JP/6/LA19

JP/6/LA19

Which path for East Asia?

Hilton L. Root
Former Senior Adviser
U.S. Department of the Treasury

The Washington Post

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

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

A comparison of East Asia with the Middle East shows why the
Bush administration should recognize the need for nuances in its
foreign policy. While Middle Eastern and South Asian leaders
sacrificed their nations' well-being to pursue geopolitical
agendas, East Asia's leaders emphasized growth with equity,
grounding their claims to political legitimacy on their economic
success.

Their governments are pursuing structural changes to ensure
healthy growth -- including steps to open labor markets, protect
intellectual property, contain corruption, improve bidding and
contract terms on infrastructure projects, and attract new
investment in high-value-added industries.

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

U.S. policymakers should understand that Japan's leadership
role is one of the region's most troubling uncertainties, and
that the 1997 crisis began a quiet shift in the regional balance
of power. East Asian leaders recall that Japanese banks withdrew
significant amounts of capital from the region, exacerbating the
1997 crisis.

Tokyo has also conceded that, if necessary, it will defend
Japanese economic interests before addressing regional needs,
even undertaking radical devaluations of the yen.

Meanwhile, China is filling the leadership vacuum. It acted as
the responsible party in the 1997 crisis, refusing to devalue and
thereby helping prevent a cycle of competitive devaluations.
Today, as sponsor of regional free-trade discussions, Beijing
continues at every possible opportunity to link itself to the
region's future growth.

U.S. policymakers preoccupied with the impact on U.S. trade of
China's accession to the World Trade Organization often ignore
the influence it will have on interregional trade: making the
region more dependent on China.

Moreover, the region's business leaders play down China's
territorial ambitions because many believe China's leaders need
growth -- and therefore stable political relations with their
neighbors -- to maintain their grip on power.

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

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

Many would suggest that an ascendant China might jeopardize
the region's democratic aspirations, but Japan itself has been
ambiguous in its support of regional democracy. Unconvinced of
any link between strong democratic institutions and future peace
and prosperity, Tokyo, in its overseas assistance, places little
emphasis on building strong civil institutions.

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

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

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