Political economy of northeast Asian regionalism: political conflict and economic integration

Political Economy of Northeast Asian Regionalism Political Economy of Northeast Asian Regionalism Political Conflict a...

Author: Che-hun Pak | T. J. Pempel | Gérard Roland

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Political Economy of Northeast Asian Regionalism

Political Economy of Northeast Asian Regionalism Political Conflict and Economic Integration

Edited by

Jehoon Park University of Incheon, South Korea

T.J. Pempel University of California, Berkeley, USA

Gérard Roland University of California, Berkeley, USA

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© Jehoon Park, T.J. Pempel and Gérard Roland 2008 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2008927980

ISBN 978 1 84720 891 0 Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

Contents List of figures List of tables List of contributors Preface 1

vii viii ix xi

Introduction: perspectives and positions of major countries Jehoon Park

1

2 Regionalism in Northeast Asia: an American perspective T.J. Pempel

11

3 Northeast Asian security regionalism: a Chinese perspective Yongtao Liu

30

4 Northeast Asian regional integration: regional theories, current realities and future prospects Young Jong Choi

44

5 The progress of Korea’s FTA policy in the context of Northeast Asian economic cooperation Inkyo Cheong

56

6 Economic obstacles to a Northeast Asian FTA Fukunari Kimura and Mitsuyo Ando

67

7 The FTA policies of China, Japan and Korea and prospects for a CJK FTA: Korea’s perspective 100 Hyungdo Ahn 8 Financial cooperation within the ASEAN3: viability and prospects Jin-Young Kim 9 European integration: what lessons for Northeast Asia? Gérard Roland

111 130

10 Conclusion: searching for models of regional integration in Northeast Asia Jehoon Park

150

Index

169 v

Figures 2.1 2.2 6.1 10.1 10.2 10.3 10.4

China has doubled its share of Asian exports China leads intra-Asia trade growth FTA networking in the Asia-Pacific Interdisciplinary summary of regional integration theories Marxian model for regional integration Weberian model for regional integration A comprehensive model for Northeast Asian regional integration

vii

16 17 68 156 157 158 163

Tables 2.1 5.1 5.2 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6A.1 6A.2

7.1 7.2 7.3 7.4

Intra-regional trade shares 15 Korean FTAs: current progress 57 FTA partner countries according to the FTA roadmap (2003) 58 Matrix of FTAs involving countries in East Asia 67 Imports of agriculture-related products and the tariff rates in Japan: imports from Korea in 2005 72 Imports of agriculture-related products and the tariff rates in Japan: imports from China in 2005 74 Ad-valorem tariff structure in Japan, Korea and China 77 Japanese direct import contents in manufacturing production of Korea and China, 1995 80 Japanese direct import contents in manufacturing production of Korea and China, 2000 84 Business environment in Japan, Korea and China 89 Business environment in Japan, Korea and China: components of 10 factors for ease of doing business 94 Business environment in Japan, Korea and China: components of the Global Competitiveness Index and notable competitive disadvantages 96 Status of RTAs 101 FTA status of Korea, China and Japan 102 Characteristics of CJK FTA policies 107 The effects of bilateral FTAs between China, Japan, Korea and a CJK FTA on national GDP 108

viii

Contributors Hyungdo Ahn is Director of the Center for Northeast Asian Economic Cooperation at the Korea Institute for International Economic Policy. Mitsuyo Ando is Associate Professor of Business and Commerce at Keio University. Inkyo Cheong is Professor of Economics at Inha University. Young Jong Choi is Professor of International Studies at the Catholic University of Korea. Jin-Young Kim is Professor of Political Science at the Pusan National University. Fukunari Kimura is Professor of Economics at Keio University. Yongtao Liu is Professor of Political Science at Fudan University. Jehoon Park is Professor and Dean of School of Northeast Asian Studies at the University of Incheon and General Secretary of Northeast Asia Intellectuals’ Solidarity Korea. T.J. Pempel is Professor of Political Science at the University of California, Berkeley. Gérard Roland is Professor of Economics at the University of California, Berkeley.

ix

Preface This book is the final product of five international conferences held since 2001 and organized by Northeast Asia Intellectuals’ Solidarity Korea (NAIS Korea). NAIS Korea is a non-governmental organization (NGO) established in 2001 with the goal of promoting regional integration in the form of a ‘Northeast Asian Community’; NAIS Korea has more than 500 scholars from Korea as well as international members from throughout the region. The Incheon Metropolitan City Government of South Korea supported our first international conference as a way for them to commemorate the opening of Incheon International airport on 28–29 November 2001. There was a consensus at this meeting that an NGO to advance solidarity among intellectuals willing to work for the construction of a ‘Northeast Asian Community’ should be formed. At the first NAIS international conference, the members adopted the ‘Incheon Declaration 2001’ announcing the official launching of the international NAIS movement. In 2004, NAIS Korea published a monograph in Korean summarizing the previous years’ activities under the title Toward the Northeast Asian Community: Dreams and Realities of Asian Regional Integration. The book brought together 17 papers written in Korean by experts and scholars from various fields of politics, economics, society and culture, the family, and science and technology. Since then there has been a strong consensus on the need to publish a book in English that summarized the outcomes of activities and research done by NAIS. The three co-editors of this volume met in Autumn 2005 at UC Berkeley when Jehoon Park was a visiting scholar there. After he returned to Korea, Park, as General Secretary of NAIS Korea, invited the two Berkeley professors to the 5th international seminar in 2007. At that seminar a variety of new papers were presented and we agreed to work as co-editors to publish this book based on the papers from that conference. Interest in regional integration and regionalism in East and Northeast Asia has been increasing steadily, but to date most publications have been written in local Asian languages. Those few written in English are mainly by Western scholars. This book brings together a number of both Asian and Western scholars as contributors. It is also somewhat unique in that contributions are made from an interdisciplinary approach covering both xi

xii

Preface

economics and political science. The book deals with various issues including applications of European experiences to Northeast Asia as well as perspectives of each country in the region, together with perspectives from outside the region, most notably from the US. The book contains eight papers from the 5th international conference plus two papers separately invited to address related topics. We wish to give special thanks to Professor Young-Sun Lee, one of the co-representatives of NAIS Korea. Without his help we would not have been able to complete this publication. Jehoon Park, T.J. Pempel, Gérard Roland 2008

1. Introduction: perspectives and positions of major countries Jehoon Park Northeast Asian regionalism has been a keen issue since the 1997 Asian financial crisis, which confirms the argument that only crises stimulate regionalism. In contrast with the fact that Free Trade Agreements (FTAs) and security cooperation have not yet produced any real output, financial regionalism has been relatively successful in East Asia due to the lessons drawn from the Asian financial crisis. The North Korean nuclear issue could be the second source of momentum for regionalism in Northeast Asia. The Six Party Talks may become a regional forum which could be developed into a multilateral security cooperation organization in the region. It took some time for the intellectual community in Northeast Asia or East Asia to understand the implications and the meanings of the Asian financial crisis. It was only in 2001 that the intellectuals in the region began to organize their activities in order to suggest policy options for the long-term goal of establishing a regional integration body like the ‘Northeast Asian Community’. Among the prominent academic NGOs aiming at an international movement for Northeast Asian regionalism is NAIS Korea (Northeast Asia Intellectuals’ Solidarity Korea) which was established in 2001 as a result of the initiative of South Korean intellectuals. This chapter summarizes and evaluates various arguments suggested by papers presented at the five consecutive NAIS international conferences, including chapters from the monograph published by NAIS in 2004 under the title of Toward the Northeast Asian Community: Dreams and Realities of Asian Regional Integration (in Korean). Perspectives and positions of major member countries, that is, China, Japan and South Korea, are introduced and summarized. A political economy approach is adopted so that issues of politics and security as well as economy can be analyzed jointly.

1

2

Political economy of Northeast Asian regionalism

PERSPECTIVES AND POSITIONS OF CHINA If we make an overall estimation based on the three-dimensional framework of state (politics and government), market (economy) and society (civil society and NGOs),1 in terms of fields and sectors, it may be noted that China adopts more realistic approaches and emphasizes the roles of state and government in regional integration, which is understandable when considering that China is still a statist country controlled by a strong Communist party. As Chinese society still has a very weak voice in terms of Western standards, therefore, it may be natural that China seems to prioritize issues of security and economy over those of society in terms of fields. Although the thrust is put on the orientation of East Asia rather than Northeast Asia, more active interests in regional integration have been displayed than initially expected. Politics and Security Vice-president of Fudan University of China, Mingyang Xue (2001) emphasizes the importance of Northeast Asian security cooperation for the construction of the Northeast Asian Community. While he points out the differences between Northeast Asia and Europe, he emphasizes the importance of economic integration for the formation of a security cooperation body. He already claims that this can become the basis for a Northeast Asian security cooperation body if the Six Party Talks concerning the solution of the Korean Peninsula problem succeed. Liu (2007) analyzes the somewhat positive roles of China in Northeast Asian Security Regionalism (NEASR). He refers to NEASR as ‘intensifying processes of cooperation and/or cooperative ideas undergoing mainly among these states: two Koreas, Japan, China, Russia and the United States’. According to his argument, China changed its view on the US military role in Northeast Asia, acknowledging that US interests in Northeast Asia are understandable and do not necessarily conflict with those of China. Emphasizing the uniqueness of Northeast Asia as a region and its historical and present context in which the regionalism unfolds, makes the process both encouraging and stunted; Liu concludes, however, that ‘economic regionalism in Northeast Asia may not lead naturally to the realization of security regionalism in the short run’ (Chapter 3 of this volume). Economy China wants to use the Beijing Olympics and the Shanghai World Trade Expos as opportunities for accelerating China’s economic opening in

Introduction

3

relation to the global economy. It can be said that China is pursuing a socalled ‘two-track strategy’ in international economic cooperation. On the one hand, by participating actively in the globalization trend under the WTO system, China is trying to upgrade its institutions to international levels by integrating its economy into the world economy. On the other hand, China is pursuing a strategy of taking initiatives in East Asian regional integration with the purpose of increasing the role of Chinese economy as a regional center. Jingyi Ye (2005) suggests a roundabout way via three parallel ‘ASEAN 10+1’ structures to achieve the long-run goal of an East Asian Free Trade Area. According to her analysis, China is pursuing a two-track approach, where it is actively involved in and is promoting the arrangements of regional trade liberalization in East Asia, while pursuing multilateral trade liberalization through the WTO mechanism at the same time. It may be interesting to note that in 2001 there was already an argument emphasizing the need to pursue in advance the FTA between Korea and China for the success of the FTA of Korea, China and Japan (Angang Hu, 2001). Emphasizing Japanese roles in Northeast Asian cooperation, Jianren Lu (2003) claims that the appearance of ‘a New Japan’ is a central element for regional cooperation in order for Japan to find an identity in East Asia and to learn historical lessons from the past with a regional perspective along with a global one. He, at the same time, emphasizes American roles in Northeast Asia and asserts that the US should be used as ‘public resources’ of Northeast Asia, and should not be seen as an obstacle. There is an argument suggesting three approaches for Northeast Asian Free Trade Agreement (NAFTA). The first is to start the process after all three bilateral FTAs are finished, and then to do a trilateral FTA, which needs time since only the Korea–Japan FTA has started negotiations. The second is to launch an independent process for NAFTA immediately since the joint study group has already finished its study, while its difficulty lies in weak social and political support. The last is to start with a trade and investment facilitation agreement and a trilateral investment agreement in 2007 or 2008, which can set up the foundation for NAFTA in the future (Zhang, 2006).

PERSPECTIVES AND POSITIONS OF JAPAN Japan adopts different approaches from other countries and emphasizes the role of civil society in regional integration, which is natural considering the fact that Japan is the most developed country in terms of maturity of

4


civil society in Northeast Asia. In terms of fields, therefore, it seems that relatively high priorities are society and culture. Initially Japan was actively in favor of concluding an FTA with Korea, but recently there has been a great deal of stalemate. The late LSE professor, Morishima (1999) suggested a creative idea for Northeast Asian regional integration: the Japanese prefecture Okinawa should be independent from Japan to become the capital of the Northeast Asian Community, and China should be included as six blocs, the Korean Peninsula and Japan each as two blocs and Taiwan as one bloc so that the Community would be a ‘Construction Community’ rather than a ‘Market Community’. Politics and Security A liberal intellectual and well-known internationalist in Japan, Yoshikazu Sakamoto (2001) insisted that to strengthen regional cooperation with a view to building a consolidated Northeast Asian community, it is imperative to transcend, at least intellectually, the traditional framework of the sovereign state system in the following four respects. First, one must transcend the negative historical legacy of the region in terms of the imperialist war of aggression and colonial rule perpetrated by Japan, because the East Asian people’s distrust of Japan and Japan’s failure, or even unwillingness, to mitigate the distrust through a sincere apology for its historical wrongdoings clearly constitute the main obstacles to the enhancement of regional cooperation. Second, to counter the trend toward aggravating global inequality and inequity, it is necessary to promote democratization at home based on the empowerment of civil society in each country, and to advance transnational democratization based on the regional and global solidarity of civil societies. Third, the regional community of the intellectuals should retain autonomy from governments and corporations. The possibility and need of cooperation between them are not ruled out, but a degree of distancetaking is indispensable. Fourth, there are two ways to transcend the framework of the sovereign state system. One is to transcend the national sovereignty at the top of the state to build a supranational world and/or regional organization. Strengthening the United Nations and the European Union is a case in point. The other is to transcend the national boundary at the bottom of the state in order to build a transnational civil society like a multitude of transnational NGOs.2

Introduction

5

Economy Motoshige Itoh (2006) emphasizes several factors blocking the realization of an FTA in this region. One of them is the chilly political relations between Japan and the other two countries, mainly due to the Yasukuni shrine issue. The lack of a summit meeting among the three made it difficult to have serious talks to initiate any kind of economic cooperation in this region. Second, there are needs to transform ASEAN+1+1+1 where each of the three countries has an FTA arrangement with ASEAN, to ASEAN+3. In addition to political and emotional obstacles, Kimura and Ando (2006) discuss three symbolic obstacles to FTA negotiations: agriculture in Japan, the manufacturing sector in Korea, and the business environment in China. ‘Agricultural protection in Japan is one of the most notorious examples of trade protection in the world’, although shares of agriculturerelated imports in total bilateral imports, regardless of whether with tariffs or not, are only 6 per cent with Korea and 9 per cent with China in 2005, which indicates that ‘it should not be a big deal for the whole economy of Japan even if the agricultural imports from Korea and China were liberalized’ (Chapter 6 of this volume). Criticizing the Japanese government’s official position favoring an ASEAN+6 approach, Makoto Taniguchi (2007) proposes to start by establishing an ‘East Asian Economic Community’ first, at the level of ASEAN+3, developed from the present ASEAN+1, because the cooperation between Japan, Korea and China is vital, as the total Gross National Income (GNI) of these three major economic players in East Asia is nine times as great as that of the ASEAN 10. He urges Japan to make efforts to conclude the delayed bilateral negotiations with Korea as soon as possible. He also calls for a Northeast Asian Environmental Cooperation Organization as well as a joint energy development and oil reserve program among Japan, Korea and China, and technological cooperation to increase agricultural production and to secure the food supply in Northeast Asia.3

PERSPECTIVES AND POSITIONS OF SOUTH KOREA South Korea seems to be the most active country in regional integration among the regional countries, although the concrete results have not yet been seen. At the intellectuals’ level, it is emphasized that the harmony of the roles of state, market and civil society is crucial for the realization of

6


regional integration. It is regarded as inevitable that Korea gives high priority to the solution of short-term security problems such as North Korea’s nuclear issue as well as mid- and long-term economic problems such as the construction of the ‘Northeast Asian hub’ country. It may be noted that the current Korean government was initially interested in the construction of Korea as the Northeast Asian hub country, while intellectuals and the private sector think that it is wiser to emphasize the mediator role of regional integration such as a Northeast Asian Community, especially toward the outside world. Roh’s government emphasized the role of a ‘balancer’ which caused controversy regarding the true implications and intentions, while NAIS emphasizes more cautious and modest roles of a ‘mediator’ or a ‘coordinator’. With regard to the future of China, the former vice premier of the South Korean government, Soon Cho (2003) raises the question, ‘Is China going to go democratic in the future?’ His answer is that ‘it appears that [the] answer is yes, but in a Chinese way’. He concludes that ‘China is at its threshold of a civil society, but the country won’t follow the George Washington model, and it will do its own thing.’ One of the well-known liberal writers in South Korea, Won-shik Choi (2004) suggests a ‘trichotomy theory of the world’. It is a trichotomy theory because the ‘East Asia discourse’ is looking for new ground from the US and the EU. And it is a trichotomy theory also because, although the Soviet Union has already collapsed, ‘the 20th century’s socialist experiment’ is treated as an important object of evaluation together with American capitalism, and a third way is being sought. Choi’s ‘East Asia discourse’ does not imply a hegemonic idea where East Asia should become a new center against the US and the USSR or the US and the EU. Because of this, it is sharply different from the famous ancient Chinese politician, Kongmyung’s trichotomy. It is argued that it is an earnest message for peace; by overcoming the Korean Peninsula’s division peacefully, Korea is looking for a new principle of forming a new world beyond statism and nationalism. The late historian and the former president of Seoul National University, Byung-Ik Koh (2003) argued that ‘we have a misconception that East Asia had a tradition that among the intellectuals of three countries, there have been active cultural exchanges. But in fact, the tradition has been lost since the 17th century until recently. Therefore, we, intellectuals of the 21st century, have a historical duty of revitalizing the tradition.’ Rozman (2004) recognizes South Korea’s critical position in bringing China and Japan together in the triangular core of regionalism. It should be noted, however, that the domestic ideological split is becoming reinforced in South Korea. It is not at all easy to reach a national consensus

Introduction

7

about a critical agenda including regional integration. One of the factors making things worse is the ideological discord between the New Right vs. the New Left. As seen in the case of the Korea–Chile FTA, and more recently the Korea–US FTA, regional integration is a very conflictive issue and potentially quite explosive. Politics and Security It seems true that the construction of regional integration such as a Northeast Asian security cooperation body in the region is unrealistic in the near future because of the numerous barriers such as the American influence, the North Korean issue, and so on. But in the field of international political science, theoretical studies about the possibilities of constructing a cooperation body and regional integration in Northeast Asia have already proceeded, based on the spreading and application of the modern European experience. Recently, it is reaching a new turning point, as the discussions concerning Northeast Asian cooperation at the government level have been proceeding well along with the establishment of The Asia–Europe Meeting (ASEM) and the regularizing of summit meetings among the three countries. Young Jong Choi (2007) argues that conventional theoretical approaches predict that regional integration in East Asia is a distant possibility, identifying four key conditions for the success of regional integration: functional demands, leadership, common exigencies or sharing of strategic interests, and common identity. It is concluded that Northeast Asia has failed to meet these conditions up to now, and the situation is likely to continue for quite a while. ‘Northeast Asia may have to continue pursuing boring functional cooperation at all levels, for example, political, social, cultural, legal, economic, and so on’ (Chapter 4 of this volume). With regard to financial cooperation in East Asia, Jin-Young Kim (2007) asserts that ‘financial cooperation of the APT is a new phenomenon which deserves more theoretically guided understanding and more researches based on major International Relations (IR) and International Political Economy (IPE) theories. Because it is still at the infant stage it may be somewhat risky to predict its future course. There may be more rocks and reefs that impede the progress of financial cooperation of APT.’ (See Chapter 8 of this volume for the issues related to the financial cooperation in East Asia.) Economy Inkyo Cheong (2007) describes the details of the initial FTA roadmap of the South Korean government from the experiences of working for the

8


government. It is known that ‘initially, the possibility of a Korea–Japan FTA was higher than a Korea–China FTA or a C–J–K FTA. According to the 2003 Korean FTA roadmap, Japan, Singapore, EFTA, India and ASEAN were categorized as the candidate countries for concluding FTAs in the short term, while the US, China, the EU and South America (Mercosur) were categorized as the candidate countries for concluding FTAs in the mid and long term’ (Chapter 5 of this volume). A realistic policy suggestion is made by Hyungdo Ahn (2006) concerning a plausible channel towards a C–J–K FTA, which could be constructed through multiples of ASEAN+1’s: ASEAN+Korea, ASEAN+Japan and ASEAN+China. He states that ‘for the moment, however, CJK investment agreement as was announced recently by Economic Ministers from [the] three countries could be considered in order to provide a useful starting point for deepened economic cooperation between [the] three countries in the future’ (Chapter 7 of this volume). In conclusion it may be said that South Korea is the most active in Northeast Asian regional integration, whereas China and Japan still have negative perceptions of each other. Generally speaking, the level of functional integration in the economy is higher than the level of cooperation in politics and security. However, there is still a need to pursue institutional integration. The chapters of this volume analyze the issues of Northeast Asian regionalism in more detail. Among them, Chapters 2, 3 and 4 focus on the political issues from the perspectives of the US, China and South Korea, although Chapter 4 tries to suggest more theoretical views from a general perspective. Chapters 5, 6, 7 and 8 analyze the economic issues focusing on the FTA and financial cooperation from the perspectives of South Korea and Japan. It is interesting that Chapter 9 alone touches on the European cases in the context of comparison with Northeast Asia. Chapter 10, the conclusion, tries to suggest models of regional integration in Northeast Asia, based on the summaries of the discussions from the previous NAIS conferences as well as from this volume.

NOTES 1. For the details, see models and theories of regional integration in Chapter 10, the conclusion of this volume. 2. Keynote speech at the 1st NAIS international conference 28 November 2001. 3. Keynote speech at the 5th NAIS international conference on 20 February 2007.

Introduction

9

REFERENCES In English Ahn, Hyungdo (2006), ‘FTA policies of CJK and prospects of CJK FTA: Korean perspective’, paper presented at the KIEP-NAEAK International Conference on Prospects for Regional FTA(s) in Northeast Asia in Seoul, Korea, 14 December 2006. Cheong, Inkyo (2007), ‘The progress of Korea’s FTA policy in the context of Northeast Asian economic cooperation’, paper prepared for the 5th International Conference, hosted by NAIS Korea, in Seoul, Korea, 20 February 2007. Cho, Soon (2003), ‘Asian pattern of development in the 21st Century – with special Reference to Rise of China’, keynote speech, the Third International Conference Hosted by NAIS Korea, in Seoul, Korea, 24–5 October 2003. Choi, Young Jong (2007), ‘Northeast Asian regional integration – theories, current state, and future prospect’, paper prepared for the 5th International Conference, hosted by NAIS Korea, in Seoul, Korea, 20 February 2007. Hu, Angang (2001), ‘Free Trade Area in Northeast Asia: A Chinese perspective’, paper prepared for the 1st International Conference, hosted by NAIS Korea, in Incheon, Korea, 28–29 November 2001. Itoh, Motoshige (2006), ‘FTA policies of Northeast Asian countries and possibilities of Northeast Asian FTA(s): Japanese perspective preliminary draft’, paper presented at the KIEP-NAEAK International Conference, Prospects for Regional FTA(s) in Northeast Asia, 14 December 2006. Kim, Jin-Young (2007), ‘Is the financial cooperation in East Asia progressing?’ paper prepared for the 5th International Conference, hosted by NAIS Korea, in Seoul, Korea, 20 February 2007. Kimura, Fukunari and Mitsuyo Ando (2006), ‘Obstacles and variables of Northeast Asian FTA(s): Economic obstacles’, paper presented at the KIEPNAEAK International Conference, Prospects for Regional FTA(s) in Northeast Asia, in Seoul, Korea, 14 December 2006. Liu, Yongtao (2007), ‘Northeast Asian security regionalism: a Chinese perspective’, paper prepared for the 5th International Conference, hosted by NAIS Korea, in Seoul, Korea, 20 February 2007. Lu, Jianren (2003), ‘Economic cooperation of Northeast Asia’, paper presented at the international symposium organized by the Presidential Commission on Policy Planning. Rozman, G. (2004), Northeast Asia’s Stunted Regionalism, Cambridge: Cambridge University Press. Sakamoto, Yoshikazu (2001), ‘Building a Northeast Asian Intellectual Community: problems and prospects’, paper prepared for the keynote speech at the 1st International Conference, hosted by NAIS Korea, in Incheon, Korea, 28–29 November 2001. Taniguchi, Makoto (2007), ‘East Asian Community: Japanese perspectives – the role of 3 Major Economic Players in Northeast Asia’, paper prepared for the keynote speech at the 5th International Conference, hosted by NAIS Korea, in Seoul, Korea, 20 February 2007. Xue, Mingyang (2001), ‘On establishing a security system of Northeast Asian Community’, paper prepared for the keynote speech at the 1st International Conference, hosted by NAIS Korea, in Incheon, Korea, 28–29 November 2001.

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Ye, Jingyi (2005), ‘East Asian economic integration and China’s position’, paper prepared for the International Conference, Building One Asia and Global Hub, in Seoul, Korea, 16–17 June 2005. Zhang, Yunling (2006), ‘Some thoughts on Northeast Asian FTA’, paper presented at the KIEP-NAEAK International Conference, Prospects for Regional FTA(s) in Northeast Asia, in Seoul, Korea, 14 December 2006.

In Korean Choi, Won-shik (2004), ‘ “East Asia discourse” as a “triangular theory” ’, in NAIS Korea edition, Toward the Northeast Asian Community, Seoul: Donga Ilbo, pp. 9–24. Koh, Byung-Ik (2003), ‘On the history of intellectuals’ exchange in East Asia’, Keynote speech at the monthly seminar hosted by Northeast Asia Intellectuals’ Solidarity Korea. Morishima, Michio (1999), Why Japan Declines, Korean edition, KDI.

2. Regionalism in Northeast Asia: an American perspective T.J. Pempel Consider two separate events. The first is the second East Asia Summit (EAS), held in the Philippines in January 2007. In attendance were leaders from 16 countries – the ten ASEAN members, the additional ‘three’ from the APT (ASEAN Plus Three), China, Japan and the Republic of Korea, plus Australia, New Zealand and India. These leaders held spirited and constructive discussions about regional cooperation on a host of key issues vexing the region, including energy security, avian flu, poverty, education, trade liberalization, and North Korea. According to the official chairman’s statement (http://www.12thaseansummit.org.ph/innertemplate3. asp?categorydocs&docid36), among other things, they signed the Cebu Declaration on East Asian Energy Security; they also agreed to begin a study on a comprehensive economic partnership agreement among the 16 countries; reaffirmed their commitment to coordinate efforts and to increase cooperation in addressing avian flu; and they agreed to consider ways to prevent or mitigate the impact of natural disasters. They also issued a strong joint statement condemning the Democratic People’s Republic of Korea (DPRK) nuclear tests of October 2006 and urging a resumption of the then-stalled Six Party Talks. The Summit was, in numerous ways, a metaphorical manifestation of many of the struggles involved in creating a more cohesive East Asian region. The attendees reflected East Asia’s breadth and diversity – a concatenation of dissimilar religions, social systems, cultural and historical traditions, political systems, and levels of economic development. Yet all came together in advocating further efforts to foster cross-border cooperation. At the same time, reflective of the ambiguous nature of many East Asian linkages, it was not clear, beyond the photo-op and the final communiqué, how much substantive cooperation would grow out of the Summit. Certainly few painful commitments, few explicit rules, and few particular institutions were agreed to, nor were any officially anticipated. Equally interesting, of the 16 nations represented, three – Australia, New Zealand and India – were relatively new additions, not usually a part of 11

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conventional definitions of ‘East Asia’. Conversely, both Taiwan and the DPRK, undeniably present on any East Asian map, were not in attendance, while Russia, which spans 11 time zones across Europe and Asia, attended as an observer. And China and Japan certainly differed on the merits of the expanded membership. Thus, there was little in the EAS to suggest that it would be a venue in which Northeast Asian cooperation per se would be easily forthcoming. Perhaps most tellingly, the United States, though not geographically in East Asia but arguably the strongest shaper of economic and strategic developments in the region, as well as a member of previously-established Asia-Pacific groupings such as the Asia-Pacific Economic Cooperation (APEC) and the ASEAN Regional Forum (ARF), had not been invited to attend. The second event is the Six Party Talks. The signing of the Joint Statement of the Fourth Round of the Six Party Talks in Beijing on 19 September 2005 held out great promise for proponents of a multilateral framework for Northeast Asian Security. The joint statement seemed to lay out the broad parameters for an eventual resolution of the difficult security and economic issues surrounding the DPRK’s nuclear program which had been exacerbating tensions across the region at least since 2002: 1) the verifiable and peaceful denuclearization of the Korean Peninsula; 2) a return by the DPRK to the Nuclear Nonproliferation Treaty (NPT) and the International Atomic Energy Agency (IAEA) inspection regime; 3) guarantees by the United States not to attack the DPRK, a respect for its sovereignty, and the commitment to negotiate a permanent peace regime on the peninsula; and 4) promotion by all six parties of economic cooperation on a bilateral and multilateral basis. Many problems remained unresolved, most notably the absence of any step-by-step timetable for achieving the goals laid out. Moreover, many of the joint statement’s specifics were open to competing interpretations. Nevertheless, the joint statement provided the main outlines of an eventual multiparty resolution of the region’s most potentially explosive issue and marked a genuine breakthrough from the previous years of stalemate and rhetorical grandstanding. As a consequence, many believed that if this troublesome issue could be resolved through the Six Party Talks, the specific framework itself could become institutionalized and serve as a mechanism to promote greater security cooperation across Northeast Asia, perhaps forming the basis for a wellinstitutionalized security community. Optimism was short-lived. The talks broke down soon after the signing. Almost simultaneously with the issuance of the Joint Statement, the DPRK demanded a light water reactor as the first step in the process, while the United States Treasury froze $24 million in DPRK banking assets in Banca Delta Asia (BDA) in conjunction with claims that the account was

Regionalism in Northeast Asia

13

being used for money laundering. Each side blamed the other for the resulting problems. Regardless, the DPRK walked out of the talks, refusing to return until the American ‘economic sanctions’ had been lifted. Unsuccessful efforts were made to resolve issues and to restart the talks at the NEACD meeting in Tokyo in April 2006 and later at the ARF meeting during that summer. And then in early July 2006 the DPRK tested a series of missiles that led to a strong UN Security Council resolution of condemnation. On 9 October, the DPRK carried out an actual nuclear test and, in less than a week, the United Nations Security Council unanimously passed an even stronger resolution condemning the DPRK’s actions. The DPRK promised a second test soon after. By mid-Autumn 2006, the previously complicated and overlapping alignments among the six parties that had characterized the preceding three years of negotiations suddenly shifted into a five versus one line-up, with the US, China, Japan, the ROK and Russia all supporting the resolution and agreeing to impose varying degrees of sanctions against DPRK trade, travel and transportation. Following a series of behind-the-scenes negotiations, most notably among the US, PRC and DPRK, talks began again on 8 February 2007 and as of this writing, there has been considerable movement forward, including the shut-down of the Yongbyon nuclear facility and the DPRK’s commitment to dismantle its nuclear program and to refrain from any actions that would transfer its nuclear technologies to third parties. In return the US has agreed to begin the process of removing the DPRK from its list of state sponsors of terrorism and to move toward normalization of relations. A summit between Kim Jung-il and Roh Moo-hyun on 2–4 October 2007 set up procedures for substantial economic aid from the South to the North. It is early to attempt a final assessment of such recent developments, but for the moment, the mood is one of cautious optimism. The two events typify many of the most striking elements contributing to and detracting from an enhanced Northeast Asian regionalism. From the East Asian Summit, one can take away the following key points: ●

●

● ●

A high degree of collective optimism about the future and overall commitment to the principles of regional cooperation, particularly on issues such as trade, development, energy security and health problems. A ‘broad’ definition of ‘East Asia’, that includes not just Northeast Asia, but also ASEAN and (most recently) Australia, New Zealand and India but one that was ‘narrow’ in excluding the United States. High levels of rhetorical commitment but low levels of institutional structure. The absence of the DPRK and Taiwan from formal participation.

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The Six Party Talks, in contrast, were characterized by the following: ● ●

●

The more narrow overall membership, but also the unmistakably critical inclusion of the US and the DPRK. The concentration on a particular and destabilizing security problem, with economic cooperation and development as no more than the post hoc ‘carrots’ to accompany the ‘sticks’ of sanctions against the DPRK. A roller coaster ride of ascents and descents that turn on the whimsicality of external events and the personal agendas of several national leaders, calculated efforts to destabilize the talks, and varying levels of trust among the negotiators.

This paper will analyze the complex and often contradictory pressures for and against Northeast Asian regionalism, focusing particularly on the issues raised by these two different embodiments of East Asian regionalism. It starts with a focus on the main ties that have been forged across the region, emphasizing that these have been largely bottom-up corporate and economic activities and that formal governmental institutions have been limited in authority and institutionalization. It stresses too the fact that Asian regional ties to date have linked Northeast Asia to the rest of Asia, as well as to non-Asian areas, making it difficult to envision an exclusively Northeast Asian regional bloc. The following section explores the security situation in Northeast Asia and the tensions that combine to impede closer ties. It closes with some observations on US actions toward the region and how these have played into recent developments.

EMERGING TIES OF REGIONALIZATION Widespread economic evidence demonstrates the deepening ties across the region. Most of these, but not all, are economic in character. Very few of them are subject to close governmental control. They are largely the forces that I and others refer to as regionalization. This is in contrast to the ways in which Asia is coming together through governmental actions – the creation of formal institutions and government-to-government arrangements that operate from the top-down, a process referred to as regionalism (Breslin et al., 2002; Fishlow and Haggard, 1992; Pempel, 2005a, inter alia). Production networks generated by capital-rich Japanese, Korean, Taiwanese, Singaporean and other firms, particularly since the late 1980s and early 1990s, expanded to take advantage of labor-rich markets in China, Southeast Asia, and more recently in export-processing zones in the DPRK

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Table 2.1

Intra-regional trade shares (%)

Region

1980

1985

1990

1995

2000

2001

2002

2003

East Asia, including Japan Developing East Asia NIEs ASEAN NAFTA European Union 15

34.7

40.2

45.6

55.5

54.0

55.4

57.3

54.0

21.6

29.1

36.4

43.7

43.4

45.6

47.5

44.1

7.7 18.0 33.8 52.4

10.7 20.3 38.7 52.5

14.3 18.9 37.9 58.6

18.1 24.1 43.2 56.8

16.4 25.7 48.7 62.2

17.5 24.1 49.0 62.1

17.1 24.4 48.3 62.4

16.1 24.0 46.0 64.4

Notes: ASEAN Association of Southeast Asian Nations, NAFTA North American Free Trade Agreement. Ease Asia comprises Japan, ASEAN, PRC, newly industrialized economies (NIEs) of Hong Kong, China; Korea; Singapore; and Taipel, China. Developing East Asia excludes Japan. Source: Kawai (2005).

(Pempel, 2005a). Trade has paralleled investment. Roughly 30 per cent of Asia’s total trade was intra-Asian in 1970; by 2006 that had risen to 57 per cent. Bilateral trade patterns reflect these growing ties. China has thus replaced the US as the major trading partner for both South Korea and Japan. Taiwanese–Chinese business, trade and investment links are weaving a single production network across the Straits similar to that of Hong Kong–Guangdong further to the south. Intra-ASEAN trade is expanding as well. Such ties are bolstered by enhanced integration of communications, shipping and transportation. Table 2.1 gives a quick overview picture of the rising levels of intra-regional trade in Asia compared to other regions. Corporations, rather than formalized governmental agreements, have been the most powerful engines driving these enhanced economic connections (Katzenstein and Shiraishi, 1997). They have created what Dennis Tachiki (in Pempel, 2005a) has called regional investment corridors, whose external boundaries are porous rather than fixed (Katzenstein, 2005). Corporations are loath to confine their activities to established political boundaries and as a consequence, the economic ties across East Asia do not match up particularly well with national configurations or the national memberships of pre-established regional bodies. Demonstrable as the economic ties are within Northeast Asia, however, it is critical to realize that Northeast Asian ties also extend well into Southeast Asia. Thus, China, aside from serving as an export platform, has

16


Exports to China, % to total 50

1996 2005

40 30 20 10

n K or ea M al a Ph ysia ili pp in e Si ng s ap or e Ta iw a Th n ai la nd In di a

Ja pa

ne do

In

H on

g

K on

g

sia

0

Sources: CEIC, SCB Global Research.

Figure 2.1

China has doubled its share of Asian exports

also become an increasingly important end-market for all of Asia. This includes raw materials and machinery imports such as fuel from Indonesia and Singapore, timber from Malaysia and Indonesia, iron ore from Australia, and machinery from Japan, Korea and Taiwan. As a result, China has been the highest growth market for most Asian exporters over the past decade, with its share in total exports of these economies more than doubled (Figure 2.1). China is now the largest export market in Asia (Figure 2.2), ranked top in Hong Kong, Korea and Taiwan, second in Japan and India, and third in Thailand and the Philippines. Japan is also closely linked economically with Southeast Asia and outside as well. Though China has become Japan’s major trade partner and Korea is number three, the US still ranks second, and Indonesia, Australia and Taiwan hold the fourth, fifth and sixth positions (Keizai Koho Center, 2006). The ROK has China and Japan as its first and third major trade partners, but the US, like Japan, ranks as number two. Nonetheless, even though trade and investment are among the most important forms of regional glue holding Asia together, a vague but nonetheless formal series of governmental arrangements have also developed in Asia that provide an undergirding for these private activities. Formal governmental regionalism as opposed to simply economic regionalization has also been seen across East Asia. ASEAN, APEC and the ASEAN Regional Forum (ARF) offer three early examples. But ASEAN

17


Intra-regional trade growth, 1998–2005, CAGR %

14 12 10 8 6 4 2

Note:

A SI

A SE A

A

N 5

* sia

na

ea st A th

hi

N or

G

re at er C

W or ld

FT A N A

EU

0

* Includes China, HK, Taiwan, Japan and Korea.

Sources: CEIC, IMF.

Figure 2.2

China leads intra-Asia trade growth

is ‘sub-regional’ while APEC and ARF are pan-Pacific. Furthermore, APEC is limited to economics and ARF focuses exclusively on security (Tanaka, 2004; Terada, 2003). Again, however, it is difficult to treat Northeast Asia as a sub-region with its own experiences of isolated institution building. No formal body, to date, exists for the more limited region of Northeast Asia, except for the Six Party Talks. The institutional experiences of Northeast Asian countries consist of organizations with memberships far larger than simply China, Japan and the two Koreas. Importantly for East Asia’s most recent regional movements, ASEAN and APEC proved completely ineffective as buffers against the financial crisis of 1997–98, a crisis which, among other things, provided unmistakable evidence of how private capital flows could change direction on a dime and devastate national economies. To many Asian elites, this underscored how economic security could be at least as problematic as safeguarding national borders. The result was an enhancement of formal governmental actions to expand regional ties. A new ASEAN Plus Three (APT) process wove regularized links among the ten Southeast Asian countries of ASEAN plus China, Japan and South Korea. APT in turn generated regional financial arrangements including a sequence of bilateral currency swaps as well as a bond market in local currencies (Amyx, 2004; Grimes, 2006; Pempel, 2005b, inter alia). Furthermore, starting in 2005 the East

18


Asian Summit (EAS) with 16 members and a focus on both security and economics, as was noted above, was added to the mix of regional institutions. Asian governments have also pursued a series of free trade agreements (FTAs) aimed at reducing trade and investment barriers among themselves and between many of them and a host of non-regional trade partners (Aggarwal and Urata, 2006; Dent, 2003). In none of these cases does one find evidence that the countries of Northeast Asia are limiting their ties to one another. China, Japan and the ROK have all been enthusiastic proponents of the Chiang Mai Initiative (CMI), the bond market initiatives and various FTAs. The result has been that their regional visions, though often complementary with one another, have also been continually more inclusive than simply Northeast Asia. To date the currency swaps have been small-scale and largely IMFcompatible. The bond market remains in its very early stages. But both are poised for expansion and together they put enhanced monetary autonomy into the hands of Asian policy makers. Further, they have special salience in that the cumulative foreign reserves of the APT countries have ballooned to nearly $2.5 trillion, roughly two-thirds of the world total and up from about $1 trillion in 2001. Thus, closer Asian financial cooperation also enhances the possibility of boosting the region’s collective voice within global financial institutions such as the IMF. Summing up, Northeast Asia is certainly becoming more economically interdependent, but the interdependence of the main countries continues to extend in two additional outside directions – the first to Southeast Asia and the second to the United States.

IMPEDIMENTS TO A CLOSER NORTHEAST ASIA It is difficult to say with conviction whether the Northeast Asian security glass is half full or half empty. Clearly, the military and diplomatic situation today is far better than it was at the height of the Cold War or even at the end of the Cold War in the early 1990s. On the other hand, within the last five or six years, Northeast Asia has become considerably more tensionfilled and resistant to regional cooperation, particularly on diplomatic and security matters, than was true just a few years before. A series of unresolved territorial disputes fester and impede cooperation on various other important security, economic, energy and environmental problems. The United States, China, Russia and the DPRK are all declared nuclear powers; so are India and Pakistan – two countries with at least peripheral strategic implications for the region. China, the US, ROK, Russia, Taiwan, Vietnam and North Korea have all deployed or possess


19

ballistic missiles that could impact the area. Conventional arms expenditures across the region have been high and continue to grow. While it would be a mistake to speak of an active ‘arms race’, many countries have been expanding their military capabilities in a tit-for-tat fashion and multiple forces propel the proliferation of nuclear materials and missile delivery systems. The DPRK’s nuclear and domestic politics reflect a regime that both feels threatened and that poses a threat to the region; certainly DPRK policies put the country dramatically out-of-step with its neighbors. Domestic political and economic tensions threaten regime stability in several key countries of Northeast Asia, and such internal problems could easily spread beyond national borders. Interestingly, however, most of these problems are deep and structural and have been relatively constant over the past decade or more. The territorial issues, for example, trace for the most part to World War II, while nuclear weapons and ballistic missile capabilities have also been longstanding. As such, while these problems are by no means easy to solve, they pose little imminent threat of destabilization or immediate challenges to regional stability. Having festered for so long, they have become like strategic wallpaper across the region. Their very longstanding nature and ongoing familiarity are largely accepted as ‘givens’ by all nations in the region. They pose problems, of course, but few threaten to open quickly into overt conflict. Over time they have been subject to sequences of adjustments by most actors that have kept them from exploding into short-term crises. In some ways, their longstanding nature and familiarity make them far less problematic than certain other recent developments. At the same time, several other changes are far newer and create potentially destabilizing conditions. Most notably, there are real changes in the balance of regional power due to the collapse of the Soviet Union and the economic rise of China – the latter touching off concerns among many that economic growth will be accompanied by military and territorial expansion (for example Mearsheimer, 2001; Shambaugh, 2006). The United States has begun a rebasing strategy, aimed at giving greater flexibility and mobility to its Asia-based forces. Japan has taken on a more active and territorially-broader military role. Cross-Straits relations have become tense, creating security worries in much of the region. And most alarmingly, the DPRK left the APT, ended IAEA inspections, and engaged in both missile and nuclear testing. In combination these recent events have left Northeast Asia more tension-filled than at most times during the first 30 years after the end of World War II. Consequently, the picture of centripetality that is conveyed by greater economic interdependence and the rise of embryonic East Asian regional bodies must contend with the even more visible examples of

20


recent, nationally-based confrontations. Most notably, diplomatic tensions have been heightened between Japan on the one hand and the ROK, DPRK and China on the other. These are superimposed on top of longstanding cross-Straits problems involving Taiwan and the PRC; the host of security problems linked to the DPRK; and the overall competition for regional leadership between Japan and China. Into this entire mix must be stirred the unavoidable importance of the United States whose military presence and security aims further complicate any regional security cooperation. As a result, developments across Northeast Asia during the past few years make it clear that tremendous barriers continue to prevent closer cross-border cooperation, particularly in security and defense. Northeast Asia is clearly quite far from the formulation of a cohesive security community, let alone an actual Northeast Asian Community. Two major obstacles confront any deepening of existing cooperation in Northeast Asia. The first of these involves the alternative national interests and competing regional visions apparently held by Japan, the ROK and China – not to mention the DPRK. The leaders of all three of these governments became more taunting in their rhetoric and more provocative in their interactions. Earlier impulses toward regional cooperation and growing economic interdependence were supplanted by outbursts of xenophobic nationalism and mutual recrimination. All sides were quick to claim that their particular behavior was no more than a ‘natural’ reaction to some alleged provocation by a particular neighbor. Yet the undeniable result has been that the once warming and softening political and diplomatic relations across the region have deteriorated sharply, replaced by a growth in increasingly rigid cleavages. The second obstacle is the danger of trying, and the inability, to isolate Northeast Asia from the broader regional and global activities within which actions in Northeast Asia are nested. Any Northeast Asian regional community must be intimately part of both the broader East Asian region and also be open, rather than closed, to broad global activities. In addition, formal institutionalization, which is often seen as a forerunner to region building, must be kept to a minimum in favor of building on existing networks and informal processes as guidelines to trust. The DPRK has certainly been a major contributor to the deterioration of relations across Northeast Asia, triggering reactions particularly by Japan. Its 1998 launch of a Taepodong missile over Japan, and its 23 April 2003 declaration that it was pursuing in secret a nuclear weapons program in violation of the Agreed Framework of 1994, its unprecedented decision to end its adherence to the Nuclear Nonproliferation Treaty (NPT), and its 10 February 2005 statement that it indeed had nuclear weapons, all


21

deepened pre-existing perceptions of a potentially menacing neighbor, particularly by Japan. Moreover, DPRK transfers of illegal drugs, most especially methamphetamines, to Japan poses a serious social problem within the country (and unlike the situation with drugs from China, lacking normal diplomatic relations with the DPRK, Japan has found it impossible to engage in bilateral efforts to curtail illegal exports). What for the DPRK may appear to be the tools needed for regime survival have increasingly been perceived by many of its neighbors as moves toward regional instability. Explicitly contributing to deteriorating regional relations were events such as the Japanese Coast Guard’s sinking of a North Korean spy ship on 22–23 December 2001; the failure of five North Koreans to obtain asylum in the Japanese consulate in Shenyang, China in May 2002; Japan’s decision to salvage the wreck of the spy ship from China’s Exclusive Economic Zone (EEZ) in June and July of 2002, and eventually to put it on public display in downtown Tokyo, well-marked as it was with signs indicating the threats the ship (and the DPRK) posed to Japan. Independently of the DPRK, however, a number of Japan’s actions have worsened ties in the region. Japan’s strategic behavior has also been increasingly shaped by its fears of a ‘rising China’. As part of an overall warming strategy toward China, Japan had been providing about $35 billion in economic assistance since the normalization of relations between the two countries. Furthermore, bilateral trade and investment ties between the two have moved forward at a rapid pace and China came to outstrip the US as Japan’s major trade partner. Yet there have been growing concerns within Japan about the potential strategic and diplomatic implications of a stronger China, particularly as its rapid economic growth allows it to expand its military budget geometrically. In addition, China’s successful launch of a manned space probe led many in Japan’s defense and military establishments to question the need for continued Japanese Official Development Assistance (ODA). In response Japan announced in October 2001 that it would reduce and redirect its ODA to China. The result was an overall reduction combined with a shift from multi-year pledges of ODA in favor of a single-year pledge system and a revised focus away from infrastructure and construction to environmental protection, increased living standards, education, institution building, and technology transfer. A clear shift in Japanese strategic doctrine was articulated in the country’s National Defense Planning Outline of December 2004. The NDPO laid out the country’s mid-term defense build-up plan for fiscal 2005–09 with expanded structures and directions. Among the most important elements, the document broke precedent by identifying China and the DPRK as potential security concerns to Japan. It also explicitly stressed the

22


country’s need to deal with both ballistic missile and guerrilla attacks as well as traditional invasion threats involving Japanese airspace and territorial waters. Japan’s security interests were overtly expanded from defense of the home islands to include international security, international peacekeeping and counterterrorism as key targets of Japan’s overall national defense strategy. To meet the newly characterized threats, Japan, it was argued, needed a new multifunctional military capability with a centralized SDF command and a rapid reaction force. The overall thrust of the new NDPO was to strengthen air and naval capabilities including the capability for force projection. It also wove into Japanese strategic thinking explicit cooperation with the US on missile defense, arms exports, the export by Japan of technologies developed in that project as well as enhanced interoperability of weapons systems. Japan explicitly considered the purchase and deployment of a US-made missile system as early as 2006 along with missiles that would be launched by Aegis-equipped destroyers and a ground-based Patriot missile system as back-up. Japan ordered PAC-2 Patriot interceptor missiles and announced plans for the subsequent purchase of PAC-3 Patriots to be delivered in FY 2006. The expanded SDF role was also reflected in an August 2003 request for a tenfold increase in spending on missile defense to $1.2 billion and an expected outlay of $1 billion for missile defense from 2004 to 2007. Finally, nothing did more short-term damage to Northeast Asian relations than former Prime Minister Koizumi’s continued and public visits to the Yasukuni shrine. The shrine is where the souls of 16 Class A war criminals have been enshrined, along with the souls of Japan’s much larger number of war dead. And within the Yasukuni grounds is the Yushukan Museum which provides an unadulterated justification of Japan’s role and behavior in World War II. Needless to say, these visits poisoned bilateral ties between Japan and China, the ROK and the DPRK. Chinese actions have also posed problems for Northeast Asian cooperation. China’s rapid economic growth and a series of related policies have unquestionably contributed to the growing bipolarity, despite that country’s best efforts to portray its developments as part of a ‘peaceful rise’. Certainly, on many problems China has shown considerable interest in playing an enhanced and tranquilizing regional role. Following the Asian economic crisis and its accession to the WTO, China began to demonstrate a renewed interest in Asian regional diplomacy. It has been an active supporter of closer trade ties to ASEAN; it has supported the ARF and the East Asian Summit. It has issued numerous statements about its broadly peaceful intentions for the region and its desire to focus its immediate efforts on improving domestic economic performance and generating greater internal economic well-being.


