Northeast Asia in the World Economy

 

This paper combines two papers on similar topics, one presented at a meeting held at Vladivostok, USSR, September 4-6, 1990, and the other presented at the Northeast Asia Economic Forum held at Tianjin, China, September 2-7, 1991.

 

               It is often said that Europe, North America, and Northeast Asia will constitute the three pillars of the world economy in the 1990s and beyond. No doubt the future course of development of the world economy will be conditioned largely by the economic performance of these three economic centers, which will in turn shape the regional economic power balance in the global economic order. In a sense, the three are and will be competing with each other for economic preeminence, and this competitive relationship underlies the current trend in the major economic centers toward greater regional economic integration and cooperation.

The Relative Decline of the West

The economic integration of the EC is moving at a rapid pace, and that movement is now being extended to EFTA and the Northeastern European countries currently undergoing market-oriented economic reforms. This regional integration is aimed at removing or reducing internal barriers impeding the free flow of people, goods, services, technology, and ideas across national frontiers. This trend will no doubt bring about more investment, more output, more trade, and higher income for the people of the region as a whole. Externally, it will greatly enhance the role and capacity of a united Europe to influence the world's economic and political affairs.

Regional integration in Europe, particularly in the EC, will be beneficial to the Asia-Pacific in so far as it will provide added trade and investment opportunities to Asians, thereby contributing to the growth and development of the Asia-Pacific economies. However, if Europe were to turn significantly inward and maintain or increase the level of trade protection against outsiders, it would place Northeast Asia at a competitive disadvantage. Improved efficiency within the EC alone will make its products more competitive relative to imported goods from Asia, and this will tend to dampen prospects for trade with Asia. Since trade flows between Asia and the EC represent a much larger share of Asia's than of the EC's total trade, it is likely that Asia will be placed in a much weaker bargaining position with respect to trade negotiations and other international economic matters.

North America has also been moving toward greater regional economic integration. Following the U.S.-Canada Free Trade Agreement in 1989, the United States is now approaching Mexico about creating a free trade area. Geopolitically, North America faces the Atlantic and Europe as well as the Pacific and Asia.

However, the relative strength of the U.S. position is diminishing on both sides. Until the mid-1980s, for example, the United States had been the major source of capital, investment, and technology for all market economies in the Asia-Pacific, making a significant contribution to their economic development. But that role is now being assumed by Japan, which has risen to the status of an economic superpower in the world second only to the United States. Although the United States is still the single largest export market for Japan, Korea, and other Asian countries, their dependence on the U.S. market is declining as a result-inter alia-of increasing trade among themselves. In 1988, for example, the volume of Asia's exports to other Asian countries overtook that of Asia's exports to North America, which in that year totaled $193 billion. This implies that economic growth in Asia is being generated more and more within the region, and the impact of the U.S. economy on the Asian economies is being reduced.

The U.S. influence in Europe also appears on the wane, economically as well as politically. Looked at from the U.S. side, the EC as a market is no more important for the United States than the Asia-Pacific as a whole. The EC share of total U.S. exports decreased from 28.6 percent in 1970 to 24.2 percent in 1987, whereas the share taken by the Asia-Pacific (PECC members) increased from 40 percent to nearly 50 percent over the same period.

U.S. attention tends to swing between the Atlantic-Europe and the Asia-Pacific, depending on the course of events on either side. Since the early 1980s, the United States apparently has been directing greater attention to the Asia-Pacific, whose economic dynamism and growth far surpassed that of Europe. Amid its growing trade deficits and trade frictions with Asian countries, the United States has been groping for a new strategy for Asia to protect its own economic interests and meet the challenge of the coming "Pacific century." At the initiative of Japan and Australia, the United States supported the idea of creating a framework of regional economic cooperation as represented by PECC and APEC.

Given the ethnic, cultural, and historical affinity of the United States and Canada with Europe, however, it is logical to assume that the central focus of U.S. and Canadian interest will always be Europe rather than Northeast Asia. It is hardly surprising that U.S. attention is now shifting back to Europe, where a radically new political and economic drama is unfolding. In any event, the United States is now being forced to redefine its political and economic role in Europe and in Northeast Asia.

Moreover, there is a growing sentiment in America that the United States should restructure its Cold War policies in Asia. It is often argued that for the last four decades, in return for their military and diplomatic cooperation in the Cold War, Washington helped Tokyo, Seoul, and Taipei build their economic power. As a result, while enjoying a "free ride" under the U.S. security umbrella, their economies have grown to the point where the United States runs chronic trade deficits with them-accounting for nearly two-thirds of the total U.S. trade deficit. Since the Soviet Union is now willing to negotiate far-reaching arms control measures, the argument goes, the United States should take this opportunity not only to achieve significant budgetary savings by negotiating arms control, but also put economic priorities first and strengthen its economic leverage with the Northeast Asian nations. At any rate, the United States now appears to be consolidating its policies toward East Asia as well as Europe, one of the implications being that Northeast Asia is required to forego many of the traditional economic advantages that were long seen as part and parcel of its Cold War alliance with the United States.

