How do you bargain with a country with whom you are technically at war?  That was the dilemma facing Israel and Lebanon last year.  In October 2022, the two countries reached a deal addressing the maritime border separating the two Mediterranean nations, allowing the natural gas reserves adjoining the border to be developed.  Today’s post involves many themes of negotiation:  mediation, stakeholders not at the table, anchors, urgency, and international law.

National Rights in the Near Coastal Seas

How do nations know what to expect with respect to maritime rights?  This question lies at the heart of the negotiations between Israel and Lebanon.  There are a broad set of principles laid out in the United Nations Convention on the Law of the Sea (UNCLOS) which were negotiated in the decades following World War II.  Some of the features defined within UNCLOS are included in this schematic diagram:

Coastal nations can claim rights in the waters adjacent to their territory based on the distance from the shoreline.  A coastal nation may define laws and regulation and exploit resources within 12 nautical miles of the coast—the territorial sea.  For reference, it is possible to see approximately 5 miles to sea from the coast—so the extent of the territorial sea is somewhat beyond the coastal horizon.  In addition, customs, taxation, immigration, and pollution laws may be enforced a further 12 nautical miles—the contiguous zone.  This prevents for example smugglers from hanging just beyond the territorial sea and sprinting in to drop off contraband.  Out to 200 nautical miles from the coast, a nation has the sole right to exploit natural resources—the exclusive economic zone (EEZ).

These principles are clear, but issues can become muddier when national waters overlap, when two nations disagree on the interpretation of UNCLOS, or when negotiating countries are not parties to UNCLOS.  In the eastern Mediterranean, Lebanon is party to UNCLOS, though Israel is not.  Nevertheless, UNCLOS represents a standard against which bargaining positions can be measured.

The Israel-Lebanon Maritime Border

The Israel-Lebanon land border has been a flash point in the recent past, chiefly during the 1970s and 1980s with probing attacks from Lebanese territory and Israeli sponsorship of proxies within Lebanon.  PLO attacks preceding Israeli invasions in 1978 and 1982, and Hezbollah attacks preceding Israeli invasion in 2006.

In the early 2000s, gas exploration took off in the eastern Mediterranean.  Off the coast of Israel, natural gas discoveries started in 1999, but the two discoveries that changed Israel’s energy future were the 2009 discovery of the Tamar field (estimated at 310 billion cubic meters of gas) and the 2010 discover of the Leviathan field (estimated at 620 billion cubic meters of gas).  Tamar, Leviathan, and other discoveries along Israel’s coast have allowed the small nation to target production of 40 billion cubic meters per year which places it in the top 25 exporters of natural gas in the world.

To exploit any natural gas discoveries adjacent to Israel’s north and Lebanon’s south, a maritime border had to be established.  With a defined border, blocks could then be delineated within coastal waters, and international energy companies would be able to bid for exploration and commercialization rights.  In 2010, US diplomat Frederic Hof began mediation between Israel and Lebanon to establish the maritime border.  At that time, the Karish and Qana fields were unknown.  In the absence of data about offshore natural resources, both parties advanced proposed borders:

Per UNCLOS, maritime borders of neighboring countries are drawn perpendicular to the coast.  With some slightly different assumptions, Israel offered Line 1 and Lebanon offered Line 23—both lines ostensibly perpendicular to the coast at the Israel-Lebanon land border.  (Note:  the above map is representative of the general features of the parties’ positions, but the lines on the above map were not drawn with GPS accuracy.)  In a classic split the difference solution, Hof proposed an intermediate line between Line 1 and Line 23.

The discovery of significant gas reserves along the maritime border of Israel and Lebanon dramatically raised the stakes for any negotiation.  In 2013, the Karish field (estimated at 85 billion cubic meters of gas) was discovered.  Subsequently, the Qana field (possibly up to 400 billion cubic meters) was also discovered.

In 2011, the Lebanese government commissioned a study from the United Kingdom Hydrographic Office (UKHO) which resulted in Line 29.  In 2020, the Lebanese side proposed Line 29 in response to maritime border talks stalling.  This may have been a negotiating tactic to cast doubt on Israel’s development of the Karish field.  Line 29 never became part of the formal Lebanese bargaining position—it hung in the background when talks resumed later.

Parties

This dispute was a two-sided negotiation with some interesting parties not represented at the bargaining table:

• Lebanon:  Lebanon is a nation that has been divided by civil war and visited by foreign militaries, including the Israeli Defense Force, Syrian Army, and Palestinian Liberation Organization.  Additionally, Hezbollah represents a proxy force for Iran and Syria.  The country has racked up huge financial obligations ($100B in debt) without proportional benefit to its people.  Natural gas revenue would not eliminate Lebanese indebtedness, but it would be a move in the right direction.
• Israel:  Israel has a vibrant economy which was hampered until the early 2000s by a lack of energy independence.  With increased economic ties to the regional economy, Israel hopes that diplomatic progress will follow, leading to more normal relations.  Thus, natural gas is not merely a tool for increasing GDP, to Israel, it represents a potential tool for the advancement of peace efforts.
• United States:  Through its good offices, the United States has invested significantly in these negotiations as a part of its Middle East regional and European political strategies.  The US hopes that natural gas revenue will help stabilize the tenuous domestic political situation in Lebanon.  And, the prospect of additional inputs of liquid natural gas (LNG) into energy hungry Europe is an added bonus in the wake of the Russo-Ukrainian war and loss of Russian natural gas supplies.
• Hezbollah:  On July 2, 2022, launched three drones toward the Karish gas field, asserting its role as a stakeholder not represented at the bargaining table.  The drones were shot down by Israeli forces, but the message was clear—Hezbollah could make production of natural gas difficult if the border issue was not settled.  However, lest it appear that Hezbollah was angling for improved relations with Israel, the primary motivation of its stand was likely that the deteriorating economic situation in Lebanon weakened the group’s political power in the small nation [1]
• Israeli Opposition:  In retrospect, we know that Benjamin Netanyahu was victorious in the Nov. 1, 2022 Israeli elections following the maritime border deal.  But, at the time of the negotiation, he was in opposition and just another stakeholder not at the bargaining table.  He made his dislike of the deal very clear in the press.  Presumably, he had two reasons for criticizing the deal.  First, Hezbollah had supported the deal with its drones, so he viewed the agreement as a capitulation to Hezbollah military action.  Second, the bargain was struck by Yair Lapid’s government, and he no doubt felt obligated to cast shade on his rival.  Since the agreement was completed, he has been quoted as saying that he will “neutralize” the agreement—he however did not say that he would abandon or disavow it.