23

At the same time, China has been expanding its military budget quite rapidly and the country’s relentless search for new energy sources has put it on a collision course with US efforts to isolate what it sees as problematic regimes in Venezuela, Sudan, Iran and Central Asia. China’s improved ties to Russia, and to traditional US allies such as Australia, Thailand and the ROK have also raised concerns in Washington. Of equal difficulty have been China’s improved relations with the ROK if only because they have destabilized longstanding ties between the ROK and Japan and the US. Diplomatic ties were normalized and expanded trade and economic relations meant that by 2001 China was the ROK’s number one target of investment. In 2002 China–Hong Kong became South Korea’s largest export market. Seoul also began cooperating with the PRC on military matters. Both China and Korea issued declarations opposing Japan’s bid for a permanent seat on the UN security council (Korea’s President Roh actually came out explicitly in favor of a seat for Germany, making even more explicit his failure to support Japan’s claims). Then in April 2005, President Roh announced that his country would seek to be a ‘balancer’ in the Asian region, a role that implied a new warmth toward China at the expense of Korea’s prior ties to the US and Japan. All of these actions, while good for bilateral ROK–PRC ties, worked to weaken existing ties between these two countries and Japan (as well as its traditional ally, the US). At the same time that it was improving relations with many countries of the region, however, China also began exploring the waters near Japan and periodically broaching areas that Japan considered within its exclusive national economic zone (EEZ). In one such instance, on 10 November 2004, the Japanese Navy discovered a Chinese nuclear submarine in Japanese territorial waters near Okinawa. Although the Chinese apologized and called the sub’s intrusion a ‘mistake’, Defense Agency Director Ono gave it wide publicity, further inflaming Japanese public opinion against China. From that point on, relations between Beijing and Tokyo went steadily downhill, culminating in the Japanese–American announcement on 19 February 2005 that Taiwan was of special military concern to both countries, which China denounced as an ‘abomination’. Moreover, textbook revisions and continued Yasukuni shrine visits by Prime Minister Koizumi were met with anti-Japanese protests at World Cup soccer matches in China, heightened competitive claims to the Senkaku/Diaoyu Islands, Chinese intrusions into the Japanese consulate in Shenyang in pursuit of North Korean asylum seekers and the like. In addition, China has been accelerating its development of a blue water navy and has become more aggressive in its search for guaranteed energy resources both in the Middle East and in West Africa. Energy competition worsened further in Spring 2005 when both China and Japan announced

24


plans to explore for natural gas in territory contested by the two countries in the Pacific. Furthermore, China has been playing a delicate balancing game with the US. It clearly favors closer economic and diplomatic ties. Indeed, it appears to have warmed to Bob Zoellick’s suggestion that China become a positive stakeholder in global matters. At the same time, China has sought to reduce US influence within the Asian region – usually with the justification that it is seeking to counter what it views as excessively hegemonic behavior, but not coincidentally serving to enhance its own role within the region. These comments provide a bridge to the final section of this paper – namely an examination of the role being played by the US in Northeast Asian regionalism.

THE ROLE OF THE US IN NORTHEAST ASIAN REGIONALISM Despite the fact that the US is not geographically a part of ‘East Asia’, as the world’s only superpower, how it uses its power has a profound effect not only on global, but also on Northeast Asian regional security. On balance, US actions have been quite powerful impediments to regionalism in Northeast Asia. America, since at least the 1960s has favored a ‘hub and spoke’ approach to Northeast Asia, forging bilateral ties, usually military in character, with a sequence of Asian countries, while at the same time resisting all efforts made of late to create any explicitly East Asian body that excludes the US. Such a position virtually guaranteed stronger bilateral US bargaining power toward its various allies. Nowhere was this made more clear recently than in the reaction to the first East Asia Summit. Former Deputy Secretary of State Richard Armitage stated quite explicitly: ‘My view is this is a thinly veiled way to make the point that the United States is not totally welcomed in Asia. I think that’s a real mistake’ (Asahi Shimbun, 2 May 2005). If governments in East Asia have increasingly defined regionalism in terms that exclude the US, there has been ample dismissive reciprocity from Washington. American skepticism toward East Asian regionalism became particularly acute with the coming of the Bush administration. America’s uncontested military prowess was put to new uses under George W. Bush in a series of unilateral strategic and foreign policy actions aimed at reshaping the global status quo in direct contrast to the prior 50 years of a predominantly multilateral and status quo oriented US foreign policy. When the Bush administration took office early in 2001 it quickly shucked off most constraints placed on it by international organizations or global treaties (though less so within the economic area, where it continued


25

to support WTO, IMF and other such bodies). Early in the administration, the US, reflecting the new policy-making dominance of neoconservatives and classic realists, explicitly renounced a host of longstanding and relatively new global agreements from the Anti-Ballistic Missile (ABM) treaty to the Kyoto Accord to the Convention against Small Arms, the Biological Weapons Convention, the Chemical Weapons Convention, the International Court of Justice and many others. Skeptical of global arrangements, as well as regional organizations such as APEC or ARF, the Bush administration moved to reinforce a classical realist thinking in which China was presumed to be America’s next major ‘strategic competitor’. As Michael Klare (2006) has summarized the policy: President Bush and his top aides entered the White House in early 2001 with a clear strategic objective: to resurrect the permanent-dominance doctrine spelled out in the Defense Planning Guidance (DPG) for fiscal years 1994–99, the first formal statement of US strategic goals in the post-Soviet era. According to the initial official draft of this document . . . the primary aim of US strategy would be to bar the rise of any future competitor that might challenge America’s overwhelming military superiority.

The predisposition toward containing China was spelled out in a systematic way by Condoleezza Rice in a much-cited article in Foreign Affairs (Rice, 2000). There she suggested that the PRC, as a rising power, would inevitably challenge vital US interests. ‘China is a great power with unresolved vital interests, particularly concerning Taiwan’, she wrote. ‘China also resents the role of the United States in the Asia-Pacific region.’ For these reasons, she stated, ‘China is not a “status quo” power but one that would like to alter Asia’s balance of power in its own favor. That alone makes it a strategic competitor, not the “strategic partner” the Clinton administration once called it.’ It was essential, she argued, to adopt a strategy that would prevent China’s rise as a regional power. In particular, ‘The United States must deepen its cooperation with Japan and South Korea and maintain its commitment to a robust military presence in the region.’ Washington should also ‘pay closer attention to India’s role in the regional balance’, and bring that country into an anti-Chinese alliance system. In keeping with its new unilateral and preventative military actions, US military and strategic thinking also underwent a comprehensive overhaul with the move from a ‘threat-based’ to ‘capabilities-based’ military. The new US doctrines were laid out in the Quadrennial Defense Review (QDR) of 2001, the Bush speech at West Point June 2002 and the National Security Strategy (NSS) of September 2002. The QDR argued that new, post-Cold War challenges would require greater flexibility in the existing US basing system. Forces would need to be

26


closer to what the US identified as the ‘arc of instability’ stretching from Northern Africa to Southeast Asia. America’s new focus would be on mobility to conduct expeditionary operations in distant theaters against adversaries armed with WMD and other means to deny access to US forces, rather than on the fixed bases designed to ward off, or respond to, conventional attacks from well-identified adversaries. The US would therefore require additional bases and stations beyond those currently in Western Europe and Northeast Asia, many of which would be either closed or reoriented to accommodate the new mission. Key to the new basing doctrine has been the creation and maintenance of selective hubs in bedrock host states (such as Japan) including potentially in new places (such as Australia), along with ‘lily pads’ that would be depositories for pre-positioned equipment to which rapidly deployable forces can move and/or ‘leap to and from’ in response to contingencies in a wide variety of geographical locations. For the most part, however, the US moved away from its earlier doctrine of multiple fixed land bases and toward greater reliance on air and sea power combined with enhanced flexibility for its ground forces. In effect, the US was rearticulating its role as a maritime, as opposed to a land, power. Of particular salience to East Asia, the QDR also called for a substantial reduction in, and a repositioning of, US forces in the Republic of Korea. This would remove the US tripwire at the demilitarized zone (DMZ) allowing US forces in ROK to conduct more than just one task, namely its traditional defense of ROK from DPRK attack. Relations between the ROK and the US were deteriorating over other issues, most notably Korea’s improved relations with China and outgrowths of the Sunshine Policy toward the North. US basing policies and the new defense orientation have further strained these bilateral ties. A new and revised Quadrennial Defense Review (QDR) was released on 5 February 2006. The document reaffirms the overarching precept first articulated in the Defense Planning Guidance (DPG) of 1992: that the United States will not allow the rise of a competing superpower. This country ‘will attempt to dissuade any military competitor from developing disruptive or other capabilities that could enable regional hegemony or hostile action against the United States’, the document states. It then identifies China as the most likely and dangerous such competitor. In addition, the Bush Administration was vociferous in its criticism of the DPRK as well as its ‘Dear Leader’. The Bush regime also explicitly rejected the Clinton policies of containment and engagement with the DPRK that had grown out of the 1994 crisis. The DPRK interest in a nuclear program appeared to have been resolved with the Korean Peninsula Energy Development Organization (KEDO) and the 1994 agreements –


27

though charges have been raised that it began a uranium enrichment program in the late 1990s. Surely many factors contributed to the break from KEDO and the DPRK’s decision to reactivate its previously frozen plutonium program while abdicating its commitments to the NPT. But conditions were undoubtedly exacerbated by the Bush administration’s unilateral rejection of the KEDO framework as well as its rejection of the bilateral US–DPRK progress made during the last months of the Clinton Administration. That rejection was quite clear when Secretary of State Colin Powell announced that he planned ‘to pick up where the Clinton administration had left off’ in trying to security the peace between North and South Korea while negotiating with the North to prevent its acquisition of nuclear weapons. A day later, Powell reversed himself – or he was reversed – as the president indicated that he planned a complete review of US–DPRK relations. The frosty tone taken by Bush during President Kim Dae-jung’s visit in March 2001 continued this pattern of attempting to isolate the DPRK. It was capped off rhetorically by the famous ‘Axis of Evil’ speech in January 2002 when Bush declared Iraq, Iran and the DPRK to be rogue regimes clamoring for weapons of mass destruction. His comments to Robert Woodward further escalated tensions between the US and the DPRK: ‘I loathe Kim Jong Il’, he declared while dismissing Kim as a ‘pygmy’ whose regime he vowed to topple. Only when the DPRK began to show serious capabilities of moving to become a nuclear state did the Bush administration reverse its prior efforts at bilateralism, isolation and regime change. Many factors certainly contributed to the recent crisis, including the decision of the DPRK to reactivate its plutonium program and to abdicate its commitment to the NPT. But conditions were certainly exacerbated by the Bush administration’s unilateral rejection of the KEDO framework and its moves toward what many have called its ABC policy (Anything But Clinton). Declaring that the DPRK was part of an ‘axis of evil’ and the American invasion of Iraq aimed at ‘regime change’ fostered the already existing sense of political insecurity among DPRK leaders. Ironically, as the US became bogged down in wars in Iraq and Afghanistan, it turned to the Six Party framework and multilateralism as probably the only practical way to deal with the DPRK nuclear situation. Clearly, if unchecked, a nuclear DPRK could dramatically destabilize the current balance of power. The export of fissile materials to non-state terrorist groups globally and the unleashing of a nuclear arms race across Northeast Asia would be the immediate concerns. And meanwhile, an economically prostrate DPRK poses the prospect of a regionally damaging regime collapse, regionally unhealthy policies involving drug and counterfeit money export, or at least serious major migration

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problems. Consequently, the US began to shift toward warmer ties to Beijing, encouraging it to call for, and to host, the Six Party Talks aimed at reversing the DPRK’s progress toward nuclearization. Early actions by the Bush Administration had been predicated on making Japan the mainstay of US policies in Asia and treating China (and of course the DPRK) as potential rivals. In the wake of the Hainan Island crisis, the attacks of September 11, the emergence of the DPRK nuclear problem, and more importantly with the growing entrapment in Afghanistan and Iraq, US views toward China shifted. In particular, China gained credibility and improved relations with the US as a result of its nominal support for the US so-called ‘war on terror’, including most notably its own opposition to Muslim fundamentalism (particularly as it is manifested in secessionist actions in its Western province of Xinjiang). China also gained credit with the US for its short-term tolerance for the development of US bases in Central Asia and its initiation of the Six Party Talks. The consequent situation in Northeast Asia today is therefore one in which the US has sought to maintain close ties to Japan, but not to the extent of backing Japan in any bilateral competition for regional leadership with China. The US is skeptical of China’s long-term goals and capabilities, but at the same time, it has close economic, and more recently with the Six Party Talks, diplomatic interdependence with the PRC. US–ROK relations have been hurt in many ways by both sides, and the recent re-basing issues have complicated matters further. The major conclusion that one can draw is that the US remains an unmistakably major force in shaping events in Northeast Asia, much as it has been since the end of World War II. To date, it has been highly skeptical of exclusively Asian regional arrangements. Yet its engagement in the Six Party Talks, along with the tentative progress that is now being made through that process, may convince the US of the benefits of multilateral cooperation in Northeast Asia. Combined with the continually growing economic linkages across East Asia, including the growing connections among the main exporters of Northeast Asia, there seems some basis for suggesting that Northeast Asia may indeed be moving toward closer regional cooperation, even on tough security issues and even in ways that include the United States.

BIBLIOGRAPHY Aggarwal, V.K. (2006), ‘Bilateral trade agreements in the Asia-Pacific’ in V.K. Aggarwal and S. Urata (eds), Bilateral Trade Agreements in the Asia-Pacific, London: Routledge.


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Aggarwal, V.K. and S. Urata (eds) (2006), Bilateral Trade Agreements in the AsiaPacific, London: Routledge. Amyx, Jennifer (2004), ‘Japan and the evolution of regional financial arrangements in East Asia’, in E. Krauss and T.J. Pempel (eds), Beyond Bilateralism: U.S.–Japan Relations in the New Asia-Pacific, Stanford: Stanford University Press. Asahi Shimbun, various issues. Breslin, S., C.W. Hughes, N. Philipps and B. Rosamond (2002), New Regionalisms in the Global Political Economy: Theories and Cases, London: Routledge. Cohen, S.S. (2002), ‘Mapping Asian integration: transnational transactions in the Pacific Rim’, American Asian Review, 20(3), 1–30. Dent, C.M. (2003), ‘Networking the region? The emergence and impact of AsiaPacific bilateral trade agreement projects’, Pacific Review, 16(1), 1–28. Fishlow, Albert and Stephan Haggard (1992), The United States and the Regionalism of the World Economy, Paris: OECD. Grimes, William W. (2006), ‘East Asian financial regionalism in support of the global financial architecture? The political economy of regional nesting’, Journal of East Asian Studies, 6(3), 353–80. Hong Kong Trade and Development Council (2006), ‘Asia focus: intra-Asia trade leads growth’, 19 April 2006, available at: http://www.tdctrade.com/econforum/ sc/sc060401.htm. Katzenstein, P.J. (2005), A World of Regions, Ithaca: Cornell University Press. Katzenstein, P.J. and T. Shiraishi (1997), Network Power: Japan and Asia, Ithaca: Cornell University Press. Katzenstein, P.J. and T. Shiraishi (2006), Beyond Japan: The Dynamics of East Asian Regionalism, Ithaca: Cornell University Press. Kawai, Masahiro (2005), ‘East Asian economic regionalism: progress and challenges’, Journal of Asian Economics, 16(1), 29–55. Keizai Koho Center (2006), Japan, 2006, Tokyo: KKC. Klare, Michael (2006), ‘Countaining China: the US’s real objective’, Asia Times, 20 April 2006, available at: http://www.atimes.com/atimes/China/HD20Ad01.html. Mearsheimer, John (2001), The Tragedy of Great Power Politics, New York: Norton. Pempel, T.J. (2005a), Remapping East Asia: The Construction of a Region, Ithaca: Cornell University Press. Pempel, T.J. (2005b), ‘Firebreak: East Asian institutionalizes its finances’, paper prepared for the Conference Institutionalizing Northeast Asia: Making the Impossible Possible?, United Nations University and Aoyama Gakuin University, 20–22 September. Pempel, T.J. (2006), ‘The race to connect East Asia: an unending steeplechase’, Asian Economic Policy Review, 2 (autumn). Rice, Condoleezza (2000), ‘Campaign 2000: promoting the national interest’, Foreign Affairs, January/February, 79(1), 45–62. Shambaugh, David (ed.) (2006), Power Shift: China and Asia’s New Dynamics, Berkeley: University of California Press. Tanaka, Akihiko (2004), ‘The development of ASEAN+3’, Social Science Japan Newsletter, March, pp. 7–9. Terada, Takeshi (2003), ‘Constructing an “East Asian” concept and growing regional identity: from EAEC to ASEAN+3’, The Pacific Review, 16(2), 264–6.

3. Northeast Asian security regionalism: a Chinese perspective Yongtao Liu INTRODUCTION Regionalism is among the few conceptions in social sciences that have regained attraction since the 1990s. Evidence is that people have taken increasing interest in the the process of Northeast Asian regionalism, and endeavors have been made conceptually and empirically in International Relations (IR) to improve our awareness and understanding of this fascinating trend in the region (Akaha, 1999; Kim, 2004; Rozman, 2004; Armstrong et al., 2006; Su, 2006; Sun and Chen, 2006; Wang, 2006). Indeed, within Northeast Asia in the twenty-first century, regionalism is a process that is expected, among others, to deal with emerging challenges and to seize new opportunities by acting as an intermediate linkage between the national level that countries in the region are starting to transcend and the global level that they are beginning to embrace. It is natural and convenient to think of regionalism in Northeast Asia in the context of the unprecedented interdependence of economics and trade as well as the increasingly linked social practices that have been achieved among the nations in the region. The process of economic regionalism in Northeast Asia is encouraging and illustrative, partly because of its unusual significance and dynamism, and partly because it is one aspect of regional integration in which it is easy and relatively comfortable for the nations in the region to share common interests and reach a consensus. As a grand regional project, however, Northeast Asian regionalism, if it is to be broad and open, is not limited to economic integration and/or social interactions; rather, it also involves cooperative engagement aimed at improving political ties and guaranteeing common security.1 The efforts in economic, social, political and security practices are closely linked to one another and will determine collectively how successfully the process of regionalism in Northeast Asia will unfold. This chapter attempts to join the discussion of Northeast Asian regionalism by an integral assessment of security regionalism, examining how 30

Northeast Asian security regionalism

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China, from the late 1990s onward, has become more positively involved in the process of Northeast Asian security regionalism (NEASR). It has done this in the process of shifting its diplomacy and security politics to accommodate ever-changing contexts both at home and within the region. The chapter will first take a look at basic conceptual meanings of ‘regionalism’ and the context in which security regionalism unfolds in Northeast Asia. I argue that today’s challenges and yesterday’s experiences in Northeast Asia make security regionalism both desirable and stunted. The chapter then addresses two factors that may affect the direction and order of security regionalism in Northeast Asia. One stems from the divergent cultures seen in the region. The other is the conventional pattern of security cooperation, namely the bilateral military alliances that have lasted since their inceptions, typically right after World War II. Finally the chapter examines how China began to respond more positively to security regionalism in the late 1990s by looking at China’s conception of ‘New Diplomacy’ and the ‘New Security Concept’. These were shaped as a new way to think about China’s foreign and security policy and they brought about China’s changed views concerning the US military role in Northeast Asia.

NEASR: MEANING AND CONTEXT Like many basic concepts in social sciences, regionalism is fraught with many different emphases. One definition focuses on the dynamic nature of regionalism by referring to it as ‘intensifying political and/or economic processes of cooperation among states and other actors in particular geographical regions’ (Griffiths and O’Callaghan, 2002, p. 273). Another understanding of regionalism is related to its ideational trait. It is thus defined as a shared ideology among actors within the region (including governments, inter-governments, non-governments, civil societies, groups and individuals), one favoring the practices of cooperation and coordination based on common interests and values (Gen, 2003, pp. 36–37; Sun and Chen, 2006, pp. 26–30). Still another focus stresses broad agreement among cognitions, policies and behaviors among governments, civil societies, groups and individuals within a given region aimed at pushing forward a regional integration. More narrowly, there is a focus on common strategies and policies reached between governments aimed at initiating and promoting regional unity (Su, 2006, p. 44). In terms of security regionalism the concept may be understood as intensifying processes of cooperation and coordination in the field of security politics among nations and other actors within a given region.

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A region is a spatial concept, which is defined by a combination of geographical proximity, density of interactions, shared institutional frameworks, and common cultural identities. It can be identified empirically by ‘relying on data on mutual interactions such as trade flows, similarities of actor attributes, and shared values and experiences’ (Griffiths and O’Callaghan, 2002, pp. 273–74). Based on this understanding, Northeast Asian security regionalism (NEASR) can be seen as referring to an intensification of cooperation and/or cooperative ideas and practices among the two Koreas, Japan, China, Russia and the United States. The first four states are geographically proximate to one another and are almost always treated as a part of Northeast Asia. Russia, though its capital is situated in Europe, has its Far East plus Eastern Siberia regions geographically located in Northeast Asia. The United States, extraterritorial and the most geographically distant, is nonetheless deeply involved and embedded in the region in many aspects, and is consequently taken as a crucial player in Northeast Asia. Northeast Asia is diversified in several aspects. It is a region bringing together the major powers calculated in any variety of ways (for example the only superpower, most global powers, and a series of regional powers). It is also a region made up of states that have divergent political institutions (for example democracies, communist states, and market-oriented states with socialist characteristics). Of seven officially declared nuclear powers in the world, three (the United States, Russia and China) are located in this region, along with at least one potential or latent state(s)/actor(s) seeking nuclear capabilities. Northeast Asia is also a region that has witnessed its own modern history replete with episodes of wars and conflicts, colonization, invasion and resistance, occupation, and divisions, creating perceptions of enmity and victimization among many peoples of the region. Two Cold War legacies (divided China and divided Korea) continue to be the most prominent flashpoints in the region, though the Cold War itself ended more than a decade and a half ago in the rest of the world. Since the 1990s Northeast Asia has seen more than 15 years of relative peace. Efforts have been made to account for the maintenance of this favorable environment. One explanation is that increasing interdependence and cooperation in the areas of economics and trade have generated closely interrelated interest networks that mitigate against any break-up by the governments of the region. Another explanation attributes the phenomenon of a post-Cold War peace in Northeast Asia to a series of consecutive interactions that have created partnerships between major states in the region. In addition to the normalization of relations between the Soviet Union (later Russia) and China and the fact that both of them normalized their diplomatic ties with


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South Korea in 1990 and 1992 respectively, there were a series of other similar moves: the US–Russian ‘friendship and partnership’ (1992), ‘a constructive partnership’ between China and Russia (1994); the China–US ‘constructive strategic partnership’ (1997), the Japan–Russia ‘mutual trust partnership’ (1997), the ‘friendly cooperative partnership’ between Japan and China (1998) and so forth. Such declaratory partnerships seek ‘to avoid hostility and confrontation, to advocate mutual coordination and cooperation; to respect each other equally and gain mutual benefits; and not to aim against or harm a third party’.2 Still another explanation is that the maintenance of the post-Cold War peace in the region is due to the dynamics of geographic balance of power politics. This view argues that the role of the US in Northeast Asian security is not unlimited despite its current status as the world’s sole superpower, and that there exists a balance of power among the regional powers, most notably between China and the US (Kim, 1997/1998, p. 52; Ross, 1999, p. 82). All these accounts have their credibility. It is worth noting, however, that the perceptions of most of them derive primarily from bilateral rather than multilateral perspectives. That said, Northeast Asia is still a region that remains vulnerable to insecurity and potential dangers. Two major interrelated sources of insecurity and danger in the region can be identified. One stems from what can be called physical or hard issues, such as ongoing territorial and maritime disputes, 3 terrorism and/or sectarianism, military build-ups and arms races as well as potential nuclear proliferation. Another source of vulnerability, however, lies in what can be labeled non-physical or soft issues, such as constant disputes over historical narratives, divergent collective and public memories, nationalistic sentiments, suspicions, and distrusts and mistrusts manifest among almost all nations in the region one way or another. Both hard and soft issues are closely interrelated and mutually constituted. For instance, there are linkages between historical accounts, collective memories, territorial disputes, and nationalistic sentiments. Historically rooted mutual suspicions and even biases, often betrayed in the rhetoric of government officials and other power elites as well as in discourses involving mass media and public opinions, are easily transformed into radical nationalism and/or ethnocentric sentiments, which in turn serve to refuel the historical disputes and reinforce entrenched collective memories as they are socially, culturally and politically (re)constructed. As one commentator has asserted, collective memories produce a victim syndrome by constant narratives of the past ‘as a means to strengthen group cohesion’, or past achievements may be stressed to ‘indicate a sense of pride to boost morale and to justify a sense of superiority’ (Buszynski, 2004, p. 7).

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Moreover, it has been increasingly apparent that the soft issues may pose the greater challenge to the process of NEASR. While hard issues are negotiable through diplomatic or dialogic means and can be put aside for the wisdom of later generations to deal with, soft issues are often far more difficult to tackle: they often pop up and can be easily subject to crass and short-term manipulation and politicization. This suggests that the common impediments to regional security cooperation faced by Northeast Asian nations are intra-regional rather than extra-regional. For instance historical memories/narratives constitute one of the major obstacles standing in the way of the peace and stability in the region. It is important to remember history so as to avoid repeating past tragedies. It is also important to learn how to forget history so as to move toward a better future. The painful parts of history constitute but a part, not the whole, of Northeast Asia. ‘Indulgence’ of the past may become seeds of new sufferings and it is not easy to let bygones be bygones, but if Northeast Asian regionalism is to unfold in the twenty-first century it will require attitudes that are more forward-looking than backward-looking. Against this context the social construction of NEASR as a process is desirable. Despite constant complaints about the lack of any official regional security institutions or mechanisms in Northeast Asia, enthusiasm for creating an official regional security institution has never ceased since the 1990s.4 Although still elusive and stunted, NEASR has become an increasingly common expectation. In the following section, the chapter turns to certain specific aspects of the security regionalism in Northeast Asia.

NEASR: CULTURES AND PATTERNS Northeast Asian regionalism has become imaginable and desirable since the 1990s. Getting there, however, is not easy because of the complexity and uniqueness of the region including the aspects that were addressed in the previous section. The chapter here restricts itself to two factors that I believe are relevant to the direction and the regional order of any plausible NEASR. One factor is the coexistence of Asian and western cultures in the region. Another factor is the existence of the conventional pattern of regional security cooperation – bilateral security alliances – that has long prevailed in the region. NEASR is, and will continue to be, influenced by cultures and identity in the region. In Northeast Asia there are important strands both of Asian cultures (represented in different ways by China, South Korea, Japan and North Korea) and western cultures (mainly represented by the United


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States, and partly Russia). Asian cultures tend to be collectivist while western cultures focus more on the individual. The former typically advocate the following values. First, they foster coexistence of different communities and groups and promote mutual accommodations and respects in attempting to reach consensus. Second, they have a clear sense of hierarchy that would put orthodoxies as sources of authority, making subcultures subordinate to them. They are also ‘reluctant to consider legal commitments, binding agreements and structured organization’ (Buszynski, 2004, p. 143). Third, they accept the tolerance of differences, if not publicly, and favor the (re)adjustment of positions through civil means so as to maintain harmonious ties between different communities and groups. The latter (western cultures) champion culturally derived values that differ from those favored in Asian cultures, for instance, the insistence on individualistic human rights, freedom and democracy; the rule of law as the source of ultimate authorities, and a proclivity for public disclosure of differences and condemnation of what is regarded as deviant behavior. This suggests that shared cultures and common value foundations are absent in Northeast Asia as a whole. This complicates the question of which culture will be used to guide and shape the direction of any future NEASR. The relief is that cultures are not fixed, but products of social construction; they are formed through social practices and human experiences. Cultures will change with conditions. In all probability, this view suggests, the transformational power of regional security institutions or mechanisms may reshape cultures in Northeast Asia in ways that will demonstrate a greater acceptance of cooperative security relations as the basis for enduring peace and stability in the region. What is unclear is whether NEASR can in fact go beyond or transcend those divergent cultures or whether the desired regional security institutions or mechanisms themselves will actually fall apart along cultural lines. Another factor that I believe will affect the creation of a viable NEASR is the conventional pattern of security cooperation in Northeast Asia: bilateral military alliances. Within the context of the Cold War, almost all states in Northeast Asia pursued their own national security through forming bilateral strategic/military ties with another state (for example, the Japan–US alliance, the South Korea–US alliance, the Sino-Soviet alliance (which broke down later), the North Korea–China alliance, and the Sino–US strategic ties aimed at balancing against the Soviet Union). Allied states protected and reassured their security by threatening and/or deterring their (potential or latent) adversaries through mutually promised military commitments. This pattern of security cooperation was widely practiced and regarded as valid for maintaining peace and stability during much of the Cold War in Northeast Asia. One remarkable feature of this

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pattern was its exclusiveness and bilateralism, which were natural byproducts in the context of the Cold War balance-of-power politics. Regional stability was achieved and maintained by the balanced distribution of material capabilities among states in the region. However, any stability based on such a physical balance is likely to be uncertain or temporary since the distribution of material resources is not static but subject to change. In Northeast Asia, some forms of bilateral military alliances have survived the end of the Cold War and have been strengthened and further institutionalized to some extent. Regional multilateral security dialogues and mechanisms are accepted but have been treated as supplements to, but not as substitutes for, this conventional pattern of security cooperation based on power balances. However, although post-Cold War bilateral security alliances help to improve security/strategic relationship between allies that share anticipated perceptions and behaviors, what is central here is that this pattern of security cooperation on a bilateral basis can hardly reduce the latent suspicions and confrontations between allied states (seeing themselves as ‘Self’ and non-allied states as ‘the Other’). It has become increasingly self-evident that Northeast Asia has undergone tremendous changes in its security environment since the 1990s. The sources of insecurity and dangers in the region are shifting: major Cold War threats have disappeared (though the two Cold War legacies remain) while other issues (such as possible nuclear proliferation) are emerging as new threats. It looks as if the conventional security alliance system, exclusive and bilateral in nature, faces challenges as to how to meet these changes (Chen, 2005, p. 366; Cha, 2004, pp. 112–31). To deal with a security environment that has changed and continues to be changing, a new pattern of security cooperation among Northeast Asian nations is imperative. The danger is that if we do not develop this new pattern, Northeast Asia may well fall back anachronistically to an age ripe for classical greatpower rivalry characterized by confrontations, tensions, deterrence and counter-deterrence. As a consequence, the nations in the region may appeal again to the creation and strength of bilateral military alliances, and preserve their own national security, not through cross-regional cooperation but through ad hoc adjustments to each changing belligerent and sanguinary act. NEASR offers an institution or mechanism that is different from the conventional pattern of security relationship. It is a cooperative security system which is inclusive and multilateral in nature. The peace and stability produced by NEASR is expected to last longer because the nations in the region will be expected to treat each other equally and trustfully and to share norms and collective identities. A recent promising illustration is the


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collective efforts made to resolve the North Korea nuclear issue. This is the first time since World War II that five nations in the region (the United States, Russia, South Korea, Japan and China) have cooperated and worked together on a ‘hard’ security issue, in which the social and political process of collective identity and discourse formation is being played out among them. In the process of NEASR, the first and foremost step is trust-building among the countries in Northeast Asia. In terms of Northeast Asia’s security in coming decades, China’s ascendance in the region is believed to be a prominent phenomenon that has produced and will continue to produce effects on the regional security. There have been different perceptions surrounding the question of how China will make use of its increased power. Some focus on China as a potential threat to the regional status quo. Others see China as a responsible power and predominantly as a stabilizer in the region. For China itself, it is the first time in more than 150 years that this country has found itself being perceived as producing great effects on the world – a country that had long been ‘threatened’ and actually victimized by wars since the year of 1840.5 In the next section, the chapter examines how China has responded to the unprecedented changes both at home and in the region by readjusting its foreign and security policy thinking so as to get more positively involved in the creation of a NEASR.

CHINA AND NEASR: ‘NEW DIPLOMACY’ AND CHANGED VIEW OF US ROLE For much of the Cold War period, China pursued an independent and ‘isolationist’ foreign and defense policy based on the principle of ‘self-reliance’ [duli zizhu]. China was once at odds with almost all Northeast Asian countries. Retrospectively, it was a rare case in the Cold War era that a nation took two superpowers as its adversaries simultaneously, because that was both theoretically unacceptable and practically risky. But China did. That situation began to change in the early 1970s with the rapprochement between China and the United States (and subsequently that between China and Japan). In the late 1980s China and the Soviet Union patched up their relations and in 1992 China normalized its diplomatic ties with South Korea. Since then China has established diplomatic ties with all the countries in the region. Yet the concept of regionalism was not immediately appreciated in China in the early 1990s (Xue, 2006, p. 33; also see Rozman, 2004). China’s growing interest in regionalism became obvious in the late 1990s when, along with other countries, it began to deal with the Asian

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financial crisis and then with the country’s entrance into the World Trade Organization (WTO). The result was to foster more positive interactions between China and its neighbors. To keep up with rapid changes both at home and in the world, China began to recast its foreign policy mentality in the late 1990s. Central was the adoption of a ‘New Diplomacy’ [xin waijiao] with its two basic ‘guiding principles’ [zhidao fangzhen]. The first involved: ‘actively engaging in international affairs’, with a general approach of ‘seeking cooperation, putting aside disputes so as to avoid confrontations . . . [and] promoting multilateral communication and cooperation’ (Huang, 2004, p. 238). The second involved maintaining stable relationships with major powers, especially the United States, which is the core issue concerning China’s diplomacy. It can be argued that this ‘New Diplomacy’ had in fact developed an earlier strategy that China should ‘hide [its] capacities and bide [its] time’ [taoguang yanghui] in world politics and concentrate on economic growth and political stability at home.6 The change of ideas marked China’s breaking away from its conventional independent and ‘isolationist’ policies while embracing the world by advocating cooperative and multilateral approaches and taking on more commitments in international affairs, showing that China was increasingly regaining its confidence in the world. Corresponding to the conception of ‘New Diplomacy’, China also proposed a ‘New Security Concept’ [xin anquan guan], which sought to transcend the boundary of the conventionally narrow vision of security and to seek instead a ‘common security’ [gongtong anquan] based on mutual cooperation and benefits. The conception asserts that mutual trust is a political foundation for maintaining long-term peace and stability in the region; that security cannot simply rely on military means or alliances, but must be based instead on mutual trust and common interests. It also asserts that sources of insecurity and dangers emerge not simply from the unequal distribution of physical capabilities among nation-states but instead they reflect the approaches that nation-states take. Genuine security consequently can be achieved only through communication, coordination and cooperation among the countries concerned. With the conception of ‘New Diplomacy’ and the ‘New Security Concept’, China has adopted a ‘development strategy of peaceful ascendancy’, a strategy aimed at integrating China positively into the international society, and ‘seeking multilateral and constructive cooperation’ with other countries to solve disputes and conflicts that exist between them.7 This change in thinking has encouraged China to recast its identity and behavior. In 1997, China for the first time pronounced that it would behave as a responsible country that would abide by the norms and principles accepted in world affairs, thus establishing a strategy for possessing a world


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power status. It began to integrate itself more positively into the existing system and was opposed to any attempts to undermine that system. It subsequently pursued a policy of pursuing a good and interdependent relationship with its neighboring countries through cooperative approaches aimed at developing a ‘stable framework of big power relations’ [wending daguo guanxi kuangjia] (Huang, 2004, p. 239). In terms of regionalism in Northeast Asia, China champions openness, tolerance and mutual benefit. In other words, three points are stressed: 1) to take development as a central theme and promote common prosperity; 2) to construct harmonious ties with neighboring countries so as to maintain peace and stability in the region; and 3) to realize mutual benefits through cooperation and coordination. Based on the conception of ‘New Diplomacy’ and the ‘New Security Concept’, China began to readjust its attitudes and behavior when involving itself in foreign and security affairs in Northeast Asia. Though subtle, China’s changed view was shown in its altered treatment of the US role and its military presence in Northeast Asia. China used to be very suspicious of, and even hostile to, the US military role in Northeast Asia, believing that the key US strategic goal in the region was to contain or check China so as to keep it under US influence. For instance, China believed that the two US-led security alliances in Northeast Asia were essentially US instruments that could be used to contain China; China was especially skeptical about the revised US–Japan security alliance (1996–97). Until the late 1990s, China had centered its security efforts on counterbalancing mighty America and on breaking what it perceived as blockades by the US military presence in the region. With the changes articulated in the conceptions of ‘New Diplomacy’ and the ‘New Security’, China began to take a more pragmatic and rational approach to the US military role in Northeast Asia, recognizing that the US has vital and proper interests in the region. China gradually came to appreciate that the US military presence in Northeast Asia can be understood as a means of maintaining regional security stability and that this does not necessarily collide with Chinese interests. Since the late 1990s, China has stressed the theme that both China and the US share ‘important strategic interests’ in the Asia-Pacific and that the two nations should ‘put aside their differences but seek cooperation’. Such ideas have frequently been articulated in China’s foreign policy discourse. As Wang Yi, Chinese ambassador to Japan, remarked, ‘The US has important interest and traditional influence in Asia. It is historically shaped and is an objective reality’; China is consequently willing ‘to see the United States play a positive role for the stability and development in Asia’ (Wang, 2006, p. 10). These changed views have also been addressed in Chinese elites’ discourses. Some

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commentators argue that ‘the United States in the end has provided, to some extent, “public goods”, . . . and China has benefited, and is likely to continue to benefit, from the “status quo” of the post-Cold War security arrangement in Asia-Pacific’ (Niu and Lan, 2005, pp. 61–2). This represents a subtle but significant change, as one commentator observes, for until the late 1990s ‘withdrawal of all of foreign troops in Asia’ had been a ‘principle’ in China’s foreign policy, and it indicates that China has altered its attitudes towards US military presence in Asia (especially in Northeast Asia) ‘from negative to at least pragmatic if not positive’ (Huang, 2004, p. 242). This significant shift has helped set the backdrop for China’s fundamental rethinking of US-led alliances in Northeast Asia. China began to review its beliefs about the US military presence in Northeast Asia, realizing that the US-led alliances may function as balancers against improper ambitions of military build-ups by America’s allies, most especially Japan. The commitments to improve security relations with the United States have led China to take a more cooperative attitude as shown in China’s quick response to the ‘9.11’ event by expressing sympathy with the sufferings of the American people and backing the US-led global war against terrorism, as well as in China’s increasingly active role as a mediator in resolving the North Korea nuclear issue. China has also adjusted its approaches to US allies in Northeast Asia, adopting a more pragmatic strategy aiming at improving bilateral ties with Japan and South Korea. China has sought to resolve its bilateral disagreements with Japan or South Korea through interstate talks instead of putting them in the context of the security alliances. As one commentator observes, China ‘has quietly stopped criticizing the US–Japan alliance’ on troubling issues in Sino-Japan relations (Huang, 2004, p. 242). Based on the process of NEASR, all nations in the region are expected to have equal positions and to show mutual respect. A struggle for regional dominance and superiority is to be discouraged and is undesirable. Since 1992, China has also been nurturing its bilateral relations with South Korea to dilute the perceived threat from the US–ROK military alliance. It can be argued that the relationship between China and South Korea is more comfortable and successful thanks to the two countries’ shared historical memories of their peoples’ sufferings during World War II as well as their shared geopolitical and/or geostrategic considerations. This has been reflected mot recently in the North Korea nuclear issue. That said, China has its own dilemmas. On the one hand, with the changed views of its foreign and security policy, China has begun to appreciate and to accept the US military role as well as US-led security alliances in Northeast Asia. On the other hand, China remains uncertain about what


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the US military presence, especially US–Japan alliance, may mean to China if Taiwan declares independence (Liu, 2006).

