The United States achieved its dominant position in East Asia in the aftermath of World War II. Washington defeated Japan and created a network of alliances to both prevent any imperial Japanese renaissance and contain Soviet and, later, Chinese expansion. The Cold War with China, which went unrecognized for three decades, and North Korea, which remains unrecognized after six decades, was very chilly indeed.

But that world has largely disappeared. Japan has recovered and created the world's number two economy. The Soviet Union is gone. Maoist China lives on only in the late dictator's ubiquitous image. Vietnam has joined the global economy. South Korea has raced past the decrepit Democratic People's Republic of Korea. Other countries, ranging from Australia to India, are capable of playing a stabilizing role in the region.

The recent naval clash between South and North Korea demonstrates that the potential of conflict remains. However, without any link to a global hegemonic competitor like the Soviet Union, such regional instability poses little threat to the United States. Indeed, Pyongyang doesn't even pose much of a threat to the Republic of Korea. How else to explain why the ROK has for years failed to further expand its own military while subsidizing its supposed antagonist?

Yet Washington's Cold War alliance structure remains essentially unchanged. The United States maintains one-sided "mutual" defense treaties with Japan and South Korea. American officials routinely resist host nation demands to reduce deployments and close bases. That America must remain both militarily dominant and guarantor of regional peace is taken for granted. In Washington the People's Republic of China's apparent determination to create a military capable of deterring U.S. intervention along its border is treated as a threat to American security.

What has ever been must ever be appears to be the basis of U.S. foreign policy and military deployment.

The Obama administration should pursue a different course, a transformational agenda, emphasizing economic integration while promoting military detachment. America still has a major economic role to play, but should increasingly devolve defense responsibilities on countries in the region.

The most important relationship for the twenty-first century will be that between the existing superpower and the potential superpower. Washington should strengthen economic and trade ties with China. That requires maintaining an open market at home while working through contentious disputes, such as the value of the Yuan. The United States also needs to address its own irresponsible fiscal practices which may discourage Chinese purchase of U.S. government securities and investment in private American companies.

Moreover, Washington must forge a cooperative relationship on difficult regional issues like North Korea. The PRC has much at stake in a stable Korean peninsula; China also has much to gain from taking the lead in promoting diplomatic solutions of regional problems. The president should press hard for a more active PRC policy to support reinvigorated U.S. engagement with the North. In that case, Beijing should be prepared to take forceful measures if Pyongyang rejects a peaceful solution. Successfully defusing the North Korean geopolitical bomb would offer some of the "strategic reassurance" which the administration has talked about.

The United States should speak frankly about the importance of human rights, while recognizing Washington's limited ability to influence the PRC's behavior. An improved bilateral relationship is more likely than isolation to encourage greater respect by Beijing for the liberty of its citizens.

Japan, with a new and untested government in Tokyo, is likely to be another tough test for the president. He should treat Japan as a full partner. In economics, that means proposing a free-trade agreement (FTA). On defense, that means shifting to genuinely mutual security ties.

Rather than merely adjust its controversial Status of Forces Agreement, Washington should withdraw its garrisons from Japanese soil, turning defense responsibility for Japan over to Tokyo. The Japanese people must decide on the foreign policy and military forces which best serve their interests, but they should understand that the United States will no longer step into any resulting security gap.

Washington also should encourage greater cooperation between Japan and its neighbors. Some in East Asia continue to express disquiet at the thought of Tokyo taking on greater security responsibilities, but World War II ended more than six decades ago. The Japanese do not have a double dose of original sin and the Americans should no longer play geopolitical wet-nurse for nations which long ago developed the means to assert their own interests. Washington should engage North Korea over its nuclear program—in fact, bilateral talks are planned later this year.

At the same time, the United States should inform the North that full international integration requires the participation of South Korea, China, Japan, and Russia as well. The president should use this trip to begin a concerted effort to coordinate South Korea, Japanese, and U.S. policies regarding Pyongyang. However, Washington should allow the Republic of Korea (ROK) to lead the nonproliferation campaign. The South, with some forty times the North's GDP and twice its population, is well able to deter North Korean adventurism. Seoul also has the most at stake in maintaining a peaceful peninsula. As the U.S. steps back from its dominant military role, the ROK and its neighbors should step forward.

At the same time, Washington should seek to tighten economic integration. The starting point for that strategy should be an announcement—appropriately made at the Asia-Pacific Economic Cooperation forum—of a push to ratify the FTA with South Korea and a campaign to promote further trade liberalization in a region that already has 168 FTAs in force, only two of which involve the United States (with Australia and Singapore).

President Obama needs to promote a changed attitude as much as offer specific policies. The new government in Japan appears to be particularly interested in promoting a regional order, called the East Asian Community, apart from the U.S. Washington should embrace rather than resist such an approach—which would represent genuine "change" from today's policy, which is still rooted in a nonexistent Cold War.

America will be most secure if friendly states in East Asia work together to confront sources of instability, promote respect for human rights, and encourage peaceful settlement of disputes. Such a cooperative venture, backed by a willingness to commit real resources to defense, as reflected, for instance, in Australia's defense white paper earlier this year, also would help channel China's rise in peaceful directions.

The United States will remain engaged in East Asia. America's cultural and economic ties to the region are long-lasting and mutually beneficial. But Washington no longer has any need to attempt to preserve regional military hegemony. And at a time of economic crisis the United States is losing its financial ability to do so. It will take time to transform America's military role. But President Obama should begin moving the region into a new era of less security dependence on Washington.

Communist Party interrogators accused Cheng of being a spy, but her real "crime" was that she was viewed as a "capitalist roader". She had attended the London School of Economics in the 1930s, where she met her husband, Kang-chi Cheng, who later became general manager for Shell in Shanghai.

When he died, in 1957, Nien Cheng became a special adviser to the new general manager. She was the highestranked businesswoman in China at the time. Her skills in dealing with party officials were invaluable and helped Shell stay in China until the start of the Cultural Revolution in 1966.

During her imprisonment, Cheng refused to admit to any wrongdoing. She was tortured and nearly died, but her determination to survive and her deep faith gave her the strength to persevere. She was released from prison on March 27, 1973, only to find the Red Guards had murdered her only child, Meiping, for failing to "confess" and denounce her mother as a "class enemy". Cheng's one hope in life was gone; she left China forever in 1980, and settled in Washington in 1983.

Anyone who knew Cheng could immediately see that she was special – even the doctor at the No 1Detention House said he never met a more "truculent and argumentative" prisoner. When she learned of her imminent release, she refused to leave the prison unless the authorities declared, in writing, that she was "innocent of any crime or political mistake". She insisted that they offer "an apology for wrongful arrest", and called the official statement "a sham and a fraud".

After nearly seven years in prison, she declared: "I shall remain here until a proper conclusion is reached about my case." The authorities refused, and the guards had to drag her out of prison.

It is ironic that Cheng learned about socialism during her studies at the London School of Economics, where she became a leftist. In her essay The Roots of China's Crisis, she wrote: "When I read a book on the Soviet Union by Sidney and Beatrice Webb, I thought, 'How wonderful and idealistic socialism sounds'."

Later, after her husband had served in Australia as a diplomat for the Nationalist government, the Chengs made the fateful decision to return to China in late 1948. They and many of their Western-educated friends were seduced by Mao Zedong's call for democracy, and wanted to help build a new China.

In her essay, Cheng notes that while she had learned about socialist ideals, such as the apparent success of Soviet central planning and state ownership, her professors never talked of "class struggle" or "the realities of communist rule".

What she painfully discovered was that in a society where individuals have no economic freedom, and there is no genuine rule of law, no one is safe from the power of the state. The Communist Party under Mao's iron fist destroyed civil society and traditional culture.

As she wrote in Life and Death in Shanghai, a new China was created after the communists' victory in 1949, but it was not the socialist ideal she had envisioned. Rather, the party created "mindless robots, unburdened by the capacity for independent thinking or a human conscience". Success depended on power, and justice vanished. "The result was a fundamental change in the basic values of Chinese society," she wrote.

Mao's mantra was: "Strike hard against the slightest sign of private property." Cheng's property, including her priceless porcelain collection, was confiscated. Her daughter was murdered and her freedom destroyed by the state.

While in jail, in 1971, the inmates were assembled and an official announced: "Many of you are here precisely because you worshipped the capitalist world of the imperialists and belittled socialist China. You placed your hope in the capitalist world and believed that one day capitalism would again prevail in China."

Today, mainland China is perhaps more capitalist that any other country, but it is "crony capitalism". The nation lacks full-fledged private property rights, especially in land; there is no independent judiciary to protect people and property against the party's monopoly on power; and freedom of religion and expression are sharply curtailed. The battle for justice that Cheng fought has not yet been won.

In her book, Cheng recognised the significance of president Richard Nixon's visit to China in 1972, and the importance of engaging China. She witnessed the progress the mainland had made since Deng Xiaoping's opening to the outside world in 1978. She understood the critical role of trade and investment in linking China to the West. But she also understood that, "Unless and until a political system rooted in law, rather than personal power, is firmly established in China, the road to the future will always be full of twists and turns."

In addition to delivering a major address at an event organized by the US-ASEAN Business Council, Lee also had an opportunity to provide his insights to President Barack Obama during a meeting in the Oval Office. His message to the American audience was unambiguous. It included a warning that America has overcommitted itself in Afghanistan and the rest of the Greater Middle East just as the global and economic power is shifting to the Pacific Rim. But Singapore and other American allies want the U.S. to remain engaged in the Asia-Pacific and counter-balance - not contain! - China, the region's leading economic powerhouse.

This week, as Obama begins his first trip to the Asia-Pacific region since taking office he is probably going to keep Lee's advice in mind, trying to convince his hosts that the U.S. is returning to play a energetic leadership role in the region. Obama should be applauded for enunciating his intentions to re-orient American global priorities towards the Pacific Rim, with the current tour of the region highlighting this change. Washington's commitment to renewed U.S. engagement in Southeast Asia will be demonstrated by Obama's participation in the side gathering of the Association of Southeast Nations (ASEAN) members in Singapore. It was the willingness on the part of the new U.S. administration to engage Burma that made it possible for Obama to attend a meeting of the organization that includes that military regime as a member.

But during the 10-day tour that will include stops in Tokyo (where Obama will deliver one of his "major addresses), Singapore (where he will attend the in the Asia Pacific Economic Cooperation forum or APEC leaders' meeting), in Beijing and in Seoul, the president is going to meet officials and to address audiences that have concluded that the U.S. is losing ground in the region and that China will assume its position as an hegemon sooner or later.

Indeed, America has been in the process of retreating from the Asia-Pacific region for most of the eight years of the administration of President George W. Bush. It was not a secret that U.S. economic and security partners in the Asia-Pacific region have been expressing their concern that the preoccupation of Washington with the political-military instability in the Greater Middle East has diverted American attention from East Asia and its dramatic economic transformation, starting with the rise of China.

It was understandable that in the aftermath of 9/11, the Bush Administration would be investing much of its time and energy in leading the global campaign against terrorism. But the fixation with this problem, which led the U.S. into fighting two long and costly wars and launching numerous diplomatic initiatives in the Greater Middle East, created the impression that global trade and investment, issues that remained central to the emerging economies of the Pacific Rim, have been placed on Washington's policy backburner with high U.S. officials spending more time traveling to Cairo and Jerusalem than to Beijing and Jakarta. And in East Asian countries like in the rest of the world, U.S. unilateral approach helped ignite strong anti-American sentiments.

It was not surprising that the elites and publics in the region felt at times that Washington was giving them the cold shoulder, especially after former Secretary of State Condoleeza Rice had skipped two of the ASEAN's ministerial meetings and instead ended-up doing more diplomatic shuttling in the Middle East. In fact, even the annual APEC meetings, where investment and trade were supposed to dominate the discussions, proved to be one more occasion for President Bush to press his anti-terrorism campaign.

In a way, the American neglect of the Asia-Pacific region and its policy concerns has not only alienated its friends in the region. It also hurt long term U.S. economic and strategic interests. Just as the Americans were being drawn to more messy military and diplomatic quagmires in the Middle East, the Chinese were launching new "charm offensives" in the Asia-Pacific region, expanding their trade and investment and applying their soft power.

The sentiment that China was ascending while American power was receding, became more pervasive among East Asians in aftermath 9/15, the day in which Lehman Brothers had filed for bankruptcy. That event marked the onset of a devastating financial earthquake in Wall Street that ended-up producing the most destructive global economic crisis since the Great Depression of the 1930's. The crisis and its aftershocks seemed threaten the intellectual assumptions of American geo-economic policies of the 1990's, and in a way, the "irrational exuberance" about the American economy and the entire creed of globalization that was so popular among the Pacific Rim economies -- encouraging the spread of American-style free markets, de-regulating of American and global financial markets, liberalizing global trade, and expecting China and other emerging markets to join and support an American-led geo-economic and geo-strategic system.

Instead, while the tenets of American economic policymaking have been challenged at home and abroad, the Chinese economy has emerged as a winner out of the current crisis which explains why officials and executives in the region seem to find the Chinese economic and political model more suitable for their long-term needs. While Obama's charm offensive in the Asia-Pacific is certainly welcomed news for U.S. partners in the region, they also recognize that with protectionism rising as a political force in Washington it is unlikely that the Obama Administration will be launching new free trade initiatives any time soon. Hence the growing expectations in the region that the economies of East Asia could be moving in the direction of forming a regional economic community dominated by China.

