China-Japan Tensions and the Risks to Cooperation and Growth in Asia
April 27 (Wednesday) 2005
For the last two years, it seemed as if China's explosive growth and the resulting regional trade boom would drift into the political agenda and initiate further economic and political cooperation, the result being elaborate proposals for energy, investment and currency cooperation in the East. Now, attention has been brought back towards the risks of overheating and public unrest in China, and the old and new rivalries in Asia over territory and resources.
Unfortunately, these risks need to be taken seriously, although the possible gains of cooperation in Asia are obvious. East Asia would certainly gain by extending the currently discussed free trade agreements (FTAs) to economic partnership agreements (EPAs) that would include some common standards, provide more security for Asian production networks, and foster necessary financial reform. Similarly, the current hunger for energy and resources could be better served with cooperative strategies that would combine regionally available technology with the trade of rights for disputed territories.
So far, economic cooperation and integration in East Asia has gained from economic reform and deregulation at home, which provided the basis for booming production and trade, and allowed major corporations to develop new production networks throughout Asia. Direct political support for international cooperation in East Asia, however, has been distinctively lacking. On the contrary, beyond trade talks, which follow the realities of growing trade flows rather than providing new chances, politicians in China, Japan and Korea have been preoccupied with their domestic structural reforms. Even worse, the same politicians have often found it necessary to buffer the impact of their reforms with nationalist rhetoric and symbolism that could easily turn against partner countries.
But even if the governments realize the risks of using nationalist rhetoric as a diversion from domestic imbalances and refrain from doing so after the current wave of tensions, effective cooperation beyond trade would still require another level of commitment. And none of the major East Asian governments currently seems to be willing to invest in such a deed.
China, East Asia's growing power, is interested in international cooperation only as long as it fuels domestic growth, buffers domestic imbalances, and feeds its political aspirations on a global scale. Promoting bilateral FTAs to secure inputs, entering the WTO and cooperating with foreign investors to enforce domestic reforms, and playing a positive role in the UN Security Council all fall into this category. But closer partnership with other regional powers, especially Japan, has so far been off the agenda, and will certainly remain secondary to the challenges of domestic structural reforms.
Japan, on the other hand, has always had a strong interest in stability in East Asia and has invested heavily. But interest in securing this objective by means of extended cooperation has always been limited. Traditionally, Japan's focus has been on worldwide trade by supporting the WTO, and its partnership with the U.S. for regional security and as a driving force for domestic reform. As in the case of China, Japan is unlikely to become a driving a force of regional integration as long as domestic reforms dominate the local agenda. Furthermore, the challenge of the rise of China as the dominant regional power fuels the odds for policies that seek competitive regional containment at the expense of domestic sensitivities towards the interests of regional partners.
Other countries in East Asia are unlikely to come to the rescue of the regional integration process. Korea faces comparable problems to Japan with domestic reforms, and shares the anxieties of a mid-size power when pushing ahead with regional integration, which always requires abandoning some special interests. Members of the ASEAN group, on the other hand, might even see some advantages in the struggles of East Asia's major powers by extracting special deals in bilateral trade talks. But as a group, ASEAN is unlikely to gain by becoming a hub of East Asian trade, investment, and integration while the major East Asian powers are struggling. The group is too diverse, unstable, and lacking in finance to develop its own economic platform without the inclusion of East Asia's entire production network in an ASEAN+3 (China, Japan, Korea) group.
What would be needed to get East Asian integration on track again? Most pundits currently stress the incompatibilities of East Asian political systems, the inability of Japan to shift the focus of its political debates towards foreign interests, the hegemony of China, and the inability of ASEAN for effective economic reform. But although all this is true, progress in cooperation does not necessarily require a perfect world for progress, only common interests. And common interests, as well as an even longer list of common problems with a related interest in solving them, are growing in the region.
The main common interest is fostering the growing (but still limited) regional trade and investment flows, which have become the basis for East Asia's current boom. Certainly, Asia's powerful corporations will not stop pushing their politicians to become more supportive to regional integration and stability. Current FTA talks therefore have not suffered so far, and are very likely to remain on track.
East Asia's biggest common problem is the dependency on final demand from the U.S., which is certain to deteriorate when the U.S. seriously starts to work off its enormous imbalances in consumption, trade and investment. A related problem is the underdevelopment of Asia's financial and capital markets, which is the main reason for East Asia's huge investments in U.S. currency reserves and treasuries.
The prescription is therefore simple, and very well within the reach of the region's governments: increasing trade in Asia, in combination with financial market reform and stable economic relations, is the surest way for sustainable (regional) growth. Already today, the main (agricultural) barriers for successful FTA talks have been tackled by (off-region) test cases as in the Japan-Mexico FTA. Similarly, the developing production networks have increased an understanding in protecting investments and copyrights in China and ASEAN, which opens the doors for extended FTAs. So the continuation of these talks will likely develop into a basis for further stabilization of economic and political relations. Financial market reform, on the other hand, cannot yet be achieved in a cooperative way. The countries therefore need to continue with their structural reforms in a competitive way, which will likely continue to cause some nationalistic undertones. But on the basis of growing intra-regional trade, growing success with domestic structural reforms, and declining complementarities with the U.S. economy, such (usually cyclical) regional tensions should be (increasingly) easy to mend for the governments involved.
