Anna Péczeli, a Stanton Nuclear Security Fellow at CISAC, wrote the following op-ed for the Bulletin of the Atomic Scientists:

What does the future hold for the US nuclear posture under President Trump? The last Nuclear Posture Review occurred in April 2009, when a 12-month review process was conducted to translate President Obama’s vision into a comprehensive nuclear strategy for the next five to 10 years. The review addressed several major areas: the role of nuclear forces, policy requirements, and objectives to maintain a safe, reliable, and credible deterrence posture; the relationship between deterrence policy, targeting strategy, and arms control objectives; the role of missile defense and conventional forces in determining the role and size of the nuclear arsenal; the size and composition of delivery capabilities; the nuclear weapons complex; and finally the necessary number of active and inactive nuclear weapons stockpiles to meet the requirements of national and military strategies.

Clearly, changes are afoot. On January 27, 2017, President Trump issued a presidential memorandum that mandated “a new Nuclear Posture Review to ensure that the United States nuclear deterrent is modern, robust, flexible, resilient, ready, and appropriately tailored to deter 21st-century threats and reassure our allies.” 

Looking ahead, the new administration should conduct this review through a broad, inter-agency process, involving the State and Energy departments, and allies as well. This approach offers several valuable benefits by broadening the focus from deterrence to non-proliferation, reassurance, and nuclear security.

The main role of the Nuclear Posture Review, or NPR, is to assess the threat environment, outline nuclear deterrence policy and strategy for the next 5 to 10 years, and align the country’s nuclear forces accordingly. Since the end of the Cold War, each administration has conducted its own NPR, but the process and the scope of the reviews were different in all three cases. 

The first NPR was conducted by the Clinton administration in 1994, and even though important senior positions have still not been appointed by the Trump White House, Trump's mandate suggests that their review might use it as a template for 2017. It was a bottom-up review, initiated by the Department of Defense, mostly focusing on a set of force structure decisions—such as the right size and composition of US nuclear forces, including the size of the reserve or so-called “ hedge” force. That review lasted for 10 months, and the Pentagon was in charge of the entire process, mainly focusing on deterrence requirements. 

In contrast, the 2001 NPR of the Bush administration was mandated by Congress, and it addressed a broader set of issues, including all components of the deterrence mix—nuclear and non-nuclear offensive strike systems, active and passive defenses, and the defense infrastructure. The Defense Department took the lead in this case just as before, but this time the Energy Department and the White House were also engaged in the process. As a result, the Bush NPR’s force structure requirements—how to size and sustain the country’s forces—were driven by four factors: assuring allies, deterring aggressors, dissuading competitors, and defeating enemies. 

The Obama administration’s 2010 NPR was also mandated by Congress, but the Defense Department was specifically tasked to conduct an inter-agency review. Besides the unprecedented level of such cooperation, a bipartisan Congressional commission also laid out a number of recommendations for the review process, many of which became part of the final text of the Obama review. Officials from State, Energy, and the Joint Chiefs of Staff were involved, as well as US allies who were regularly briefed during the different stages of the review. 

In the final phase of the 2010 NPR, the White House leadership made the decisions on the actual content of the nuclear posture. While the Clinton and the Bush reviews were largely conducted behind the scenes and only short briefing materials were published on the outcome, the Obama administration released an unprecedentedly long report on its nuclear posture review. 

These cases offer two models for a review process: It can be conducted by a small group of people in the most highly classified manner, or it can be a larger, relatively transparent inter-agency process. In the former approach, the final decisions are typically presented to the secretary of defense, the president, Congress, and allies. The problem is that this tends to be a one-sided approach, putting the main focus on deterrence and modernizations. 

Though it is effective and fast, the implementation of a Nuclear Posture Review requires all stakeholders to be on board with the new strategy. One of the most painful lessons of the Bush review was that because the White House and Defense failed to explain their new approach to the public, the military, and Congress, there was effectively a loss of leadership—which made procurement extremely difficult and caused major problems in the implementation of their strategy. 

On the other hand, involving all stakeholders and providing a balanced approach to nuclear strategy would support the goals of not just deterrence, but those of reassurance, non-proliferation, and nuclear security as well. Due to the involvement of the State Department, the 2010 NPR, for example, emphasized a number of policies which supported non-proliferation objectives and strengthened US negotiating positions at global arms control forums. One of these policies was the “negative security assurance,” which stated that the United States would not use or threaten to use nuclear weapons against non-nuclear weapon states that are party to the NPT and in compliance with their nuclear nonproliferation obligations. 