Start with the locus classicus of American alliances, NATO. Several former heads of state and other policymakers from Central and Eastern European NATO members greeted the Obama administration six months into its term with a hectoring letter demanding Washington pay more attention to their region. The letter argues that these leaders' "ability to sustain public support at home for our contributions to Alliance missions abroad … depends on us being able to show that our own security concerns are being addressed in NATO and close cooperation with the United States."

In other words, these countries have options, and if Uncle Sam would like to continue receiving their contributions in places like Afghanistan, Washington had better pony up. The authors have several suggestions for us, one being to deploy military personnel on their territory. After all, they argue, "at a regional level and vis-à-vis our nations," Russia acts as a revisionist power.

It is easy to understand why these countries, given their experience with Russia, want increased American support. The trouble is that capitals across Central and Eastern Europe have shown precious little interest in carrying their own weight within the NATO alliance.

This past summer, for example, the Czech Defense Ministry announced it was cutting its defense budget by more than 10 percent. Other countries complaining of the looming threat from Russia, such as Poland, Estonia, Latvia and Lithuania, all spend less than 2 percent of their gross domestic product on defense, an anemic figure.

Note that the countries could afford a robust defense against Russia if they chose. In 2008, the combined GDP of the NATO members added after the Cold War was roughly equal to Russia's. Along with wealthier Western European countries, these nations could keep Russia from pushing them around.

The simplest explanation for these countries' low defense spending is that their leaders know that Washington will do the work for them. And why should they pay for a service that will be provided anyway? That was more or less how things went during the Cold War.

U.S. alliances in Asia are almost as perverse. During his recent visit to Japan and South Korea, Defense Secretary Robert Gates faced a plucky new Japanese prime minister, Yukio Hatoyama. After imploring Hatoyama to continue Japan's miniscule contribution to the war in Afghanistan and not to reconsider the deal to realign U.S. forces in Japan, Gates was asked whether the U.S. military role in Japan might be scaled back. Offering the obligatory reference to the countries' "shared interest" in regional security, Gates admitted that "the primary purpose of our alliance from a military standpoint is to provide for the security of Japan … It allows Japan to have a defense budget … of roughly 1 percent of GDP."

This is an excellent reason why the Japanese should support the alliance, but it raises the question of why U.S. taxpayers should want to pick up the tab for Japan's security.

The next day, Gates was in South Korea, where he reassured the South Koreans that the United States would continue to provide extended deterrence to Seoul, "including the nuclear umbrella." There is such a thing as too much reassurance, however. Gates' statement likely had two effects: one, to diminish Seoul's concerns about the threat posed by the North, and two, to diminish Chinese apprehension that a nuclear North Korea may ultimately lead to a U.S. departure from Japan and South Korea, possibly causing those countries to develop their own nuclear arsenals.

Given that Washington's current policy on North Korea would benefit from a greater, not lesser, concern about the future in both Seoul and Beijing, Gates' explicit promise of nuclear extended deterrence to Seoul likely dampened the admittedly low prospects for progress on the North Korean nuclear issue.

America's alliances are no longer considered responses to security challenges. Instead, they have become ends in themselves. In an era of record-breaking budget deficits and serious economic problems at home, the billions of dollars Uncle Sam pays each year to baby-sit Europe and East Asia ought to be coming in for scrutiny, not perpetual affirmation.

Making a public pledge to shield Japan and South Korea with America's nuclear umbrella was unwise on two counts. First, it eliminates the principal incentive for Beijing to regard North Korea's nuclear weapons program as a serious problem for China, not just the United States and its allies. As columnist Charles Krauthammer aptly put it when the current crisis began in late 2002, America's nightmare is a nuclear-armed North Korea, but China's nightmare is a nuclear-armed Japan.

By reiterating Washington's commitment to extended deterrence — especially the nuclear component — U.S. officials send a message to Chinese leaders that they don't need to worry about Japan (or South Korea) developing an independent deterrent. In fairness to Gates, he was not the first U.S. official to make that blunder. After North Korea's first nuclear test, Secretary of State Condoleezza Rice issued a similar, highly public pledge.

Apparently U.S. leaders don't know even the basics about playing international diplomatic chess. Obligingly eliminating the specter of a nuclear-arms race in northeast Asia is akin to casually surrendering one's queen in a chess match with Chinese officials. Granted, the United States might want to discourage Tokyo and Seoul from building their own nuclear arsenals, thereby exacerbating the global proliferation problem, but it is unwise to make high-profile public statements to that effect. Any continuing commitment to extended deterrence should be confined to quiet, private assurances to Japanese and South Korean leaders.

Washington's public statements, as well as private discussions with the Chinese, need to adopt a totally different tone: that a nuclear-armed North Korea changes the entire strategic equation in northeast Asia, and that the United States cannot possibly guarantee that Japan and South Korea will not decide at some point that their own security needs dictate building independent deterrents. That is the one development that might prod Beijing into getting far tougher with North Korea on the nuclear issue.

The fawning U.S. promises to persist with extended deterrence not only play into the hands of Chinese leaders who want to avoid taking a hard-line toward Pyongyang, it plays into the hands of security free riders in Japan and South Korea. For decades, those two countries have woefully under-invested in their own defenses. Even as Japanese and South Korean leaders insist that North Korea poses a serious threat, they persist with anemic defense budgets. Although it shares a border with perhaps the most ruthless and unpredictable country in the world, South Korea spends less than 2.5 percent of its gross domestic product on the military. Seoul continues to rely on the United States for critical elements of its defense, especially air and naval power.

Security free riding is also alive and well in Japan. Indeed, South Korea's military effort seems robust compared to Japan's. Despite North Korea's repeated saber-rattling, Tokyo spends a paltry 0.9 percent of its GDP on defense, and that situation may get even worse under the new left-leaning government.

U.S. officials who make repeated pledges to continue extended deterrence are enablers of such irresponsible behavior on the part of Washington's northeast Asian allies. Not only do such pledges discourage Japan and South Korea from building independent nuclear capabilities, it allows them to refrain even from taking prudent measures to build more robust conventional capabilities. It is just too easy for them to rely on the United States to take care of North Korea or any other security threats that might emerge.

Secretary Gates did both America and the nations of northeast Asia a disservice with his comments in Seoul. His statements, and the policies they represent, may make the North Korean nuclear problem even more dangerous than it is already.

Last month, the Democratic Party of Japan ousted the Liberal Democratic Party, which had held power for most of the last 54 years. Exactly how policy will change is uncertain: The DPJ is a diverse and fractious coalition.

But Washington is nervous. U.S. policymakers have grown used to Tokyo playing the role of pliant ally, backing American priorities and hosting American bases.

That era may be over. Although Prime Minister Yukio Hatoyama insists that he wants to strengthen the alliance, before taking office he wrote in the New York Times: "As a result of the failure of the Iraq war and the financial crisis, the era of U.S.-led globalism is coming to an end."

Of course, there are significant barriers to any dramatic transformation of Japanese policy. Indeed, during the campaign the DPJ platform dropped its earlier pledge to "do away with the dependent relationship in which Japan ultimately has no alternative but to act in accordance with U.S. wishes, replacing it with a mature alliance based on independence and equality."

Nevertheless, the DPJ possesses a strong left wing and vigorously opposed the ousted government's logistical support for U.S. naval operations in the Indian Ocean.

Other potentially contentious issues include reducing the military presence on Okinawa, renegotiating the relocation of the Marines' Futenma Airfield to Guam at the Japanese expense, cutting so-called host nation support, and amending the Status of Forces Agreement.

Some Obama administration officials privately acknowledge that adjustments will be necessary. However, the day after the election State Department spokesman Ian Kelly said that there would be no renegotiation of the Okinawa accord.

This might seem like a good negotiating tactic, but it didn't go over well in Tokyo. Washington's dismissive response gives the Japanese one more reason to want to escape dependence on the U.S.

Actually, Americans should support a transformation of the alliance. The current relationship remains trapped in a world that no longer exists.

Japan has the world's second (or third, based on purchasing power parity) largest economy, yet Tokyo remains dependent on America for its security, a minor military player despite having global economic and political interests.

There are historical reasons for Tokyo's stunted international role, but it is time for East Asian countries to work together to dispel the remaining ghosts of Japan's imperialist past rather than to expect America to continue acting as the defender of the last resort.

Since Japan and Asia have changed, so should America's defense strategy. There should be no more troops based on Japanese soil. No more military units tasked for Japan's defense. No more security guarantee for Japan.

The U.S. should adopt a strategy of offshore balancer, expecting friendly states to defend themselves, while being ready to act if an overwhelming, hegemonic threat eventually arises. China is the most, but still unlikely, plausible candidate for such a role — and even then not for many years.

Washington's job is not to tell Japan — which devotes about one-fourth the U.S level to the military — to do more. Washington's job is to do less.

Tokyo should spend whatever it believes to be necessary on its so-called "Self-Defense Force." Better relations with China and reform in North Korea would lower that number. Japan should assess the risks and act accordingly.

In any case, the U.S. should indicate its willingness to accommodate Tokyo's changing priorities.

It's the same strategy that Washington should adopt elsewhere around the globe. The Marine Expeditionary Force stationed on Okinawa is primarily intended to back up America's commitment to South Korea. Yet, the South has some 40 times the GDP of North Korea. Seoul should take over responsibility for its own defense.

Even more so the Europeans, who possess more than 10 times Russia's GDP. If they don't feel at risk, there's no reason for an American defense guarantee. If they do feel at risk, there's no reason for them not to do more — a lot more.

Defending populous and prosperous allies made little sense in good economic times. But with Uncle Sam's 2009 deficit at $1.6 trillion and another $10 trillion in red ink likely over the next decade — without counting the impact of any additional financial disasters — current policy is unsustainable. The U.S. essentially is borrowing money from China for use to defend Japan from China.

In Washington, officials are rounding the wagons to protect the status quo. But America's alliance with Japan — like most U.S. defense relationships — is outdated. Both America and Japan would benefit from ending Tokyo's unnatural defense dependence on the U.S.

For most of the twentieth century, China was an international nullity. The sordid remains of a once proud imperial court were pushed overboard by a nationalist revolution, but the result was divided warlord rule rather than a modern democratic state. Decades of conflict ensued among the murderous Japanese invaders, incompetent and corrupt nationalists led by Chiang Kai-shek, and brutal Chinese Communist Party (CCP) cadres, headed by Mao Zedong. The new regime's international influence was limited. Mao's bizarre economic theories and bitter political feuds convulsed party, state, and people. Once Beijing fell out with the Soviet Union, China's foreign reach shrank even further.

But the PRC's potential remained. The nation possessed the world's largest population and its people were entrepreneurial successes around the world. China boasted an ancient and proud civilization which once had dominated East Asia. All that was necessary was to release China's people from the strictures of totalitarian communism. Mao's death more than thirty years ago began that process.

Today the PRC is a dramatically different country. Hundreds of millions of people have moved out of immiserating poverty. Private businesses have proliferated. An independent sector has arisen. Although the authorities maintain the CCP's political monopoly, other aspects of the once totalitarian system have weakened: even religious liberty has expanded, despite continuing persecution.

But Beijing's growth poses a significant challenge. The economic benefits of China's integration into the international trading system have been enormous. However, the PRC is presenting an alternative authoritarian model rather than joining the democratic West. And Beijing increasingly is asserting itself — and building a military to match.

The Pentagon annually issues a report on Chinese military outlays. Although the Department of Defense has eschewed alarmism, its latest publication noted: "much uncertainty surrounds China's future course, particularly regarding how its expanding military power might be used." The latest National Intelligence Strategy warned that China's "increasing natural resource-focused diplomacy and military modernization are among the facts making it a complex challenge."

Yet however impressive the PRC's recent military parade — involving 8,000 personnel and 151 planes — Beijing remains far behind the United States. Washington starts at a much higher base. The American armed forces are the most capable on earth. U.S. ground forces are better trained, equipped, and prepared than those of China.

Washington's nuclear arsenal is far larger and more sophisticated. U.S. air power is without peer. America possesses eleven carrier groups compared to none for Beijing.

Nor will it be easy for China to catch up. Especially since PRC military outlays remain far behind those of America. U.S. defense spending in 2009 (the fiscal year ended September 30) ran roughly $700 billion. That's about seven times estimated Chinese expenditures. Subtract war outlays and the U.S. government still devotes roughly five times as much to the military as does Beijing. Even if the latter accelerates its military modernization, it will take years if not decades to match America's outlays, let alone move into the lead.

Thus, to talk about China as a security threat in the near- to mid-term verges on the bizarre. That doesn't mean Beijing poses no challenge to the U.S. government. The PRC will soon threaten American domination of East Asia.

The real issue is America's ability to attack the PRC. Observes former–Pentagon official Chas Freeman, the Chinese "have no intentions of fighting a war in the United States, but we have done a lot of planning about fighting them on their territory."

But possessing the ability to attack China at will is not the same as the ability to defend America against all comers. The latter is the military's central mission. The former is convenient, not essential, and mostly benefits America's friends and allies rather than America. As Washington's post–Cold War dominance ebbs, it will be much harder for the United States to intervene on behalf of other nations.

Today America's security guarantees appear to offer a free lunch. Washington need merely threaten to go to war, and any potential adversary is expected to back off. But China is creating a military that can deter U.S. intervention.

Beijing doesn't have to be able to defeat America. The former doesn't even have to match the U.S. military. China merely need create sufficient risk to prevent Washington from using its superior forces. There has, for instance, been near hysteria in some circles about the possibility that Beijing might equip one carrier. Notes Peter Singer of the Brookings Institution: "the military dynamic in the Pacific is changing. But it is not because the Chinese may one day gain a small number of their own, far-worse aircraft carriers. It is what they are planning to do to overcome our own aircraft carriers and other traditional strengths."