Issues

In a sense, the issues involved in this negotiation were deceptively simple.  Examining the maritime map of the Israel-Lebanon border, the issue seems to be literally one of how to slice the natural gas cake, but that ignores other issues that represented challenges and opportunities in the negotiation.  One of the most important strategies of negotiation is to perceive all the issues at hand in order to take advantage of hidden breaks.  Some issues and opportunities confronting the Israeli and Lebanese negotiators included:

• Ossified Negotiating Positions:  In any negotiation that proceeds for an extended period of time, the positions of the principals risk becoming hardened and inflexible.  In the case of this negotiation, the first attempt at mediation in 2010 had been followed by a long period without any progress.
• Regional Rivalry:  Israel’s northern border has been the site of recurrent violence since Israeli independence in 1948.  It can be tremendously difficult to work constructively with an old rival.    
• Urgency of the Moment:  As in the case of Nixon’s opening to China [2], the Israel-Lebanon maritime border negotiation benefited from some unique circumstances that created one-time incentives toward breakthrough.  These include:  1) With global warming becoming an issue, hydrocarbon producing nations are under pressure to extract resources from the ground or leave them forever in place.  If Israel and Lebanon do not pump out the Karish and Qana fields in the next few decades, it is possible that the opportunity will pass, like money left on the table.  2) The Lebanese treasury is under massive pressure as Lebanon’s GDP craters.  3) Both the Israeli and Lebanese governments were in flux.  Israeli elections followed in late 2022 and the Lebanese government was in a caretaker role.  So, neither side had time to spare before they might lose power.  4) Israel was ready to bring the Karish field into production in 2022, but without an agreement, there was risk of military attack on gas infrastructure from the Lebanese side of the border—something the Israeli military could deal with but which it no doubt preferred not to.  5) In the wake of the Russian invasion of Ukraine, the world was short of natural gas due to the Russian supply to Europe being interrupted.  So, negotiation of new natural gas agreements would be easy and lucrative from the supplier point of view.

Negotiation

Early mediation efforts in 2010-2012 by US diplomat Frederic Hof were described above.  Unfortunately, although the issues had been explored, no concrete progress had been made.

Negotiations restarted in October 2020 with mediation by Assistant Secretary of State for Near Eastern Affairs David Schenker.  The Lebanese asserted Line 29 which fell outside of the previously discussed Lines 1 and 23.  This was what might be called a late-stage anchor.  Early anchors can improve the bargaining position of a party [3].  Late-stage anchors signal one of two things:  a shift of the balance of power in the negotiation toward the party offering the anchor or a willingness of the party offering the anchor to blow up the negotiation.  Talks quickly deadlocked with the Israeli Energy Minister Yuval Steinitz tweeting hyperbolically [4], “Lebanon has changed its stance on its maritime border with Israel seven times.”

Amos Hochstein was appointed as the new US mediator in October 2021.  A US diplomat born in Israel, Hochstein was familiar with the region, as well as having familiarity with US departments affected by the negotiation (the White House, State, Treasury, and Energy).  A new mediator can often get stalled negotiations moving, and in this case, that seems to have been critical.  He was able to shuttle between the two sides and apply pressure for compromise.

The US pressured the Lebanese side to abandon Line 29; nevertheless, the Lebanese side seems to have benefited from the late-stage anchor.  The final line swung from the split-the-baby Hof line of 2010-2012 negotiations to the Lebanese offered Line 23—a victory for the Lebanese side.

Interestingly, there is another interpretation of what happened in the negotiation.  The Israeli side relinquished some territory that it had earlier claimed (Line 1), but it gained some prospect for peace on its northern border.  The agreement places two valuable economic assets along that border (Karish for the Israelis and Qana for the Lebanese), creating a powerful disincentive to future military conflict on Israel’s norther border.  So, this may have been a sea-for-peace trade.

Once the new maritime border had been agreed on, the question became:  how much of the gas is on the Lebanese side of Line 23 and how much is on the Israeli side?  This was a theoretical question because the field remained unexplored at the time.  The answer the two sides agreed to was in effect 83% on the Lebanese side and 17% on the Israeli side.  The final deal was signed at the end of October, just prior to Israeli elections, and included the features:

• The first 5 kilometers are defined by the buoy line set by Israel for maritime security, farther out, Line 23 governs.
• 17% of profits from the Qana field go to Israel.
• US to mediate royalty disputes.

