Although little attention is paid to the US island territories and associated states in the Western Pacific, they increasingly play key roles in strategic jockeying between Beijing and Washington. The regime in Beijing fully appreciates the strategic importance of this region and is working actively to undermine the US presence there.

These territories have limited commercial prospects and few natural resources other than the rich fisheries of Micronesia. Nevertheless, they do have considerable strategic importance for the continued US presence in the Western Pacific. If an adversary established a military foothold or economic dominance with de facto veto power in the territories, it could effectively split US and allied defenses along the so-called Second Island Chain stretching from Japan southward to Australia.

The islands include three US territories – Guam, the Commonwealth of Northern Mariana Islands and American Samoa – and three “freely associated states” – the Republic of Palau, the Federated States of Micronesia and the Republic of the Marshall Islands. While the latter three are independent nations, they are tied to the United States under respective compacts of free association (COFA).

Those arrangements authorize the United States to handle each nation’s national defense, preventing foreign militaries from having access to their territories. The agreements also oblige the United States to provide financial assistance to the territories, in addition to visa-free travel and the right to reside in America.

In a case study for the Center for Strategic and Budgetary Assessments in Washington, from which this article is excerpted, I’ve examined the different methods used in the three territories where Chinese efforts are most extensive – the Northern Marianas, the Federated States of Micronesia, and Palau.

Although the focus is on those three nations, it’s worth noting that Chinese interests have quietly established a strong commercial presence and dominate the fishing industry in the Marshall Islands. The People’s Republic of China is also rumored to be behind the recent vote of no confidence against the Marshalls president, with the ultimate aim, according to some observers, of peeling the country away from Taiwan.

Northern Marianas

In 2014, Chinese-owned casino company Best Sunshine opened on Saipan, a small island with a population of 50,000, promising multi-billion-dollar investments.

For the island, the timing was seemingly fortuitous. Its economy was in the doldrums, and its government finances were on the verge of collapse. Amidst rumors of bribes, Best Sunshine was approved for business. Along with this company came a timely contribution to the public pension fund and to Saipan’s utilities company.

Chinese company Best Sunshine, pioneer of casino development on Saipan, is characterized in a new case study as an agent of Chinese political warfare. In this file photo taken in the company’s casino Imperial Palace a Chinese contestant poses with her trophy during the 11th Asian Supermodel Contest in 2017. Photo: AFP

In addition, Chinese nationals migrated to the island, began leasing and buying property, and started other businesses. This, combined with visa-free entry for Chinese tourists, created a rapid-growth Chinese presence that hadn’t existed a few years earlier.

This surge has generated a segment of the local population and political class that views the PRC presence as a strong positive. As a result, anything that threatens to upset that relationship, such as US military bases, is viewed as a problem.

The casino is rapidly becoming a tool of political influence, with reports that the casino developers have funded several candidates in the 2018 elections.

Saipan’s governor also announced a $20.8 million special funding measure described as being generated by casino tax payments. The money appeared right before the election and included $3.5 million for commonwealth retiree fund member bonuses and a $150,000 grant for the Marianas Political Status Commission, a body created solely to decide how to become independent from the United States.

Tinian, a smaller island near Saipan with a population of around 3,500 people, is China’s next target for casino building. Chinese-owned or -controlled casino and resort companies are planning to build large resorts with over $1 billion of investment planned – although they’ve had a bumpy ride of late. The choice is not a coincidence: about two-thirds of the island is leased to the US military.

One of the Chinese developers, Alter City Group, has called for limits to be placed on US military activities on both Saipan and Tinian, claiming that they are bad for tourism and suggesting that without the limitations, the company might withdraw its business. Not surprisingly, a degree of local opposition to the US military has emerged. Recently this opposition has been extended to several of Washington’s new plans in the region, including the US proposal to develop an amphibious training area on Pagan Island at the northern end of the Mariana Islands chain.

Although it is hard to say with certainty that the Chinese Government is directly behind the casino surge in this area, there is clearly a very strong convergence of interests. A common feature of Chinese political warfare operations globally is the mutually supportive – and not coincidental – linking of Chinese commercial activities with PRC government operations and interests.

Compare the Northern Marianas case with Beijing’s recent efforts to rein in Macau casinos to prevent capital outflows from China. The Chinese Government has made no such moves against Best Sunshine, even though extremely large sums of money move from China through the Saipan casino. For Beijing, this is perhaps a small price to pay for the strategic benefit of handcuffing the US military on Pagan, interfering with it elsewhere in the Northern Marianas, and creating a politically influential Chinese presence in an American territory.