To forestall American intervention, the PRC is developing nuclear force sufficient to prevent Washington from attempting nuclear coercion, an arsenal of missiles and subs to sink U.S. carriers, and asymmetrical warfare capabilities to blind American satellites and fry American electronic systems. The ultimate result, in the words of Daniel Blumenthal of the American Enterprise Institute, will be to raise "the costs to us of accessing the region to defend our allies and help keep the peace."

That price already is rising. For instance, Reuters reports: "American naval strategists are concerned that China may have developed an anti-ship ballistic missile, a Dongfeng 21-D, that could force U.S. aircraft carriers to keep their distance in the event of an attack on self-ruled Taiwan." Similarly, notes the Director of National Intelligence, Dennis Blair, "China is very aggressive in the cyber-world." To acquire these capabilities Beijing need spend far less than Washington will have to spend to overcome China's growing capabilities.

But a U.S. retreat need not leave America's friends helpless. Rather, they should do much more on their own behalf. For instance, though current bilateral relations have been improving, Taiwan is the most likely target of an attempt at Chinese coercion. But Taipei need not sit naked next to its big neighbor. Taiwanese Prime Minister Wu Den-yih recently observed: "Taiwan needs to ensure it has strong defense (against China), so it is necessary to continue to procure weapons to achieve that goal." The United States should fulfill its promises to sell Taiwan the necessary weapons.

Japan, with an economy that remains larger (on an exchange rate basis, at least) than that of the PRC, could do far more. In recent years Tokyo has been adopting a tougher stance towards Beijing. With a new party taking power, the Japanese government has a unique opportunity to reconsider Japanese foreign policy. The Democratic Party of Japan appears inclined to tilt more towards the PRC, but a shift in U.S. policy might change the DPJ's attitude. Paul Giarra and Michael Green, of the group Global Strategies & Transformation and the Center for Strategic and International Relations, respectively, recently observed: "U.S. officials will have to lay out constructive thinking in Tokyo about how to add more capability in the U.S.-Japan alliance. The U.S. should have serious talks with its allies about gaps in strategic defenses caused by the Chinese military's build-up."

But these negotiations should emphasize devolution. The U.S. should suggest that Tokyo consider its options in a world in which Washington no longer maintains bases, troops, and fleets on station to fight for the security of prosperous, populous nations that have grown used to being subsidized and protected by America.

So, too, South Korea. The Republic of Korea (ROK) enjoys about forty times the GDP and twice the population of North Korea. As the ROK looks beyond the Korean peninsula, it should work with Japan and the ASEAN states to create an environment which encourages the PRC to rise peacefully, as Beijing has promised. Historically China has been cautiously assertive, not recklessly aggressive. The better armed and more willing to cooperate with their neighbors, the more likely America's friends will be to deter conflict — without relying on the U.S.

The outcome of the twenty-first century depends much on the nature of the relationship between the globe's superpower, the United States, and the globe's likely next superpower, China. America's rise transformed the international order without causing world conflict, while Germany's ascent triggered two global conflagrations. Will the existing international order — and particularly the United States — successfully accommodate the PRC's growing influence?

Washington has vital interests to protect, but not all of its interests are vital. Defending American territory, liberties and people at home is essential; ensuring dominant American influence half a world away is not. And doing the latter at acceptable cost will grow ever more difficult. By spending a fraction of America's defense budget Beijing is constructing a military able to deter U.S. intervention against China. To overcome this force Washington will have to spend far more, money which it does not have. It is one thing to ask the American people to sacrifice to defend their own nation. It is quite another to demand ever higher financial exactions to protect populous and prosperous allied states. Especially since an increasingly wealthy and influential China is unlikely to retreat gracefully and accept perpetual U.S. hegemony.

With China on the move, DoD observes that "The United States continues to work with our allies and friends in the region to monitor these developments and adjust our policies accordingly." But the resulting policy adjustment should be to reduce America's international ambitions rather than increase America's military spending. Even as President Obama seeks to improve Washington's relations with the PRC, the United States should replace dominance with defense as the core of its foreign policy.

But it was his inept handling of the destruction caused by Typhoon Morakot in early August that has truly imperiled his political future. Rescue efforts were poorly executed, and criticism poured in that a more competent performance might have saved at least some of the 670 people who perished. Ma himself apologised to the Taiwanese public, but the pervasive anger barely abated. On September 7, the Morakot fiasco caused prime minister Liu Chao-shiuan to resign, followed a few days later by the rest of his cabinet. By then, Ma's approval rating had plunged to 20 per cent - a dangerous level for any incumbent.

There is an eerie parallel between Ma's misfortunes in the aftermath of Morakot and US president George W. Bush's political problems after Hurricane Katrina. Even before that storm, Bush was a highly controversial figure, but the mishandling of the rescue efforts in New Orleans greatly escalated public doubts about his judgment in appointing high-level officials and his overall competence as president. He was never able to erase that perception, and it is likely that Ma will experience a similar problem.

That ongoing shift in Taiwan's political landscape has far-reaching implications. Tensions with Beijing have declined dramatically since Ma took office, in marked contrast to the situation that existed with his predecessor, Chen Shui-bian. Mainland China and Taiwan have established a regular scheduled commercial airline service, mainland tourists are visiting the island in robust numbers, and a wide range of economic ties are growing at a brisk rate.

Political relations have also improved, as the two sides are engaging in direct negotiations for the first time in a decade, and Beijing has not only allowed Taiwan to acquire observer status at the World Health Organisation but has stopped trying to wean away the two dozen countries that still maintain diplomatic relations with Taipei. The Chinese Communist Party even sent Ma a congratulatory letter when he was elected chairman of the Kuomintang - a gesture that would have been highly improbable only a few years ago. For its part, Taiwan dropped its provocative annual bid to get a seat in the UN General Assembly.

True, not all manifestations of tensions have disappeared. Most troubling, Beijing has not reduced the number of missiles that it deploys across the strait from Taiwan. But, on the whole, relations between Beijing and Taipei are far better today than they have been since the early 1990s. From Beijing's perspective, that thaw became possible because of the conciliatory attitude that Ma and the KMT have adopted. That political development came as a great relief to Beijing following eight years of confronting Chen and his independence-minded Democratic Progressive Party (DPP).

If Ma and the KMT cannot sustain their political dominance, it is uncertain how long the improvement in cross-strait tensions will last. Beijing is clearly worried and is careful to avoid taking any action that might cause further problems for Ma. That became apparent in late August when Ma gave permission to the Dalai Lama to visit the island. Eight years earlier, Beijing responded with vehement denunciations regarding a similar visit.

This time, the reaction was muted, and most telling, mainland officials directed their fire at the DPP for inviting him, largely ignoring the point that Ma had approved the visit (as part of an effort to revive his flagging domestic popularity). Beijing's uncharacteristic restraint suggests just how concerned mainland leaders are about Ma's political future.

Unfortunately, Ma and the KMT seem intent on shooting themselves in the foot. On September 11, a KMT-controlled court convicted Chen and his wife of corruption charges and sentenced them to life in prison. That move has probably made Chen, who left office with woeful levels of popularity, into a political martyr and galvanised the DPP.

Washington has been relieved at the easing of tensions between Taipei and Beijing, but that sense of relief may prove only temporary if the DPP regains power. The political situation on Taiwan is now highly volatile. The Taiwan issue, which has been largely off the list of global crisis spots since the spring of 2008, threatens to return to prominence. The Barack Obama administration would be wise to start making some contingency plans.

Despite all of the stress points, both real and imagined, Sino-U.S. trade relations have held up remarkably well. Indeed, there have been pork bans, poultry bans, antidumping and countervailing duty investigations, World Trade Organization (WTO) dispute settlement decisions, accusations of currency manipulation, U.S. objections to China's export-led growth and complaints from Beijing about the impact on its U.S. debt holdings of uncontrolled spending in Washington.

Indeed, that these disputes have not erupted into bigger problems signals a growing maturity to the bilateral relations.

But even mature relationships have their breaking points. And President Barack Obama's woefully shortsighted decision to impose duties of 35 percent on Chinese-produced tires under Section 421 of the Trade Act of 1974, as amended — the so-called "China-Specific Safeguard" — is one of them.

In fact, it presents the most serious test yet. Even though imposition of the tariffs does not violate any trade agreements — and even though the Chinese Government has no recourse to retaliation within WTO rules — there should be no question that the possibility of an escalating trade war is real.

The tire decision marks the first time since well before China joined the WTO in 2001 that a U.S. president has personally ordered restrictions on imports from China. Of course there have been duties imposed under U.S. antidumping and countervailing duty laws on numerous occasions, and there have been quantitative restraints imposed on Chinese textiles and apparel.

But none of those outcomes required the participation of the U.S. president — and none were perceived as reflecting his personal wishes.

The edict to impose duties on Chinese tires, by contrast, came directly from President Obama himself, after he had two months to weigh the impact of the decision.

That he chose to levy a prohibitive duty of 35 percent is being perceived as a sign of disrespect by the Chinese Government and the people it represents — particularly when juxtaposed against former President George W. Bush. The previous president rejected trade restrictions on all four occasions when such recommendations from the U.S. International Trade Commission (ITC) reached his desk.

Under the law, which became effective as a condition of China's entry into the WTO, U.S. industries can seek temporary trade restrictions in cases where imports from China are increasing and causing market disruption. The evident threshold in these cases is fairly mild — as compared with the standard applied in anti-dumping, countervailing duty, and general safeguard cases.

Thus, the U.S. president is granted the discretion to reject the ITC's remedy recommendation if he determines that import restrictions would have an adverse impact on the U.S. economy that is clearly greater than its benefits, or if he determines that such relief would cause serious harm to the national security of the United States.

The cost of protectionism to the broader economy always exceeds the concentrated benefits accruing to the narrow interest groups seeking protection and a trade war could well compromise U.S. national security. So restrictions under this statute should always be rejected.

But President Obama's decision was guided strictly by selfish, political considerations: He felt he owed American unions for their previous and continuing support, regardless of the economic and diplomatic fallout.

Just one day after Obama's tire decision, the Chinese Government announced new trade remedy investigations of U.S. exports of automobiles and poultry. Whether those cases are based on evidence of dumping or subsidization that withstands formal evaluation is beside the point. The Chinese Government can always harass U.S. exporters with the threat of new investigations and throw other obstacles in their paths.

But the mere prospect of heightened trade tensions — let alone actual protectionist measures — breeds the kind of uncertainty that undermines trade and investment, and retards economic growth.

Those costs are felt most profoundly in the country imposing restrictions, thus China should do its best to avoid retaliation.

Of course exercising restraint could prove challenging for the Chinese authorities. The U.S. barriers could well lead to restrictions on Chinese tires in other countries — to "protect" their own producers from the diversion of supply from the U.S. market.

Furthermore, Obama's tire decision represents a blatant disavowal of the U.S. pledge at April's G20 summit in London to avoid new protectionist measures through 2010. The temptation of other G20 governments to indulge similar protectionist pressures at home for political gain might prove irresistible — especially now that the United States has abdicated its leadership role in the trade sphere.

And then there is the very real danger that other U.S. industries, encouraged by the outcome in tires case, will file their own Section 421 cases, leading to new restrictions on new products, and creating similar pressures abroad to follow suit — while igniting calls within China for retaliation.

It is not a pretty picture, but the Chinese Government could heroically forestall a trade war by taking the moral high ground, and doing its best to avoid ratcheting up the dispute with its own provocative measures.

Sino-U.S. cooperation on trade and investment has been too fruitful and too promising to allow a few problematic areas to define the broader relationship.

North Korea says it wants to deal, but even the Chinese are no longer confident that the nuclear crisis can be resolved diplomatically. Does any basis remain for engagement? Yes, reply the contributors to Engagement With North Korea.

Editors Sung Chull Kim of the Hiroshima Peace Institute and David C. Kang of the University of Southern California note that despite intense debate over policy toward Pyongyang, "there has been little sustained effort either to explore the theoretical logic of engagement or to assess whether or not — and if so in what ways — engagement has worked on the Korean Peninsula." They conclude that "engagement in general is a viable alternative to coercive strategies for inducing North Korean cooperation."

But nothing is simple with the so-called Democratic People's Republic of Korea.

U.S. engagement has been controversial since the Clinton administration negotiated the Agreed Framework in 1994. Youngshik D. Bong of American University doubts that Washington's "staged engagement strategy," that is, "the tit-for-tat or action-for-action pattern," will succeed. He contends that "nuclear weapons may have become too valuable for Kim Jong Il's regime to trade away under the principle of simultaneous reciprocity." While the overall deal might be worth making, the specific rewards for individual denuclearization steps might not be sufficient.

Moreover, the system makes it hard to unite surrounding states behind U.S. objectives. Mr. Bong notes: "Any failure of a staged engagement will not be enough to convince all the members of the engagement coalition that every opportunity to resolve the nuclear issue through engagement has been exhausted. They might still disagree whether the time has come to turn to coercive methods." Mr. Bong instead argues "that the United States must adopt a full-engagement strategy and make a grand bargain with North Korea if it is to achieve complete denuclearization peacefully."

Mr. Bong's argument is strong, but what if Pyongyang proves unwilling to yield its nuclear weapons under any circumstances? Moreover, will Kim Jong-il or anyone else be willing and able to force the military to drop the program in the midst of a leadership transition? "Full-engagement" is worth pursuing, but Washington and the North's neighbors should simultaneously prepare for the strategy's failure.