Conclusions

There are so many interesting themes to the Israel-Lebanon maritime border negotiation.  They were ticked off in the discussion above (mediation, stakeholders not at the table, anchors, urgency, international law).  One that bears additional reflection is the negotiation model.  There are several negotiation models that apply to various bargaining situations (competitive, problem solving, compromise, allocation).  Clearly, some see this negotiation as competitive—for instance, Netanyahu has made it clear that he thinks Israel conceded to Hezbollah—he is embracing a competitive view of the negotiation.  But there are other aspects.  Israel compromised regarding the final line—a consideration that may (or may not) pay off in the long run in terms of improved relations with the US (who appreciated the support of its diplomacy) and with Lebanon.  There was an allocative aspect to the negotiation—which country would receive what fraction of the gas reserve?  Allocative negotiations often proceed in the face of imperfect knowledge of the size of the asset, but this type of negotiation is benefited as more information is provided.  Given that the undersea gas fields of the eastern Mediterranean were better understood in 2022 than 2010, this increased knowledge aided a final settlement.

[1] Marsi, F.  “What to know about the Israel-Lebanon maritime border deal,” Al Jazeera, Oct 14 (2022).

[2] Gallant, S.R.  “Opening to China,” DiscussingTerms, Dec. 1 (2022).  discussingterms.com/2022/12/01/opening-to-china/

[3] Gallant, S.R.  “Making an Offer,” DiscussingTerms, Jan. 9 (2023).  discussingterms.com/2023/01/09/negotiation-tip-making-an-offer/

[4] Daily Sabah.  “Israel accuses Lebanon of changing stance on maritime border,” Nov. 20 (2020).

Disclaimer:  DiscussingTerms^TM provides commentary on topics related to negotiation.  The content on this website does not constitute strategic, legal, or financial advice.  Consult an appropriately skilled professional, such as a corporate board member, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on DiscussingTerms.com.

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Today’s post takes on Detroit’s 2013 bankruptcy.  Bankruptcy is a classic type of multiparty negotiation.  From the point of view of scope, Detroit’s bankruptcy settlement is fascinating, with billions of dollars at stake, negotiated in the glare of national media.  Most remarkably, the negotiation was successful.  The parties were able to come to terms in which every creditor agreed to the deal.

Background

Detroit is located on the shores of Lake St. Clair and the Detroit River, across from Windsor Canada.  Historically, it has been a major manufacturing center for the United States.  However, over a period of 6 decades, from the 1950s to the early 2000s, Detroit fell on increasingly hard times, leading ultimately to bankruptcy in 2013.  Detroit’s bankruptcy did not have just one cause, it had many.  Some of the causes of bankruptcy included:

• Growth of Suburbs:  In the Post World War 2 era, many Americans moved out of crowded cities to suburbs.  This population movement can be summarized in the following table.  From 1950 to 1980, Detroit City loses 0.7 million people, as the metro region gains 1.0 million people.  This represents a loss of some of Detroit’s best educated and most talented workers.

• Loss of Employment:  As population shifted to suburbs, businesses moved from Detroit to the surrounding suburbs, reducing the tax base.
• Shrinking Tax Base:  At the time of the bankruptcy (2013), Detroit had four sources of tax revenue [1]:  1) Property taxes peaked in dollar value at about $1B in the late 1950s.  Even though tax rates had increased since the late 1950s, the absolute yield of property tax dollars had shrunk to less than $250M.  The causes of the loss in revenue were movement of businesses out of Detroit City and degradation of the housing stock within the city.  2) An income tax was initiated in 1962 to capture revenue from workers who commuted into the city.  In 2000, the income tax brought in about $500M, but it shrunk over the following years, bringing in only half that amount in 2012.  3) A utility tax brought in a small amount of revenue (less than $100M).  4) A tax on gambling brought in about $250M at the time of the bankruptcy—without this tax, the budget simply would not balance.
• Poor Management and Outright Corruption:  Mayor Coleman Young, who held office for two decades starting in 1974, recognized that Detroit’s government needed to shrink in line with its reduced population and tax revenue.  His administration cut jobs and programs, allowing Detroit’s debt to drop from $3.3B in 1974 to $1.4B in 1985.  But, starting in 1985, Detroit’s debt increased in an exponential fashion.  The following table lists the level of debt at the end of each mayoral administration.  Clearly, debt was becoming a serious problem in the Archer administration.  Instead, of addressing the problem, the Kilpatrick administration used a shell corporation structure to add $1.44B of debt [1]:

By 2012, it was clear something needed to be done.  The city’s debt had ballooned to $18.5B (more than double what it was at the end of the Kilpatrick administration).  Clearly, Detroit was no longer in control of its debt—the debt was in control of Detroit.  83% of the budget was devoted to police, fire, retiree healthcare, pension contributions, and debt service.  Only 17% of the budget was available for all the other functions of government. Of the $204M budgeted for discretionary items in 2012, $121M was deficit spending, piling more debt onto the city.

Multiparty Negotiations

Bankruptcy is an example of a multiparty negotiation.  Often a multiparty negotiation is conceptualized using a Venn diagram:

Each party is envisioned as possessing a circle within which it will be satisfied by the outcome of the negotiation.  In the simplest representation of this idea, negotiation consists of finding the area in which all parties are satisfied by the outcome (i.e., the red hatched region).  However, several aspects of multiparty negotiations make them unique and risky:

• Initial Marker:  From the point of view of a mediator, it may be tempting to set a marker for one party at a time.  The multiparty negotiation then becomes a succession of two-party negotiations between individual parties and the mediator.  The disadvantage of this approach is that the mediator may not be familiar with the zone of satisfaction for each party.  Because of this lack of knowledge, the mediator may set an initial marker outside the zone of possible agreement (e.g., the red dot in the diagram below).  If that happens, the mediator is stuck with two bad options:  1) go back to the first party to extract additional concessions or 2) face the possibility that some of the parties will not sign onto the final agreement willingly.