Northeast Asia in the World Economy

Northeast Asia, as defined to include China, Japan, North and South Korea, the Soviet Far East, Mongolia, Taiwan, and Hong Kong, constitutes the largest economic zone in the world in terms of population, natural resources, and potential market size, as well as its vast trade and investment opportunities. It has been and still is one of the most dynamic areas of the world economy mainly owing to the phenomenal economic growth of the region's market economies, and, more recently, also that of China.

Yet the Northeast Asian pillar of the world economy is relatively weak, beset with many difficulties; the region as a whole accounts for only about 15 percent of the world's trade today. Intraregional trade in Northeast Asia has been increasing rapidly in recent years, but it remains relatively modest compared with the volume of trade with other regions such as the EC and North America. No country in Northeast Asia ships more than 30 percent of its total exports to countries in its own region, except for the special case of trade between China and Hong Kong.

What is particularly unfortunate for this region is that economic development has been hampered by numerous political obstacles. They include, as we all know, the territorial division and continuing stalemate between North and South Korea, lack of diplomatic relations between the two Koreas and their respective opponents, Japanese-Soviet territorial disputes, uncertain PRC-Taiwan relations, and the use of economic sanctions by the United States and others against the PRC following the June 1989 Tiananmen incident. It follows from this situation that the future prospects for economic development in Northeast Asia depend, more than anything else, on the extent to which these political barriers are reduced or removed.

Brighter Prospects

Fortunately, however, we now see much brighter prospects for easing these political obstacles, as the Cold War has come to an end. For example, South and North Korea have finally joined the United Nations, enhancing prospects for peace and rapprochement-including economic exchanges between the two Koreas. Pyongyang has also initiated talks with Japan for the long overdue normalization of relations between them, which would also promote increased economic exchanges between North Korea and the rest of the countries in the region. The recent visit of the Japanese prime minister to Beijing likewise augurs well for political and economic cooperation between the two countries.

In this connection, the recent proposals for a multilateral approach to regional security issues draw our particular attention, particularly regarding the Korean peninsula. For example, Canada's foreign minister Joe Clark recently offered a proposal to create a security organization structured along the lines of NATO that would bring together Canada, Japan, North and South Korea, China, the Soviet Union, the United States, and possibly Taiwan. Another example is the proposal by Dr. Titalenko of the Soviet Union that was presented on July 27 at a conference sponsored by Pennsylvania State University. He proposed a five-point plan for peace on the Korean peninsula and called for what may be termed a "2-plus-4 multilateral consultation group" involving the United States, the Soviet Union, China, and Japan-as well as the two Koreas.

No doubt these are constructive suggestions, and Dr. Titalenko's proposal in particular appears to be in broad agreement with the position of the South Korean government as publicly expressed on various occasions. If for any reason this proposal is found difficult to accept by any party involved-I am afraid that is the case at present-it may be advisable to consider a more informal or unofficial multilateral group attended on a regular basis by representatives from both the private and the public sectors of the countries involved. In this case the scope of discussion need not be confined to the Korean question but should be broadened to cover security issues in general in the Asia-Pacific. At any rate, an informal approach may be better suited to promoting dialogue and better understanding, hopefully paving the way to intergovernmental consultation and decision making in the future.

On the economic front, the institutional transformation toward a market economy is making rapid progress in China and to some extent in the Soviet Union. There is also growing realization that promotion of economic exchange and cooperation itself provides better opportunities for resolving political questions between the parties involved. It therefore behooves all countries in the region to seize this opportunity to create a new order of economic cooperation in Northeast Asia on the basis of mutual respect and reconciliation.

Toward Closer Economic Cooperation

There is much to be done multilaterally as well as bilaterally in our efforts to improve regional economic cooperation. What is needed most at the present time is to promote mutual understanding through dialogue and exchanges of information and views in order to better explore ways and means of promoting regional cooperation. This sort of intellectual exchange is essential-especially between the market and nonmarket economies-for the obvious reason that the two sides have long been far apart and thus have relatively little knowledge of each other. From this perspective, I especially appreciate the value of this conference, which serves exactly the purpose I have just underscored.

Secondly, there is a great need for removing institutional barriers on the part of both market and nonmarket economies in the region. Although we have seen a rapid increase in recent years in economic exchanges between the two types of economies in the region, the fact remains that various institutional barriers on both sides are impeding further expansion of trade and investment between them. We anticipate, of course, that these barriers will either be lowered or removed as the economic reforms in China, the Soviet Union, and others make progress. We also realize how formidable a task it is to transform a long-entrenched planned economy into a market economy. Certainly the job cannot be done overnight, and the transformation process requires patience and cooperation on the part of the market economies, which can make their experience and resources available to the reforming countries.