CONCLUDING REMARKS The chapter has conducted a tentative study of the subject matter of Northeast Asian regionalism by focusing on its security facet. Several points can be offered as concluding remarks. First, regionalism as a revived concept in the study of IR contains competing meanings. The chapter tends to believe that regionalism is a process of social, cultural and political construction, a way of thinking, and even a mode of life. If regionalism in Northeast Asia has become imaginable and desirable since the 1990s, the unique characteristic of Northeast Asia as a region as well as its historical and present context make the process both encouraging and bumpy. Of the two major sources of insecurity and dangers in Northeast Asia, the chapter has addressed specific concerns about the soft issues that may constitute hidden but entrenched obstacles to forming a NEASR. It is not realistic to expect that regionalism in Northeast Asia will imitate the way that regionalism has been achieved and practiced in other parts of the world, such as in Europe. Second, NEASR may become an integral part of Northeast Asian regionalism, even though it is culturally and politically quite difficult to achieve. It looks as if economic regionalism in Northeast Asia may not lead naturally to the realization of security regionalism in the short run. They are not as closely interrelated in Northeast Asia as they have been in Europe. It is imperative for Northeast Asian nations to find ways to get rid of security dilemmas that still remain as major security challenges in the region. NEASR promises an alternative pattern of security cooperation that is both encouraging and desirable because of its inclusiveness and multilateralism. Both NEASR and the conventional pattern of security cooperation (bilateral military alliances) are instruments intended to promote peace and stability in the region. In the long run, however, the foundation of lasting peace and stability in Northeast Asia is more likely to rely on a pattern of security cooperation that is inclusive and multilateral, both of which are core elements in a NEASR. Third, changes in security ideas may well bring about changes in security behaviors. China’s changed views on the US military presence and US-led security alliances in Northeast Asia can be understood as the practice, among others, of China’s adoption of conception of ‘New Diplomacy’ and the ‘New Security Concept’ in the late 1990s. They are also signs indicating that China has been more positive in its involvement with the process of

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NEASR, and has taken concrete steps toward the social and political construction of security trust-building with the US and its allies in the region.

NOTES 1. See Gilbert Rozman: ‘Introduction’, in Armstrong et al. (2006), p. x. 2. Sun Jianshe: ‘Yatai daguo “huoban guanxi” de hudongxing he buduichenxing’ [Interactions and asymmetries of ‘Partnerships’ of Asian-Pacific powers], Nanjing Daxue Xuebao [Nanjing University Academic Journal] (Social Sciences edition), March 2001, cited from Yan Xuetong, ‘Decade of peace in East Asia’, in Yan Xuetong and Zhou Fangying (eds) (2004), p. 28. 3. Such as the Tokdo/Takeshima Islands (Seoul versus Tokyo), the Diaoyu/Senkaku Islands (Beijing versus Tokyo), the Northern Territories (Tokyo versus Moscow), the Northern Limit Line on the Yellow/West Sea (Seoul versus Pyongyang), and the Spratly Islands (China versus six other East Asian states. Besides, as some have observed, with the entry into force of the United Nations Convention on the Law of the Sea (UNCLOS) in 1994, the enlarged exclusive economic zones ‘pose a clear and present danger of a new pattern of maritime conflict in the region’. See Samuel S. Kim: ‘North Korea and Northeast Asia in world politics’, in Samuel S. Kim and Tai Hwan Lee (eds) (2002), p. 5. 4. There are, however, non-official efforts in Northeast Asia that intend to facilitate the creation of official security mechanisms. One of such efforts is the creation of The Northeast Asia Cooperation Dialogue (NEACD) in 1993, which is considered a leading ‘track II’ forum in Northeast Asia. 5. The China ‘threat’ rhetoric can be roughly reduced to two major concerns. One concern is that it is unclear whether a strong China will revive its old tributary system towards its neighboring countries as practiced hundreds of years ago. Another concern is that it is unclear how a strong China may make use of its power in the world and for what purposes. 6. There have been debates in China over whether the strategy of taoguang yanghui should be transcended. For the overview of the debates, see Zhao (2006), pp. 24–7. 7. Zheng Bijian: ‘The new road of China’s peaceful ascendancy and the future of Asia’, a speech made at the Bo’ao Asian Forum (October 2003) at Bo’ao, Hainan Province, China. Quoted from Huang (2004), p. 238.

BIBLIOGRAPHY Akaha, Tsuneo (1999), Politics and Economics in Northeast Asia: Nationalism and Regionalism in Contention, New York: St. Martin’s Press. Armacost, Michael H. and Daniel I. Okimoto (eds) (2004), The Future of America’s Alliances in Northeast Asia, Stanford: Asia-Pacific Research Center. Armstrong, Charles K., Gilbert Rozman, Samuel S. Kim and Stephen Kotkin (eds) (2006), Korea at the Center: Dynamics of Regionalism in Northeast Asia, Armonk: M.E. Sharpe. Buszynski, Leszek (2004), Asia Pacific Security – Values and Identity, London: Routledge Curzon. Cha, Victor D. (2004), ‘Shaping change and cultivating ideas in the US–ROK Alliance’, in Michael H. Armacost and Daniel I. Okimoto (eds), The Future of America’s Alliances in Northeast Asia, Stanford: Asia-Pacific Research Center.


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Chen, Hanxi (2005), ‘Cooperative security in East Asia’, in Yan Xueting and Kim Dexiang (eds), Dongya heping yu anquan [Peace and Security in East Asia], Beijing: Shishi Publishing House, Gen, Xiefen (2003), Xin diquzhuyi yu yataidiqu jiegou biandong [Neo-Regionalism and Change of Asia-Pacific Structures], Beijing: Beijing University Press. Griffiths, Martin and Terry O’Callaghan (2002), Interational Relations: The Key Concepts, London: Routledge. Huang, Jing (2004), ‘China and America’s Northeast Asian alliances: approaches, politics, and dilemmas’, in Michael H. Armacost and Daniel I. Okimoto (eds), The Future of America’s Alliances in Northeast Asia, Stanford, CA: Asia-Pacific Research Center Publication. Kim, Dalchoong and Chung-in Moon (1997), History, Cognition, and Peace in East Asia, Seoul: Yonsei University Press. Kim, Kyung-Won (1997/1998), ‘Maintaining Asia’s current peace’, Survival, 39(4), 52–64. Kim, Samuel S. (ed.) (2004), The International Relations of Northeast Asia, Lanham: Rowman & Littlefield Publishers. Kim, Samuel S. and Tai Hwan Lee (eds) (2002), North Korea and Northeast Asia, Lanham: Rowman & Littlefield Publishers. Liu, Jiangyong (2006), ‘Rimei tongmeng zhuanxing jiqi dui zhongguo de yingxiang’ [Transformation of Japan–US Alliance and Its Impact on China], Guoji Guancha [International Survey], (1), 9–16. Niu, Jun and Jianxue Lan (2005), ‘Zhongmei guanxi yu dongya heping’ [China–US Relations and East Asian Peace], in Yan Xuetong and Jin Dexiang (eds), Dongya heping yu anquan [Peace and security in East Asia], Beijing: Shishi Publishing House. Ross, Robert S. (1999), ‘The geography of the peace – East Asia in the twenty-first century’, International Security, 23(4), 81–118. Rozman, Gilbert (2004), Northeast Asia’s Stunted Regionalism: Bilateral Distrust in the Shadow of Globalization, Cambridge: Cambridge University Press. Su, Hao (2006), ‘Dongya kaifang diquzhuyi de yanjin yu zhongguo de zuoyong’ [Evolution of East Asia’s Open Regionalism and China’s Role], Shijie Jingji yu zhengzhi [World Economy and Politics], (9), 43–51. Sun, Xuefeng and Chen Hanxi (2006), ‘Zhongguo diqu zhuyi zhence de zhanlue xiaoying’ [Strategic Effects of Chinese Policy Toward Regionalism], Shijie Jingji yu Zhengzhi [World Economy and Politics], (5), 26–30. Wang, Yi (2006), ‘Sikao ershiyi shiji de xin yazhou zhuyi’ [Think about the 21st Century Neo-Asianism], Waijiao Pinglun [Foreign Affairs Review], (3), 6–10. Xue, Xiaopeng (2006), ‘Zhongguo dui dongya diqu zhuyi guannian de zhuanbian’ [The Change of China’s View on Regionalism in North Asia], Waijiao Pinglun [Foreign Affairs Review], (3), 28–33. Yan, Xuetong and Zhou Fangying (eds) (2004), Security Cooperation in East Asia, Beijing: Beijing University Press. Zhao, Xiaochun (2006), ‘Qianxi youguan “taoguang yanghui” zhanlue de zhenglun’ [An Analysis of Debates on the Strategy of Taoguang Yanghui], Guoji Guanxi Xueyuan Xuebao [Journal of College of International Relations], (5).

4. Northeast Asian regional integration: regional theories, current realities and future prospects Young Jong Choi INTRODUCTION The global wave of regionalism has finally reached Northeast Asia, a hotspot of unprecedented economic dynamism and anachronistic nuclear threats. The visualization of an FTA linking South Korea, China and Japan has been undergoing a reality test ever since the then Chinese Premier Zhu Rongji proposed it in November 2002 on the basis of a joint research project carried out by para-governmental research institutions in the respective countries (Munakata, 2006, pp. 128–9). Along with such a proposal, a bilateral FTA between South Korea and Japan has been in negotiation and may be around the corner, although the final stage of official negotiation has become stalled. Both the South Korean and Chinese governments are also showing keen interest in establishing their own bilateral FTA. The leaders of South Korea, China and Japan have regular trilateral meetings, and the three countries have also developed regular ministerial meetings on trade, finance, communication, and the environment. At the ASEAN3 meeting in October 2003 in Bali, the ‘Plus Three’ countries issued a Joint Declaration aimed at promoting trilateral cooperation. The Declaration pledges further cooperation and dialogue on economic, cultural, educational, environmental, political–military and security issues, and the leaders also agreed to set up a trilateral committee to promote and implement the cooperative agreements. This institutional arrangement, along with the rapid expansion of economic exchanges, has laid a strong foundation for trilateral cooperation. At the Seventh Trilateral Leaders’ Meeting of South Korea, China and Japan held in Cebu in January 2007, the three leaders agreed to expand trilateral cooperation into the political and security realms by setting up a trilateral mechanism involving regular consultations among senior foreign 44

Northeast Asian regional integration

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affairs officials. They also expressed a shared desire to promote cooperation on trade, investment and energy, and they agreed to initiate trilateral investment negotiations as well. A number of new priorities were jointly named for trilateral cooperation, including finance, science and technology, public health, tourism, logistics and distribution, youth and teenager communications. The leaders agreed to promote cultural exchanges in a bid to enhance understanding and friendship among the people of the three countries. The three countries will jointly hold the ‘Year of Cultural Exchanges among China, Japan and Republic of Korea’ in 2007 (Kyodo News International, 14 January 2007). However, rhetoric rarely guarantees action. While Northeast Asian regionalism has become a hot issue, nationalism continues to take precedence in regional politics. Chinese nationalism has clashed with Japanese and South Korean versions of nationalism. Japanese nationalism strains its neighboring countries. South Korean nationalism toward Japan has flared up quite often in recent years. The lack of trust among the three countries continues to pose formidable barriers that prevent them from forming a meaningful economic grouping. In this sense, the current state of regionalism in Northeast Asia justifies neither pessimism nor optimism. As Rozman argues, economic liberals have been far too optimistic in stressing the primacy of economic factors in promoting regional integration in Northeast Asia, while realists have been far too pessimistic in stressing how security fears drive countries apart. Liberal political economists have paid little attention to the significant barriers to regionalism in Northeast Asia by assuming that economic interdependence will erode security fears. Realists’ predictions of conflict over disputed territories and counterbalancing China’s rising power have failed to materialize (Rozman, 2004). This chapter will analyze the current state and the future prospect of Northeast Asian regionalism from the perspectives of various theories of regional integration. Northeast Asia raises interesting questions concerning the slowness of regional integration in spite of the rapid growth in regional economic independence. However, there has been a sudden surge of regionalist interests in recent years. If regional integration demands, as conventional theories suggest, a certain convergence of values, interests and ideas, it will be useful for us to seriously evaluate the degree to which such a convergence exists among South Korea, Japan and China. This endeavor leads us to examine the theories of regionalism in light of the current state of Northeast Asian regionalism, from which it may be possible to give an assessment of the future prospects of regional integration in Northeast Asia.

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REGIONAL THEORIES AND THE CURRENT STATE OF REGIONAL INTEGRATION IN NORTHEAST ASIA Theoretical Overview Regional integration has both demand and supply sides. Functionalist approaches represent sophisticated theorizing about the demand side. They start from groups and individuals who are involved in trans-border economic exchanges and therefore have intense interests in breaking down barriers to economic exchange. Reduction of transaction costs, elimination of red tape, and removal of tariff and non-tariff barriers will increase the geographic scope of production and exchanges and enhance overall economic efficiency. The process of economic integration, however, involves not just economic exchanges but also rules and institutions. Even the simplest economic exchanges require regulations and standard-setting as well as specification of property rights. Separate national legal regimes constitute the crucial source of transaction costs for those wishing to engage in exchanges across borders (Stone Sweet and Sandholtz, 1998, p. 11). Although a well-developed demand side is necessary for regional integration, it is not sufficient. Without political mechanisms to provide leadership, aggregate interests, and convert them into policy, even the most intense interests may not achieve desired policy consequences. In this sense, regionalism has a supply side. Institutional arrangements, however, do not automatically come into being just because they are efficient. There are many potential regional arrangements that would be beneficial but have not come into effect. Efficiency at the regional level may be sidestepped by national or sub-national actors benefiting from the status quo. Specifying the supply-side conditions of regional integration has been one of the major subjects of international relations theories and regional integration theories. One plausible answer coming out of this theoretical journey is the important role that could be played by a core area or a small group of committed members among the potential integrating countries. Successful regional arrangements have a hegemonic core, for example, Germany or Germany–France in the case of the EU and the United States in the case of North America. Hegemonic stability theory argues that the presence of a hegemonic power increases the prospects for cooperation of all kinds. The ensuing theoretical development shows that, short of a single large power whose interests lie in integration, a small number of committed countries favorable to integration can help. Since regional integration contains aspects of public goods, the presence of a committed core of countries (the so-called privileged k1) that benefit from integration even in the face of free-riding will facilitate integration.


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In recent years, researchers have been paying increased attention to domestic politics, which is at the center of liberalism as well as liberal intergovernmentalism, both of which emphasize the role of inter-governmental negotiations in the process of regional integration. Their basic idea is that economic and social interests provide only the raw material of politics, but such interests have to be recognized and mobilized before they become active in politics. Therefore, liberal theorists focus their efforts on explaining the formation of groups pursuing their respective interests and the political process through which interests are converted into actual policies. Pluralist interest group theory, the logic of collective action, and institutional theory are instrumental in understanding how economic demands are translated into political results. Liberalism and liberal intergovernmentalism provide a sophisticated theory of preference formation regarding regional integration (Moravcsik, 1998). Strategic concerns (for example, concerns for relative power and opportunistic behavior) are at the center of realism and are commonly mobilized to show the difficulties of regional integration among sovereign states. The agenda of realist research has, however, gradually shifted to explaining regional integration as an indisputable political reality. For example, Joanne Gowa ascribes the success of European integration to the stability of the bipolar system during the Cold War period (Gowa, 1989). Joseph Grieco explains the acceleration of European integration after the end of the Cold War as the result of the incentives held by secondary states in binding the powerful countries (Grieco, 1995). According to realist logic, the existence of a security community will help bring about regional integration. History shows, however, not just that regional integration can proceed without a security community but also that many regional integration initiatives are driven by the incentive to counter integration in other regions or to increase collective strengths against external powers. Therefore, we may safely assume that sharing strategic interests (for example, facing common threats or crises) will make it easier for a group of geographically contiguous countries to form a regional entity. Finally, ideational factors like mutual trust or common identity deserve attention as facilitators of regional integration. Mutual trust among member countries provides an important aspect of social capital to economic and political actors, and therefore many potential economic exchanges will not take place without it. Common identity will also facilitate integration, particularly the deepening of already existing regional entities. This concern belongs to early functionalists like Deutsch who focused on community and the development of ‘we-feelings’. Constructivism is particularly strong in explaining the acceleration of European integration in recent years with the formation of a more cohesive European identity

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(Laursen, 2003, pp. 18–20). It is also not unusual for a group of countries that experience common threats or crises to develop a strong sense of community or common identity. Current State of Regional Integration in Northeast Asia In view of these underlying forces toward regional integration, the long stagnation of regionalism in Northeast Asia can be attributed to the deficiency of both the demand and supply of regional integration. For instance, according to neofunctionalism, integration is most likely to emerge among countries with a certain type of domestic environment, that is, liberal democratic countries with advanced capitalist economies, differentiated social structures, and highly pluralistic interest group structures (Haas and Schmitter, 1964). A transnational society has a better chance to emerge among such countries. Northeast Asia, however, does not meet these basic conditions. Societies there are still far from pluralistic in the Western sense and moreover they are separated by various border barriers and self-centered nationalisms. Besides, formal regional institutions are underdeveloped. In short, both transnational societies and transnational institutions, the prime movers of regional integration in neofunctionalism, are weak in Northeast Asia. Realists may point to the continuation of the Cold War, an unstable power distribution, the absence of a security community, and the deficiency of a working regional leadership as important factors that have prevented integration in Northeast Asia. Inter-governmentalists would also take note of the divergence of national preferences concerning regional integration, particularly between Japan and China (Choi, 2002, pp. 219–34). If we follow the logic of constructivism, Northeast Asia lacks coherence as a geopolitical entity, let alone any communal consciousness or common identity. Until the financial crisis in 1997, Northeast Asian countries, with their impressive economic track records, had not experienced common exigencies that might justify joint actions. They have been impressive domestic adjusters and therefore slower than the United States and European states in recognizing the possible benefits of external adjustment via collective regional action. Northeast Asian states maintained a high degree of domestic economic control, and therefore domestic adjustments were both available and feasible. The nationalistic nature of their economic policies was reinforced by close government–business ties. All these factors had long deterred any serious debate about regional integration that might have gone beyond inter-governmental cooperation. The seed of Northeast Asian regionalism was laid in 1993 and 1994, prior to the economic crisis in 1997, when the ASEAN countries (at that


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time only six) invited South Korea, Japan and China to join them in broader discussions. Since then, the APT (ASEAN plus three) forum has become the foundation for the current discussions on Northeast Asian regionalism. There is no denying that a degree of convergence of national interests among South Korea, Japan and China contributed to the launching of a drive for regional cooperation in Northeast Asia. However, Japan and China have been widely apart in their national preferences toward specific details about economic integration in Northeast Asia as well as in East Asia as a whole. At present, both countries are competing intensely to pull the ASEAN into their respective spheres of influence by offering attractive FTA deals with ASEAN countries (Munakata, 2006, pp. 121–3). Although Japan and China are reluctant to take the leadership role necessary for the provision of various public goods for regional cooperation, they have struggled to prevent the other from gaining a dominant position in the region. Meanwhile, South Korea, a secondary power in the region, has been the country that has taken the initiative for regional cooperation. If identity determines the boundaries of a region, as constructivists argue, Northeast Asia has a stronger common identity now than a decade ago when the Northeast Asian three started gathering as a part of the ASEAN3 meeting. It is, however, still unclear what constitutes the Northeast Asian-ness or Northeast Asian identity. Questions also remain regarding the extent of the effects this fledgling collective identity may have on individual countries’ policies and ultimately on regional cooperation. The divergence of historical experiences, cultural and linguistic diversity, and conflicting political ideologies still pose formidable barriers against forging a common identity in Northeast Asia. Worse still, neoliberal consensus, which has propelled integration in other regions, is weak in Northeast Asia. Another burden that the constructive argument must deal with is refuting the powerful claim that ideas are only tenuously linked as an independent variable to regional integration (Choi and Caporaso, 2002, p. 490). The surge of interest in functional arrangements like bilateral FTAs indicates that it is rational calculation of national interests, rather than common identity, which drives Northeast Asian regionalism today. Domestic politics does not offer a fertile ground for regional cooperation in Northeast Asia. According to functionalist approaches, the pressure for regional integration becomes stronger along with democratization and economic liberalization. Even in the most liberal, democratic countries like Japan and South Korea, however, the state is still highly interventionist; protectionist forces are influential in making foreign economic policies; and mercantilist orientation guides their commercial and industrial policies.

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KEY ISSUES IN NORTHEAST ASIAN REGIONALISM Functional Needs or Political Will? For every political adventure, be it a world revolution or regional integration, there have been intense debates concerning whether objective conditions or human will matter more. In the case of regional integration, functionalist approaches, mainly based on the experience of Western Europe, emphasize objective conditions (the so-called degree of interdependence according to Haas and Schmitter) like the size of units, rate of transactions, pluralism, elite complementarity, and so on. Political integration comes automatically as the degree of interdependence increases. At present, Northeast Asian economies are highly integrated, but such integration is currently limited to the economic realm. If economic interdependence begins to spill over into other areas, functionalist approaches would suggest that a deeper process including political integration will be launched. The best strategy for Northeast Asian countries to achieve regional integration, they would argue, would be to continue this rather boring functional cooperation. Then, what would be the place for the will to integrate, particularly the will to overcome the insufficiency of objective conditions? It is possible that the logical arrow may move in the opposite direction from the functionalist argument, that is, from political integration to economic integration. That is to say, regional integration may progress if a strong political will exists even without objective conditions prescribed by functionalists. That is why regionalism has become a global phenomenon. However, many of the regional integration agreements among developing countries (namely South–South or S–S integration), motivated primarily by political goals like enhancing bargaining leverage against outsiders, have either collapsed or have never taken off (World Bank, 2000, p. 25). The poor record for politically-initiated regional integration schemes reiterates the importance of functional demands for integration. This fact cautions against overly hasty, politically motivated efforts at integration in Northeast Asia. This concern leads us to critically examine South Korea’s effort to facilitate Northeast Asian integration. Northeast Asia has been at the center of President Roh’s foreign policy. He invested a significant portion of his diplomatic assets in a Northeast Asian integration project while both China and Japan showed little interest. President Roh was mainly motivated by his political ambition to bring peace to the Korean peninsula. He saw no major breakthrough in the process and invited only worries and cynicism from the two neighbors. Will South Korea’s political approach to regional integration (that is, to place Northeast Asian integration high in


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foreign policy priorities) pay off, bringing peace and prosperity to the region? Can China and Japan share a political will to facilitate Northeast Asian integration in spite of the formidable obstacles noted above? How far can politics push economic integration where functional demands are weak? These are the issues to be answered in the study of regional integration in Northeast Asia. Disparities in the Level of Development History shows that the level of economic development has been a decisive factor in the success of economic integration. For example, most integration agreements involving high-income countries (namely North–North or N–N integration) have survived, successfully locking in their policies. The record among developing countries (namely South–South or S–S integration) is very poor. Northeast Asian integration would involve a case of North–South (N–S) integration, in which a huge gap exists between Japan and China, with Korea in the middle. A North–South integration typically involves not only the fear of economic domination by the Northern members but also serious disturbances caused by relocation of industries. Labor-intensive production activities will move toward lower-wage Southern countries. Therefore, any serious N–S integration requires a greater loss of sovereignty and policy autonomy, greater political commitment, and more demanding domestic reforms than other types of integration. Difficult negotiations usually end up with the largest concessions being demanded of the Southern side. The recent increase in the number of N–S integration has been led by several willing Southern countries like Chile, Mexico and former Soviet bloc countries. In addition, the Northern developed countries should have sufficient political leverage against the Southern countries in order to mitigate a race to the bottom in the social standards, exodus of labor-intensive industries, and grueling domestic restructuring of the Northern sides. Will China (and to a degree South Korea) act like Chile or Mexico by accepting the tough domestic reforms necessary to appease Japan’s concerns? Does Japan have enough leverage against China? If power can be measured, as Keohane and Nye argue, by the asymmetry in economic interdependence (namely differences in ‘sensitivity’ and ‘vulnerability’), less dependent countries enjoy a point of leverage that can be applied to impose demands on more dependent states. In this sense, China has ‘go it alone’ power based on its huge domestic markets, in addition to which the Chinese government enjoys considerable leeway to use economic statecraft thanks to the relative weakness of domestic society and strong autonomy from domestic politics. Considering China’s long ambition to place itself at the

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center of the world, it will be a daunting challenge to harness China’s rising power in the interests of regional cooperation. The fact that China is a political giant defies the logic of applying typical N–S integration experiences to the Northeast Asian case. A successful Northeast Asian integration requires a new model of N–S integration. The Leadership Problem At present, China is not ready for further liberalization beyond the requirements imposed by the WTO. The ASEAN–China FTA is in a sense a token proposal driven by political motivations. Closer cooperation with ASEAN can serve several political purposes for the Chinese government. That is to say, it may tame the fear of the ‘China threat’ among East Asian countries, particularly ASEAN members; serve its foreign policy goal of ‘anti-hegemonism’ and undermine Japan’s dominant position in Southeast Asia. In this regard, Northeast Asian integration will pose no direct harm unless it places unbearable demands upon China itself. Currently, Japan has neither a clear vision for an integrated Northeast Asia nor a capability or willingness to open up domestic markets to its neighbors. Japan is just a commercial giant without much military strength or soft power. Japan is disadvantaged, as compared with China, in approaching East Asia since its options are tightly constrained by the need to maintain an amicable relationship with the United States. Historical animosity also runs deep with China and South Korea. Under the circumstances, hegemonic leadership cannot be expected in Northeast Asia. Joint leadership by Japan and China may be an alternative. However, the intense rivalry between the two makes this an unlikely option. Another possibility is, as Rozman argues, to make Northeast Asia a region without a leader. He points out that a leadership role for any state will reinforce the historical suspicions of neighboring states, limiting the prospects for forming a regional identity (Rozman, 2004, pp. 369–70). In this case, South Korea can play the leadership role as a political entrepreneur. A security-based agreement between China and Japan will help not only to form a regional identity but also to facilitate regional integration. Common Identity The importance of ideas or shared identities cannot be easily discounted. The federalist idea was behind the early development of European integration. Early functionalists like Karl Deutsch identified the formation of common identity as the driving force of regional institutional integration. Since then, ideas, along with power and interests, have drawn scholarly


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interest in the study of regional integration. Transnationalism, which is different from inter-governmentalism, presupposes that beyond shared interests there should be a degree of common identity pushing further institutional integration. However, questions remain concerning the role of identity. Whether and how much does identity matter as an independent variable to regional integration? Can a regional identity be forged without sharing solid common interests? What constitutes Northeast Asian identity? Does it necessarily differ from Western values, cultures and identities? At present, any regional identity is at best vague in Northeast Asia, and common interests are not strong enough to further regional integration initiatives. Nationalism and national economic interests loom larger than regionalism and regional economic interests. In order to break the impasse surrounding regional integration, however, Northeast Asia may take the detour of changing its collective identity first so as to expand the overlap among the national interests of its members. At present, Northeast Asia faces the dual challenges of identifying a common identity or common culture while at the same time coming up with an appropriate strategy by which to foster them. The region can halve the burden by simply accepting that Northeast Asia does not have to be unique or different from the West in terms of culture. Although the governments of South Korea, Japan and China agreed to celebrate 2007 as the ‘Year of Cultural Exchanges’, in fact many proposed cultural exchanges (for example, music, cartoons, movies, TV drama) are already expanding quite rapidly with the result that their popular cultures are not much different, either from one another or from Western culture. Continued economic prosperity and, possibly, further democratization in China will accelerate the formation of a Northeast Asian culture or identity in line with individualism, consumerism and other universal values such as human rights, democracy and market economy. Since common culture or common identity is susceptible to domestic political whims if it is found only at the elite level, there is greater strength when values are shared by average people throughout the region. Only then can regional integration be locked in. In this sense, democratization and liberalization in Northeast Asia are crucial to the formation of a common regional identity.

FUTURE PROSPECTS Conventional theoretical approaches predict that regional integration in Northeast Asia is but a distant possibility. This chapter identifies four key conditions for the success of regional integration: functional demands,

54


leadership, common exigencies or sharing of strategic interests, and common identity. Northeast Asia fails to meet these conditions at present, and the situation is likely to continue for quite a while. The most serious obstacle will continue to be the strategic rivalry between Japan and China. Many approaches, particularly those belonging to liberal/functionalist traditions, predict that democratization and further liberalization in China will dramatically increase the chance of successful integration among the three major economies in Northeast Asia. Another challenge to overcome is Japan’s reluctance to integrate with less developed neighbors. Particularly, Japan’s fear of a powerful, increasingly unruly China can be justified from the recent increase in both the number and intensity of bilateral trade disputes. Japan is troubled most by China’s absence of a predictable legal system, the primitive physical infrastructure in many of China’s regions, and recently by the blatant use of economic sanctions. For example, in 2001 Japan imposed temporary tariffs on leeks, shiitake mushrooms and tatami straw from China, which was inundating the Japanese markets. The tariffs were, however, removed because of China’s retaliatory action against Japanese vehicles, mobile phones and air conditioners. South Korea had a similar experience of an unruly China in a series of bilateral trade conflicts, most blatantly during the ‘garlic war’ of 2000. In this sense, South Korea and Japan share common interests in going trilateral. Not only will this maximize the benefits of free trade but it could also serve to transform China into a more reliable and respectful trade partner. One plausible option for the successful integration in Northeast Asia is to take a gradual approach that will start from a Japan–South Korea FTA. This would bring together the two biggest democratic, capitalist economies in East Asia. Once established, it could be expanded into a trilateral FTA including China. This may gradually expand to cover the whole region similar to the widening of the EU to other parts of Europe. However, this option cannot proceed if China is opposed. China has already become a key regional player with its huge domestic markets, strong growth potential, and fast-growing political weight. Under this circumstance, Northeast Asia may have to continue pursuing boring functional cooperation at all levels, for example, political, social, cultural, legal, economic, and so on.

NOTE 1. The privileged k means a subgroup of the larger beneficiaries of collective action, whose benefits accruing from collective action exceed the costs to that subgroup. When such a group is formed, the public good can be provided entirely by that subgroup. Russell Hardin calls it a ‘k-group’.


55

BIBLIOGRAPHY Choi, Young Jong (2002), ‘China–Japan relations and the East Asian Regionalism’, in Chul Koo Woo and Jinwoo Choi (eds), Korea and Japan in the New Global System, Seoul: Korean Association of International Studies. Choi, Young Jong and James A. Caporaso (2002), ‘Comparative regional integration’, in Walter Carlsnaes, Thomas Risse and Beth Simmons (eds), Handbook of International Relations, California: Sage Publications, pp. 480–99. Choi, Young Jong and Nae Young Lee (2002), ‘A comparative study of regionalism in East Asia and the Americas’, Asian Perspective, 26(3), 169–92. Gowa, Joanne (1989), ‘Bipolarity, multipolarity and free trade’, American Political Science Review, 83(4), 1245–56. Grieco, Joseph M. (1995), ‘The Maastricht Treaty, economic and monetary union, and the neo-realist research program’, Review of International Studies, 21(1), 21–40. Haas, Ernst B. and Philippe C. Schmitter (1964), ‘Economics and differential patterns of political integration: projections about unity in Latin America’, International Organization, 18(3), 705–37. Keohane, Robert O. and Joseph Nye (1977), Power and Interdependence, Boston: Little, Brown. Laursen, Finn (2003), ‘Theoretical perspectives on comparative regional integration’, in Finn Laursen (ed.), Comparative Regional Integration: Theoretical Perspectives, Aldershot, UK and Burlington, US: Ashgate, pp. 3–30. Mattli, Walter (1999), The Logic of Regional Integration: Europe and Beyond, Cambridge: Cambridge University Press. Moravcsik, Andrew (1998), The Choice for Europe, Ithaca: Cornell University Press. Munakata, Naoko (2006), Transforming East Asia: The Evolution of Regional Economic Integration, Washington, DC: Brookings Institution Press. Rozman, Gilbert (2004), Northeast Asia’s Stunted Regionalism: Bilateral Distrust in the Shadow of Globalization, Cambridge: Cambridge University Press. Stone Sweet, Alec and Wayne Sandholtz (1998), ‘Integration, supranational governance, and the institutionalization of the European polity’, in Wayne Sandholtz and Alec Stone Sweet (eds), European Integration and Supranational Governance, Oxford: Oxford University Press, pp. 1–26. Woo, Chul Koo and Jinwoo Choi (eds) (2002), Korea and China in the New Global System, Seoul: Korean Association of International Studies, pp. 219–32. World Bank (2000), Trade Blocs, New York: Oxford University Press.

5. The progress of Korea’s FTA policy in the context of Northeast Asian economic cooperation Inkyo Cheong One of the motives behind Korea’s active approach towards FTAs is its strategy for developing the nation to be an open trading country in the world. Since the enactment of the Korea–Chile FTA in 2004, the Korean people have become more confident about the liberalization of the market through FTAs. The FTA with Chile enabled the public to realize that the benefits of the FTA were greater than expected, with smaller losses for its weak industry (agriculture). The government introduced an ‘open trading country’ as one of its policy goals in 2005, and began to regard FTAs as being one of the most efficient policy tools in achieving the goal. The Korea–Chile FTA also helped the people to realize that the promotion of FTAs is one of the essential trade policy tools in order to secure the growth engine of the Korean economy and to create the foundation for becoming an advanced economy with high national and per capita incomes. Korea’s pursuit of FTAs will help it to become the business hub in Northeast Asia, and will finally result in creating a foundation for an advanced and more competitive trading power. This chapter will summarize current progress of Korea’s FTA policy in terms of its open trading country goal and FTA roadmap, a US–Korea FTA, and Korea’s position regarding FTAs with Japan and China. Finally, a conclusion is provided, proposing that the government take a more active and progressive position regarding FTAs with Japan and China if it wishes to develop as a Northeast Asian business hub and open trading country, while enhancing economic integration in East Asia.

KOREAN FTAS: CURRENT PROGRESS Korea is one of the countries that are actively pursuing FTAs, although it lags behind the global trend of regionalism. Korea began to pursue FTAs after 56

The progress of Korea’s FTA policy

Table 5.1

57

Korean FTAs: current progress Country\Region

Remarks

Chile (2004) Singapore (2006) EFTA (2006) ASEAN (2007)

Market access for goods

Ratification

US

Signed in June 2007

Negotiation

ASEAN India Canada Mexico EU Japan

Services and investment Possibly 2007 Possibly 2007 CEPA Possibly 2007 Negotiations suspended in December 2004

Joint Study

China

Possible negotiation 2007

Mercosur

Negotiation for CEPA in 2007

Effective

Australia Note: The negotiation for a Japan–Korea FTA was suspended in December 2004.

the Asian financial crisis, but progress was slow for a while. The Korea–Chile FTA needed three years for the conclusion of negotiations, and an additional one and a half years for the ratification by the national assembly. It was concluded in October 2002 but came into effect in April 2004. Therefore, the FTA was not implemented in Kim Dae-Jung’s presidency, which ended in 2003. A more active approach to FTAs was made by President Roh MooHyun’s administration from 2003. President Roh’s administration marked another milestone for Korea’s FTA policy. It adopted the FTA roadmap in September 2003, and brought Korea’s first FTA with Chile into effect in April 2004. So far four FTAs have been concluded, the US–Korea FTA was signed in June 2007, and the negotiations for bilateral FTAs with India, Canada and the EU are in progress (see Table 5.1). The Roh administration set about establishing the rule of a free and fair market as the primary goal of its economic policy. Behind setting such a goal was the realization that only sustained reform would allow Korea to enter the ranks of developed economies, and various reform packages would not work unless pro-liberalization ambience was widely spread throughout the country. This approach was packaged in the goal of an ‘open trading country’ in 2005. The administration chose FTAs to be one of the most effective ways for achieving this goal.

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Table 5.2


FTA partner countries according to the FTA roadmap (2003)

Timeframe

Country/Region

Short term Mid–long term Mentioned

Japan, Singapore, Mexico, Canada, India, ASEAN US, China, EU, Mercosur, Russia, CJK, EAFTA, etc. Australia, South Africa, etc.

Korea is implementing four FTAs: with Chile (April 2004); Singapore (March 2006); EFTA (September 2006); and ASEAN (June 2007);1 and the National Assembly is preparing the ratification process for an FTA with the US. The country is negotiating for five bilateral FTAs in 2007: with ASEAN (services and investment); India; Canada; Mexico; and the EU. The country is studying the economic feasibility for three further FTAs: with China; Mercosur;2 and Australia. The final report for a Korea–Mercosur FTA will be available to the public at the end of 2007, and it is known that both parties will start negotiations for a complementary economic partnership agreement (CEPA) in 2008.

ACTIVE PROMOTION OF FTAS BY THE ROH GOVERNMENT As an integral part of economic reform and liberalization policy, the Korean government established an FTA roadmap in September 2003. The roadmap aims to form an extensive network of FTAs with major economies and emerging markets. In order to accelerate the formation of such a network, the roadmap calls for an active, multi-front FTA drive – undertaking FTA negotiations with several partners in parallel. To help achieve the twin goals of expanding access to the markets abroad and bringing more competition to the domestic market, the roadmap also requires that Korea’s FTAs be comprehensive and of a high quality, aiming for substantial liberalization in a broad range of areas including goods, services, investment, government procurement and intellectual property rights. According to the 2003 Korean FTA roadmap, Japan, Singapore, EFTA, India and ASEAN were categorized as the candidate countries for concluding FTAs in the short term, while the US, China, the EU and South America (Mercosur) were categorized as the candidate countries for concluding FTAs in the mid and long term (see Table 5.2). Following the FTA roadmap, Korea agreed to enter into FTA negotiations with Japan and Singapore in October 2003. Also, in 2004, Korea agreed to launch FTA


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negotiations with EFTA and with ASEAN. In the same year, Korea also agreed to start a joint study for an FTA with Mercosur. One of the core economic issues for Korea’s trade policy was the ratification of its FTA with Chile by the Korean National Assembly, when President Roh Moo-Hyun took presidential office in February 2003. The Korean government had called for the ratification of the agreement on 8 July 2003, and the National Assembly attempted to vote for the agreement at the end of 2003 and in early 2004, but ratification was delayed due to demonstrations from agricultural activists and objections from members of the National Assembly who had ties with the agricultural sector. The conclusion of the FTA with Chile became a significant turning point for Korea’s open trade policy. In the bilateral relationship of the Korea–Chile FTA, Korea had opened its agricultural market for the first time, and following this, Korea’s FTA promotion was expected to be extended to other economies. In the meantime, the country chose Japan and Singapore for FTA partners following the FTA with Chile, since these two countries would not be agricultural exporters for Korea. When President Roh’s administration took office in February 2003, it was not expected that the government would pursue FTAs actively, since it announced economic policies which favored economic equity rather than economic growth. However, they succeeded with the former government’s trade policy of a business hub in Northeast Asia, which requires substantial economic reforms and improvement of business environment. As a result, the country made substantial progress in concluding FTAs with major trading partners.

THE PROGRESS OF A KORUS FTA Korea realized the need for an FTA with the US when it designed its FTA roadmap in 2003. But this issue was set aside and was regarded as a mid- to long-term task for many reasons such as the political-economic burdens that could arise from agricultural liberalization, the lack of FTA experience, the lack of interest shown by the US government regarding the FTA with Korea, and so on. Moreover, amid the reality that the Bilateral Investment Treaty (BIT) between Korea and the US was dragging on for years due to the matter of screen-quarter reduction,3 the Korean government had difficulty in reviewing an FTA with the US in practice, and trade specialists of the US mentioned that the review of an FTA between Korea and the US would be difficult without settling the BIT negotiations and the liberalization of agriculture. Moreover, agricultural liberalization was becoming more

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difficult and complicated, as the Doha Development Agenda (DDA) negotiation was not progressing, and an atmosphere of anti-liberalization was growing. In particular, the Korean NGO led an anti-globalization rally when the WTO ministerial meeting was held in Cancun, Mexico in September 2003. In mid-2004, top trade officials in the US started showing an interest in an FTA with Korea. The US changed its position for many reasons: the US Congress’ call for economically meaningful FTAs; implementation of the FTA between Korea and Chile; ongoing FTA negotiations with many countries by the Korean government; China emerging as a great power in East Asia; the need to respond to the growing regionalism in East Asia, and so on. Among those listed above, the two most significant reasons that changed the position of the US seem to be China emerging as a large power and the rapid progress of regionalism in East Asia. In particular, after the financial crisis in the late 1990s, key countries in East Asia were working on FTAs. Korea and Japan, both of which have a significant economic volume in East Asia and share many similarities in terms of economic system and industrial structure, were working on negotiations for a bilateral FTA, and China, emerging as a large political and economic power in East Asia, was seeking an FTA with ASEAN, which will become a decisive variable in the future of regionalism in East Asia. What will an FTA with the US bring to Korea? Although it might cause some difficulties with restructuring as a result of the liberalization of agriculture and services, the entire national economy will be able to make great economic gains. Based on the findings of the author’s own research, an FTA between the US and Korea is expected to bring 2–3 per cent additional GDP growth to Korea. Clearly, agricultural liberalization will be a pivotal issue in the conclusion of an FTA between the two countries. The US might be seeking an FTA with Korea in order to advance into the Korean agriculture market to some extent.4 Additionally, an FTA with the US will be a good chance for Korea to accelerate the advancement of its industrial structure and to improve its trade and economic systems, and should result in less trade friction with the US. It will also help Korea reduce its dependence on China, which is growing drastically these days. Taking this a step further, the FTA will reinforce the US–Korea alliance through deeper economic cooperation, and this will ultimately contribute to the stability of the Korean peninsula. The US and Korea started negotiations for a bilateral FTA in June 2006, and finished the eighth round of negotiations in March 2007. Both parties had strong motivation for concluding the FTA negotiation in due time in order to take advantage of the US’ Trade Promotion Authority (TPA), due to expire in June 2007. Finally, the two countries concluded negotiations


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for the bilateral FTA in early April 2007, and officially signed the agreement in June 2007.

ECONOMIC COOPERATION WITH THE NORTHEAST ASIAN COUNTRIES It is worth noting that the economic importance of Northeast Asian countries in the world has been growing. Northeast Asia including China, Japan and Korea, all three members of the top 10 economies in the world, accounted for 21 per cent of global GDP and 17 per cent of global trade in 2004. Since China’s economy is expected to maintain an astonishing economic growth rate of 7–10 per cent for the time being due to its strong domestic demand and export performance, the economic importance of Northeast Asia will grow in the future. Production resources are complementary in Northeast Asia. In the Northeast Asian region, it seems that economic integration in the private sector is being enforced through market-driven investment and trade. Korean and Japanese investment has increased considerably, targeting the domestic Chinese market and China’s cheap labor market. Investment in China has expanded in diverse fields from labor-intensive industries such as fiber and clothing to capital-intensive industries such as electrical equipment and electronics, automobiles and information technology. At the same time, economic cooperation channels between private and government sectors have been strengthened. Japan and China are the most important trade partners for Korea, with a 30 per cent export share (in 2005) out of Korea’s total exports and a 33 per cent import share out of its imports from the world. China has risen to become Korea’s first FDI destination since 2002, and Korea is the second investor for China, following Japan in 2006. The three countries have already formed close economic linkages via market-driven economic integration, and Korea has been promoting economic cooperation with Japan and China through various channels. The country has introduced several industry and economic cooperation mechanisms in the bilateral and trilateral framework. However, the discussion concerning the introduction of an institutional framework such as an FTA for economic integration in Northeast Asia has not been progressing well, compared with other FTAs in the region. During the 2001–04 ASEAN3 Leaders’ meeting, China–Japan–Korea held summits, but they could not get together in 2005 due to political conflicts originating from the conservative right-wing approach by the former Japanese Prime Minister Junichiro Koizumi. At the same time, concerns

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over economic cooperation in Northeast Asia by Korean scholars and policy makers diminished, and Korea looked for an alternative approach concerning closer economic relations in Northeast Asia. Korea’s progressive approach toward closer economic cooperation with Northeast Asia materialized with the initiative of the Northeast Asia business hub during Kim Dae-Jung’s presidency, which was transferred to the current President Roh Moo-Hyun with minor revisions. The hub strategy can be understood to maximize the gains from the geopolitical location of Korea in the Northeast Asia region, and to develop Korea’s land along similar lines to Singapore or Hong Kong. Based on the recognition that it is not easy for Korea to advance its economic system and rules and to liberalize trade barriers in a short period of time because of internal resistance to economic reforms, the country designated free economic zones for Incheon, Kwangyang and Busan, giving dramatic incentives for foreign investors. Korea’s business hub initiative can be seen to be competing with the interests of neighboring countries in the region. However, the real goal is for Korea to adopt international standards for economic rules and practices, and to lead economic integration in the region. In order to develop the economic hub, the country needs to allow free access for commodities and services regardless of their nationality. Korea’s decision to pursue FTAs actively was closely related with this idea. Although it is best for a country to liberalize unilaterally, this is not easy to implement due to conflicting interests. Therefore, FTAs were chosen to be the second-best approach for multilateral liberalization. This idea was seriously discussed when Korea adopted its FTA roadmap in September 2003.