• Coalitions:  In a multiparty negotiation, groups of parties may find it strategically advantageous to band together to attempt to extract concessions from the mediator or from the other parties.
• Zone of Possible Agreement:  The Venn diagrams above are depicted with a red hatched area in which it is possible to satisfy all the parties (i.e., the zone of possible agreement).  However, it is possible that such a zone does not exist.  It may only be possible to satisfy a portion of the parties with any practical solution.
• Information Sharing:  In a multiparty negotiation, it is likely that some parties will share information with certain parties while excluding other parties from that information.  Similarly, side negotiations and trade-offs are possible.

Municipal Bankruptcy

In any negotiation, it is important to ask, “What are the rules of this negotiation?” because the rules shape the zone of possible agreement often as much as the needs and desires of the parties shape it.  In the case of municipal bankruptcy, the laws implicitly recognize that people who live within a municipality are entirely dependent on the government for services like police, fire protection, schooling, and public transportation.  Chapter 9 bankruptcy looks to preserve viable local government at the same time it tries to protect the rights of creditors.

Governmental bankruptcies are rare events in the United States.  On average, two or three municipalities declare Chapter 9 bankruptcy each year.  These are usually cities and towns, not larger entities (Orange County, California’s 1994 bankruptcy and Jefferson County, Alabama’s 2011 bankruptcy being exceptions).  The procedures for Chapter 9 bankruptcy include:

• State Law:  To file for bankruptcy, a municipality must exist within a state that authorizes government entities to access Chapter 9.  Many states either fail to authorize municipal bankruptcy or create conditions too restrictive to make it practical.
• Insolvency:  A municipality must demonstrate insolvency (i.e., that its debts are larger than it resources to pay).
• Good Faith Bargaining:  A municipality must have attempted to resolve its debts with its creditors prior to filing for bankruptcy.
• Authority Under Bankruptcy:  Chapter 9 (municipal) bankruptcy is different that Chapter 11 (corporate) bankruptcy.  In corporate bankruptcy, the court’s powers are broad and substantial.  If a corporation is found insolvent, the owners of the company may be left with nothing.  In contrast, Chapter 9 preserves the operational powers for the municipality (or the emergency manager empowered to act in the elected officials’ place).  Even while inside bankruptcy, the city or county can continue to maintain its roads, pay its employees, and undertake new contracts.
• Plan of Adjustment:  To exit bankruptcy, the municipality (not the creditors) must develop a “plan of adjustment” which is presented to the responsible judge.  For the plan to be approved, it must be legal (i.e., comply with relevant state and federal law), be in the best interests of the creditors, not discriminate unfairly between the creditors, and be feasible to implement.

The Negotiation

Judge Steven Rhodes was appointed to oversee Detroit’s bankruptcy.  Broadly speaking, there were five parties involved in Detroit’s bankruptcy negotiations:

• The Government of the City of Detroit:  With strong statutory powers, the state-appointed emergency manager Kevyn Orr was given control of Detroit’s budget and had the ability to set aside labor contracts and sell assets.  Orr recognized that Detroit needed to be able to protect its citizens with fire and police, pave and light its streets, plow snow in the winter, and perform a host of services that would make people want to live in Detroit, rather than abandon it.  So, in addition to solving the city’s debt problem, Orr wanted $1.7B of new spending over 10 years to fix things like streetlights and computer systems, purchase buses, and provide wage increases to workers whose pay had stagnated during the years of budgetary crisis.
• Current Detroit City Workers:  The policemen, firemen, and other city workers were in a difficult position, particularly if they had put substantial time toward their city pension.  It was hard for many of them to walk away, but not all of them needed to walk away to tip the city into an ungovernable mess.  If a significant percent of the city workers took jobs in Detroit suburbs or moved to other cities, the city could grind to a halt.  Throughout the negotiations, the unions representing the city’s workers were visible and vocal advocates for their members, reminding everyone who would listen of the important services they provided.
• Retirees Receiving Healthcare and Pensions from Detroit:  The retirees were perhaps the most vulnerable in this negotiation.  Many were entirely dependent on their pensions because, as city workers, they had not paid into Social Security.  If they took a significant hit in the negotiation, many would not be able to pay their rent or buy groceries.  But, in a way, this was also a strength of their bargaining position.  It would be extremely difficult for the bankruptcy judge to endorse a plan that put tens of thousands of retirees on the street.  And, they had one other card to play, Michigan state law said that pensions could not be reduced in municipal bankruptcy.  (On the other hand, federal law allowed pensions to be reduced in bankruptcy, so the law was unclear.)  If the retirees felt that they got unfair treatment, they could attempt to litigate against the plan of adjustment.
• Unsecured Creditors of Detroit:  Secured creditors held debt tied to specific streams of revenue (for example the revenue of the city’s water and sewer system)—they stood to recover 100% of their capital.  But, unsecured creditors were not so lucky—what they recovered was the subject of negotiation within the bankruptcy.  These creditors had little leverage in the negotiation.  They could express their dismay at the “haircut” they were to receive, and they could refuse to sign onto the plan of adjustment.  Ultimately, they could appeal the plan if they felt that they had grounds, perhaps delaying or casting a shadow over the plan.
• Bankruptcy Mediator:  Judge Gerald Rosen was appointed to act as a bankruptcy mediator, working with the parties to narrow differences and flesh out possible terms.  However, Rosen acted as more than an honest broker.  He developed a mechanism to bring additional funds into the settlement.  Detroit had authority over the works in the collection of the Detroit Museum of Art.  Rosen realized that these works of art would become targets of liquidation in bankruptcy, leaving the city with a huge cultural vacuum.  Rosen created a deal in which private foundations and the Michigan state government were solicited for funds to protect the Detroit Museum of Art, and the funds were then used to protect the city’s pensioners.  In effect, the donations were a pass through to the retirees which had the effect of protecting the city’s art in perpetuity:

