pacific rim trade and development: historical environment and future prospects

PACIFIC RIM TRADE AND DEVELOPMENT HISTORICAL ENVIRONMENT AND FUTURE PROSPECTS

JACK W. HOU, SHlNlCHl ICHIMURA, SElJl NAYA, LARS WERIN, LESLIE YOUNG*

Pacific Asia is deep rooted in its cultural heritage and historical background, which have set the tone for region‘s success. These same factors also have created rather d f i r en t trading practices, compared with those o f the West-practices that are less transparent and full o f hidden private trade barriers.

Interdependence within the region suggests integration, but Pacific Asia has taken a course o f non-exclusive cooperation rather than following the exclusive course o f the European Community (EC) and o f the North American Free Trade Agreement (NAFTA). The latter two trade blocs threaten the continued success and development o f Pac@c Asia. Although the Uruguay Round 4 the General Agreement on Tar@ and Trade (GATT) sends reliq‘; fostering a cooperative rather than a retaliative Asian Pac@c Economic Cooperation (APEC) organization offers the most promise.

I. INTRODUCTION

Hou: With the Industrial Revolution, the ”Epoch of Modern Growth” (EMG), as Kuznets (1966) called it, replaced centuries of settled agrarianism. The past two centuries has been essentially a gradual spread of the EMG, resulting in a diverse range of economies at different stages towards modernization/industrialization. Especially since the end of World War 11, the less developed countries (LDCs) have

This is a synthesis of a general session, “Pacific Rim Trade and Development,” at Western Economic Association International’s Pacific Rim Conference in Hong Kong, January 10, 1994. Y. C. Richard Wong, University of Hong Kong, organized the session. Panel members were Shinichi Ichimura, Provost and Profes- sor, Osaka International University; Seiji Naya, De- partment Chair and Professor of Economics, Univer- sity of Hawaii, Manoa; Lars Werin, Professor Emeritus, Stockholm University, Sweden; and Leslie Young, Pro- fessor of Finance, Chinese University of Hong Kong. Jack W. Hou, Associate Professor of Economics, Cali- fornia State University, Long Beach and Coeditor of Contempora y Economic Policy, obtained manuscripts from the panelists, added analysis of his own as an ex post panelist and moderator, integrated the recorded transcription with the written manuscripts, and edited all of these materials to produce this synthesis.

embarked on industrialization, repeating the experience of the industrialized countries (ICs).

Among contemporary LDCs, the Four Small Dragons (or Tigers)-Taiwan, Hong Kong, Singapore, and South Korea-stand out as successfully transforming into a technology-oriented stage of growth (i.e., exporting technology-intensive products),

ABBREVIATIONS AFTA: Asian Free Trade Agreement APEC: Asian Pacific Economic Cooperation ASEAN: Alliance of Southeast Asian Nations DFI: Direct foreign investment EAEC: East Asian Economic Caucus EC: European Community EMG: Epoch of Modern Growth FTA: Free Trade Agreement IC: Industrialized countries LDC: Less developed countries MFA: Multifiber Agreement MFN: Most Favored Nation NAFTA: North American Free Trade

NET: Natural Economic Territories NIE: Newly Industrialized Economy OECD: Organization for Economic

WTO: World Trade Organization

Agreement

Cooperation and Development

1 Contemporary Economic Policy (ISSN 10743529) Vol. XIII, October 1995 @Western Economic Association International

3 - CONTEMPORARY ECONOMlC POLICY

following Japan’s footsteps. Other economies in the region also have made great strides, making the Pacific Rim comparable to the world’s two major economic regions, North America and EC.

II. PACIFIC RIM OR PACIFIC ASIA?

Werin: At home, I have a globe in my study. Now and then the Pacific Ocean happens to be turned towards me. When that happens, I always am amazed because I see nothing but water, the Pacific. Or to be exact, I get a glimpse of Australia, and a number of tiny dots representing Hawaii and other small islands. But I see neither the Old World nor the New World. So obviously, the borders of the Pacific are very, very far apart.

Then why do so many people speak of the Pacific Rim, or the Pacific Basin, as a specific, well-defined region? One possible explanation could be that water unites better than land, and once it obviously did. Very long ago, the international economy was mainly a Mediterranean economy. Later on, the international economy was essentially an Atlantic economy. But the era of the Atlantic economy ended a few decades ago. Now the amount of trade that crosses the Pacific exceeds the amount of trade that crosses the Atlantic. But this in itself is not enough to establish a true Pacific Rim economy. For, after all, the bulk of international trade does not cross any oceans a t all. It crosses land or IS c a r r i d along coasts.

In the case of the Atlantic economy, i t was a question of how easily not only yi lorfs C-ould be moved. The ease with which p o p l e as well as capital could move tvas more important. The system was in fact generated by migration of Europeans to America rather than by trade. When people themselves move or financial cap- Ltal is transferred or when information is conveyed, it does not matter whether land or water is in between. Indeed, these movements probably are more unifying than is merchandise trade.

Thus, if anything is inherent in the idea of a Pacific Rim economic region, it seems to have very little to do with transportation geography and rather little with the intensity of merchandise trade. The idea must be based on something else.

My guess is that when people speak of the Pacific Rim as a well-defined economic region, they do so not because of what it is, but because of what it is not. It is not Europe; or rather: it does not belong to the part of the world that consists of Europe and the eastern half of the United States. It may be true that nearly all basic scien- tific progress has taken place-and nearly all Nobel Prizes have landed-in that part of the world. But economically it is the old, tired part of the world. Europe is stag- nating and shows signs of becoming increasingly introspective. The eastern half of the United States perhaps is not in quite as bad a condition, but i t is not particularly dynamic either.

But as we all know, the Asian part of the Pacific Rim is indeed dynamic. So by designing a geographically coherent super-region that includes all the East Asian miracle countries, many people elsewhere in that super-region can indulge in the hope that their own countries might be touched by some kind of magic wand, and themselves automatically grow faster.

111. PACIFIC RIM TRADE AND DEVELOPMENT: HISTORICAL PERSPECTIVE

Hou: To gain historical perspective requires distinguishing between (i) the long lineage of cultural heritage, (ii) the effect of Western colonialism of the 19th and early 20th centuries, (iii) and the post World War I1 political environment. Pa- cific Asia has its fair share of natural resources, but not an over abundance compared to many other regions of the world. Perhaps its biggest asset is its human resource. More important is the tradition of hard work and frugality, which stems from the cuIturaI heritage of the region.

3 HOU et al.: PACIFIC RIM TRADE AND DEVELOPMENT

Like the rest of the ”new” world, Pacific Asia also was subject to a long period of Western colonialism. Despite the exploitation typical of such foreign rules, the area benefited economically. More recently, the Western (mainly US.) military presence brought greatly needed political stability and multifaceted economic prosperity.

A. Cultural Heritage Young: Like the Jews, the Chinese have

too much history and too little geography; the United States suffers from the reverse problem. Therefore, an application of the Heckscher-Ohlin Theorem to the international trade in ideas across the Pacific would predict that Chinese exports would be relatively history intensive. My remarks on Pacific Trade and Development will be in line with this prediction.

The Pacific Rim today is the most dynamic region in the world economy, as both East Asia and Latin America race toward a market economy at the fastest growth rates in history. However, this is not the first time that the Pacific played a key role in world development. Let us begin the story with the advent of America onto the world stage: as a nuisance block- ing Columbus’s proposed short cut to China across the Western Ocean. The Spaniards who followed him to conquer America shipped two American crops- the potato and the sweet potato-to the eastern branch of their empire in the Phil- ippines on the galleon that traded annually between Acapulco and Manila. These crops spread to China where they could be cultivated on hillsides that were not us- able for rice. This new food supply supported the world’s greatest population ex- plosion up to that date, leaving China thereafter as the most populous nation.

These American crops made the Ch’ing Empire a prosperous, well-fed state, so that when Jesuits missionaries arrived in the 16th and 17th centuries they encoun- tered a vast, affluent empire run on a secular basis by competitively selected

scholar bureaucrats. Here, it seemed, was an advanced society uncluttered by privileges of birth and ecclesiastical institutions, being instead organized along ratio- nal lines. Jesuit reports to Europe had a profound influence on the thinkers of the Enlightenment.

Equally important to the philosophes were the philosophical foundations of Chinese thought: the concept of a general, spontaneous order, found not only in Tao- ism but also in official Confucianism. Just as China provided a critically important alternative model of society to set against the ancient regime of royalty, clergy and nobility, so the Chinese concept of a spontaneous “natural order” provided a critical ideological weapon and an alternative source of legitimacy to set against the theological buttresses of that regime. In the political sphere, this emerges clearly in those archetypal Enlightenment documents: the French Universal Declaration of the Rights of Man and the American Declaration of Independence with their references to ”Nature” and ”Nature’s God.” Another key element was Adam Smith’s concept of the Invisible Hand of the market, which was anticipated by the great Han dynasty Chinese historian Sima Qian. In ongoing research, I am document- ing whether there was a direct intellectual debt.