The role of the People's Republic of China, too, is critical. Stephan M. Haggard of the University of California at San Diego and Marcus Noland of the Institute for International Economics review Pyongyang's economic relationships and find that capital inflows have been rising since 2005, largely from South Korean aid and Chinese trade. Mr. Haggard and Mr. Noland emphasize that "sanctions are not likely to be effective in the absence of coordination."

However, such coordination is unlikely because China's objectives are not the same as those in Washington or Seoul.

Argues Fei-Ling Wang of the Georgia Institute of Technology: "Beijing prefers the continued survival of [North Korea] for its political and strategic needs." Although "Nominally supporting Korean unification, [China] seeks to maintain the political status quo and denuclearization on the Korean Peninsula," he adds.

It still might be possible to recruit Beijing in a more coordinated campaign against North Korea, but the United States and its allies would have to persuade China that it is in the latter's interest to squeeze Pyongyang — no easy task.

Seoul's perspective, too, differs from Washington's. For most of the past decade, South Korea engaged in the "Sunshine policy," in which economic engagement, Sung Chull Kim writes, "was intended to buy peace, that is, to use economic tools for achieving security objectives." Although President Lee Myung-bak, elected in December 2007, has adopted a tougher stance toward the North, Mr. Kim observes "that the new administration has tried to maintain a core element of the engagement, particularly the Kaesong Industrial Complex project. The main elements of the engagement still survive in spite of the recent administration change."

Success of this approach has been limited. Concludes Charles K. Armstrong of Columbia University: "If engagement and 'Sunshine policy' were intended to fundamentally change North Korea in the near term, the policy is clearly overly ambitious. This does not mean, however, that the alternative would have been any better. Coercion and pressure historically have done little to change North Korean behavior."

Russia's role in peninsula affairs has been modest in recent years and is unlikely to change. Japan's position is more significant, but, as Jung Ho Bae of the Korea Institute for National Unification and Sung Chull Kim point out, Tokyo has been essentially AWOL, focused, for domestic political reasons, on forcing North Korea to account for Japanese citizens kidnapped over the years. Japan's new government should rethink Tokyo's stance.

Mr. Kang's concluding essay presents the most fundamental argument for engagement: the lack of a viable alternative. "In large part, engagement was eventually arrived at when it became clear that coercive strategies were unlikely to succeed, and were unlikely to gain the support of critical actors," he writes. That remains the case today.

Nevertheless, there are caveats. As Mr. Armstrong puts it, "[C]ontinued engagement, but with lower and more realistic expectations of engagement's effect on North Korea's near-term behavior, would be the most prudent policy." So would be preparing for the possible — or more realistically, likely — failure of negotiation.

Engagement with North Korea reminds us why diplomacy is the preferred strategy in dealing with Pyongyang. However, the contributors offer no guarantees about the likely success of such an approach. Unfortunately, the problem of North Korea is not likely to be resolved any time soon.

But the Obama administration has said no. At least no negotiations outside of the six-party talks. U.S. special representative Stephen Bosworth explained, "because of the nature of this issue and its regional implications and its global implications . . . this is a problem that requires a multilateral solution."

That's true as far as it goes, but it doesn't go very far.

The potential of a nuclear Democratic People's Republic of Korea should be primarily an issue for northeast Asia. However, Washington has made it America's problem. And the U.S. role is central in North Korean eyes. The administration should initiate bilateral talks with an eye to extricating America from this position.

Secretary Clinton should invite the DPRK to send an envoy to Washington. (Enough supplicants have gone to Pyongyang.) The agenda would be to develop the parameters for any bilateral talks. The administration should indicate that it is willing to discuss most any issue, but genuine negotiations could be conducted only in a multilateral context—if not the six-party talks per se, then in an ongoing, parallel framework.

The reason is simple: the North's nuclear program, accentuated by Pyongyang's predictable brinkmanship, is the principal barrier to improvement of the DPRK's relations with the United States, as well as North Korea's neighbors. In response, Washington should indicate that it is prepared to work with the other parties to develop a comprehensive program to promote stability, security and prosperity for the Korean peninsula. The solution must be both regional and consensual. Washington should indicate that it has no intention of imposing a solution on other nations.

During this period the administration should work with Seoul and the new Japanese government to craft a package that includes: a peace treaty, a nonaggression pact, phased U.S.-troop withdrawal, mutual diplomatic recognition, an end of sanctions, membership in international organizations, and bilateral and multilateral aid. In return, the North would agree to forgo nuclear weapons and long-range missiles, fully dismantle its existing nuclear facilities, relinquish all nuclear materials and accept intrusive inspections.

The need for the latter is even more evident after Pyongyang's claim to be in the final stages of uranium enrichment. If true, that gives the lie to the regime's lengthy denial that it possessed such a capability. In return for bountiful benefits from engagement, the DPRK must agree to a process that ensures no more unpleasant surprises for its neighbors and America.

Washington, South Korea and Tokyo should simultaneously work together to encourage more intensive Chinese involvement. With increasing pessimism in Beijing that North Korea will agree to give up its nuclear potential, the allies should suggest that the People's Republic of China closely coordinate its policy with theirs for one last serious attempt to resolve the nuclear crisis through negotiation.

In essence, Pyongyang's three antagonists would provide the carrots while its ally would wield the stick. If the DPRK chose to obstruct and obfuscate, it would demonstrate that it does not desire a diplomatic solution. In that case, Beijing should support—and, more importantly, enforce—an enhanced sanctions regime. China also should consider using whatever influence it has within the North to encourage more responsible behavior and/or better leadership.

To ease the PRC's concerns over the prospect of inadvertently sparking a North Korean implosion, the United States, South Korea and Japan should emphasize that the situation today is dangerously unstable, despite the fact that Pyongyang is in its manic phase. Should the result of Chinese pressure be social collapse, the three allies would contribute financially. Moreover, both Washington and Seoul should promise that there would be no American military presence in a reunified Korea.

To jump-start both bilateral and multilateral engagement, the administration should offer to initiate consular relations with the North. There would be no demand for a quid pro quo; rather, Washington should indicate that it favors allowing both nations to maintain official representatives in order to reduce the possibility for additional mutual misunderstanding. A move to full diplomatic ties would be part of the comprehensive package to be developed through multilateral discussions.

Of course, all of this might—and perhaps likely would—come to naught. Pyongyang enjoys obvious benefits as a nuclear-weapons state and might be unwilling to accept denuclearization at any price. But the prospect of a nuclear North Korea is an awful one and the potential consequences of a military "solution" are even worse, making an extra diplomatic effort imperative.

Such a coordinated campaign also should clear the international air, so to speak. If the DPRK refuses to negotiate, the allies would know that they need to prepare for a world in which the North has nuclear weapons. Only unpalatable options would remain, including attempting to further isolate the Kim Jong Il regime by interdicting its air and sea traffic, negotiating with the North for a verifiable nuclear freeze rather than rollback, and accepting South Korean and Japanese creation of an equivalent nuclear deterrent.

The organized attempt at a negotiated settlement would have a salutary impact in Beijing as well. China could no longer blame American intransigence for the failure of negotiations. The PRC would have to decide whether it was willing to accept an unstable, potentially failed state with nuclear weapons on its border, as well as the possibility of nuclear proliferation extending to the ROK and Japan.

A coordinated multilateral denuclearization effort is the best shot for resolving the North Korean nuclear crisis. But bilateral talks between Pyongyang and Washington may be required to initiate such an effort. With the North apparently prepared to negotiate, the Obama administration should seize the moment. Any resulting discussions won't deliver the solution, but they likely would help determine whether or not a negotiated solution is possible.

Exactly how policy will change is uncertain: The DPJ is a fractious coalition, ranging from socialist pacifist to renegade LDP and conservative nationalists. But with a nearly two-thirds majority, the DPJ will be able to stamp its will on domestic and foreign policies alike.

That has Washington nervous. Only slightly less unhappy than the LDP dinosaurs who misruled Japan for so long are U.S. policymakers, who have grown used to Tokyo playing the role of pliant ally, backing American priorities and hosting American bases. Washington long has wanted the Japanese government to do more internationally, but only in support of U.S. objectives.

That era may be over. Presumptive Prime Minister Yukio Hatoyama wrote in the New York Times last week: "As a result of the failure of the Iraq war and the financial crisis, the era of U.S.-led globalism is coming to an end." Tokyo likely is headed on a more independent course.

Of course, there are significant barriers to any dramatic transformation of Japanese policy. Japan always has been a more consensus-oriented society and popular attitudes towards America remain positive.

Hatoyama moved toward the political center during the campaign, indicating his support for the U.S.-Japanese alliance. The DPJ platform dropped its earlier pledge to "do away with the dependent relationship in which Japan ultimately has no alternative but to act in accordance with U.S. wishes, replacing it with a mature alliance based on independence and equality."

Nevertheless, the DPJ possesses a left-wing absent in the LDP. Indeed, the new government is likely to include representatives of the tiny Socialist Party, a strong critic of the status quo. The DPJ vigorously opposed the ousted government's logistical support for U.S. naval operations in the Indian Ocean. Other likely demands include reducing the military presence on Okinawa, renegotiating the relocation of the Marines' Futenma Airfield to Guam at Japanese expense (nearly $3 billion), cutting so-called host nation support, and amending the Status of Forces Agreement.

Michael Auslin of the American Enterprise Institute talks of "a fear of dramatic change in the U.S.-Japan alliance" in Washington, a time when "No one knows what will happen next, or even who to talk to for answers."

Some Obama administration officials privately acknowledge that adjustments will be necessary. Others, however, appear to be operating more as throwbacks to the Bush administration during its most unilateralist phase. On Monday the State Department spokesman, Ian Kelly, said that there would be no renegotiation of the Okinawa accord. An unnamed official said that the administration hoped the new government would "moderate" its position.

This might seem like a good negotiating tactic, but it didn't go over well in Tokyo. The Asahi Shinbun headlined one article "U.S. on Futenma Revisit: Forget It." Washington might have the law on its side, but the LDP had to use its overwhelming majority to ram the unpopular accord through the Diet. And elections inevitably have consequences.

Unfortunately, publicly telling the new government "up yours" is more likely to infuriate than conciliate both incoming ministers and the public. There are reasons some Japanese want to escape dependence on America. Washington's dismissive response gives them one more reason.

Actually, Americans should be as interested as Japanese in transforming the U.S.-Japan alliance. The current relationship remains trapped in a world that no longer exists. The imperial Japanese navy has been rusting away on the bottom of the Pacific for more than six decades; Douglas MacArthur departed as American regent in Tokyo nearly a half century ago; China buried Maoism with Mao Zedong more than three decades ago; the Cold War ended two decades ago; Japan retains the world's second (or third, based on purchasing power parity) largest economy despite "the lost decade."

Yet Japan remains dependent on America for its security, a minor military player despite having global economic and political interests. There are historic reasons for Tokyo's stunted international role, but it is time for East Asian countries to work together to dispel the remaining ghosts of Japanese imperialism past rather than to expect America to continue acting as the defender of last resort.

Since Japan and Asia have changed, so should America's defense strategy. There should be no more troops based on Japanese soil. No more military units tasked for Japan's defense. No more security guarantee for Japan. The U.S. should adopt a strategy of off-shore balancer, expecting friendly states to defend themselves, while being ready to act if an overwhelming, hegemonic threat eventually arises. China is the most, but still not very, plausible candidate for such a role — and even then not for many years.

Washington's job is not to tell Japan, which devotes about one percent of its GDP, one-fourth the U.S level, to the military, to do more. Washington's job is to do less. Tokyo should spend whatever it believes to be necessary on its so-called "Self-Defense Force." Better relations with China would lower that number. So would reform in North Korea. Of course, the former isn't certain while the latter isn't likely: let Japan assess the risks and act accordingly.

In any case, the U.S. should indicate its respect for Japanese democracy and willingness to accommodate itself to Tokyo's changing priorities. Reverse the situation and Americans would expect the Japanese to do likewise.

It's the same strategy that Washington should adopt elsewhere around the globe. The Marine Expeditionary Force stationed on Okinawa is primarily intended to back up America's commitment to South Korea. Yet the South has some 40 times the GDP of North Korea. Seoul should take over responsibility for its own defense. Even more so the Europeans, who possess more than ten times Russia's GDP. If they don't feel at risk, there's no reason for an American defense guarantee. If they do feel at risk, there's no reason for them not to do more — a lot more.

Defending populous and prosperous allies made little sense in good economic times. But with Uncle Sam's current year deficit $1.6 trillion and another $10 trillion in red ink likely over the next decade — without counting the impact of any additional financial disasters — current policy is foolish and unsustainable. The U.S. essentially is borrowing money from China to spend defending Japan from China. America does not need to spend roughly as much on the military as the rest of the world combined.

The tremors of Tokyo's political earthquake are being felt in Washington, where officials are rounding the wagons to protect the status quo. But America's alliance with Japan — like most of its defense relationships — is outdated. The Obama administration should take the lead in modernizing a security pact originally designed for a world which disappeared years ago. Both America and Japan would benefit from ending Tokyo's unnatural defense dependence on the U.S.

In August 1945, Japan was disarmed and occupied. General Douglas MacArthur acted as regent, overseeing reconstruction of the Japanese economy and government. As part of that process Japan proclaimed pacifism to be its new foreign policy: Article 9 of the U.S.-drafted constitution stated that "land, sea, and air forces, as well as other war potential, will never be maintained."