FTAS WITH JAPAN AND CHINA Korea had two critical issues regarding international trade policies in the second half of 2003. The first was how to develop the initiative of the Northeast Asia business hub, and the second was to progress a Japan–Korea FTA. These two were interlinked from the viewpoints of policy makers, since in developing a business hub, it was regarded to be a prerequisite to have many FTAs, especially with neighboring countries. In early 2003, the Japanese government and business community urged negotiations to begin for an FTA with Korea. In some sense, their points sounded reasonable, since the two countries had been discussing a bilateral FTA for the last five years, and it was time for the two countries to make one step forward to further their mutual interests. In the meantime, it was said that the decision for negotiating an FTA with Japan should be taken


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into account in the framework of its national agenda concerning the Northeast Asia business hub. Therefore, the government of Korea began to study the FTA roadmap in mid-2003, and it was decided that an FTA with Japan was to be a short-term goal. The government of Korea dramatically decided to start negotiations for an FTA with Japan in October 2003, although no national consensus was formed at that time. Diverse responses were raised to the governmental decision. One of them was to start negotiations for an FTA with the US, in order to minimize more dependence on the Japanese economy. Korean policy makers had serious discussions about the timing for an FTA with the US. This implies that bilateral FTAs with Japan and the US were interlinked, and became the basic element for the FTA roadmap. One of the most critical tasks to be resolved regarding an FTA with the US was how to change the position of the US, which was negative regarding an FTA with Korea when Korea introduced its first FTA roadmap. Therefore, the government decided to delay the promotion of an FTA with the US until the US considered Korea as an FTA partner. A Japan–Korea FTA has not progressed since the fifth round of negotiations in December 2004. The two countries had widely differing stances regarding the market access for goods. Contrary to the initial expectation that Japan would be flexible in dealing with trade liberalization in the negotiations, it maintained a conservative position regarding market access, and Korea was not able to remain in the FTA negotiations. Korean business circles expressed a concern that there could be substantial losses when the bilateral trade between the two countries was liberalized without special consideration about sensitive sectors, and the government decided to suspend the negotiations for an FTA with Japan. The subject of an FTA with China was officially raised by China in the Prime Ministers’ meeting in June 2005.5 However, Korea could not respond to China’s request until the China–Korea Trade Ministers’ meeting in November 2006. In the Hanoi APEC Leaders’ meeting, two ministers from China and Korea agreed to launch an official study group, and it is now clear that the two countries will be able to start negotiations for an FTA mid2008. However, the negotiations can start as early as the end of 2007, since there are several reports on economic analysis of the FTA which proposed official negotiations, and the Korean business sector is quite supportive of the idea. Research institutes from both countries have been studying the economic feasibility of an FTA since 2004, and have found positive results. Several factors seem to be affecting the progress of an FTA between China and Korea. One of them is market access for agriculture. Although China has expressed its position to allow special consideration for Korea’s agriculture in the negotiations, it will be difficult for the government of

64


Korea to overcome the strong opposition to the FTA from farmers and anti-FTA groups. Although a Korea–China–Japan FTA is one of the FTAs that Korea will pursue in the FTA roadmap, it is not likely to be realized in the near future. The three countries involved have agreed to study a trilateral FTA at the summit among the three of them in November 2002, and a joint research group on the economic effects of the China–Japan–Korea FTA was organized for 2003–2005, publishing joint study reports for these three years, showing that the China–Japan–Korea FTA will bring great economic benefits for all three countries. However, the three interested countries are not clearly motivated to pursue a trilateral FTA at this time.6 Rather, the East Asian Free Trade Area (EAFTA) is one of the FTAs that ASEAN3 countries have actively discussed recently. China proposed temporary (two-year) operation of a group of experts for the EAFTA in the 2004 ASEAN3 Economic Ministers’ meeting. A final report was documented by the group in July 2006, and was presented to the ASEAN3 Economic Ministers’ meeting at Kuala Lumpur in August 2006. In the meeting, Japan proposed the setting up of a think tank in order to promote regional cooperation in East Asia, and Korea proposed an in-depth study group for the EAFTA.

CONCLUSION The reason behind Korea’s high success rate regarding FTA conclusions is probably the government’s strong position for open economy and economic reforms. Otherwise, the country could not conclude the FTA negotiations with the US. The Korean FTA policy is expected to progress toward encompassing more trade partners in the future. The government is promoting multiple FTAs with a view to the spread and deepening of regionalism following the postponement of the DDA conclusion. Realizing the FTA roadmap along with multilateral trade liberation under the DDA will require full-scale liberation in the long term. Although agricultural liberalization under the FTAs with Chile, Singapore, EFTA and ASEAN were not entirely comprehensive, the KORUS FTA liberalized most agricultural sectors with modified approaches regarding agriculture. Korea’s future FTAs will closely depend on the progress of the context of the KORUS FTA. Unless the FTA is ratified in due time and course, the country will face serious problems in promoting other FTAs, especially that with the EU now in progress, since anti-FTA groups will exercise more influence over the general public in opposing FTA policies. If Korea


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concludes negotiations for an FTA with the EU, then the country will be more competent in proceeding with FTAs with China and Japan. In addition to an ‘open trading country’ goal in 2003, in August 2006 the government of Korea opened the Vision 2030 strategy, which presents Korea’s direction toward future innovation and globalization to boost the Korean economy’s flexibility and transparency. The Vision 2030 strategy can be understood to be an extension of the 2003 ‘open trading country’. The declaration of the ‘open trading country’ goal is focused on improving the business environment, but the Vision 2030 strategy covers industrial upgrades in addition to the business environment. According to the Korea Policy Review (October 2006), which is the official magazine for Korea’s policy, the government is showing its intention to promote FTAs with Northeast Asian countries, as a part of policy packages for globalizing its economy and enhancing economic cooperation in East Asia. Although the government is showing its long-term national vision, the initiative for closer economic relations with Northeast Asia does not seem to be tightly designed. Korea set the national goals of the Northeast Asia business hub, and the open trading country in the inauguration of the administration in early 2003. In addition, the country has finalized the FTA with the US, and could overcome the opposition against the promotion of FTAs. However, Korea has kept a passive position regarding FTAs with Japan and China. It is China that has led a China–Korea FTA, and Korea is responding passively to the request by China. Moreover, there are as yet no plans for resuming an FTA with Japan. Korea needs to fix the schedule for concluding FTAs with Japan and China soon. In order to achieve a balanced economic relationship in Northeast Asia, the country should resume negotiations regarding an FTA with Japan, because the active pursuit of FTAs with both Japan and China will provide Korea with the possibility of Northeast Asian and East Asian economic integration toward a regional economic bloc.

NOTES 1. The FTA covers only market access for commodities with all ASEAN countries except Thailand. Korea and ASEAN are negotiating for other areas such as services, investment, trade rules, and so on. 2. Mercosur implies the South American Common Market, and member countries are Argentina, Brazil, Paraguay, Uruguay and Venezuela. 3. According to the old Korean law on film, movie theaters were supposed to show Korean movies at least 146 days a year, but the new law reduced the minimum to 73 days. 4. One of the main issues in concluding an FTA with the US is the import of US beef, which was banned following the outbreak of bovine spongiform encephalopathy (BSE) in 2003.

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5. Before the Prime Ministers’ meeting, Chinese high-ranked officials informally proposed an FTA with Korea. 6. The three countries agreed to establish a trilateral investment treaty in the ASEAN3 Leaders’ meeting in Cebu, Philippines, in January 2007.

BIBLIOGRAPHY Ahn, Choong Yong, Richard E. Baldwin and Inkyo Cheong (2005), East Asian Regionalism: Prospects and Challenge, Amsterdam: Springer. Ahn, Choong Yong, Inkyo Cheong, Yukiko Fukagawa and Takatoshi Ito (2005), Korea–Japan FTA: Toward a Model Case for East Asian Economic Integration, Seoul: Korea Institute for International Economic Policy. Cheong, Inkyo (2003a), ‘Korea’s FTA policy: background and current progress’, in Moonjung Tcha and Chung-suk Suh (eds), The Korean Economy at the Crossroads, New York: RoutledgeCurzon, pp. 312–26. Cheong, Inkyo (2003b), ‘Korea’s FTA policy: progress and prospects’, in Yangseon Kim and Chang Jae Lee (eds), Northeast Asian Economic Integration: Prospects for a Northeast Asian FTA, Seoul: KIEP. Cheong, Inkyo (2004a), ‘The FTA approach towards East Asian economic integration: progress and challenges’, in Vo Dai Luc and Do Hoai Nam (eds), Towards East Asian Economic Community, Hanoi: The Gioi Publisher. Cheong, Inkyo (2004b), ‘A strategic approach towards a US–Korea FTA’, Coping with Korea’s Security Challenges, Seoul: Institute of Foreign Affairs and National Security. Cheong, lnkyo and Jungran Cho (2006), ‘Korea’s FTA policy and position for a Japan–Korea FTA’, in Sung-Jo Park and Jongwon Lee (eds), Economic Cooperation and Integration in Northeast Asia, Berlin: LTI Verlag. Park, YungChul, Shujiro Urata and Inkyo Cheong (2007), ‘The political economy of the proliferation of FTAs’, in Peter A. Petri and Summer J. La Croix (eds), Challenges to the Global Trading System, New York: Routledge, pp. 43–57.

6. Economic obstacles to a Northeast Asian FTA Fukunari Kimura and Mitsuyo Ando EVOLVING INTERNATIONAL ENVIRONMENT AND A NORTHEAST ASIAN FTA Although East Asia was regarded as a region lagging behind in the worldwide boom of regionalism until quite recently, such a criticism is no longer relevant. Table 6.1 presents the current status of FTA networking in East Asia as of July 2007; a double plus () represents an FTA signed and/or that has come into force, a single plus () denotes an FTA under negotiation or where negotiations have been agreed, and a sharp (#) means an FTA under consideration or for which a feasibility study has been initiated. Clearly, ASEAN is working as a hub of FTAs in the region, and India, Australia and New Zealand are coming into East Asia. Regardless of whether to support Northeast Asia, ASEAN3, or ASEAN6, FTA networking will surely proceed in the coming Table 6.1 Matrix of FTAs involving countries in East Asia (as of July 2007) Japan Japan Korea China ASEAN India Australia NZ

# /

Korea

China

ASEAN

India

Aus

NZ

# #

/ ^ / /

#

# /

# /

# ^ # #

#

Notes: : entered into force or signed (^: not signed for Korea–Thailand FTA). : under negotiation or agreed to negotiate. /:for plurilateral FTA and for some bilateral FTAs. #: under consideration (G-G base) or feasibility study initiated.

67

68


Japan Korea

Canada

Singapore

United States

Australia

Mexico New Zealand

Chile

Being signed and/or in force Under negotiation or negotiations agreed Figure 6.1

FTA networking in the Asia-Pacific (as of July 2007)

years, with a notable delay in forming an FTA among China, Japan and Korea. In addition to FTAs within Asia, a number of trans-Pacific FTAs are under negotiation, have been agreed, have been signed or are in force, stimulating discussion on how to form competing architecture of plurilateral FTAs. Figure 6.1 shows the status of the bilateral FTAs among seven OECD member countries in the Asia-Pacific and two relatively advanced countries, Singapore and Chile. Out of 36 bilateral combinations for these nine countries, 19 are connected by FTAs, and an additional six are negotiating over FTAs. In particular, the recent conclusion of the Korea–US FTA will have a significant impact on the regional scene once it has been ratified and enforced by both countries. East Asian integration is not like a ‘fortress East Asia’; not like limiting members and deepening integration. Rather, East Asian countries utilize a shallow mode of integration, that is, FTAs, and pursue an open architecture. Indeed, some of the countries such as ASEAN and Korea are trying to conclude FTAs with all major trading partners and to establish a sort of ‘open-regionalism’. Regarding such dynamism in East Asia and the Asia-Pacific, we should admit that the absence of FTAs among the Northeast Asian countries, namely, Japan, Korea and China, is a great anomaly. Why can’t we conclude FTAs? To resolve this entangled situation, we should for once put all

Economic obstacles to a Northeast Asian FTA

69

emotional issues aside and nurture our mutual understanding on what we can logically make straight. There are certainly a number of issues to be discussed in the context of economics and political economy. Among them, this chapter focuses on three symbolic obstacles to negotiating over FTAs in Northeast Asia: the agricultural sector in Japan, the manufacturing sector in Korea, and the business environment in China. The authors believe that these three issues are particularly prone to becoming confused by emotional issues, and thus require calm discussion among professionals.

OBSTACLES IN JAPAN: THE AGRICULTURAL SECTOR1 Agricultural protection in Japan is one of the most notorious examples of trade protection in the world. Japan, as a whole, has high regard for the value of free trade because its post-WWII economic growth has depended heavily on imports of food and natural resources and free access to foreign markets for manufactured products. Japan is also one of the largest beneficiaries of international production/distribution networks developed in East Asia since the 1990s, which has been backed up by extensive trade/FDI liberalization and facilitation. However, agricultural protection has seriously damaged the reputation of Japanese trade policies. Economists have long analyzed the cost of trade protection. In the partial equilibrium approach to social welfare, trade protection causes a loss in domestic consumer surplus and a loss for foreign exporters’ welfare while it generates a gain in domestic producer surplus, ending up with an overall loss in efficiency. The hierarchy of various types of policies has also been well established. Border measures including trade policies are in general less efficient than direct producer subsidies. Quantitative restrictions and other non-tariff measures are quite often more distortive than simple ad-valorem tariffs. Although the agricultural lobby in Japan frequently claims the logic of ‘food security’ and ‘multi-functionalism’ based on a shaky argument on market failure, such a statement is hardly convincing to justify extremely high border barriers. Agriculture is not a quantitatively important industrial sector in Japan any more; the agriculture, forestry and fishery sector as a share of GDP has steadily declined and reached as low as 1.7 per cent in 2004.2 Nevertheless, agricultural protection remains because of the robust structure of the political economy; the agricultural lobby is strong in Nagata-cho (the politicians’ quarter in Tokyo) and Kasumigaseki (where most of the ministries are located). In addition, the general public and mass media are quite often

70


tolerant of declining industries, which is typical in developed countries but happens to an extreme extent in Japan. A very rough quantification based on the OECD’s producer support estimate (PSE) in 2003 suggests that one Japanese consumer bears over US$100 for rice protection and about US$350 for overall agricultural protection, which is heavy but not a nontolerable level of cost-bearing.3 The other side of the coin regarding agricultural protection is that Japan imports massive amounts of agriculture-related products. Japan is one of the largest, most active importers of various agricultural products in the world, and thus has a complicated structure of protection across products.4 Japanese agricultural protection is structured with at least three tiers. The first tier includes products under ‘structural protectionism’. For those products, a relatively large number of domestic producers as well as production locations are scattered so that protection is designed to be highly complicated and resilient. Rice is a typical product in this category; animal meat including beef, pork and chicken has some elements of this type. The second tier consists of products under ‘local protectionism’. For them, the number of producers as well as the geographical extension of production is limited. Heavy protection for a limited number of producers in a specific area is often related to the existence of a specific powerful politician. Products in this category include sugar, molasses, barley, konnyaku, pineapples, bananas,5 and others. The third tier contains ‘sectors being liberalized’. In the past GATT negotiations, particularly in the Uruguay Round, trade liberalization was realized for a wide range of products including various kinds of vegetables and fruits, forestry products, seafood and others, including asparagus, peppers, melons, avocados, mangoes, coffee, plywood, tuna, salmon, and shrimps/prawns. While some low tariffs remain for these products, preferential arrangements for less developed countries (LDCs) are often applied under the Generalized System of Preferences (GSP).6 These three tiers have different types of protection in different politico-economic backgrounds and thus should be dealt with in distinctive ways. FTA negotiations may not be entirely powerless in liberalizing the agricultural sector. In fact, market access is improved to some extent through FTAs already concluded by Japan, particularly in ‘sectors being liberalized’. However, the complexity of the tariff system still remains in FTAs such as price-differential tariffs, specific tariffs and tariff quotas. In addition some sensitive sectors are simply excluded from the list of tariff removal under FTAs or are to be renegotiated; state trading products such as rice, wheat, barley and designated dairy products, beef, pork, starches, fishery products under import quotas and so on are treated as such. In the case of FTAs among the Northeast Asian countries, however, we must look at the situation calmly. The Japanese agricultural lobby always


71

plays up the difficulties in removing trade protection and claims huge adjustment costs and a possible total collapse of the Japanese agricultural sector. Is such a claim really warranted? Tables 6.2 and 6.3 tabulate major agricultural imports from Korea and China with their tariffs in Japan. These tables reveal a number of important facts. First, shares of agriculture-related imports in total bilateral imports, regardless of whether with tariffs or not, are only 6 per cent with Korea and 9 per cent with China in 2005. Moreover, these figures have been decreasing substantially since 2000 due to a significant expansion of manufactured goods trade.7 Therefore it should not be a big deal for the whole economy of Japan even if the agricultural imports from Korea and China were liberalized. Second, most of the imported agriculture-related products from Korea and China belong to ‘sectors with local protectionism’ or ‘sectors being liberalized’ for which tariff rates are no longer very high. Although some difficulty may arise in negotiations because imported products are widely diversified, substantial removal of trade protection does not seem to be impossible. A more serious problem for Japan would seem to reside in its extremely pragmatic approach to FTAs. Although Japan was one of the most loyal advocators of non-discriminatory trade liberalization until the 1990s, it started working on FTAs, clearly making them without a high standard of liberalization. Japan has hardly presented such a philosophy as that it concludes FTAs to promote worldwide trade liberalization or to accelerate domestic reform. Rather, domestic political economy tends to be apparent from the beginning. Typically, FTAs are expected to benefit the manufacturing sector. Then, sectors that are supposed to bear the ‘cost’, namely agriculture, cooperate to conclude FTAs with the minimal level of liberalization. With this logic, Japan does not show any intention of removing trade barriers for a wide range of agricultural products even if they are not imported from the partner country in the negotiations. A direct reason why the negotiations between Japan and Korea stalled was the Japanese unwillingness to come into the negotiations with a strong commitment to a ‘high-standard’ FTA without excluding any commodity a priori. Now Korea is setting a very high standard of FTA in terms of the liberalization coverage in Korea–US negotiations, which will become much more difficult for Japan to achieve. Substantial policy reform for agriculture is obviously required. The Ministry of Agriculture, Forestry and Fishery announced a massive reform plan involving switching policy measures from border measures to direct domestic subsidy as a second-best choice, but it has barely been implemented so far. In addition to the cost of agricultural protection in the context of welfare analysis, the cost of protection in economic diplomacy must be considered. Particularly in the era of regionalism with stalled

72

Tuna Alcoholic beverages Distilling alcohol (excl. used for making alcoholic beverage) Sake (seishu and dakushu) Mixtures of fermented beverages (excl. sake) Sparkling beverages made, in part, from malt Other fermented beverages Vodka Liqueurs and cordials Fish other than ornamental fish (other-other) Prepared or preserved vegetables (other-not in airtight containers) Aquatic invertebrates and molluscs Akagai and sea urchins Abalone, baby clam, fresh water clam, and molluscs (other)

Commodity

0.85 0.10 0.37 0.06 8.11 5.94 5.59 1.22 4.37

0.10 0.38 0.07 8.28 6.07 5.71 1.25 4.46

0.15 0.01

0.15 0.01 0.87

16.06 8.47 6.93

in agri. (wood)

16.39 8.65 7.07

in agri.

Import share (%)

(0.33) (0.07) (0.26)

(0.35)

(0.01) (0.02) (0.00) (0.48)

(0.05)

(0.01) (0.00)

(0.96) (0.51) (0.41)

(in total)

10% 10%

9.6%

43.1yen/l 17.9% 141.1yen/l 5%

6.4yen/l

7% 7%

9%

42.4yen/l 16% 126yen/l 3.5%

42.4yen/l

(70.4yen/l) 27yen/l

16%

17.9% 70.4yen/l 30.8yen/l

3.5%

WTO

5%

General

Free

25.2yen/l/* Free

Free Free

Free

Preferential Temporary

Tariffs

Imports of agriculture-related products and the tariff rates in Japan: imports from Korea in 2005

Major imported commodities: import share and tariff rate

Table 6.2

73

3.98 1.61 1.82 0.56 3.95 3.62

2.89 2.07 2.05 1.52 1.27 1.13 1.10 1.04 0.99

4.07 1.64 1.86 0.57 4.03 3.69

2.94 2.11 2.09 1.55 1.29 1.15 1.12 1.06 1.01

(0.06) (0.06)

(0.12) (0.12) (0.09) (0.08) (0.07) (0.07)

(0.17)

Source:

Ando and Kimura (2006).

5% 160yen/kg

10% 16% Free 28% 5% 30%

12.8%

(0.24) (0.10) 15% (0.11) 15% (0.03) 1.5yen/piece (0.24) 5% (0.22) 9.6%

Notes: * ‘Free’ denotes free for only those originated in the LDCs. Total imports: 2695.29 billion yen. Agriculture-related imports: 157.61 billion yen (share in total imports: 5.85%). Agriculture-related imports (incl. wood): 160.85 billion yen (share in total imports: 5.97%).

Edible seaweeds Hijiki Wakame Formed into rectangular papery sheets Sweet peppers (incl. other) Prepared and preserved crab (incl. molluscs (other)) (not in airtight containers) Prepared and preserved hard roes of Tara (not in airtight containers) Oysters Chestnuts Vegetable saps and extracts (other) Preparation of wheat flour Spanish mackerel Food preparations not elsewhere specified (others-others) Matsutake Agar-agar 3% 112yen/kg

23.8% 3.5% 29.8%

7% 9.6%

9.0%

3% 9.6%

10.5% 10.5%

0% *Free

7.2%/*Free

8%/*Free

74

Prepared or preserved chicken (other) Eels Live Prepared or preserved Nishin and Tara Fresh, chilled, frozen, or frozen fillets Fillets excl. frozen Hard roes of nishin Hard roes of tara Prepared or preserved Nishin (whole or in pieces, but not minced) Prepared or preserved Nishin, not in airtight containers Prepared or preserved Tara, not in airtight containers Prepared or preserved fish (excl. nishin and tara) Prepared and preserved crab (incl. molluscs (other)) (not in airtight containers) Frozen vegetables Green soya beans, spinach, broccoli, and other Potatoes, peas, beans, and other Sweetcorn

Commodity

Import share (%)

5.96 5.77 1.56 4.22 3.56 2.02 0.00 0.18 0.23 0.10 0.02 1.11 3.47 3.09 2.62 2.15 0.39 0.07

6.93 6.72 1.81 4.91 4.25 2.35 0.00 0.21 0.26 0.10 0.02 1.30 4.04 3.60 3.05 2.50 0.45 0.08

in agri. in agri. (wood)

Major imported commodities: import share and tariff rate

(0.24) (0.20) (0.04) (0.01)

(0.32) (0.28)

(0.10)

(0.00)

(0.54) (0.53) (0.14) (0.39) (0.33) (0.18) (0.00) (0.02) (0.02) (0.01)

10% 10% 20%

9.6% 10%

12.8%

12.8%

6% 8.5% 12%

(9.6%) 7.2%/*Free 10% 7.2%/*Free

9%

11%

6% 8.4% 8% (9.6%) 7.2%/*Free

10% 10% 12% 15% 9.6%

*Free

3.5% (9.6%) 7.2%/*Free

6%

5% 10%

8%

(in total) General WTO Preferential Temporary

Tariffs

Table 6.3 Imports of agriculture-related products and the tariff rates in Japan: imports from China in 2005

75

0.01 2.56 1.69 0.00 0.18 0.69 2.56 2.20 1.58 0.05 1.53 1.47 1.17 1.06 0.49 0.57 1.40 3.29

0.01 2.98 1.97 0.00 0.21 0.80 2.98 2.56 1.83 0.05 1.78 1.71 1.36 1.23 0.57 0.67

(0.11) (0.10) (0.04) (0.05) (0.13) (0.30)

(0.20) (0.14) (0.00) (0.14) (0.13)

(0.06) (0.23)

(0.00) (0.23) (0.15) (0.00) (0.02)

Source:

Ando and Kimura (2006).

Notes: * ‘Free’ denotes free for only those originated in the LDCs. Total imports: 11975.45 billion yen. Agriculture-related imports: 940.73 billion yen (share in total imports: 7.86%). Agriculture-related imports (incl. wood): 1095.13 billion yen (share in total imports: 9.14%).

Burdock Shrimps and prawns Frozen, not frozen Not frozen (other) Prepared or preserved (smoked, simply boiled in water or in brine) Prepared or preserved (other) Soya beans (seeds and oil-cake and other solid residues) Prepared or preserved vegetables (other) Ika Prepared or preserved, smoked Prepared or preserved, other than smoked Prepared or preserved pork (excl. Ham, Bacon, Pressed Ham) Bamboo shoots Shiitake Fresh or chilled Dried Waribashi Other articles of wood (other) 13.6% 4.3% 13% 4.7% 2.82%/*Free 2.9%

5% 15% 5.6% 5.8%

6.7% 10.5% 20%

9.6% 15% 25%

*Free

*Free 4%/*Free 3.2%/*Free

16%

9%

9.6%

5%

1% 5% 4.8%

4% 6% 4.8% 6% Free

10.6%

12.5%

76


multilateral liberalization efforts, agricultural protection may become a crucial constraint towards the degree of freedom in strategic moves. Japan has to be serious about agricultural sector reform, not only for its trading partners but also for itself.

OBSTACLES IN KOREA: THE MANUFACTURING SECTOR In the context of discussion on the possibility of Northeast Asian FTAs, a number of businessmen, politicians and even academics in Korea often express concerns about Korea’s competitiveness in some major industries, particularly with Japan. They typically claim that Korea and Japan have a similar pattern of comparative advantage, while Korea is still at a technological disadvantage compared to Japan in many fields, and they are thus afraid that tariff removal in the process of forming a free trade area may degrade the competitiveness of Korean industries, mainly in machinery industries. On the other side of the coin, there is also an unproved optimism expecting a natural development of a European-type horizontal intra-industry trade between Japan and Korea. Discussions on competitiveness are often emotional without rigorous objective analysis. Liberalization in the Korea–US FTA would be likely to substantially change the mindset once the FTA were ratified and enforced. However, the somewhat irrational fear of trade liberalization with Japan is unlikely to have been completely removed yet. The issue is certainly complicated and requires extensive investigation from the viewpoint of economics and political economy. There are, however, several points to be made.8 First, Korea still maintains trade protection for a much wider range of the manufacturing sector than usual developed countries do. The trade liberalization effort in Korea has been somewhat stalled since the end of the 1980s while the international competitiveness of the Korean manufacturing sector has been substantially strengthened. Table 6.4 summarizes the Most Favoured Nation (MFN) advalorem tariff structure in Japan, Korea and China for 2004/2005 at the HS two-digit level.9 The most notable is the existence of tariffs widely imposed on machineries (HS84-92), which is at the center of the current international division of labor in East Asia. Second, tariffs of 8 per cent or so do not seem to provide effective protection in any case. Why don’t Japanese products such as domestic electrical appliances and automobiles rush into the Korean market? This may be due to the tastes of consumers, the existence of large sunk costs to set up distribution channels, and a sort of national sentiment against imported products. Whatever the interpretation is, it is true that some Japanese companies intentionally refrain


Table 6.4 HS

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

77

Ad-valorem tariff structure in Japan, Korea and China

Japan MFN rates (2005)

Korea MFN rates (2004)

China MFN rates (2005)

Average

Standard deviation

Average

Standard deviation

Average

Standard deviation

0.4 10.4 5.5 23.8 0.3 0.4 6.0 8.5 3.5 1.4 17.1 3.3 2.9 3.1 3.6 13.1 11.5 18.1 20.2 15.8 17.6 6.1 0.5 5.1 0.2 0.0 1.3 2.4 2.7 0.1 0.0 3.1 1.4 0.6 5.5 4.7 0.0 2.2

1.7 13.8 3.5 11.5 0.9 1.1 3.8 6.9 4.8 4.0 8.5 7.3 5.5 3.3 5.5 10.2 11.0 10.5 6.3 7.2 8.1 9.3 2.2 9.5 0.6 0.0 1.8 1.8 1.9 0.4 0.0 1.4 2.1 1.4 4.3 1.3 0.0 1.5

15.2 22.5 16.1 61.8 8.9 11.0 116.7 72.7 62.7 175.9 284.5 88.1 89.6 5.0 16.6 23.7 19.7 10.5 10.4 33.9 32.7 21.1 12.2 30.9 3.3 1.3 5.3 5.2 5.7 5.0 5.8 6.9 18.5 6.7 48.2 7.5 7.1 6.4

20.1 6.2 4.9 55.1 6.8 6.1 202.1 127.1 139.4 248.3 292.1 202.8 234.6 2.3 63.3 8.5 42.6 9.6 9.3 13.5 127.7 35.8 18.5 10.0 1.2 0.5 2.0 1.2 1.7 3.8 1.8 0.7 87.4 0.5 108.4 0.7 1.7 4.7

6.1 18.3 11.1 15.0 11.4 8.2 11.5 19.1 14.0 22.4 21.8 8.9 14.6 10.3 14.1 12.5 26.3 11.9 19.1 21.2 21.0 22.6 5.3 31.1 3.5 1.4 5.6 5.5 5.8 4.6 8.1 7.6 15.4 9.6 9.7 8.6 5.8 7.3

4.9 5.4 4.2 5.7 6.1 6.8 3.6 7.7 5.3 30.1 18.9 7.3 6.2 3.2 5.8 3.9 15.7 5.1 5.9 6.4 8.6 17.0 2.7 21.0 1.4 1.9 2.4 0.8 1.3 1.4 13.5 1.9 4.3 2.1 3.2 1.1 9.1 2.7

78


Table 6.4 HS

39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76

(continued)

Japan MFN rates (2005)

Korea MFN rates (2004)

Average

Standard deviation

Average

3.6 0.2 10.8 10.4 12.2 3.4 0.0 4.2 0.0 0.0 0.0 6.0 2.7 5.9 3.5 6.1 6.7 3.6 6.7 6.0 3.9 7.2 9.2 9.4 6.1 18.8 4.6 4.1 1.6 0.9 1.2 1.3 1.3 0.2 0.5 1.5 1.8 3.3

0.9 0.6 11.4 4.7 8.3 3.0 0.0 2.2 0.0 0.0 0.0 4.8 2.5 1.5 4.4 1.6 1.6 2.0 2.8 3.1 1.2 1.9 1.8 1.7 2.4 9.4 0.9 0.5 2.5 1.3 1.2 2.1 2.3 0.9 1.1 1.5 1.5 3.0

6.8 7.1 3.8 10.0 9.0 5.5 8.0 8.0 0.1 0.0 1.4 14.2 6.8 8.5 4.8 8.0 9.0 8.5 10.0 10.3 8.2 10.0 12.8 12.6 11.8 11.5 8.0 11.3 8.0 8.0 7.9 7.8 5.2 0.6 4.3 6.6 4.6 7.5

Standard deviation 0.6 2.0 1.6 2.5 5.7 2.5 0.0 0.0 0.4 0.0 3.1 15.5 4.8 2.0 3.0 0.0 1.3 0.9 0.0 2.5 0.6 0.0 0.9 1.3 1.9 2.3 0.0 2.5 0.0 0.0 0.5 1.0 2.6 1.6 4.0 2.3 2.4 1.5

China MFN rates (2005) Average

Standard deviation

8.6 13.4 8.8 14.7 17.5 3.6 5.8 9.1 0.0 6.6 3.1 9.1 10.7 10.5 9.4 8.3 10.6 8.4 13.3 10.4 9.9 10.3 15.8 15.8 14.4 19.0 16.6 12.3 21.4 13.7 14.4 13.0 11.8 5.0 10.0 7.0 4.9 9.0

1.7 6.8 3.6 4.9 4.2 4.3 4.2 0.3 0.0 1.5 3.8 1.5 9.7 3.3 2.2 2.4 3.2 2.6 2.1 0.9 0.8 0.7 2.3 1.3 0.9 6.0 6.2 2.1 3.0 6.1 6.4 5.2 13.3 2.8 5.4 4.7 1.4 5.6

79


Table 6.4 HS

(continued)

Japan MFN rates (2005) Average

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97

2.0 1.8 2.0 1.2 0.7 2.0 0.0 0.2 0.0 0.1 0.0 0.0 0.1 0.6 0.0 6.9 0.6 1.3 3.1 0.0

Standard deviation 1.4 1.5 1.3 1.5 1.5 1.5 0.0 0.8 0.0 0.9 0.0 0.0 0.8 2.8 0.0 1.5 1.4 1.7 2.2 0.0

Korea MFN rates (2004) Average 6.6 6.8 6.8 5.1 8.0 8.0 6.0 5.5 3.7 7.9 0.9 3.7 5.9 7.8 8.0 3.7 3.7 4.7 8.0 0.0

Standard deviation 2.2 2.0 2.5 2.3 0.0 0.0 3.4 3.7 2.5 1.9 2.0 2.8 3.5 0.7 0.0 4.1 4.0 4.0 0.0 0.0

China MFN rates (2005) Average

Standard deviation

4.9 5.0 6.2 5.5 10.4 11.0 7.9 8.8 4.4 19.5 2.3 7.5 7.6 15.7 18.9 13.0 7.6 7.5 19.7 9.0

1.7 1.6 4.6 2.4 3.4 2.7 4.7 9.0 2.3 10.4 1.5 2.0 6.1 3.6 3.3 0.0 9.1 7.8 4.0 6.1

Note: Average MFN rates are simple average, using tariffs at the HS9 digit level for Japan and at the HS10 digit level for Korea and China. Data source: Authors’ calculation, based on UNCTAD TRAINS.

from flooding into Korea even after the notorious import-origin diversification code of Korea was abolished in 1999. Japanese mega firms are still not surprising the Korean people by suddenly rushing into the Korean market. Third, we observe strong vertical linkages between Japan and Korea in important industries. The international input–output (I–O) table allows us to quantify the Japanese inputs in Korean-made manufactured goods. Tables 6.5 and 6.6 present input coefficients available from the International I–O Table for 1995 and 2000, which indicate the proportion of direct inputs imported from Japan as intermediate inputs in Korea/China’s production (total output) based on the 24-sector matrix. The tables notably present the decreasing dependency of Korea on direct inputs from Japan in the period

80

Japanese direct import contents in Korean production Agriculture, 0.0003 0.0000 0.0002 0.000 forestry, fishery, and mining Food, beverage 0.0007 0.0001 0.0000 0.000 and tobacco Textile and 0.0000 0.0101 0.0001 0.001 leather Timber and 0.0000 0.0000 0.0010 0.000 wooden products Pulp, paper and 0.0002 0.0001 0.0003 0.004 printing Chemical 0.0009 0.0063 0.0006 0.002 products Petroleum and 0.0001 0.0003 0.0002 0.000 petro products Rubber products 0.0000 0.0000 0.0000 0.000 Non-metallic 0.0001 0.0000 0.0002 0.000 mineral products Metal products 0.0004 0.0001 0.0005 0.000 Machinery 0.0001 0.0009 0.0003 0.002 0.0180

0.0009 0.0027 0.0000 0.0000

0.0001 0.0013

0.0418 0.0011 0.0000 0.0003

0.0003 0.0011

0.0040 0.0022

0.0023 0.0001

0.0003

0.0001

0.0000

0.0000

0.0040

0.0001

0.0000

0.0001

0.0000

0.0000

0.0000

0.0001

0.0000

0.0000

0.0004

0.0005

0.0002 0.0013

0.0000 0.0074

0.0008

0.0028

0.0000

0.0000

0.0000

0.0000

0.0009

0.0168 0.0020

0.0000 0.0004

0.0004

0.0009

0.0000

0.0000

0.0000

0.0000

0.0000

0.0056 0.0542

0.0002 0.0015

0.0001

0.0038

0.0001

0.0000

0.0000

0.0000

0.0000

0.0102 0.0133

0.0008 0.0004

0.0002

0.0006

0.0000

0.0000

0.0001

0.0000

0.0000

0.0008 0.0075

0.0001 0.0010

0.0002

0.0146

0.0003

0.0000

0.0007

0.0000

0.0001

Food, Textiles Timber Pulp, Chemical Petroleum Rubber NonMetal Machinery Transport Other beverage and and paper products and petro products metallic products equipment manufacand leather wooden and products mineral turing tobacco products printing products products

Table 6.5 Japanese direct import contents in manufacturing production of Korea and China, 1995

81

0.0027

0.0000

0.0005

0.0000

0.0036

Total

(a) share in total output (%) (b) share in total intermediate input (%) (c) share in total intermediate inputs from abroad (%)

0.0003

0.0001

2.1

3.0

10.9

0.4

0.5

3.4

0.0208

0.0000

0.0000

Transport equipment Other manufacturing products Trade and transport Others

2.7

0.7

0.5

0.0052

0.0000

0.0007

0.0011

0.0000

7.8

1.8

1.2

0.012

0.0000

0.002

0.001

0.000

22.8

7.2

5.0

0.0501

0.0000

0.0044

0.0004

0.0000

1.2

1.0

0.6

0.0063

0.0000

0.0007

0.0001

0.0000

16.8

5.2

3.5

0.0347

0.0000

0.0036

0.0002

0.0000

21.6

2.6

1.6

0.0161

0.0000

0.0023

0.0003

0.0000

14.0

3.1

2.3

0.0231

0.0000

0.0023

0.0002

0.0000

35.8

11.3

7.3

0.0729

0.0000

0.0058

0.0014

0.0001

35.8

6.5

4.4

0.0442

0.0000

0.0040

0.0009

0.0137

30.1

5.4

3.5

0.0353

0.0000

0.0035

0.0065

0.0000

82

0.0000

0.0000 0.0000 0.0000 0.0000 0.0002 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000

0.0000

0.0000 0.0004 0.0000 0.0000 0.0106 0.0000 0.0000 0.0000 0.0012 0.0000 0.0000

0.0000 0.0000 0.0000

0.0030 0.0000

0.0000

0.0036

0.0000

0.0004 0.0000

0.0000

0.0000

0.0003 0.0001 0.0000

0.0000 0.0001

0.0084 0.0000 0.0000

0.0000 0.0001

0.0000

0.0001

0.0000 0.0000

0.0000

0.0000 0.0000

0.0000

0.0000

0.0000

0.0000 0.0000

0.0000

0.0001

0.0042 0.0305 0.0000

0.0000 0.0008

0.0001

0.0003

0.0000

0.0000 0.0000

0.0000

0.0000

0.0067 0.0105 0.0100

0.0001 0.0000

0.0002

0.0001

0.0000

0.0000 0.0000

0.0000

0.0000

0.0008 0.0023 0.0000

0.0000 0.0000

0.0000

0.0080

0.0000

0.0019 0.0000

0.0000

0.0000


(continued)

Japanese direct import contents in Chinese production Agriculture, 0.0002 0.0000 0.0001 0.0000 forestry, fishery, and mining Food, beverage 0.0006 0.0000 0.0000 0.0000 and tobacco Textile and leather 0.0000 0.0077 0.0000 0.0000 Timber and 0.0000 0.0000 0.0001 0.0000 wooden products Pulp, paper and 0.0001 0.0000 0.0000 0.0076 printing Chemical 0.0010 0.0042 0.0003 0.0011 products Petroleum and 0.0000 0.0002 0.0000 0.0000 petro products Rubber products 0.0000 0.0000 0.0000 0.0000 Non-metallic 0.0000 0.0000 0.0000 0.0000 mineral products Metal products 0.0001 0.0001 0.0010 0.0008 Machinery 0.0000 0.0000 0.0000 0.0000 Transport 0.0000 0.0000 0.0000 0.0000 equipment

Table 6.5

83

0.0000

0.0000

0.0024

Total

12.5

2.0

0.3

3.4

1.4

0.2

2.9

0.3

0.2

0.0018

0.0000

0.0002

0.0000

9.4

1.6

1.1

0.0114

0.0000

0.0017

0.0001

15.2

2.1

1.4

0.0139

0.0000

0.0013

0.0002

0.4

0.1

0.0

0.0004

0.0000

0.0000

0.0000

11.1

1.4

0.8

0.0081

0.0000

0.0008

0.0003

6.8

0.1

0.1

0.0007

0.0000

0.0001

0.0001

12.8

1.3

1.0

0.0097

0.0010

0.0001

0.0000

31.3

5.3

3.9

0.0391

0.0000

0.0030

0.0001

26.0

4.4

3.2

0.0317

0.0000

0.0028

0.0012

17.0

2.4

1.7

0.0168

0.0000

0.0017

0.0020

Data source:

Authors’ calculation based on IDE (2000).

Notes: Input coefficients are based on the 24-sector matrix. Sectors in columns however show only manufacturing. Sectors in rows include all sectors, though the sector for ‘agriculture, forestry, fishery and mining’ consists of seven sectors for paddy, other agricultural products, livestock, forestry, fishery, crude petroleum and natural gas, and other mining, and the sector for ‘others’ consists of four sectors for electricity, gas, and water supply, construction, public administration, and services. Input coefficients with more than 20% of the total of the sector are in bold type.


0.0018

0.0003

0.0144

0.0003

0.0002

Other manufacturing products Trade and transport Others

84 0.0170

0.0010 0.0004 0.0000 0.0000

0.0000 0.0006

0.0340 0.0038 0.0000 0.0001

0.0003 0.0005

0.0014 0.0015

0.0033 0.0002

0.0001

0.0000

0.0000

0.0000

0.0018

0.0000

0.0000

0.0000

0.0000

0.0000

0.0000

0.0000

0.0005

0.0000

0.0002

0.0000

0.0003 0.0010

0.0000 0.0046

0.0003

0.0038

0.0000

0.0000

0.0000

0.0000

0.0002

0.0283 0.0016

0.0000 0.0002

0.0001

0.0007

0.0000

0.0000

0.0000

0.0000

0.0000

0.0021 0.0495

0.0001 0.0008

0.0000

0.0035

0.0001

0.0000

0.0001

0.0000

0.0000

0.0053 0.0089

0.0006 0.0002

0.0001

0.0006

0.0000

0.0000

0.0002

0.0000

0.0000

0.0011 0.0063

0.0000 0.0014

0.0001

0.0108

0.0001

0.0000

0.0003

0.0000

0.0000


Japanese direct import contents in manufacturing production of Korea and China, 2000

Japanese direct import contents in Korean production Agriculture, 0.0006 0.0002 0.0004 0.000 forestry, fishery, and mining Food, beverage 0.0011 0.0000 0.0000 0.000 and tobacco Textile and 0.0000 0.0053 0.0001 0.001 leather Timber and 0.0000 0.0000 0.0011 0.000 wooden products Pulp, paper and 0.0001 0.0000 0.0002 0.007 printing Chemical 0.0007 0.0053 0.0008 0.003 products Petroleum and 0.0000 0.0001 0.0001 0.000 petro products Rubber products 0.0000 0.0001 0.0000 0.000 Non-metallic 0.0001 0.0000 0.0002 0.000 mineral products Metal products 0.0001 0.0001 0.0005 0.000 Machinery 0.0001 0.0006 0.0004 0.001

Table 6.6

85

0.0023

0.0000

0.0006

0.0000

0.0037

Total


0.0002

0.0003

1.4

2.0

9.5

0.4

0.5

4.2

0.0143

0.0000

0.0000


2.9

0.8

0.5

0.0054

0.0000

0.0008

0.0008

0.0000

11.9

2.2

1.5

0.015

0.0000

0.002

0.001

0.000

20.1

5.7

4.4

0.0441

0.0000

0.0048

0.0004

0.0000

0.5

0.4

0.3

0.0027

0.0000

0.0004

0.0001

0.0000

18.2

4.6

2.9

0.0295

0.0000

0.0035

0.0003

0.0000

18.5

2.0

1.3

0.0129

0.0000

0.0017

0.0008

0.0000

22.4

4.8

3.6

0.0355

0.0000

0.0041

0.0004

0.0000

22.9

8.8

6.3

0.0630

0.0000

0.0049

0.0020

0.0000

29.3

3.9

2.9

0.0290

0.0000

0.0032

0.0015

0.0084

27.5

4.4

3.1

0.0315

0.0000

0.0038

0.0076

0.0000

86 0.0000

0.0000 0.0004 0.0001 0.0000 0.0000

0.0001 0.0009

0.0000

0.0001 0.0081 0.0001 0.0000 0.0001

0.0002 0.0009

0.0006 0.0008

0.0008 0.0000

0.0000

0.0040

0.0000

0.0000

0.0031

0.0013 0.0014

0.0000 0.0005

0.0001

0.0015

0.0000

0.0000

0.0002

0.0000

0.0071 0.0017

0.0000 0.0001

0.0030 0.0120

0.0001 0.0006

0.0000

0.0012

0.0005 0.0001

0.0000

0.0000

0.0001

0.0000

0.0000

0.0000

0.0000

0.0000

0.0000

0.0001

0.0003

0.0002

0.0000

0.0001

0.0000

0.0000

0.0024 0.0039

0.0003 0.0001

0.0000

0.0004

0.0000

0.0000

0.0001

0.0000

0.0008 0.0016

0.0001 0.0002

0.0000

0.0079

0.0000

0.0000

0.0014

0.0000

0.0000


(continued)

Japanese direct import contents in Chinese production Agriculture, 0.0000 0.0001 0.0000 0.0000 forestry, fishery, and mining Food, beverage 0.0002 0.0000 0.0000 and tobacco Textile and 0.0000 0.0075 0.0013 0.0006 leather Timber and 0.0000 0.0000 0.0001 0.0000 wooden products Pulp, paper and 0.0001 0.0000 0.0000 0.0071 printing Chemical 0.0004 0.0016 0.0014 0.0017 products Petroleum and 0.0000 0.0000 0.0000 0.0000 petro products Rubber products 0.0000 0.0000 0.0000 0.0000 Non-metallic 0.0002 0.0000 0.0000 0.0001 mineral products Metal products 0.0001 0.0000 0.0013 0.0005 Machinery 0.0003 0.0005 0.0007 0.0011

Table 6.6

87

0.0000

0.0000

0.0018

Total

14.1

5.9

8.0

0.8

0.6

0.0060

0.0000

0.0008

0.0002

8.0

1.9

1.3

0.0133

0.0000

0.0021

0.0002

Authors’ calculation based on IDE (2006).

See notes for Table 6.5.