The negotiations proceeded from July 18,2013 when the city filed for Chapter 9 to November 7, 2014 when Judge Steven Rhodes accepted the plan of adjustment.  Some significant milestones in the negotiation were [2]:

• Kevyn Orr had a vision for the city with the people of Detroit at the center of his vision, but he was no cupcake.  Shortly after filing for bankruptcy, Orr made his first offer to pensioners with 50% reductions to retirement benefits and major cuts to healthcare coverage.  This and other early offers to unsecured creditors had the effect of sobering all the parties in the proceeding.  This was in effect a low ball first offer.
• Orr used his powers to put other markers down.  For instance, he named a new chief of police, James Craig, who came from the Cincinnati police force.  Craig would work to restore morale, reduce response times, and improve documentation systems.  By naming the new police chief and supporting the police force, Orr wanted to signal that Detroit was still open for business.
• Both Bank of America Merrill Lynch and UBS held significant debt from Detroit.  They attempted to settle with the city early in the bankruptcy process.  First, they cut a deal for 75¢ to 87¢ on the dollar.  Then, they and the city cut a more modest payout for the banks in a second deal.  Both times, Judge Rhodes nixed the deal, indicating that he would not tolerate side deals that might make the overall settlement impossible or might burden the city with too much debt imperiling its financial health after emerging from bankruptcy.
• Two of the last holdouts on the plan were bond insurers Syncora and Financial Guaranty Insurance Company (FGIC).  They stood to lose a lot in the bankruptcy—Syncora would receive $25M on a $400M claim.  As financial institutions, they did not have the public sympathy that either the pensioners or the city workers received.  But, they had one thing on their side—if the city ruined them, then the reputation of Detroit in financial deals would suffer.  Both Syncora and FGIC were able to cut sweetheart real estate side deals with the city that did not make them whole but offered the opportunity that over time they could make good some of their losses in the bankruptcy.  With Syncora and FGIC signing on, essentially all the large unsecured creditors were inside the bankruptcy deal.
• The cost of the bankruptcy in terms of fees to lawyers and financial professionals was $170M to Detroit, an index of the Herculean effort required to put Detroit’s financial house in order.  Of course, the savings in forgiven debt was many times that figure.  Ultimately $7B was removed from Detroit’s books, leaving Detroit with somewhat more debt in November 2014 than it had at the end of the Kilpatrick administration.

Conclusions

Multiparty negotations are often difficult and time consuming, as was the case in Detroit’s 16 month bankruptcy.  Two significant features of this negotiation were:

• An iterative approach to the negotiation in which early offers to the pensioners, the unions, and the financial institutions were revised, sometimes significantly, until a zone of satisfaction was located.
• Creative enlargement of the pie was critical to drafting the final plan of adjustment.  The most impressive addition to the plan was the $800M added to preserve the art held by the Detroit Museum of Art and to protect the retiree pensions.  And, the sweetheart real estate deals with Syncora and FGIC were critical to bringing those creditors into the plan.  The latter is an example of the strategy of “is there something that would cost little to one party and would mean a lot to another party?”

It’s a credit to emergency manager Kevyn Orr, bankruptcy judge Steven Rhodes, and mediator Gerald Rosen that they were able to resolve the financial crisis and return the city to democratic administration.  As Eminem rapped, “You only get one shot, do not miss your chance to blow.  This opportunity comes once in a lifetime.”

[1] Bomey, N. and Gallagher J.  “How Detroit went broke: The answers may surprise you – and don’t blame Coleman Young,” Detroit Free Press, Sept. 15 (2013).  All dollar values adjusted to 2013 dollars.

[2] Bomey, N.  Detroit Resurrected:  To Bankruptcy and Back, W.W. Norton and Company (2017).

Disclaimer:  DiscussingTerms^TM provides commentary on topics related to negotiation.  The content on this website does not constitute strategic, legal, or financial advice.  Consult an appropriately skilled professional, such as a corporate board member, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on DiscussingTerms.com.

The post <strong>Detroit’s Bankruptcy</strong> appeared first on discussingterms.com.

February 2022 was the 50^th anniversary of President Richard Nixon’s visit to the People’s Republic of China—the first state visit of an American president to China.  The 1972 visit capped years of negotiations between the US and the PRC over the terms for establishment of diplomatic relations.  Those negotiations were intense, secret, and freighted with consequence for both nations, and they are the subject of today’s DiscussingTerms post.

Background

In January 1967, Henry Kissinger was in Prague meeting with Antonín Šnejdárek, the former head of Czech intelligence operations in Germany who was then director of the country’s Institute of International Politics and Economics [1].  During their conversation, Šnejdárek made an interesting conjecture, “Despite their wild talk, the Maoists might turn out to be more flexible toward the U.S. than their opponents (the USSR).”  Šnejdárek’s essential point was that the United States might be able to “flip” the Chinese Communists and score the biggest diplomatic coup of the post-World War II era.  In that sense, the PRC was already in play, the United States government had merely failed to realize and act on that insight.