China thus provided one part of the recipe for the modern world by developing the concept of an imminent natural order, which functioned smoothly without con- scious intervention. The West’s Judeo- Christian heritage of an individual relationship with a personal God completed the recipe for an economically dynamic civil society. Only with the recognition of mechanisms that reconcile the exercise of individual rights with socially desirable outcomes did societies began to cast off authoritarian ideologies like the ancient regime of Europe, thereby releasing the energies of their peoples.

4 CONTEMPORARY ECONOMIC POLICY

Thus, the first wave of trade across the Pacific set the stage for the modem explo- sion of economic growth led by market forces. This has now come full circle back to the Pacific h m whence it began. Many nations contributed to the intellectual and social foundations of modem society: Chi- nese philosophy, Middle Eastern religion, Roman law, Western European political liberalism, all played key roles. This international partnership resembles the recent development in world trade and production whereby semi-finished products are shipped around the world to have value added in different countries according to their comparative advantage.

Although trade across the Pacific now exceeds trade across the Atlantic, there is a critical difference between the trade across the two oceans. Atlantic trade is between two societies with a broadly similar cultural and political endowments. As predicted by Heckscher-Ohlin trade theory, the similarity in endowments has meant that there have been few gains from trade in ideas across the Atlantic to accom- pany the trade in commodities. By contrast, trade across the Pacific is between societies with very different cultures and political endowments. I predict that Pa- cific trade also will be accompanied by a exchange of ideas that will be even more beneficial than the commodity trade itself.

To see this, let us continue the story of the movement of ideas around the globe. Returning to their starting point in East Asia, market forces have brought about unprecedented economic growth. Why there rather than Africa, for example? One major reason is that although both regions are dominated by authoritarian governments, those in the successful East Asian economies are run not by selfish dictators but by effective and non-corrupt bureaucrats, genuinely dedicated to improving their societies.

Efficient, selfless authoritarianism is a necessary condition to getting rich fast. This is because authoritarians can break

up interest groups who stymie progress. Thus, Japanese, Korean and Taiwanese growth was preceded by a land reform that broke the power of the landlords to impede industrialization. Britain took much longer because it had to resolve the conflict between interest groups over the Corn Laws by democratic means (a conflict, incidentally, in which modern international trade theory was forged). In the United States, it took a Civil War to overcome Southern agrarian interests because the Southern states could invoke constitu- tionally guaranteed ”States Rights.” The problems of a democratically led transi- tion to a market economy are most appar- ent today in Russia where the opening of the political system permitted entrenched interests to block reforms that would un- dermine their economic power and privileges. Democracy guards the rights of minorities, therefore permitting minorities to veto the changes needed to re-orient the economy toward growth. All the fastest growing countries are autocracies led by bureaucrats whose prime motivation is something other than their own economic self-interest.

In East Asia, the ruling groups have in- ternalized constraints on their own behavior because of the Confucian tradition. Al- though China has just been officially pro- claimed the world’s third largest economy, China has been the world’s largest economy for most of history. This was because it had developed a way to select capable civil servants according to an objective cri- terion-mastery of the Confucian Clas- sics-which inculcated selfless behavior by rulers. It also limited official corruption by an elaborate system of checks and bal- ances. With this historical example, the Japanese, Koreans and Taiwanese all developed civil services run by modern mandarins, selected according to exam performance and with a strong esprit de corps. These authoritarians make socially beneficial decisions without trying to exploit their power to get rich personally. In Hong

5 HOU et al.: PACIFIC RIM TRADE AND DEVELOPMENT

Kong, the mandarins happen to be British. (The term “mandarin” for a high British civil servant came from China.)

This selfless bureaucratic elite, which stage-managed East Asia‘s high growth rates, is an important example of the benefits of trans-Pacific trade in culture and ideas. Such an elite must be grounded in the entire culture. It cannot be created overnight by an act of will. Although the modern Confucian societies of East Asia had some of the prerequisites, such as a widespread respect for education, other crucial elements were missing, such as the elaborate education system of Imperial China, which screened individuals according to their mastery of the Confucian classics. How did Korea and Taiwan select their top bureaucrats? The answer is: according to whether they had earned Ph.D.s from top US. schools!

However, neither Taiwan nor Korea holds the world record for the number of Ph.D.s in its cabinet. That record is held by Mexico, which under President Salinas also engineered a top-down revolution. Other examples of mandarin-led revolu- tions are provided by the “Chicago Boys“ who engineered the turn-around of Chile and the “Berkeley Boys” who engineered the turn-around of Indonesia.

A Ph.D. education in the United States, particularly in economics, turns out to be a good way to form the bureaucratic elite critical to managing high growth rates. It selects individuals who are not motivated primarily by greed but who are willing to give up some of their best income-earning years for study. It screens them for high intelligence by making them jump over ar- cane intellectual hurdles. It commits them to a useful ideology: the benefits of a free market. It creates an esprit de corps by placing talented young people in a rar- efied hothouse milieu with peculiar ritu- als, isolated both from the host society and from the value system and the network of personal obligations of their own society. It thus prepares them to make decisions

for the good of the society as a whole in order to gain the respect of the peer group comprising their fellow Ph.Ds. It com- mands immense social prestige, which money cannot buy and which they would lose through corrupt conduct. In all these respects, it resembles China’s imperial ex- aminations in the Confucian classics.

The creation of a bureaucratic elite by an educational system spanning the Pa- cific is only the first of the international gains from trade in cultures. Let me give another example, again from the educational system. The same authoritarian, group-oriented tradition that is so conducive to economic growth is inimical to research that requires the willingness to challenge authority. This contradiction can be and is resolved by providing research education to Asians within the individu- alistic United States-to such an extent that UCLA these days might as well be an acronym for “United Caucasians Lonely amongst Asians” and MIT an acronym for ”Made In Taiwan.” The United States gains from having the disciplined, numer- ate individuals that it needs to staff its research institutions but which its own high school system-trivialised by feel-good non-subjects, prostrated by grade infla- tion, addled by drugs, enfiladed by gun- fire-is increasingly unable to produce.

The Asian elite educated in the United States inevitably take some American val- ues back with them to Asia. A good way to develop a strong relationship with a Chinese official is to assist his offspring enter graduate education in the West. These educated offspring of powerful of- ficials will return to positions of power. In effect, the United States is training the next generation of China’s elite, while exposing them to the ideas of the rule of law and democratic processes. This already has proceeded in Taiwan and Korea to the extent that the consensus has shifted toward a more open political system. Thus, Asia and America are collaborating in the production of an Asian government cadre


and an American research cadre, as surely as they are collaborating in the production of disk drives designed in California and assembled in Singapore or autos designed in Nagoya and assembled in Kentucky.

Another way in which the Pacific Rim community inadvertently cooperates is in the arena of political dissent. While pro- tracted political confrontations can stymie growth, a powerless but noisy ”loyal opposition” provides very real economic benefits, for example, by asking hard questions about the validity of policies and exposing corruption. The concept of a loyal opposition, pivotal in the political systems of the West, has little place in the authoritarian societies of Asia. Its place has been taken by the obstreperous Amer- ican press and grandstanding American politicians who constantly feel moved to comment loudly upon the workings of Asian societies and economies, expostulat- ing about human rights violations, corruption, labor practices and so forth. These nosey, noisy Americans can do nothing directly to disrupt the governance of a country, but they can make its government ac- countable for policies and uncomfortable about shameful excesses. Thus, they function very much like a loyal opposition.

The aforementioned are manifestations of constructive multi-culturalism. What is the force driving them? Trade! Trade forces one culture and society to face the strengths of another, typically in a manner that mixes carrots with sticks. Trade gives the American loyal opposition a means to make its voice heard. The Chinese author- ities could not care less about Amnesty International’s views on human rights, but trade sdnctions get their attention. They are unimpressed by the concept of the rule of law as a philosophical matter, but sanc- tions for violations of intellectual property rights and awareness of the damage that the lack of patent protection does to their own software industry are another matter. Meanwhile, there never was much chance that Americans would be led to emulate

the desirable features of Asian cultures through some miracle of intellectual hon- esty and candid introspection. They began developing small doubts about whether they were indeed the “last best hope on earth” only when one industry after another was buried by the inexorable flood of manifestly superior Japanese products.

Trans-Pacific trade has for centuries provided an important channel for Pacific cultures to interact and build upon each other’s strengths. In the Pacific Century, the gains from trade in ideas will be con- frontational, humiliating and unwelcome to all parties-but ultimately will be even more beneficial than the gains from trade in goods.

