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(08/16/2002 - Root) Which Path for East Asia?

Which Path for East Asia?
By Hilton Root
16 August 2002
The Washington Post

Secretary of State Colin Powell's recent visit to Asia was meant to reassure countries assisting the U.S. anti-terror effort, but it may have had the opposite effect by highlighting how much U.S. interests have diverged from the priorities of that region.

In emphasizing the same anti-terrorist theme for both South and East Asia, the administration seems to underestimate the continuing effect of the 1997 financial crisis in East Asia. A one-dimensional approach would be unfortunate in a region that welcomes broad U.S. engagement and cannot imagine its future without a strong U.S. role. It would also facilitate China's expanding leadership in the region.

A comparison of East Asia with the Middle East shows why the Bush administration should recognize the need for nuances in its foreign policy. While Middle Eastern and South Asian leaders sacrificed their nations' well-being to pursue geopolitical agendas, East Asia's leaders emphasized growth with equity, grounding their claims to political legitimacy on their economic success. Their governments are pursuing key structural changes to ensure healthy growth -- including steps to open labor markets, protect intellectual property, contain corruption, improve bidding and contract terms on infrastructure projects, and attract new investment in high-value-added industries. The assumption throughout the region is that political stability depends on boosting growth.

China is now imitating this East Asian formula and emerging as the region's economic anchor, leading many Asian business leaders to consider China a more reliable player in regional security than Japan. By not addressing regional economic stability vigorously, the United States invites more active regional leadership by China.

U.S. policymakers should understand that Japan's leadership role is one of the region's most troubling uncertainties, and that the 1997 crisis began a quiet shift in the regional balance of power. East Asian leaders recall that Japanese banks withdrew significant amounts of capital from the region, exacerbating the 1997 crisis. Tokyo has also conceded that, if necessary, it will defend Japanese economic interests before addressing regional needs, even undertaking radical devaluations of the yen.

Meanwhile, China is filling the leadership vacuum left by Japan. It acted as the responsible party in the '97 crisis, refusing to devalue and thereby helping prevent a cycle of competitive devaluations. Today, as sponsor of regional free-trade discussions, Beijing continues at every possible opportunity to link itself to the region's future growth.

U. S. policymakers preoccupied with the impact on U.S. trade of China's accession to the World Trade Organization often ignore the influence it will have on interregional trade: making the region more dependent on China. Moreover, the region's business leaders play down China's territorial ambitions because many believe China's leaders need growth -- and therefore stable political relations with their neighbors -- to maintain their grip on power.

While the percentage of trade between the region and Japan has been stable, China's share has grown dramatically. Moreover, key investments in the natural resource sector in Indonesia, and in Taiwan's semiconductor industry, will further increase China's influence.

By contrast, Japan's prosperity depends more on shifts among the G7 than on the Asian economies. Japan's cumulative foreign investment is more focused in Europe and North America, its share of ASEAN (Association of Southeast Asian Nations) exports is smaller than the United States' share, and its overseas production ratios are lower than those of the United States or Germany.

Many would suggest that an ascendant China might jeopardize the region's democratic aspirations, but Japan itself has been ambiguous in its support of regional democracy. Unconvinced of any link between strong democratic institutions and future peace and prosperity, Tokyo, in its overseas assistance, places little emphasis on building strong civil institutions. In a world where shared values keep trade disputes from becoming culture clashes, Japan is overlooking an important opportunity to build regional unity.

Meanwhile, China is subtly moving toward a kind of capitalism that depends more on corporate governance and shareholder rights than does Japan's system and that also seems more willing than Japan's to open its economy to foreign investment.

U.S. policy will be more effective if it becomes more sensitive to the structural economic changes occurring in East Asia. If Chinese leaders understand that smooth integration into the global trading system will be the key to ensuring future economic stability and job growth, then a central objective of U.S. policy must be a responsible China committed to, and benefiting from, strong international economic organizations.

This does not mean abandoning Japan in favor of China. East Asia will find most comfort if the United States sits down with China and Japan to work out the basis for trilateral cooperation that will provide the bedrock for future security and growth in the region.

The writer was a senior adviser to the Department of the Treasury during the current Bush administration. He is a senior fellow at the Economic Strategy Institute.

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