Micronesia

The Federal States of Micronesia comprises four island states: Pohnpei, Kosrae, Yap and Chuuk (previously known as Truk). Unlike the other “compact” states of Palau and the Marshall Islands, which have diplomatic relations with Taiwan, the FSM has recognized the Peoples’ Republic of China since 1989 and maintains an embassy in Beijing.

China has taken a steady, systematic approach to political warfare during the last 30 years in the FSM. Its agencies have insinuated themselves into its political and commercial worlds through grants, loans, donations, gifts, scholarships, educational opportunities and China-sponsored regional forums offering investment and aid.

A particularly effective approach has been “visit diplomacy” – hosting FSM leadership and delegation visits to China and rolling out a sometimes-literal red carpet. The then-FSM president Peter Christian visited China in 2017 and met with President Xi Jinping. Besides meeting senior Chinese officials, visitors on these all-expenses-paid trips are well-treated. Reportedly they receive cash payments for “expenses” that are sometimes a source of controversy back in the FSM.

China also provides scholarships for students from the FSM, including children of prominent politicians, to attend college in China. In addition, the PRC provides technical training programs for Yapese and occasionally dispatches medical experts to the FSM.

Infrastructure

China built the Pohnpei State Administrative Building, the largest structure in the FSM, as well as a major sports center. A Chinese construction company also built and provided personal residences for the FSM president, vice president, speaker and chief justice. And the PRC reportedly funds the lease for the FSM Embassy in Beijing.

In addition, China has donated the construction of a new state house in Chuuk worth an estimated $10 million.

Chinese companies have also bid on major US “compact-funded” infrastructure projects – sometimes as the sole or most competitive bidder, drawing on Chinese workers already in the country. Other notable infrastructure projects include building a fish processing facility, refurbishing generators in Pohnpei, upgrading and maintaining outer island airfields, and undertaking extensive road construction. Finally, Beijing has donated inter-island shipping vessels to improve local transport.

Investment

Through its Embassy in Pohnpei, China also provides financial assistance directly to the FSM.

These grants include multiple contributions to the FSM Trust Fund, to which both the FSM and US Governments contribute.

These contributions are intended to support the nation when Compact of Free Association funding terminates in 2023 – and there is little if any optimism that funding will be reinstated. Few observers believe the Trust Fund will be adequate to replace current levels of COFA funding. Uncertainty over whether the US Government will offer some amount of financial aid to compensate is immensely worrisome to FSM leaders – and to leaders in the other compact states as well.

The PRC has also provided money to bail out the Chuuk state government on at least one occasion and periodically donates money to assist recovery from natural disasters. Additionally, the PRC has made regular loans to the FSM national and state governments, which  have limited capacity to repay.

Creating dependency, inserting itself inextricably, appears to be a central theme of Chinese support provided to the FSM. In one notable case, Luen Thai Fishing Ventures, a quasi-state Chinese company, has managed to dominate the FSM fishing industry. Reportedly it both exerts considerable political influence and provokes a degree of public resentment.

Yap pullback

Micronesia’s Yap state is a small island group with a population of 11,000 and few economic prospects beyond a tiny number of tourists and modest fishing license revenue. Yap’s experience with a Chinese resort developer shows how commercial activities and political warfare combine in a quietly coordinated effort reminiscent of the casino business in the Northern Marianas.

In 2011 a Chinese development group, ETG, appeared on the scene proposing to build large resorts, a casino and golf courses to make Yap a major tourist destination. It promised to invest hundreds of millions of dollars, improve infrastructure, and help with Yap’s education and health needs. It also sought to address the island’s high unemployment problem. ETG bought a number of 99-year leases on properties from Yapese citizens.

Despite the lofty promises, opposition materialized, with concerns expressed about the project’s scale, effects on local culture and lifestyle, and a lack of transparency in the deals between. As a result, the Yap governor and ETG were forced to pull back.

However, ETG is persistent and currently biding its time. The company still has its leased properties, and a local ETG representative continues to work to build support for its offer.

In 2013, the FSM president expressed his support for the ETG proposals, and two years later the Yap governor and a delegation including the local ETG representative visited China.

During their trip they met with ETG’s chairman and an official of Luen Thai fishing company. At the delegation’s last stop in Beijing, the group met with the CEO of China Civil Engineering

Construction Corporation to discuss a potential loan for the FSM. In 2017 another group of Yap government officials, traditional leaders, and dancers took a PRC-sponsored trip to several Chinese cities as part of cultural exchange tour.

