By The Diplomat | Created at 2026-08-06 18:37:16 | Updated at 2026-08-06 20:23:55
8 hours ago
Negotiation failures are leading U.S. Pacific Command (PACOM) to look for alternative locations for the $2 billion Department of Defense investment in infrastructure in Yap, Federated States of Micronesia (FSM).
On June 29, 2026, Admiral Samuel Paparo, the PACOM commander, wrote to President Wesley Simina of FSM that the country’s demand for a “$1.3 billion compensation package is unreasonable, unanchored to demonstrable costs, and divergent from the spirit of our partnership under the Compact of Free Association.” As a result, “U.S. PACOM intends to move forward by assessing alternative locations across the region to meet the needs of Pacific defense.”
Yap state, made up over a hundred islands, is a core part of the Second Island Chain. The main island in Yap state, also called Yap, is just over 500 miles southwest of Guam. The strategic importance of the Yap group of islands was proven toward the end of World War II. After the United States took the region from Japan, one of Yap’s atolls, Ulithi, became the largest and busiest American naval base in the world.
Map by Cleo Paskal and Pavak Patel.
FSM’s Compact of Free Association With the U.S.
In the decades after the war, Yap joined with neighboring island groups to form the independent country of Federated States of Micronesia. FSM then signed a Compact of Free Association (COFA) with the United States that ties the two countries together in profound ways, including the citizens of FSM being allowed to live and work freely in the U.S.
Additionally, according to COFA, the “Government of the United States has full authority and responsibility for security and defense matters in or relating to the Federated States of Micronesia.” This goes far beyond usual U.S. defense agreements as it stipulates that this responsibility includes “the obligation to defend the Federated States of Micronesia and its people from attack or threats thereof as the United States and its citizens are defended.”
However, as seen by the latest negotiations, new U.S. defense site access is not guaranteed and requires agreement on terms. The word “free” in Compact of Free Association has real meaning.
As Howard Hills, former lead counsel and advisor for COFA negotiations under Presidents Ronald Reagan, Joseph Biden, and Donald Trump, explained: “Under COFA the U.S. power to deny military forces of third nations access to the FSM, Palau and Republic of Marshall Islands is absolute and permanent. But to the extent U.S. authority and responsibility for mutual security and defense requires military use and operating rights, that is subject to mutual agreement by the governments concerned, in this case FSM.”
This is at least the second time recently there have been major problems in U.S. defense negotiations with a COFA country. One reason that Washington pursued Yap airport improvements in the first place was that Department of Defense negotiations for increased access in Angaur, in the neighboring Second Island Chain country of Palau, fell apart.
There are at least three interconnected reasons this will keep happening unless efforts are made to course correct.
The Lure of Money
In part because locals see for themselves the comparatively lavish lifestyle of visiting U.S. government officials – often staying the best hotels in town, and eating out every meal – and the relatively astronomical rates given to U.S. consultants and contractors, there is often the perception in FSM that the U.S. government is a bottomless piggy bank. This combines with reporting about the importance of Second Island Chain defenses to give some the feeling they have the U.S. over a barrel.
There is a pool of lawyers, negotiators, environmental experts, and others keen to fan this perception (and, incidentally, few of them seem to be around when Chinese projects are involved). Given human nature, some local leaders and land owners are drawn to hiring these representatives. In this case, Yap’s negotiators and leaders clearly overreached.
The $1.3 billion demand comes out to over $185,000 for each of the 7,000 or so resident of the island of Yap. And that amount, combined with the around $1.4 billion appropriated in the NDAA for the Yap airport makes investments in, for example, the airport on the main island of Palau, cost effective.
The China Factor
Also, at least in the case of FSM, the United States is not necessarily negotiating bilaterally. As made clear in a series of letters written in 2022 and 2023 by then FSM President David Panuelo, the national government of FSM is heavily infiltrated by Chinese political warfare operations – meaning there are some leaders at the national level (at least) with an interest in seeing the negotiations fail.
As Paparo himself said before the Senate in April 2026, in the Pacific “information, influence, cognitive, and cyber operations achieve increasing strategic effects by shaping perceptions and disrupting decision-making.” This dynamic, combined with corruption, is known to be playing out in FSM.
Panuelo’s March 9, 2023 letter stated: “One of the reasons that China’s Political Warfare is successful in so many arenas is that we are bribed to be complicit, and bribed to be silent. That’s a heavy word, but it is an accurate description regardless.… What else do you call it when an elected official receives a check for a public project that our National Treasury has no record of and no means of accounting for?”
This means when the United States is negotiating at the national level in FSM, it is likely China has friends in the room. However, there has been no recent public effort by the United States to help the people of FSM liberate themselves from this elite capture, even though it is also affecting U.S. interests. It is possible to do so.
As a small example, in February, the U.S. Department of State designated some key people in the other two COFA countries, Palau and Marshall Islands. The president of the Senate of Palau, for instance, was called out for “involvement in significant corruption on behalf of China-based actors.”
It’s a good start, with more needed. But not even that much has happened in FSM in spite of a former sitting president of the country calling out his own government for corruption.
As Hills said, “Between scheming PRC agents in the FSM and those who may advise that gouging the U.S. is clever negotiating, let’s hope cooler heads prevail in the national interest of both allies.”
Failure to Understand the Operating Environment
The failure to counter fantasist negotiators with facts or address pervasive Chinese influence is a subset of the more fundamental problem – a U.S. failure to understand local dynamics in FSM.
Yap’s demand for $1.3 billion is unreasonable. However, the fact some on the Yap/FSM side thought they could get away with it – combined with the failure of the Angaur project and myriad other issues – indicates PACOM has a serious problem with understanding the dynamics on the ground in crucial components of the Second Island Chain. These are places where thousands of Americans died in WWII, including on Angaur and the neighboring Palauan island of Peleliu.
The population of Yap island is around 7,000. Angaur’s is under 150. Yet PACOM’s “Micronesia whisperers” (including in Guam) seem to be missing out on developing relationships with, and listening to, locals who truly understand how things work.
It doesn’t help that there are no permanent U.S. government officials in Yap – meaning no one locals can get to know, and talk with on a day-to-day basis. Meanwhile, a Chinese state-owned company has set up shop, seemingly permanently.
Building trust and understanding can’t be done by flying in for a few days, staying in the best available hotels, doing meetings in offices, and relying on AI as well as hamfisted attempts to gain “intel.” On the ground in Yap now, most of the here-today-gone-tomorrow U.S. government officials are thought to be “spies” – a gift to Chinese cognitive warfare operators.
It is possible Paparo’s letter is a negotiating tactic designed to get things back on track. An August 3 letter from President Simina to Yap Governor Francis Itimai acknowledged the “possible setback” and leaves the door open to finding a way forward.
As Hills put it: “I read the FSM president’s letter to be an opening offer, not a final demand at all, importantly based on apparent initial agreement that the proposed military use and operating rights proposal will strengthen the mutual security and defense alliance.”
Regardless, the United States – and the people of Yap – shouldn’t be in this position. The inherent problems with the negotiations were publicly reported on over a year ago, and have not been corrected.
PACOM’s failure to move forward on a project for which NDAA appropriated $1.49 billion – work publicly announced by Hegseth – is possibly the result of not spending a tiny portion of that budget on getting to understand the information, influence, and cognitive environment in one of the United States’ closest allies. The same is true for the failed Angaur plan.
Thinking a change of location without a change of approach will solve things could cost the U.S. – and a free and open Indo-Pacific – years it doesn’t have to waste.