Hou: There can be no doubt regarding the Confucian influence in East Asia. It is no coincidence that the first group of countries to evolve from less developed countries (LDCs) to newly industrialized economies (NIEs) (i.e. the Four Small Dragons) all fall under this umbrella.

In Kuznets’ view, three cultural elements must exist before economic growth can ensue: secularism, egalitarianism, and nationalism. Thus, whether Confucianism is conducive to economic development depends on whether it can fulfill these three conditions. Weber (1964) offered one of the earliest and perhaps best known discussions. He argued that Confucian ethic has a negative contribution towards economic development, making the growth of capi- talism difficult in China. Weber criticized Confucianism’s lack of desire to transcend or seek salvation because he viewed this desire as the compelling spirit conducive to economic development in the Protes- tant society.

This is not entirely relevant and perhaps is contradictory, since Kuznets listed secularism as one of the three major factors leading to the modern economic growth. In reality, economic development is a secular and mortal affair, while salvation is devout and spiritual. Establish direct links between the two is difficult. Fur-

HOU et al.: PACIFIC RIM TRADE AND DEVELOPMENT 7

thermore, supposedly you cannot “buy” your way into heaven. If hard work is not an end in itself but a method to please God or obey his commandments, or as Weber stated, as the means for salvation, then one must raise the question: if Puritans were so solemnly worshipping and pleas- ing God, then why were they determined to conquer, rather than to adapt to the world that was God’s creation?

Leslie related earlier the story of the spontaneous natural order that the Jesuits brought back to Europe that, perhaps, af- fect the Age of Enlightenment. (For a more detailed evaluation of Confucianism and Kuznets EMG, see Ranis, 1988, and Hou and Hou, 1995.)

The cultural influence of Confucianism goes beyond China’s boundary. In Japan for example, there is ample evidence that Japanese entrepreneurs actively absorb Confucianism in their management philosophy. These include the CEOs of con- glomerates such as Mitsui, Mitsubishi, Sumitomo, founders of Daiichi Bank, Nissan, Toyota. The businessmen of Osaka contributed money to build schools in the 17th century to instill managerial concepts by using the Four Books and the Five Clas- sics of China as teaching material. They founded the famous Huai Te Hall in the 18th century, which till this day still holds the Huai Te Hall Lectures with Chinese and Japanese classics as the main lecture material. The second generation of the Mitsubishi conglomerate established the Ching Chia Hull Collection at the end of the 19th century to collect Sinology literature.

In recent years, high level management of Japanese business have held regular gatherings and cordially have enlisted Yasuoka Masatoku, the authority on the Yang-ming School, to lecture on the Sum- mary ofthe History $the Eighteen Dynasties, the Four Books, the Five Classics, and various conversations/discussions between emperors and ministers regarding the methods of ruling a nation and benefiting its people. This is what the Japanese

termed as “Knowledge of the Emperors,” which is applied in business management.

In addition, there is the “Pu Ju Society” of Tokyo, which takes its name from a statement by Confucius, “I have been the whole day without eating, and the whole night without sleeping: occupied with thinking. It was of no use. The better plan (Pu Ju) is to learn.” (Chapter XXX, “Book XV: Wei Ling Kung,” CoMfucian AnuIects) Kansai has the ”Wu I Society,” which takes its name from the Mencius saying, ”Men must be decided on what they will not do (Wu), and then they are able to act with vigor in what they ought to do (I).” (Chap- ter VIII, “Book IV Le Low, Part 11,” The Works 4 Mencius) The members of both societies are made up mainly of entrepreneurs. This enthusiasm in Confucianism among Japanese entrepreneurs may not be the only cause of their success, but it undoubtedly has played a role.

B. Colonial Ifluence Hou: The characteristics of secularism,

egalitarianism, and nationalism have been present in all East Asia nations and have survived the exploitation of Western Co- lonialism. China is the largest country and perhaps suffered the most from Western exploitation, so the Chinese experience is the basis for the discussion here. The se- ries of “unequal treaties,” starting with the Treaty of Nanking (consequence of the Opium War of 18401, gave a wide range of political, legal, and economic privileges to Western powers. These unequal treaties resulted in complete economic dominance by foreigners. The degree of foreign con- trol and the scope of activities were sel- dom seen anywhere in the world or any- time in history.

Foreign owned firms penetrated every facet of the economy, from tea processing to cotton textiles, from coal/iron mining to ship building/repairing, even including utilities and the postal service. The economic exploitation of imperialism, how-


ever, is a double edged sword. On the one hand, it delayed the modernization process through the inhibition of native industry growth, one the other hand, it in- duced ”Nationalism” and provided incen- tive for economic modernization.

Even in modern days, the risk of international business ventures are risky. One can only imagine what it was like for firms in the 19th century. These unequal treaties, and colonialism in general, greatly re- duced the risk and attracted a much larger foreign venture capital than otherwise would have been possible. These foreign companies demonstrated the existence of profit. They introduced entrepreneurship and modern organization/managerial methods, all of which led to the emergence of modern Chinese companies. This is manifested in the fact that 227 Chinese firms were registered between 1904-1908; yet by 1912 there were 20,749 native firms in operation. Granted they were mostly small firms (less than 40% had employees of 100 or more), and they had to struggle in the shadow of the foreign giants. Never- the-less, they were a product of foreign stimulus.

C. Modern Western l$uence Ichimura: One can say many things to

explain Asia’s remarkable development. But when we look back at history for the past 100 years, the explanations are not so obvious. The success of the East Asian economies is the result of the struggle of earnest people under a somewhat favorable environment.

What is this favorable environment? The East Asian economies were put in an environment created with generous en- deavor on the part of Western countries, particularly the United States. If the United States were like Great Britain after the World War I, the miraculous development of East Asia never would have taken place,

The United States almost single hand- edly fought the Cold War and contained the enormous political influence of Com- munism. This is true not just in Europe but also in East Asia. The Korean War and the Vietnam War were not the most successful military actions, but nevertheless they made it possible for us to concentrate on economic development.

For East Asia, as well as the rest of the world, the first half of the 20th century was a political and military period, while the second half has been an economic one. We were able to concentrate on economic development because of the single- handed effort of the United States to pro- tect us from the bad influence of the political and military activities of the other side.

Second, given similar circumstances, not all developing countries could achieve the same level of development. Latin America, Africa, the Middle East, and even Southern Asia, were not able to develop. There must some reasons why East Asian countries were able to accomplish what many others could not. Previous speakers already have mentioned a number of factors, and I generally agree with their views. What I would like to point out is that the development pattern of these East Asian countries is rather unique: a ”flying geese pattern.” The lead obviously is Japan, followed by the Four Small Drag- ons (Korea, Taiwan, Hong Kong, Singa- pore), with the Alliance of Southeast Asian Nations (ASEAN) Four as the next wave.

This development pattern has enormous implications for the learning process of the followers, and the effect of changing technology, which makes the learning even easier. The literature, covers this subject well and I see no need for further elab- oration. However, this pattern of growth was relevant only when China was isolated and closed its doors. Once China came into the picture, the flying geese pattern was disturbed.


Hou: After World War 11, the U.S. military presence provided a multitude of benefits that were essential to the economic development of the region. The United States did more than shield or stop the negative influence from the other side. It provided political stability that allowed business confidence to build, not just enterprises in the region, but foreign firms whose purchasing orders were the lifeline and nourishment for the export-oriented growth that has become synonymous with East Asia’s success.

The importance of the U.S. military presence allowed Japan, South Korea, and Taiwan to greatly reduce their defense spending, which freed up vital investment resources during a period when finances were extremely tight for these economies. Furthermore, the Korean War and the Viet- nam War also were instrumental in building the industrial base of Japan, South Korea, and Taiwan, as they served as supply and maintenance points for the United States.

IV. CURRENT DEVELOPMENT AND AN OUTLOOK TOWARDS THE FUTURE

Hou: The Organization for Economic Cooperation and Development (OECD) predicted that “the wonder years of Asia’s economic miracle might be over.” This is perhaps premature. A general gradual slowdown is standard in the industrialization process, but rapid growth within the East and Southeast Asia region likely will continue into the next millennium. This is true especially of Southeast Asia. Many have predicted that Thailand and Malay- sia will lead in terms of growth rates. East Asia may experience a slowdown but still will grow at a much higher rate than the rest of the world.

The NIEs are exhibiting signs that they are reaching maturity and simply are going through what the United States and Europe experienced several decades ago. What is different, however, is the presence of China. Barring political instability,

China will continue to grow above or near 10 percent annually. This certainly will fuel the neighboring NIEs and may put a strain on these economies, since they are operating at close to potential already.

