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D.W. Kim & G. Stone: Compact of Free Association and the Future of Micronesia


On a map, the Pacific Ocean is nothing but an expanse of blue, crystal clear water and speckled small islands and atolls. It is difficult to fathom that these pieces of land and its surrounding waters all have their rightful owners, and along with it distinct people, cultures, international boundaries, and its share of struggles and conflicts. Largely under colonial control before the end of World War II, nations of the Pacific largely have achieved independence, albeit with close economic and political support from western nations. However, the ways in which these nations operate and form foreign relations have depended on their geographical location and ethnic makeup. The Pacific Ocean is divided into three areas based on geography and ethnicity: Micronesia to the west, Melanesia to the south, and Polynesia to the east. Serving as a gateway to the Pacific from Asia, Micronesia may rise to a global prominence in the near future.

Along with the winding down of the decade long US involvement in the Middle East and the rise of China as a global superpower, the seemingly innocuous western Pacific is becoming a frontier for US international relations efforts. The US Navy has expressed plans last year to shift more of its fleet to the Pacific, and the naval strategy was brought to national focus at the 2012 US Presidential Debate. According to media, the US Navy looks to change its current, evenly split fleet ratio between the Atlantic and Pacific, to a ratio more heavily weighted towards the Pacific within the next 10 years. China’s purchase and refitting of its first aircraft carrier is also a well known fact. Even though Liaoning may not reach its full capacity in the next few years, coupled with China’s rapidly expanding military expenditures, China’s economic and military rise to prominence is destined to end in increased friction between China and the US.

The frontier of US influence in the Pacific Ocean lies along Micronesia. Northernmost Guam and Northern Mariana Islands are each an unincorporated territory and part of the Commonwealth of the US, respectively. To the southwest lies Republic of Palau, and going eastward are Federated States of Micronesia (FSM) and Republic of Marshall Islands (RMI). Although Micronesia and its component nations exhibit loose ethnic and political similarities, they are nations with different history and national interests. Despite the encroaching future of US-relations in the Pacific Ocean, volume of research and general interest in the region lacks enthusiasm. Thus, this report aims to increase awareness of Micronesia by providing brief, modern history of Palau, Federated States of Micronesia, and Republic of Marshall Islands, and the contract describing their relationship to the US, Compact of Free Association.

Historical Overview

Following the end of World War I, much of Micronesia was placed in care of Japan through the League of Nations Mandate. Many of the islands were scenes of fierce battles between the US and Japanese forces during World War II. At the conclusion of the war, much of Micronesia was placed under US support by UN as the Trust Territory of Pacific Islands. Under the UN Charter, trusteeship of Micronesia was put into action with an eventual independence and self-rule of the region in mind. However, Micronesia, due to its strategic location forming the western gate to the vast Pacific, was placed under the authority of the Security Council, rather than the Trusteeship Council. This meant that US had a vast control over the region, and this has been the cause for the close economic and political cooperation between the US and Micronesian nations in the region.

Northern Mariana Islands (NMI) took a largely different approach from the other three nations discussed in this report. NMI’s series of referenda on integration with Guam was thwarted by 1969 referendum in Guam, and NMI passed a referendum in 1975, and negotiated “Covenant to establish a Commonwealth of the Northern Mariana Islands in Political Union with the United States of America” in 1976. Beyond the economic support from the United States, NMI has come under full jurisdictional administration of the US when the new government went into effect in 1978.

Brief Modern History

Federated States of Micronesia

Outside Northern Mariana Islands, the region of Micronesia, under the Trusteeship consisted of Chuuk, Pohnpei, Kosrae, Yap, Palau, and the Marshall Islands. Nauru, an island to the south, was placed under Trusteeship with the UK, Australia and New Zealand, gained independence in 1968. UN Trusteeship originally called for all the regions in the Trust Territory of the Pacific Islands to be united and independent under a single government. US, in union with UN expectation, offered Commonwealth status to all of TTPI. However, following the rejection of such arrangement from Palau, Marshall Islands, and the NMI’s independent decision to join Commonwealth, the remaining four states decided to seek statehood on their own.