Data source:

Notes:

1.6

1.2

0.3

0.2

0.0020

0.0003


0.0002

0.0002

0.0120

0.0000

0.0000


13.3

1.5

1.1

0.0115

0.0000

0.0012

0.0004

1.1

0.3

0.2

0.0020

0.0000

0.0002

0.0001

11.5

1.4

1.1

0.0112

0.0000

0.0016

0.0001

14.8

0.9

0.6

0.0062

0.0000

0.0008

0.0003

0.0000

14.0

1.4

1.1

0.0110

0.0000

0.0013

0.0001

0.0000

13.1

2.6

2.0

0.0196

0.0000

0.0021

0.0006

0.0000

21.9

2.2

1.7

0.0167

0.0000

0.0016

0.0002

0.0076

13.9

2.3

1.7

0.0173

0.0000

0.0023

0.0030

0.0000

88


1995–2000, though inputs from Japan still seem to be crucially important for manufacturing activities in Korea. Direct intermediate inputs from Japan in 2000 amount to as high as 6.3 per cent in one unit of machinery goods produced in Korea, 4.4 per cent in one unit of chemical products, 3.6 per cent in one unit of metal products, 3.1 per cent in one unit of other manufacturing products, and 2.9 per cent in one unit of transport equipments and rubber products, which are twice or three times as great as the corresponding figures for China.10 The tables also show the proportion of the Japanese direct intermediate inputs in total intermediate inputs as well as the proportion in total intermediate inputs from abroad. Surprisingly, figures for 2000 are, for instance, as high as 8.8 per cent (in total intermediate inputs) and 22.9 per cent (in total intermediate inputs from abroad) for machinery goods, 5.7 per cent and 20.1 per cent for chemical products, 4.8 per cent and 22.4 per cent for metal products, 4.4 per cent and 27.5 per cent for other manufacturing products, 3.9 per cent and 29.3 per cent for transport equipment, and 4.6 per cent and 18.2 per cent in other rubber products, which are indeed large numbers.11 The figures discussed above clearly indicate how significant the intermediate inputs from Japan are for the Korean manufacturing sector, particularly in machinery, chemical products, metal products and transport equipment, even though the dependency on imports from Japan seems to be declining substantially over time. Since substantial amounts of imported inputs would be used in intermediate goods produced in Korea, the total Japanese contents in the products of Korea in these sectors, including both direct and indirect ones, would be even higher than the direct proportions expressed in Table 6.6. Considering that Korea still maintains significant tariffs on these imported intermediate goods, tariff cuts in the scheme of an FTA would be expected to enhance cost competitiveness of the Korean manufacturing sector substantially. From these observations, there does not seem to be a convincing argument supporting the continuation of trade barriers against Japan in the manufacturing sector. Rather, it is better for Korea to remove redundant tariffs and promote trade/FDI facilitation so as to make vertical and technological linkages with Japan even tighter.

OBSTACLES IN CHINA: THE BUSINESS ENVIRONMENT The recent development of China is truly remarkable, and China is now the most powerful production site for various kinds of industries and at the same time the most attractive market in the world. We must also greatly

89


Table 6.7

The business environment in Japan, Korea and China Japan Korea China

(a) Ease of doing business, 2005 Overall ranking (out of 175)

12

Ranking for 10 factors Starting a 87 business Dealing with 3 licenses Employing 28 workers Registering 35 property Getting credit 13 Protecting 12 investors Paying taxes 89 Trading across 20 borders Enforcing 6 contracts Closing a business 1

Data source:

Japan Korea China (b) Global Competitiveness Index, 2006–2007 Overall ranking 7 24 54 (out of 125)

23

108

105

141

26

151

108

77

Infrastructure

7

21

60

65

21

Macroeconomy 91

13

6

19 58

117 114

1

18

55

50 26

169 35

16

25

71

15

21

77

18

59

12

69

10

43

56

19

18

75

1

20

57

2

22

65

1

15

46

Ranking for major factors Basic 19 22 requirements Institutions 22 47

Health and primary education Efficiency enhancers Higher education and training Market efficiency Technological readiness Innovation factors Business sophistication Innovation

44 80

World Bank (2007) for (a) and World Economic Forum (2006) for (b).

appreciate the tremendous effort being made in economic reform on a unilateral basis as well as on a WTO commitment basis. However, there are still a massive number of problems and issues related to the business environment that need to be solved. Table 6.7 presents the business environment for Japan, Korea and China in terms of (a) ease of doing business and (b) global competitiveness. Tables 6A.1 and 6A.2 in the Appendix represent an evaluation of

90


components of 10 factors underlying the ranking of ease of doing business and notable competitive disadvantages underlying the ranking of global competitiveness index, respectively. The overall ranking for China is 108 out of 175 economies in the former survey and 54 out of 125 in the latter survey, suggesting that there is sufficient room for the improvement of the business environment in China. In particular factors with poor evaluation or disadvantages are issues related to ‘paying taxes’, ‘starting a business’, ‘dealing with licenses’, ‘getting credit’, ‘protecting investors’, ‘institutions’, ‘higher education and training’, ‘technological readiness’, and ‘infrastructure’. This is largely due to the length of time and the large number of administrative procedures required to start a business, get licenses, pay taxes, and so on. The current class of ‘high-level’ FTAs in the world places great emphasis on a wide range of policy modes in addition to simple tariff removal. It is now clear that the expansion of the scope of WTO policy discipline is extremely difficult. FTAs thus naturally become an important channel to pursue new policy objectives in an international setting. In fact, the WTO does not impose substantial discipline on FTAs except GATT Article 24; GATS Article 5 is not a big deal, and MFN/National Treatment (NT) in other policy modes such as intellectual property rights also do not seem to be very effective. As long as the negotiating parties agree, almost anything can be concluded in FTAs. On many policy fronts, developing countries are somewhat behind compared with developed countries, and thus developing countries typically require more substantial policy reform than developed countries. Even so, developing countries would start negotiations over FTAs if there were enough incentives. In general there are various types of FTA. US FTAs, for instance, include a complete range of requests from a wide scope of industries, backed up by a massive number of lawyers. They include very specific requests, particularly in service sector reform, investment rule, and intellectual property rights. The United States Trade Representative (USTR) and industrial lobbyists are certainly capable of compiling all the requests from industries in the form of a long list for negotiation. Moreover, they are rule-oriented. Legal and institution building is emphasized, and legal commitments with dispute settlement mechanisms are incorporated. Japanese FTAs with ASEAN countries have quite different characteristics from those of the US; they take a pragmatic approach rather than a legal/rule-making approach. Japan requests a series of improvements in the investment climate, which includes (i) trade/FDI facilitation; (ii) institution building on investment rule, intellectual property rights and others; (iii) the establishment of channels for trouble-shooting between private companies and governments; and (iv) the development of active interfaces among


91

policy modes such as connection with international cooperation policy and international financial policy. The intention is to further activate international production/distribution networks extended in East Asia. Unlike US FTAs and Japanese FTAs with ASEAN countries, Chinese FTAs present a limited scope so far. The ASEAN–China FTA has been implemented solely on tariff removal, and its extension to services does not seem to have a great impact. To make a solid commitment to domestic reform in the framework of FTAs, FTAs must provide strong enough incentives. In cases of US FTAs, market access to the US market provides a strong incentive for partner countries to initiate domestic reform. In cases of Japanese FTAs with ASEAN countries, the commitment to improving the business environment on the ASEAN side is matched with massive economic/technical cooperation and FDI from Japan. Can we really prepare such strong incentives for China? China has already attracted massive FDI. The recent discussion in China has sometimes been on an eventual removal of ‘supernational’ treatment granted to foreign companies vis-à-vis domestic companies, the re-evaluation of FDI from the viewpoint of technology transfer, and other sorts of possible shift to selective acceptance of FDI. China has always been an extremely aggressive country in domestic reform, but FTAs may not be the best channel to promote this. Recent good news is the announcement that negotiations will start over the Japan–Korea–China investment treaty. This may become a great starting point for the trilateral FTA. However, the negotiations seem to be going slowly due to China’s reluctance regarding its own domestic reform. FTA negotiations between China and Australia may become a channel to present a new China, although smooth progress is not reported yet. We would like China to present a ‘model’ for LDCs in the rest of the world.

CONCLUDING REMARKS China, Japan and Korea have had a long, long history of complicated diplomacy and have barely experienced relationships with each other on an equal footing. Because the world economy is now truly globalized, and all three countries have started to enjoy economic prosperity, we are finally ready to construct mature diplomatic relationships with mutually beneficial economic ties. Concluding a Northeast Asian FTA will be a big and effective step to break the ice in politics and emotional confrontation. It will also be an important component of economic integration for the whole of East Asia and the Asia-Pacific. It has been unfortunate that even discussions among economists have occasionally been contaminated with near-sighted politics and journalism

92


in this region. Three symbolic economic issues, agricultural protection in Japan, manufacturing sector protection in Korea, and the business environment in China, have often resulted in emotional exchange. Economists, however, can share calmer and more effective analyses on these issues before entering into complicated politico-economic considerations. The discussion in this chapter was deliberately developed in an argumentative tone so as to generate constructive analyses and discussions among economists in Northeast Asia. We hope that cooperation among economists will accelerate the integration process in this region.

NOTES 1. 2. 3. 4. 5. 6. 7. 8.

9.

10. 11.

A detailed analysis of the Korean and Japanese agricultural protection in the context of pursuing the Korea–Japan FTA is found in Song (2005) and Honma (2005). Kimura (2005) discusses Japan’s policy inconsistency regarding East Asian countries. According to the website of the Statistics Bureau, Director-General for Policy Planning, the Government of Japan (http://www.stat.go.jp/). Per capita agriculture protection cost used to be much higher; for instance in 1995 it was over US$200 for rice and over US$500 overall. These figures are calculated by using population, exchange rate, and PSE, which are available from OECD (2007). See Ando and Kimura (2006) for the detailed discussion on Japanese FTA/EPA strategies and agricultural protection. Bananas are not produced much in Japan. One reason behind high seasonal tariffs is that bananas used to be considered as complements of apples, and thus sales of bananas were thought to reduce sales of domestically produced apples in winter. Kimura (2001) discusses the issue of Japan’s provisional safeguards in 2001 on Welsh onions, fresh shiitake mushrooms, tatami-omote. These products fall into the category of ‘sectors being liberalized’ though the safeguards were motivated by ‘local protectionism’. See Kimura and Ando (2002) for corresponding tables for agriculture-related imports in 2000. Kimura and Ando (2003) conduct a detailed analysis on the patterns of intra-regional trade between China, Japan and Korea in the major industries. One of the important findings in the paper is that intra-industry trade among the three countries is largely ‘vertical’, that is, unit prices of exports and imports are widely different even if they are classified in the same trade commodity category at the HS six-digit level. This suggests that the three countries export complementary products, rather than those that directly compete with each other. High MFN ad-valorem tariffs on some agricultural products in Korea are mostly due to (i) high out-quota-tariff in the case of tariff quota or (ii) high ad-valorem tariff in the case of a combination of ad-valorem tariff (A) and specific tariff (B) set as ‘A or B, whichever is the greater’. Direct intermediate inputs from Japan in 2000 amount to 2.0 per cent in one unit of machinery goods produced in China and 1.7 per cent in one unit of transport equipments as well as other manufacturing products produced in China. The corresponding figures for China in 2000 are 2.6 per cent (in total intermediate inputs) and 13.1 per cent (in total intermediate inputs from abroad) for machinery, 1.5 per cent and 13.3 per cent for chemical products, 1.4 per cent and 14.0 per cent for metal products, 2.3 per cent and 13.9 per cent for other manufacturing products, 2.2 per cent and 21.9 per cent for transport equipments, and 1.4 per cent and 11.5 per cent in other rubber products.


93

REFERENCES Ando, Mitsuyo and Fukunari Kimura (2006), ‘Japanese FTA/EPA strategies and agricultural protection’, KUMQRP Discussion Paper No. 2006-024, Tokyo: Keio University. Honma, Masayoshi (2005), ‘Agricultural issues on Japan–Korea FTA’, in Choong Yong Ahn, Inkyo Cheong, Yukiko Fukagawa and Takatoshi Ito (eds), Korea–Japan FTA: Toward a Model Case for East Asian Economic Integration, Seoul: Korea Institute for International Economic Policy, pp. 218–32. Institute of Developing Economies (IDE) (2000), ‘Asian international Input–Output table 1995’ (CD-ROM), IDE. Institute of Developing Economies (IDE) (2006), ‘Asian international Input–Output table 2000’ (CD-ROM), IDE. Kimura, Fukunari (2001), ‘The dangers of local protectionism’, Journal of Japanese Trade and Industry, 20(6), 8–11. Kimura, Fukunari (2005), ‘Japan’s structural reform, liberalization, and market opening: implications for East Asia’, in Kiichiro Fukasaku, Masahiro Kawai, Michael G. Plummer and Alexandra Trzeciak-Duval (eds), Policy Coherence towards East Asia: Development Challenges for OECD Countries, Paris: Development Centre of the Organisation for Economic Co-operation and Development, pp. 163–91. Kimura, Fukunari and Mitsuyo Ando (2002), ‘Jiyuu Boueki Kyoutei to Nougyou Mondai [Free Trade Agreements and Controversy about Agricultural Protection]’, Mita Gakkai Zasshi [Mita Journal of Economics], 95(1), 111–37 (in Japanese). Kimura, Fukunari and Mitsuyo Ando (2003), ‘Intra-regional trade between China, Japan, and Korea: intra-industry trade of major industries’, in Yangseon Kim and Chang Jae Lee (eds), Northeast Asian Economic Integration: Prospects for a Northeast Asian FTA, Seoul: Korea Institute for International Economic Policy, pp. 193–225. Organisation for Economic Co-operation and Development (OECD) (2007), ‘Producer and consumer support estimates, OECD Database 1986–2003’, available from http://www.oecd.org/document/58/0,2340,en_2649_37401_32264698_ 1_1_1_37401,00.html/. Song, Yoocheul (2005), ‘Liberalization of the agriculture and fishery sectors’, in Choong Yong Ahn, Inkyo Cheong, Yukiko Fukagawa, and Takatoshi Ito (eds), Korea–Japan FTA: Toward a Model Case for East Asian Economic Integration, Seoul: Korea Institute for International Economic Policy, pp. 201–17. World Bank (2007), ‘Doing business database’, available from http://www. doingbusiness.org/. World Economic Forum (2006), The Global Competitiveness Report 2006/2007, Basingstoke: Palgrave Macmillan.

94


APPENDIX Table 6A.1 Business environment in Japan, Korea and China: components of 10 factors for ease of doing business Japan

Korea

China

Starting a Business Procedures (number) Time (days) Cost (% of income per capita) Min. capital (% of income per capita)

11 31 11 75

12 22 15 309

13 48 14 947

Dealing with licenses Procedures (number) Time (days) Cost (% of income per capita)

11 87 20

14 64 180

28 359 101

Employing workers Difficulty of hiring index (0–100) Rigidity of hours index (0–100) Difficulty of firing index (0–100) Rigidity of employment index (0–100) Nonwage labor cost (% of salary) Firing costs (weeks of wages)

17 60 0 26 13 9

11 60 30 34 18 91

11 20 40 24 45 91

Registering property Procedures (number) Time (days) Cost (% of property value)

6 14 4

7 11 6

3 32 3

Getting credit Legal rights index (0–10) Credit information index (0–6) Public registry coverage (% adults) Private bureau coverage (% adults)

6 6 0 61

6 5 0 81

2 3 0 0

95


Table 6A.1

(continued) Japan

Protecting investors Disclosure index (0–7) Director liability index Shareholder suits index Investor protection index

Korea

China

7 6 8 7

7 2 7 5

10 1 2 4

Paying taxes Payments (number) Time (hours) Profit tax (%) Labor tax and contributions (%) Other taxes (%) Total tax rate (% profit)

15 315 .. .. .. 54

27 290 .. .. .. 32

48 872 .. .. .. 77

Trading across borders Documents for export (number) Time for export (days) Cost to export (US$ per container) Documents for import (number) Time for import (days) Cost to import (US$ per container)

5 11 789 7 11 847

5 12 780 8 12 1040

6 20 335 11 24 375

Enforcing contracts Procedures (number) Time (days) Cost (% of debt)

20 242 10

29 230 6

31 292 27

1 4 93

2 4 82

2 22 32

Closing a business Time (years) Cost (% of estate) Recovery rate (cents on the dollar) Data source: World Bank (2007).

96


Table 6A.2 Business environment in Japan, Korea, and China: components of the Global Competitiveness Index and notable competitive disadvantages Japan Basic requirements 1. Institutions Public institutions Property rights 1.01 Property rights Ethics and corruption 1.02 Diversion of public funds 1.03 Public trust and politicians Undue influence 1.04 Judicial independence 1.05 Favoritism in decisions of government officials Government inefficiency (red tape, bureaucracy and waste) 1.06 Wastefulness of government spending 1.07 Burden of government regulation Security 1.08 Business costs of terrorism 1.09 Reliability of police services 1.10 Business costs of crime and violence 1.11 Organized crime Private institutions Corporate ethics 1.12 Ethical behavior of firms Accountability 1.13 Efficacy of corporate boards 1.14 Protection of minority shareholders’ interests 1.15 Strength of auditing and accounting standards 2. Infrastructure 2.01 Overall infrastructure quality 2.02 Railroad infrastructure development 2.03 Quality of port infrastructure 2.04 Quality of air transport infrastructure 2.05 Quality of electricity supply 2.06 Telephone lines 3. Macroeconomy 3.01 Government surplus/deficit

Korea

China

34

82

26 25

51 67

71

22

51 46

78 60

74 25

73 50

97

63

104

43

46 54

92

104 30 31

86 76

119 113

31

57

108

65

79

114

97


Table 6A.2

(continued) Japan

3.02 National savings rate 3.03 Inflation 3.04 Interest rate spread 3.05 Government debt 3.06 Real effective exchange rate 4. Health and primary education Health 4.01 Medium-term business impact of malaria 4.02 Medium-term business impact of tuberculosis 4.03 Medium-term business impacts of HIV/AIDS 4.04 Infant mortality 4.05 Life expectancy 4.06 Tuberculosis prevalence 4.07 Malaria prevalence 4.08 HIV prevalence Primary education 4.09 Primary enrolment

China

108 111

77

Efficiency enhancers 5. Higher education and training Quantity of education 5.01 Secondary enrolment ratio 5.02 Tertiary enrolment ratio Quality of education 5.03 Quality of the educational system 5.04 Quality of math and science education 5.05 Quality of management schools 5.06 Local availability of specialized research and training services 5.07 Extent of staff training 6. Market efficiency Good markets: distortions, competition, and size Distortions 6.01 Agricultural policy costs 6.02 Efficiency of legal framework 6.03 Extent and effect of taxation 6.04 Number of procedures required to start a business 6.05 Time required to start a business

Korea

92 70

77 38 53

76

115 49 70 42

78 47 72 85

74 94 81

98

Table 6A.2


(continued) Japan

Competition 6.06 Intensity of local competition 6.07 Effectiveness of antitrust policy 6.08 Imports 6.09 Prevalence of trade barriers 6.10 Foreign ownership restrictions Size 0.00 GDP-exportsimports 6.11 Exports Labor markets: flexibility and efficiency Flexibility 6.12 Hiring and firing practices 6.13 Flexibility of wage determination 6.14 Cooperation in labor–employer relations Efficiency 6.15 Reliance on professional management 6.16 Pay and productivity 6.17 Brain drain 6.18 Private sector employment of women Financial markets: sophistication and openness 6.19 Financial market sophistication 6.20 Ease of access to loans 6.21 Venture capital availability 6.22 Soundness of banks 6.23 Local equity market access 7. Technological readiness 7.01 Technological readiness 7.02 Firm-level technology absorption 7.03 Laws relating to ICT 7.04 FDI and technology transfer 7.05 Cellular telephones 7.06 Internet users 7.07 Personal computers Innovation factors 8. Business sophistication Networks and supporting industries 8.01 Local supplier quantity 8.02 Local supplier quality Sophistication of firms’ operations and strategy 8.03 Production process sophistication 8.04 Extent of marketing

Korea

China

36 35

74

53 77

56 95

83 87

70

66 114

99

59 45

38 23 76

42 89 69 82 61

99 91 123 77 69

25 76 39

95

104 76 80

89

99


Table 6A.2

(continued) Japan

8.05 8.06 8.07 8.08 9. Innovation 9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08

Korea

Control of international distribution Willingness to delegate authority Nature of competitive advantage Value-chain presence Quality of scientific research institutions Company spending on research and development University/industry research collaboration Government procurement of advanced technology products Availability of scientists and engineers Utility patents Intellectual property protection Capacity for innovation

China

74

63

86 31

Notes: Variables considered as disadvantages are those ranked below 10 for Japan, those ranked equal to or lower than the economy’s overall ranking for Korea, and those ranked lower than 50 for China. See Table 6.7 for the overall ranking. Data source: World Economic Forum (2006).

7. The FTA policies of China, Japan and Korea and prospects for a CJK FTA: Korea’s perspective Hyungdo Ahn* INTRODUCTION The proliferation of Free Trade Agreements (FTAs) around the world has intensified over the last 15 years. The WTO reports that there are now 217 Regional Trade Agreements (RTAs) around the world as of July 2007 (see Table 7.1), and there will be about 300 RTAs in the near future when taking into account the RTAs currently under negotiation. This is a remarkable development when one takes note of the fact that there were only 27 RTAs by the end of 1990. It seems that FTAs have got fully underway in recent years. While there are differing views on whether this worldwide phenomenon will turn out to be beneficial or detrimental to the establishment of a more open and free economic environment in the world, the positive economic impacts of FTAs have led policy makers and the general public to reconsider the issue and the benefits of lower trade barriers. The Northeast Asian region chose to ignore the trend of FTAs in the 1990s when a total of 162 RTAs were formed. It was only after the Asian financial crisis that Northeast Asian countries began to realize the importance of regional economic cooperation and to adopt FTAs as important agendas in their trade policies. The three Northeast Asian countries, though, pursue FTAs based on different goals and with varying intensity. Another important issue – at least to Korea – is whether a Northeast Asian FTA is, in fact, feasible. The Korean government has set Northeast Asian economic integration as one of the top national agendas to promote peace and prosperity in the region. Korea envisions an EU-like community in the region, and a China–Japan–Korea (CJK) FTA is a natural first step towards this goal. In this chapter, the FTA policies of the three Northeast Asian countries (Korea, Japan and China) are reviewed and compared. In addition, we discuss whether a CJK FTA is plausible in the near future. 100

101

The FTA policies of China, Japan and Korea

Table 7.1 Year New Cumulative

Status of RTAs 1955– 1960

1961– 1970

1971– 1980

1981– 1990

1991– 1995

1996– 2000

2001– 2007 (July)

3 3

3 6

11 17

10 27

35 60

42 102

113 217

Note: 18 July 2006 as reported by GATT/WTO, WTO.

KOREA’S FTA POLICY Despite the early proliferation of FTAs at the start of the last decade, Korea turned its attention to FTAs only after the 1997 Asian financial crisis; before 1998, Korea’s trade policy focused more on multilateralism than regionalism. The IMF or Asian financial crisis, as one of the major factors that propelled economic reforms, provided the necessary momentum to promote regionalism in Korea. Korea has signed five FTAs so far with Chile, Singapore, EFTA, ASEAN (goods trade), and the US (as shown in Table 7.2), and is in the midst of conducting five FTA negotiations with ASEAN (services and investment), Mexico, Canada, India and the EU. Negotiations with Japan were suspended in November 2004 due to disagreements over the coverage in agricultural products.1 In addition, joint studies with China, MERCOSUR, Australia and New Zealand are currently underway and an FTA with the GCC2 is under review. By the end of 2010, more than 10 FTAs are expected to come into effect in Korea. In the initial stages, Korea pursued FTAs with countries with low economic significance, such as Chile and Singapore. This was to minimize the possible negative impacts on the national economy. Korea’s FTA negotiations with Japan and the signing of the Korea–US FTA were rather bold initiatives, which reflected a drastic change in Korea’s stance towards FTAs. Two major reasons can be identified as being responsible for the radical change in Korea’s trade policy. First, Korea started FTA negotiations to minimize damage to its trade with the rest of the world in the face of mounting regionalism, especially after the launch of the EU in 1992 and NAFTA in 1994. Korea needed to avoid being secluded from the worldwide spread of regionalism and to secure its trade share by hopping on the bandwagon. It adopted an FTA policy to maintain its market share on the one hand, and move into new markets by forming FTAs with major trading partners on the other.

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Table 7.2

FTA status of Korea, China and Japan

Nation

Korea

China

Japan

Status

Concluded [Signed / Effective]

Under Negotiation

Joint Study (or Review)

⎧ Chile ⎪ [2003. Feb / ⎪ 2004. Apr] ⎪ Singapore ⎪ [2004. Nov / ⎪ 2006. Mar] ⎪ EFTA Jul / 2006. ⎪ [2005. Jul] ⎪ ASEAN (Goods) ⎨ [2006. Aug / ⎪ 2007. Jun] ⎪ ⎪ ⎪ ⎪ US ⎪ [2007. June] ⎪ ⎪ ⎩ ⎧ ASEAN ⎪⎪ (Service and Investment) ⎪ Canada ⎨ EU ⎪⎪ India ⎪ Japan ⎩ Mexico ⎧ China ⎪ MERCOSUR ⎨ Australia ⎪ New Zealand ⎩ GCC

Hong Kong China [2003. Jun / 2004. Jan] Macao China [2003. Oct / 2004. Jan] ASEAN (Goods) [2004. Nov / 2005. Jul] Chile [2005. Nov / 2006. Nov] Pakistan [2006. Nov]

ASEAN (Service) [2007. Jan / 2007. Jul] ASEAN (Investment) Australia GCC Iceland New Zealand Singapore South Africa Korea

Singapore [2002. Jan / 2002. Nov] Mexico [2004. Sep / 2005. Apr] Malaysia [2005. Dec / 2006. Jul] Philippines [2006. Sep] Brunei [2006. Dec / 2007. Jun] Chile [2007. Mar / 2007. Sep] Thailand [2007. Apr] Indonesia [2007. Aug] ASEAN Australia GCC India Korea Vietnam Switzerland

India

Sources: Ministry of Foreign Affairs and Trade (http://fta.go.kr); Chinese Ministry of Commerce (website); Bilateral Trade and Investment Website http://www.bilateral.org; Korea International Trade Association FTA portal: http://www.kita.net/newtri/new_fta_ info/fta_intro.jsp#; The Ministry of Foreign Affairs of Japan: http://www.mofa.go.jp/policy/ economy/index.html.


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The second goal of Korea’s FTA policy is to strengthen its economic competitiveness and improve its national economic system through market opening and liberalization. Korea’s intention with its FTA policy is to enhance the qualitative growth of its economy and to develop into an advanced economy (Kim and Chung, 2006, p. 213). Attempts to open its market have consistently faced severe protests from farmers and labor unions, despite its high dependence on trade. However, Korea changed its trade policy to actively pursue high quality FTAs with its trading partners against intense political opposition, which can be regarded as a remarkable shift in Korea’s trade policy. Korea has adopted four strategies in pursuing FTAs with other countries.3 First, it has a policy of simultaneous FTA negotiations with interested counterpart countries; Korea is negotiating five FTAs with interested countries at the moment. This is to overcome the 15-year delay in adopting FTAs, thereby minimizing the costs that Korean companies and the Korean economy will eventually bear. Second, the Korean government is simultaneously pursuing FTAs with large economies, such as the EU, ASEAN and Japan and newly rising economies, such as MERCOSUR and India,4 with the expectation that forming FTAs with large economies or economic blocs will maximize the effects of market opening. Third, Korea seeks to establish comprehensive FTAs in terms of coverage and content; that is, it looks for substantial liberalization in other areas of trade, besides trade in goods: for example, services, investment, government procurement, IPR and technical standards. This is to establish high quality FTAs which could substitute multilateral liberalization and help domestic economic reform. Finally, the Korean government regards national consensus building and transparency as important factors to consider in promoting FTAs. Since market liberalization affects various interest groups differently, diverse opinions need to be heard in order to minimize the tensions and potential conflicts in Korean society.

CHINA’S FTA POLICY After becoming a member of the WTO in 2000, China actively pushed for FTAs with other countries once it realized FTAs were useful instruments both in terms of the economy and international politics. So far, China has signed FTAs with Chile, Pakistan, ASEAN (goods and services) and Thailand; it is in negotiations with Australia, New Zealand, GCC, Iceland, South Africa, ASEAN (investment) and Singapore. China has undertaken joint studies with Korea and India and has also agreed to pursue an FTA

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with SCO5 members by 2020. Overall, China has signed or is in negotiations with about 30 countries. The motivation behind China’s FTA policy can be summarized as follows.6 First, China approaches its FTA policy as a tool to expand its political and economic influence first in East Asia and eventually around the world. Regionally, China plans to play a leading role in building an East Asian economic integration body. By accelerating the FTA with ASEAN and deepening the CEPA (Close Economic Partnership Agreement) with Hong Kong and Macao, China plans to develop a Sino-centric economic cooperation structure in the East Asian region. From a global perspective, China seems to be paving the road through its FTA policy to emerge as a hegemonic power rivaling that of the US. The diversity of China’s FTA counterparts around the world and the relatively low levels of market opening pursued in its FTAs both indicate the importance of noneconomic factors in Chinese FTA policy making. It seems that one of China’s major goals in FTAs is to build its position as a leading nation in world politics (Lee and Lee, 2006, p. 9). Second, China focused on promoting FTAs with resource-abundant countries and regions, such as Russia, Australia, the Middle East, Middle Asia, Africa and South America. It is widely known that one of the major tasks of Chinese diplomacy is to secure a stable supply of energy and natural resources to support the rapid growth of the Chinese economy. The final and, perhaps, less important goal is China’s intentions to expand its market share around the world through FTAs. Lower trade barriers could enhance the competitiveness of Chinese products and expand its international market share. To achieve these goals, China’s first choice for negotiating partners would be the developing countries adjacent to it geographically. China has already concluded FTAs with ASEAN and Pakistan and is promoting FTAs with Korea and India. China wants to lead the regional integration process in East Asia and is a major proponent of the East Asian FTA (EAFTA), which includes 10 ASEAN countries, and China, Japan and Korea. To secure energy and natural resources, China has selected the GCC, South Africa, and Australia as primary negotiating partners.

JAPAN’S FTA POLICY Like other East Asian countries, Japan did not pay much attention to the worldwide trend of FTAs before the Asian crisis: Japanese government officials, instead, focused more on multilateral liberalization and disregarded the shifting trend towards regionalism. Difficulties in WTO negotiations and


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the rising number of FTAs around the world have led Japan to rethink its trade policy in favor of FTAs. Japan concluded its first FTA with Singapore in November 2002, and has subsequently signed FTAs with Mexico, Malaysia, the Philippines, Brunei, Chile, Thailand and Indonesia. FTA negotiations with ASEAN, the GCC, India and Vietnam are in progress and a joint study with Switzerland is currently underway (Kim, 2006). After South Korea concluded its FTA with the US in early April 2007 and then opened FTA negotiations with the EU in early May 2007, pressures from Japanese businesses have mounted on the Japanese government to conduct FTA negotiations with the US and the EU. A 2007 White Paper on International Economy and Trade, which was approved by the Cabinet in early July 2007, points out the need to consider FTAs with the United States and the European Union as ‘future topics’. This is the first time that the Ministry of Economy, Trade and Industry (METI) has mentioned the possibility of concluding FTAs with the US and the EU in its annual report on international trade. The report reflects a strong desire to prevent the world’s second-largest economy from being left behind the global FTA movement. METI is already considering the launch of a joint bilateral private-sector study with the US and the 27-nation EU on the FTA issue as early as September 2007. These private-sector studies would pave the way for official government-togovernment negotiations. The characteristics of Japanese FTAs are threefold. First, Japan has designated ASEAN nations as priority counterparts for its FTA negotiations. Japan has signed individual FTAs with five ASEAN member countries, and is negotiating with two more ASEAN countries.7 Japan has continuously expanded its trade and investment to Southeast Asia since the 1980s and has a complementary production network with ASEAN countries. FTAs with ASEAN countries are, thus, expected to maximize the economic benefits accruing to Japan. On the other hand, this policy also intends to restrain China’s rising influence in the region. Second, Japan’s liberalization package presents varying levels of market opening in different sectors. Japan’s proposal includes relatively high levels of market opening in the manufacturing sector and lower levels in agriculture and fishery. This imbalance resulted in the suspension of Korea–Japan FTA negotiations in 2004. The political influence of the agricultural sector is still high in Japan and farmers and related interest groups have been a major obstacle in the drive for trade liberalization in Japan. Third, Japan utilizes its FTA policy not only as a means of trade, but also for regional diplomacy. Japan has sought to create a favorable international political environment by pursuing its FTA goals. In particular, Japan

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intends to take a leading position in the East Asian economic community in direct competition with China. The 2007 White Paper also reveals that one of Japan’s major objectives is to conclude FTA negotiations with the Association of Southeast Asian Nations (ASEAN) as a whole by November 2007, and expresses Japan’s resolve to push forward its FTA proposal with 16 Asian economies, including 10 ASEAN nations, Japan, China, South Korea, Australia, New Zealand and India. In conclusion, the characteristics of Japan’s FTA policy reveal that noneconomic factors are more important in Japanese FTA policies; maximization of economic benefits through FTAs is not Japan’s top priority. Rather, minimization of domestic conflicts and adjustment costs seem to be more important in Japan’s policy decision making. Curbing China’s rise in Southeast Asia is another important policy goal for Japan, as is suggested by its decision to pursue FTAs with seven major ASEAN countries and the proposal for an ASEAN6 FTA. Japan’s choice in FTA counterparts shows that its interest – at least for the time being – is overwhelmingly focused on developing countries, rather than developed countries.

COMPARISON OF CJK FTA POLICIES The three Northeast Asian countries display different characteristics in their FTA policies (see Table 7.3). In selecting FTA counterparts, China and Japan tend to prefer developing countries, while Korea tends to choose advanced countries. This selection pattern reflects the different goals of each country: Korea as a middle power in the world economy tends to emphasize economic benefits, while China and Japan as major powers tend to focus relatively more on non-economic factors. This relates to the next characteristic of FTA policies in the three countries. On the one hand, China and Japan are pursuing regional hegemony in East Asia through their respective FTA policies. Both countries recognize ASEAN member countries as important FTA counterparts and attribute a higher priority to this region in their FTA negotiations. ASEAN was the first FTA counterpart for China (the China–ASEAN FTA was signed in November 2004). In contrast, Japan has put more emphasis on establishing individual FTAs with ASEAN member countries; it has signed FTAs with seven major ASEAN members. In the case of China, the hidden goal of its FTA policies seems to be its interest in building a foundation to establish itself as a hegemonic nation in the world in order to compete with the US. On the other hand, Korea’s interest is more concerned with economic benefits. Korea’s FTA initiative is a means to advance its economic system and insulate its economy from major crises.


Table 7.3

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Characteristics of CJK FTA policies Korea

China

Japan

Counterparts

Advanced countries

Developing countries

Developing countries

Factors of influence

Economic benefits & economic reform

Non-economic factors (world and regional leader)

Non-economic factors (regional leader)

Desired Role in EA

Regional facilitator

Regional hegemon

Regional hegemon

Interests

Comprehensive FTA

Energy and resources

Protection of the agricultural sector

In terms of the areas of interest, each country has different priority agendas: China holds energy and resource security as one of its primary FTA goals; Japan prefers lower levels of market opening in agriculture and fishery, while allowing higher market opening in the manufacturing sector; Korea’s pursuit, meanwhile, focuses on the conclusion of comprehensive FTAs in services, investment, government procurement, IPR and so on.

PROSPECTS OF A CJK FTA The fact that these three countries are taking FTA policies seriously is very encouraging for regional integration in Northeast Asia. The race to establish more FTAs in the region will make policy makers and the general public in the three countries more open-minded towards trade liberalization and regional economic integration. However, the road to establishing a CJK FTA is unclear given the vast array of economic and political obstacles. China, Japan and Korea have been conducting a joint study, originally proposed by the Chinese in 2002, on a possible CJK FTA since 2003; this joint study has, however, failed to develop into a higher level of action between the three governments. Analyses of the economic effects of the bilateral and trilateral FTAs between the three countries show positive gains in terms of GDP in all FTA scenarios (Table 7.4) (KIEP, 2003, p. 96). In all bilateral FTA scenarios, the country left out faces significant negative gains. However, a CJK FTA produces mutually beneficial GDP gains for all three countries.

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Table 7.4 The effects of bilateral FTAs between China, Japan, Korea and a CJK FTA on national GDP (unit: %) China–Japan FTA

China–Korea FTA

Japan–Korea FTA

TL

TL&CA

TL

TL&CA

TL

TL&CA

TL

TL&CA

1.11 0.12 0.26

0.12 0.00 0.76

0.45 0.04 1.76

0.01 0.01 0.22

0.03 0.04 0.92

0.34 0.06 0.94

1.29 0.13 2.45

China 0.27 Japan 0.05 Korea 0.05

CJK FTA

Note: TL and CA stand for trade liberalization and capital accumulation, respectively. Source:

KIEP, Economic Effects of CJK FTA, 2003, p. 11.

Discussions on bilateral FTAs between the Northeast Asian countries have not produced any tangible outcomes thus far. Korea and Japan started negotiations in December 2003, but suspended talks in November 2004 due to disagreements surrounding the opening of the agricultural and fishery markets. Korea criticized Japan for its passive attitude in agricultural market opening and investment promotion to Korea; Japan retorted by accusing Korea of not making enough efforts to improve its investment environment. The possibility of resuming negotiations is quite low at the moment. If Japan comes up with a more constructive proposal that offers further concessions in the agricultural sectors, the chances of realizing a Korea–Japan FTA will be higher. However, one also needs to bear in mind the disadvantages for Korea: the Korea–Japan FTA might deepen the bipolarization of the manufacturing industry and weaken the competitiveness of strategic industries in Korea. Government research institutes in Korea and China agreed to enter into a joint study in November 2004.8 The joint study was expanded into a tripartite project at a meeting in 2007, in which businesses, academia and government representatives were in attendance. China has actively pushed for the Korea–China FTA, through which China hopes to assume a leading role in regional integration in East Asia. As China struggles with Japan for leadership in East Asia, the FTA with Korea could put China in a more dominant position in this race. However, it is also important to recognize that Korea could also face a serious threat by way of the Korea–China FTA. Imports of cheap Chinese manufacturing goods and agricultural and fishery products will encroach upon the market share of domestic products, thereby weakening the domestic industrial base and reducing Korea’s trade surplus.


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From Korea’s perspective, the economic benefits from bilateral and trilateral FTAs are unclear, while the expected costs of market adjustment are very high, especially in a Korea–China FTA and CJK FTA. Japan’s reluctance to form a CJK FTA is another hurdle: Japan fears its economy will be overwhelmed by China subsequent to the formation of a CJK FTA. Moreover, given that China is a political rival and a perceived enemy to Japan in the region, it is unlikely the two major powers will cooperate in an FTA in the near future. In the end, a CJK FTA looks to be more of a long-term goal for the region. One can predict two channels for the formation of a CJK FTA. The first is the pre-formation of a Korea–China FTA and Korea–Japan FTA. In this case, Korea could act as a mediator in the eventual creation of a CJK FTA. The second plausible channel towards a CJK FTA could be through a series of ASEAN1s: ASEANKorea, ASEANJapan, and ASEANChina. As the structure of ASEAN1 strengthens, an East Asian FTA embracing three ASEAN1s could set the stage for a broader FTA between the three Northeast Asian countries. For the moment, current negotiations on a CJK investment agreement will provide a useful starting point for deeper economic integration between the three countries in the future.

NOTES * 1. 2. 3. 4. 5. 6. 7. 8.

This chapter is an updated version of the paper presented at the International Conference on ‘Prospects for regional FTA(s) in Northeast Asia’ in Seoul, Korea, 14 December 2006. Korea proposed over 90 per cent of agricultural products in terms of trade volume to be covered in the liberalization list, while Japan proposed only about 50 per cent. The Gulf Cooperation Council (GCC) includes Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the United Arab Emirates. http://www.fta.go.kr/user/fta_korea/policy.asp. Ministry of Foreign Affairs and Trade (http://fta.go.kr). The Shanghai Cooperation Organization (SCO) includes China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. The roadmap presented by the Development Research Center (DRC) of the State Council and the Ministry of Commerce in 2005 also sums up the major goals of China’s FTA policy. The remaining ASEAN member countries are Cambodia, Myanmar and Laos, the three less developed ASEAN member nations. KIEP in Korea, NIRA in Japan, and DRC in China led the joint study.

REFERENCES KIEP (2003), Economic Effects of CJK FTA, Seoul: KIEP. Kim, Yanghee (2006), ‘Characteristics of Japan’s Free Trade Agreement policy’, Journal of Northeast Asian Economic Studies, 18(3), 61–90 (in Korean).

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Kim, Yanghee and Joonho Chung (2006), ‘Critical review of Korean FTA policies and new directions: views and prospects’, Journal of Northeast Asian Economic Studies, 18. Lee, Jangyu and InKoo Lee (2006), Chinese Strategies of FTAs and Implications, Seoul: KIEP Policy Report.

Websites Bilateral Trade and Investment (http://www.bilateral.org). Chinese Ministry of Commerce (http://www.mofcom.gov.cn). Korea International Trade Association FTA portal (http://www.kita.net/newtri/ new_fta_info/fta_intro.jsp#). Ministry of Foreign Affairs and Trade of Korea (http://fta.go.kr). The Ministry of Foreign Affairs of Japan (http://www.mofa.go.jp/policy/economy/ index.html).

8. Financial cooperation within the ASEAN3: viability and prospects* Jin-Young Kim INTRODUCTION: APT AND FINANCIAL COOPERATION The Asian financial crisis of 1997–98 set in motion a movement toward enhanced East Asian regionalism. The movement was spurred by a relatively new body, the ASEAN Plus Three (APT). Even before the Asian currency crisis occurred, there had been calls for East Asian regional cooperation – most notably an appeal to create the East Asian Economic Group, made by Prime Minister Mahathir of Malaysia. However, his appeal did not bear immediate fruit due to Japan’s reluctance and a lukewarm response from other countries. The Asian crisis, however, made East Asians more keenly aware of the need for regional economic cooperation (Terada, 2003), and hence stimulated them to set up their own cooperative system. There was a widely shared perception in East Asia that more prompt countermeasures to deal with the early signs of the Thai crisis could have mitigated both the spread of the crisis and the huge fallout costs subsequently incurred by the Asians. The hands-off attitude of the US toward the Asian crisis contrasted sharply with its prompt action to the Mexican Peso crisis of 1994, and East Asians’ related sense of disappointment and betrayal was aggravated by the US opposition to an Asian Monetary Fund proposed by Japan that might have dealt with the short-term liquidity problems facing several Asian countries. During the financial crisis, moreover, the existing Asia-Pacific Economic Cooperation (APEC) was, in fact, of little use in stimulating regional cooperative efforts that could have mitigated the spread of the crisis. A common feeling grew out of the crisis that East Asia should have its own financial self-help system. In the aftermath of the crisis, the leaders of the APT began to meet on a regular basis, and financial cooperation mechanisms were launched within the APT framework. As an outstanding example, the Chiang Mai Initiative (CMI) was set up as a liquidity-supply mechanism. Initiated at the APT financial ministerial meeting at Chiang Mai in May 2000, the system creates a network of bilateral currency-swap 111

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arrangements among APT countries. Another notable response was the Asian Bond Market Initiative (ABMI), launched in December 2002, which was promoted to recycle domestic savings in the region and reduce Asia’s perceived overdependence upon the US dollar. Since talks on enhancing such cooperative schemes have continued, it is relevant to evaluate the progress of financial cooperation within the APT. Financial cooperation is not the sole aim of APT cooperation. The 2001 East Asia Vision Group (EAVG) Report, for example, recommends six categories of goals concerning APT cooperation, and looks to establish a singular East Asian community that would reach well beyond cooperation in finance.1 Nonetheless, financial cooperation has been the most notable response to the Asian financial crisis and it has solidified the APT framework, and is now the key criterion by which to test the viability of the APT as the main vehicle for promoting East Asian regionalism. Expanding networks through the use of free trade agreements (FTAs) among East Asian countries is also a part of the regionalization initiative, but FTAs by East Asian countries are not geographically limited; many FTAs reach well beyond the region. East Asian countries do not adhere to the APT framework, and as Dent (2003) points out, they weave complex networks of bilateral FTAs according to their own national interests, meaning that many are extra-regional in nature. Most FTAs signed or studied by East Asian countries are also bilateral. It is generally less difficult to accommodate conditions and coordinate interests in the case of bilateral agreements than it would be if regional FTAs were pursued. Interests born from financial cooperation are more general and overarching than those in the trade arena, where related interests between partners tend to proliferate. Financial cooperation is also less likely to be opposed by domestic interest groups. For all these reasons, currently, financial cooperation within the APT framework has a very regional flavor. However, obstacles abound. The progress of East Asian regionalism is constrained by the burden of lingering historical legacies, which often surface as eruptions of rekindled nationalist sentiments among Northeast Asian countries. As Moon (2006, pp. 24–6) argues, nationalism remains a principal factor that fundamentally impedes the cooperation, let alone the regional integration among China, Japan and South Korea. Many observers also argue that the lack of prominent leadership in promoting East Asian regionalism – comparable to the Franco-German alliance in the case of the EU, for example – is problematic, and some skeptics argue that as there is no visible sign of another financial crisis, the original fervor that supported East Asian regionalism is abating. Considering the tensions among APT members, there is some pessimism regarding the future prospects of financial cooperation (Hund, 2003),

Financial cooperation within the ASEAN3

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which stands in contrast to other cautious and more positive prospects (Terada, 2003; Dieter and Higgott, 2003; Stevenson, 2004; Naustion, 2005). Whether the likelihood of such cooperation is viewed pessimistically or optimistically is not merely a matter of objective facts, but also one of will and hope. Because the APT is still in its infancy, it is necessary to examine its current status in search of clues regarding its progress, rather than hastily predicting a doomed future. The major thrust of this chapter is to focus on the recent developments in Asian finance cooperation, examining both the obstacles and the steady progress. The shared perception among APT stakeholders as to the common interests derived from APT financial cooperation will help the agenda proceed. Due to a lack of multilateral economic and political cooperation among APT members in recent history and the persistent specter of nationalism – especially among China, Japan and South Korea – institutionalizing financial cooperation has thus been slow. Nevertheless, although there remain many political and technical tasks in promoting the institutionalization of financial cooperation, the process has been steady and irreversible. The Asian crisis of 1997–98 showed how deeply interdependent Asian economies have become, and with this increased awareness of economic symbiosis and the members’ common vulnerability to exogenous irregularities, there arose a region-wide sensibility that it is necessary to establish a cooperative institution for collective problem-solving. The future of financial cooperation of the APT depends on how strongly the perception of common interests is held, and whether or not it can supersede the nationalism-based legacies that remain. Financial cooperation is less likely to be confronted by strong resistance from domestic interest groups as in the case of FTAs. Financial cooperation within the APT is a new feature of East Asian history, and it may lead to a region-wide institution of multilateral economic cooperation. The theoretical substructure of this study is influenced by neoliberal institutionalism and neofunctional insight. My analysis is neoliberal institutional, in the sense that I treat concerned member-states as rational interestseekers who sense that a cooperative institution will help them pursue common interests and collective problem-solving initiatives (Grieco, 1988; Axelrod and Keohane, 1988). Because this study supposes that financial cooperation within the APT is driven by the interests of concerned states, and that advancements in one area will affect performance in others, it is also closely aligned with neofunctionalism (Schmitter, 2005, p. 259). With regard to future prospects, no one should be so ambitious and bold as to say exactly when such symptoms of deep financial integration as a common currency or an Asian Monetary Fund (AMF) will be realized. The purpose of this study is to examine the progress and problems inherent in

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APT financial cooperation, and to explore the conditions under which further progress and institutionalization can be feasibly promoted. As mentioned, East Asian financial cooperation is still in its infancy, and so this study may help to generate a more informed understanding of the future of APT, including its financial cooperation.