In some ways, the rapid growth that has characterized Pacific Asia for decades is forcing the Asian economies to make massive infrastructure improvements just to avoid choking on their achievements. Traffic jams that make even the legendary Los Angeles rush hour look like a drive in the countryside, are paralyzing capitals from Beijing to Bangkok. Airports are extended to beyond capacity, energy de- mands are growing so fast that “brown- outs’’ are a fact of life-not to mention the tremendous strain on communications.

This infrastructure spending (table 1) is a major growth engine for Japanese industries. But the Japanese do not own the market. Almost every industrial nation has contracts in Taiwan’s Six Year Na- tional Construction Project. German-built subway cars run beneath the paralyzed surface streets of Shanghai. Many of these projects are at a lower-than-usual cost, funded by soft loans from the contractor countries (e.g. Germany), or they include technology transfers, thus benefitting Asian nations. But the projects also help the recession ridden industrialized West.

The United States and EC nations are much more willing than is Japan to be involved in soft loans and technology transfers. As a German executive said, “It is easier to be best friends in areas far away.” Technology, or skill transfers, whether voluntary or involuntary, are inevitable. The elite leadership society that Leslie Young characterized is full of technocrats, trained in the best Western universities. Once ex- posed to the technologies, management/design skills, they are able to absorb them very quickly.

Despite its infrastructure problems, Pa- cific Asia no doubt will be the most dynamic region of the world. As the recent past typically is a good predictor of the

CONTEMPORARY ECONOMIC POLICY

TABLE 1 Asia Infrastructure Spending

(billions of Dollars, till 2000 A.D.)

Transportation Power Telecom. Other

ASEAN $74.0 $64.1 $21.0 $63.3

China 968.4 54.0 25.2 NA

Hong Kong 23.2 12.8 1.2 29.6

Korea 132.3 46.2 32.3 145.7

Taiwan 124.3 28.5 9.6 84.1

Source: Peregrine‘s Asian Infrastructure Fund Business Week, November 28, 1994.

immediate future, one only has to compare the performance of the APEC countries. The average growth rate of the NIEs in 1993 was 12.8 percent, 10.8 percent for ASEAN, 17 percent and 9.7 percent for China and Japan, respectively. During the same period, the non-Asian APEC countries averaged -0.2 percent growth rate.

Perhaps one of the best measures of the Asia Pacific’s short-run dominance in growth and development is their ”international competitiveness.” The Lausanne In- stitute for Management Development 1994 World Competitiveness Report de- fines it as ”the ability of a country to pro- portionally generate more wealth than its competitors in world markets.” According to the Institute’s analysis, the top four economies, in descending order, are the United States, Singapore, Japan, and Hong Kong. Other ”honorable mention” Asia Pacific economies include Malaysia (17), Taiwan (18), Thailand (23 ) , and South Korea (24). Even they outranked EC countries like Spain, Portugal, Turkey, Italy, and Greece.

Werin: From the discussion so far, clearly the importance attached to the Pa- cific Rim is linked mainly to its electrify- ing Asian part. I will first make three observations on the effects of what happens in Pacific Asia, and then I will expand

from the Pacific Rim to include other parts of the world.

I presuppose that Pacific Asia will continue to grow as it has in the last 10 or 15 years. Of course, no one can be sure of this. Maybe Japan has become European and s topped growing? Maybe the rapid growth in China soon will come to a halt, for one reason or another? All this is possible. But few of us believe it will happen, even though temporary setbacks could occur, and growth rates could slow down to somewhat more “human” levels of around 5 percent. At such a rate, production still will be nearly three times as high after 20 years. In contrast, European-style growth rates of 2 percent will lead to an increase of only about 50 percent. This means that Pacific Asia will be the engine that pulls the rest of the world. The engine hardly will pull uniformly. This is my first observation.

What is less often pointed out is that the process is bound to bring about a fun- damental change in relative factor scarci- ties in the World economy. So far, we have seen only the first phase. A tremendous labor force will be brought to bear upon world production and will call for capital and management skills. This will occur re- gardless of how many obstacles protectionist-minded governments may attempt to raise.


We simply can recall the drastic changes generated by the oil price rises in the 1970s or the effects on real interest rates and exchange rates felt all over the world as a consequence of the fall of the Berlin Wall and German reunification, accompanied by prospects of a quick opening up of the East European economies. The effects were substantial, but the factor supply switch emanating from Pacific Asia is a much stronger upheaval. The fact that it does not constitute a sudden shock but makes itself felt gradually, however, will make the adjustments somewhat smoother than they otherwise would be. Note that the switch is affecting not only the world outside Pacific Asia, but the countries within that region as well. Step- wise down the ladder are first Japan, then the four tigers, and eventually laggers like Vietnam.

How will the rest of the world react? In two ways: by seeing the development (i) as a deadly threat or (ii) as a golden opportunity. Here is my second observation (or better, second batch of observations). Obviously, both the European Union and the United States have a peculiar inclina- tion to blame their relative lagging not on themselves but on others, and particularly Pacific Asia. This leads to tendencies towards protectionism, whether in the form of insistence on bilateral managed-trade targets, or tariffs embellished by labels such as antidumping, or some other method. This is not to say that similar in- clinations do not arise in other countries as well, Japan for instance. I do not know which part of the world practices the high- est degree of protection today, all kinds of it included; the measurement problems are too large to allow a clear verdict. But it seems to me that it is most fashionable to be a protectionist in the European Union. The tendencies towards protectionism might be the strongest there.

At least this was what I planned to say when I prepared this material a few days ago. Now I read in the newspapers about

the United States’ action against China. Maybe it is fashionable to be a protectionist even outside of the European Union.

Actually, there seem to be rather high protective walls between the countries within Pacific Asia. The trade between them is only about 20 percent of their total trade-if I have read the statistics cor- rectly-a proportion that appears remarkably low. So maybe one of the major effects of the recent GATT agreement will be a sharp growth of trade within Pacific Asia-an indication of the efficacy of mul- tilateral trade policies! This will add further to the strength of the area.

But if we want to study the intensity of economic relations among countries, and within the full Pacific Rim area in partic- ular, perhaps trade is no longer the most important dimension. I already have hinted at this, which leads to my third observation. Take all the relations within firms that operate in two or more countries and all the direct relations between firms in different countries-such as part- nerships, alliances, linkups, long-term agreements to use parts, long term licens- ing agreements, joint ventures, and agreements for joint development of a new tech- nique. The list could be made very long. Far from all these phenomena are covered by figures for so-called “direct investment,” and our empirical knowledge of them is quite scant. As for merchandise trade, much of it is in fact now intra-firm trade. To understand these new phenomena, we have to revise our theoretical framework. The one provided by my fellow countrymen Heckscher and Ohlin is no longer sufficient. We need the approach of Ronald Coase concerning the contrac- tual nature of the firm as well.

We know that relations of this type are very strong between Hong Kong and at least nearby parts of China; Taiwanese firms seem to be extending their relations rapidly all over China; Japanese firms have relations all over Pacific Asia and in the United States as well; and American

12 CONTEMPORARY ECONOh4IC POLICY

firms in the opposite direction. But we know little about the full strength of all this, nor do we know how fast these relations develop. For instance, it would not astonish me if my own country, Sweden, carries an even greater weight than any American state of a comparable size, such as Michigan or Florida or North Carolina. But a small separate country like my own does not matter in discussions about world regions. The real concern of these discussions is who the main players are in the world economy. The focus is thus geo- political rather than purely economic.

I offer these remarks because they give me an opportunity to end by expressing a wish. As an academic economist I do not represent anything but myself. But if I think of myself as a representative of something beyond my own person, it is as a citizen of a very small country, very de- pendent on the world economy, and not belonging to any bloc-although there has been a mutual free trade agreement between Sweden and its giant neighbor the European Union since the beginning of 1994. At least for small countries, and there are a number of them in the Pacific Rim area, bloc-free multilateralism is first best. This is, of course, the lesson of basic economic theory as well. But in spite of the recent GATT accord, it seems utopian.

Ichimura: As I mentioned earlier, with the re-entrance of China, the ”flying Geese” pattern was disrupted. If one di- vides China into, say, seven or eight regions, then each of these regions will cor- respond to twice the size of Thailand, Phil- ippines, Vietnam, or any East Asia country. The rapidly developing regions like the Shanghai/Nankang area will in fact supersede Thailand or Malaysia. Because of this, the entire East Asia economic region is developing in a new fashion. We really need to pay attention to this new pattern of the East Asian countries, much more so than does the World Bank Report.

To mention just a few developments: First, Japan is increasingly becoming the

supplier of capital and financial funds for the ASEAN countries. Japan’s role is determined mainly by economic motives. We really need to pay attention to how the Japanese enterprises and the Japanese government are going to direct their investment and their political ideas. I currently am involved in developing aid policies toward Indonesia for the Japanese government. I discovered that most Japan- ese pilot investment and financial aid is moving to China rather than to Southeast Asia. The trend is clear. Whether it will continue, remains to be seen. It nevertheless is something the ASEAN countries need to worry about.

