Months ago, negotiations concluded between the United States and the three U.S. Freely Associated States (FAS) – Palau, the Federated States of Micronesia (FMS) and the Republic of Marshall Islands (RMI) – on the terms of the renewals of key components of the Compacts of Free Association (COFA).
Those components cover primarily financial and service elements of the Compacts for the next 20 years, things like education programs, support for U.S. military veterans from the FAS who have returned home, and the postal service.
Those agreements then went to the U.S. Congress where they have been waiting to be approved. And waiting. And waiting.
On February 6, 2024, the presidents of Palau, RMI and FSM wrote to Senate leadership on the “need for the legislation that would strengthen our associations and enable them to endure.”
The Compacts: Critical to a Free and Open Indo-Pacific
Through the COFAs, the three countries voluntarily grant the United States uniquely extensive defense and security access over a critical corridor that runs roughly between Hawai’i and Guam – and on to Taiwan and U.S. treaty allies the Philippines and Japan. The U.S. is also obligated to protect Palau, the FMS, and the RMI from any attack or threat.
This “Corridor of Freedom” (including freedom of movement) underpins U.S. strategic planning in the Pacific. No other countries on the planet have such deep relationships with the United States – apart from the defense ties, FAS citizens can live and work in the U.S., and the three countries even have U.S. postal codes.
As a result, the Compact states, two of which (Palau and Marshall Islands) also recognize Taiwan, are at the receiving end of a long running, well-funded, focused, and multifaceted attack by China.
Beijing’s goal is to undermine these entities’ relationships with the United States, weaken their state institutions, and ultimately create the conditions in which the U.S. is forced to give up its presence in the western Pacific. As one senior Chinese official told U.S. Admiral Timothy Keating: “You take Hawai’i east. We’ll take Hawai’i west.”
Congress and the Compacts
The financial and services components of the COFAs – for example, those covering postal services and education programs – need to be periodically renewed. We are in that renewal period now.
The terms have been agreed between the United States and the countries, but they need to be passed by the U.S. Congress.
The problem is not that they are considered unimportant or that there are disqualifying issues with the agreements – they have successfully passed out of the dozen relevant committees in both the Senate and the House. It’s that the COFA renewals have reached Congress during one of its most dysfunctional periods in recent memory.
They are sitting, ready and approved, waiting to be introduced so they can be voted upon.
First it was thought they would be included in the National Defense Authorization Act (NDAA). However, Republicans were asking for “offsets,” meaning any dollar for the COFAs needed to be taken from somewhere else in the budget.
While the COFA budget for the three countries over 20 years is $7.1 billion, the offsets required are only around $2.3 billion. If you average that out, it comes to under $40 million per country per year.
That amount couldn’t be found. From the Departments of State, Defense, or Interior – no one offered a politically acceptable solution. So, the COFA renewals didn’t go in the NDAA.
The next idea was that they would be included in the Emergency Supplemental budget request, which would not require an offset. If you’ve been following U.S. politics, you might know that as the politically charged bill covering border security, as well as aid for Israel, Taiwan, and Ukraine. Until as late as last week, drafts also included COFA funding.
So, as of now, that renewal is months late and not in any legislative vehicle.
Technically both the RMI and FSM financial and services agreements with the United States expired with the end of last financial year, on September 30, 2023.
Given Congress hasn’t even managed to pass a budget, they were included in the subsequent Continuing Resolutions (CR), ensuring funding and services would continue at the old rates. That level of funding is far below the new agreements, but at least the banks wouldn’t shut down (yes, that was a concern for the FAS banks that are U.S. insured), the Federal Aviation Administration (FAA) could continue operating in the countries, and there was a level of financial support.
Palau’s Urgent Situation
Palau’s agreement expires on September 30, 2024, and some have used that as a justification for not including it in the CRs. But, as per its existing agreement, Palau’s financial transfer from the U.S. tapered down to a low amount in this, the final year of the previous COFA funding agreement – and that amount was supposed to be dedicated primarily to maintaining infrastructure relevant for the U.S. military.
There was enough concern for Palau’s financial stability that, when the Senate appropriated money for the Pacific Islands, the committee, in its report on the legislation, directed the State Department to use $20 million of that to assuage Palau’s budgetary challenges. That hasn’t happened.