The unstated political corollary was that Washington would be responsible for Japan's defense. This arrangement seemed logical when the United States, and other nations in East Asia, assumed that a revived Japan was the most likely future security threat. But as the cold war deepened — and especially after Mao Zedong and the Communist Party ousted the pro-American Kuomintang from China's mainland — disarming a nearby American ally was increasingly seen as counterproductive.

Moreover, some Japanese also grew dissatisfied with the "peace constitution," bridling at the assumption that the Japanese people possessed a double dose of original sin. Tokyo established a "Self-Defense Force" (SDF) to maintain the pretense of complying with Article 9. Some academics and politicians debated moving further, but the establishment view, embodied in the LDP, was to leave the heavy lifting in security policy to Washington. Tokyo instead used bilateral assistance and participation in global financial institutions to institute a "checkbook foreign policy."

Along the way, the United States and Tokyo engaged in an oft-frustrating dialogue. Washington routinely asked Japan to do more militarily, but only in following America's lead. In Japan the government resisted Washington's entreaties as pacifists and nationalists battled over even modest augmentation of Japan's SDF and limited involvement in international missions.

Japan has edged towards a more active role in response to China's growing economy and more assertive foreign policy, as well as North Korea's unremitting hostility amid ongoing missile and nuclear programs. Yet Japanese military spending remains anemic and polls suggest that a plurality of Japanese want to cut the SDF budget even further. Proposals to revise Article 9 have gone nowhere. Kent Calder of the Johns Hopkins School of Advanced Studies contends that we have "likely seen the high-water mark of Japan's international presence and assertiveness."

What now with a new government taking control in Tokyo? Dramatic change has been rare in this consensus-oriented society, and incoming Prime Minister Yukio Hatoyama ran towards the center, terming the U.S.-Japan alliance a "top priority." The DPJ platform calls for a "close and equal Japan-U.S. alliance to serve as the foundation of Japan's foreign policy." Indeed, before the election, Abraham Denmark of the Center for a New American Security argued: "Despite its provocative statements in the past, the DPJ has several reasons to moderate its approach to foreign policy and the alliance." Nevertheless, the DPJ reaches much further to the left than does the LDP. In opposition the party opposed refueling U.S. ships in the Indian Ocean and Ichiro Ozawa, until March party leader, proclaimed that "it will be the age of Asia, and in that context it is important for Japan to have its own stance, to play its role in the region." The 2005 party platform promised to "do away with the dependent relationship in which Japan ultimately has no alternative but to act in accordance with U.S. wishes, replacing it with a mature alliance based on independence and equality." There is broad support for amending the Status of Forces Agreement, cutting host nation support and reducing the U.S. military presence on Okinawa.

The factional battle over the DJP's approach is likely to be complicated, since the spectrum of views runs well beyond socialist pacifists and conservative hawks. Wrote Dan Twining of the George Marshall Fund:

Some DPJ members support a trans-Pacific foreign policy in keeping with American priorities, but want Japan to assume a more equal and capable role within the alliance. Other DPJ leaders define a future in which Japan orients itself toward China and pursues Asian economic integration as its external priority, thereby diminishing the alliance with the United States. The DPJ's political alliance with the Socialist Party in Japan's upper house will pull its foreign and security policy further to the left — and further away from the broad consensus that has defined the U.S.-Japan alliance for three generations.

Over the last half century Japan has changed far more than has the alliance. It is time to adjust the U.S.-Japan relationship accordingly. Some on the Right point out that Tokyo cannot demand equality unless it does more. Bruce Klingner of the Heritage Foundation observed: "Neither country is well served by endlessly repeated bromides of the strength of the alliance as it becomes increasingly apparent that Japan will not fulfill the security role required to address increasing global security threats." However, the real problem is not that Tokyo does too little, but the United States does too much. Japan's security dependence is not in America's interest.

Why preserve a military relationship created in a very different world? Klingner contended that "the alliance is critical to fulfilling current U.S. strategic objectives," since "The forward deployment of a large U.S. military force in Japan deters military aggression by North Korea, signals Washington's resolve in defending U.S. allies, and provides an irreplaceable staging area should military action be necessary."

Yet South Korea, with forty times the GDP, twice the population, and far greater military spending than Pyongyang, should be the one deterring threats from the North. America should not demonstrate resolve in defending allies — Japan as well as South Korea — which should be defending themselves. And Tokyo is unlikely to allow the United States to use facilities in Japan for American purposes — especially to initiate war against China over Taiwan or to otherwise maintain U.S. primacy.

In fact, America's aggressive foreign policy and force structure, oriented to offense rather than defense, is why the United States spends so much on the military — roughly half of the global total. Washington has eleven carrier groups in order to attack other nations, such as Iran, North Korea and China, not to prevent them from attacking America. Even more so, the role of U.S. bases and forces abroad is offensive, to intervene. Protecting war-torn allied states in the aftermath of the greatest conflict of human history made sense. Doing the same today, when allied states have prospered and the most serious hegemonic threat has disappeared, does not make sense. Washington should return to Japan responsibility for its defense. Even today, Tokyo, though spending just one percent of GDP ($47 billion last year) on the military, is on par with the leading European states. But with the world's second largest economy (third based on purchasing power parity), Japan could do much more. Doubling its defense effort — which would still be half of America's burden — would match Chinese military spending.

Whether Japan needs to do so is, of course, up to Japan. The more persuasive Beijing's so-called peaceful rise, the less pressure on Tokyo to act militarily. The more provocative North Korea in developing and testing both missiles and nuclear weapons, the greater the need for Japan to augment its forces. Whatever the Japanese people wish to do, they should pay the cost of and take responsibility for doing so.

Particularly important is the future of so-called extended deterrence. Analysts like Harvard's Joseph Nye take the policy for granted, worrying only about whether or not it is credible. However, as Beijing develops its own strategic nuclear deterrent against America, the question will arise: should the United States risk Los Angeles for Tokyo?

The increasing unpredictability of North Korean behavior has led to more discussion in Japan about the possibility of developing a countervailing weapon. The potential for further proliferation in the region is worrisome, but no more so than the possibility of a confrontation between the United States and nuclear-armed China over the interests of other nations. Deterrence can fail. And protecting other nations can lead them to be dangerously irresponsible. In any case, the United States would be less likely to have to rely on nuclear deterrence for Japan if that nation possessed an adequate conventional defense.

With the rise of prosperous and/or populous allied states (Japan, South Korea, Australia, and several ASEAN nations) as well as friendly powers (India and Indonesia, most notably), Washington is in the position to act as an off-shore balancer, prepared to act against an aggressive hegemonic power should one arise, but not entangled in daily geopolitical controversies. America's overwhelming power and geographic isolation give Washington greater flexibility in defending its own security.

Expecting Tokyo to protect itself doesn't mean severing bilateral security relationships. The United States and Japan should cooperate on issues ranging from intelligence sharing to emergency base access. Nye also writes of "a new set of transnational challenges to our vital interests, such as pandemics, terrorism, and human outflows from failed states. Chief among these challenges is the threat posed by global warming." None of these, however, compares to the importance of preserving the nation from attack. And none are relevant to a military alliance. In fact, today's emphasis on military issues may inhibit bilateral cooperation elsewhere.

The DPJ intends to change Tokyo's relationship with the United States. In what direction will the new government move? Washington should take the lead, turning defense responsibilities over to Japan, which would benefit both countries.

"They feel, the North Koreans, that by giving us the two American journalists, that they've made an important gesture," explained Gov. Richardson. The Democratic People's Republic of Korea certainly knows how to spell chutzpah.

The government of Kim Jong-il is owed nothing. The DPRK is a relic of the Cold War, a Stalinist remnant in which some 23 million people suffer and even starve. The impoverished and backward nation would matter little but for its nuclear weapons program. With the latter, however, Pyongyang can command international attention.

The North has now formally invited the U.S. to send an envoy for negotiations. How to respond? Seven steps would help the U.S. promote peace and stability on the Korean Peninsula.

1. Keep expectations low. Otherwise sober-minded analysts and policy-makers occasionally proclaim the latest "breakthrough." Yet North Korea thrives on isolation, fears Western freedoms, and relies on brinkmanship as a negotiating technique. Diplomatic progress is possible, but neither certain nor even likely.

2. Negotiate with North Korea. Refusing to talk is a grade-school tactic that has gotten the U.S. nowhere. Indeed, one of the Bush administration's great policy failures was refusing to deal with the North as it began reprocessing spent fuel that had been set aside under the so-called Agreed Framework negotiated by the Clinton administration.

Pyongyang both augmented its arsenal and became more confrontational. Washington should engage in both bilateral and multilateral discussions.

3. Beware making the perfect the enemy of the good. An increasing number of analysts doubt that the North will ever give up its existing nuclear materials and weapons. On the other hand, Pyongyang still might be willing to halt any expansion of a program currently capable of yielding only a handful of weapons.

Although a nuclear-free peninsula remains a worthy goal, a freeze might be a more realistic objective in the short-term, while offering a potential way station toward full denuclearization as the North Korean regime evolves or dissolves.

4. Treat North Korean provocations with bored contempt. The U.S. needs to reward the North when it acts responsibly and punish or ignore it when it acts badly. Reprogramming the DPRK won't be easy, but the regime has been on markedly better behavior over the last month than previously. For that Washington and other nations should respond favorably.

5. Let other countries, which have the most at stake, take the lead. The DPRK is primarily a problem for its neighbors, not the U.S. The North's antiquated military has only limited reach. A messy DPRK regime collapse would loose refugees on South Korea and China, not America.

A North Korean nuclear arsenal similarly would most threaten the region. Pyongyang lacks both an accurate delivery vehicle and the miniaturization technology to put a nuke on a missile; moreover, Washington has overwhelming retaliatory capability.

6. Press China in particular to take a more active and forceful role. Economic sanctions are largely futile without the cooperation of the DPRK's northern neighbor. Yet so far Beijing has been more concerned about preventing a North Korean collapse and forestalling creation of a united Korea allied with America.

However, the current situation is highly unstable, with the possibility of regime failure and all the attendant consequences anyway. Moreover, American military action could plunge the entire peninsula into war and South Korea and Japan might respond to a growing North Korean arsenal by developing their own nuclear weapons.

If China acted responsibly, however, Washington could offer to share in the cost of caring for any refugees created as well as promise not to take geopolitical advantage of Beijing by turning the Korean Peninsula into a permanent American military outpost.

7. Withdraw U.S. forces from South Korea. The Republic of Korea has a vast economic and technological lead over its northern antagonist and is fully capable of defending itself.

Nor do American conventional forces help resolve the nuclear issue; to the contrary, by putting U.S. military personnel within reach of the North, Washington has created 28,000 nuclear hostages.

Moreover, eliminating America's military presence on the peninsula would be the strongest possible signal to Beijing that it need not fear pressing the North to deal and reform, even at the risk of the latter's collapse.

The North's coming leadership transition will yield both opportunities and dangers. The Obama administration should recognize the limitations inherent to any policy toward the North, while doing its best to promote a peaceful resolution of the Korean confrontation.

Senator Webb's unofficial venture has been compared to President Bill Clinton's trip to North Korea, and both countries are humanitarian tragedies. But the United States has diplomatic relations with Burma, which poses no security threat to America. As a result, Burma has never been—and is never likely to be—high on Washington's agenda.

Nevertheless, Webb has created an opportunity for the administration to press the Burmese junta to improve, even if modestly, its treatment of the Burmese people.

The Burmese military junta, which styles itself the State Peace and Development Council (SPDC), is one of the worst governments on earth, having for decades promoted war and prevented development as a matter of state policy. The regime continues to imprison Ms. Suu Kyi, the most important opposition symbol in the country, as well as more than two thousand one hundred other people for opposing the regime. With elections of sorts scheduled next year—her party won the last free poll, in 1990, which then was voided by the military—the regime would have found another excuse to keep Ms. Suu Kyi imprisoned had Yettaw, who was originally sentenced to seven years in prison, not made his unexpected appearance at the home of Ms. Suu Kyi, who has spent fourteen of the last twenty years under arrest.

The poll will be a farce without her participation. (The regime's handwritten constitution also bars her candidacy because she married a foreign citizen.) But that is the junta's intent: to produce a pliant assembly which creates only the veneer of democracy for international purposes.

Ms. Suu Kyi's heroic struggle has received the most international attention, but the regime's depredations are not limited to the suppression of democracy. The junta also continues its brutal war in the east against multiple ethnic groups, such as the Karen and Shan, which have long sought autonomy from the central government. Although the SPDC has reached peace agreements with some peoples, it is the peace of the graveyard, resulting from the regime's growing military superiority.

Thousands of people have died. Civilians have been murdered, raped and conscripted as porters by the Burmese military. The army routinely destroys villages and sows the conquered territory with land minds to prevent rebuilding. Millions of people have been displaced within Burma and hundreds of thousands of refugees have been driven across the border into Thailand by the conflict. Children and young adults have spent their entire lives in camps, with no hope of ever living a normal life.

No one disputes the desirability of dramatic reform in Burma. But Washington has been attempting to pressure the junta for years, without effect. America's options are limited. The United States and European Union already apply economic sanctions against Burma, including controls targeted against regime elites and cronies. The lack of international unanimity has robbed them of maximum impact. Unfortunately, China has exhibited no similar scruples, both blocking (along with Russia) UN sanctions and becoming the junta's strongest backer. India, Thailand, Singapore, Japan, South Korea, and other nations in the region also invest in and trade with Burma.

Neither the regime's botched response to Cyclone Nargis last year nor its brutal suppression of widespread demonstrations in 2007 increased international support for tighter economic controls. So any attempt to expand general sanctions is likely to fail and, even if successful, would hurt Burma's vulnerable people more than regime elites.