In other parts of the FSM, casinos are still viewed as lifesavers – with Ponhpei government officials speaking out in favor of casino development.

Effectiveness

The dependency that the Federal States of Micronesia now has on China and the goodwill that the PRC has fostered there are striking considering the FSM’s longstanding relationship with the United States and how US financial contributions dwarf those made by Beijing.

It seems the United States is paying the overhead and is taken for granted while China is getting outsized credit for what it does, especially because of the professional promotion of its efforts.

Parts of the FSM government support Chinese resort development and are happy to acquiesce to the Chinese takeover of the local fishing industry, their only economically valuable resource. There is also growing willingness to accept Chinese aid and accumulate debt.

The FSM’s political class has tilted increasingly toward China over the years. In Kosrae, employees of Luen Thai Fishing Venture Ltd. were once living in a house owned by the FSM vice president, who publicly supported China’s repression of the Uighurs.

In 2016 a legislative proposal was tabled in the FSM to end the Compact of Free Association in 2018 – five years ahead of schedule. In Chuuk a secession movement is active. Some regional observers claim a degree of Chinese involvement in both developments.

Importantly, there is no sign that the FSM is eager to disassociate itself completely from the United States. In fact, it has limited options for allowing a Chinese defense presence because of the agreement with the United States.

However, if that funding were to disappear or become greatly reduced, Beijing might be able to rapidly increase its influence in the FSM.

Palau

Palau has only 20,000 citizens, maintains diplomatic relations with Taiwan, and is traditionally well disposed toward the United States and Japan. Its location east of the Philippines is particularly useful from a military perspective.

The US government agreed to a revised compact agreement with Palau in 2010, but there was a six-year delay in getting Congress to pass the economic assistance part of the agreement.

Around 2014, Beijing placed Palau on its approved list for overseas tourism. Chinese tourists poured into the island, constituting about half of the country’s tourists in 2015. This led to a Chinese-funded hotel construction boom, the buying up of buildings and apartments, and the driving up of rents that forced many locals to relocate.

Chinese-owned restaurants and small businesses also sprang up, displacing local enterprises, and many long-term land leases were sold to Chinese buyers.

Chinese tour groups were typically self-contained, staying in Chinese-owned hotels and bringing in their own tour guides. This froze out the locally owned tourism businesses. As a result, Palau’s governor ordered a reduction in the number of charter flights from China, hoping to attract a better class of tourists.

The influx of Chinese tourism split the Palauan community between those benefiting or depending on Chinese money and those troubled by the threat to lifestyles, living costs and the local environment.

In late 2017 Beijing placed Palau off-limits for package tours. As a result, the number of Chinese tourists plunged. The off-limits order, which remains in place, reportedly seeks to apply pressure on Taiwan via the Palauan economy.

China has gotten a foothold on this island that it did not have a few years ago. While local opposition to Chinese encroachment exists, there is now also a pro-Chinese segment in the society. Over time, Palau could increasingly drift away from the United States and switch diplomatic recognition from Taiwan to the PRC in efforts to reap more economic benefits.

Political warfare

China has insinuated itself into the heart of the Western Pacific, leapfrogging the first island chain – which runs from Japan down through Taiwan and the Philippines to Borneo – and burrowing into and beyond the second island chain. And it now has a presence in the center of a north-south axis between Japan and Australia. This is a strategic accomplishment, and it has been able to do it without applying military force.

These developments represent significant challenges to the local US military presence.

China’s Northern Marianas investments are adjacent to key US military bases and training areas that are essential infrastructure for repositioning US forces in Asia and countering the PRC’s strategic expansion. The conflict between these interests and those of the local government has already stymied the US development of a needed amphibious training area in Pagan.

Meanwhile, China has made solid inroads into all levels of the Federated States of Micronesia, representing key terrain to the south of CNMI. Chinese entities have co-opted key leaders and established a restricting commercial presence. They have also laid the groundwork for springing a debt trap on the FSM and local state governments.

While free-association agreements provide legal grounds for keeping the Chinese military out of FSM, Palau, and the Marshall Islands, there is a risk of a local government becoming unduly sympathetic to Beijing. And reminiscent of Puerto Rico in past years, local opposition can prevent the US military from using facilities to which it is legally entitled.

Much of this problem has to do with perceptions. If the United States is seen to be less active in the Western Pacific, the governments of these territories may feel that Chinese dominance in the region is inevitable and negotiate favorable terms with Beijing.

Grant Newsham is a retired US Marine Corps officer and a former US State Department diplomat. This article is excerpted with permission from the Center for Strategic and Budgetary Assessments.