THE CHIANG MAI INITIATIVE The CMI is a core element of the APT. The CMI distinguishes APT from other such organizations as APEC and ASEAN, in the sense that it was launched as a crisis-preventive mechanism with committed financial resources. The CMI, agreed upon in May 2000 by the APT, is a network of region-wide bilateral currency-swap arrangements; its very existence points to APT countries’ desire to prevent another financial crisis. The CMI has seen slow but steady progress, and the resources committed under the CMI scheme have gradually increased since its inception. The total value of the bilateral swap agreements (BSAs) is estimated in 2007 to have reached US$83.0 billion, leaping from US$36.5 billion in 2004, US$58.5 billion in 2005 and US$75.0 billion in 2006. Issues regarding the institutional improvement of the CMI framework have been discussed at the annual meetings of the finance ministers of member-states. The 2007 annual meeting showed particularly notable progress toward the multilateralization of the now-bilateral swap agreements. At the same time, there are mixed signs within the conditions and procedure of the swap arrangements that point to some remaining problems. First, the CMI is still linked to the IMF, even though the APT members were quite frustrated with the way the IMF dealt with the 1997–98 Asian crisis. Under the original arrangements, a substantial part of the CMI money was linked to the IMF agreement. At the 2005 APT Financial Ministers’ Meeting, the limit that could be drawn without IMF agreement was raised from 10 per cent to 20 per cent of the agreed-upon value of the BSA; countries drawing more than 20 per cent were still obligated to accept the IMF’s macroeconomic and structural adjustment program. The IMF had been blamed for the belated response to the spreading wildfire of the Asian crisis. Because investors in money markets move quickly and often manifest a ‘herd behavior’ at early signs of irregularity, counterresponses must be speedy. Taking a long time to negotiate borrowing conditions makes any prompt response to an early stage of a crisis almost improbable. Additionally, the structural adjustments and macroeconomic policies demanded by IMF conditions often create unnecessary hardships for borrowing countries. The IMF, for example, is often blamed for applying


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a ‘one size fits all’ kind of thinking, drawn from Latin American cases in the 1980s, regardless of the real causes behind specific financial problems. Thus, the high interest rate demanded in the case of South Korea caused many small- and medium-sized enterprises that were in otherwise sound condition to go bankrupt, due to a severe liquidity crunch. The IMF program, based on the doctrinal rigidity implied in the phrase ‘Washington Consensus’, has also been criticized as a program that is designed to favor creditors, at the cost of borrowers. ASEAN members, Malaysia and Thailand in particular, have been strongly in favor of reducing the IMF link more aggressively, whereas China and Japan have been hesitant to raise the level of non-linked funds. The IMF link serves the interests of likely creditor countries, because the promised money without conditions may create a situation of moral hazard (Grimes, 2006, p. 367). If the CMI is equipped with a credible and effective surveillance and monitoring system and sufficient conditionalities of its own, the IMF link can be reduced drastically or eventually eliminated completely. In the meantime, the IMF link seems to be a compromise between potential lenders and potential borrowers while at the same time lending credibility to the Chiang Mai swap system (Grimes, 2006, p. 367; Nemoto, 2003, p. 31). Second, the original CMI arrangement was bilateral and contains an inherent weakness that would be laid bare at a time of real urgency. Recently the multilateralization of swap activation – the ‘Post CMI’ – has been agreed to. Under the original arrangement, when a country needs short-term liquidity, it must negotiate the activation of a swap with all swap-providing countries on an individual basis. This would take time since it would be necessary to persuade hesitant partners and to negotiate with multiple partners demanding different conditions. Swap-partners might hesitate or refuse to activate the swap, or individual swap-providers might demand different conditions and terms that are difficult to coordinate. In order to make sure liquidity is obtainable in time to mitigate a crisis promptly, it is far better to activate swaps with multiple partners simultaneously (Park, 2005, p. 31; Council on East Asian Community, 2004). At the ninth APT Finance Ministers’ Meeting (2006), the principle of a collective decision-making procedure for the swap activation was adopted. At the tenth Meeting, further progress was made: a self-managed reserve pooling arrangement governed by a single contractual agreement was adopted as an appropriate form of multilateralization. Further studies are being carried out on other key elements of the multilateralization of the CMI including surveillance, reserve eligibility, size of commitment, borrowing quota and activation mechanism (Joint Ministerial Statement of the 10th ASEAN+3 Finance Ministers’ Meeting, 2007). Though more

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concrete steps toward multilateralization are under study, these have been meaningful steps forward. Third, multilateralizing swap activation and de-linking from the IMF require an effective regional monitoring and surveillance system (Park, 2005, p. 32). The monitoring process of the APT framework is centered on the Economic Review and Policy Dialogue (ERPD), which was introduced in 2000 by an agreement among the APT finance ministers. The processes followed by the ERPD prevent it from being a fully effective independent surveillance mechanism of the APT. Countries have broad discretion over the contents of their individual reports to the ERPD, which makes a wellinformed ‘apples to apples’ comparison across the various countries difficult. Furthermore, no independent, professional organization prepares comprehensive papers for the purpose of analysis, meaning that the current ERPD process cannot effectively uncover early warnings of potential risks, and thus facilitate required countermeasures (Wang and Woo, 2004, p. 444). The Manila Framework Group (MFG), which was created in 1997 and is supported by such non-Asian states as the US, Canada, Australia and New Zealand, is regarded as a more effective surveillance mechanism for East Asia. The MFG was formed as a regional supplement to the global surveillance function carried out by the IMF, in part as a substitute for the idea of the AMF. The MFG is supported by the IMF, World Bank, Asian Development Bank (ADB), and the Bank for International Settlement. At present, the CMI depends upon the IMF for effective surveillance and monitoring. In order to turn the CMI into a reliable regional liquiditysupply mechanism that helps prevent crises, it is desirable to have an independent and professional surveillance and monitoring system that can issue effective early warning signals and calls for collective or individual actions. There is a wide consensus across Asia that the Asian crisis of 1997–98 signaled that the early warning system of the IMF had failed. During the Asian crisis, there was plenty of talk about the need for a new architecture for the global financial system, but with the speedy recovery of the Asian countries, that original concern about global financial reform dissipated. More changes have been made in terms of individual Asian economies than in terms of the IMF, including improvements to bank supervision and greater liberalization of capital markets. It is difficult to say whether there has been a similar improvement in the global financial architecture. Indeed, Asian economies continue to remain exposed to the irregularities of the global financial system. The global governance function of the IMF needs to be complemented by a regional system that considers the increased volatility and insecurity of the current financial world. An Asian regional system need not replace the IMF in issuing assessments and policy recommendations; it can be compatible with, and complementary to, IMF


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surveillance. Having its own effective surveillance and monitoring mechanism is, however, a critical condition for developing a more closely knit regional financial organization. At the ninth APT Finance Ministers’ Meeting, to explore ways of further strengthening surveillance capacity, the Group of Experts (GOE) and the Technical Working Group on Economic and Financial Monitoring (ETWG) were launched. The ETWG plans to play an important role in developing and spreading the early warning system in an effort to facilitate early detection of market irregularities (Joint Ministerial Statement of the 9th ASEAN+3 Finance Ministers’ Meeting, 2006). In order to enhance monitoring and surveillance capacities and activate swaps simultaneously, creating a standing general secretariat with a professional support staff should be considered in the near future. It is interesting to note that many CMI improvement-related issues raised by pundits and scholars have been put on the agenda of the finance ministerial meeting, one by one, and that commonly agreed-upon solutions were thus devised. These happenings seem to be the reverse of Hegel’s famous dictum, ‘Minerva’s owl only flies when the evening falls’. It is not naive to believe that scholarly talks can play a positive role in making things happen.

THE ASIAN BOND MARKET INITIATIVE The ABMI was launched in December 2002 and endorsed in August 2003, under the APT framework, by the agreement generated during the finance ministers’ meeting. Among the weaknesses in the East Asian financial markets revealed during the financial crisis were such failings as the ‘double mismatch problem’, an over-reliance on the banking sector, and an overdependence on the US dollar. The ‘double mismatch problem’ refers to the mismatch of currency with maturity: a large portion of regional savings flowed out of East Asia and into the purchase of US dollars, due to the lessdeveloped and less-absorptive nature of the Asian regional financial system. At the same time, local banks in the East Asia region borrowed US dollars for short-term maturity and lent them to local businesses, in local currencies, for long-term maturity. This meant that the assets of local banks were locked in local currency-denominated, long-term credits, whereas a high percentage of their actual liabilities were dollar-denominated, shortterm debts. When borrowings were recalled abruptly, local banks fell into insolvency and bankruptcy, with a concurrent shortage of available liquidity. The total value of the sudden reversal of foreign credits at the onset of the 1997–98 crisis was estimated at slightly over US$100 billion. This accounted for only 5 per cent of the combined, pre-crisis domestic

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savings of the five countries most severely affected (Thailand, Indonesia, Malaysia, Philippines and South Korea) and the five leading economies in the region, that is, China, Hong Kong, Japan, Singapore and Taiwan (Rhee, 2003, pp. 5–6). Therefore, the rationale behind the ABMI is that it is advantageous to recycle domestic savings in the regional bond markets in the form of local currency-denominated bonds. Regional bond markets dealing in local currency-denominated bonds will help prevent a recurrence of the problems of ‘double mismatch’ and an over-reliance within Asia on capital borrowed from the banking sector. Also, the purchase of long-term bonds that match the economic life of local projects will reduce the risk of any sudden liquidity crunch. Asian bond markets – especially corporate bond markets – are still in their infancy. However, the market size in East Asia has grown somewhat since the 1997–98 crisis, and with the birth of the ABMI, six working groups have been created, showing gradual progress at the study and discussion level. Some of the issues that need to be addressed are as follows. First, a variety of bonds – in local currencies and with different risk profiles – need to be provided. For the purpose of nurturing the emerging Asian bond market, governments with good credit standings are encouraged to issue sovereign bonds, in order to establish benchmarks. In order to enhance their overall credit level, international institutions such as the ADB and the International Finance Corporation (IFC) – of the World Bank – should issue more bonds in local Asian currencies. As an example of progress in this direction, the ADB and IFC issued Ringgit-denominated bonds in Malaysia in 2004, and in 2005, the IFC and ADB issued RMBdenominated Panda Bonds, worth 1.13 trillion and 1 billion yuan, respectively (Progress Report of the ABMI, 2006). Also, various asset-backed securities (ABS) can be created and used to enhance the liquidity of the market. For instance, the cross-country primary collateralized bond obligations (CBOs) or ‘Pan-Asia Bond’ for financing small- and medium-sized enterprises in South Korea were issued with the collaboration of Japan and South Korea (Kihara, 2004, p. 8). If this works well in channeling Japan’s surplus money to capital-thirsty small- and medium-sized enterprises in South Korea, it will provide a good precedent for improving the allocation of investment money among regional countries. Another example of new bond products is the basket currency bonds, which are based on government bonds in local currencies. The basket currency helps reduce currency risk for investors. Opportunely, the ADB announced it would publicize the ACU (Asian Currency Unit), a notional unit of exchange based on a basket – or the weighted average of the values of currencies used in APT – in January 2006 (Daily Yomiuri, 13 January


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2006). The release of the ACU may eventually lead to the issuance of ACUdenominated bonds. Second, a regional financial infrastructure that helps to promote the issuance of bonds and to boost cross-border investments needs to be developed. The regional financial infrastructure includes credit guarantee institutions, regional credit rating agencies, and a regional system of clearing and settlement. At present, only two institutions in East Asia – the Asian Development Bank (ADB) and JBIC (Japan Bank for International Cooperation) – are able to perform the function of such credit guarantees. Though there are credit-rating agencies in APT countries, none are comparable in terms of influence to the top global agencies. Third, the foremost and basic condition for the construction of Asian bond markets is the liberalization and opening up of domestic financial markets. With liberalization, domestic investors can invest in foreign bonds, and foreign borrowers are able to issue bonds denominated in different local currencies in the markets of other countries (Park, 2005, p. 39). By deregulating and opening up markets, domestic lenders and borrowers will be able to take advantage of new sources of financing through regional bond markets (Park and Park, 2003, p. 36). The schedule and speed of liberalization and concomitant, concrete achievements depend on specific conditions within each country. With the liberalization of markets, it will be important to harmonize tax and regulatory systems and to develop open and transparent information systems. The degree of institutional bond market development varies with the economic conditions of member countries and the eventual success of the ABMI will thus also depend upon the coordination of such institutional developments across different countries.

EXCHANGE RATE STABILITY AND FINANCIAL COOPERATION The CMI was devised as a rescue mechanism to supply needed liquidity under short-term crises, whereas the ABMI was initiated to circulate regional savings within regional markets. In addition, in order to make financial cooperation more effective, measures to secure exchange rate stability are essential. After all, the strong dependency upon the US dollar and the consequent vulnerability to fluctuations in US dollar–yen exchange rates were primary causes of the Asian financial crisis. Securing exchange rate stability is critical to preventing similarly dangerous currency speculations in the future. Furthermore, the increasing intra-regional trade and FTAs among APT countries put an additional premium on the stability of exchange rates.

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Nonetheless, at this stage, cooperation in terms of exchange rate stability within the APT framework is at the theory-based discussion level. Governments want to retain autonomy of their economic policy and to be free to make use of fiscal and monetary tools, according to their own policy priorities. Establishing an East Asian exchange rate coordination regime will require the willingness of participating countries to adjust their economic policies to regionally set standards, thereby having their own economic autonomy constrained by the regional authority. This is not a palatable pill to swallow for states keen to keep sovereignty. The diversity of economic status among APT countries also makes the establishment of any such regime difficult. However, as economic interdependence deepens, the benefits of exchange rate coordination will become obvious to APT countries. The introduction of an ‘Asian Currency Unit’ (ACU)2 may facilitate cooperation among member-states in coordinating exchange rates across the region. At first, the ACU will be released as a ‘yardstick’ to monitor fluctuations in the values of APT currencies. ACU-denominated bonds will then be issued, and if ACU-denominated assets and liabilities work to reduce currency risks, the ACU may eventually be able to achieve a wider circulation in terms of intra-regional transactions. In the European case, even at the height of the European Currency Unit (ECU), the ECU-denominated claims equaled less than 10 per cent of all non-US dollar foreign claims of banks reporting to the Bank for International Settlements (BIS). It then took the Europeans two decades from the introduction of the ECU to launch the euro. In the case of the APT, a single currency is currently no more than a distant dream; even establishing an exchange rate coordination regime like the exchange rate mechanism (ERM) in East Asia looks to be immensely difficult at present. There have been scarcely any reports of serious discussion on that matter at the level of an APT meeting. However, at some point in the future, conditions may mature and render a serious discussion possible.

REVISITING IMPEDIMENTS AND ARTICULATING INTERESTS Before assessing the viability and future prospects of financial cooperation within the APT, it would be beneficial to consider and examine both the negative and positive factors involved. One impediment to the financial integration of East Asia is the objection of the US. The US and IMF rejected the idea of the AMF when it was proposed by Japan; some agents within both are still skeptical of the CMI, wondering if it represents a revival of the AMF. However, the official


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position of the US government has changed somewhat – albeit cautiously – expecting that if the CMI functions well and under relevant regulations that safeguard against moral hazards, it may be compatible with American interests, by lessening the costs to the US of maintaining economic and political stability in East Asia. Also, the regular policy dialogues used to coordinate policies among APT countries may help build mutual trust and improve security in East Asia (Cho, 2004, pp. 23–4). From the standpoint of the IMF, a regional counterpart can help improve financial stability in the global system by creating a regional monitoring system complementary to, and compatible with, the IMF system. Such a counterpart would provide another reservoir of liquidity supply. Lately, the thinking of the IMF on East Asian financial cooperation has been more positive than in the past (Belaisch and Zanello, 2006). At present, the negative influence of the CMI and ABMI on US interests is virtually non-existent. The US is aware of the widespread frustration East Asians felt regarding the US attitude to the 1997–98 crisis. It is difficult to interfere in the progress of a voluntary regional self-help system, as long as the CMI is compatible with the IMF. On the other hand, if the Asian bond markets grow and some day divert Asian savings from the purchase of US Treasury bills, it would naturally run counter to US interests. At present, Asian bond markets are still underdeveloped and Asian investors absorb huge volumes of US dollar assets. The chronic imbalance between the US deficit and the Asian surplus is not sustainable in the long term (Garton, 2005; Disyatat, 2004), and efforts should be made to fix these problems – for the sake of the US itself and for the global economy – even before Asian bond markets become deep and mature. Considering that the ABMI is currently in its infancy, no one seems to be seriously worried about it. A second impediment to the financial integration of East Asia is the question of leadership. The rivalry between China and Japan and the lack of prominent leadership thereof is often pinpointed as a critical obstacle to deeper regional integration. These concerns are rather valid on one hand, but on the other, both countries are quite supportive of financial cooperation. Japanese officials see the CMI as a way of bringing the AMF to fruition in the future. Japan has advanced the proposal quietly and consistently with ‘leadership from behind’, after the AMF was turned down (Hayashi, 2006). Japan is likely to continue advancing financial regionalism in East Asia quietly and unremittingly, while compromising where necessary with the US interests. Moreover, China was rather active in initiating the CMI and developing its capital markets. China is very supportive of financial cooperation and earned goodwill with neighboring countries when it decided not to devalue the yuan during the Asian crisis. Despite a lack of dominant leadership, the financial cooperation of APT has

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progressed in ministerial meetings, at least at the technocratic level. Until financial cooperation within the APT reaches a more or less mature level, relatively slow but steady progress at the technocratic, practical level is somewhat promising. Both re-examining obstacles to financial integration and articulating the expected results of financial cooperation will help foster willingness among APT members in promoting the initiative. The first expectation is that APT countries will be better able to cope with a possible financial crisis and irregular financial conditions. With an effective early warning system and prompt countermeasures, they hope to ‘nip in the bud’ any other crisis that occurs. Capital markets were liberalized to some extent after the 1997–98 crisis; Asian economies are major recipients of private capital flows from the global market, and were home to half the total capital flows in 2003 and 2004 (Belaisch and Zanello, 2006). Given that many APT countries are deeply involved in the global financial market, they are also vulnerable to its vagaries. No Asian country wants another crisis or another humiliating experience of having an IMF economic ‘trusteeship’; it therefore seems self-evident that a regional safeguard would be an indispensable self-help apparatus in precluding this from happening. A second expected result of financial cooperation is that East Asian countries will be able to reduce the burden of holding excessive foreign reserves and make better use of those they have. Their central banks have stockpiled huge foreign reserves as a bulwark against another shock, with the aggregate total reaching US$2.5 trillion in 2005. The amount of capital reversal at the time of the 1997–98 crisis, slightly over US$100 billion, seems somewhat trivial in comparison (Rhee, 2003, pp. 5–6). The foreign reserves of East Asian governments are more than adequate. If the CMI works effectively and East Asian bond markets develop, the burden of holding excessive reserves can be reduced and more efficient investments of surplus moneys can be made for the purposes of regional development. Third, by establishing a regional system of financial cooperation, APT countries can enhance their status in the global economy. East Asia now commands a fifth of global GDP, a quarter of global trade, and nearly onehalf of world foreign exchange reserves; however, it commands only about 15 per cent3 of the IMF quota, and hence, IMF voting seats. The voting rights of the US – which holds 17.08 per cent of the IMF quota – exceed those of East Asia as a group in the IMF, and therefore, East Asia is greatly underrepresented. The voting power of the IMF – a system that reflects financial strengths at the founding of the IMF – along with the constituent representation of the Executive Board, is biased toward the US and


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Europe, at the expense of East Asia–Japan in particular (Naustion, 2005, p. 428). The APT financial ministers’ meetings have called for an increase in the status of East Asian countries within the IMF and other international financial institutions. The call for a review of the East Asian position will receive more global attention as the APT’s financial cooperation progresses. By establishing a regional body like the AMF, East Asian countries will be able to provide more input to rule-making bodies in the global economy, such as the Basel Committee and the IMF. East Asia has traditionally been a ‘rule taker’ rather than a ‘rule maker’, ever since it was ‘discovered’ by the West. Considering the realities of the changing global economy and a rapidly growing Asia, East Asian countries share the sense that something needs to be done: the current power structure of the international financial institutions does not reflect these changing realities. Ultimately, financial cooperation through the APT is part of a project that will empower Asia as a whole. The above-mentioned interests are not as instantly calculable and tangible as gains from trade. Financial cooperation tends to produce interests that are more long-term and structural. Nonetheless, these interests will prompt APT countries to advance the regional project. As improvements such as the increase of swap facilities, better communications through policy dialogues, the enhancement of monitoring and multilateralization of swap arrangements, become more evident, mutual trust and consensus on the project will become solid and facilitate further institutionalization. Success in one issue area is likely to ‘spill over’ into others, as is supported by neofunctionalist thought.

PROSPECTS OF FINANCIAL COOPERATION IN THE APT The pursuit of the common interests expected from and generated by financial cooperation will help the APT framework proceed, thereby sidestepping confrontational political issues in a manner consistent with neofunctionalism.4 What is important at this point is the articulation and perception of common interests. The institutionalization of financial cooperation can be facilitated as such perceptions spread. While it is not feasible to solve quickly the range of political questions inherent in deep regional integration, it is possible to build up common interests and an institutional scheme by which to pursue them. The Asian crisis showed how increasingly interdependent the Asian economies were. Deepening economic interdependence must be followed by deeper political discourse in a positive-sum game so as to support East Asia’s changing financial realities.

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Financial cooperation within the APT provides a new momentum in East Asian history that can nurture long-term common interests. This is where the lessons of neoliberal institutionalism can be applied.5 Under the APT scheme, the member-states expect a regional institution to help in collective problem-solving, that is, collective crisis prevention and promotion of common interests, as a way to deal with the increasing uncertainties of globalization. By focusing on expected common interests, as discussed in the previous section, institutionalization of the APT framework can become increasingly empowered. What is possible and critical at this moment is that APT members forge and promote their common interests. In fact, APT members all seem to agree on one goal: preventing another crisis. Yet it is desirable that they develop more common interests as was discussed above. If they are satisfied to confine their goals to crisis prevention, and there are no signs of economic crisis around the corner, the original drive for regional integration may run out of steam. A primary condition of long-term viability and progress in financial cooperation among APT members is, as mentioned, the articulation of common interests and developing shared perceptions of what they are. Shared common interests will facilitate further cooperation (Rosamond, 2005), and if the experiences of cooperation in one area prove beneficial, mutual trust should grow and as suggested by neofunctionalism, the common experience of cooperation and mutual trust should spill over into other areas. Initial progress with the CMI framework and the ABMI study group has so far shown the possibilities for such spillover. In the case of the CMI, improvements have been steady, as was shown above. The size of swap funds and the number of BSAs have both increased, as have the drawing limits that are de-linked from IMF conditions (that is, from 10 per cent to 20 per cent). Agreement has been reached that the activation process of bilateral swaps should be multilateral, and regional surveillance and monitoring capacities are expected to improve with the launch of new institutional arrangements, including the Group of Experts (GOE) and the Technical Working Group on Economic and Financial Monitoring (ETWG). In the case of the ABMI, the six working groups have successfully achieved concrete outcomes; one has actually completed its mission and has been disbanded. The Asian Bonds Online website was launched in May 2004 and has thereafter been constantly updated and improved upon. Various international and foreign institutions – such as the ADB, JBIC and IFC – have issued local currency-denominated bonds, as was noted above; local currency-denominated corporate bonds, with the guarantee of the JBIC, have also been issued. Driven by the ABMI and an increasing market demand, East Asian local currency bond markets have been growing (Progress Report of the ABMI, 2006).


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The above-mentioned developments point to concrete progress in the search for greater regional cooperation. The cumulative experience of cooperation may facilitate improvement in the cooperative mechanism and lead to further institutionalization. The rational interest-seeking view of neoliberal institutionalism and neofunctionalism seems to be working. Also, as the theoretical import of neoliberal institutionalism implies, the expectations of APT countries seem to converge with regard to the institutions of financial cooperation as a means through which to pursue collective, common interests. At this moment, no timetable or predictions for achieving the final goal of financial cooperation across APT members exists. Success will depend upon how quickly APT countries reach a consensus on a feasible timetable as well as on their final goals. Finally, it is worthwhile to raise the issue of leadership once again. There is no easy solution to the feud between China and Japan over regional leadership, and no one knows for how long this feud will continue. The most hopeful scenario is that a grand alliance between the two can be established, similar to the Franco-German alliance in the EU. China and Japan know that they hold the key to establishing a powerful East Asian community; with a united East Asia, they can have more leverage in negotiating with the West, in both the political and economic arenas. A more integrated and prosperous East Asia is a common interest for both of these countries, and indeed for all APT members. They can make some compromises vis-à-vis common interests. South Korea, which has been working on an FTA with China and Japan, can fulfill the role of a mediator between the two, just as the Benelux countries did in Europe. An alliance between China and Japan, with South Korea and ASEAN serving as mediators, can create a triarchy supporting the APT.

CONCLUDING REMARKS The common interests that should be achieved as a result of financial cooperation will help to move the APT framework forward. Positive thinking and unceasing progress in institutionalizing financial cooperation should allow the APT framework to serve as a viable means for attaining East Asian regionalism. The APT framework is the main vehicle by which its members can pursue the long-term vision of an East Asian community. Still, the road ahead is both long and rough. Some people are skeptical of the future of East Asian regionalism. However, the short history of multilateral cooperation in this region is far from disappointing. The recent history of East Asia, so riddled with

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division and distrust, points to how remarkable it is that APT countries have come together for a common purpose. Such institutionalization takes time, and so it can easily be said that this proverbial glass is half full, rather than half empty. As the concluding statement of this chapter, it would be apt to mention a well-known Korean adage: a journey of a thousand miles starts with but a single step.

NOTES *

The original version of this chapter was published in the Korea Observer, 38(1), Spring 2007 (The Institute of Korean Studies, Seoul, Korea). 1. The key recommendations of the Vision Group are as follows: Economic Cooperation ● establishment of the East Asian Free Trade Area (EAFTA) ● expansion of the Framework Agreement on an ASEAN Investment Area ● promotion of technological cooperation among regional countries, and assistance to less-developed countries ● realization of a knowledge-based economy Financial Cooperation ● establishment of a self-help regional facility for financial cooperation ● adoption of a better exchange rate coordination mechanism ● strengthening of the regional monitoring and surveillance process within East Asia to supplement IMF global surveillance Political and Security Cooperation ● promotion of norms, procedures and mechanisms for good management of intraregional relations ● establishing mechanisms for addressing threats to peace in the region ● amplification of the East Asian voice in international affairs Environmental Cooperation ● bilateral and multilateral environmental cooperation ● public information and education in environment issues ● effective management of water and fisheries and combating of marine pollution ● joint development and exploration of new sources and supplies of energy Social and Cultural Cooperation ● establishment of poverty alleviation programs ● greater access to basic health care services ● implementation of a comprehensive human resources program ● promotion of regional identity and consciousness ● East Asia Education Fund to promote basic education Institutional Cooperation ● evolution of the annual summit meetings of ASEAN3 into the East Asian Summit ● establishment of an East Asia Forum 2. The ACU will be calculated using a currency basket of the weighted average of the values of the 13 currencies. The relative value of each currency in the composition of the basket will be based on the GDP and trade volume of the nation that uses the currency, as well as the currency’s international usability. The Chinese, Japanese and South Korean currencies will therefore be of greater value in the basket, leaving some small nations to hold lower values. 3. 16.68 per cent (ASEAN3 India, Australia, New Zealand) as of 2005.


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4. The main tenet of functionalism is that political divisions can be transcended gradually by establishing a working network of international cooperation in which the interests of all nations are gradually integrated. Areas of functional cooperation are likely to be found in the ‘low-politics’ area of economic and social life. Neofunctionalism succeeds the main idea of functionalism but it is distinct from functionalism in its stress on the integrating aspect of political processes. Neofunctionalism introduces political actors and the utilitarian concept of interest politics. According to Haas, the process of community building is dominated by nationally constituted groups with specific interests and aims, willing to shift their loyalties, expectations and activities to a supranational center when this course looks promising to meet their interests. A core concept of a dynamic process of integration is ‘spillover’. Spillover refers to a situation in which a given action creates a situation in which the original goal can be assured only by taking further actions, which in turn creates a further condition for more action, and so forth (Mattli, 1999, pp. 21–28). 5. Neoliberal institutionalism accepts the main assumption of realism: states are the major actors in world affairs and are unitary-rational agents. It also accepts realism’s view of anarchy as a key characteristic of international systems. Contrary to realism and in accordance with traditional liberal views, neoliberals claim that institutions can help states work together (Joseph Grieco, 1988, pp. 492–3).

BIBLIOGRAPHY Axelrod, Robert and Robert Keohane (1988), ‘Achieving cooperation under anarchy: strategies and institutions’, World Politics, 38(1), 226–54. Belaisch, Agnes and Alessandro Zanello (2006), ‘Deepening financial ties’, Finance and Development, quarterly magazine of the IMF, 43(2), available at http://www.imf.org/external/pubs/ft/fandd/2006/06/zanello.htm. Chen, Hong (2004), A New Approach to the Asian Finance Cooperation, KIEP CNAEC Research series 04–07, Seoul. Cho, Young Kyun (2004), The Implication and Prospect of Financial Cooperation in East Asia, Policy report, Seoul: Institute of Foreign Affairs and National Security. Council on East Asian Community (2004), ‘Monetary Cooperation and trade and investment cooperation’, 5th Plenary Meeting Report, 19 November 2004. Dent, Christopher M. (2003), ‘Networking the region? The emergence and impact of Asia-Pacific bilateral free trade agreement projects’, The Pacific Review, 16(1), 1–28. Dieter, Heribert and Richard Higgott (2003), ‘Exploring alternative theories of economic regionalism: from trade to finance in Asian cooperation?’, Review of International Political Economy, 10(3), 430–54. Disyatat, Piti (2004), Rationalizing Asia’s Foreign Reserves Build-up, report of Monetary Policy Group, Bank of Thailand. Garton, P. (2005), Foreign Reserve Accumulation in Asia: can it be sustained?, report of International Economy Division, Australian Treasury. Grieco, Joseph M. (1988), ‘Anarchy and the limits of cooperation: a realist critique of the newest liberal institutionalism’, International Organization, 42(3), 485–507. Grimes, William (2006), ‘East Asian financial regionalism in support of the global financial architecture? The political economy of regional nesting’, Journal of East Asian Studies, 6, 353–80. Hayashi, Shigeko (2006), Japan and East Asian Monetary Regionalism, London and New York: Routledge.

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Hund, Markus (2003), ‘ASEAN Plus Three: towards a new age of pan-East Asian regionalism? A skeptical appraisal’, The Pacific Review, 16(3), 383–417. Ito, Kenichi (2005), Higashi Ajia kyodotai yume to genjitsu, [The dream and reality of East Asian community] Policy Report, The Council on East Asian Community (CEAC), 10. Joint Ministerial Statement of the 9th ASEAN3 Finance Ministers’ Meeting (2006), Hyderabad, India, 4 May 2006, available at: http://www.aseansec.org/ 18390.htm. Joint Ministerial Statement of the 10th ASEAN3 Finance Ministers’ Meeting (2007), Kyoto, Japan, 5 May, 2007, available at: http://www.mof.go.jp/english/if/ as3_070505.pdf. Kihara, Seiji (2004), ‘Ajia saiken sijo ikusei initiative ni tsuite’ [On the initiative to develop Asian bond markets], Finance, 12. Malik, Mohan (2005), ‘East Asia summit, more discord than accord’, Yale Global, December. Mattli, W. (1999), The Logic of Regional Integration, Cambridge: Cambridge University Press. Moon, Chung-in (2006), ‘Stalled community building: nationalism and limits to regionalism in Northeast Asia’, paper presented at the 2006 KAIS 50th Anniversary International Conference. Naustion, Anwar (2005), ‘Monetary cooperation in East Asia’, Journal of Asian Economics, 16, 422–42. Nemoto, Yoichi (2003), ‘An unexpected outcome of the Asian financial crisis: is ASEAN3 a promising vehicle for East Asian monetary cooperation?’, Princeton Institute for International and Regional Studies Program on US–Japan Relations Monograph Series, No.7. Park, Yung Chul (2005), ‘Whither regional financial and monetary integration in East Asia?’, paper presented at the conference on East Asian Economic Integration: Reality and Vision, organized by the KIEP, in Seoul, Korea. Park, Yung Chul and Daekeun Park (2003), ‘Creating regional bond markets in East Asia: rationale and strategy’, the 2nd Annual Conference of PECC Finance Forum, Hua Hin, Thailand, 8–9 July 2003. Park, Yung Chul and Yunjong Wang (2005), ‘The Chiang Mai Initiative and beyond’, World Economy, 91–101. Rhee, S. Ghon (2003), ‘Structure and characteristics of East Asian bond markets’, paper presented at the 2nd annual conference of the PECC Finance Forum, Hua Hin, Thailand. Rosamond, Ben (2005), ‘The uniting of Europe and the foundation of EU studies: revisiting the neofunctionalism of Ernst B. Haas’, Journal of European Public Policy, 12(2), 237–54. Schmitter, Philippe C. (2005), ‘Ernst B. Haas and the legacy of neofunctionalism’, Journal of European Public Policy, 12(2), 255–72. Sohn, Injoo (2005), ‘Asian financial cooperation: the problem of legitimacy in global financial governance’, Global Governance, 11, 487–504. Stevenson, Adlai E. (2004), ‘Regional financial cooperation in Asia’, Journal of Asian Economics, 15, 837–41. Stubbs, R. (2003), ‘ASEAN plus three: emerging East Asian regionalism?’, Asian Survey, 42(3), 440–55. Terada, Takashi (2003), ‘Constructing an “East Asian” concept and growing regional identity: from EAEC to ASEAN3’, The Pacific Review, 16(2), 251–77.


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Wang, Yunjong and Wing Thye Woo (2004), ‘A timely information exchange mechanism, an effective surveillance system, and an improved financial architecture for East Asia’, in Asian Development Bank (ed.), Monetary and Financial Integration in East Asia: the Way Ahead, Vol. II, Basingstoke: Palgrave Macmillan, Ch. 11. Webber, D. (2001), ‘Two funerals and a wedding? The ups and downs of regionalism in East Asia and Asia-Pacific after the Asian crisis’, The Pacific Review, 14(3), 339–72.

Statements and Reports The Joint Ministerial Statement of the 5th ASEAN3 Finance Ministers’ Meeting (2005). The Joint Ministerial Statement of the 6th ASEAN3 Finance Ministers’ Meeting (2006). Progress Report of the Asian Bond Markets Initiative (ABMI) (2005). Progress Report of the Asian Bond Markets Initiative (ABMI) (2006). East Asia Vision Group Report, Towards an East Asian Community (2001).

Newspapers Asahi Shimbun (various issues). People’s Daily Online, 6 February 2006. The Daily Yomiuri Online, 13 January 2006.

9. European integration: what lessons for Northeast Asia? Gérard Roland INTRODUCTION When looking back over the history of the twentieth century and many of the major events that have marked it, most would agree that the experience of European integration after World War II is one of the century’s major success stories. Whatever the future of Europe in the twenty-first century, it is fair to take stock of its success in the second half of the twentieth century. During the first half of the twentieth century, it would have seemed unbelievable to think that French and German heads of executive would regularly consult each other on important policy affairs and that French and German citizens would work together and share leisurely activities without expressing forms of nationalist animosity. European citizens traveling across the world talk about their growing sense of ‘European identity’ that is often defined in opposition to parts of the ‘US identity’. Another success story of the second half of the twentieth century is the strong and sustained growth of Asian economies, starting with Japan after World War II, then the Asian tigers (mainly South Korea, Taiwan, Hong Kong and Singapore) followed by the spectacular growth of China, and more recently that of India. Interestingly, the spectacular growth that has been profoundly transforming the economic landscape of Asia has not been accompanied by any form of supranational institutional integration that could be comparable to the European Union. Forms of regionalism have emerged in different parts of the globe (ASEAN, NAFTA, Mercosur, and so on) but the experience of the European Union seems to stand out by the deeper nature of its institutional integration. When compared with other supranational institutions that have been set up in recent decades and years, the European Union appears to be the most successful experience. What are the general reasons behind the success of the European Union? Is its success likely to continue and what are its weaknesses? What is unique and what is transposable in the experience of the European Union? How 130

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relevant is the EU experience for integration in North East Asia? These are important questions that I will attempt to address in this chapter.

THE SUCCESS OF THE EUROPEAN UNION There are many dimensions along which the European Union can be considered as a success. On one hand, integration has deepened with each successive Treaty. The Treaty of Rome in 1957 established the European Community and laid the basis for the Single Market and competition policy. The Single European Act of 1987 strengthened the Single Market, removing any non-tariff barriers that existed between European countries.1The Maastricht Treaty of 1992 went further by creating the European Monetary Union. This led to the creation of the euro-zone with the effective circulation of euro banknotes replacing national banknotes from January 2002. Twelve member-states initially joined the euro-zone, and Slovenia recently joined on 1 January 2007. Many other members are planning to join in coming years. The Amsterdam Treaty in 1997 made further progress in institutional integration, among others by introducing responsibilities of the European Union in terms of foreign policy, by increasing the powers of the European Parliament, increasing the scope of qualified majority voting in the Council and introducing ‘enhanced cooperation’, a procedure that allows a subset of countries to move ahead with further integration in new dimensions without having to involve all other countries.2 The Nice Treaty of 2001 made further institutional changes mostly to accommodate the enlargement of the European Union to ten new member-states. Because the Nice Treaty was deemed unsatisfactory, a convention was set up at the end of 2001 to prepare a new Constitutional Treaty which has been accepted by 16 countries but was so far rejected in two referendums in France and the Netherlands. Not only has there been deepening of European integration but also there has been significant broadening of the European Union itself. Six countries were the founding member-states in 1957: West Germany, France, Italy and Benelux. These are the countries where commitment to further integration has traditionally been the strongest, albeit with variations in time and across countries. Three more countries joined in 1973: the UK, Ireland and Denmark. Greece joined in 1981 and Spain and Portugal in 1986. Austria, Finland and Sweden became members in 1995. The biggest enlargement was the one of 2004, whereby the European Union grew from 15 members to 25 with the addition of Cyprus, Malta, Poland, Hungary, Czech Republic, Slovakia, Slovenia, Lithuania, Latvia and Estonia. Finally, Romania and Bulgaria became the 26th and 27th members in January 2007.

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While growth in Europe has recently been less spectacular, one should not lose sight of the fact that the European prosperity of the last decades owes a lot to the institution of the European Union. Counterfactuals are always controversial but it is now a fact that the European Union covers a market of roughly 500 million inhabitants with a GDP that can be estimated at $13.4 trillion (and is now probably slightly higher than the US). The European Union is thus clearly a heavyweight in the world economy as it represents over 30 per cent of the world’s GDP. The European Union has in the last decades played an important role in fostering competition, financial market liberalization and mobility of goods, capital and persons within Europe. It is uncontroversial that the Single Market and the euro have promoted more trade within Europe. Capital markets in Europe were relatively underdeveloped even in the 1980s. There is no doubt that the European Union was a very strong factor behind the strong boost to European capital markets in recent years (see Eichengreen, 2007). The European Monetary Union has been a success so far. Both the introduction of the euro in 1999 and the introduction of banknotes and coins in 2002 went very smoothly, despite protests by some citizens that the switch from the national currency to the euro had been an opportunity by some businesses to exploit the monetary illusion of ordinary citizens and to raise their prices. The EU has played a substantial role in stabilizing the macroeconomic situation of many European countries, especially in the 1980s and the 1990s. After World War II, the main European economies, the UK, France and Germany, followed very divergent macroeconomic paths. For decades, even after the macroeconomic stabilization of the late 1950s, France has had a higher inflation level than in Germany, requiring repeated currency adjustments. The preparation for the European Monetary Union provided a powerful tool to achieve convergence in inflation rates. The so-called Maastricht criteria that were introduced to prepare countries for the European Union played a very useful role in counteracting serious government failures that had occurred in countries like Belgium and Italy where repeated deficits had brought the level of public debt to very alarming levels. Maastricht brought those countries back on track to more sound macroeconomic policies. Without the process of European Monetary Unification, Belgium and Italy might have eventually ended in Argentinian-style crises. The cooperation of countries within the framework of the European Union has created mechanisms of conflict resolution within a context of peace and stability. This is especially important since Europe has been nearly incessantly at war for centuries. The two world wars in the twentieth century in particular were extremely bloody (for Western Europe more during World War I and for Central Europe more during World War II).


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Achieving long-term peace within Europe was one of the main objectives of the founding fathers of the European Union such as Jean Monnet or Konrad Adenauer and it is still seen as one of the main objectives, even though the memory of the atrocities of the two world wars has somewhat faded. Peace is achieved not only via more trade by the virtue of the internal market, but the governments of EU member-states widely share the idea of peace as a fundamental goal of EU integration. EU countries will not wage wars against each other. Any conflict that has arisen so far between countries has been managed within the general framework of the EU institutions. In other times, the breakout of mad cow disease (BSE) and the ban on British beef or the Belgian dioxin crisis in 1999 could have easily led to retaliatory moves that could have escalated into a conflict. The institutions of the European Union provide not only a constant forum for dialogue between governments and political representatives from different European countries; they have also changed the attitude of European politicians towards the international sphere. Indeed, the acceptance of the rule of law within countries has taken centuries to take a firm root but international relations are not yet firmly established within the rule of law. Many countries live under the strange dichotomy where there is respect for rule of law at the domestic level but where bullying and the logic of force seem to prevail at the level of international relations. This is most visible for the US. This is one of the countries which has set the world an example of what the rule of law can achieve but it seems unable to accept the rule of law at the international level, especially when it implies that the US government must submit itself to internationally established rules. European politicians who have had a longer tradition of use of the logic of force in past centuries have, with the existence of the European Union, nearly completely become used to seeing the international relations of their country governed by the rule of the European Union and of other supranational organizations. The European Union has not only been a haven of peace. It has been quite an effective magnet for democratization and modernization. It is well known that the European Union has provided an institutional anchor that has allowed Greece, Spain and Portugal to achieve a successful transition from dictatorship to democracy. So much has democratization gained ground that it is difficult to imagine that only forty years ago, these countries were living under right-wing dictatorships. Participation in the European Union has also been a very useful vehicle for modernization in these countries in all dimensions. They have modernized their legislations, their financial sector, their judicial system and government administration. Culturally, they have opened up tremendously and experienced interesting cultural revivals. A similar promise holds for the new entrants who went

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through decades of Soviet occupation and economic stagnation in the socialist economic system and had to undergo quite a fundamental transition of their economy, of their political system and, more broadly, of their whole social system.