Instead, the United States and Europe should press India, the ASEAN states, Japan, and South Korea to adopt limited sanctions targeted against junta leaders and their economic allies. Policy change is more likely if regime leaders pay a higher price for their repressive policies.

Moreover, Washington should engage Beijing over the issue, indicating that promoting political reform in Burma would enhance China's international reputation and claim to global leadership. The Obama administration should assure the Chinese government that Washington would not take geopolitical advantage if Beijing's efforts result in a transformation of the junta—there would be no U.S. military installations in Burma under any circumstances.

At the same time the United States, along with its Asian and European friends, should offer a positive package of economic and diplomatic benefits should the Burmese junta improve human rights and open Burmese society. In fact, in June, Kurt Campbell, the assistant secretary of state for East Asia, stated that the Obama administration is "prepared to reach out" to Burma.

Washington's expectations should be limited: the regime is not likely to yield power irrespective of the inducements offered. However, the junta might decide that the benefits from more limited reform are worth the risk of change. Admittedly, a number of human rights advocates view such an offer as appeasement or worse. However, the present course has failed for years to help the Burmese people.

In contrast, limited engagement might lead to an improvement in human rights. For instance, the regime's response to Cyclone Nargis, though initially criminally callous, improved over time, leading the International Crisis Group (ICG) to conclude that "it is possible to work with the military regime on humanitarian issues." That same ICG report further added, "By and large, the authorities are making efforts to facilitate aid, including allowing a substantial role for civil society." Frank Smithuis of Doctors Without Borders told the New York Times: "You can work here very well." Indeed, "the military at times has actually been quite helpful to us."

In some international situations, such as Burma, there is no good answer. And good intentions are not enough.

The present U.S. policy of isolating Burma has failed. While Washington should continue to highlight the SPDC's brutal repression and work with other states to win greater backing for punitive measures, the administration also should develop a positive package to reward the regime for liberalizing Burmese society. Admittedly, the chances of success are slim, but that still would be improved odds over the likelihood of Washington's current strategy working.

The 67-year-old Kim allegedly suffered a stroke in August and disappeared from public view for months. When he reappeared he looked gaunt and sickly. Kim is thought to be afflicted with diabetes and heart disease and has been rumored to have cancer.

Since the Democratic People's Republic of Korea was established in 1948, only two men have held supreme power: Kim Il-sung, who died in 1994, and his son, Kim Jong-il. The latter's rise to power was carefully orchestrated by his father.

Since the 1994 Agreed Framework, the North also has engaged in an on-and-off negotiation with the U.S. and North Korea's neighbors over ending its nuclear program.

Despite the common assumption that the North was willing to deal, Pyongyang had obvious reasons to reject even a seemingly generous offer. Nuclear weapons offer the North security assurance, international status, and extortion opportunities.

Still, hope of a solution rose in the aftermath of the October 2007 denuclearization agreement. Alas, North Korea subsequently denounced the arrangement, expelled international inspectors, and even renounced the 1953 Armistice. Earlier this year Pyongyang conducted a nuclear test and several missile tests.

None of this means that North Korea could not come back to the table. The Clinton visit demonstrates that surprises are ever possible. However, today there is increasing doubt that the DPRK will abandon its nuclear program, let alone yield up its existing nuclear materials.

Moreover, North Korea's current internal instability will make reaching a deal even more difficult.

The military is central to Kim's rule. He has long pushed a "military first'' policy. In his prime Kim may have had sufficient authority to sacrifice the military's most powerful weapon as part of a political deal. A seriously ill Kim may not. A transitional collective leadership likely would not.

The North already is restricting private markets and closing up the little private space that had recently opened up. Equally significant is the rising influence of the military.

Kim may have decided he must placate an institution capable of ratifying or blocking any leadership transition; the military may have become more demanding in the wake of his incapacity.

This would explain the rapid multiple international provocations, punctuated by the nuclear and missile tests. Moreover, the National Defense Commission, of which Kim is chairman, is gaining internal authority.

Even more problematic is the leadership transition. The uncertainty created by Kim's condition is compounded by the age of many other top officials. For instance, 81-year-old Kim Yong-nam is chairman of the Supreme People's Assembly and nominal head of state.

Moreover, North Korea has evolved into the modern equivalent of the Ottoman Empire. "Great Leader" Kim Il-sung was married twice and had many other relationships.

Kim Jong-il apparently has had four wives or long-term mistresses. The result has been several children from different spouses as well as a number of illegitimate children.

Earlier this year Kim apparently designated 26-year-old Kim Jong-un, his youngest son, as his heir. However, unless Kim Jong-il survives and rules for at least several years, the younger Kim is unlikely to have an easy time claiming his political inheritance in a culture that typically reveres age and in which potential rivals are many.

The regime number two appears to be brother-in-law, Jang Song-taek, who might not be satisfied with playing a secondary role in the event of Kim Jong-il's death.

Many other senior officials have been waiting for years and even decades to take charge. Moreover, there are more than a few Kim family members available to front for competing factions, including Kim's half-brother, two other sons, and current wife/mistress.

How this international soap opera will turn out is anyone's guess. But it could have a significant impact on Pyongyang's relations with the rest of the world.

Given the horrors perpetuated by Kim Il-sung and Kim Jong-il, it is hard to imagine the situation getting worse in the DPRK.

However, overt factionalism, a brutal power struggle, and political instability would add an incendiary element to peninsula affairs. At the very least, an insecure leader, weak collective rule, and/or de facto military rule all would make North Korean concessions on the nuclear issue even less likely.

The U.S. and South Korea should continue diplomatic efforts, both bilateral and multilateral. Moreover, both governments should intensify efforts to involve Japan and engage China in a concerted campaign to pressure Pyongyang and/or seek to effect regime change.

At the same time, however, policymakers must realistically assess the future. The U.S. and North Korea's neighbors had better prepare for the possibility of an even more unsettled and dangerous future.

As China's foreign exchange reserves passed $2 trillion, its calls for a new international monetary system are becoming more strident. Is there a case for changing the current floating rate international monetary 'non-system' with the dollar as its core?

Any international monetary system faces the 'trilateral dilemma'. One can have two, but not all three, among fixed exchange rates, monetary independence and free international mobility of capital. Under the Gold Standard (which perished in the Great Depression) there were fixed exchange rates and free capital mobility but no monetary independence. Under the Bretton Woods quasi-fixed exchange rate system which replaced it (and perished in the Great Inflation generated by the Vietnam War), there were fixed exchange rates and monetary independence but not free capital mobility, with capital controls restricting short-term capital movements. In the current floating rate 'non-system' there is capital mobility and monetary independence but no fixed exchange rates.

The Chinese, who have run a Bretton Woods-type quasi-fixed exchange rate system — with an undervalued renminbi pegged to the dollar — want to extend it to the world, with an expanded form of SDRs replacing the dollar as the global reserve currency. This desire is based on China's reluctance to freely float its currency, and its mounting fear that US fiscal and monetary expansion will lead to a fall in the value of its massive holdings of US government debt, as US interest rates rise and the dollar depreciates. This is a consequence of its foolish exchange rate policies, which in effect have converted a large part of China's massive savings into relatively low-yielding US government debt. But, should the world accede to the former Chinese desire (as also that of Russia and Brazil) to dethrone the dollar, and is it likely to succeed?

Any quasi-exchange rate system is subject to a fundamental flaw. It depends upon control of short-term capital movements, which could lead to speculative attacks on the currency. But, these controls become increasingly leaky as foreign trade is liberalised, as short-term capital can be moved through the 'leads and lags' in foreign trade: with exporters 'under-invoicing' exports, and importers 'over-invoicing' imports, keeping the difference in whatever foreign currency they choose.

Despite draconian capital control, China has not been able to control such 'hot money' flows. Its latest increase in reserves of $178 billion (in the second quarter of 2009) is not based on the traditional drivers of the trade surplus and foreign direct investment which, at about $60 billion, were the lowest in three years. The increase was due to 'hot money' inflows of between $30 billion and $70 billion ("Lex", FT, July 15). To prevent any currency appreciation, the Chinese have (as in the past) sterilised these inflows. But with the domestic money supply, nevertheless, rising rapidly with the growing credit made available to stem the slide in output caused by the global financial crisis, a serious housing and stock market bubble is developing. With non-traded goods prices rising, whilst those of traded goods are kept constant through the relatively fixed nominal exchange rate, the real exchange rate must be appreciating. China, because of its continuing attachment to the Bretton Woods Mark II system, is likely to find its current distorted recovery unsustainable. Why then should the rest of the world follow it by embracing another Bretton Woods type system for the international monetary system?

China's desire for an enhanced SDR (with the BRIC currencies having a greater weight) is also likely to be unfulfilled. Central banks have had the opportunity to diversify their reserves into non-dollar assets, including SDRs, but have not chosen to do so. Instead, dollar holdings in central bank reserves have risen to about 75 per cent of total reserves in the first quarter of 2009. Nor is the Chinese move to finance its growing bilateral trade with emerging markets in renminbi likely to make its inconvertible currency a potential reserve currency. It is more like the creation of a 'rouble area' under Comecon.

Nor is the proposal being floated by a Brazilian economist for four competing currency unions, with four alternative reserve currencies, likely to succeed. Ricardo Amaral ("Brazil, China, and the New Asian currency", www.rgemonitor.com) has proposed an Asian currency union (modelled on the euro) centred around the renminbi, which would also include Brazil. Russia should join the euro, and the Gulf countries should have a common currency centred on the Saudi rial. But, currency unions require some political common ground amongst the participating countries ideally, as in the US— currency union is a political union. The euro still remains fragile, because the hoped-for European political union has not yet emerged. A stable political union is necessary if 30-year bonds issued in the common currency are to be widely held. Without a political union there can be no guarantee that the common currency will be around when the bonds come to be redeemed.

Though a Gulf currency union with a political union seems more feasible, there is no chance of an Asian currency union comprising, I presume, India, Japan and the southeast Asian countries with such divergent polities being formed. Who would be willing to hold the bonds of an authoritarian country whose currency remains inconvertible for its citizens and foreign holders?

Finally, though the dollar may be in trouble, it remains the currency of the sole superpower. The sterling remained the world reserve currency even after British hegemony was beginning to slip. So, I do not expect the dollar to cease to be the world's reserve currency for a long time to come. The current international monetary 'non-system' remains the only desirable one to deal with the continuing turmoil in the world economy.

Pyongyang subsequently relaxed internal controls and slightly opened the economy to the outside. Under South Korean Presidents Kim Dae-jung and Roh Moo-hyun the Republic of Korea engaged in the so-called Sunshine Policy, aiding and investing in the DPRK. Since the 1994 Agreed Framework, the North also has engaged in an on-and-off negotiation with North Korea's neighbors and the United States over ending its nuclear program. This process has significantly increased Pyongyang's contact with the West.

Even so, a negotiated settlement remained out of reach. Despite the common assumption that the North was willing to deal, Pyongyang had reason to reject even a seemingly generous offer. Observes analyst Balbina Hwang: "For the regime itself, isolation of course serves to preserve its own power and legitimacy which would immediately be undermined by openness." Lankov points out that the Kim regime is particularly vulnerable given the proximity of South Korea, with a prosperous and free people who share the same culture and speak the same language.

Still, hope of a solution rose in the aftermath the October 2007 denuclearization agreement. Alas, the accord crashed and burned last year. North Korea has subsequently denounced the arrangement, expelled international inspectors, announced that it will not return to the six-party talks, begun to rebuild its nuclear program and restarted reprocessing activities, renounced the 1953 Armistice, nullified boundary-demarcation accords, terminated bilateral political cooperation and reconciliation agreements, and voided economic arrangements with the South. Earlier this year, Pyongyang conducted a nuclear test and several missile tests. As international criticism increased, the DPRK ratcheted up its rhetoric, threatening military retaliation in response to varied South Korean, U.S. and UN actions.

None of this means that North Korea could not come back to the table. However, today there is far less expectation that the DPRK will ever be willing to abandon its nuclear program, let alone yield up its existing nuclear materials. Nuclear weapons offer the North security assurance, international status and extortion opportunities. If Pyongyang can still be bought off, the price has likely risen sharply.

North Korea's current internal instability will make reaching a deal even more difficult. Despite common claims that Kim is "crazy," the evidence indicates that he is evil, not insane. His strategy is consistent with regime preservation.

The military is central to Kim's rule. He long has pushed a "military first" policy. Even as the regime lost authority, it continued to funnel resources to the armed forces. Nevertheless, in their prime both Kims may have had sufficient authority to sacrifice the military's most powerful weapon as part of a political deal. A seriously ill and perhaps dying Kim Jong Il may not. A transitional collective leadership likely would not.

As noted earlier, the North already is moving in reverse on several fronts. The regime has been restricting private markets — limiting their number and what they can sell. Able-bodied men and women have been barred from the market trade. "Slowly but surely, plans to close all general markets are becoming a reality," warns the charity Good Friends.

The little private space that had opened up is closing: cell phones have been banned and their use now can result in a large fine and internal exile. The regime has launched a concerted campaign to prevent the sale of smuggled South Korean videos and CDs. Overall, writes Jinwook Choi, since late 2005 "Pyongyang seems to be enforcing the role of the party, prioritizing regime solidarity and implementing conservative policies at home and abroad in the aftermath of failed liberal economic policies (albeit partial and limited) over the last decade."

Pyongyang has tightened border controls, cracked down on corruption among border guards on the north and periodically closed the border to the south. The North also reintroduced the state monopoly over food supplies and restricted activities by the World Food Program. (The WFP warns of impending food shortages, though Open Radio for North Korea, a South Korean group with contacts in the DPRK, reports the opposite.)