The other policy that was advocated by senior State Department officials was the so called sole-purpose posture—which means that nuclear weapons only serve to deter or respond to a nuclear attack, and they no longer play a role in non-nuclear scenarios. Although the sole purpose posture was eventually dropped and it was set only as a long-term objective, the Obama administration still reduced the role of nuclear weapons with the new negative security assurance, and it signaled its intent to continue this process with the promise of sole purpose. These steps supported US leadership at the 2010 Nuclear Non-Proliferation Treaty Review Conference and they contributed to the adoption of a consensual final document at the conference. 

This broader scope strengthens inter-agency cooperation, and ensures that all the departments that are affected by the NPR are on board with the strategy, which eases the implementation of the decisions. Besides, it also strengthens alliance relations by regular consultations. The Trump administration’s mandate did not include a specific timeline or format; consequently it will be mainly the responsibility of Defense Secretary James Mattis to decide on the framework. Though the presidential memorandum did not require an inter-agency process, it would be wise to conduct one.

Compared to 2010, the security environment has dramatically deteriorated: renewed tensions between NATO and Russia since the annexation of Crimea, China’s building of military bases in what had previously been international waters, significant military modernization efforts by both these states, and North Korea’s increasingly bellicose nuclear threats. All of these developments have created a serious deterrence and security challenge for the United States and its allies. Only a broader approach can address all relevant threats and create the necessary internal consensus for the funding and creation of a modern, robust, flexible, resilient, ready, and appropriately tailored nuclear arsenal.

Siegfried S. Hecker wrote the following essay for the U.S. News & World Report in an online discussion among seven experts regarding North Korea's nuclear situation:

The North Korean nuclear crisis continues to dominate the news, but it has been remarkably devoid of analysis. To resolve the crisis it is crucial to understand what nuclear capabilities North Korea has, how it acquired them, when and why.

What? A nuclear weapons arsenal requires bomb fuel, the ability to weaponize and the ability to deliver the bomb. Bomb fuel, namely plutonium or highly enriched uranium, is typically the most difficult to acquire. Plutonium is produced in reactors and uranium is enriched in centrifuges. The rate of production of bomb fuel constrains the size of the arsenal.

Siegfried S. Hecker, Center for International Security and Cooperation: (650) 725-6468, shecker@stanford.edu

Clifton B. Parker, Center for International Security and Cooperation: (650) 725-6488, cbparker@stanford.edu

Uncertainty about U.S. intentions in Northeast Asia has increased fear that events could spin out of control in the region due to American disengagement. That engagement cannot be taken for granted, Shorenstein Fellow Thomas Fingar writes on the Stanford University Press blog, and it remains to be seen just how well regional political leaders adjust to the Trump administration’s evolving foreign policy.

The blog post highlights themes from his book Uneasy Partnerships: China’s Engagement with Japan, the Koreas, and Russia in the Era of Reform (Stanford, April 2017).

"What is behind democracy’s seeming decline? What is fuelling the widespread appeal of authoritarianism? Is liberal democracy simply a politics of prosperity, but ill-suited for times of crisis and parsimony? By privileging individual choice and minimizing civic virtue, is liberal democracy simply a victim of its own ‘success’?" For ABCRadio, Larry Diamond, Senior Fellow at CDDRL/FSI discusses the dangers of authoritarianism. Listen here. 

President Trump hosted Chinese President Xi Jinping last week at Mar-a-Lago for their first meeting which set out to address economic, trade and security challenges shared between the two countries. Shorenstein Asia-Pacific Research Center (APARC) experts offered analysis of the summit to various media outlets.

In advance of the summit, Donald K. Emmerson, an FSI senior fellow emeritus and director of the Southeast Asia Program, wrote a commentary piece urging the two leaders to prioritize the territorial disputes in the South China Sea in their discussions. He also suggested they consider the idea of additional “cooperative missions” among China, the United States and other countries in that maritime area.

“A consensus to discuss the idea at that summit may be unreachable,” Emmerson recognized in The Diplomat Magazine. “But merely proposing it should trigger some reactions, pro or con. The airing of the idea would at least incentivize attention to the need for joint activities based on international law and discourage complacency in the face of unilateral coercion in violation of international law.”