Second, the intra-firm trade among these Asian countries is growing rapidly due to the enormous investment of multi- national corporations. The regional integration of East Asian countries has been brought about mainly by this increase of intra-regional trade, especially between Northeast Asia and Southeast Asia. Korea and Taiwan have become more and more integrated with the ASEAN countries as a result.

Finally, Japan is confronted with enormous difficulties right now, and these difficulties seem to be rather inherent in its stage of development. Japanese economic achievement is the result of several important factors that are difficult to reverse. For instance, the proportion of petroleum imports (within Japan’s total imports) has declined sharply. It is now comparable to the proportion prior to the first oil crisis. This implies that, relative to the present size of the Japanese economy, the real price of oil is equivalent to the $2.00 per barrel price of pre-1972. This is an enormous advantage. There are several other similar factors. For these reasons, Japan is going to suffer from large balance of pay- ments surpluses for many years to come, unless some radical changes occur in Japan’s trade competitiveness.

For the same reasons, the East Asian economies are moving closer towards re-


gional integration. Europe is forming the EC and the United States is leading NAFTA. It is only reasonable that the East Asian developing countries attempt to in- tegrate and see what they can achieve jointly. If Australia, New Zealand, and the United States try to organize the Pacific Rim countries under their initiative, they will encounter difficulties because their national interests are very different from those of China, Japan, East Asian, and the ASEAN countries. For some reason, the leaders of American and Australian seem to think that the basic economic interests of these Asian countries are consistent with theirs. I do not think so. For example, if China remains united, it inevitably will become very strong. Would the U.S. leaders think that China could be controlled according to the American wishes? I do not think so.

There are several other factors, but maybe they are best left for political scien- tists. I would like only to mention that some scholars, such as Samuel Hunting- ton, are too pessimistic. I do not agree with their expectations that the conflict between the Confucius civilizations and Christian civilizations are inevitable. I am saying only that national economic interests of the East Asian economies and of the United States are not necessarily consistent. Look at the case of Mexico. NAFTA will benefit Mexico in its trade with the United States. Would Mexico not be com- peting with East Asian countries like Korea, Taiwan, Coastal China, and ASEAN? My answer is yes. And if so, why should the East Asian countries accept NAFTA as something favorable for their future? On this, I return to Lars’s question: How will the rest of the world react to the rapid growth of East Asia-as a deadly threat, or as a golden opportunity?

Naya: I would like to focus on the issue of economic interdependence and the possible future direction of Asia-Pacific economic integration. First, I will consider the factors responsible for the rising trade

flows and increasing interdependence within the region. In light of these factors and recent developments, I will then consider whether or not a preferential trading arrangement is feasible, likely, or desirable for Asia. Finally, I will consider the future role of the APEC forum and why Asian leaders have expressed reservations regarding setting a target for regional trade liberalization.

Asia-Pat@ Growth and Trade The Asia-Pacific is well known as the

most dynamic region in the world economy today. Interdependence within the region, as Lars talked about earlier, has grown markedly, based on growing trade and investment ties.

The role of Japan in the trade, investment, and technology transfer components of Asia-Pacific interdependence is unparalleled. In fact, if we view the region as Japan plus developing East Asia-the NIEs, ASEAN, and China-75 percent of the combined GDP of the region is accounted for by Japan alone. Japan’s dom- inant position, however, is eroding stead- ily. Even without the purchasing power parity basis of comparison, Japan’s GDP in the region is in relative decline. Since the 1970s, the NIEs have achieved rapid growth, and several members of the ASEAN subsequently have joined the league of high growth economies. More recently, China has been growing at double digit rates, and reform in Vietnam and Laos have launched them on the road to successful development.

Trade has been a key factor in the region’s high economic growth. Again, we see the eroding dominance of Japan. The combined exports of the developing East Asia are 50 percent larger than that of Japan. The importance of trade for these economies is evident in their high ratios of trade to GDP: 50 percent for NIEs, 35 percent for ASEAN, and about 16 percent for China. In contrast, export-to-GDP ra-


FIGURE 1 Growing Interdependence: Intra-Regional Trade

% share of exports 45 I 1

15

10 1980 1985 1986 1987 1988 1989 1990 1991 1992

Year -t- Asia to Asia + Asia to U.S. +e- U.S. to Asia

Note: Asia includes NIEs, ASEAN, China, and Japan.

tios for the U.S. and Japan are only 7 percent to 8 percent. Thus, the developing Asian countries clearly have used trade as the engine of growth.

interdependence A close look at regional trade patterns,

reveals that countries in the Asia-Pacific region have become quite interdependent and are trading with each other more than ever before. Intra-Asian trade rose from 31 percent in 1986 to 43 percent of total Asian exports in 1992 (see figure 1). At the same time, exports to the United States fell from 34 percent to 24 percent of the total, although U.S. exports to Asia are increasing and currently constitute about 24 percent of the total.

Why have the Asia-Pacific economies become so interdependent? Deepening re-

gional interdependence is market-driven, rather than based on preferential trade arrangements. First, the effect of rising in- comes has exerted a direct pull on trade flows. As in the "flying Geese" pattern of development to which Dr. Ichimura re- ferred, Asian-Pacific countries, one after the another, have adopted outward-oriented policies and have succeeded in sus- taining high growth rates of national income. Increasing levels of regional trade are a natural outcome of this unprecedented income growth.

Second, major unilateral trade liberalization measures have stimulated trade flows. Official trade barriers have been falling in Japan, Korea, Taiwan, ASEAN, and China. Unlike EC or NAFTA, however, Asia-Pacific trade has not been based on preferential arrangements. The sole ex- ception is ASEAN, whose proposed Free


Trade Area (AFTA), signed in January 1992, has not affected trade much to date but has future significance. In general, trade liberalization in the Asia-Pacific has been nondiscriminatory, based on the principles of the Most Favored Nation (MFN) and in the spirit of GATT.

Given this nondiscriminatory character, why has trade within the region expanded at a faster pace than that with the rest of the world? The answer lies in overcoming pervasive private barriers to trade. Neigh- bors in the region are more capable of pen- etrating such private barriers, which range from economic subsystems-such as Japan’s keiretsu and domestic marketing system-to cultural and ethnic differ- ences. In some cases-e.g. in China- property rights are not well defined and the “rules of the games” are vague. In these circumstances, regionally attuned traders and investors have an advantage in minimizing the transactions costs necessary for business success. The dynamism of trade and investment between China and Taiwan or between China and Korea testify to the significance of these factors. As official barriers to trade and investment continue to fall globally, the dismantling of private barriers is becoming ever more important.

A third cause of increasing interdependence in the region is the forging of complementarity of economic structures through direct foreign investment (DFI). First Japan invested in the NIEs and Southeast Asia, as labor- and land-intensive industries sought safe haven from rising costs and yen appreciation. Subse- quently, the NIEs themselves have become major investors in the region. For example, during the 1986-1991 period, the NIEs accounted for a third of DFI in China and the ASEAN-4 (Thailand, Malaysia, Indo- nesia, and the Philippines), exceeding even Japanese investment in the region (see figure 2).

A qualifying statement is needed regarding the NIEs investment in China.

Based on official Chinese statistics, the figure is a significant underestimate of the Taiwanese investment due to the political sensitivity of Taiwan-Mainland China relations. Korea’s investment in China is also underestimated, as the Sino-Korean relations were not normalized until Au- gust of 1992.

A fourth factor is the emergence on a significant scale of sub-regional cooperation, or what is known as ”growth trian- gles” or ”Natural Economic Territories” (NETS). What is a NET? The concept can be divided into two categories.

The first kind of NET is based upon joint development of infrastructure and natural resources. These NETs take advantage of beneficial externalities, provide regional public goods, and develop common resources through joint exploration and investment. Examples include the Mekong River and Tumen River projects, the proposed Japan Sea project, and to some extent, the Singapore-Johore link within the Southeast Asian Growth Triangle (involv- ing Singapore, Indonesia, and Malaysia).

The second type of NET is exemplified by the Hong Kong-Southern China-Tai- wan nexus and the Singapore-Rau Islands portion of the Southeast Asian Growth Tri- angle-which also includes Johore. These NETs create economic complementarity through investment and technology transfer for international production. Such NETs have been remarkably successful in capitalizing on local comparative advantage and tapping into regional economic dynamism, even though similar NETs in Latin America and Africa have failed.

