Ed's gesture means he throws the priest's ambition away to where the arrow points using his both hands. The SFX (onomatopoeia)「ぺいっ」(pei with small tu to express impetus) dexcribes the movement you toss away something light that you can easily carry such as a crumpled paper. 「ぽいっ」is used commonly but in this case, the author chose「ぺいっ」to make Ed's action a bit funnier because he totally ignored the priest's burning passion to conquer the nation in front of his nose.
About the Japanese flag, I think only the author knows the true meaning of it but I assume the flag is hoisted on the priest's head to make fun of him who's in shock by Ed's indifference.
It won't make a difference if it were a American flag or a tiny flower because it doesn't hold a serious meaning which affects the scene but only add a mockery taste to the conversation of them and give a tiny giggle to a reader.