Thirdly, economic exchange presupposes the existence of means of communication and transportation. However, the reality is that inadequate provision of this means is one of the most serious barriers limiting not only domestic exploration of natural resources distributed widely throughout the vast territory of China and the Soviet Far East, but also flows of people, goods, and services among countries in the region. It is an urgent requirement for all countries in the region to establish a modern network of marine and air transportation as well as electronic communications systems. It is encouraging to note in this regard that a great emphasis is placed on the development of transportation-communications systems in the Chinese government's Eighth Five-Year Development Plan for the period 1991-1995. This approach certainly deserves support from developed countries and international financial organizations. It is also gratifying to note a case of regional cooperation in which a sea route connecting Pusan and Inchon in Korea and Tianjin, Dalian, and Shanghai in China was opened last year by a joint venture company of the two countries. No doubt it is a small but highly significant beginning, and I am personally hoping that it becomes possible in the near future for all of us to fly directly from Seoul to Beijing or vice versa without detouring to Tokyo or Hong Kong. Let me stress once again that the presence of well-developed means of communication and transportation is one of the greatest stimulants to the growth of business, industry, and commerce-both domestically and internationally.

Fourthly, I would argue that Japan should play a more positive role in regional economic cooperation, for the obvious reason that Japan is one of the three pillars of the global economy with far-flung interests and responsibilities. But history, geography, and opportunity dictate that the economic responsibilities with the greatest claim upon Japan's resources are those closest to home-that is, regional responsiblilites. For example, Japan can put more of its surplus funds originating from the Asian trade into development projects in Northeast Asia-including China, the Soviet Far East, Mongolia, and North Korea-instead of diverting them to unproductive investments elsewhere. An even better way for Japan to assist neighboring countries would be to reduce such surpluses by importing more industrial goods from them so that those countries could pursue a more self-reliant path in their economic development. In order for this to happen, it would be necessary for Japan to disseminate her technology and know-how to the deficit countries so as to enable them to produce goods that are exportable to Japan. This would in turn call for industrial adjustment on the part of Japan in response to shifting patterns of comparative advantage vis-a-vis Asian developing countries. Japan could also share its vast experience of economic development under the market system with the reforming countries to assist them with their economic transformation. Japan has already been moving in this direction, making considerable contributions to the economic development of Asian countries in recent years. Yet Japan can and should do much more to further regional development in Northeast Asia.

Fifthly, the Asian NIEs also have something to offer to regional development. Some financial resources, though modest, are currently finding their way from these countries to China and the Soviet Union within the limits set by their own capabilities and institutional constraints on the part of the reforming countries. In addition, the NIEs can provide middle-level technology suited for labor-intensive production and processing. Their experience with development is no less-or even more-relevant to the policy problems involving the economic reforms under way in China and the virtual transformation of the Soviet system. They can also provide rapidly growing markets for primary resources and raw materials from China and the Soviet Union in return for manufactured products.

Finally, I have come to believe that we need, among other things, a multilateral institution to help implement the recommendations outlined above. I am not proposing creation of any new regional body similar to APEC, PECC, ASEAN, or the like. We already have enough regional groupings in the Asia-Pacific region that are mainly engaged in dialogue. What I am suggesting is a more practical proposal of creating a regional development bank for Northeast Asia such as the one I proposed a few years ago at a meeting very similar to the current one dedicated to regional cooperation in Northeast Asia. The character of the bank proposed should be modeled after the ADB, with equity participation of countries not only in Northeast Asia but also any other countries outside of the region that wish to participate.

My proposal was based on the following considerations. First, it would facilitate financial flows from Japan, the Asian NIEs, and hopefully from other sources outside the region, to developing countries in our region. A merit of the bank proposed is that it would make international cooperation and coordination easier and more effective. At the same time, it would make Japan less vulnerable to the charge that it is seeking economic hegemony in Northeast Asia than would be the case if Japan concentrated on bilateral dealing with the countries of the region. Second, the bank could serve as a brokerage house, so to speak, arranging exchanges of information as well as consultations in which many cooperative issues could be addressed. For example, the members of the governing body of the bank could meet regularly and discuss the easing of institutional barriers, which is especially urgent and vital in advancing regional economic cooperation. Finally, the bank could also act as a catalyst, disseminating knowledge of basic elements of the market system such as trade practices, the banking system, business organization, accounting, and so on. This would assist the integration of nonmarket economies into the open international economic system for their own benefit. I am hoping that this proposal receives serious consideration by political leaders of the countries in the region.

Conclusion

At any rate, Northeast Asia is now at a crossroads. One road leads to the removal of political impediments to economic development and, eventually, the full realization of the region's growth potential. The other road is that of continuing political and economic disunity and growing disparity between the Asia-Pacific on the one hand and Europe and North America on the other, in terms of production, living standards, and global influence.

In conclusion, what I have tried to say is that there are four major factors that will determine the future course of economic development in Northeast Asia and its place in the world economy: The first and most important is reduction or removal of political obstacles in the way of economic exchanges among countries in the region; the second is the progress of economic reforms in China, the Soviet Union, and other countries; third, developing transportation-communications systems for both domestic development and for expansion of economic exchanges and cooperation among countries in the region; and fourth, the preeminent role of Japan and the auxiliary role of the Asian NIEs in regional economic development. All of these seem to call for creation of a regional financial institution for more effective economic coordination and cooperation in the region in the years ahead.