Kathleen Stephens, the William J. Perry Fellow in Shorenstein APARC’s Korea Program, spoke to the Boston Herald about U.S. policy toward North Korea and a potential role for China in pressuring North Korea to hold talks about denuclearization. She addressed the purported reports that the National Security Council is considering as options placing nuclear weapons in South Korea and forcibly removing North Korean leader Kim Jong-un from power.

“The two options have been on the long list of possible options for a long time and they have generally been found to have far too many downsides,” Stephens said in the interview.

Writing for Tokyo Business Today, Daniel Sneider, the associate director for research at Shorenstein APARC, offered an assessment of the summit. He argued that two events - the U.S. airstrike on an airbase in Syria following the regime's chemical weapons attack and the leaked reports about tensions between White House staff - shifted the summit agenda and sidelined, at least for now, talk of a trade war between China and the United States.

“Instead of a bang, the Mar-a-Lago summit ended with a whimper,” Sneider wrote in the analysis piece (available in English and Japanese). “On the economy, the summit conversation was remarkably business-as-usual, with President Trump calling for China to ‘level the playing field’ and a vague commitment to speed up the pace of trade talks. When it came to North Korea…the two leaders reiterated long-standing goals of denuclearization but ‘there was no kind of a package arrangement discussed to resolve this.”

In Nikkei Shimbun, Takeo Hoshi gave his analysis of the border adjustment tax and its potential impact on domestic and international economic policies.

The article was republished with permission and is available in English and Japanese below.

Two months have passed since Donald Trump entered the White House, and the direction of his international economic policies is gradually becoming clearer. On his first full day in office, he signed a presidential order pulling the United States out of the Trans-Pacific Partnership, strategically steering the country away from multinational trade agreements—through which the United States had led the way in writing the rules of international commerce—and toward bilateral pacts with the aim of giving the country an advantage over foreign competitors.

Often considered part of this more protectionist approach is the administration’s push to introduce what is known as a border adjustment tax, which the Republican Party has been advocating. Trump himself initially rejected the tax as being too complex but has recently begun to support it. Because the tax is applied to imports but not to exports, some see it as a mercantilist tool to promote sales of domestic goods and services in overseas markets while keeping out imports. Should Washington embrace such a tax, other governments may be prompted to reciprocate with protectionist policies of their own, raising the specter of shrinking global trade.

Is It Really Protectionist?

On closer inspection, though, the border adjustment tax is actually not a trade-distorting mechanism but part of fundamental tax reform. This article will examine the implications of this tax using a number of simple, hypothetical examples. The impetus for such an examination was provided by a series of articles authored by members of the Tokyo Foundation’s Tax and Social Security Policy Committee (Japanese only), led by Senior Fellow Shigeki Morinobu.

The border adjustment tax, properly speaking, is part of a “destination-based cash flow tax” (DBCFT). As the name suggests, there are two basic components to the DBCFT.

The first is the “destination-based” element, meaning that the tax is levied in the country of consumption rather than of origin. Japan’s consumption tax and other forms of value added taxes all follow this principle, as exports are untaxed, while imports are taxed. The tax now being debated in the United States is an attempt to apply the destination-based idea to corporate taxes.

The other is the “cash flow” element, which taxes the profits defined as actual receipts minus actual payments. One important difference of this approach from current corporate tax practices is that companies would be able to deduct the full amount spent on capital investment during that year, instead of depreciating it over the useful life of a tangible asset. By providing immediate relief, the DBCFT is likely to encourage corporate investment. Here, though, I will concentrate my discussion on the impact of the destination-based element of the tax.

The destination-based element, as noted above, leads to “border adjustment,” inasmuch as the tax is applied to domestic consumption and excludes goods or services produced at home but are consumed abroad. To elucidate what this entails, let us see how the DBCFT would affect the after-tax income using a simple example of a vertically integrated corporate group with three stages of production, depicted in the table. We will first assume that the corporate tax rate is 20%.

(1) The material supply producer sells raw materials for $5 million, of which $3 million is paid as labor, leaving a profit of $2 million.

(2) The intermediate goods producer purchases the raw materials for $5 million and processes them into intermediate inputs worth $8 million. Workers are paid $1.8 million for a profit of $1.2 million.