THE REASONS FOR THE SUCCESS OF THE EUROPEAN UNION Historical factors have often been invoked to explain the relative success of the European Union. Prominent among those explanations is the devastation created by two world wars and the atrocities of the Nazi regime which created a strong desire for durable peace in all European countries. We invoked this reason above. It is clear that this provided a very strong motivation. This was facilitated by the fact that in Germany a distantiation process had developed towards the Nazi regime. The Nazi regime had been very oppressive towards many categories of the population; it exterminated the Jews, the gypsies, the disabled and other minorities. It arrested and executed Communists, Socialists and Catholics who were opposed to Hitler. Among those oppressed by the Nazi regime, there was no feeling of shame for Germany losing the war but on the contrary a strong feeling of relief. Among those who had not been oppressed and who had even supported the regime, arguably a majority, feelings of shame for the defeat were certainly present. In other times, those feelings would certainly have been transformed into resentment for the victorious allied powers. However, a process of denazification was vigorously developed by the newly elected German politicians (who had not been guilty of collaboration with the Nazis) with the help of the allied powers. People were told that they had been manipulated by the Nazis and made to feel guilty and ashamed for having supported the Nazis. The guilty Germans welcomed the prospect of a more peaceful Europe and were quite happy to accept the idea that the Germans needed some kind of internationally imposed straightjacket that would prevent them from sinning again. The children of the generation that had lived through the Nazi regime, the generation of the 60s’ student revolt, were educated in a strong anti-Nazi spirit. They were encouraged to work for free in Israel to show remorse for the guilt of their parents’ generation in letting the Jews be exterminated. They questioned their parents to find out if they had been guilty of collaboration. They saw the ideal of a European federal state as a way to end once and for all the ugly face of nationalism, one of the dirtiest words in the German postwar lexicon. Germans thus became big supporters of the European ideal.


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Still today, the idea that the European Union is a welcome tool to constrain a powerful Germany that may go astray is still widely accepted in Germany. In addition to the aftermath of two world wars and the atrocities of Nazism, the conditions of the Cold War made the US very favorably inclined towards European integration and towards a strong European economy that would act as a counterbalancing force to the Soviet bloc. The generosity of the Marshall plan served to a great extent to help European economies recover as quickly as possible so that they could stabilize politically and be firmly in the camp of the West. After World War II, the US was the only prosperous capitalist country to face the Communist bloc. Helping European economies to recover from the wounds of the war and to develop in turn prosperous economies was in the long-term interest of the US in the context of the Cold War. The development of the European Communities was very strongly in line with that objective. Military cooperation was to be developed within the context of NATO under US leadership. The European leaders who were afraid of the danger posed by the Soviet bloc were more than happy to accept American military leadership and protection. In that sense, the European ambitions of political leaders in the large European countries were inward-looking. They wanted their countrymen to live in peace within the framework offered by the European institutions but did not develop global ambitions for Europe. The idea that the European Union could have external ambitions and become a counterweight to the US (an idea that has gained ground in recent years) was neither discussed nor expressed. It is clear that the historical conditions were particularly propitious to the emergence and development of supranational European institutions. This created a strong political will for integration among parts of the European political elites. One cannot in general overestimate the importance of political will in such a process. It can be seen as the fuel of integration. However, all fuel needs an engine if it is to be used productively. Political will alone is not enough to explain the success of European integration. Moreover, one tends to exaggerate the real extent of the political will that existed at the time. It was mostly senior and experienced politicians who had lived through the turmoil of the preceding decades who were the most ardent supporters of European integration. Most of them, however, had their political career behind them. Many other prominent politicians in various European countries were suspicious of the European project and not willing to give up national sovereignty. De Gaulle who was President of the French republic between 1958 and 1969 was clearly putting the interests of France above those of Europe and was pushing a French nationalist

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agenda. Margaret Thatcher was quite opposed to Europe and contributed to halting the integration process when she was British Prime Minister. Even when there is enough political will, there are certainly examples of windows of opportunity that were not used productively. Latin America failed to unite after the independence wars against the Spanish and Portuguese colonizers. One can argue that Latin America has always had more propitious conditions for integration than Europe. Only two main languages are spoken officially and they are both Latin. The economies are not too far apart; they are geographically connected. There are more cultural affinities and less history of wars and conflict than was the case in Europe. Not only have they failed to integrate but even many countries within Latin America, such as Argentina, have failed to build an internal governance structure that is sufficiently coherent.3 The Dutch United Provinces after independence from Spain in the seventeenth and eighteenth centuries were a very loose confederation and had a very hard time making collective decisions, though they would probably be considered a success compared to the European Union. The United Provinces were able to flourish economically but were never able to build a military power that could challenge England. The German states remained divided for centuries and it was only in 1871 under the leadership of Prussia that Germany could be unified. In history, there are many examples of integration but most of them have happened via wars and invasions. The Swiss confederation and Germany are two of the only examples of non-violent political integration. The European Free Trade Association (EFTA) which can in some ways be seen as a competitor to the European Union, albeit with fewer ambitions, proved to be less successful, and EFTA members joined the European Union one by one: first Denmark and the UK and then Portugal followed by Austria, Sweden and Finland. Only Switzerland, Iceland, Norway and Liechtenstein remain. In essence, the EU has absorbed most of the EFTA countries. Why was the European Union more successful than EFTA? Asking this question already indicates that the political will for peace cannot be a sufficient explanation for the success of the European Union. Indeed, the political will for peace was always very strong among EFTA countries and it is difficult to argue that the will for peace was less strong than among the founding members of the European Union. The main argument I want to develop in this chapter is that the institutional architecture designed by the founding fathers of Europe played a key role in explaining its success. The window of opportunity created by the historical conditions as well as other factors I have not mentioned was a necessary but not a sufficient condition! I develop the argument in the next section.


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THE INSTITUTIONAL REASONS FOR THE SUCCESS OF THE EUROPEAN UNION The main institutional arrangement that has been used inside the European Union since its foundation to push European legislation is what is called the community method (often referred to by its French appellation ‘méthode communautaire’). The community method is the common mode of decision-making. It works as follows. The European Commission is the agenda-setter for legislative proposals, that is the Commission has the sole right of initiative to make legislative proposals. The Commission is supposed to be the ‘advocate for Europe’ within the European institutions. It is therefore supposed not to be biased in favor of either some countries or some party family. All countries and all major party families are represented in the Commission. This is very important to prevent suspicion of the Commission among national governments. The Commission’s role is thus constantly to be able to come up with proposals for integration that are liable to achieve consensus among national governments. The Council, which is composed of the heads of states of all member-states and which meets every six months, then examines the Commission proposals. Unanimity has traditionally been required for legislative proposals to pass in the Council. The community method has evolved over time but I would argue that its main components have remained in place. The main change that has appeared is the increasing role of the European Parliament. Initially, the European Parliament only had a consultative role and could not veto proposals from the Commission. In the last fifteen years, especially with the Amsterdam and the Nice Treaty, the powers of the European Parliament have strongly increased, in particular via an expansion of the co-decision procedure whereby approval from both the Council and the European Parliament are required for a bill to pass. The co-decision procedure allows the European Parliament to reject a piece of legislation at the second reading. If the Council does not agree with an amendment proposed by the European Parliament at the second reading, the proposal goes to a conciliation committee composed of an equal number of members from each body. If no compromise is then reached, the proposal is rejected. Otherwise, it is adopted provided it is accepted by the European Parliament (by a simple majority) and by the Council (by a qualified majority).4 Traditionally, until the 1980s at least, most voting in the Council was by unanimity. Even when voting by majority was introduced, individual countries could always invoke the Luxembourg compromise allowing individual countries to block a decision if they felt it threatened their national sovereignty. Though there have been major extensions of majority voting, major

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decisions in the EU are still taken by unanimity, and consensus is generally sought even when unanimity is not required. The community method is quite remarkable because it has enabled a judicial balance to be struck between providing an engine for the promotion of European integration while preserving national sovereignty and the interests of member-states. The Commission has played the role of the ‘advocate of Europe’, constantly trying to promote integration in areas where it would benefit the general interest and knowing that only proposals that could achieve overall consensus had a chance of passing. At the same time, the Council has acted as a watchdog for national interests. The effective veto power of national governments has allowed them to make sure that proposals which could hurt their country interests would not pass. One often hears criticisms in the popular media but also among academics that there is creeping centralization in European and that the ‘Brussels bureaucracy’ (that is the Commission) is constantly plotting to increase its own powers. This is a complete misrepresentation of how European institutions work. The Council has always had sufficient veto power that proposals that would be considered against any national interest would be blocked. On the other hand, it is the job of the Commission to promote the cause of further integration. This is what they are supposed to do. To understand the success of the community method, it is interesting to contrast it with the other method that has been used for legislative purposes. This is the intergovernmental method of legislation. It has been used in areas of the ‘second pillar’ (Common Foreign and Security Policy) and ‘third pillar’ (Justice and Home Affairs) and it has been largely unsuccessful. In essence, while the Amsterdam Treaty created these two pillars, deciding in effect that the Commission would not have the right to make legislative proposals in those areas, no significant legislative initiative has emerged via the intergovernmental method. The Constitution proposed to abolish the second and the third pillar and to use the community method instead. The only main difference between the community method and the intergovernmental method rests in the power of proposal. In the intergovernmental method, powers of proposal rest with governments of memberstates, whereas with the community method, powers of proposal rest with the Commission. How thus to explain the success of the community method versus the failure of the intergovernmental method? As we have seen, the community method gives agenda-setting powers to the European Commission, whereas the intergovernmental method does not allocate agenda-setting powers to any particular agency or institution but gives it to countries instead. The most logical explanation thus seems to be that the community method prevents free-riding in the generation of proposals for


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integration. This explanation seems to make sense. The lack of success of the intergovernmental method of legislating suggests indeed that European governments do not have the incentives to provide the adequate level of resources necessary to generate proposals for European legislation. Governments, as other economic agents, have scarce resources and allocate them to their priority objectives. Resources necessary to generate legislative proposals are not huge. However, they require technical expertise (at the level of ministerial cabinets), a scarce resource. Cabinet staff members in national governments are generally overworked and jump from one issue to the other depending on the political conjuncture. European objectives are quite naturally not at the top of the agenda of national governments because these objectives generate benefits for European citizens as a whole and bring fewer local electoral benefits. National governments in the EU are thus prone to the traditional free-rider problem: they prefer a situation where all governments would expend resources to improve European integration to a situation where nobody spends resources on generating such proposals. However, they prefer even more a situation where all other countries, excluding themselves, generate proposals so that they can free-ride on the efforts of the others. As a result, all countries end up free-riding and an inadequate level of resources is spent on generating legislative proposals. The European Commission, seen as a legislative proposal-making institution, gathers strong expertise (legal, economic, political, technical) from all European countries. The quality of higher-level Commission staff is certainly comparable if not higher than that in the cabinets of individual country governments. This small body of high-level technocrats has accumulated expertise and knowledge, allowing it to constantly generate proposals for further European integration. At the same time, because the European Commission is both geographically and politically inclusive, it is not seen as biased towards the interest of specific countries or party families. Therefore, it is not the case that governments of some countries or heads of governments of particular party families feel that they have to play the role of opposition and constantly vote against proposals from the Commission. Given the requirement of unanimity or at least of consensus, decision-making would be completely paralyzed if this were the case. The advantage of the community method is thus that the Commission, having the task to protect the Treaties and to foster European integration, prevents the pitfall of free-riding in generating proposals. On the other hand, the strong veto powers of the Council serve as a powerful counterbalance to ensure that national interests are not hurt by European legislation. The community method Pareto-dominates the intergovernmental method because the veto powers of the Council allow, as in the intergovernmental method, to

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make sure that country interests are not hurt while preventing free-riding in generating proposals, the major drawback of the intergovernmental method. The structure of Council meetings with their biannual frequency forces discussion among member-states. At the same time, the COREPER, the committee of permanent representatives of the different countries, a committee of high-level experts who work as liaison between the Commission and the Council, permanently seats in Brussels. There is thus constant dialogue between the Commission and national governments as well as among representatives of national governments. The institutional structure provided by the community method thus makes it possible to achieve Pareto-improving deals among member-states of the European Union. This has been a powerful force for integration. It would, however, be exaggerated to claim that the European Union provides Pareto-optimal deals. There are numerous inefficiencies in the functioning of the European Union. For example, it has happened repeatedly that governments of specific countries use their veto powers in effect to hold up the Council. A typical scenario would be the following. The Commission comes up with a legislative proposal in a given area that is in principle favorable to all countries, but a subset of countries who stand to gain less from that initiative will threaten to veto the bill unless it receives ‘in return’ either transfers or a bill that favors the electorate of that country. This is very much like typical pork barrel politics in the US or in other legislatures. A country can thus use its veto right to extract rents from other countries. If there were no transaction costs associated with this, it would not really be a problem, but this is unfortunately not the case. Thus, the British government managed to paralyze the Council for years until it got the famous ‘British rebate’ giving back to the UK part of the tax revenues it is paying to the European Union. The British rebate has been questioned recently and was the object of heated debates towards the end of the British presidency in 2005 when a budget deal was struck down because of this. Despite its imperfections, the institutions of the European Union appear in today’s world as a model of a supranational institution. It has fewer problems than other supranational institutions in collecting revenues, in pursuing its agenda and in making and implementing decisions.

WEAKNESSES OF THE EUROPEAN UNION It would be wrong to mention only the successes of the European Union. There are also many problems and inefficiencies and these problems might become more important over time.


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First of all, there is a lack of European action on many fronts. Despite some limited initiatives, the European Union is so far nowhere in terms of defense. While the Yugoslav war was unraveling and thousands of innocent civilians were being slaughtered, the European Union remained essentially passive and the UN proved relatively more effective, thanks partly to US leadership. The European Union is an economic giant but it is even less than a military dwarf. Second, the European Union is not well prepared to coordinate actions against terrorism. What would have happened if a simultaneous terrorist attack had struck important buildings in London, Paris and Frankfurt instead of in New York on 9/11? Steps have been made to coordinate action but preparedness is nowhere near what exists in the US. The simple step of extraditing terrorist suspects between European countries is still potentially problematic. Third, there is as yet very little coordination on immigration issues. This is a topic that is becoming increasingly important as masses of refugees and illegal aliens attempt to enter the European Union in search of a better life. Some countries such as Spain and Italy which are closer to Africa bear the brunt of the burden of dealing with these problems. There are obvious externalities associated with this. It is in the interest of other member-states to deal with these issues because once illegal immigrants have penetrated one country of the EU, they can easily travel across the EU. Fourth, despite some progress in the area of foreign policy, there is still very little European foreign policy and it is not necessarily consistent. Countries of the European Union have a joint interest in finding a common position on the burning problems of the Middle East or on which attitude to adopt towards Russia. Countries like the UK and France have been very reluctant to cooperate at the European level and have also developed divergent positions on Iraq and other issues. Fifth, even on the economic front, which is the EU’s strong point, while the European Central Bank has so far proved effective in keeping European inflation reined in, the European Union is currently not doing much about growth two years after the Sapir report came out. Europe’s growth rates have been consistently lagging behind those of the US and Asia for more than a decade and little has happened about the Lisbon agenda which was supposed to push economic reforms within Europe to make the European economy ‘the most competitive in the world’. Even at the institutional level, the current state of affairs is deemed unsatisfactory which is the reason why the constitutional convention was set up. There has been repeated criticism of the democratic deficit at the level of European institutions. There are many layers of delegation between the voters in Europe and the Commission and the Council which are the two

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most powerful institutions. The European Parliament is the only directly elected body of the European Union and it is the one with the fewest powers. The flipside of having an unbiased Commission is that it is not elected and not accountable to European voters. This lack of democratic legitimization is in the long run harmful for the Commission since it makes it appear weak in any standoff with heads of national governments. The democratic deficit has negative consequences in terms of voter interest and mobilization. Elections for the European Parliament have a low turnout. Things are not improving as turnout decreases with each successive election. Even then, elections to the European Parliament are often seen as protest elections whereby voters show their dissatisfaction with incumbent governments. This is quite a rational form of behavior. As voters know that the European Parliament has few powers, they use these elections mostly to express their protest rather than to seek to influence the European legislative process. An aggravating factor is that electoral campaigns for the European Parliament are not based on European party platforms but on national party issues. In fact, European parties do not directly campaign in elections. It is the national parties which campaign at the national level. They thus tend to campaign on national issues since those are the issues on which they are competing against the other national parties. It does not appear very likely that the problems of governance as well as those of lack of action will be solved in the near future. The negative outcome for the referendums on the constitutional Treaty in France and the Netherlands has created a fragile situation. The Constitution was finally adopted as a simplified Treaty (the Lisbon Treaty) taking on board the governance changes provided for in the Constitution with some changes in voting rules as concessions to Poland. While this will help the decision-making process, there is the perception of a lack of legitimacy because the Treaty would not pass the test of a referendum in all 27 countries. While a worse outcome could have been feared if the Constitution had simply been abandoned, there is clearly little momentum in the dynamics of institutional integration. I would expect the era that started with the Single European Act and ended with the Lisbon Treaty to be over. Europe has entered a period of integration fatigue. Another reason for cautious pessimism is that the Franco-German axis, which was a big engine of the integration process, has been permanently weakened. Any initiative that was positively welcomed by the French and German governments would in the past create a positive momentum as it lent a large legitimacy to integration proposals. However, the situation has changed with the enlargement process. The center of gravity of Europe has moved east. France is becoming marginalized not only due to enlargement but it has notoriously dragged its feet on enlargement and has not really


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wholeheartedly accepted it. This negative attitude contributes to a further marginalization of France in a European Union of 27. This marginalization may still have long-run consequences. If the French political elite loses interest in Europe and uses Europe only as a forum to express its national interests, then this might have very negative consequences for Europe. Another factor is that the new member-states are becoming somewhat disillusioned and are less enthusiastic than they were initially. Finally, there has not been a Commission as active as the Delors Commission in the 1980s. The recent Commissions have not been very bold or very active in unblocking the situation. The Prodi Commission was not very active in the Constitution debate and the Barroso Commission seems more to manage the status quo than anything else. The support for a stronger political integration in Europe appears rather weak and unequal across countries today. The current institutional situation carries with it elements of instability. Given the failure of the constitutional process, the current institutional setup with 27 members favors the status quo. The European budget is more likely to be reduced than expanded. Indeed, contrary to what was universally predicted, the enlargement did not lead to an increase in the European budget relative to the European GDP. Even though the European budget represents roughly 1 per cent of European GDP and is thus extremely small in relative terms, it is likely to be reduced because more than half of the expenditures are transfers in the framework of the Common Agricultural Policy and Structural Funds. The allocation of the budget is widely perceived as inefficient and if there cannot be an agreement on important new expenditures, there are likely to be threats by countries which are net donors to the budget to reduce their contributions. Finally, negative shocks to EMU are not impossible. Fiscal discipline has considerably weakened since the introduction of the euro, and countries like Portugal and Italy are going through spells of real appreciation. Since the instrument of the exchange rate is not present any more to boost aggregate demand by currency devaluation, painful contractionary policies are the only possible way out. Leaving the EMU would be extremely costly both to individual countries and to Europe as a whole. On the other hand, despite these notes of pessimism, it seems highly unlikely that the European institutions will unravel. The European Union has become an integral part of the landscape. Young European people of all social classes are now accustomed to travel all over Europe and to pay for their purchases in euros. They speak English to each other and have a certain sense of a European identity. University students now routinely spend a semester abroad and meet students from other European countries who do the same. In twenty years, these students will form the European

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elite and be part of European institutions and of large multinational corporations. These slow sociological phenomena will undoubtedly in the long run cement European unity. The euro has also had positive effects as people can compare prices more easily across countries and can cross borders without having to change currency. National political elites have become used to the European institutional environment which has become an integral part of the landscape. Just as ministers are routinely requested to appear in front of the Parliament to answer questions of elected representatives, the work of cabinet members and their staff is partly dictated by the European agendas, the preparation of Council meetings, the rotating presidency, and so on. To conclude, a European ‘federal state’ will not be on the cards for the coming decades but the European ideals remain strong within large parts of the European elite and are likely to strengthen.

COMPARISON BETWEEN THE EUROPEAN AND NORTHEAST ASIAN CONTEXT Which of the lessons from European integration can be transposed to Northeast Asia? What are the similarities between Europe and Northeast Asia? I must start by stating that I know much less about issues of Northeast Asian integration and therefore this section will be much more tentative and must be taken with a pinch of salt. We have seen that a strong political will for peace after World War II provided a strong impetus for European integration. The situation was quite different after World War II when China adopted a Communist regime. The simple fact that the Korean War took place is an indication that the conditions after World War II were completely different from those in Europe. However, it seems to me that the current North Korean nuclear problem seems to provide a strong incentive for other countries in the region to act jointly so as to preserve peace. Undoubtedly, the North Korean problem is a potential source of instability in the region. However, it also creates powerful incentives for China, South Korea, Japan and Russia to act in common to prevent a nuclear war in the region. The situation has similarities to the Cold War when European countries were faced with the Soviet threat. This seems to me to be a first argument favoring some form of Northeast Asian integration. Second, there are definite advantages from market integration given the strong economic growth in the region. Trade between the countries of Northeast Asia has increased much more than growth. The size of the Chinese market has been a boon for its immediate neighbors including


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Russia. A free trade area between China, Japan and Korea could increase GDP between 0.5 and 3 per cent (Lee, 2004). Third, the environmental challenges facing the region are becoming more pressing. One example is that of the ‘yellow dust’ which comes from Mongolia and China and flies through Korea and Japan. It is a phenomenon related to desertification and is likely to get worse with global warming. Countries in Northeast Asia have a high demand for energy and are energy-poor, with the obvious exception of Russia. Environmental challenges are certainly more important than they were in Europe fifty years ago. These are factors that can be seen as potentially encouraging. However, I also see other factors that are less encouraging. First of all, the view and interests of the different countries that could be part of a Northeast Asian community seem to be more diverse than is the case in Europe. Korea is in the middle of Northeast Asia and thus has strong interests in the development of forms of regional integration. South Korea has the keenest interest in defusing the North Korean threat and needs the cooperation of other countries for that purpose. However, for China, only its Northeastern provinces are part of Northeast Asia. This is not the region of China that is developing the most. It is thus not clear how much China wants to privilege Northeast Asia relative to the rest of Asia and the rest of the world. Clearly, China wants to play a role in containing North Korea. On the other hand, Japan is less interested in developing economic relations with Northeast Asia and wants rather to focus on East Asia and has not been very active in the Six Party Talks (Kim, 2006). Moreover, there is not a set of core countries like the Franco-German axis in the EU and the founding members where there is a deep attachment to stronger integration. Second, the historical barriers between countries still seem very strong. While there are certain clear cultural affinities, these historical barriers seem important. The disputes around school history textbooks are to me quite illustrative of this phenomenon. Distortions in Japanese textbooks about World War II and distortions in Chinese textbooks about the Korean War are a serious bone of contention. The self-critical attitude that existed in Germany after World War II seems very much absent. If there cannot even be agreement on facts of history, it seems difficult to create trust across countries, a fundamental precondition to engage in common projects. These historical barriers are very important. European countries have always had very strong cultural affinities but this did not prevent them from being at war with each other for centuries. The historical barriers created by these wars and by the different perceptions they have generated on the different sides of conflicts have been a constant source of animosity. Therefore, it seems that a willingness to overcome these historical barriers should be a precondition for any serious common project.

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A third aspect that is somewhat less important but not irrelevant is that most countries of Northeast Asia have less experience in international diplomacy. European countries have had centuries of experience of diplomacy and even when their countries were at war, the diplomatic channels were rarely closed, which enabled a constant dialogue. This constant dialogue between the diplomatic elites of the various countries is quite important to maintain because it can play a critical role in defusing crises. China has only opened up recently and has historically little experience with diplomacy. Japan has opened up over a somewhat longer period but still has had historically little experience with diplomacy, and the same can be said of South Korea. Finally, there is the problem of the lingua franca between the different peoples. In Europe, it is clearly English. Young people who meet in tourist spots in Europe will speak together in English. Even though the knowledge of English is more limited in some countries like Hungary or France, it is relatively easy to get around in Europe with only knowledge of English. This seems more problematic in the case of Northeast Asia where linguistic barriers between peoples seem larger, even though written Mandarin is shared by the educated elites. A factor which I would like to give some thought to is the question of size asymmetries in integration. When the process of European integration started, France, Germany and Italy had roughly equal-sized populations (at the time roughly 40 million on average) and there were three smaller countries, Belgium, Netherlands and Luxemburg, with a joint size of roughly 20 million inhabitants. The last three countries formed the Benelux trade agreement and Belgium and Luxemburg had a shared balance of payment. They were quite enthusiastic supporters of European integration and were ready to give up a great deal of sovereignty to be part of a bigger European entity. Currently, Germany is the largest country with roughly 80 million inhabitants while the smaller countries like Sweden have somewhat less than 10 million inhabitants.5 The ratio of smaller countries to Germany is roughly 1 to 8. There has not yet been enough time to see how the balance between smaller and larger countries in the enlarged EU will work. The potential entry of Turkey is seen as a problem because it has a population of 71 million and would be the second biggest country after Germany. There is a consensus that Russia would never be part of the European Union because its size is much larger (143 million). If we turn to Northeast Asia, we see that Mongolia has a population of 2.5 million, South Korea 49 million, Japan 127 million and China 1.3 billion. The ratio between South Korea and China is nearly 1 to 30, which is higher than the ratio between smaller countries in the EU and Russia. Asymmetries in size create a problem because successful supranational institutions require both the respect of national sovereignties


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and the recognition of differences in size. As sovereign countries, China and South Korea should be counted as two sovereign countries, which gives each country an implicit equal weight. On the other hand, the larger size of China should also be recognized. Balancing these two requirements is tricky. Systems of double votes are often used to reflect this but they are not necessarily a panacea. Smaller members in the European Union have willingly allowed the larger countries to have more say inside the European Union unless they have felt their national interests might be hurt. If size asymmetries become too important, it might, however, become too difficult to find an adequate balance between recognition of size and of national sovereignty. Indeed the respect of sovereignty of the smaller country creates a veto power that can appear completely unacceptable to the larger country. On the other hand, the recognition of size differences may appear to infringe directly on the sovereignty of the smaller country. It therefore seems to me that size asymmetries are a larger issue of concern in the case of Northeast Asia compared to Europe. For all these reasons, it seems unrealistic to expect a level of integration in Northeast Asia comparable to that of the European Union. Unrealistic expectations can foster disappointment and bitterness. This does not mean that more modest forms of integration are not possible. There should be a continued practice of common participation in existing forms of collaboration in Northeast Asia and a flexible development of new forms of collaboration: the Six Party Talks on peace, ASEAN3 on trade, a possible free-trade agreement between Japan, China and South Korea, joint initiatives in the area of energy and the environment, and so on. The logic of the argument made in this chapter would suggest that it would be useful to introduce elements of the community method in these looser forms of arrangement. However, for this to be useful, there has to be a minimum of political will to engage in joint projects. In the goal of bridging the cultural and historical gaps between nations, it would be useful to organize large-scale programs of exchange of students between China, Japan and South Korea, in the spirit of the European Erasmus program. As mentioned above, such programs are very useful in creating bonds between the future elites of countries. Students will have to speak a common language so the question of the lingua franca is raised. Similarly, universities must decide whether they want to offer courses in other languages than their own. The initial success of the Erasmus program in Europe, for example, has led many universities to expand the number of courses taught in English because that is the lingua franca between students. In Holland, there has even been the decision to generally switch from Dutch to English in university lectures. Similarly, it should be important to organize programs between

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countries of Northeast Asia to encourage and facilitate the mobility of workers, high-skilled and low-skilled, between countries. The more people work in different countries the more cultural exchange there will be and the more a common regional identity may develop among people of the different countries. My impression is that these are big challenges for the region but the long-run payoff seems important.

CONCLUSION The reasons for success of the European Union are multiple. I have argued that apart from the historical window of opportunity that appeared after World War II, the introduction of the community method as a mechanism of cooperation and legislation was an important institutional reason for its success. It would be a mistake to isolate the institutional or the historical factor. Despite the strong success of the European Union in the last decades, there are reasons to be skeptical about fast progress in political integration in Europe, but there are fewer reasons to think that the European Union could unravel. Northeast Asia has a booming economic environment but it is an unstable institutional environment. The strong growth indicates that large negative shocks are not expected by markets. However, history teaches us that large unexpected shocks may occur. World War I was, for example, largely unexpected and occurred in the midst of a long period of prosperity. Little can be done in the short run about institutional instability but a pragmatic dialogue, a diversity of forms of cooperation and cultural opening can go a long way to improve things.

NOTES 1. There is still some form of national protectionism in the service sector which has not been completely liberalized. 2. The European Monetary Union is itself a form of enhanced cooperation as the UK, Denmark and Sweden are not part of it. 3. Internal governance problems, and in particular the lack of fiscal discipline of the provinces and the incapacity of the center to rein them in, have been considered an important cause of the structural macroeconomic weakness leading to the Argentinian crisis. See, for example, Spiller (2003). 4. The role of the Commission has been weakened under the co-decision procedure as the European Parliament is no longer required to secure the support of the Commission for its amendments. Co-decision now covers a great deal of EU legislation, with the important exceptions of EMU, agriculture, fisheries and fiscal harmonization. In some codecision areas (citizenship, mobility of workers, tax treatment, self-employment, culture),


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unanimity is still required in the Council, making bargaining particularly difficult. Even though the Commission retains the exclusive right of initiative, this exclusivity plays no real role at the amendment. 5. Baltic countries are smaller but together have a little less than 8 million inhabitants and Malta and Cyprus each have less than a million inhabitants.

REFERENCES Eichengreen, B. (2007), The European Economy Since 1945: Co-ordinated Capitalism and Beyond, Princeton: Princeton University Press. Kim, Soung Chul (2006), ‘International environment for a Northeast Asian community’, mimeo, Sejong Institute. Lee, Su-Hoon (2004), ‘A Korean initiative in building a Northeast Asian community’, paper presented at the conference, ‘Building one Asia and global hub’, in Seoul, Korea. Sapir, A, Ph. Aghion, G. Bertola, M. Hellwig, J. Pisani-Ferry, D. Rosati, J. Vinals, H. Wallace, M. Buti, M. Nava and P. Smith (2004), An Agenda for a Growing Europe: The Sapir Report, New York: Oxford University Press. Spiller, P. (2003), ‘The institutional foundations of public policy: a transactions approach with applications to Argentina’, Journal of Law, Economics and Organization, 19(2), 281–306.

10. Conclusion: searching for models of regional integration in Northeast Asia Jehoon Park We have seen four sets of talks crucial for regionalism in Northeast Asia during the year of 2007. The first was the second East Asia Summit, held in the Philippines in January 2007. The leaders from 16 countries – the ten ASEAN members, the additional ‘three’ from the APT (ASEAN Plus Three), China, Japan and the Republic of Korea, plus Australia, New Zealand and India signed the Cebu Declaration on East Asian Energy Security. They also agreed to begin a study on a comprehensive economic partnership agreement among the 16 countries; reaffirmed their commitment to coordinate efforts and to increase cooperation in addressing avian flu; and they agreed to consider ways to prevent or mitigate the impact of natural disasters. They also issued a strong joint statement condemning the DPRK nuclear tests of October 2006 and urging a resumption of the thenstalled Six Party Talks. Second is the Six Party Talks (SPT), where two agreements were made in 2007. The first took place on 13 February and laid out the framework for preliminary execution of the earlier 19 September 2005 joint statement. The 19 September statement promises that energy equivalent to 50 000 tons of heavy oil would be sent to the North in return for shutting down of the Yongbyon nuclear facility and allowing inspectors to enter the North within 60 days. The second SPT agreement is that of 3 October, according to which North Korea will completely disable its three nuclear facilities in Yongbyon. Although no specific timetable was set, the US agreed in exchange to remove the North from its list of states that support terrorism, a consistent request made by the North in return for nuclear concessions. The third set of talks was the second Inter-Korean Summit, which resulted in a joint ‘Declaration on the Advancement of South–North Korean Relations, Peace and Prosperity’ issued on 4 October 2007. ‘At the meetings and talks, the two sides have reaffirmed the spirit of the June 15 Joint Declaration and had frank discussions on various issues related to realizing the advancement of South–North relations, peace on the 150

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Korean Peninsula, common prosperity of the Korean people and unification of Korea.’ The declaration consists of eight clauses which mainly cover economic cooperation. The fourth and final meeting involved the final signing of the Korea–US Free Trade Agreement (FTA) which was officially made on 30 June 2007. The two countries had to accommodate a bipartisan agreement reached between the Democratic-controlled Congress and the Bush administration which included language on labor, the environment and five other areas that were to be incorporated into all free trade deals signed by the United States. All four of these talks are closely interconnected and have their own significance for regionalism in Northeast Asia. The EAS meetings are significant especially from the perspective of favoring economic regionalism for East Asia rather than simply Northeast Asia. The other three talks focus more on Northeast Asia than East Asia and deal primarily with politics and security; even the Korea–US FTA has strong implications for regional politics and security. These talks are directly or indirectly related to the major issues and problems of Northeast Asian regionalism which the previous chapters touch upon and this chapter tries to resolve in a more comprehensive way. The first problem concerns the possibilities of regional integration. At present there are competing views about whether one should be optimistic or pessimistic about regionalism, as well as whether one should anticipate actual integration or simply closer cooperation across the region. The second problem is whether ‘the region’ should be East Asia or Northeast Asia, and in the case of Northeast Asia, which countries should be included. The third big problem is which country could be the major actor leading any regional integration – Japan, China or the US. The fourth concern we will address is which fields or sectors should be in the forefront of regional integration – economics (market), security (state) or civil society (society). First of all, this chapter summarizes the issues related to the above four problems. Second, the existing theories and models of regional integration from the fields of economics as well as political science are introduced and analyzed in order to make an interdisciplinary summary. Based on this work, two models, that is, the Marxian Model and the Weberian Model, are suggested as the general models for regional integration. Third, the factors positively and negatively influencing Northeast Asian regionalism are listed. Fourth, based on the Weberian model, the Northeast Asian version of the regional integration model and the Northeast Asian way for regional integration are suggested as solutions resolving the issues and as the final outputs reflecting factors unique for Northeast Asia. Finally, a summary is made and future tasks are proposed.

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ISSUES The first issue has to do with rather fundamental questions such as why regional integration is necessary in Northeast Asia and whether or not it is possible. There could be many answers to the first question. One of them is an explanation according to the ‘grand wave theory’. This says that currently there are two waves in the twenty-first century’s world. One is globalism initiated by the US. The other is regionalism by the EU. Nobody can be sure how Asia will cope with these two waves. However, it is clear that Asia will approach regionalism from a uniquely Asian perspective. Regarding the possibility of regional integration in Northeast Asia, pessimists usually emphasize the uniqueness of Northeast Asia compared to Europe. Optimistic views, however, cite the fact that Europe also had numerous difficulties in the early period of integration especially right after the end of World War II. Peoples focusing on the economy are usually talking about integration across all of East Asia, whereas political scientists analyzing regionalism typically concentrate on politics and security and argue for the need to generate cooperation among the countries in Northeast Asia rather than all of East Asia. Because the economy is proceeding relatively well compared to other fields, ‘East-Asianists’ emphasize economic fields like FTAs and financial cooperation from the relatively optimistic perspective. On the other hand, ‘Northeast-Asianists’ are relatively rather pessimistic, stressing the importance of barriers in politics and security rather than achievements in the economy. Finally on the issue of major leaders of any regional deepening, ‘the US factor’ is emerging as a critical variable. This centers on the question of whether it is possible or desirable for Northeast Asian regional integration to proceed without American participation. The critical role of the US is acknowledged especially among the ‘Northeast-Asianists’, but generally there is strong suspicion that the US does not actively favor Northeast Asian regionalism. T.J. Pempel (2007) analyzes the role of the US in Northeast Asian regionalism in a rather pessimistic perspective saying that ‘US actions have been quite powerful impediments to regionalism in Northeast Asia’. His conclusion is that ‘it is unlikely to unravel growing economic linkages across East Asia, including the growing connections among the main exporters of Northeast Asia. But on matters of security and diplomacy, it seems clear that the US will serve more as an impediment than a facilitator of Northeast Asian cooperation.’ (See Chapter 2 of this volume for his views on closer regional cooperation in Northeast Asia.) The ‘North Korea factor’ is also one of the core variables affecting regional integration. Two perspectives predominate. ‘East-Asianists’ tend to exclude

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North Korea from the discussion. Their analyses of CJK or ASEAN3 do not include North Korea, based on the implicit assumption that the participation of North Korea in regional integration is not conceivable without a fundamental change in the regime. In contrast, the discussion among ‘Northeast-Asianists’ is centered on the issue of North Korea, although this group is subdivided into two which hold opposite positions on policies toward North Korea. One group gives priority to the cooperation and integration between the two Koreas, supporting, for instance, the ROK’s ‘sunshine policy’. The other stands for the conservative position favoring regime change distinguishing the regime from the people of North Korea. But both sides agree that North Korea will be a key player in any Northeast Asian region. Regarding the role of South Korea, there was a controversy surrounding President Roh’s argument for ‘balancer role’ to be played by South Korea. Although the critical role of South Korea is generally acknowledged for regionalism in Northeast Asia, critics argue that the concept of ‘mediator’ or ‘coordinator’ would be more appropriate than ‘balancer’ in describing the role of South Korea. In South Korea, domestically, there has been considerable debate as to whether the country should give priority to becoming a ‘Northeast Asian Hub Country’ or focusing instead on building a broader ‘Northeast Asian Community’. Three conceptual frameworks, that is, competition, cooperation and integration, allow one to focus on the core issues regarding Northeast Asian economic integration. To attain regional integration . . . it is necessary to make cooperative relations through gaining competitiveness of each country in the region. It is impossible to attain regional integration from only cooperation without competition. It is impossible, either, to attain regional integration from competition without cooperation. Regional integration, also, makes competition deepened by means of reducing all the obstacles in the region. (Park, 2004, pp. 86–8)

Regarding the issue of whether the region should be East Asia or Northeast Asia, in economics, an East Asian Community is more frequently discussed than any Northeast Asian Community. M. Taniguchi (2007) suggests that ‘Korea plays a strong and dynamic role towards the establishment of an “East Asian Community”, not only as a moderator or a balancer between Japan and China, but also as one of the leading players of whole East Asia.’ Japan has recently been proposing a new option of ASEAN6 (adding India, Australia and New Zealand) rather than ASEAN3 in order to dilute the influences of China. Also, when it comes to financial cooperation, East Asia is emphasized. As to Northeast Asian economic integration, arguments proceed in two directions. The first direction argues for economic integration through

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industry cooperation in such sectors as energy and logistics. The second direction focuses on economic integration achieved through FTAs, which is currently given the highest priority by the governments of China, Japan and South Korea. As one of the arguments in the first direction, Shioya (2005) suggests specific examples of strategic development projects for a Grand Design for a Northeast Asian Community. One of them is the natural gas pipeline project, a key project involved in the plan for a ‘Northeast Asia Energy and Environment Community’, which was proposed by the National Institute for Research Advancement (NIRA) in April 2001. The second example is a major railway network referred to as the ‘Big Loop’. ‘This is a plan to construct an express railway network in the form of a loop connecting the central parts of Northeast Asia, forming a transport artery for the basic areas of the region.’ Taehwan Kim (2005) presents a pessimistic view of Northeast Asia’s emerging new regionalism when he considers the energy situation. Firstly, Russia is more likely to take a bilateral than multilateral approach in the region, particularly in the realm of regional energy cooperation. As the most crucial potential supplier of crude oil and natural gas in the region, Russia barely has an incentive to collaborate with Northeast Asian regional countries.

Therefore, he suggests the following. ‘Organizing an investment consortium may be an effective approach at regional energy cooperation, considering Putin’s repeated emphasis on developing Eastern Siberia and the Far East.’ On matters of FTAs, which countries should be included in any Northeast Asian FTA is an issue. Initially, it was expected that a Korea–Japan FTA would be the easiest to form, particularly compared to a Korea–China FTA or a China–Japan–Korea FTA. But lately controversies have arisen within Korea over whether to first pursue a Korea–Japan FTA or a Korea–China FTA. In favor of a Korea–Japan FTA, Young Jong Choi (2004) provides an analytical framework to evaluate FTA partners, upon which the South Korean government can design an FTA strategy. ‘Income level and relative power of FTA partners are the two independent variables that determine the nature of the FTA agreement. As a middle-income country with little leverage against trading partners’, he concludes, ‘South Korea will get the maximum benefits by forming an FTA with advanced, powerful economies like Japan and the United States.’ He ‘cautions the South Korean government not to rush into an FTA with China, a developing major power’. On the other hand, believing that a China–ASEAN FTA would do the most to open markets in East Asia, Inkyo Cheong (2005) argues that ‘there is a high probability that China becomes an FTA hub considering

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potentials of economic growth, leadership of FTA negotiations and the qualitative aspect of FTAs concluded.’ This argument follows the same logic as that comparing the cases of Europe and Asia, namely that Japan will be a passive follower in signing FTAs much like the UK in Europe, while China will be an active leader, like France (Baldwin, 2004). Generally speaking, it is true that China has been relatively more active than Japan in the FTA policies. The position of Japan toward FTAs, however, has become more active, stimulated by rivalry with China for ASEAN countries on the one hand and by the signing of the Korea–US FTA on the other.

THEORIES AND MODELS IN GENERAL Historically there have been two models from which economic integration might proceed. The first is a ‘Trade-Oriented (or Market-Oriented) Model’ which is based on the traditional regionalism or EEC model (Spark Report, Rome Treaties, 1957). This model is also based on the Neo-Classical Functional approach. The second is an ‘Industry-Oriented (or Planning-Oriented) Model’ which is based on the ECSC model (Schuman Plan, Monnet initiative, 1950). This model is based on an institutional approach and emphasizes the role of institutions for economic integration together with the role of human will in institutional building. Recently a third model has emerged. That is a ‘Financial Sector-Oriented Model’ which is based on the new regionalism growing out of the East Asian crisis model (East Asian financial crisis, 1997). In the fields of politics and security, there are two different approaches. The first is an ‘Ideological Approach’ where we may see the left, the right, the central wing or the conservatism, the radicalism. The second is the triad of constructivism, liberalism and realism based on the theories of International Relations (IR). Constructivism involves perspectives adopted from sociology. It is believed that the ideational structures mediate how actors perceive, construct and reproduce the institutional and material structures. Liberalism is a perspective adopted from economics. Liberals assign greater importance to international institutions as a basis for sustaining cooperative state behavior and mitigating the effects of anarchy. Finally, realism maintains a traditional perspective of political science, especially the centrality and objective character of the material distribution of capabilities (Katzenstein and Sil, 2004, pp. 8–19). As a comprehensive effort to combine all of these approaches, one could call for an ‘interdisciplinary summary of regional integration theories’.

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Political sociology Socio-political science (Constructivism)

Political science (Realism)

Political economy (Marxism) Political economics (Liberalism) Figure 10.1

Sociology

Economics Social economics (ECSC Model, EEC Model) (Weberian)

Interdisciplinary summary of regional integration theories

In Figure 10.1, the upper vertical angle depicts ‘political sociology’ or ‘socio-political science’, especially constructivism. The right vertical angle depicts ‘social economics’, especially the Weberian approach (Max Weber). The left vertical angle depicts political economy (Marxism) or political economics (liberalism). Realism belongs to the traditional realm of political science. In the traditional category of economics, the ECSC model and the EEC model explain the typical integration through economic processes. Academic legacies can be traced to ‘two great thoughts of capitalism’. One of them is Marxism, especially historical materialism or economic determinism. The other is Max Weber’s thought. Weber’s main question is ‘Why did only the West develop capitalist systems?’ He explains this by Protestantism, which in turn is rooted in the philosophy that the superstructure determines the economy. Figure 10.2 depicts a Marxian model for regional integration based on the interdisciplinary summary. This is a long-term model for economic integration where markets directly influence state, society and institutions, although state and society, also, exert weak influences over institutions. The market is considered to be the strongest force and player in the model. It takes a rather long time for institutions to emerge, which is consistent with the arguments of the evolutionary view in the New Institutional Economics. This model explains relatively well the EEC model or the EU model since the 1970s.

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Conclusion

Institution

Power

Identity

State

Society

Interest

Market

Note: Bold arrows depict strong and direct influences and relationships, while dotted arrows depict weak and indirect influences and relationships. State, society and market are three fields and players in regional integration.

Figure 10.2

Marxian model for regional integration

Figure 10.3 depicts a Weberian model for regional integration based on the interdisciplinary summary. This is a short-term model for security cooperation where the state directly influences official institutions. In this regard, especially, political leadership or human will plays a critical role in building official institutions. This model explains relatively well the early EU model of the ECSC or the Financial Sector-Oriented Model. The first model could be said to be a ‘Natural Flow Model’. In this case, competition induces cooperation and then cooperation again induces integration or institutionalization. This further explains traditional economic cooperation. On the other hand, the second model could be said to be a ‘Reverse Flow Model’, where competition or conflict induces crisis and then crisis induces cooperation or institution. This explains security cooperation or financial regionalism. The reality, however, is that only the combination of these two models allows us to understand the complexities under which regionalism is

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Official Institution

State

Market

Economy

Security

Society

Civil Society

Note: Bold arrows depict strong and direct influences and relationships, while dotted arrows depict weak and indirect influences and relationships. State, society and market are three fields and players in regional integration.