SeYSustaining Growth When the data on the direction of trade

for the Asia-Pacific are broken down by regional group-e.g., East Asia, Japan, United States-an interesting pattern emerges. Trade expansion in the Asia-Pa- cific is quite different from that emerging in Europe and North America. A recent


FIGURE 2 Direct Foreign Investment in ASEAN and China,

1986-1 99 1 Cumulative

70

60

50

3 40

n

ru

i 30 20

10

0

m

Japan -ASEM USAEurope Japan ASEAN USAEurope N I E S

Sourrr: Lee and Montes (1994)

study by the World Bank (de Melo and Panagariya, 1992) concludes that South- South integration is hopeless and that North-South integration is most prornis- ing. The latter kind of integration is exemplified by NAFTA or the EC. But this World Bank conclusion is questionable in light of the success of market-based integration among the developing economies of Asia.

Which regions are the current driving forces behind Asia-Pacific trade expansion? Intra-ASEAN trade has not increased significantly, remaining at only about 18 percent, despite the AFTA arrangement. In contrast, trade between ASEAN and the NIEs has expanded rapidly, as has trade between the NIEs and China and among the NIEs themselves. As these trade flows indicate, the developing nations of East Asia have been the driving force behind regional trade expansion.

Figure 3 illustrates these trade patterns. The average share of exports going to East

Asia markets has been increasing over the past decade: intra-East Asia exports, Jap- anese exports to East Asia, and even US. exports to East Asia all demonstrate a rising trend. In contrast, shares of exports destined for markets in the United States and Japan have been declining or stag- nant. Japan has not been importing much from East Asia. In fact, East Asia exports almost twice as much to the United States as to Japan in 1992.

Clearly, then, to a large extent, Asian export growth now is powered by exports to markets in developing East Asia. Intra- East Asia exports account for 50 percent of total. This is an important reason why Asian developing countries have been able to sustain high growth rates even in the face of recessions in Japan and Europe and with only sluggish growth in the United States. One need look only at the booming trade between Taiwan and Southern China or between Korea and China to see that East Asian economic


50

45

40

35

30

25: A

20

15

lol

5

0

FIGURE 3 Increasing Self-Reliance: Intra-Regional Trade

l / o share of exports

\ I

(GI) US. to EA

7 7 5 1980 1985 1986 1987 1988 1989 1990 1991 1992

Year

Note: East Asia (EA) includes NIEs, ASEAN, and China.

growth has become increasingly self-generating. East Asia’s declining reliance on the United States and Japan has great im- plication for the prospect of regional integration in Asia.

A n Asian Trade Bloc? The emergence of the single market in

Europe and of NAFTA.in North America presents Asian nations with a dilemma of how to react. This was briefly touched on by Dr. Ichimura earlier. What are the prospects for a preferential arrangement or trade bloc in Asia? Unless circumstances change dramatically, an Asian trade bloc- even as a defensive measure (such as the

proposed East Asian Economic Caucus, or EAEC)-does not seem likely.

An Asian bloc is impractical for several reasons. First, reliance on the U.S. market is still large enough among the Asian exporters as to preclude an exclusionary trade bloc among themselves. Even though dependence on the U.S. market has been declining, the trade pattern merely restores that of the late 1970s prior to the onset of American unbalanced macroeconomic polices in the mid 1980s. This decline in Asian export shares to the United States perhaps indicates a return to a “normal” state. For example, in 1992, Asia’s exports to the United States were 24


percent of the total, the same as 1980 (figure 3 ) . The big question is: will this share continue to decline in the future? That depends on whether Japan will ”start pick- ing up the slack” or not.

A second and related reason why an Asian bloc is impractical concerns the role of Japan. Japan has not yet been able to serve as a large market for Asia’s exports, especially of manufactured products. Therefore, Japan cannot replace the role of the United States in the Asia-Pacific trade. Selling to the U S . market will remain vital for Asian exporters for years to come. Until Japan can absorb a much greater share of Asian exports, the success of the East Asian Economic Caucus will be in doubt; it may even be a mistake to push for the EAEC.

Finally, Asian subregional NETS are ba- sically transnational export processing zones, rather than steps toward economic integration in the traditional sense. The integration of Hong Kong and southern China, as well as the Singapore-Johore- Riau Islands growth triangle, depend upon world markets as the destination for their products-especially the US. market. Producers in these dynamic areas do not compete directly in domestic markets. This characteristic leads to the virtual ab- sence of resource allocation effect or trade creation and trade diversion effect which typically are associated with regional integration.

How, then, shall Asia counter the protectionist effects of the EC and NAFTA, which are exclusive trade blocs? The completion of the Uruguay Round of the GATT is extremely timely. The accord will lower the external barriers of these emerging trade blocs. The GATT agreement is merely the beginning, however, since the completion of the Uruguay Round has left many matters unsolved. The phasing out of Multifiber Agreement (MFA) and the opening of the door on agricultural products are significant achievements, but the Round did not go far enough with regard

to such contentious issues as services, safety, environmental issues, voluntary export constraints and antidumping measures. Further consultation in these areas will be necessary.

The most promising option for Asia is to strengthen the APEC forum. Created in 1989, APEC was set up as a consultative framework and an ongoing process, not as a fixed institutional grouping. At the APEC meeting in Seattle, which President Clinton evaluated from the usual ministe- rial meeting to an informal leadership conference, two countries became new APEC members-Mexico and Papua New Guinea. Their inclusion brings APEC membership up to 17: the United States, Japan, South Korea, Taiwan, Hong Kong, China, the ASEAN countries (Indonesia, Malaysia, Philippines, Singapore, and Brunei), Canada, Australia, New Zealand, Mexico, and Papua New Guinea. Chile is also seeking membership.

APEC does not aim to be a retaliatory, exclusive trade bloc, but rather a “community” founded on the principle of ”open regionalism,” which combines elements of both regionalism and globalism. With Mexico’s accession to APEC, all three countries of NAFTA also are APEC members. One of APEC’s main virtues lies in tying the United States and NAFTA in general to the Asia-Pacific, thereby secur- ing Asian access to NAFTA markets. Uru- guay Round tariff reductions also will decrease the fear of NAFTA by helping to prevent NAFTA from becoming inward- looking and protectionist, especially after other Latin American countries are brought into the FTA. APEC is important in bringing together the two largest economies of the region and in counteracting U S . hemispheric myopia.

The Future qf APEC At the recent informal APEC leadership

conference in Seattle, Asian leaders-particularly those from Indonesia, Thailand,


and China-objected to the setting of a schedule for trade liberalization in the region. Due to these concerns, APEC re- jected the Eminent Person’s Group pro- posal to set a date for the goal of Asia-Pa- cific free trade.

This is quite different from the World Bank report saying that developing countries would love to have integration with the rich industrialized countries. In fact, all Latin America is knocking on the door, wanting to join NAFTA. Chile already has applied for NAFTA. Argentina and others are waiting in line. African countries want to join the EC. But Asian leaders show re- luctance in embracing a timetable for lib- eraliza tion.

There are several reasons for this reluc- tance. First, a preferential arrangement for the Asia-Pacific is premature. Negotiating a free trade area or tariff agreement involves divisive and complicated issues. As official barriers to trade decrease globally, trade agreements increasingly need to tackle such sensitive areas as intellectual property rights, investment measures, and trade in services and agricultural products. These kinds of negotiations are difficult even for a handful of countries in a subregion-such as for the ASEAN FTA- much less for the vast and variegated Asian-Pacific.

A second reason is duplication of effort. Deregulation and liberalization already are taking place rapidly in the region, and the private barriers to trade that remain cannot be easily overcome through a trade agreement. Ongoing liberalization efforts and market-based interaction already are creating economic complementarity and driving de fucto integration.

Finally, Asian leaders are leery of relin- quishing some sovereignty to another international organization. Similar caution greeted the initiation of both EAEC and APEC. Asia is well known for effective use of industrial policies to stimulate development, and tariff s have been of strategic importance in these policies. Therefore,

Asian leaders probably are reluctant to surrender sovereignty in policymaking. Their discomfort also is linked with the fear of US. domination and/or Japanese domination. What is needed, as Dr. Ichimura hinted, is a rethinking of Japan- ese economic policies towards Asia-Pa- cific. The broad question is what kind of a future Asia to build, in light of China‘s emergence as a major regional power and in light of ASEAN’s attempt to form the ASEAN FTA. It might be a great mistake to try too hurriedly to set a target date for trade liberalization.

However, open regionalism is suffi- ciently vague to make clarification through a framework of agreement of Asia-Pacific nations is a worthy goal. Countries should push for a flexible trade and investment framework agreement. In principle, such a framework agreement could cover a wide variety of areas in which cooperation would enhance the common good. Examples include confidence-building measures, guidelines for negotiations on a regional and bilateral basis, commitments to advancing the achievements of the GATT or the new World Trade Organization, and perhaps expediting the implementation of liberalization measures. In short, the framework agreement would be general and in the main would not envision discriminatory trading practices nor encompass other divisive issues. The diversity of the region makes effective confidence-building all the more imperative, since it will lay the foundation for more difficult cooperative measures in the future.