(3) The final goods producer purchases the intermediate inputs for $8 million and assembles them into final goods, which are sold to consumers at $10 million, paying workers $1 million and registering a profit of $1 million.

Group Profit after Border Adjustment Tax ($ million)

Note: No border adjustment for overseas production.

Let us first look at what this corporate group would owe the tax authorities under the current corporate tax system. When all three stages of production take place domestically, the three companies would be required to pay 20% of their profits as corporate tax. Together, the three companies earn $4.2 million ($2 million + $1.2 million +$1 million) in profits. After paying 20%, they would be left with after-tax income of $3.36 ($4.2 million × 0.8).

Current System Encourages Multinationals to Move Offshore

How would the amount the group pays in taxes change if it chose to relocate its intermediate goods production to a country with a corporate tax rate of, say, 10%? The lower taxes would mean that the after-tax income of the group as a whole would now rise to $3.48 million ([$2 million +$1 million] × 0.8 + $1.2 million × 0.9). The group would thus have an incentive to move its operations overseas. In other words, the current US tax system has a distorting effect in encouraging multinationals to move to countries offering lower corporate tax rates.

The border adjustment tax can rectify the distortion by eliminating this incentive, as shown in the right-hand column of the table. If the group ships raw materials to the intermediate goods company located in a different country, the group’s tax base, adjusted at the border, would decline by $5 million (exports are not included in taxable revenue) and correspondingly rise by $8 million (imports are taxed) as the offshore affiliate ships the intermediate goods to be assembled and sold as final products. With a corporate tax rate of 20%, the group as a whole would see its after-tax income decline to $2.88 million ([$2 million + $1 million] ×0.8 – [$8 million − $5 million] × 0.2 + $1.2 million × 0.9) despite a lower corporate rate for the intermediate goods company. Note that the second term of the equation represents the border adjustment tax.

As the example shows, a border adjustment tax will eliminate the financial benefits of relocating abroad, as companies will gain nothing from the lower tax rates in other countries.

The same goes for countries where lower wage levels prevail. To see this, let us consider a case where the corporate group can benefit from lower labor costs overseas. Suppose that producing intermediate goods domestically costs $1.8 million in labor but that this cost is reduced to $1.3 million at an offshore plant. For simplicity’s sake, we will assume that the $500,000 in lower expenses boosts profit at the intermediate goods company to $1.7 million.

In the absence of border adjustment, a business would have an incentive to relocate to a country with lower wages even if the corporate tax rate were the same. Such advantages disappear, though, in the face of border adjustment; in the above example, the group would see its after-tax income fall to $3.16 million ([$2 million + $1 million] ×0.8 – [$8 million − $5 million] × 0.2 + $1.7 million × 0.8). Here we are assuming that the corporate tax rate in the foreign country is the same 20%. The after-tax income with border adjustment is less than the $3.36 million the business would have earned had it kept production at home.

Destination-Based Principle

These calculations are premised on the foreign country using the origin-based approach to corporate taxation, rather than the destination-based principle. If the offshore plant, too, is subject to border adjustment, then its sales (exports) would be untaxed and only its purchases (imports) taxed. In such a situation, its after-tax income would rise to $1.96 ($1.7 × 0.8 – [$5 million − $8 million] × 0.2) even with a corporate tax rate of 20%, boosting the income of the group as a whole to $3.76 million.

Should the Trump administration embrace the destination-based approach, therefore, other governments would have an incentive to follow suit. In fact, most proponents of the border adjustment tax in the United States argue that the lack of such a tax puts the country at an unfair disadvantage vis-à-vis markets that have value-added taxes.

I hope these examples will help show that the border adjustment tax is not a protectionist measure. It can be considered part of the Trump administration’s efforts to maintain US competitiveness as the world increasingly turns from origin-based tax systems to destination-based systems.

As the failed Obamacare repeal effort suggests, though, the White House’s ability to push policies through Congress appears dubious. That said, the global trend toward the destination-based tax systems is undeniable, and the introduction of a border adjustment tax will continue to be a topic of political debate in the United States. Japan has a value-added tax in the form of the 8% consumption tax, but its corporate tax has no border adjustments. Tokyo, too, needs to review the current tax system critically, including the possibility of introducing border adjustments to its corporate tax, as the day Washington goes forward with tax reform may not be far off.