Figure 10.3

Weberian model for regional integration

moving forward. Politics and economics are sometimes interconnected and sometimes they divert from each other. Many expect that economic cooperation in Northeast Asia is gathering strength and will spill over into expanded security cooperation. In turn, if security cooperation develops into a regional mechanism, it may encourage further economic cooperation or integration in the region. Jaymin Lee (2007) states that East Asia is currently characterized by economic integration and political conflict.

FACTORS IN NORTHEAST ASIAN REGIONALISM Comparing Northeast Asia with the EU or other economic integration bodies especially in terms of the initial conditions of integration, we may note that positive factors could be identified together with many more barriers in the region. Positive Factors Globalization and the development of information technologies exert a positive influence on the spread of regionalism, even if regionalism is a

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conceptual antithesis of globalization. Rapid economic growth rates and the large percentage of regional trade in national economic activities are also counted as positive components that can accelerate the establishment of a regional economic community in Northeast Asia. It means that the Northeast Asian economy is occupying a larger share of the world economy. Moreover, there has been a consensus in the region since the Asian economic crisis in the late 1990s that there needs to be a regional economic cooperation mechanism. Especially with other regional organizations such as the EU and the NAFTA ever expanding, awareness has grown that East Asia also needs more formal economic integration in order to increase its competitiveness. Barriers Many barriers and challenges abound that work against establishing a regional cooperation organization. The possibilities of face-offs in the military and security fields remain high. In the economic arena, competition is rising among the players, and the historical interpretation issues remain a keen focus for social and cultural problems. These issues may very well prove to be a hindrance to current efforts to establish a regional cooperation body. All of these barriers could be categorized into three factors according to time span. First, there are short-term factors. One of them is the ‘North Korean factor’ which is, for now, centered on the North Korean nuclear issue. In order to build up a model of regional integration in Northeast Asia, the North Korean factor thus becomes a core variable. Related to this are broader needs to solve the impending security and economy crises. In this case there are four possibilities (Rhyu, 2005). The first is ‘Nuclear Free and Economic Integration’ which is the best option. The second is ‘Nuclear Threat and Economic Sanction’, that is, the worst option. The third is ‘Nuclear Threat and Economic Integration’, which could be regarded as a North Korean option. The last is ‘Nuclear Free and Economic Sanction’, which could be a US option. In reality, an ambiguous combination of the third and the fourth might offer either side some limited satisfaction. Even though the recent inter-Korean summit and Six Party Talks of October 2007 increased the probability of the best option (the first), it will take time before this might actually be realized. In the medium term, an important variable is the ‘China factor’ that is, whether China will continue its stable economic growth, or whether the domestic political or economic system in China will collapse with the country disintegrating as pessimists have expected. The competitive relationship between China and Japan may cause conflicts and endanger cooperation between them. Current bilateral conflicts include territorial disputes, energy disputes, water area disputes, and historical interpretations

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of past events. The relationship with the US could also prove to be unstable over the Taiwan issue. Roland (2007) points out that the China factor presents important size asymmetries in regard to regional integration. Noting that ‘Korea and China is nearly 1 to 30, which is higher than the ratio between smaller countries in the EU and Russia’, he concludes that ‘it therefore seems to me that size asymmetries are a larger issue of concern in the case of Northeast Asia compared to Europe’ (Chapter 9 of this volume). The ‘US factor’ could be a long-term or permanent factor affecting regional integration in Northeast Asia. There are various views on the participation of the US in regard to regional cooperation in Northeast Asian. The US may hinder regional cooperation as an outgrowth of its own Northeast Asian strategy, or the US may actually try to establish a multilateral system in the region. It can be said that the main factor that has worked against forming regional cooperation in Northeast Asia has been relations between the US and the USSR, or currently, the relations of the US to the region as a whole. In other words, any future Northeast Asian regionalism may prove extremely difficult to generate unless the US takes a central role in untangling the imperfect sovereignty relationships among the countries in the region. If the US and the Northeast Asian regionalism run into conflicts of interest with each other, a regional community in Northeast Asia is unlikely to occur (Keun Lee, 2003).

POSSIBLE MODELS FOR NORTHEAST ASIAN REGIONAL INTEGRATION Generally speaking, the Weberian model is more applicable to Northeast Asia than the Marxian model because of the needs to formulate driving forces for institutionalization of regional integration in Northeast Asia given the fact that the level of functional integration is not low compared with the level of the EU in the early period of integration. However, the Weberian model alone is not sufficient to establish a unique model for regional integration in Northeast Asia. Based on the above discussions, the factors and the general theories and models of regional integration, we may consider the following sets of possible models for Northeast Asia according to each field or sector of state, society and market. State Crisis model We may prefer and anticipate a natural flow model or a gradual model for regional integration in Northeast Asia. We should, however, consider and

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prepare for the possibilities of a big-bang. The North Korea nuclear crisis could play a double role in regional integration. It is easy to understand that the current crisis is an evident barrier against regional integration. From a different angle, however, the crisis could be a catalyst for regional integration in that the procedure for resolving the current crisis (like the Six Party Talks) could become the forum for reinforcing broader regional integration. The crisis model could belong to the above-mentioned reverse flow model or Weberian model. Also, we may call this ‘a reduced or a compressed integration model’ in the sense that regional integration is achieved in a rather short-term period compared with the cases of, for instance, the EU. Political leadership model The crisis model could lead to an appreciation of how political leadership plays a critical role, considering the fact that the state still has stronger power than the market and society in Northeast Asia and strong political leadership is essential to resolve the current crises in the region. European experiences, especially those of Jean Monnet, teach us that a ‘genuine integration leadership’ comes from the strong conviction for uniting people as well as for ‘ideologically unbiased and politically neutral leadership’ (Monnet, 1978). But it should be noted that Jean Monnet’s political leadership model for institution building through sudden change is distinguished from the evolutionary arguments of New Institutional Economics, for instance, by D.C. North (1990). Society Intellectuals model An epistemological community build-up by intellectuals matches the Northeast Asian tradition of scholar-officials on the one hand, and the emergence of the knowledge society in the twenty-first century on the other. Intellectuals or academic NGOs could play a key role in regional integration, although it is likely to take time for China to allow genuine NGO initiatives. Academic NGOs could be developed into key organizations like Jean Monnet’s Action Committee for the United States of Europe. Education model Roland (2007) suggests a kind of Northeast Asian version of the Erasmus program, saying that ‘in the goal of bridging the cultural and historical gaps between nations, it would be useful to organize large-scale programs of exchange of students between China, Japan and South Korea, in the spirit of the European Erasmus program’ (Chapter 9 of this volume). Education takes rather a long time to influence regional (or other)

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development. It could, however, be a short cut for tough tasks such as regional integration. Glocalization model Experiences of NAIS Korea (Incheon Metropolitan City government sponsored their activities) provide a good case of microregionalism (Breslin and Hook, 2002). Authorities at the local level are often on the frontlines of regionalism. ‘Glocalization’ is suggested as one way to forge regional ties through joint efforts of global and local forces (Rozman, 2004, p. 9). Rozman ‘examined the links forged in Northeast Asia by local and regional (as opposed to national) governments in China, South Korea, North Korea, the Russian Far East and Eastern Siberia, Japan, and Mongolia’ (Pempel, 2005, p. 27). Market Transition model If we consider the factor of North Korean transition as an endogenous variable, we may construct a ‘Transition Model’ for regional integration. There could be four types in such a model. The first is a ‘radical type’ where the collapse of the North Korean system comes first, leading to reunification, followed then by transition and integration (U – T – I). A second option is a ‘gradual type’, where integration comes first, followed by transition, with unification coming last (I – T – U). The third process involves what might be called ‘transition type I’ where transition or reform comes first, then integration follows, with unification coming last (T – I – U). The fourth type, ‘transition type II’ would see transition or reform coming first, and then unification followings, with integration coming last (T – U – I). The ‘radical type’ is the option for groups who are against the Kim Jong Il regime or who believe there is a high possibility of some big-bang scenario involving North Korea. The ‘gradual type’ could be the best option in the sense that it could minimize the so-called unification costs. It is also consistent with the strategy of ‘Unification through Regional Integration’ where unification of the Korean peninsula could be attained only after or through regional integration. The fact that the October Inter-Korean Summit was proceeding simultaneously with the Six Party Talks confirms the usefulness and the applicability of this strategy. ‘Transition type I’ presents a rather realistic model, considering the fact that in order to be integrated, the North Korean system would have to be reformed to a certain degree. ‘Transition type II’ presents an option for a perspective from which integration would be achieved only after unification and as the final result of an engagement policy like the ‘sunshine policy’ toward North Korea.

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Conclusion

Official Institution Political Leadership

Crisis Asian financial Crisis N.K. Nuclear Issues Politics Security

NEA Version of Marshall Plan Functional Integration Development · Transition

Market

State Education

Intellectuals Local Government

Society

Figure 10.4 A comprehensive model for Northeast Asian regional integration Development model In order for regional integration in Northeast Asia to have any feasibility, we should take into consideration the fact that there are many relatively underdeveloped parts of the region like North Korea, the Northeast provinces of China and the Russian Far East. Therefore, any model for regional integration in Northeast Asia should be constructed based on considerations of development as well as transition. The above ‘Industry-Oriented (or Planning-Oriented) Model’ which is based on the ECSC model could be applied here. As a comprehensive program for reinforcing development and transition of North Korea after the nuclear issue is resolved, a ‘Northeast Asian version of the Marshall Plan’ could be proposed under a US initiative. If we incorporate the above models into the Weberian model, we may get a comprehensive model for Northeast Asian regional integration. Figure 10.4 depicts and summarizes a comprehensive model for Northeast Asian regional integration. This model focuses on domestic politics or the single country dimension of regional integration. The country exterior or the multi-country dimension of regional integration is analyzed below. Northeast Asian Way Building up of core, threshold and catalyst of integration In the case of the EU, the six countries of the ECSC became the core. Since then other countries from Western Europe have become members of the EU

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and now all of the transition countries of Eastern Europe want to join. We need a threshold for institutional integration like the ECSC. A K–J FTA or a K–C FTA then could be the core of such economic integration. Once this happens, then, China or Japan might well desire to join the integration. The Six Party Talks should be developed into, for instance, a ‘Conference on Security Cooperation in Northeast Asia (CSCNA)’ which would be a Northeast Asian version of a CSCE (Conference on Security and Cooperation in Europe, 1975) or OSCE (Organization for Security and Cooperation in Europe, 1994). CSCNA could become a threshold for regional integration in Northeast Asia. A Korea–US FTA could become a catalyst for economic integration in Northeast Asia. At least in the security aspect the crucial role of the US is inevitable. In order to manage a rising China effectively, the US should change its existing policies toward Northeast Asia to become more active as a participant or at least to accept regionalism in Northeast Asia. Active involvements by the US in Asian regional integration are essential. Otherwise the US should encourage and embrace the region’s emerging integration as part of its own new grand world design. The ‘ASEAN way’ is a unique bargaining style that emphasizes cooperation despite low levels of formal institutionalization and legalization by creating sequential issue-by-issue coalition (Pempel, 2005, p. 11). Instead of following the ‘ASEAN way’, what is needed is a nexus of the Southeast Asian way that is, an ASEAN three approach, and a Northeast Asian way that is, Korea–Japan core (or Korea–China core) CSCNA threshold US catalyst approach.

SUMMARY AND FUTURE TASKS In Northeast Asia, functional integration in the economy has developed sufficiently. The problem lies in the lag or deficiency of institutional integration, for instance, in the form of a CSCNA or CJK FTA. The main impediments to such a move come from the non-economic factors. We therefore proposed a comprehensive model for Northeast Asian regional integration. According to this, a state model, a crisis model and a political leadership model are suggested with political leadership playing a critical role in utilizing crises to advance regional integration. From the perspective of society, we have offered an intellectuals model, an education model and a glocalization model emphasizing the long-term role of intellectuals, education and local governments in fostering regional integration. Finally, we offer a marketbased transition model and a development model aimed at showing how to ease the transition of North Korea and development of underdeveloped parts of the region and making them endogenous variables of regional integration.

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We could offer tentative answers to major problems raised in the first part of the chapter. For regional integration, we need optimistic realism. We should pursue cooperation and integration, with the final goal being eventual integration. About the question of whether the region should be East Asia or Northeast Asia, it may be argued that security cooperation should focus on Northeast Asia while economic integration focuses on East Asia. Although East Asian economic integration is proceeding relatively well at least in the short run by means of ASEAN+3, along with FTAs, East Asian economic integration can not succeed unless China, Japan and South Korea ultimately agree to conclude a trilateral FTA among the three of them. Shares in economic size make this critical for Northeast Asian integration. In terms of significance and urgency in politics and security, Northeast Asia matters critically. This is why Northeast Asia needs a crisis model and political leadership model for regional integration. Regarding the question of which country could be the major actor in regional integration, it should be emphasized that the US should play a role of catalyst for regional integration, for instance, by means of the Korea–US FTA, while the relationship between Japan and China is not evolving into joint leadership. This leaves the need for either a Korea–Japan core or a Korea–China core and one or the other should be formed as soon as possible. Regarding the question of which field or sector should lead the regional integration, it is clear that economic moves are going well, but that security problems or crises could play a determining role for regional cooperation. The crisis model and political leadership model in the state sector, therefore, are needed. In the economy, we need both a transition model and a development model in order to take into consideration the uniqueness of the region. In the aspect of society, the long-term roles for intellectuals, education and local government are needed for regional integration. Summarizing all of these, it may be said that we need ‘a Bold, Comprehensive & Creative (BCC) Approach’, firstly by ‘creative’ intellectuals and civil society actors such as NGOs from the various fields, secondly by means of ‘comprehensive’ ways and models of regional integration, and lastly by ‘bold’ political leaders like Jean Monnet and Konrad Adenauer. We have two levels of future tasks for the regional integration in Northeast Asia. At the level of theory, we need to work on future research agendas such as family and culture studies focusing on an Asian Value Study (Bovenberg, 2003), a study on ‘Federalism’ for the long-term goal of regional integration, basic studies for ‘Regionology’ and ‘Asianism’ in Northeast Asia, and finally research on models for regional integration in Northeast Asia including regional integration index studies and how to build international institutions from the perspective of, for instance, New Institutional Economics.

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At the level of practice and policy suggestions, there could be three stages. In the first stage we need to build up an epistemic community, for instance, by means of consolidation of NGOs (for instance, NAIS). We also need active attention to the establishment of education institutions like ‘Leaders Academy of Northeast Asian Community (LANACO)’ drawing on European experiences such as the ‘European University Institute’ and ‘The Robert Schuman Center for Advanced Studies (RSCAS)’ and an Asian version of the Erasmus program. In the second stage of policy options, the focus should be on solving crises and trust-building. These could be the core of an international program such as a ‘Northeast Asia Energy Community’ that would include the solution of North Korean nuclear issues. This in turn could be based on the study of, for instance, a ‘Northeast Asia Development and Transition Belt Project’ in order to integrate not only North Korea but also relatively less developed sub-regions including the Russian Far-East and China’s NorthEast Provinces into the more developed areas. In the third stage of policy options, we might pursue formal institutionbuilding such as the establishment of a ‘CSCNA’ based on the Six Party Talks, which would be a Northeast Asian version of a CSCE. For a longerterm goal we might also pursue the establishment of an ‘East Asian Economic Community’ which would represent the formal institutionalization of the APT or, even further, an ‘Asian Community’, an ‘Asian Union’ or ‘the United States of Asia’ as a final goal.

REFERENCES In English Baldwin, Richard E. (2004), ‘East Asian regionalism: a comparison with Europe’, paper presented at the conference on East Asian Regionalism, Inha University, Incheon, Korea, May, 2004. Bovenberg, L. (2003), ‘Unity produces diversity: the economics of Europe’s social capital’, in W. Arts, J. Hagenaars and L. Halman (eds), The Cultural Diversity of European Unity: Findings, Explanations and Reflections from the European Value Study, Leiden: Koninklijke Brill, pp. 403–420. Breslin, Shaun and Glenn D. Hook (eds) (2002), Microregionalism and World Order, New York: Palgrave. Choi, Young Jong (2004), ‘East Asian regionalism and South Korea’s FTA strategy’, The Korean Journal of International Relations, 44(5), 85–108. Katzenstein, P.J. and R. Sil (2004), ‘Rethinking Asian security: A case for analytical eclecticism’, in J.J. Suh, P.J. Katzenstein and Allen Carlson (eds), Rethinking Security in East Asia Identity, Power and Efficiency, Stanford: Stanford University Press, pp. 1–33.

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Kim, Taehwan (2005), ‘Shifting domestic coalition and Putin’s sway to neoMercantilism: Russia’s national strategy on Northeast Asian regionalism’, paper presented at the conference on Northeast Asia’s New Institutional Architecture and Community-Building in a Post-9/11 World, UC Berkeley, 11 December 2005. Lee, Jaymin (2007), ‘New political economy of East Asia: Korean perspective’, paper presented at the 5th International Conference, hosted by NAIS Korea, Seoul, Korea, 20 February 2007. Monnet, Jean (1978), Memoirs, New York: Doubleday & Company. North, Douglas C. (1990), Institutions, Institutional Change, and Economic Performance, Cambridge: Cambridge University Press. Pempel, T.J. (ed.) (2005), Remapping East Asia: the Construction of a Region, New York: Cornell University Press. Pempel, T.J. (2007), ‘Regionalism in Northeast Asia: an American perspective’, paper prepared for the keynote speech at the 5th International Conference, hosted by NAIS Korea, in Seoul, Korea, 20 February 2007. Rhyu, Sang Young (2005), ‘North Korea: institutionalizing regime survival through special economic zone’, paper presented at the conference on Northeast Asia’s New Institutional Architecture and Community-Building in a Post-9/11 World, UC Berkeley, 11 December 2005. Roland, G. (2007), ‘European integration: What lessons for Northeast Asia?’, paper prepared for the keynote lecture at the 5th International Conference, hosted by NAIS Korea, in Seoul, Korea, 20 February 2007. Rozman, G. (2004), Northeast Asia’s Stunted Regionalism, Cambridge: Cambridge University Press. Shioya, Takafusa (2005), ‘Shaping a grand design for Northeast Asian cooperation and community building’, paper prepared for the International Conference on Building One Asia and Global Hub, hosted by NAIS Korea, Seoul, Korea, 16–17 June 2005. Taniguchi, Makoto (2007), ‘East Asian community: Japanese perspectives – the role of 3 major economic players in Northeast Asia’, paper prepared for the keynote speech at the 5th International Conference, hosted by NAIS Korea, Seoul, Korea, 20 February 2007.

In Korean Cheong, Inkyo (2005), ‘Environments and economic effects of CJK FTA’, The Journal of Northeast Asian Economic Studies, 17(3), 1–26. Lee, Keun (2003), ‘Possibilities for Northeast Asian economic integration from security perspective’, in Chung Young Ahn and Chang Jae Lee (eds), Northeast Asian Economic Cooperation, Seoul: Parkyoungsa Publishers, pp. 366–95. Park, Jehoon (2004), ‘Northeast Asian economic community: issues and suggestions’, in NAIS Korea’s edition, Toward the Northeast Asian Community, Seoul: Donga Ilbo, pp. 81–120.

Index Aggarwal, V.K. 18 Ahn, Hyungdo 8, 100–110 Akaha, T. 30 Amyx, J. 17 Ando, Mitsuyo 5, 67–99 Armstrong, C.K. 30 ASEAN and IMF 115 intra-regional trade 3, 5, 8, 15–17, 22, 57–8, 67, 68, 101–5 ASEAN Plus Three (APT) Asian Bond Market Initiative (ABMI) 112, 117–19, 121, 124 Asian Monetary Fund (AMF), objections to 111, 120–21 Chiang Mai Initiative (CMI), see Chiang Mai Initiative (CMI) China 7, 17, 18, 19, 44–5, 49, 61, 64 common interest development 124 East Asia Vision Group (EAVG) Report 112 Economic Review and Policy Dialogue (ERPD) 116 exchange rate stability 119–20 financial cooperation, expected results 122–3 financial cooperation, impediments 120–22 financial cooperation, prospects of 123–5 financial cooperation within 111–29, 165 financial crises, prevention of 114, 115, 116–17, 122, 124 foreign reserves holding 18, 122 Group of Experts (GOE) 117, 124 and IMF status 123 and leadership, lack of 121–2, 125 monitoring and surveillance 116–17 and neofunctionalism 124–5 and neoliberal institutionalism 124–5

North Korea exclusion 19, 152–3 Technical Working Group on Economic and Financial Monitoring (ETWG) 117, 124 see also individual countries ASEAN Regional Forum (ARF) 12, 13, 16–17, 22, 25 regional cooperation 44–5, 49 Asia–Europe Meeting (ASEM) 7 Asia-Pacific Economic Cooperation (APEC) 12, 16–17, 25, 63, 111 Asian Bond Market Initiative (ABMI) 112, 117–19, 121, 124 Asian Currency Unit 118–19, 120 Asian Development Bank (ADB) 116, 118, 119, 124 Asian financial crisis double mismatch problem 117–18 effects of 1, 17, 38, 48, 58, 60, 101, 111–13 and exchange rate fluctuations 119 future crises, prevention of 114, 115, 116–17, 122, 124 and IMF 114–15, 116 Asian Monetary Fund (AMF) 113, 121 US opposition to 111, 120–21 Asian Value Study 165 Australia China, relations with 23, 91 in East Asia 11–12, 13 FTAs 57, 58, 67, 68, 91, 101–4, 153 Japan, trade with 16 Axelrod, R. 113 Baldwin, R.E. 155 Banca Delta Asia asset freezing 12–13 Bank for International Settlement (BIS) 116, 120 Belaisch, A. 121, 122 Bijian, Zheng 42 bond market 169

170

Index

ACU-denominated bonds 120, 124 Asian Bond Market Initiative (ABMI) 112, 117–19, 121, 124 Asian Bonds Online website 124 basket currency bonds 118–19 collaterized bond obligations (CBO) 118 and local currencies 17, 118–19 Pan-Asia Bond 118 Bovenberg, L. 165 Breslin, S. 14, 162 Brunei, FTA 102, 105 Buszynski, L. 33, 35 Canada, FTAs 57, 58, 68, 101, 102 Cebu Declaration on East Asian Energy Security 11, 150 Cha, V.D. 36 Chen, H. 30, 31, 36 Cheong, Inkyo 7–8, 56–66, 154 Chiang Mai Initiative (CMI) and Asian Monetary Fund (AMF) 121 bilateral swap agreements (BSAs) 111–12, 114, 124 and foreign reserves 122 IMF link 114, 116–17, 124 multilateral swap agreements (postCMI) 115–16 skepticism about 120–21 support for 18 surveillance and monitoring 116–17, 121 Chile, FTAs 7, 57–60, 68, 101–3, 105 China agricultural exports 71, 74–5 ARF support 22 and ASEAN 22, 52, 60, 91, 104, 106, 154–5 ASEAN Plus Three (APT) 7, 17, 18, 19, 44–5, 49, 61, 64 and Asian financial crisis 38 Beijing Olympics 2–3 business environment 5, 88–91, 94–9 CEPA (Close Economic Partnership) with Hong Kong and Macao 104 and Cold War 37, 39 competitiveness 104

cooperative approach 38–40, 44–5, 51–2, 104 democracy 6, 53, 54 East Asia Summit (EAS) support 22 economy 2–3, 8, 19, 21, 22, 38–9, 60, 61, 104, 144–5, 159, 164 energy competition 23–4, 104, 106 exclusive economic zone (EEZ) 21, 23 export growth 15–16, 61 FDI 61, 91 FTA with Korea 3, 44, 57, 58, 102 FTA policy 103–4, 106–9 FTA with South Korea 3, 8, 44, 57, 63–4, 103, 104, 108, 154, 164 FTAs 3, 8, 44, 49, 52, 54, 57–8, 60, 67–8, 91, 102–3, 154–5 GDP gains and FTA 107–8 Global Competitiveness Index 96–9 historical barriers 145 and IMF 115 international diplomatic experience 20, 51, 146 international economic strategy 3, 38–9, 60, 104, 159 investment treaty with Japan and South Korea 8, 91 Japan, relationship with 21, 23, 37, 40, 121, 125 Japanese direct import contents in Chinese production 20, 23, 51, 52, 54, 82–3, 86–7, 88 labor market 61 military budget 23 nationalism 20, 45, 48 New Diplomacy 38, 39 New Security Concept 38, 39 NGO initiatives 161 as nuclear power 18 perspectives and positions 2–3, 22 politics 2, 38, 103–4, 106–9 regional hegemony, pursuit of 106 and regionalism 37–8, 39 security 2, 32, 37–41, 106 ‘self-reliance’ policy 37, 38, 51–2 Shanghai World Trade Expos 2–3 size asymmetry 146–7 soccer matches, anti-Japanese protests 23

Index South Korea, relations with 23, 26, 37, 40 tariff system 54, 76–9, 91 technology transfer 91 trilateral cooperation 44–5 US relations 23–5, 28, 29, 33, 37–40, 60 WTO membership 22, 38, 52, 89, 90, 103 Xinjiang province and Muslim Fundamentalism 28 Year of Cultural Exchanges among China, Japan and Republic of Korea 45, 53 Cho, S. 6 Choi, W. 6 Choi, Young Jong 7, 44–55, 121, 154 Cold War and China 37, 39 and European Union 135, 144 post-Cold War peace and Northeast Asian security regionalism (NEASR) 32–3, 36, 39, 144 security cooperation 35–6 constructivist theory 47–8, 49 cross-Straits problems 19, 20 currency swaps 17, 18 bilateral swap agreements (BSAs) 111–12, 114, 124 democratization China 6, 53, 54 European Union 133–4, 141–2 Dent, C.M. 18, 112 Deutsch, K. 47, 52 Dieter, H. 113 Disyatat, P. 121 Doha Development Agenda (DDA) 60 DPRK, see North Korea East Asia broad definition of 13 economic ties 15–16 exchange rate mechanism (ERM) 120 global GDP share 122, 123 IMF voting power 122–3 intra-regional trade shares 14–16 and Northeast Asia, economic difference between 153

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East Asia Summit 2007 (EAS) 11–12, 13, 18, 22, 150, 151 and US 24 East Asia Vision Group (EAVG) Report 112 East Asian Economic Community proposal 5, 111 East Asian Energy Security 11, 150 East Asian Free Trade Area (EAFTA) 58, 64, 104 East Asian regionalism 14, 16, 60 Financial-Sector Oriented Model 155 leadership, lack of 112, 121–2 see also Northeast Asian regionalism Eichengreen, B. 132 energy competition, China 23–4, 104, 106 East Asian Energy Security 11, 150 Korean Peninsula Energy Development Organization (KEDO) 26–7 Northeast Asian regionalism 154, 159, 166 oil reserve program proposal 5 environmental issues 5, 145 European Commission 137, 138, 139–40, 141–2, 143 European Free Trade Association (EFTA) 57, 58, 64, 136 European Parliament 137, 142 European Union Amsterdam Treaty (1997) 131, 137 Asia–Europe Meeting (ASEM) 7 British rebate question 140 centralization claims 138 and Cold War 135, 144 community method of decisionmaking 137–8, 139–40 conflict resolution 132–3 Constitutional Treaty (2001) 131 Constitutional Treaty referenda 142 constructivism and integration 47–8 COREPER committee 140 Council of Europe 137, 138, 139–40, 141–2 Council veto measures 139–40 defense shortcomings 141 democratization 133–4, 141–2 enlargement and budget 143

172

Index

Erasmus student exchange program 147 European Currency Unit (ECU) 120 European Monetary Union 131, 132, 143, 144 foreign policy 141 Franco-German alliance 125, 130, 142–3 FTAs 8, 57, 58, 101, 102, 103, 105, 136 GDP 132, 143 German denazification 134–5, 145 growth rates 141 immigration issues 141 Industry-Oriented Model (PlanningOriented)) 155, 163 institutional democracy, lack of 141–2 institutional integration 131, 135–40, 143–4, 163–4 integration leadership 161 intergovernmental method of legislation 138–40 intra-regional trade 15, 17 Lisbon Treaty 142 Luxembourg compromise 137 Maastricht Treaty (1992) 131, 132 macroeconomic stability 132 and Marshall plan 135 and nationalism 135–6 Nice Treaty (2001) 131, 137 and Northeast Asia, comparisons between 144–8 Pareto-improving deals 140 regional cooperation 132–3 regional integration experience 7, 46, 47–8, 50, 52, 112, 130–49, 163–4 Sapir report 141 Single European Act (1987) 131 Single Market 132 size asymmetries 146, 147 success, institutional reasons for 137–40 success of 131–4 success, reasons for 134–6 terrorism issues 141 Trade-Oriented Model (NeoClassical Functional Approach) 155

veto powers 137–8, 140 weaknesses 140–44 exchange rate stability 119–20 exchange student program, suggested 147, 166 FDI, China 61, 91 Fishlow, A. 14 free trade agreements (FTA), see individual countries and regions Garton, P. 121 GATS, Article 5 90 GATT, and trade liberalization 70, 90 Gen, X. 31 globalization anti-globalization rally, South Korea 60 and Northeast Asian regionalism 20, 158–9 government actions 14, 17, 46, 57–8 liberal inter-governmentalism 46, 48, 138–40 see also individual countries Gowa, J. 47 Grieco, J. 47, 113 Griffiths, M. 31, 32 Grimes, W.W. 17, 115 Gulf Cooperation Council (GCC), FTA 101, 102, 103, 104, 105 Haas, E.B. 48, 50 Haggard, S. 14 Hayashi, S. 121 Higgott, R. 113 historical barriers, Northeast Asian regionalism 145, 159–60 historical legacy, East Asian regionalism 112 Hong Kong 15, 16, 17, 104 FTA 102 Honma, M. 92 Hu, A. 3 Huang, J. 38, 39, 40 Hund, M. 112 Iceland, FTA 102, 103 IMF and ASEAN Plus Three (APT) 123

Index and Asian financial crisis 114–15, 116 and Chiang Mai Initiative (CMI) 114, 116–17, 124 and China 115 and currency swaps 18 East Asian financial cooperation 121 East Asian voting power 122–3 and Japan 115 Manila Framework Group, support for 116 Washington Consensus 115 India China exports 16 in East Asia 11–12, 13 FTA 8, 57, 58, 67, 101–5, 153 as nuclear power 18 Indonesia China exports 16 FTA 102, 105 institutional arrangements 14, 17, 18, 20, 46 European Union 131, 135–40, 143–4, 163–4 neoliberal 113, 124–5 International Atomic Energy Agency (IAEA) 12, 19 International Finance Corporation (IFC) 118, 124 Itoh, M. 5 Japan agricultural policy reform 5, 71–6 agricultural protection 69–76, 105, 106, 108 ASEAN+6 suggestion 153 ASEAN 105, 106 ASEAN Plus Three (APT) 7, 17, 18, 19, 44–5, 49, 61, 64, 90–91 Asian Monetary Fund proposition 111, 120–21 business environment 89, 94–9 China exports 16 China, relations with 21, 23, 37, 40, 52, 54, 121, 125 and civil society 3–4 competitiveness 106 economy 5, 8, 61 energy competition 23–4 FDI 69, 90, 91

173 FTA negotiations with US and EU 16, 105 FTA obstacles 69–76 FTA policy 104–9 FTA with South Korea 3, 4, 8, 44, 54, 57, 59–60, 62–4, 71–9, 101, 103, 105, 108, 154, 164 FTAs 3–5, 8, 44, 49, 54, 57–60, 67–8, 90–91, 101–2, 104–5, 154–5 GDP gains and FTA 107–8 Global Competitiveness Index 96–9 historical legacy 4, 52, 145 illegal drugs trade 21 and IMF 115 international diplomatic experience 20, 146 and international policies 91, 105–6 investment treaty with China and South Korea 8, 91 manufacturing sector 105, 106, 108 military role 19 National Defense Planning Outline (NDPO) 21–2 nationalism 20, 45, 48 North Korea, deteriorating relations with 21 Okinawa prefecture independence proposal 4 perspectives and positions of 3–5 politics and security 4, 21–2, 32, 91, 105–6 protectionism 49, 69–76 regional hegemony, pursuit of 106 Russia, relations with 33 and Six Party Talks 145 size asymmetry 146 tariff system 54, 70, 71, 76–9 trade liberalization 70, 71–6, 105 trilateral cooperation 44–5 UN security council seat, objections to 23 US military cooperation 22, 25, 28, 39, 40–41, 52 White Paper on International Economy and Trade (2007) 105, 106 Yasukuni shrine 5, 22, 23 Year of Cultural Exchanges among China, Japan and Republic of Korea 45, 53

174

Index

Japan Bank for International Cooperation (JBIC) 119, 124 Jianshe, S. 42 Katzenstein, P.J. 15, 155 Kawai, M. 15 Keohane, R.O. 51, 113 Kihara, S. 118 Kim, Jin-Young 7, 111–29 Kim, K.-W. 33 Kim, S.C. 145 Kim, S.S. 30 Kim, T. 154 Kim, Y. 103, 105 Kimura, Fukunari 5, 67–99 Klare, M. 25 Koh, B.-I. 6 Korean Peninsula Six Party Talks 2, 162 see also North Korea; South Korea Lan, J. 40 Laursen, F. 48 leadership problems and ASEAN Plus Three (APT) 121–2, 125 East Asian regionalism 112, 121–2 Northeast Asian regionalism 52, 54, 161 Lee, J. 104, 158 Lee, K. 160 Lee, S.-H. 145 linguistic barriers, Northeast Asian regionalism 146, 147 Liu, Yongtao 2, 30–43 Lu, J. 3 Malaysia 16, 102, 105, 115, 118 Manila Framework Group (MFG) 116 Marxian model, regional integration 156–7 Mearsheimer, J. 19 Mexico FTA 57, 58, 68, 101, 102, 105 Peso crisis 111 Monnet, J. 160 Moon, C. 112 Moravcsik, A. 47 Morishima, M. 4 Munakata, N. 44, 49

NAFTA (North American Free Trade Agreement), intra-regional trade 15, 17, 101 nationalism 20, 33–4, 36, 44, 45, 48, 53, 112 natural gas pipeline project 154 Naustion, A. 113, 123 Nemoto, Y. 115 neofunctionalism 48, 54, 113, 124–5 New Zealand in East Asia 11–12, 13 FTA 67, 68, 101, 102, 103, 153 Niu, J. 40 North Korea APT, leaving 19, 152–3 asylum seekers 21, 23 diplomatic tensions with Japan 20 East Asia Summit, absence of formal participation 13 exclusion of 152–3 illegal drugs trade 21, 27 Inter-Korean Summit 150–51 Korean Peninsula Energy Development Organization (KEDO) 26–7 light water reactor demand 12 migration problems 27–8 nationalism 20 and NEASR 32 nuclear issue 1, 6, 11, 12–13, 18–21, 27–8, 37, 40, 144–5, 150, 159, 161, 163 sanctions 13, 14 Six Party Talks, inclusion in 11, 12, 14, 27, 28 spy ship sinking by Japan 21 and UN Security Council 13 US, relations with 12–13, 26–7, 150 Yongbyon nuclear facility shut-down 13 Northeast Asian FTA and agricultural sector in Japan 69–76, 105, 106, 108 and business environment in China 5, 88–91, 94–9 CJK FTA, feasibility of 100–110 economic obstacles to 67–99 international environment, evolving 3, 67–9

Index and manufacturing sector in South Korea 5, 76–88, 108 see also individual countries Northeast Asian regionalism and APT, effect of 49 and Asian Value Study 165 barriers to 45, 159–60 collective identity 49, 52–3, 54 crisis model 160–61, 166 cultural diversity 49 current state 48–9 demand-side conditions 46, 48 development model 163 economic cooperation 61–2, 144–5, 153–4, 159 economic development disparities 51–2 economic integration 50, 61, 159 education model 161–2, 166 energy situation 154, 159, 166 environmental issues 5, 145 European integration lessons, see European Union exchange student program, suggested 147, 166 functionalist approach 50, 53–4 future prospects 53–4, 164–6 and globalization 20, 158–9 glocalization model 162 grand wave theory 152 historical barriers 145, 159–60 impediments to 18–24 integration catalyst 163–4 integration models 150–67 integration theories and prospects 44–55, 152–5 intellectuals model 161 international diplomacy experience, lack of 146 key issues 50–53, 152–5 leadership problems 52, 54, 161 and liberal inter-governmentalism 46, 48, 49 linguistic barriers 146, 147 military capabilities 18–19 and nationalism 48, 53 natural gas pipeline project 154 political integration 50 political leadership model 161

175

positive factors 158–9 and power changes 19, 33 and protectionism 49 railway network proposal (‘Big Loop’) 154 realist perspective 47, 48 size asymmetries 146–7, 160 supply-side conditions 46, 48 theoretical overview 46–8 transition model 162 US perspective on 11–29, 152 US role 24–8, 152, 160, 164 worker mobility programs, suggested 147–8 see also East Asian regionalism Northeast Asian security regionalism (NEASR) 2, 30–43 and China 32, 37–41, 106 cooperation pattern 35–7, 38 cultures and patterns 34–7 meaning and context 31–4 and North Korea nuclear issue 37 and post-Cold War peace 32–3, 36, 39, 144 trust-building 37 Northeast Asian Community 1, 20, 153, 154 Northeast Asian Environmental Cooperation Organization proposal 5 nuclear issue, North Korea 1, 6, 11, 12–13, 18–21, 27–8, 37, 40, 144–5, 150, 159, 161, 163 powers 18 proliferation 12, 36 Nuclear Nonproliferation Treaty (NPT) 12 O’Callaghan, T. 31, 32 oil reserve program proposal 5 Pakistan 18 FTA 102, 103, 104 Park, Jehoon 1–10, 150–67 Park, Y.C. 115, 119 Pempel, T.J. 11–29, 152, 162 Philippines 16 FTA 102, 105

176

Index

pluralist interest group theory 47 property rights 46, 90 protectionism 49, 69–76 railway network proposal (‘Big Loop’) 154 regional integration and collective action 47 and common identity 47, 52–3 hegemonic stability theory 46, 52 interdisciplinary summary 155–8 key conditions 7 Marxian model 156–7 and mutual trust 47 and neofunctionalism 48, 54 North–South integration disparities 51–2 opportunistic behavior 47 and security community 47 Weberian model 156, 157–8, 163 see also individual countries and regions regional trade agreements (RTAs) 100, 101 regionalism and China 37–8, 39 US skepticism towards 24 see also East Asian regionalism; Northeast Asian regionalism regionalizaton, emerging ties of 14–18 Rhee, S.G. 118, 122 Rhyu, S.Y. 159 ROK, see South Korea Roland, Gérard 130–49, 161 Rosamond, B. 124 Ross, R.S. 33 Rozman, G. 6, 30, 37, 45, 52, 162 Russia China, relations with 23, 33 FTA 58, 104 and NEASR 32 as nuclear power 18 US, relations with 33 see also Soviet Union Sakamoto, Y. 4 Sandholtz, W. 46 Schmitter, P.C. 48, 50, 113 security

Cebu Declaration on East Asian Energy Security 11, 150 China 2, 32, 37–41, 106 China, New Security Concept 38, 39 East Asian Energy Security 11, 150 issues 18–22 Japan 4, 21–2, 32 Northeast Asian security regionalism (NEASR), see Northeast Asian security regionalism (NEASR) and Six Party Talks 12–13, 14, 150, 164 South Korea 6, 7, 8, 145 UN Security Council 13, 23 United States, National Security Strategy (NSS) 25 security cooperation, Cold War 35–6 Shambaugh, D. 19 Shanghai Cooperation Organization (SCO) 104 Shioya, T. 154 Singapore China exports 16 FTA 8, 57, 58, 59, 68, 101, 103, 105 Six Party Talks 17, 159 and Japan 145 Korean Peninsula 2, 162 and security and economic issues 12–13, 14, 150, 164 US and North Korean involvement 11, 12, 14, 27, 28 size asymmetries 146–7, 160 Song, Y. 92 South Africa, FTA 58, 102, 103 South America FTA (Mercosur) 8, 57, 58, 101, 102, 103, 104 regional integration, lack of 136 South Korea agriculture industry 56, 59–60, 63–4, 71, 72–5, 80, 84, 103, 108 anti-globalization rally 60 ASEAN Plus Three (APT) 7, 17, 18, 19, 44–5, 49, 61, 64 Bilateral Investment Treaty (BIT) with US 59, 60–61 business environment 89, 94–9 business hub initiative 62–3, 65 China exports 16

Index China, relations with 23, 26, 37, 40, 60 diplomatic tensions with Japan 20 diplomatic ties with China and Russia 33 economic competitiveness 103, 108 economy 7–8, 60, 61–2 export trade 61 FDI 62 foreign policy 50–51 free economic zones 62 FTA with Chile 7, 56, 57 FTA with China 3, 8, 44, 57, 63–4, 103, 104, 108, 154, 164 FTA with Japan 3, 4, 8, 44, 54, 57, 59–60, 62–4, 71–9, 101, 103, 105, 108, 154, 164 FTA negotiations 103 FTA policy 101–3, 106–9 FTA, prospects for CJK 100–110 FTA roadmap 58, 59, 62–3 FTA with US 7, 57–61, 63, 69, 71, 76, 101–2, 105, 151, 155, 164 FTAs 7–8, 56–66, 67, 68, 154 FTAs, current progress 56–8 FTAs, government promotion of 58–9, 62–3, 65 GDP gains and FTA 107–8 Global Competitiveness Index 96–9 and IMF 101, 115 industrial competitiveness 76 industrial structure 60 institutional integration 8 Inter-Korean Summit 150–51 international diplomatic experience 146 investment treaty with Japan and China 8, 91 Japanese direct import contents in Korean production 84–5, 88 Japanese direct import contents in manufacturing production 80–81, 88 leadership role 52 manufacturing sector 5, 76–88, 108 nationalism 20, 45 and NEASR 32 as Northeast Asian hub country 6, 153

177

‘open trading country’ goal 57 Pan-Asia Bonds 118 perspectives and positions 5–8 politics 7, 8 protectionism 49, 76 and regional integration 5–7, 8, 50–51, 61–2, 101, 145, 153 security 6, 7, 8, 32, 145 size asymmetry 146–7 SMEs 118 Sunshine Policy 26, 153 tariff system 76–9 trade liberalization 63, 76, 101, 103 trilateral cooperation 44–5 US military cooperation 25, 26, 29, 40 Year of Cultural Exchanges among China, Japan and Republic of Korea 45, 53 Soviet Union China, relationship with 37 collapse of 19 see also Russia Spiller, P. 148 Stevenson, A.E. 113 Stone Sweet, A. 46 Su, H. 30, 31 Sun, X. 30, 31 Switzerland, FTA 102, 105 Tachiki, D. 15 Taiwan China exports 16 Cross-Straits problems 19, 20 independence 41 intra-regional trade 15, 16, 17, 160 as military concern 23 Tanaka, A. 17 Taniguchi, M. 5 tariff system barriers 46, 54 China 76–9, 91 Japan 54, 70, 71, 76–9 South Korea 76–9 Terada, T. 17, 111, 113 territorial disputes 18–19, 33–4, 45 Thailand 16, 23, 115 FTA 102, 103, 105 trade liberalization, and GATT 70, 90

178

Index

UN Convention on the Law of the Sea 42 UN Security Council 13, 23 United States ABC policy (Anything But Clinton) 27 Asian financial crisis, double mismatch problem 117–18 Asian financial crisis, hands-off attitude 111 Asian Monetary Fund, opposition to 111, 120–21 and ‘Axis of Evil‘ 27 Banca Delta Asia asset freezing 12–13 Bush administration and East Asia 24–8 China, relations with 23–5, 28, 29, 33, 37–40, 60 and East Asia Summit 2007 (EAS) 24 economic role 3 FTA with South Korea 7, 57–61, 63, 69, 71, 76, 101–2, 105, 151, 155, 164 FTAs 8, 68, 90, 91 global agreements, renouncement of 25 and international rule of law 133 Japan, military cooperation with 22, 25, 28, 39, 40–41, 52 Japan, trade with 16, 105 and Marshall plan 135 military role in Northeast Asia 2, 19, 20, 22, 23, 24, 25, 25–6, 26, 29, 39–41 National Security Strategy (NSS) 25

and NEASR 32 North Korea policy 12–13, 26–7, 150 Northeast Asian regionalism, perspective on 11–29, 152 Northeast Asian regionalism role 24–8, 152, 160, 164 as nuclear power 18 Quadrennial Defense Review (QDR) 25–6 regional integration experience 24, 46, 48 Russia, relations with 33 Six Party Talks, inclusion in 14, 27 Trade Promotion Authority 60 and WMD 27 Urata, S. 18 Vietnam, FTA 102, 105 Wang, Y. 30, 39, 116 Weberian model, regional integration 156, 157–8, 163 World Bank 116, 118, 124 WTO and globalization 3, 60, 100 membership, China 22, 38, 52, 89, 90, 103 Xue, K. 37 Xue, M. 2 Ye, J. 3 Zanello, A. 121, 122 Zhang, Y. 3 Zhao, X. 42

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