By the late 1960s, both Richard Nixon and National Security Advisor Henry Kissinger had a vision of rapprochement with China.  Nixon wrote a famous essay for Foreign Affairs in October 1967 in which he stated, “Taking the long view, we simply cannot afford to leave China forever outside the family of nations, there to nurture its fantasies, cherish its hates, and threaten its neighbors.”  Similarly, Kissinger said (through New York Governor and 1968 presidential candidate Nelson Rockefeller for whom Kissinger acted as a sometime speech writer and advisor) that “aiding or encouraging the self-isolation of so great a people” would hurt American interests, and “in a subtle triangle with communist China and the Soviet Union, we can ultimately improve our relations with each—as we test the will for peace of both [2].”

The Nixon administration’s goal was to triangulate between China and the Soviet Union with the hope of improving America’s position regarding its two Cold War adversaries.  In addition, Nixon hoped that China could be encouraged to help the US bring an end to its ongoing war with North Vietnam.

What caused China to be receptive to rapprochement?  Chinese Communist Party Chairman Mao Zedong had two goals [2].  First, with the death of Stalin in 1953, China had begun a long and agonizing split from the Soviet Union.  By the late 1960s, Mao saw the USSR as a more significant threat to the PRC with which it shared a border than the distant government of the United States.  Second, Mao had begun the Cultural Revolution in 1966 as a movement to purge the Chinese Communist Party and Chinese society of people who did not adhere to Mao’s view of Communism (i.e., to rid China of the influence of the USSR).  But, the Cultural Revolution had come at a terrible cost to the PRC with more than one million deaths and more than 20 million victims of political persecution [3].  By the late 1960s, Mao wanted to bring this chaotic period of Chinese history to a close; improving relations with Western countries was a mechanism to transition away from the Cultural Revolution.

Preliminaries

By the end of the 1960s, the time was ripe for negotiations between America and China, but how was that to happen?  In 1969, President Nixon began to send out feelers regarding improvement of Sino-American relations.  Nixon met with Romanian President Nicolae Ceausescu and Prime Minister Ion Maurer, saying, “One must understand that Asia cannot have peace or solve its problems without recognition of China’s existence and drawing China into negotiations [4].”  In a separate conversation with US Ambassador Walter Stoessel at the White House, Nixon suggested a pretext to begin a new dialog, “You know the next time you are at a social gathering in Warsaw, if the Chinese ambassador your counterpart is there, I would suggest you walk up and say hello to him [5].”

Nixon’s message through Stoessel was delivered to the Chinese delegation.  Two meetings were held in Warsaw.  The dialog through Stoessel and the State Department became the front door of Sino-American communication [6].  However, President Nixon did not depend exclusively on Stoessel; he had an alternative mechanism of dialog available to him.  During a trip to Asia, Nixon had met with Pakistani President Yahya Khan and asked him to act as an intermediary between the US and the PRC [2].  Chinese Prime Minister Zhou Enlai consented to the arrangement, and Nixon had a back channel to complement Stoessel’s front door.  As negotiation continued, the Pakistani route would become the far more important channel of communication.

In November 1970, a message for Nixon came back through Yahya Khan.  The message was written by Zhou and Mao who favored warming relations with the US and by Lin Biao, Vice Chairman of the Chinese Communist Part, who favored rapprochement not with the US but with the USSR.  It said, “Taiwan and the Straits of Taiwan are an unalienable part of China which have now been occupied by foreign troops of [the] United States for the last fifteen years.  Negotiations and talks have been going on with no results whatsoever.  In order to discuss the subject of vacation of China’s territory, called Taiwan, a special envoy from Pres. Nixon will be most welcome in Peking [2].”  In one step, the Chinese had put the subject of Sino-American relations in-play and expressed their precondition for improved relations—US withdrawal of support for Taiwan.  Interestingly, no mention was made of the Vietnam War which the PRC did not consider an impediment to at least talking about improved relations with the US.

Kissinger’s First Visit to China

Following the Chinese invitation, Kissinger met with US ambassador to Pakistan Joseph Farland.  He asked Farland to coordinate a trip for Kissinger to Asia with a stopover in Islamabad.  The proximity of Pakistan to China would allow the possibility of a face-to-face meeting with Chinese representatives. 

The story used to cover Kissinger’s arrival and then disappearance from Islamabad in July 1971 was that Kissinger had fallen ill and required a few days of rest to recover.  However, far from being incapacitated, Kissinger immediately departed Islamabad for China to meet Zhou.  Kissinger was accompanied by US NSC wunderkind Winston Lord, as well as John H. Holdridge and Dick Smyser from NSC, and two Secret Service agents.  Kissinger had completely excluded State from the most significant diplomatic effort of the Nixon administration.

Both sides prepared thoroughly.  Holdridge had prepared numerous briefing books which Kissinger reviewed in advance.  The Chinese side formulated 8 “Basic Principles” which they communicated to the Americans [2]:

• Removal of US military forces from Taiwan and the Straits as a precondition for improvement of Sino-American relations
• Taiwan would remain a Chinese territory; no outside interference would be permitted
• Taiwan would be reintegrated into China peacefully—this was a concession to the United States, indicating a lack of belligerence on the part of the PRC
• Opposition to any “two China” policy.  (This policy would quickly lead to the admission of the PRC to the United Nations and the expulsion of Taiwan from the UN, although Kissinger could not know how quickly.)
• Acceptance to the first 3 principles was a precondition to establishment of diplomatic relations.
• China promised not to initiate the question of UN representation as long as the United States did not advance a two China policy.
• Resumption of trade would be contingent on US troop withdrawals from Taiwan.
• The PRC intended to push the US to withdraw forces from Vietnam, Korea, and Japan.

