01-5217-2-CH 1 2/6/04 9:49 AM Page 1 1 Introduction omething was stirring across East Asia in the opening Syears of the twenty-first century. A region that had been notable for its lack of internal economic links over the previous fifty years was talking actively about regional cooperation. Given the consolidation of the European Union, the formation of the North American Free Trade Area, and the rapid proliferation of bilateral free trade areas around the world, the talk was not surprising. Neverthe- less, East Asia’s relative lack of past action raises many ques- tions about its emerging regionalism. Why has the region suddenly shifted from taking a global approach to eco- nomic issues to discussing a regional bloc? How fast and how far will the new regionalism progress? Will the region become a version of the European Union, or something far less? What is the probable impact on American economic and strategic interests—are the likely developments some- thing that the U.S. government should encourage or dis- courage? This book takes up these questions. Some advocates envision an East Asian equivalent of the EU—a region linked both by preferential trade and 1 01-5217-2-CH 1 2/6/04 9:49 AM Page 2 2 Introduction investment and by a common currency. The same vision underlies worries in the United States that if it is realized, East Asia may drift away from its strong trans-Pacific economic ties. Some may find this vision so unrealis- tic as to represent a straw man; nevertheless, the talk in East Asia makes it a straw man worth analyzing. So far, nothing akin to the economic consolidation of Europe or North America has occurred in East Asia. However, regional institutions do exist, and others under discussion or negotiation could evolve in a manner that either aids or obstructs American interests in the Asia-Pacific region. The core issue is whether East Asia will drift toward a more exclusive economic regionalism that specifically shuts out the United States or continue to embrace broader regional and global institutions and their more liberal rules for economic interaction. Recent developments suggest that the region is indeed moving, albeit slowly and cautiously, toward a more exclu- sive regionalism that could have negative consequences for the United States. Certainly much of the rhetoric concerning East Asian regionalism has sounded a strong anti-Western or anti-American theme. Nonetheless, a principal conclusion of this book is that such moves are relatively weak and slow. This book takes a skeptical view of regional groupings in general. For- mal blocs involve distortions of trade and investment that generally are undesirable. Furthermore, a tight regionalism like that of the European Union can also involve an ethnic or racially inspired hubris that can com- plicate international relations more broadly. That might be especially true in East Asia, where there has been a tendency to emphasize “Asian values” and reject “Western” economic, political, or social principles. With notions of cultural superiority that are at least as explicit as those ingrained in the European Union, East Asian regionalism carries the potential for promot- ing an unhelpful divisiveness and tension in the region’s economic and political relations with the rest of the world. In addition, manufacturing technology, as well as the information tech- nology that underlies much of the service sector, has been moving steadily toward larger economies of scale, which lead to global competition. Firms also are developing the personnel and technical capability to engage in global direct investment. As much as some interest groups in society may deplore globalism, economic activity should continue to move in that direction. To divide the world up into a variety of groupings, each with dif- ferent rules of access, can only impede progress; an East Asian economic bloc therefore would not be desirable. 01-5217-2-CH 1 2/6/04 9:49 AM Page 3 Introduction 3 A fascinating disconnect has emerged between the growing American embrace of globalism as an economic and business concept and the rising Asian resentment of what some Asians view as American or European in- terference in their economies. Whereas twenty years ago, purchase of American companies or real estate by foreign investors generated media coverage, today most Americans appear to have abandoned a nation- centered view of the economy. While there is a “globaphobia” problem in the United States, the predominant world view among business people and policymakers has become much more open.1 This openness includes less reliance on legal means to block foreign businesses from the U.S. market and a stronger global strategic view among corporate managers. But in Asia, concern over American influence or dominance continues to be a fac- tor behind the interest in regional economic cooperation. Resentment of the United States is not new, and it may be simply one of the costs of being the world’s largest economy and having globally active firms. However, in East Asia resentment of the United States and the West more generally received a boost from the 1997 Asian financial crisis. From an Asian perspective, the crisis was precipitated by Western speculators. Some point out that the U.S. government initially downplayed the crisis in Thailand and Indonesia, in contrast to its swift engagement in some other crises, such as that in Mexico. Once engaged, the U.S. government worked with the International Monetary Fund (IMF) for solutions, but the IMF imposed conditions for its loans that many felt were unfair or wrong. Of course, criticism of the IMF has not been confined to Asians; however, they have argued that the IMF has tried to “force” Western or American capitalism on Asia. Some voices in the region have argued that therefore the East Asian nations need to band together to protect themselves from the ravages of Western speculators and the unfair demands of the U.S. gov- ernment and the IMF. Feelings of frustration and angry words, however, do not always find expression in action. This book looks at what has been happening with trade and investment links and with the development of regional institutions. The fundamental conclusion is that far less move- ment toward a regional bloc is occurring than the rhetoric would suggest. A conundrum faces the developing countries of Asia and those else- where. They, or at least the noncommunist nations in the region, liked the framework imposed by the cold war. During that era, most developing countries maintained stiff import and investment barriers that were toler- ated by the United States, which wanted to humor its friends in the strug- gle against communism. Those barriers enabled these nations to develop 01-5217-2-CH 1 2/6/04 9:49 AM Page 4 4 Introduction on their own, reversing several centuries of foreign domination of their economies through colonialism, and because of that they were politically popular. On the other hand, protectionism resulted in weak or flawed legal and institutional systems for pursuing modern economic development and often promoted inefficient or corrupt business practices. For a time, these nations managed to maintain high rates of economic growth and industri- alization anyway. But the 1997 financial crisis was a potent lesson in the problems that eventually befall flawed economic systems. So now these countries must deal with the contradiction between their nationalistic urge to keep foreigners (especially Americans and other Westerners) out of their core economies and the need to open up in recognition of the fact that their institutions and behavior must accommodate international trade and investment if they hope to underwrite more robust economic growth and industrialization. Even Japan faces this dilemma. The emergence of eco- nomic regionalism in East Asia is, in part, an attempt by these countries to find a middle path by creating a preferential opening up among them- selves, thereby still keeping the West at some distance. How great that distance should or will be remains debatable. A decade ago, Lester Thurow wrote of a coming competition between three large economic blocs—Europe, North America, and Asia.2 That prediction has not come true. Nothing resembling an economic bloc has yet to emerge in Asia, but discussion in that direction has progressed over the past decade. Some now see it as a real possibility. Writing in 2001, C. Fred Bergsten stated that “East Asia, for the first time in history, is creating its own eco- nomic bloc, which could include preferential trade arrangements and cur- rency cooperation in the form of an Asian monetary fund (AMF).”3 The reality thus far appears to be less dramatic. A number of Asian nations are involved in negotiations or proposals for regional or bilateral free trade agreements (FTAs). The Association of Southeast Asian Nations (ASEAN) is in the process of forming an ASEAN free trade area; China has entered negotiations for an ASEAN-China FTA; and Japan has signed a bilateral FTA with Singapore. Other ideas—includ- ing a proposal for a broader free trade area among ASEAN, China, South Korea, and Japan—have been floated informally. The change in Japan’s trade policy, which until the late 1990s had been firmly rooted in global- ism—that is, centered on the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) rather than on region- alism—has been dramatic, at least in terms of rhetoric. Analysis of these 01-5217-2-CH 1 2/6/04 9:49 AM Page 5 Introduction 5 discussions and agreements, however, reveals that Asian nations face con- siderable difficulty in opening up, even among themselves.