In 1978, Chuuk, Pohnpei, Kosrae and Yap drafted a constitution to form Federated States of Micronesia. In 1982, FSM, along with Republic of Marshall Islands, signed Compact of Free Association with the US, and with the US administration ending in 1986, FSM gained full independence, ensuring future self-governance of the nation while entrusting the responsibility of security and defense to the US.

Republic of Marshall Islands

Marshall Islands lies to the east of FSM, the furthest east in Micronesia. While RMI followed a similar path to independence along with other Micronesian nations, it held a much more significant relationship with the United States. Many islands and atolls in RMI were used as nuclear testing sites by the US Atomic Energy Commission. Between 1946 and 1958, RMI saw 67 nuclear weapons tested in its territory. The incident in Bikini Atoll where its residents were exposed to high amounts of radiation is well documented. The strategic importance of the area to the US and the consequences of the nuclear tests separated RMI’s relationship to the US from the other nations.

After rejecting FSM’s offer to form a single nation, Marshall Islands drafted their own constitution and was accepted by the US in 1979. FSM and RMI, acting concurrently, signed COFA simultaneously and became independent in 1986. However, in contrast to FSM, US included continuous use of Kwajalein Island as the site of their Ronald Regan Ballistic Missile Defense Test Site, with US$1.9 million annually paid to the RMI government. Furthermore, about 1000 US citizens, mostly military personnel, living on the Kwajalein Island have been an economic catalyst to the people living in the atoll.

Republic of Palau

Palau is located southwest of Guam, and sits in close proximity to Philippines. Due to its location, Palau is easily the most ethnically diverse nation out of the 3 independent nations in Micronesia, and the diversity may have contributed to the delayed independence. Upon abandoning the notion to form a single Micronesian state in 1978, Palauans adopted a constitution and established Republic of Palau in 1981. As with the other two nations, COFA was negotiated in 1982. However, rising civil unrest which escalated to periods of violence resulted in referenda to adopt the COFA to be rejected until 1994.

Another issue that may have delayed adoption of the COFA lies in its relationship to the US. Palau was the first nation in the world to adopt a nuclear free constitution, which banned the use, storage and disposal of nuclear,toxic chemical, gas and biological weapons without first being approved by a 3/4 majority in a referendum.. Scholars have argued that the Palauan constitution with US strategic interests to maintain security measures in the region. Palau’s constitution currently remains nuclear-free.

Compact of Free Association (COFA)

Remaining 3 nations, Federated States of Micronesia, Republic of Marshall Islands, and Republic of Palau eventually sought independence and self-governance separate from each other. Once the respective governments were set to take administration over from US care, each nation negotiated and signed an agreement on maintaining a certain level of relationship with the US, called Compact of Free Association. FSM and RMI negotiated conjointly, and adopted a renegotiable 15 year period in 1982, active in 1986. Republic of Palau, albeit concurrently, negotiated as a separate entity from the other two nations, and although it was signed in the same year, it was not ratified due to domestic disagreement until 1993. FSM and RMI renewed the agreement with amendments after a 2 year delay in 2003, active for 20 years starting in 2004. COFA for Palau expired in 2009, but has not been renewed yet due to a recession in the US.

COFA between the US, FSM, and RMI encompassed various terms on government relations, grant assistance, service provisions, and defense agreements. In short, US fully relinquished the right to rule and conduct foreign affairs to respective governments. US extended non-resident alien status and subsequent legal rights for all citizens of the two nations. However, FSM and RMI are considered to be customs territory of the US, and their citizens are not subject to US tax laws.

US agreed on various annual and one-time grants of funds totaling approximately US$1.3 billion. During the renewal renegotiation, in order to reduce dependence on direct US assistance, Compact Trust Fund was formed, with the goal of nations maintaining revenue after the expiration of COFA. US also agreed to provide various services such as: National Weather Service, US Postal Service, and Federal Aviation Administration.

US assumed full responsibility for security and defense matters regarding FSM and RMI. US also reserved the right to negotiate installments and operation of military bases and operations in the region.

COFA between the US and Republic of Palau largely took a similar form, with minor differences in grant assistance and service provision terms. With continuing resolution in effect after the expiration of the original agreement, the US government is expected to provide US$215 in grand assistance through 2024. Furthermore, the US extensively provided funds to improve infrastructure, constructing roadways, healthcare, and educational system.

