam. Each event occasioned endless handwringing and predictions of declinism. And so it is today. Professors at Yale and Harvard rightly note the re-rise of sleeping Asian giants, India and China, but then argue pessimistically that it means the necessary decline of the United States.

My confession that I do not know for sure whether the United States will rejuvenate itself does not mean that it’s impossible or even unlikely. In fact, I think there are significant grounds for optimism that the United States will bounce back. We are in only the second year of the greatest financial crisis of the post-war era. Typically, the United States has required six to ten years to conduct three or four elections to cull the Congress and administration that failed—and to surface new ideas and leaders—before the comeback becomes apparent.

President Roosevelt needed ten years to emerge from the Great Depression. President Reagan pronounced that “it’s morning again in America” fully nine years after the last helicopters lifted off from the embassy in Saigon.

The United States still has competitive advantages in innovation, demographics, technological savvy, quality universities, a diverse and enterprising population, and a Constitution that abhors and punishes failure. Massive correctives have already been applied to the industries that engaged in the excesses of the past decade, even though Americans are still typically and vocally impatient with the pace of recovery. That impatience is itself the engine that drives change, and it has an excellent chance of working its will again.

China, by contrast, is in a popular mood of triumphalism, combined paradoxically with a hypersensitivity to perceived offenses. In 2008, the spectacular Olympics and Beijing’s reaction to protests by Tibetans symbolized this odd mix of feelings among Chinese.  Strong GDP growth, accumulated reserves, and a growing economic presence abroad stand in contrast with the troubles faced by America and the West. China’s media—not free to dwell on China’s shortcomings—wallow in ours. Maybe, they say, it is China’s turn to lead.

But there is much in the superlative language of the media—China’s the number two economy and will overtake the United States, China sets the globe’s commodity prices, China has the world’s largest banks, etc.—which is very familiar, and should be somewhat worrisome to Beijing. In fact, the current success of China is plainly modeled on the examples of its Asian forerunners, especially Japan. We remember Ezra Vogel’s bestseller Japan as Number One, and we can see what’s happened to Japan since.

Like Japan and other economies in their time, China has suppressed the earning potential of its vast masses to harness their savings to provide below-cost capital to its favored industries. This investment-led strategy is a good model to industrialize and break into export markets, while permitting living standards to rise, but only for a limited time. It importantly greases the functioning of a closed political system, like China’s, which often rewards relationships before performance. But like American excesses in consumption, an investment-led economy is also unsustainable if domestic consumption does not eventually rise to replace it. There will come a point when China’s infrastructure and industrial capacity will max out, and some other factor must drive growth.

Given China’s size, this pattern will probably be sustainable longer than the experiences of Japan, Korea, and Taiwan. The suppressed earnings that fueled the development of China’s coastal region now have a decade or more to develop China’s hinterland.

And it should be noted that, unlike Japan, China has military capability, a political system, and values that set it apart and make its future less predictable.

China will argue that the leading role of investment is necessary to maintain stability, even as it distorts pricing in the global marketplace. This subsidization of investment is really the crux of today’s international arguments over global rebalancing, the valuation of the renminbi, savings versus consumption, and trade disputes.

This leads me to suggest that at this conference—as you discuss China, the regional alliances, and the prospects for diplomatic truce—you take into account the potentially conflicting timetables at work. In my view, China has a worrisomely premature sense that its moment of destiny has arrived. It underestimates the United States and fails to see that the underestimation may also be premature. And China has an unrealistic sense of what price distortions the world trading system will bear, in order for China to meet its long-term development goals and maintain employment.

China may think now is the moment to seek to secure its interests, but it lacks the strength to succeed through direct confrontation. If it waits for a few years to build its strength, it may discover that the United States is back and a tougher potential adversary. And if it thinks the world will sit by and permit market share to be taken by a heavily subsidized China without resistance, it is likely to be surprised, sooner rather than later.

This misalignment of timelines can be very destabilizing. It is no challenge to envision a downward spiral in China’s relations with its neighbors and the United States. Just look at the New York Times’ breathless coverage lately. At this moment, there is a need for a rare level of deft diplomacy—combined with effective and targeted deterrence—to keep relations civil through the remainder of this year and 2011. The following year—with elections in the United States, Taiwan, and selections in China, plus others—the potential for trade and regional frictions will increase dramatically. Constraining competition and reinforcing cooperation are the best option. Containment of China or attempting to exclude the United States will lead to failure. 

Now more than ever, we need officials who can be tough at times when necessary and conciliatory when diplomacy has a chance, who listen and do not shout, who are culturally sensitive but strategically steady and clear-headed. The problems are likely to accumulate. The patience of our publics is limited. And the rewards of public service are few, while the work is hard.

I very much look forward to hearing what your proceedings may say about these thoughts about the future and their implications for Taiwan and its diplomatic truce.

Thank you.