V. DISCUSSION

Werin: You showed interesting statistics on the trade among Asian countries. I think it is a general observation that trade tends to be most intense between countries that are similar to each other and close to each other. If we measure international trade in a classical way, trade within


Western Europe is about half of world trade. This demonstrates the above statement, but it also shows that statistics can be misleading: a region with many small countries tend to increase international trade. But then there is a tendency for trade to induce unification of economic units. This depends on the intensity of trade rather than on the grade of trade. So if trade between Asian countries intensi- fies, it naturally will call forth an Asian titled union.

Hou: That may well be, but as Seiji pointed out, the United States continues to be an important destination of East Asia exports. As long as significant gains from trade outside of the union exist, integration will be difficult. This is perhaps one of the main reasons why the ASEAN FTA is floundering (Nadal de Simone 1995), since not only does it rely on trade with the United States, it also heavily depends on trade with and investment from non- ASEAN neighbors. Furthermore, the so- lidification of APEC and GATT will lower the gains from an Asian union.

Ichimura: One technical point: When we talk about the proportion of imports or exports to GDP or GNP or total exports/imports, we have to be careful as to whether we are estimating the dollar denomination or in yen denomination. Be- cause the yen has been rising so much, if you dominate in dollars, imports tend to be small and exports tend to be big. And in fact, slightly more than 50 percent of the Japanese foreign trade now is yen denom- inated. The yen denomination part for- merly was very small but now it exceeds 50 percent. In the case of ASEAN or Asian trade, many of the trade now is yen de- nominated so we should express it in yen denominations.

Richard Wong, University of Hong Kong: I have a question for all members of the panel related to the statistical issue that Professor Werin mentioned a minute ago. As in the classical way, intra-Asian trade is measured by national entities or

territorial entities. This is very much an artifact of the existence of these countries. A big part of intra-Asian trade is generated, first of all, through Hong Kong, which is the tenth largest trading entity in the world. Another good portion is through Singapore. China’s opening generated a lot of trade as Hong Kong and Taiwan firms invested in China. However, in January 1997, Hong Kong will become part of China, at least in an accounting sense, a big part of the growth in the intra- Asian trade then will disappear, as trade no longer will be crossing the border. I never have seen it done, and I am not sure it could be done: holding constant partic- ular trading entities like Hong Kong and Singapore as you would hold constant a trading entity like New York. But surely they will devise ways of measuring it. This also shows that changes in policies, like the China’s opening, alter the trade pattern enormously, and in a sense, two issues really are involved: how a country approaches its economic policies and whether the origin of trade is intra-firm or transnational. The latter is of great interest because a big part of the 1980s growth in intra-Asian trade in Hong Kong and in Singapore really was generated by transnational activity that just happened to move slightly across the border geographically.

Hou: In 1997, Hong Kong will become part of China, but Taiwan will not do so in the foreseeable future. The unique role of Hong Kong between the two sides of the Taiwan Strait by definition will cease. However, as long as Taiwan maintains its prohibition against direct trade, it will find an alternative. The Taiwan government is looking into several proposals. If Taiwan were to choose Seoul, for example, as its new intermediary, that portion of trade would still show up despite the change of flags on Hong Kong. Certain other nations and/or transnational firms may do something similar. If so, the extent of the problem that Richard raised will be


smaller. Nevertheless, Richard does raise an interesting problem of double-counting in ”international” trade statistics, which economists are so avid in eliminating in the GDP calculation. Is it out of the question for the Chinese to formally take over Hong Kong but treat it as a special territory-which it promised in any case-and keep separate statistics? This is not without precedent. China maintains Taiwan as part of its territory lists Taiwan in its international trade statistics.

Clement Tisdell, University of Queens- land, Brisbane, Australia: Professor Ichimura, I am interested in your comment that Australia and New Zealand’s interests differ from those of East Asia. As you stated, Australia has supported the United States in relation to APEC, but Australia sees a lot of benefits in the development of East Asia. It is an export market, and we think that if it continues to grow, it only can benefit us. Japan for- merly was our main market, but it no longer is. So I would like to know why our interests differ from those of East Asia. I think that in the longer term Japan and China might have some difficulties because we are mixing politics with economics. Undoubtedly, as China becomes an economically greater power, it will become more influential politically. And one of the areas in which conflicts may occur is Southeast Asia, particularly Indochina. At the moment there is a rush for influence on smaller countries like Laos, Burma, and so on. In the long run China likely will win out. But I want to know why that is not in Australia’s interest, because we think we have complementarities in terms of raw materials. We not only produce raw materials, we also produce more sophisticated technology, and as far as China is concerned, it really does not consider Aus- tralia as a serious threat politically. So maybe that is an advantage for Australia and New Zealand.

Ichimura: Of course interdependence is clear among many East Asian countries

and Australia or the United States. No- body challenges that. But compare, for instance, the development of ASEAN countries (including Indochina) and their industrial competitions extended into the middle part of the 21st century, Australia will be one of the main competitors for the newly developed industries in these countries. Australia is rich in natural resources, but the manufacturing industries that Australia desires to promote are in direct conflict with industrial development ob- jectives of ASEAN. So the kind of industries you try to develop must be determined very carefully, and in that sense, I do not see much of the consistencies so easily conceived, particularly if you include coastal China. And in the same sense, I am rather concerned with the future of ASEAN’s manufacturing industries.

Naya: You are quite right. Actually, any FTA involves both a trade aspect and a protection effect. The debate over NAFTA was framed in terms of protectionism or free trade. But in these debates, we often forget that both elements are involved. Creation of a free trade area means that members have to worry about rules of origin. In fact, the automobile content requirement for NAFTA was raised from 50 to 62.5 percent. They also tightened the textile requirements-not only the fabric but the yarn must be made in NAFTA. These are examples of the protection-rais- ing effects of FTAs and are reasons I worry about Article XXIV of the GATT. GATT’s Article XXIV allows free trade area formation under very loose restrictions. Perhaps these restrictions should be tightened to specify that trade barriers actually fall when a trade bloc is formed. I do not know whether the new World Trade Organiza- tion (WTO) will look into this issue or not. Your comments about transnational activities are quite right. This is why the United States has a large deficit with China and China has a large surplus with the United States. Much of the U.S. trade goes


through an intermediary, such as Hong Kong, so you do not know where the goods are coming from. Both Hong Kong and Singapore have exports larger than their respective GDPs. How can that be? It is because exports are gross value, whereas GDP is value added. So if you simply look at the value added, the total transaction is smaller. But the beauty of Asia is that through networking, it can generate much more trade. A lot of these "transactions through connections" are through transnational corporations. There is nothing wrong with this, as long as it facilitates trade; i t is an important part of the cultural aspect of Asian trade. But it does cloud the actually measuring of how much value added is being generated and the directions of trade increase.

Ichimura: So long as the proportion of re-export of Singapore and Hong Kong remains unchanged the figures we have been using is okay. There maybe a little upward trend in export, but it does not seems to be significant.

Jim Johnston, Illinois Institute of Tech- nology, Chicago: I have a question about the service component in the trade statistics and whether or not that is important in changing the underlying pattern. I would expect it to be a very important part, just as i t was in the NAFTA negotiations. A point made about the service component is how much more difficult it is to erect trade barriers for exchanging services. This might be good news for trade, both in general and within the region.

Eric Ramstetter, Kansai University, Osaka, Japan: First, about the re-export issue. In €long Kong the ratio of re-export to total exports has gone up dramatically and in Singapore it has come down dramatically. I have two comments. I have heard today some discussion of what we call the private barriers to trade, and I really wish we as economists could stop talking like that because we are talking about the ability of some entrepreneurs to function in an economy that is culturally

different from theirs. The Japanese have learned how to market in America the American way. Why can't the Americans learn how to do it in Japan, the Japanese way? There are many cases in which the Japanese way actually worked in favor of U.S. firms. In fact, I have seen evidence that more U.S. firms in Japan benefit from Japanese methods than are hurt by them. The second point is related to that because I believe that Japan has liberalized about as much as is possible. So I do not see any room for large changes in government policy to increase imports by effecting relative prices or something like that. Rather, my opinion is that what the Japanese government really needs to concentrate on is getting itself out of the recession and pop- ping up the growth rate to something like 5 percent. That will do a lot more for imports than any move on trade policy.