In the original COFA between the US and Palau, and under amendment in 2003 for FSM, Compact Trust Fund was created with US$70 million and US$16 million in order to provide continuous revenue after termination of US direct assistance.

Current Issues and the Future

Micronesian nations discussed above, due to their geographical location, and their modern history, face similar issues in terms of growth, although to varying magnitudes. With COFA aiming to eventually reduce direct assistance and promote self-sufficiency, these disadvantages are becoming more severe.

Micronesia’s location and geography restricts market access. Scattered across thousands of miles on small islands, access to imports of raw materials and consumption goods are severely limited. Manufacturing has been in steady decline since the time of Japanese occupation. Thus, despite having relatively low wage rates, nation such as FSM has had trouble attracting manufacturing investment. Furthermore, although Palau has a relatively well developed road system with US assistance, infrastructure in FSM and RMI are still under development. While construction of road systems in FSM and RMI create domestic revenue in the short run, if the nations cannot sustain an export market, long term economic growth cannot be expected.

Fishing industries are a common economic sector across the nations. However, the vast sea jurisdiction face issues of small population, low investment and lack of a navy to keep foreign fishing fleets out; growth of fishing sector has been stagnant despite the region’s wealth of resources. Yet the large sea jurisdiction with islands for access presents a room for growth in domestic fishing industries.

Palau was able to establish tourism as a large part of their economy due to their relative proximity to Asia. Blessed with natural attractions, Palau has attracted investments from Japan and Taiwan. FSM and RMI however, even though they share the same natural advantage of Palau, have not attracted much attention due to their remote location. Furthermore, heavy reliance on the tourism sector, which is more sensitive to economic fluctuations, should not be the main tool for economic development.

Lastly, vast ocean under the nations’ jurisdiction presents another opportunity: deep-sea mineral reserves. While majority of land globally are continuously being prospected for resources, the Micronesian nations are not getting the same attention. Although current technology does not allow extensive submarine prospecting ventures, Micronesia may become an attractive location for deep-sea mining operations.


After a tumultuous colonial period in the early 20th century, Micronesia has settled peacefully into the new millennium, due in part to support from the US. Unlike nations in Africa or the Middle East that were former colonies, Micronesia avoided civil wars and welcomed relatively stable governments. Furthermore, Micronesia’s abundant natural resources hint endless opportunities for future growth. Despite Micronesia’s bright future, the US has not been able to strengthen its relationship with Micronesia beyond the issues of security due to its engagements in the Middle East. The recent relations between the US and Micronesia has been friendly, but without a stride for further improvement.

Palau’s COFA has not been renewed after expiring in 2009 with stalled talks; current COFA and assistance agreements with all three nations do not extend beyond 2024. China’s rapid economic growth and expanding influence to surrounding regions suggests that the geopolitical balance of Micronesia is due to change. However, current volume of scholarship and research on Micronesia is miniscule in comparison to scholarships of other regions. Consequently, the US policy oversight and development has been stagnant, and a reconsideration and intricate planning of the US involvement in the region is crucial. Micronesia’s potential, coupled with shifting security focus of the US to Pacific, means that the opportunity to forge closer economic and political relationship must be available to both parties.

In order for the US and the Micronesian nations to maximize the mutual benefit from the close relationship in the future, both parties must collectively work on increasing awareness about the region both in the media and in academia. Increased exposure will create interest in the populace, demand attention and involvement, lead to increased cooperation both on governmental and private level, and will ultimately result in even stronger and beneficial alliance between the US and Micronesia.

Works Consulted

Compact of Free Association, United States-Federated States of Micronesia/Republic of Marshall Islands, April 30, 2003. Congressional Record, Vol. 149. Retrieved from Republic of Marshall Islands Embassy to the US.

Compact of Free Association, United States-Republic of Palau, January 10, 1986. (Unknown Document Number). Retrieved from the United States State Department.

Smith, Roy H. (1993). "Aspects of Security in Micronesia." The Journal of Commonwealth & Comparative Politics, 31:2, 155-172, DOI:10.1080/14662049308447660

Youngblood-Coleman, Denise. (2010). Country Review: France [2011 Edition]. (Geopolitical and Economic Background Review), Retrieved from