US Compacts of Free Association Are Key to Deterring a Taiwan Contingency

The continuing fallout from U.S. House Speaker Nancy Pelosi’s trip to Taiwan reminds us that the risk of escalation in the Pacific is real. In order to back up President Joe Biden’s promises to defend Taiwan, the United States must retain the ability to both deter and respond to a potential contingency there. That ability is tied to three of Washington’s most crucial security arrangements in the Pacific, known as the Compacts of Free Association (COFAs). In the narrow window before their expiration deadlines, these arrangements are finally gaining the attention they deserve.

However, the concurrence of Compact renegotiations with both changing regional dynamics and Micronesian national election cycles adds another layer of complexity. The outcome of these negotiations and their reception amongst Micronesian populations could affect the future of both U.S. and Chinese influence in the region. If the United States wants to maintain a solid base of deterrence, it must wake up to the needs of small island nations that truly matter before Beijing steps in.

What Are the COFAs?

The Compacts of Free Association are bilateral agreements between the United States and three countries of the Micronesian region: the Republic of the Marshall Islands (RMI), the Federated States of Micronesia (FSM), and the Republic of Palau. As part of the COFAs, the “military clause” gives the United States exclusive rights to maintain defense assets in the territorial lands and waters of these nations. In exchange, these countries receive a variety of funding and services (more on this later) from the U.S. government, including the provision of their security.

These COFAs renew periodically, with 2023 marking the deadline for the RMI and FSM Compacts and Palau’s up for renewal in September 2024. While the United States had a slow start to COFA negotiations, recent tensions in the Pacific generated momentum. After China’s security deal with Solomon Islands and its proposal for a region-wide security deal, the U.S. sent a special envoy to the FSM and RMI to start negotiations. Pelosi’s Taiwan visit prompted an announcement about the “confirmation and selection of members to the Palau Advisory Economic Forum,” which is part of the Compact review process. The quality of these efforts will shape U.S. crisis deterrence in one of the world’s hottest potential flashpoints.

Why Do the COFAs Matter to a Crisis Involving Taiwan?

A recent report highlighted renewed emphasis on Guam’s role in responding to or deterring a potential Taiwan contingency. In such an event, Matthew Costlow, a senior analyst at the National Institute for Public Policy, reminds us that Guam would serve as a logistics hub hosting key military assets in the “Second Island Chain” out of range of most of (not all) China’s military arsenal but close enough for quick response. Moreover, its designation as a U.S. territory makes it less susceptible to host nation basing complications. These factors make Guam more reliable compared to other more vulnerable U.S. bases within the “First Island Chain.”

Oriana Sklyar Mastro’s analysis posits that Guam’s most effective potential deterrent role hinges on the CCP perception that disruptive events (such as a missile strike) would have little effect on Guam’s protracted operational capacity in a conflict. To realize this “deterrence by resilience” theory, the United States’ relationship with Guam’s neighboring countries in Micronesia must contribute to Guam’s resilience. This falls in line with the lesson Timothy Walton draws from World War II: “Establishing control over key islands and using them to project power is contingent on establishing control over (or denying enemy control) of clusters of islands.”

U.S. defense exclusivity in COFA states serves that role by denying China the ability to employ military capabilities in these countries, which could threaten U.S. assets on Guam. For perspective, the roughly 500 nautical miles between the Federated States of Micronesia and Guam is within range of a variety of PLA strategic bombers and missile systems. More than defense, dispersing assets across COFA states bolsters Guam’s resilience and deterrence value. The RMI already hosts key missile and space assets on Kwajalein Atoll and Palau hosts a radar system with plans to build additional military infrastructure.

However, the military clause of the COFA doesn’t necessarily protect against subtle non-kinetic threats from China, like intelligence, cyber, and information operations, nor the range of influence wielded by economic deals under the guise of CCP-directed state-owned enterprises (SOEs). This is where the other tenets of the COFA add important value: If the COFA states aren’t guaranteed enough support through a newly agreed COFA to ensure economic stability, they will be forced to seek greater portions of their assistance from non-traditional sources.