Naya: You are correct in noting that the service component is increasing as a proportion of total current account. Services gradually are being freed in many places. I just came from New Delhi, where they have recently decided now to liberalize their insurance regulations. They are going to allow 50 percent shares in the insurance fund. This is one example of the enormous reform taking place. India wants to be like other tigers, so it is re- forming everything including its services. GATT did not quite go far enough into services, particularly in the banking area. The fact is that private barriers do exist, and they increase transaction costs. There- fore, the transaction costs are higher for Americans and Europeans, who are less adept in dealing with such private barriers. China is a case in point: both the law and its enforcement is somewhat vague. Consequently, in many cases, transaction costs are significantly higher than they would be under a system with greater transparency. Of course, if you know the ropes you can handle such complications. That is why entrepreneurs from Hong Kong and Taiwan have been able to pen-


etrate southern coastal China most effec- tively. Even the Japanese have a harder time, and Americans usually face an even greater challenge. Another issue is the fact that investment in China is largely for export processing. If China starts allowing large investment for domestic production, things will be quite different. Then China will attract a lot more investment from both the United States and Japan.

Yeomin Yoon, Seton Hall University, South Orange, N.J.: I have a question for Professor Ichimura. If the inconsistency of economic interest between United States and Asian countries, including Japan, continues and aggravates, do you think it feasible to extend the concept of your in- verted V-shape wild geese formation and form some kind of East Asian Pacific co- prosperity sphere?

Ichimura: No. That is a gross misunder- standing. What I am saying is this: The United States initiated the formation of NAFTA, and she wants to extend NAFTA. At the same, she proposes APEC and wants to make APEC a political economic instrument to liberalize trade among the Pacific Rim countries. Don’t you see the conflict between these two proposals? That is what I mean. From the East Asian economies’ perspective, why should we form APEC while you have your own NAFTA? The natural way of thinking in terms of regional integration would be to form something similar to NAFTA among East Asian countries, and then try to form APEC on the basis of two groupings. To me, APEC and NAFTA are contradictory.

Yoon: Is NAFTA an open FTA? Ichimura: It is not. That is what the

Americans say. But the ”countries of origin” proposals imposes prohibitive barriers. For example, if Korea agreed with the proposals and wanted to join, could they join? No, because their export commodities consist of imported goods from Japan. So they are not able to export automobiles to the United States because their engines are imported from Japan. There are many

conflicts between the APEC proposals and NAFTA.

Robert Lipsey, City University of New York and NBER: The charts are very interesting. I wonder what they would look like if one used pure proportions by taking account of the growth rate of the exporters and the importers. Other things equal, exports are biased towards markets that are growing faster, and exports are going to be greater by countries that are growing faster. So some of this simply may reflect the growth rates rather than greater regionalization. It would be nice if one could take out growth and say what else is in there besides the pure growth rates. In other words, the net. Was there any net regionalization beyond the growth rate? The other comment is on the general discussion here. It strikes me that as soon as we start talking about economic policy, ev- eryone turns into a mercantilist. Nobody talks about the gains from cheaper imports. We all are talking about protecting our home industries or promoting their growth. One of the biggest benefits to the United States has been the imports of cheaper and better Japanese cars and of cheaper clothing from Hong Kong and other countries. I have not heard a word about that today. We ought to keep that in mind. What is trade for? It is for welfare.

Werin: You obviously are right, and that is why I always have defended old fashion free trade. The Japanese automobile industry and East Asian electronic industry have meant tremendous benefits for the United States. The goods are much cheaper, and living standards increased on both sides. But the interest in forming trade blocs venture into the territory of American domestic politics and senti- ment.

Naya: My first explanation for the rising interest in forming trade blocs is the “income effect.” This effect has been very significant in generating greater intra- Asian trade. Probably the decrease in East Asian exports to Japan also is due to the


income effect. Japanese income growth has slowed down. As Eric said the best thing for Japan would be to grow at 5 percent. That would solve a lot of problems for Japan. I feel the overall impact of NAFTA is positive rather than negative. As I have said previously, any exclusive trading area-such as NAFTA-leads to trade creation and trade diversion effects. The dynamic impact also can be very large. Examples include the reallocating investment and shifting labor-intensive industries across the border to Mexico. These will tend to increase the income of both sides. Maquiladora arrangements will be eliminated as such export processing zones are phased out over time. Based on these various components, I think the total efiect is going to be positive. I do not think there will be a negative trade impact for Asian countries.

Werin: Seiji, you are too optimistic. The trade creation effect is positive, but the trade diversion effect is negative. Which is larger? Nobody knows.

Naya: The first relevant comparison is between the trade creation and trade diversion effects. The empirical estimates that I have seen seem to indicate that the dynamic trade creation effect is going to be large enough to offset negative trade diversion effect of NAFTA. What seems more important is whether or not Asia needs a trading bloc of its own. My personal feeling is that, unless there are major changes, it is going to be very difficult to establish an Asia trading bloc. I don’t see the kind of leadership that is needed. NAFTA was extremely controversial for the United States. Based on this experience, it certainly seems less likely that an Asian or Asia-Pacific-wide trade bloc can be created. As I said, many of the leaders said no to the Eminent Person’s Group’s recommendation to set some sort of trade liberalization target. The Asian economies must find their own solution in dealing with NAFTA and EC. Fortunately, GATT will further reduce external barriers,

thereby decreasing the trade diversion effect of such trade blocs.

Young: With regard to the NAFTA agreement, this side of the Pacific deems it as a kind of failure because its principle objective was a political one rather than an economic one. The change in trade barriers were small indeed. It was mainly an attempt by the American elite to validate the moves towards an open economy. It was an attempt to give NAFTA political support and lock into place those changes regarded as desirable. So I think the ag- gressive intentions behind NAFTA are overstated.

Unidentified Member of the Audi- ence: I would like to confirm my under- standing of what you have just said. The negative impact of NAFTA towards Asian countries including Japan and China is negligible to the extent that it could be safely ignored?

Naya: I do not think you can safely ig- nore any regional free trade area based on exclusivities. Such an FTA is different from an open regionalism espoused by APEC. Whatever is agreed upon among APEC countries can be made applicable to Swe- den or any other country. But NAFTA is different. NAFTA has elements of exclusivity, such as tighter rules of origin and higher content requirements. The abolish- ment of the Maquiladora arrangements will mean that imported parts are subject to custom duties, and there are a lot of parts coming from Asia. This is an example of exclusivity and the related protection effect. What is important is the low- ering of all barriers so that the trade diversion effect of a FTA will be less. GATT has, to some extent, accomplished that. It also is very important for APEC to work closely with NAFTA so that NAFTA does not become inward-looking. NAFTA certainly has the potential of becoming inward-looking if it goes beyond including Chile. Chile already is a very liberalized country with a 10 percent uniform tariff rate, an almost unprecedented achieve-


ment among developing countries. Most Latin American countries are far less liberalized. So if they join NAFTA, the pres- sure for protection will increase. It is very important for both the United States and other APEC countries not to become inward-looking.

Ichimura: The NAFTA requirement on automobiles is not falling. The local content percentage for engines and transmis- sions in passenger cars and small trucks remains 50 percent for the next four years but will be raised to 56 percent for the following five years, and to 62.5 percent from then on.

Werin: Would that be favorable for Korea?

Ichimura: In electronics, computers must use a mother board made in the United States. TVs bigger than 14 inches must use brown tubes made in the United States. Is this favorable for Korea, Taiwan? No. Why should the United States import TVs and automobiles from Mexico rather than from Korea and Taiwan. This is against gut principle.

Unidentified Member of the Audi- ence: As a follow up to that, are the rules stricter under NAFTA than they were before NAFTA?

Naya: Yes. Mexico has a 30 percent content requirement for automobiles because Mexico wants to have foreign automobiles coming in. But NAFTA imposes a 50 percent content requirement. In this sense, NAFTA includes some elements of protectionism. I think that whenever a free trade area is established there are elements of both free trade and protection. Although the chief concern here is the protection element, I feel that NAFTA also will have a strong income growth effect.

REFERENCES

de Melo, Jaime, and Arvind Panagariya, ”The New Regionalism in Trade Policy,” World Bank, 1992.

Hou, Chia-Chu, and Jack W. Hou, ”Confucianism, En- trepreneurship, and Economic Development,” paper presented at the Western Economic Asso- ciation International 68th Annual Conference, Lake Tahoe, Nev., June 21, 1995.

Kuznets, Simon, Modern Economic Growth, Rate, Struc- ture, and Spread, Yale University Press, New Haven, COM., 1966.

Nadal de Simone, Francisco D. A., “A Macroeconomic Perspective of AFTA’s Problems and Prospects,” Contemporary Economic Policy, April 1995, 49-62.

Ranis, Gustav, “The Evolution of Policy in a Compar- ative Perspective: An Introductory Essay,“ in K. T. Li, The Evolution qf Policy Behind Taiwan’s De- velopment Success, Yale University Press, New Haven, COM., 1988,l-25.

Weber, Max, The Religion $- China: Confucianism and Taoism, translated by H. H. Gerth, Collier Mac- millan, London, 1964.

pacific rim trade and development: historical environment and future prospects

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