(Translated from “Kokkyo-chosei-zei, kakkoku zeisei ni eikyo,” Keizai Kyoshitsu, Nihon Keizai Shimbun, March 30, 2017.)

トランポノミクスの行方（上）国境調整税、各国税制に影響―海外移転促すゆがみ是正

   トランプ米政権の発足から２カ月が過ぎた。経済政策に関して一つ明確になったのは国際経済政策だろう。環太平洋経済連携協定（ＴＰＰ）など多国間での国際経済活動に関する包括的なルールを構築するために指導的な役割を果たそうとする政策から、２国間で米国が有利になるような国際経済交渉を戦略的に進める政策へと移行した。

   保護貿易政策の一つとして取り上げられるのが国境調整税だ。もともと共和党が推していた政策で、トランプ大統領自身は複雑すぎるとして当初難色を示していたが、最近ではホワイトハウスも支持し始めたようだ。輸入品に課税する一方、輸出品は課税対象にならないので、輸出を促進し、輸入を抑える重商主義的な政策とされる。もし米国がそうした政策をとるなら、他国もそれに対抗して保護貿易的な政策をとり、世界貿易は収縮のスパイラルに陥ってしまう。これは由々しきことだ。  

   筆者もそう考えていたが、国境調整税の中身を検討すると、本質は貿易政策ではなく、根本的な税制改革の一部であり、その観点からとらえる必要があることが分かる。本稿では国境調整税の仕組みを簡単な例を使いながら考える。東京財団の税・社会保障調査会の森信茂樹・中央大教授、田近栄治・成城大特任教授、佐藤主光・一橋大教授による一連の論考が契機となった。
 

   そもそも国境調整税は正確には「仕向け地主義キャッシュフロー課税」の一部だ。名前の通り、こうした課税の仕方には２つの特徴がある。 　

   一つは「仕向け地主義」だ。財が消費される場所（国）で課税対象が決まることで、生産の場所で課税対象が決まる「源泉地主義」と区別される。日本の消費税も含めて付加価値税は仕向け地主義の税制の分かりやすい一例だ。実際、付加価値税に関しては国境調整が行われている。輸出は課税されず、輸入は課税される。そうした仕向け地主義を法人税に適用しようとするのが現在の米国での議論だ。 　

   もう一つは「キャッシュフロー課税」だ。実際に手元に入る売り上げから実際に支払われた費用を引いたキャッシュフローに課税する。例えば現在の法人税では設備投資の際に、その減耗分だけを何年かにわたり控除するが、キャッシュフロー課税では投資した年に投資額をすべて控除できるようになる。これは投資を促進する効果を持つが、本稿では仕向け地主義の国境調整の方に議論を集中する。 　

   国境調整の意味を理解するため、次のような３段階の生産過程を垂直に統合した企業の例を考える。法人税率は２０％で、最終消費財はすべて国内で消費されると仮定する。 　
   ①材料部門は労働を投入して５００万ドルの価値の原材料を作り出す。３００万ドルを労働者に支払い、２００万ドルの利益が生まれる。 　
   ②中間財部門は原材料を５００万ドルで仕入れて加工し、８００万ドルの中間財を生産する。１８０万ドルを労働者に払い、利益は１２０万ドルだ。 　
   ③消費財部門は中間財を８００万ドルで仕入れて加工し生産物を消費者に１千万ドルで売る。１００万ドルを労働者に払い、利益は１００万ドルになる。 この例を使って、国境調整を含まない米国の現行税制では企業が生産過程の一部を法人税率の低い外国に移転するインセンティブ（誘因）があることを示せる。  

   まず３つの生産過程すべてが国内で行われる場合には、法人税率は２０％なので、企業全体の税引き後利益は（２００万＋１２０万＋１００万）×０・８＝３３６万ドルになる。 　

   企業が中間財部門を海外に移転すれば、原材料部門は原材料を海外法人の中間財部門に輸出し、消費財部門は中間財を海外法人から輸入する。これを示したのが表の最初の４列で、４列目が各部門の税引き前の利益だ。法人税率が海外の方が安ければ、企業は海外に移転するインセンティブを持つ。例えば海外の法人税率が１０％なら、中間財生産を海外に移すことで企業全体の税引き後利益は（２００万＋１００万）×０・８＋１２０万×０・９＝３４８万ドルに増える。  　