Paying Attention to Both Sides of the Deal

Since the establishment of the Compacts in the 1980s, U.S. aid to the three COFA states has totaled $7.7 billion. In addition to aid, under the COFA Micronesians can migrate or travel to the United States without a visa, join the U.S. military, are entitled to a variety of social programs offered to U.S. citizens, and even use the U.S. Postal System.

While these terms appeared sufficient in the past, Compact renegotiations are occurring within a new economic and political context. Election cycles in each of these countries will happen right before COFA deadlines, which means that the progression of negotiations and elections will have some effect on each other. During the pre-election period, Micronesian politicians will pay attention to the most pressing issues of the voting population, of which there are many. The global economic impacts of COVID-19, rising oil prices resulting from Russia’s invasion of Ukraine, and the effects of climate change all disproportionately affect the economies and communities of these microstates. In Palau, for example, where the tourism-based economy will have suffered a projected 38 percent decline across FY20/21 and the price of gas is almost double the $3.50/hour minimum wage, people won’t be paying attention to much else.

Solving these dire economic issues will likely transcend any historical allegiances to Western partners and decrease the standards these populations use to consider other foreign investments. While these states deserve agency and options in choosing their financial partners, any gaps in U.S. support leave limited alternatives to doing business with an authoritarian surveillance state. Such a situation could open the region to just the type of influence that China strategically desires.

The Alternative: What Could Happen If the U.S. Doesn’t Get This Right?

Examining China’s playbook in the First Island Chain and the South Pacific foreshadows what could happen if the United States fails to address economic vulnerabilities during COFA renegotiations. The examples are plentiful, from the expanding role of China’s maritime militia in the South China Sea to the recent bilateral security deal with Solomon islands. These are all part of the “military-civil fusion” and “three warfares” strategies to establish control and influence below the level of armed conflict.

In fact, some of these malign activities are already happening. In 2017, Beijing used an “anaconda squeeze tactic” by taking Palau off of “Approved Destination Status” as a punishment for Palau’s diplomatic relations with Taiwan, dropping its overall tourist arrivals by 16 percent. What if Palau and the RMI are convinced to flip their diplomatic relations away from Taiwan in order to unlock the economic benefits gained with membership in China’s Belt and Road Initiative (BRI) or renewed arrival of Chinese tourism?

The FSM already made that flip in 1989, gaining membership to China’s BRI – and the lucrative infrastructure investments that come with it. On the eve of 2019 elections in Chuuk, which coincided with a Chuukese independence movement, Beijing granted Chuuk (one of the four Federated States of Micronesia) construction of a $10 million state government complex, another likely form of “dollar diplomacy.” Had the independence movement been successful, China could attempt bilateral military deals with Chuuk because it would no longer be part of the COFA.

Furthermore, illegal, unregulated, and unreported (IUU) fishing by Chinese boats continues to plague the fish stocks of the territorial waters of these Micronesian states, which rely on the healthy oceans for their livelihoods.

These are just a few examples. For the COFA states, the balance of power could shift unexpectedly given their small populations (in total less than 200,000 people), reliance on outside sources for military power, and rapid internet and social media penetration. While current leadership in Palau, the FSM, and RMI understand the destabilizing nature of malign influence from China, bountiful COFA terms can give future leaders the flexibility to consider decisions through both economic and security lenses.

The Way Forward

Although the timeline for renegotiation is tight, the process cannot be rushed. Policymakers should consider the unique needs of the Palauan, Marshallese and Micronesian populations. Besides recent shocks, there are traditional issues around compensation for nuclear testing, support to Micronesian migrants and refugees living in the United States, Veterans Affairs support for Micronesians who serve in the U.S. military, and many more topics to be address. The U.S. Congress must be willing to open its pocketbook to meet all these needs. This investment will see lucrative returns for U.S. national security.

That said, the COFAs cannot solve every issue, nor are they the sole source of support. Support to Micronesians living in the United States, who are the foundation of the Micronesian remittance economy, should also be a top priority. Another priority includes comprehensive and creative ways efforts to address climate change. Nevertheless, starting with a solid COFA renegotiation will set the stage for continued American strategic advantage in the region. Beyond the COFAs, continued engagement, investment in and understanding of Pacific Island partners should be an enduring priority instead of a fad. Peace in the Pacific depends on it.