The differences in American and Chinese approaches to the negotiation appeared in this first negotiation session and would continue through the entire process of the Opening.  The two approaches can be summarized:

• US Approach:  The American side was guided by Antonín Šnejdárek’s insight discussed above.  They felt that many things would be possible once dialog had started.  As a result, the US side was eager to get to the bargaining table.  They were not initially as concerned about the details of the negotiation, believing that opportunities would appear as discussion continued.  The strength of this approach is that it allowed the US side to overcome what would have been large obstacles if they had been more focused on existing relationships and agreements.  The weaknesses of this approach are that:  1) it caused them to imagine that the Chinese side would take actions that it had no intention of taking and 2) it left a legacy of issues (such as Taiwan) that were not carefully thought out at the time and would return to cause problems for Sino-American relations in the years and decades following.
• Chinese Approach:  The Chinese side was wary of the US based on previous negotiation experience.  One small but significant slight had occurred when US Secretary of State John Foster Dulles had refused to shake Zhou Enlai’s hand at the 1954 negotiation in Geneva regarding French withdrawal from Vietnam.  More importantly, the Chinese felt that the US had not delivered on its commitments within the 1954 agreement on Vietnam.  As a result, the Chinese side was extremely concerned about details and sought to tie the Americans down with precise language to ensure US performance.  The strength of this approach is that it protected the Chinese bottom line and ensured that the PRC got most of what it was looking for without conceding much, if anything.  The Chinese approach does not seem to have had any significant weaknesses.  One interesting side effect of the approach was that the political stresses stemming from the internal dialog about what China wanted from the Americans in all probability led to the “Lin Biao Incident,” in which the leading advocate of Sino-Soviet rapprochement fled the PRC, dying in a mysterious plane crash.

Announcing the Breakthrough

On July 15, 1971, President Nixon appeared on a live television broadcast to announce the success of Kissinger’s initial trip and the resulting invitation for Nixon to visit China.  This was the first occasion on which many stake holders would learn just how far the US administration had already pushed the process of rapprochement.  Nixon’s statement included the text of the invitation which stated:

Premier Zhou Enlai and Dr. Henry Kissinger, President Nixon’s Assistant for National Security Affairs, held talks in Peking from July 9 to 11, 1971.

Knowing of President Nixon’s expressed desire to visit the People’s Republic of China, Premier Zhou Enlai, on behalf of the Government of the People’s Republic of China, has extended an invitation to President Nixon to visit China at an appropriate date before May 1972. President Nixon has accepted the invitation with pleasure.

The meeting between the leaders of China and the United States is to seek the normalization of relations between the two countries and also to exchange views on questions of concern to the two sides.

The text of the invitation had been carefully crafted to avoid the impression that either side was too eager for the meeting.  There was honor for Nixon to be invited and for the PRC to issue the invitation.  Nixon was aware that the surprise revelation would create numerous political brush fires that would need to be smothered in the ensuing weeks and months.  In anticipation, Nixon said in his televised statement, “Our action, in seeking a new relationship with the People’s Republic of China, will not be at the expense of our old friends.”

Two stake holders with large amounts at risk were Taiwan and the Soviet Union.  From contemporaneous records, it is clear that Nixon and Kissinger had already decided to give China what it wanted regarding Taiwan.  The main dilemma from the point of view of the US administration was how to pitch this concession to Taiwan and to the US China lobby.  Nixon’s solution was to obscure the true scope of the diplomatic defeat to Taiwan.  On example is his statement in a January 1972 interview on the eve of his visit to China [8].  He told Dan Rather and a US national audience, “Under the circumstances (of Taiwan’s recent removal from the UN), however, we will go to the People’s Republic (of China), we will have this relationship (between the US and China) normalized on the basis that I have just described, but we will continue also our relations with Taiwan, and we will continue our defense agreement.”

His approach to the Soviet Union was comparatively honest.  He and Kissinger had continually stressed to the Chinese that it was not the US goal to turn the PRC into an ally against the Soviets.  Nixon made the same point to the Soviets.  As bitter a pill as it was, the Soviets seem to have largely accepted this line [2].  Soviet Minister of Foreign Affairs Andrei Gromyko said that the Soviet side had no objection to Sino-American rapprochement as long as they did not gang up on the USSR.

In October, Kissinger visited China for a second time, but without a veil of secrecy.  Kissinger and Zhou discussed major issues to the rapprochement, secondary issues, and technical issues (such as the presence on Chinese soil of the President’s Secret Service detail).  February 1972 was set for Nixon’s visit to China.  Zhou continued to refuse help on Vietnam.  And, they discussed the conflict between India and Pakistan.  The US viewed the conflict as a strategic conflict that the Soviet Union was fomenting, while China views it as a regional conflict and saw no reason to become involved.

The Summit

President Nixon, his wife Pat, and the US team left Washington on Thursday February 17, 1972.  They traveled in stages, arriving on Monday February 21, to minimize jet lag.  Upon arrival, Nixon and Kissinger met with Mao and Zhou at Mao’s home in the Imperial City of Beijing.  It was an extraordinary convergence of power:  Nixon the head of one of the world’s superpowers at the peak of his political strength and Mao the leader of the world’s most populous nation and newest nuclear power.

