How Washington’s Budget Fights Are Affecting Three Critical Pacific Island States

Kyler Schardein is the Intern for Global Governance at the Council on Foreign Relations.

Since 2020, U.S. policymakers have identified securing twenty-year renewals on the Compacts of Free Association (COFAs) with Palau, the Marshall Islands, and Micronesia as a major priority. The COFAs are international agreements that govern the relationship between the United States and each of the mentioned Pacific Island countries, including economic assistance, defense responsibilities, and migration. In his 2022 Indo-Pacific Strategy, President Joe Biden labeled these negotiations as “the bedrock of the U.S. role in the Pacific” [PDF]. Similarly, Gregorio Sablan, the co-chair of the U.S. House Task Force on the Indo-Pacific and delegate from the Northern Mariana Islands, concluded, “The Compacts are essential to America’s security posture in the Western Pacific.” These negotiations took on increased urgency when congressional funding provisions of the existing compacts with the Marshall Islands and Micronesia expired on October 1, 2023.

Why It Matters

Although these three Pacific Island states, known collectively as the Freely Associated States (FAS), are sparsely populated, they matter to the United States for three core reasons: history, strategic geography, and the growing competition with China in the Indo-Pacific.

First, all three states are former U.S. Trust Territories that became independent in the 1980s. For decades, the FAS have been core components of the U.S. security architecture in the western Pacific, and defense planning in the region has been built [PDF] on the assumption of compact renewal. Defense infrastructure, including a U.S. Army base and radar systems, are already in place and being expanded upon throughout the FAS.

Second, despite their small populations, the FAS encompass over one thousand atolls and islands in a maritime area vaster than the continental United States. Additionally, the FAS surround Guam—and its critical military bases—to the southeast, south, and east. Given the expansiveness of the FAS’ maritime areas, this means that alongside Guam, the FAS consolidate U.S. military positions in the region. Additionally, in the event of a conflict with China over Taiwan or in the South China Sea, the FAS would be critical to U.S. force projection as part of the Second Island Chain, which are further out of reach from China’s conventional ballistic and cruise missiles than areas closer to southeastern China.

Third, China is increasing its diplomatic, security, and economic activities in the region, positioning itself to advance its foreign policy objectives, including reducing U.S. power projection capabilities in the western Pacific and removing all of Taiwan’s formal diplomatic links to Pacific Island states. As China’s maritime capabilities have grown, Beijing has courted small Pacific Islands, creating alternative security partner options for Pacific Island countries. To date, this has culminated in a Solomon Islands security agreement that U.S. officials have expressed significant concerns about.

COFA Negotiations

Under the existing COFAs, the United States provides economic aid and permits FAS citizens to live and work in the United States, in return for the exclusive right to operate military bases in their countries and make decisions about external security. COFA aid forms substantial budget components of all the FAS, including funding essential services. As economic aid renewal discussions began, these existing arrangements formed the basis of negotiations with the FAS seeking increased U.S. investment and aid.

In early 2023, the United States signed a Memorandum of Understanding with each of the three states outlining compact assistance for the next two decades. U.S. negotiators led by Ambassador Joseph Yun finalized agreements with Palau and Micronesia in May and with the Marshall Islands in October. Providing for over $7 billion in aid over twenty years, collectively, these agreements represent a near-doubling of Compact aid. Now, Congress must approve these agreements and appropriate the money.

However, Congressional budgetary fights continue to hinder U.S. investment in this crucial region. As President Biden and House Republicans remain divided on a final budget, both continuing resolutions passed this fiscal year affected short-term COFA funding.

Under the budget extension signed into law in September, Micronesia received more than $16 million, but Palau and the Marshall Islands received no new economic assistance, although some existing services and federal programs continued at fiscal year (FY) 2023 levels.

This budget wrangling particularly hurts Palau. Even though Palau’s existing compact does not expire until 2024, U.S. negotiators hoped to harmonize its timeline with the other two FAS and provide Palau with increased support to address its high level of debt partly incurred because of Chinese economic coercion and the COVID-19 pandemic.  This is especially important amid rumors that a Chinese economic delegation may visit Palau.

In November, Representative Bruce Westerman (R-AR) introduced a bill to approve all three revised agreements with significant bipartisan support. While the Natural Resources Committee favorably reported out the bill, the full House has not taken it up yet. 

The enacted November budget extension included an extension of FY 2023 funds for the Marshall Islands and Micronesia. However, these extensions do not address funding adjustments enshrined in the agreements reached with Ambassador Yun.

Jeopardizing Relations

Congress risks unnecessarily harming relations and the image the United States wishes to project in the Pacific. True, dense networks of ties and a history of partnership help buttress U.S.-FAS relationships to weather this tumult. However, Congress's sluggish pace in passing meticulously negotiated, bipartisan renewal agreements will have consequences. It risks further fueling FAS frustrations over perceived U.S. neglect and creating gaps between the United States and these three critical allies as China expands its Pacific diplomatic and economic engagement. Moreover, this treatment of longstanding allies sends exactly the wrong message to the region at a time when the United States seeks to expand and deepen Pacific partnerships.

This June, in observing that the FAS members faced a choice in deciding whether to renew, Representative Sablan noted that despite decades of free association, the FAS all still rank near the global bottom for economic prosperity. He urged Congress to invest more aid and sustained attention in the FAS. The United States also faces a choice, and so far, Congress is feeding China-led narratives of U.S. unreliability and capriciousness.