The North also is threatening to pull the plug on the Kaesong industrial development, which hosts 106 South Korean companies (one of which has pulled out) and employs forty thousand North Koreans. Pyongyang has torn up the agreement covering Kaesong and demanded a massive increase in rent and wages (which are pocketed by the regime). The North also arrested a South Korean in March for allegedly criticizing Kim Jong Il and has held him incommunicado. The regime appeared to back away from its expressed willingness to close Kaesong during the most recent bilateral negotiations, but the development's future remains in doubt.

Unconfirmed reports indicate that Choe Sung-choi, the official responsible for North-South relations, was executed last year, allegedly for corruption; the more serious offense, some observers suspect, is the deterioration in inter-Korean relations. All told, notes Lankov, "Though a complete return to the 1980s system has not occurred (being perhaps impossible), the backlash has been partially successful in reversing the changes."

Equally significant is the rising influence of the military. Cheong Seong-chang, director of the Inter-Korean Relations Studies Program at the Sejong Institute, argues that "Since the appearance of health issues with Kim Jong-il last year, the North Korean military became more influential." Kim may have decided he must placate an institution capable of ratifying or blocking any leadership transition; the military may have become more demanding in the wake of his incapacity; both phenomena may be occurring simultaneously.

This would explain the rapid multiple international provocations, punctuated by the nuclear and missile tests. Moreover, the National Defense Commission (NDC), one of Pyongyang's most powerful military bodies, is gaining internal authority. Responsibility for foreign intelligence apparentlywas recently moved to Commission. Open Radio for North Korea reports that strategic weapons development also was shifted to the NDC (from the Korean Workers' Party). The group concluded: "The move is an indication that the National Defense Commission is expanding its role beyond being apolicy council for the senior insiders, transforming into a real power with enforcement agencies under its wings."

Indeed, Rodger Baker of Stratfor Global Intelligence goes further, telling Fox News:

The NDC has really solidified as the central leadership body of North Korea, so it sits over top of the Workers Party, over top of the military, over top of the parliament, in general terms of power. It becomes the place were Kim Jong-il is able to shape his policies, where he's able to make sure that he has all the strong men of North Korea in one location.

Even more problematic is the leadership transition. Although it is hard to know how actively involved and in control Kim remains — there is evidence of organizational changes designed to limit his workload — the ruling elite almost certainly is thinking about future contingencies. This can only complicate Pyongyang's dealings with the rest of the world.

The uncertainty created by Kim's condition is compounded by the age of many other top officials. Indeed, Kim is relatively young compared to some of those around him. For instance, eighty-one-year-old Kim Yong-nam is chairman of the National People's Assembly and nominal head of state.

The NDC, however, is the single most important state institution and provides Chairman Kim Jong Il with his only formal position. The NDC's first vice chairman, Vice Marshal Jo Myong-rok, is seventy-three. General O Kuk-ryol, seventy-eight, spent some time in political purgatory in the early 1990s, but was recently elevated to vice chairman of the NDC. Another vice chairman is Vice Marshal Kim Yong-chun, the seventy-three-year-old defense minister. Thus, irrespective of Kim Jong Il's condition, significant changes within the ruling elite are inevitable in coming years.

As the largest holder of US debt, China would suffer large losses if the Fed engineered a policy of inflation to reduce the real value of US debt. Although there is no immediate threat, China is already talking about a new "super-sovereign" reserve currency to replace the dollar.

While leaders of both nations discussed conventional issues, they did not acknowledge the significant policy mistakes on both sides that helped bring about the most serious recession since the 1930s.

Rather than allowing market forces to rebalance their respective economies, both Beijing and Washington are engaging in the very politicisation of investment decisions that is the hallmark of a socialist economy. Unfortunately, little mention was made of that fact during the dialogue. No one seemed concerned about the drift from market principles toward state planning - with the consequent socialisation of risk.

Vice-Premier Wang Qishan did lecture US officials on the need to reduce the growth of government debt and to "balance and properly handle the impact of the dollar's supply" - that is, to avoid inflation. Both sides agreed that any move towards protectionism would severely damage the global economy and should be avoided, and both agreed to work to restore global balances: the US by increasing saving and China by increasing consumption.

The irony is that China's own policies - pegging the yuan to the dollar at an artificially low rate, spurring exports and accumulating large foreign exchange reserves - have allowed the US to live beyond its means and fuelled US federal spending, thus spreading the socialist-market virus.

China's own stimulus programme is creating asset bubbles in the stock and housing markets. Current money and credit growth are not sustainable and could well increase inflationary expectations. The People's Bank of China, like the Fed, needs an "exit" strategy.

Beijing's overriding desire to maintain growth at any cost could end up spoiling the Communist Party's 60th anniversary. There are considerable distortions in China's financial markets. The government-led stimulus programme may lead to short-term growth, but only at the expense of further distorting capital markets and slowing down real reform. The danger is that the dynamic non-state sector will recede while the state sector gains ground.

Non-performing loans at state-owned banks could mushroom, corruption associated with the political allocation of capital could worsen, and inflation could lead to wage and price controls that impede economic and personal freedom. Such setbacks would shift the balance of power further in favour of the party, just as it has shifted to Washington during the current financial crisis.

Indeed, the legacy of the global financial crisis, which was due in large part to government failure, may be the permanent increase in the size and scope of government - both in China and the US.

Reports suggest that Kim Jong-il may have pancreatic cancer; some analysts predict he could die within the year. Since the Democratic People's Republic of Korea (DPRK) was established in 1948, only two men have held supreme power: Kim Il-sung, who died at age eighty-two in 1994, and his son, Kim Jong-il. The monarchical succession from the former to the latter faced opposition at home and in China, the DPRK's closest ally, but Kim Jong-il's rise to power was carefully orchestrated by his father in a process that took more than two decades. Who now will take the throne?

North Korea has evolved into the modern equivalent of the Ottoman Empire. "Great Leader" Kim Il-sung was married twice and had many other relationships. Kim Jong-il apparently has had four wives or long-term mistresses. The result has been several children from different spouses as well as a number of illegitimate children.

Family members have played a significant role in the regime. Kim Jong-il faced political competition from his uncle, Kim Yong-ju, who eventually was sidelined by Kim Il-sung. Kim Jong-il also pushed aside his younger half-brother, Kim Pyong-il, who since 1979 has been posted as ambassador to several European nations, keeping him out of domestic North Korean politics. When the elder Kim died in July 1994, Kim Jong-il appeared to face little opposition to taking control.

Until Kim Jong-il fell ill, he appeared to give little thought to his succession. However, STRATFOR's Roger Baker believes that Kim "has a very strong fear that after he dies, if the country changes direction, that his family may be on the receiving end of vigilantism or punished or killed." That's plausible, though Kim may simply desire to cement his legacy by choosing someone who would have little choice but to venerate Kim's rule. Observes Atsuhito Isozaki of Tokyo's Keio University: "Since Kim had a stroke last year, North Korea appears to be in a hurry in naming his successor." Earlier this year Kim apparently designated twenty-six year-old Kim Jong-un, his youngest son, as his heir.

Reports indicate that Kim Jong-un was recently shifted from his position at the Korean Workers' Party to the National Defense Commission (NDC). Party and military officials have been tasked with promoting the younger Kim, jokingly referred to by some observers as "Cute Leader"; he is being called "Brilliant Comrade" and "Commander Kim" by the North's media. Open Radio for North Korea reports that diplomats and military leaders have been informed of his new status and promotional efforts have been launched, including party and military propaganda campaigns.

Reports are circulating that the succession may be confirmed at an upcoming party conference in October of this year or next. Another theory is that the process may be formalized in 2012, the centenary of the birth of Kim Il-sung.

Kim Jong-un is a virtual unknown outside of North Korea. Only one photo of him exists, taken when he attended the International School in Bern, Switzerland. During his two years there he apparently demonstrated some proficiency in English, French, and German, enjoyed skiing and watching Hollywood action movies, and favored the National Basketball Association. Classmates say he showed no political interest, though he was only in his mid-teens then.

However, unless Kim Jong-il survives and rules for at least several years, the younger Kim is unlikely to have an easy a time claiming his political inheritance in a culture that typically reveres age — and in which potential rivals are many. The regime number two appears to be the elder Kim's brother-in-law, Jang Song-taek, who disappeared in a purge a few years ago but recently reemerged. Kim Jong-il recently named Jang to the NDC.

Jang is only four years younger than Kim and his independent authority is hard to assess. Jang, backed by the NDC's O Kuk-ryol and Kim Yong-chun, is thought to have been tasked to act as Kim Jong-un's principal mentor. However, he might not be satisfied playing a secondary role in the event of Kim Jong-il's death.

Many other senior officials have been waiting for years and even decades to take charge. Their loyalty to Kim Jong-il might not survive his death. Especially since there are more than a few Kim family members available to front for competing factions.

For instance, Kim Jong-il's oldest son is thirty-eight year-old Kim Jong-nam, who apparently fell into disgrace after he was discovered traveling on a forged passport while attempting to enter Japan in order to visit Tokyo Disneyland. He now lives in Macau. Although he seems out of the power equation and in a television interview voiced his support for Kim Jong-un, reports recently surfaced that his supporters were being purged and that Kim Jong-un's aides organized an assassination plot, busted by China. (If true, this would seem to mimic the Ottoman practice of new sultans eradicating male family members who could challenge their ascension.)

Kim Jong-un has an older brother, Kim Jong-chol. Their mother, Ko Yong-hui, is said to have been Kim Jong-il's favorite wife. Before she died of cancer in 2004 she reportedly was promoting both sons as potential heirs. The twenty-eight year-old Kim Jong-chol is supposedly sickly and viewed as effeminate by his father. Nevertheless, he apparently runs the Party Leadership Department, traditionally a critical position. However, some of the department's functions apparently have been transferred to Jang. Although Kim Jong-chol has formally pledged to support his younger brother, that could change and the former could be used by a competing faction.

Kim Jong-il's current wife/mistress, Kim Ok, and her relatives, though currently unimportant politically, also conceivably could play a role in providing a family connection in any ensuing power struggle. So could Kim Pyong-il, Kim Jong-il's half-brother who is currently serving as the DPRK's ambassador to Poland. More distant family members are not likely to dominate the North's political future, but still might play a role in any factional struggle.

How this international soap opera will turn out is anyone's guess. But it could have a significant impact on Pyongyang's relations with the rest of the world — and not for the better.

Given the horrors perpetuated by Kim Il-sung and Kim Jong-il, it is hard to imagine the situation getting worse in the DPRK. However, overt factionalism, a brutal power struggle, and political instability would add an incendiary element to peninsula affairs. Observes Dennis Blair, Director of National Intelligence: "Any time you have a combination of this behavior of doing provocative things in order to excite a response — plus succession questions — you have a potentially dangerous mixture."

At the very least, an insecure leader, weak collective rule, and/or a de facto military government all likely would make North Korean concessions on the nuclear issue even less likely. A new, more responsible and forward-looking regime — one that recognized real international influence requires significant reform — might eventually emerge. However, counting on that result would let hope trump experience.

The United States should continue diplomatic efforts, both bilateral and multilateral. Moreover, Washington should intensify its efforts to engage China in a concerted campaign to pressure Pyongyang and/or seek to effect regime change. At the same time, however, policy makers must realistically assess the future. The United States and North Korea's neighbors had better prepare for the possibility of an even more unsettled and dangerous future.

However, Australia is breaking the mold, preparing to do much more to protect itself and its region. Washington should encourage its other friends to follow suit.

Canberra issued its previous defense white paper a decade ago. Observed Defense Minister Joel Fitzgibbon: "the biggest changes to our outlook over the period have been the rise of China, the emergence of India and the beginning of the end of the so-called unipolar moment; the almost two-decade-long period in which the pre-eminence of our principal ally, the United States, was without question."

Australia now discerns a future in which "there will be a number of other powers floating about, China and India, for example, the re-emergence of Russia," he added. Particularly important will be the People's Republic of China, which said Fitzgibbon, "will be the strongest Asian military power, by a considerable margin." Although the U.S. isn't going away anytime soon, its relative domination will shrink and its willingness to make war for its allies will diminish. Different circumstances require different policies. Explained Fitzgibbon: "We need to be able to defend our country without necessarily relying on the assistance of other nation states."

That means a military build-up. Prime Minister Kevin Rudd observed: "It's as plain as day that there is a significant military and naval build-up across the Asia-Pacific region." He noted that "Either you can simply choose to ignore that fact, or to incorporate that into a realistic component of Australia's strategic assumptions about what this region will look like over the next two decades." In May the Rudd government issued a 140-page white paper, "Defending Australia in the Asia Pacific Century: Force 2030."

The report announced: "The government has decided that Australia's defense policy should continue to be founded on the principle of self-reliance in the direct defense of Australia and in relation to our unique strategic interests, but with a capacity to do more when required, consistent with those strategic interests that we might share with others, and within the limits of our resources." To influence security in the Asia-Pacific, the Rudd government has proposed upping real, inflation-adjusted military spending by three percent annually through 2018 and then 2.2 percent through 2030.

That's a $72 billion increase in military outlays, a meaningful investment for a nation of about 20 million. Canberra plans to double the number of submarines, replacing existing models with more sophisticated vessels capable of firing cruise missiles. Also on Australia's procurement list are "hunter-killer" submarines, Aegis-class destroyers, frigates, sealift ships, and helicopter-carrying amphibious vessels.