Over the course of the ensuing seven days, Nixon would have the opportunity to meet with Chinese leaders, chiefly Zhou, to discuss many aspects of Sino-American relations.  There were no significant revelations.  Kissinger’s two trips had fully covered the ground of Taiwan, Vietnam, India/Pakistan, and Japan.  What Nixon’s trip accomplished was to allow the American public, Chinese citizens, and the people of the world to consider what the new relationship would mean.  In that sense, Nixon, Mao, Kissinger, and Zhou were acting out the new relationship—signaling the change through the television in the way that ancient governments had publicized changes with handbills posted on walls or through the words of the town crier.

The last task in Sino-American rapprochement (at least as far as Nixon could realize it through summitry) was the drafting of the summit communiqué—a task that Kissinger took on for the US and Qiao Guanhua oversaw for the PRC.  Both sides took careful interest in the document with significant horse trading between Kissinger and Qiao.

The 16-paragraph communiqué included the following text which summarized the US position on Taiwan:

The United States acknowledges that all Chinese on either side of the Taiwan Strait maintain there is but one China and that Taiwan is a part of China. The United States Government does not challenge that position. It reaffirms its interest in a peaceful settlement of the Taiwan question by the Chinese themselves. With this prospect in mind, it affirms the ultimate objective of the withdrawal of all U.S. forces and military installations from Taiwan. In the meantime, it will progressively reduce its forces and military installations on Taiwan as the tension in the area diminishes.

By the time these words were written, Taiwan had already lost its seat in the United Nations.  The last US soldier left Taiwan on May 3, 1979.

Results of Rapprochement

In a few short months, the US and the PRC had begun to chart a new path for their relations.  From Mao and Zhou’s point of view, what they wanted was relatively simple in expression if not in accomplishment.  The PRC wanted to reduce the US role as a military and diplomatic power in the Pacific and to forestall the reemergence of Japan as an Asian military power.  If these things were accomplished, the PRC wanted to establish normal economic and diplomatic ties with the US.

The US’s view of the future relationship was considerably more complex.  Winston Lord wrote two position papers outlining numerous possible changes to Sino-American relations [2].  The list of possible strategic gains through the relationship included:

• Through triangulation, the Soviets would be encouraged to be more pliant on arms control and European security issues
• Chinese could be encouraged to support the Paris peace talks and place pressure on North Vietnam in the negotiation
• China could encourage a reduction of the conflict between India and Pakistan
• China could stop funding Communist insurgencies in Asia

In the event, China was unhelpful in Paris and unhelpful in the India-Pakistan conflict [9].  The major US win was through détente with the Soviet Union.  US-Chinese rapprochement did catalyze the improvement of US-Soviet relations.  In May 1972, the US and the USSR signed the SALT agreement, the agreement limiting nuclear arms.  (Earlier treaties had all covered special topics, for instance 1963’s Limited Test Ban Treaty and 1968’s Nuclear Non-Proliferation Treaty.  The SALT agreement specifically limited the number of missiles the US and USSR could deploy.  It represented a true limit on the nuclear arms race between the superpowers.)

In 2022, it is possible to suggest that the major accomplishment of US-Chinese rapprochement was economic normalization.  The United States’ largest trading partner is China (total 2017 volume:  $635B), and China’s largest trading partner is the United States.  It’s easy to think about that in terms of soybeans and iPhones, but it means so much more.  The trade in agricultural and technical items is based on people-to-people connections that strengthen every year.  In that sense, Nixon’s trip 50 years ago was an investment in the future that has paid off handsomely.

Security issues remain sticking points with the Korean peninsula and the South China Sea being two major foci of concern.  Taiwan remains independent of China, though tensions in the Strait remain strong.  The US remains a Pacific military power in 2022, attempting to hold together a coalition of smaller Asian nations, including Japan and South Korea.  In the end, perhaps the approach of pushing security issues down the road was part of the wisdom of Nixon’s strategy.  Security was too big and complex to be solved at the 1972 summit or even in the ensuing five decades.  By working to find 16 paragraphs that both nations could sign, the US and China were able to move into a new future together, free of at least some of the problems of their old relationship.

[1] Ferguson, Niall.  Kissinger, 1923-1968, The Idealist, Penguin (2015).

[2] Tudda, C.  A Cold War Turning Point: Nixon and China, 1969-1972, LSU Press (2012).

[3] Walder, A.G.  “Rebellion and Repression in China, 1966–1971,” Social Science History, Volume 38 , Issue 3-4 , Fall/Winter 2014 , pp. 513-539.

[4] United States Department of State.  “Private Meeting Between President Nixon and Ceausescu,” Memorandum of Conversation, Bucharest, August 2, 1969.

[5] “Nixon’s China Game,” American Experience, Season 12, Episode 7, aired Feb. 1, 2000.

[6] In describing Stoessel’s approach to the Chinese, Zhou famously said, “We have found the door; it is time to knock on it, and here is the knock.”

[7] “Richard Nixon Announces He Will Visit China, July 15, 1971,” china.usc.edu/richard-nixon-announces-he-will-visit-china-july-15-1971

[8] Nixon, R.  “A Conversation with the President,” interview with Dan Rather of CBS, Jan. 2, 1972.

[9] Tudda points out that the US’s stated aim was for China to become involved in the India-Pakistan conflict of 1971.  The US didn’t get what it wanted when it greenlit Chinese involvement, but perhaps the US was better off.  It’s a little unclear how having three militaries deployed and active in South Asia would have been an improvement over two.  So, maybe Nixon and Kissinger got what they needed, rather than what they wanted.

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