   つまり現在の米国の法人税は多国籍企業に、法人税率の低い国に生産を移すインセンティブを与えているという意味でゆがみがあるといえる。 　国境調整を導入すると、このゆがみを是正できる。表の最後の列は国境調整の値を示す。原材料部門はすべてを輸出するので国境調整はマイナス５００万ドルに、消費財部門の仕入れは輸入なので国境調整は８００万ドルになる。この国境調整に税率２０％をかけたものが国境調整額（以下の数式の第２項）になる。中間財生産の海外移転時の税引き後利益は（２００万＋１００万）×０・８―（８００万―５００万）×０・２＋１２０万×０・９＝２８８万ドルで、国内にとどまる場合を下回る。 　
  
   国境調整が多国籍企業の海外移転を防ぐという結論は、海外移転の魅力の根元に左右されない。法人税率の低さを利用する海外移転も、賃金の安さを利用する海外移転も、国境調整があれば起きない。 　例えば中間財生産で、国内生産ならば１８０万ドル分の労働が必要だが、海外生産ならば労働投入が１３０万ドルで済む場合を考える。ここでは簡単化のために、すべて中間財部門の利益を押し上げると仮定する。中間財部門の利益は表の場合よりも５０万ドル増えて１７０万ドルになる。 　
  
   国境調整がない場合、海外の法人税率が国内と一緒だったとしても、生産費が低い地域に中間財生産を移すことで全体の利益を増やせるので、企業は海外移転を決める。 　

   しかし国境調整があると、税引き後の利益は（２００万＋１００万）×０・８―（８００万―５００万）×０・２＋１７０万×０・８＝３１６万ドルにしかならない。国内にとどまる場合の税引き後利益（３３６万ドル）より低くなるので、企業は海外移転しない。   

   こうした一見効率的にみえる海外移転も妨げられてしまうのは、海外の法人税の制度が源泉地主義をとっているからだ。もし海外の法人税も仕向け地主義に変更され国境調整が行われるなら、中間財部門の売上高はすべて輸出で、仕入れはすべて輸入なので、その税引き後所得は１７０万×０・８―（５００万―８００万）×０・２＝１９６万ドルとなり、企業全体の税引き後所得は３７６万ドルになる。 　

   つまり法人税を仕向け地主義に変えると、海外の政府にもまた仕向け地主義に変更するインセンティブが生じる。米国で法人税の仕向け地主義への変更を主張する論者は、他国が付加価値税を課して国境調整を行っているのに、米国の法人税には国境調整がないので、米国が国際競争上不利になっていると指摘する。 　

   国境調整税の本質は貿易政策ではない。源泉地主義課税から仕向け地主義課税への移行という世界的な流れの中で、米国の国際競争力を保とうとする税制改革の一部だ。 　

   医療保険制度改革法（オバマケア）代替法案を撤回せざるを得なかったことに象徴されるように、トランプ政権の政策実行能力は大いに疑問視される。国境調整が導入されるか否かも確かではない。しかし仕向け地主義への世界的な方向性が変わらない限り、国境調整などの法人税の改革は繰り返し議題にのぼるだろう。日本には消費税という仕向け地主義の税が既に存在するが、法人税の国境調整はない。米国が国境調整を導入するとき、日本の税制度は現状のままでよいのか、今のうちに見直しておくべきだろう。

(2017年3月30日付『日本経済新聞』「経済教室」より転載）

The Korea Program Prize for Writing in Korean Studies recognizes and rewards outstanding examples of writing in an essay, term paper, or thesis produced during the current academic year in any discipline within the area of Korean studies, broadly defined. This competition is open to both undergraduate and graduate students. The prize will be awarded at a special ceremony in the fall, and the first place winner will receive a certificate and $1,000; Honorable mention winner(s) will receive a certificate.

Application Deadline: May 31, 2019
Eligible Students: All currently-enrolled Stanford students
Application Instructions: Submit the following items by email to John Groschwitz, CEAS Associate Director.

• Current CV
• One Korean studies paper/essay (minimum 20 pages double-spaced, Times 12pt., 1″ margins)
• One recommendation letter from a Stanford professor (emailed by the professor directly to John Groschwitz)