Canberra would enhance its aerial capabilities by adding roughly 100 F-35 Lightning Joint Strike Fighters, 46 Tiger Helicopters, new transport planes, and advanced surveillance aircraft. Finally, Australia plans to expand its armor and artillery forces and increase the total number of military personnel. Explained Prime Minister Rudd: "Force 2030 will mean the best fighter jets, the most versatile armored vehicles and the most sophisticated submarines available to defend Australia's national security." Canberra wants to be capable of dealing with a worst case scenario, including by projecting power beyond its own waters if necessary.

It's a significant effort and is being criticized by the conservative opposition. Obviously, even with this new defense program Australia alone cannot contain a more aggressive PRC, if Beijing's rise eventually proves to be less than peaceful. Nevertheless, China's future domination is not guaranteed:  China remains a poor country with substantial social and ethnic divisions. Moreover, Canberra's planned expansion demonstrates an effective strategy for other Asian nations: create a potent military which would exact a high price for any aggression by any nation.

In fact, the PRC's reaction to Australia's plans demonstrates that Chinese officials are concerned. For instance, Rear Adm. Yang Yi called Australia's plans "crazy," "dangerous," and "stupid," and said Canberra risked "stimulating an arms race in the region." Other PRC officials anonymously complained of Australia's "Cold War mentality." Imagine how Beijing would react to substantially more defense spending by South Korea, Japan, and other states.

Canberra is well ahead of the allied pack, but a similar realism seems to be slowly creeping into the policies of both South Korea and Japan. Prime Minister Rudd and South Korean President Lee Myung-bak met in March. The two leaders denied that their joint security statement was directed against Japan, but President Lee opined that "we have the issue of China building their military spending."

The Republic of Korea spends nearly $30 billion a year on defense. The ROK long has faced a serious security threat from North Korea, but the South has more than twice the population and between 30 and 40 times the GDP of the North. With Pyongyang busy testing nuclear weapons and shooting off missiles, Seoul finally appears ready to do more.

The Lee government recently issued the latest update to the National Defense Reform 2020 plan. More money will be spent with the goal of "stemming and eliminating to the maximum degree" threats from the North, including attacking Pyongyang's "bases as quickly as possible to prevent launches no matter where they are." Seoul hopes to increase its anti-missile capabilities, along with adding or improving satellites, artillery, early warning aircraft and drones, and intelligence-gathering assets. This is a good start, though much more could and should be done.

Equally important is Japan. The U.S. imposed Article Nine on the defeated nation after the end of World War II, but soon came to regret the forced disarmament. So did Tokyo, which created a modest "Self-Defense Force," though for decades this cleverly named military was not deployed outside of the Japanese islands.

Now, however, with both China growing and North Korea threatening, Japan appears to be slowly if irregularly adopting a more realistic perspective. Tokyo sank a North Korean spy ship in 2001 and is considering attempting to shoot down any North Korean missiles that threaten Japanese territory. Japan also has provided unarmed assistance to the UN peacekeeping mission in Cambodia and U.S. operations in Afghanistan and Iraq. Two years ago Japan raised the Japanese Defense Agency to cabinet status.

Tokyo still spends far less than it could, but its capabilities are likely to grow as the international threat environment becomes more unsettled. In May Japanese Foreign Minister Hirofumi Nakasoni visited Australia and called China's military build-up an "issue of some concern." Japanese officials have begun debating the unthinkable: creating the capability to preemptively take out North Korean missiles and even developing nuclear weapons. "Calls for the debate are escalating," explained Takehiko Yamamoto, a professor at Tokyo's Waseda University. The growing number of Japanese advocates of a larger military split between those who would amend Article Nine or simply interpret the pacifist provision away. "We won't sit and wait for death," said Gen Nakatani, a former civilian defense chief now heading the Liberal Democratic Party panel on security policy, in May.

Other East and South Asian nations too, are arming. The International Institute of Strategic Studies notes "substantial evidence of continuing efforts by several Southeast Asian states to modernize their armed forces." For instance, Bangladesh, Indonesia, Malaysia, Pakistan, Singapore, Thailand, and Vietnam all are constructing submarines. A plethora of better-armed smaller states may be unnerving to some, but will further constrain the dominant regional powers. Such a build-up also puts a premium on America's democratic friends doing more, since they can ill afford to rely on Washington to protect them from everyone else.

Indeed, the most important incentive for Australia to strengthen its forces is recognition that America is likely to do less. Canberra's White Paper lauds the continuing U.S.-Australian alliance, but delicately warns of changes to come: "the United States might find itself preoccupied and stretched in some parts of the world such that its ability to shift attention and project power into other regions, when it needs to, is constrained."  In fact, Americans concerned about paying for Medicare, Social Security, and accumulated debts aren't likely to want to keep spending as much as the rest of the world combined to protect wealthy friends, like Australia. And as Beijing develops its own potent military with the ability deter U.S. involvement, Washington will be far less likely to risk war to micro-manage local and regional disputes in East Asia.

The U.S. should make the same point to Japan and South Korea, as well as other friendly states, such as the Philippines, Singapore, Taiwan, and Thailand. It is time for them to take over their own defense responsibilities, instead of sitting idly by assuming that Washington will come to the rescue in any crisis.

The U.S. cannot forever be the world's 911 number. While most of America's allies hope the good times of U.S. subsidies go on forever, Australia is more realistic. Recognizing that Washington is not likely to forever patrol the globe, the Rudd government is preparing Australia to be militarily self-sufficient. The rest of America's military dependents should do likewise.

Such smug complacency has begun to evaporate with surprising speed — and not just in the United States. When I discussed the North Korea issue with officials and policy experts in China during an April 2008 trip, only a small minority seemed worried that the six-party talks might fail. Their attitude was dramatically different during my trip in June of this year. Indeed, the pessimism about being able to stop Pyongyang through diplomacy was strong and growing.

Recent North Korean actions justify such pessimism. Since April, Pyongyang has, in rapid succession, conducted a long-range-missile test, withdrawn from the six-party talks, expelled international inspectors from the Yongbyon reactor complex and detonated an underground nuclear device. Kim's government has taken all of those steps not only in the teeth of international condemnation, but over the strenuous objections of its only serious remaining ally: China.

We have reached the point where we need to determine, once and for all, whether North Korea has any intention of abandoning its nuclear ambitions. In the diplomatic equivalent of Texas Hold 'Em poker, it is time for the United States to go "all in" — put all its chips on the table.

North Korea insists that it is pursuing a nuclear-weapons program because of Washington's "hostile policy." In other words, Pyongyang professes to fear that if it does not develop a nuclear deterrent, United States will someday use military force to achieve regime change, as it did in Iraq.

It is more likely that fear of U.S. intentions is only one reason why Pyongyang is building a nuclear arsenal. The prestige of being a member of the exclusive global nuclear-weapons club, the belief that a nuclear North Korea would be able to blackmail its nonnuclear East Asian neighbors, and the prospect of lucrative revenues from selling atomic technology or warheads to willing purchasers are probably other factors.

There is one reliable way to find out. The United States should offer a comprehensive bargain to North Korea. Washington should agree to sign a treaty formally ending the state of war on the Korean Peninsula, ink a nonaggression pact, establish diplomatic relations with Pyongyang and end all economic sanctions against the regime, except those that have direct military applications. In exchange, Washington should insist on the simultaneous implementation of a verifiable agreement (including a rigorous inspections system) to terminate North Korea's nuclear program.

Such concessions would cost the United States very little. Signing a peace treaty to end the Korean War would merely formalize the state of affairs that has existed on the ground since the signing of the armistice in 1953. Agreeing to a nonaggression pact is even less of a substantive concession. Even the most reckless American hawks hesitate about advocating an attack on North Korea to achieve regime change — however much all of us want to see that odious system on the ash heap of history. Using military force against North Korea might well trigger a major war on the Korean Peninsula and perhaps a general war throughout East Asia. That is a risk no rational person would wish to take. So giving North Korea "security assurances" (i.e., a nonaggression pact) merely renounces an option we would not want to pursue in the first place.

Similarly, establishing diplomatic and economic relations with Pyongyang is a step the United States should have taken many years ago. Indeed, throughout the 1970s and 1980s, a key component of U.S. foreign policy in the region was a proposal to Moscow and Beijing for cross recognition of the two Korean states. At the end of the cold war, Russia and China both recognized South Korea, but the United States never kept its part of the bargain by recognizing North Korea.

Diplomatic recognition does not imply moral approval of a regime. We have diplomatic relations with a good many odious, repressive governments (Saudi Arabia comes to mind). Maintaining such relations merely acknowledges that it is in our interest to deal with the country in question.

Likewise, economic ties do not imply moral approval. In North Korea's case, ending economic sanctions might also help open up that closed and bizarre country to the outside world. It is a strategy that we used with China in the 1970s — a country that had recently experienced the convulsions of the Cultural Revolution — with considerable success.

The main point of offering a comprehensive bargain, however, is to determine whether Pyongyang is bluffing in this game of high-stakes nuclear poker. If North Korea is truly developing nuclear weapons only because it fears U.S. intentions, Pyongyang should accept the proposed bargain without hesitation. Even an intrusive system of inspections should not be a barrier to such an agreement.

Conversely, if Kim's regime demands other concession or balks at the requirement for inspections, we know that there are ulterior motives. Indeed, it would then be indisputable that Pyongyang is not using its nuclear program merely as a bargaining chip but is deadly serious about becoming a member of the global nuclear-weapons club. At least we would know where we stood and could consider relevant policy options. That is far preferable to another round of fruitless talks that perpetuate ambiguity and impasse.

China is right in thinking that the global meltdown is due partly to abuse of the dollar's reserve currency status by the United States. But this has been aided and abetted by China's own mercantilist policies that have created huge current account surpluses and excess liquidity. China's search for an alternative international reserve currency is touched with irony: the drug pusher is pushing the addict to reform itself.

But is the proposal in China's self-interest? That may seem an odd question, given that the proposal is seen widely as serving two Chinese purposes. The first is to warn the US to avoid policies that would lead to a crash of the dollar, and so inflict huge valuation losses on the dollar component – estimated at $ 1.2 trillion – of China's foreign exchange reserves. Having created a dollar hoard through its mercantilist policies, China seeks to preserve the value of its hoard.

The second and more important purpose is political. By calling for a greater role for SDRs at the expense of the dollar, China seeks to reduce the political and financial power of the US. For much the same reason, China's move has been backed by Russia, Brazil, India and other developing countries that have long chafed at the de facto dollar standard. These countries are far from being admirers of the IMF, but think they would be better off having some say in an IMF-backed currency than none at all in the US currency.

China must know that the creation of a totally new and powerful international currency is a pipe-dream. The dollar is strong because the US had a huge domestic economy and the ability to tax its citizens to honour its obligations. The IMF has no GDP and no tax capacity. But China feels that an expanded SDR role could be a half-way house that could dilute the US's dominance.

The dollar's dominance will be reduced only when some other country emerges with a large enough GDP and tax capacity to compete with the US in providing a reserve currency. That country is obviously China itself. Right now China is still a developing country, but in perhaps little more than a decade it will become a high income country, and its GDP will begin approaching that of the US. Its total GDP already exceeds that of Germany. In terms of fiscal management, it has outperformed both the US and Europe. As China becomes wealthier, its economic focus will shift from exports to domestic consumption. At some point it will find it better to stop micro-managing its exchange rate, and instead float its currency, like all major economic powers.

Historically, countries have moved from having "soft" currencies to "hard" (international traded) currencies after running current account surpluses for a significant period, and hence emerging as creditor countries. The UK achieved creditor status in the 1800s and the US in the early 1900s, and the markets rewarded them with hard-currency status. They retained that status even when they later ran deficits.

China has now achieved creditor status. And, consciously or otherwise, its latest moves are pushing it towards a hard currency. It seeks to make Shanghai an international financial center. It has entered into yuan swap arrangements with several countries, including Brazil and Argentina. And it seeks the strengthening of the Chiang Mai initiative to create a regional Asian pool of swappable foreign exchange reserves. These three moves constitute unilateral, bilateral and regional moves in the direction of a hard currency. If China admits to itself where this road is leading, its attitude towards SDRs will change. Once it becomes a hard-currency country, it will find no advantages — and see clear disadvantages — in reducing the role of hard currencies and expanding that of SDRs. It will be where the US is today.

China's current SDR gambit is myopic. In trying to check US influence today, it might unwittingly be building a straitjacket for itself tomorrow. Of course, China could strive right now for a major role for the SDR, and repudiate that in the future when the yuan moves towards becoming a reserve currency. But that would be crassly expedient. Instead, why not prepare for the day when the US and Europe call for international fiat money to reduce the dominance of the Chinese yuan?

Today the SDR has two roles: as a unit of account, and as a line of credit between IMF members. Neither role makes it a currency. The SDR's value is defined as equal to that of a basket of four currencies: the U.S. dollar, the euro, the yen, and the pound sterling. Member-states occasionally agree to issue SDRs to themselves, and these serve as mutual lines of credit, providing needy countries access to hard currency. SDR allocations represent purchasing power through a credit facility, not through creation of a new currency.

Chinese officials and some leading economists want a greater role for SDRs in foreign exchange reserves. This would shift currency risk away from China to the IMF. But other IMF members would have to pick up that risk, and there is no reason for them to subsidize China. Underlying the SDR issue is a global struggle for political power. But China has a large and growing GDP and tax capacity, which may overtake that of the United States one day. Before then, the Chinese yuan will probably become convertible, and become a highly sought-after reserve currency in its own right. The real currency challenge to the dollar will come from the yuan, not the SDR.