So, Palau is stuck. If the funding isn’t approved, and quickly, Palau may have to make cuts, including to pensions, as well as borrow – leaving it even more vulnerable to internal instability and outside influence.
Already, direct flights from Macau to Palau (which recognizes Taiwan) are landing almost daily, and the amount of money pouring in from China is enormous. There are also increasing criminal cases that may be linked to organized crime, including the recent murder of a Chinese boat operator, for which four other Chinese citizens have been arrested.
The president of Palau is having a hard time funding and getting the tools he needs to combat China-linked and -funded influence operations. He also has to explain to voters – the election is in November – why the United States is a good partner, given that Palau has acted in good faith, signed the COFA renewal agreement, and now is going to have problems even just paying teachers and pensions.
Palau has been here before. From 2010 to 2018, due to similar complications with Congress, its funding was discretionary rather than mandatory, permeating its economy with uncertainty. China took full advantage.
Beijing worked to build up Palau’s dependence on Chinese tourism. In 2008, there were 634 Chinese tourists in Palau, less than 1 percent of all tourists. By 2015, it was more than 91,000, or around 54 percent.
Then, in 2017, China pulled the plug, making it clear that, unless Palau switched its diplomatic recognition from Taiwan to China, the tourists wouldn’t come back. This devastated the economy and left empty and crumbling Chinese-leased real estate and developments across the country.
Palau stood firm. But it was not easy, especially after COVID-19 added a second hit.
Now, the Chinese tourist flights are coming in again – just in time for the election.
Completely coincidentally, the Palau Senate has issued a resolution against hosting U.S. Patriot missiles batteries in the country.
Similarly, China may have offered the Federated States of Micronesia $100 million in infrastructure – $20 million for the federal government and $20 for each of the four states. That would mean bringing in more Chinese companies and labor, opaque budgets, and relationship building. And China’s largesse provides more reason for those inclined to publicly question why the United States can’t even pass the exiting agreement.
As the presidents of the FAS wrote in their letter to Senate leaders: “Although we understand the delay in the legislation’s approval, it has generated uncertainty among our peoples. As much they identify with and appreciate the United States, which formerly governed our islands, this has resulted in undesirable opportunities for economic exploitation by competitive political actors active in the Pacific.”
The Real Cost of Failing on the Compacts
In his congressional testimony, Grant Newsham, a retired Marine colonel and a senior fellow at the Center for Security Policy, estimated that should the COFA renewals fail, the cost to the U.S. of paying for the ships, aircraft, missiles, submarines, and troops required to secure the 5.6 million square kilometers covered by the Compact states would be around $100 billion – a year.
This has implications for the whole region. As Representative Amata Coleman Radewagen from American Samoa put it, the Compacts are “[o]ne of [the] most important tools that the United States has in supporting democracy and good governance while denying China the ability to project strategic power throughout the vast Pacific region.”
Some have argued that the defense and security components of the COFAs are unaffected by the current renewal process, as they are in a different part of the agreement.
However, first, note the word “Free” in “Compacts of Free Association.” The Freely Associated States voluntarily entered into the Compacts and can voluntarily withdraw from them – all parts of them (and that is clearly China’s long-term goal for the region).
Second, people in the FAS view “security” very differently. For many, it is the financial and services elements of the COFAs that provide them with security – including the ability to withstand the social, democratic, and political attacks that come with China’s deliberately and hugely destabilizing thrusts into their economies, societies, and countries.
Beijing, adept as it is at political warfare, knows that the way to neuter the FAS from a U.S. defense and security perspective is to enter first via local economics and politics. FAS citizens and leaders know it as well, and are raising the alarm. If, because of U.S. inaction on an already signed agreement, Palau can’t pay its pensions, the United States is going to be less likely to be able to base Patriots in Palau. That’s very reductionist, but still accurate.
Currently, legislatively, the COFA renewals are not even in a position to be voted on. They are nowhere. It is hard to overstate the damage this can cause to U.S. defense architecture in the Pacific and the United States’ reputation across the region – not to mention the lives of the people living in America’s closest defense allies.
The U.S. is obligated to protect the FAS from any attack or threat. While the attack may be coming from China, the threat is coming from U.S. government.