COFA Collateral Damage and Its Consequences: A View from Palau

Washington’s rancorous and “chaotic” politics of the past month have reverberated far and wide. Bipartisan legislation addressing the pressing domestic issue of the southern border crisis, bundled together with foreign policy flashpoints of funding for Ukraine and Israel, was torpedoed in early February by Republicans who had previously been clamoring for a border resolution. Also bundled in the now-scrapped Border Bill was legislation finalizing the lengthy and complicated renewal of the 20-year Compacts of Free Association (COFAs) between the U.S. and the Republic of the Marshall Islands (RMI), the Federated States of Micronesia, and the Republic of Palau.

For unclear reasons, the COFA renewal legislation was taken out of a revised Senate bill early last month, leaving it without a legislative path to enactment. Some members tried get the COFAs included in a Senate bill that created a $95 billion funding package for Ukraine, Israel, and other national security areas. That bill passed out of the Senate on February 13 but COFA was not included. The bill has moved back to the House of Representatives, where things went awry last time and there’s no sign whether COFA will find a way into the contentious bill.

There is extensive bipartisan appreciation in Congress that U.S. security in the Pacific has been predicated on these agreements for the past 40 years. The importance of these agreements has been elevated exponentially in light of escalating tensions with China. The case for renewing the COFAs for the third time since the mid-1980s has not been contentious (although it was for the RMI), but figuring out how the increased financial packages will be funded scuttled a late 2023 attempt to bundle the COFA renewals with the National Defense Appropriations Act (NDAA).

Now Congress must endeavor to fashion legislation and funding that must be enacted by March 28, 2024, when the existing continuing resolution expires. It represents a financial precipice for all three COFA nations. Resolving this, to put it mildly, is of critical importance to multiple interlocking U.S. interests, as well as those of the three compact states.

Nearly 14,500 kilometers from Washington, where a replica U.S. Capitol building houses the legislature of the Republic of Palau, the chaos of Congress is having serious repercussions. In an interview with The Diplomat, President Surangel Whipps laid out what the delay in passing COFA renewal legislation means for his nation, which is on the frontline of China’s geopolitical pressure campaigns and its expanding military zone in the South China Sea.

Whipps said that when the Palau-U.S. compact agreement was signed in Port Moresby, Papua New Guinea, in May 2023, “there was optimism and hope.” The expectation was that bolstered funding would be flowing by October following U.S. congressional approval of the renewed agreements and their funding lines

The renewed agreement was supposed to have transferred $92 million to Palau by now, $40 million for operating costs like funding education and health care, and $50 million in a trust fund. Due to the financial strictures of the previous COFA agreement with Palau brokered in 2004, which differed from the financial arrangements of the other two COFA states, and that has been maintained in the 2023 continuing funding resolution, Palau has instead received about $2 million. This dire financial shortfall brings home the “gravity of the situation” for Palau, as Whipps put it, due to the ongoing U.S. congressional delays.

Whipps will be facing his electorate in November 2024 when he seeks another presidential term. The renewed COFA, the ongoing relationship with the U.S. and its use of Palau for military installations, and Palau’s allegiance to Taiwan will all be issues impacting the election. Whipps recounted that in the 2020 election, two out of the four presidential candidates supported switching Palau’s allegiance to China. In the intervening years, China’s geopolitical pressure campaigns have increased markedly and transformed the Pacific region in myriad ways.

China’s brokering of a security deal with the Solomon Islands in March 2022 triggered a complete reassessment in Washington, and beyond, about the importance of the Pacific Islands. The COFA renewal negotiations, which had stalled since the Biden administration took office, were reactivated with vigor.

China’s efforts to undermine the United States by diminishing the number of nations maintaining allegiance with Taiwan bore fruit recently when Nauru announced its switch to Beijing in the wake of the Taiwan election in January.

More recently, eyes have turned to Tuvalu's newly elected government, which at first seemed headed in the same direction – that is toward Beijing, though the latest reports indicate it will not alter its position on Taiwan. All of these factors will undoubtedly make Palau’s allegiance to Taiwan an even more forceful and divisive electoral issue in 2024.

U.S. congressional dysfunction only hands “more ammunition” to U.S. “competitors” and creates “uncertainty” and “doubt” in the minds of Palauans, Whipps said.

In Palau, China’s pressure campaign to achieve a diplomatic switch has been acutely felt for over 14 years. When the U.S. Congress took eight years to finalize the last of Palau’s compacts from 2010 to 2018, China swooped in with massive investment, and Chinese tourist numbers exploded. When Palau refused to switch allegiance to Taiwan, China crashed the Palau economy by preventing Chinese tourist arrivals in November 2017. The pandemic’s collapse of tourism in 2020 only exacerbated Palau’s economic woes, which are still acutely felt.

Whipps said that the line from China is “if you switch, the sky’s the limit” for the flow of yuan into Palau, yet the president added, “Palau has been strong” and it continues to stand by Taiwan. And, by extension, the United States.

There is now talk in Palau, Whipps said, that Nauru has taken the most pragmatic path and that Palau should follow. Given its dire financial circumstances, why does Palau remain loyal to Taiwan and the United States? One undeniable reason is Whipps’ outlook. He is a staunch believer in democracy and its processes (no matter how bewildering and frustrating, as exemplified by the U.S. Congress this past month) and that “like-minded democracies should stick together.” Whipps appreciates the 25 years of support Taiwan has shown Palau, which has been reciprocated. He is also a staunch supporter of U.S. military expansion in the northern Pacific, adhering to the view that peace comes through strength.

Whipps noted, however, that other Palauan legislators disagree with this thinking and instead fear that the placement of military assets on Palau soil increases the likelihood of conflict returning to the nation, which was devastated during World War II. Indeed, the Palau Senate acted to prevent a U.S. missile deployment in December 2023. Politicians furthering this line, which aligns with China’s objectives, will likely contest the presidential election come November.

The U.S. Congress will erode, albeit inadvertently, Whipps’ electoral support and bolster these politicians’ electability by inflicting ongoing economic precarity on Palau if Congress fails to compact renewal legislation, and fast. The COFAs may now seem, from a U.S. viewpoint, like collateral damage in the Border Bill debacle and the mess that is the U.S. Congress, but all the signs point to far greater consequences for the United States if this linchpin of Pacific security is not rapidly put right.